Coal Lessors are also owners of timber, it is not our purpose to speak for timber lessors or operators. I understand they have a presentation which they will make to you and I would like to say that we have no objection to anything that they propose.

The first amendment contained in section 631 (b) is to state that a sublessor of coal is an owner entitled to capital-gains1 treatment on his gains from royalties. The amendment is designed to correct a ruling of the Internal Revenue Service to the effect that a sublessor of coal in place is not an owner. We think the ruling was wrong and that the amendment conforms the statute to the original intent of Congress.

The Internal Revenue Service has ruled that successors in title to the owner who executed the contract of disposition are entitled to the benefits of section 117 (k) (2) of the present Internal Revenue Code. That is, in our opinion, a correct interpretation of the law. The bill does not undertake to change this interpretation.

The second amendment, which is contained in both sections 631 (b) and 272 (b), provides that the expenses of administration of the contract of disposition and of preserving the economic interest of the royalty recipient should be deducted from the royalty income and not from nonroyalty income. This is a proper change which will promote equality among royalty recipients and we approve it. In our opinion, it does not alter the original intent of the present code, as such expenses are necessary and attributable to the sale out of which the royalty income arises and should be charged against them. The Internal Revenue Service has not ruled on this point and field agents have taken different positions, usually depending on which will produce the larger tax.

It is possible that a royalty recipient might realize a loss on his royalty income. Under the present law, section 117 (j) of the code, such a loss is treated not as a capital loss but as an ordinary loss. The counterpart of that section in the bill, section 1231, continues such treatment. But section 272 (b) of the bill, when fitted into the context of sections 63 (a) and 161 of the bill, apparently denies such a loss either as an ordinary loss deductible under section 165 (a), or as a capital loss carry-forward under section 1212, or as a carrying charge to be added to base under section 266. Moreover, we have not been able to reconcile the meaning of section 272 (b) of the bill, as written, with the comments thereon contained in the report at pages 59-60, A68, A190-191, and A272.

1 The new language appears in the third sentence of sec. 631 (b) and reads: "*** and the word owner means any person who owns an economic interest in coal in place, including a sublessor."

2 This is accomplished by the addition to the first sentence of sec. 117 (k) (2) IRC of the words "plus the deductions disallowed for the taxable year under sec. 272." Sec. 272 (b) of the bill disallows as a deduction under sec. 161: * expenditures attributable to the making and administering of the contract under which such disposition occurs and to the preservation of the economic interest retained under such contract." It also provides: "This subsection shall not apply to any taxable year during which there is no production, or income, under the contract." This last sentence of sec. 272 (b) is new. It is unobjectionable as to substance but is subject to technical criticism. Reference to the report (p. A68) shows that the two commas in the sentence should be deleted and that the word "or" should be changed to the word "of," so that the sentence was obviously intended to read: "This subsection shall not apply to any taxable year during which there is no production of income under the contract.' Since there may be more than 1 such contract and since, under sec. 1231, all must be considered in 1 computation to determine the gain or loss from the group, the last sentence should preferably read: "This sentence shall not apply to any taxable year during which there is no production of income under the contract. or if there is more than one contract, under such contracts."

It is our opinion that losses sustained with respect to royalty income should be treated as presently provided for in the code under section 117 (j), and we urge the committee so to provide. Drafts of changes in the bill necessary to accomplish this result are attached.3

If, however, the committee desires to write itno the bill the results as to losses described in the report, the language necessary is also attached.4

Another desirable amendment to section 631 (b) of the bill is to change the word "lessee" contained in the fifth sentence to "producer." This will clarify, but, in our opinion, will not change, the meaning. We recommend this amendment.5

Since all the foregoing amendments contained in the bill and additional changes in the bill recommended by us are merely clarifying and are not intended to represent any basic or fundamental change, we strongly urge that they should be made retroactive to January 1, 1951. If adopted, they will not have any material effect on the revenue, but will tend to increase rather than decrease revenue payments by affected taxpayers.

