United States v. Swank

Background

Three coal companies operated mines under written leases that let the owners cancel on 30 days’ written notice. Each lessee paid a fixed royalty per ton, ran continuous operations for years, and sold the coal at market prices. The companies claimed a special tax break called percentage depletion, a deduction based on gross income meant to compensate an owner for exhausting a mineral deposit.

Reasoning

The Court addressed whether a short‑notice termination clause automatically destroys a lessee’s qualifying “economic interest” and thus bars the percentage depletion deduction. The majority said the statute and Treasury regulation require an economic interest, but the mere existence of an unexercised right to terminate does not remove that interest. The Court contrasted these lessees with pure contract miners in earlier cases, noting these lessees had legal rights to the coal and sold it on the open market. The Court found the Government’s theory — that lessors would inevitably oust lessees if prices rose — speculative and unsupported by the record, and held that duration alone is not a rational basis to deny the deduction.

Real world impact

The decision affirms that coal operators who actually mine and sell coal and who have an economic stake can claim percentage depletion even when their leases include 30‑day cancellation clauses. The ruling leaves open that different facts or shorter notice periods might be decided differently, and it does not change the lessor’s separate tax treatment under the Code.

Dissents or concurrances

Justice White (joined by Justice Stewart) dissented, arguing courts should defer to the IRS interpretation that short‑term cancellable leases do not create a depletable economic interest.