Second, I wish to direct your attention to the definition of the term "property" in connection with the depletion allowances, both unit and percentage, contained in section 614 of the bill. The definition, which appears for the first time in the code, is a departure from the provisions of the regulations 118-section 39.23 (m-1) (i)—and would require a separate accounting by lessors and producers, whether or not taking percentage depletion, as to each separate mineral interest, which in the case of coal would be each seam in each separate tract as described in the deeds of acquisition, and would deny to lessors any right of aggregating into a single property all seams in a boundary of land composed of two or more contiguous tracts, a right they have

3 To conform the rule as to losses sustained in connection with royalty income, as now provided in section 117 (j) of the code with respect to losses sustained on the disposition of "property used in trade or business," sec. 272 (b) of the bill should be rewritten as follows (it being understood that the Council is suggesting changes only with respect to coal):

"(b) Where the disposal of coal or timber is covered by sec. 631 (b), no deduction shall be allowed for expenditures attributable to the making and administering of the contract under which such disposition occurs and to the preservation of the economic interest retained under such contract, except that when in any taxable year such expenditures plus the adjusted depletion basis of the coal or timber disposed of exceed the amount realizd under the contract, such excess shall, to the extent not availed as a reduction under sec. 1231, be a loss deductible under sec. 165 (a). This subsection shall not apply to any taxable year during which there is no production of income under the contract, or if there is more than one contract, under such contracts.'

4 To conform the rule as to losses sustained in connection with royalty income as described in the report on page A68, sec. 272 (b) of the bill should be rewritten as follows (it being understood that the Council is suggesting changes only with respect to coal:

"(b) Where the disposal of coal or timber by the taxpayer is covered by sec. 631 (b), no deduction shall be allowed for expenditures attributable to the making and administering of the contract under which such disposition occurs and to the preservation of the economic interest retained under such contract, except that when in any taxable year the expenses (other than apportioned property taxes) plus the adjusted depletion basis of the coal or timber disposed of exceed the amount realized under such contract, such excess, to the extent not availed as a reduction of gain under sec. 1231, shall notwithstanding the provisions of sec. 1231 be treated as a capital-loss carryover under sec. 1212. Taxes paid by the owner on land subject to such contract or contracts shall first be apportioned between the value of the land attributable to the timber or coal covered by the contract or contracts and the value attributable to other elements of value. To the extent that the apportioned part of such taxes plus the taxpayer's other expenditures disallowed by this section and the adjusted depletion basis of the coal or timber disposed of exceed the amount realized from such contract or contracts, the taxes shall be deductible under sec. 164. In making this computation, the income under such contract shall first be reduced by the other expenditures and the adjusted depletion basis and then by the taxes. This subsection shall not apply to any taxable year during which there is no production of income under such contract, or if there is more than one contract, under such contracts." 5 With such change, the fifth sentence will read: "In determining the gross income, the adjusted gross income, or the taxable income of the producer, the deductions allowable with respect to rents and royalties shall be determined without regard to the provisions of this subsection."

enjoyed and exercised for years. It is our understanding that this result was not intended by the draftsmen of section 614. In any event, section 614 as it now reads is highly objectionable.

The CHAIRMAN. What do we know about that?

Mr. SMITH. That was not the intention.

The CHAIRMAN. Will you be prepared to clarify that?

Mr. SMITH. Yes.

Mr. CAMPBELL. Unless changed, it would impose a great expense and nuisance on royalty owners, operators, and the Internal Revenue Service and would accomplish no useful purpose whatever.

It is our recommendation that section 614 of the bill should be completely rewritten; that taxpayers reporting income from depletable property should have the optional right to aggregate their mineral interests into one or more aggregations each of which is to be treated as a single property as they may elect with the right to revise their election upon the happening of any substantial change in their holdings or operations, and that apportionment of depletion allowances to any single mineral interest be required only when such an apportionment becomes necessary, as for example, when such an interest is sold. A suggested redraft of section 614 incorporating these proposals is attached.

If such an approach cannot be made by the committee, then we strongly urge that a special rule should be added to section 614 which would recognize and preserve existing practice with respect to aggregating tracts for computing unit depletion by royalty recipients.

The CHAIRMAN. I invite your attention to section 614 (b):

For purposes of the preceding sentence, operating mineral interests which constitute all or part of an operating unit may be aggregated whether or not they are included in a single tract or parcel of land and whether or not they are included in contiguous tracts or parcels. The taxpayer may not elect to form more than one aggregation of operating mineral interests with any one operating unit.

Mr. CAMPBELL. Mr. Chairman, as I read that language, it is limited to the election allowed to those taking percentage depletion to form

Redraft of sec. 614 is as follows:

"SEC. 614. DEFINITION OF PROPERTY.

"(a) GENERAL RULE. For the purpose of computing the depletion allowance in the case of mines, wells, and other natural deposits, the term 'property' means each separate interest owned by the taxpayer in each mineral deposit in each separate tract or parcel of land.

"(b) ELECTION TO AGGREGATE SEPARATE INTERESTS. If a taxpayer owns two or more separate mineral interests, he may elect

"(A) to aggregate two or more of such interests into one or more aggregations, each of which shall be considered as a separate property; and

"(B) to treat as a separate property each such interest which he does not elect to include within an aggregation referred to in subparagraph (A).

"(c) MANNER AND SCOPE OF ELECTION. The election provided by subsection (b) shall be made, in accordance with regulations prescribed by the Secretary or his delegate, not later than the time prescribed for filing the return (including extensions thereof) for the first taxable year beginning after December 31, 1953, with respect to mineral interests owned by the taxpayer at the end of such year. Such election may be revised by the taxpayer with respect to all mineral interests of the taxpayer not later than the time for filing the return (including extensions thereof) for any subsequent taxable year during which the taxpayer acquires or disposes of a mineral interest or changes any mineral interest from a development stage to a production stage or abandons operations in any mineral interest. An election made by the taxpayer shall be binding on the taxpayer for all subsequent taxabie years unless revised under the preceding sentence or unless the Secretary or his delegate shall consent to a different treatment of the interest with respect to which an election has been made.

"(d) APPORTIONMENT OF DEPLETION ALLOWANCES. Where there has been an aggregation of mineral interests under subsection (b), the depletion allowance with respect to the aggregation shall be reasonably apportioned among the mineral interests aggregated for the purpose of determining the adjustment to basis of each such interest under section 1011 whenever it becomes necessary so to do."

an aggregation within one operating unit and does not apply to royalty owners or recipients who do not take percentage depletion.

Now if that language were made applicable to what is described in there as nonoperating mineral interests, which would be the royalty recipient, it would be entirely all right.

The CHAIRMAN. Bring that to the attention of the staff.

Mr. CAMPBELL. I am sure there is a defect in draftsmanship which just didn't occur to the draftsmen when they were working on it, since they had their attention primarily focused on the problems connected with percentage depletion.

Senator CARLSON. Mr. Chairman, I remember the many appearances of Mr. Campbell before the House Ways and Means Committee and he usually came in with good suggestions, so I would hope his remarks will be given their due regard before this committee.

The CHAIRMAN. I hope the staff will pay special attention to this when we get into executive session.

Mr. CAMPBELL. Thank you very much, Mr. Chairman.

Continuing, I suggest a special rule which should be substantially as follows:

(c) SPECIAL RULE AS TO NONOPERATING MINERAL INTERESTS. If a taxpayer owns 2 or more separate nonoperating mineral interests in a single tract or parcel of land, or in 2 or more contiguous tracts or parcels of land, the taxpayer's interests in such mineral properties may be considered to be a single property, provided such treatment is consistently followed by the taxpayer.

This is substantially the language of present regulations 118, section 39.23 (m-1(1)).

The CHAIRMAN. Have you discussed this with members of the staff? Mr. CAMPBELL. Yes, I have. I have with the Internal Revenue Service, but not with Mr. Stam and his staff.

So.

The CHAIRMAN. I suggest you make a date with Mr. Stam.

Mr. CAMPBELL. Thank you very much, sir. I will be happy to do

If the committee retains a difference in treatment between operating and nonoperating mineral interests, we do not suggest that a nonoperating mineral interest should be combined in one aggregation with an operating mineral interest.

While this subject is highly technical, it is of extreme importance to taxpayers affected and deserves the most careful and discriminating attention both as to substance and as to technical language.

I thank you for the privilege of appearing before this distinguished committee.

The CHAIRMAN. We thank you.

Mr. J. Rutledge Hill was scheduled to present an oral statement in behalf of the National Sand and Gravel Association. He was unable to appear today because of illness but his statement will be made a part of the record in lieu of his personal appearance.

(The statement of J. Rutledge Hill follows:)

STATEMENT OF J. RUTLEDGE HILL, DALLAS, TEX., CHAIRMAN OF COMMITTEE ON TAXATION, NATIONAL SAND AND GRAVEL ASSOCIATION, ON PERCENTAGE DE

PLETION

My name is J. Rutledge Hill. I am president of Gifford-Hill & Co., Inc., Dallas, Tex., which has sand and gravel operations in Texas, Louisiana, and Arkansas. I appear before you as chairman of the committee on taxation of the National Sand and Gravel Association.

I was a witness before the Ways and Means Committee of the House of Representatives in the public hearings conducted by that committee last year. This statement will not duplicate the testimony offered at that time and will be confined, as you request, to the additional recommendations which my industry has to offer on the basis of the bill which passed the House and is now pending before your committee.

I should make it clear at this point that although at the public hearings conducted by the Ways and Means Committee, I represented both my association and the National Industrial Sand Association, this morning I appear only for sand and gravel producers and not for producers of industrial sand, whose products and problems in this connection are quite different from ours.

The bill passed by the House proposes a percentage depletion allowance of 15 percent for chemical and metallurgical grade limestone for whatever purpose used. My industry believes that this is a sound proposal and is fully justified by the national policy of granting a percentage depletion allowance to industries with wasting assets. It is our hope that the wisdom and the justification of this proposal will be recognized by your committee; but I must say in behalf of the industry which I represent that the same considerations which led to this decision by the House apply with equal force and logic to the sand and gravel industry, whose percentage depletion allowance of 5 percent the House does not propose to change.

Sand and gravel producers and producers of crushed limestone used for construction and building purposes are in competition with each other all over the United States for common markets. Each should therefore get the same consideration from the Congress under the national policy of encouraging the mining industries to explore and develop new sources of supply in order that the mounting demands of the country for mined products may be fulfilled. I should therefore like to ask your committee to include the sand and gravel industry in the category of mining industries entitled to the 15 percent percentage depletion allowance. Another competitor of our industry, with whom we must compete in many areas for highways and streets is the rock asphalt industry, which has been entitled to a percentage depletion allowance of 15 percent since 1943. There is no evidence in the public record that this industry is entitled to more consideration than the sand and gravel industry and we hope that your committee will eliminate this competitive inequality imposed on the sand and gravel industry. To a lesser extent, but nonetheless acute in certain phases of our operations, we will be at a disadvantage if the proposal of the House of Representatives to increase the percentage depletion allowance for slate from 5 percent to 15 percent is approved by your committee without increasing our own rate by a corresponding amount.

I ask for your committee's consideration of the demonstrated need for equality of treatment in the application of the percentage depletion policy. We do not wish to be regarded as asking here any reduction in the percentage depletion rates provided for in the bill which passed the House. We believe that the action of the Ways and Means Committee and its later approval by the House is easily justified on the facts and in full accord with a wise national policy; but we do urge upon your committee the propriety of according to all industries in the same mining family the same rate for percentage depletion in order that obvious inequalities may not be imposed.

The sand and gravel industry is second only to the bituminous coal industry in annual tonnage produced in the United States. Our country is exhausting its economically available sand and gravel reserves at a distressing rate. We face the prospect of serious sand and gravel shortages in many areas, and while I realize that it is a grave but common error to suppose that sand and gravel can be found almost everywhere, the grim truth is that under modern conditions vast sums of money must be spent first to explore for and locate a satisfactory sand and gravel deposit and then to build a plant which will produce and process the materials in conformity with the severe specification standards now required to be met before our materials will be accepted.

It is my deep-rooted conviction that our industry on the merits and on the basis of competitive equality, is entitled to an increase in percentage depletion allowance from 5 percent to 15 percent.

The CHAIRMAN. Mr. Barker