STATEMENT OF W. BRICE O'BRIEN, ASSISTANT COUNSEL, NATIONAL COAL ASSOCIATION, ACCOMPANIED BY LOVELL H. PARKER, CHAIRMAN, TAX COMMITTEE

Mr. O'BRIEN. Mr. Chairman, my name is W. Brice O'Brien. I am assistant counsel of the National Coal Association, representing bituminous coal producers throughout the Nation. I am accompanied by Mr. Lovell H. Parker, chairman of the association's tax committee. We feel that the tax-writing committees of Congress are to be congratulated for undertaking the tremendous and essential task of rewriting the Internal Revenue Code. It is inevitable, of course, that there will be some inequities arising out of the new language. It is hoped, however, that this committee will do their best to correct at this time any inequities which they may discover and will also study the actual operation of this new code so any undiscovered inequities may be corrected retroactively.

We are advocating, on behalf of the coal industry, four amendments to H. R. 8300-dealing with dust allaying and antifreeze treatment of coal, with the net operating loss deduction, with the definition of the "property" for depletion purposes, and with the net income upon which percentage depletion is based. However, because of time limitations, we will discuss here only the amendment dealing with dust allaying and antifreeze treatment of coal. We ask that our written statement, dealing in detail with all four recommendations, be made a part of the record of these hearings.

The CHAIRMAN. That will be done.

(The statement referred to follows Mr. O'Brien's testimony.)

Mr. O'BRIEN. In the decade beginning in 1930 dust-allaying treatment was developed on a broad scale to combat the alarming trend away from coal as a domestic fuel. This technique has been only partially successful, as evidenced by the fact that in the last 10 years the retail deliveries of bituminous coal have been cut almost in half. Nevertheless, if any part of the domestic market is to be retained, the coal which serves that market will have to be dust-treated. The industry is having an extremely difficult time selling coal to the householder even with dust treatment. If we must sell dusty coal, our job is utterly hopeless. Without dust-allaying treatment, it is practically impossible to sell coal for domestic heating purposes.

Section 114 (b) (4) (B) was added to the Internal Revenue Code in 1943. This section provides a definition of gross income from the property, upon which percentage depletion is based. This definition is carried over in subsection (c) of section 613 of H. R. 8300.

Under the definition, "gross income from the property" means the gross income from mining. The provision specifies that "mining” includes not merely the extraction of the ores or minerals from the ground but also the "ordinary treatment processes" normally applied in order to obtain the commercially marketable product or products. The provision further specifies that ordinary treatment processes include the following:

In the case of coal-cleaning, breaking, sizing, and loading for shipment. In Black Mountain Corporation v. Commissioner (21 T. C. No. 83), promulgated February 25, 1954, the Tax Court held-with Judge Arundell dissenting that the application of a fine oil spray or mist

to coal for the purpose of allaying dust is not an ordinary treatment process within the meaning of the statute. The Tax Court held, therefore, that the gross income from the property upon which percentage depletion is based must be reduced by the amount of gross income from the dust-allaying treatment and that the net income. from the property which also provides a limitation on percentage depletion must be reduced by any profit involved in the dust-allaying treatment.

This decision was promulgated too late for us to bring this matter to the attention of the Ways and Means Committee. We ask, therefore, that this committee amend subsection (c) (4) (A) of section 613 of H. R. 8300 to read as follows:

In the case of coal-cleaning, breaking, sizing, dust-allaying and antifreeze treatment, and loading for shipment.

The CHAIRMAN. Anti what?

Mr. O'BRIEN. Antifreeze.

The CHAIRMAN. Tell us about that.

Mr. O'BRIEN. When coal is shipped in the northern parts of the country during the winter months, it is necessary to use certain chemicals or other materials-I believe calcium chloride is the most common-when the coal is loaded on the car, to keep the coal from freezing in the car. Without such treatment in the cold months it would be very difficult to get the coal out of the car. It freezes I believe primarily in the corners of the car.

The CHAIRMAN. Is that a common practice?

Mr. O'BRIEN. It is.

The CHAIRMAN. What is the percentage of coal sold subjected to that practice?

Mr. O'BRIEN. It depends upon the weather at the time of shipment. If the weather is below freezing at the time of shipment, it is my understanding that all of the coal in that climate is treated for antifreeze. But coal shipped in the summertime, of course, is not so treated.

Unfortunately, I am unable to give you figures as to the percentage of the total production.

The CHAIRMAN. Well, is it a common practice?

Mr. O'BRIEN. It is, sir. It is universal.

The CHAIRMAN. All right.

Mr. O'BRIEN. With respect to the dust treatment, the Tax Court recognized, in the Black Mountain decision, the following important facts:

On the average, only 11 pounds of oil are applied to 2,000 pounds of coal, and the oil so applied does not add to the burning qualities of the coal in any measurable amount. In other words, the burning qualities of the coal are not beneficiated by the oil treatment. The purpose of the oil treatment is primarily and purely to allay the dust which would otherwise be so annoying to the householder.

The CHAIRMAN. What percentage of your coal is customarily subjected to that treatment?

Mr. O'BRIEN. In the last year for which figures were available-I believe that was 1949-some 41 million tons of coal were subjected to the dust-allaying treatment.

The CHAIRMAN. Out of a total of how much?

Mr. O'BRIEN. Out of a total of 465 million tons—approximately 9 percent.

The CHAIRMAN. You say it is about 9 percent?

Mr. O'BRIEN. Yes, sir. The point is, however, that that 9 percent of total production represents, as near as we can judge, somewhere over 90 percent of the coal which goes to the domestic home. Retail deliveries of coal in that year amounted to about 65 to 70 million tons. But retail deliveries include not only domestic coal, but includes also coal to the small industrials and to the hotels and large apartment houses.

Now, much of that coal it is not necessary to dust treat. It is necessary to dust treat over 90 percent of the coal which goes into the home. Government figures aren't available as to the exact percentage of home coal which is dust treated. The reason for that is that there is no breakdown in the amount of retail deliveries between homes and these small industrials. Our sales people are convinced, however, that practically all coal that goes into the home is dust treated and must be dust treated in order to be sold.

The CHAIRMAN. Do you have any evidence of that in the House? Mr. O'BRIEN. The only evidence on the point was opinion evidence which was presented to the Tax Court in the Black Mountain case in Chicago. They made no specific finding in their decision as to the percentage of domestic coal which is oil treated or dust treated. There is no available evidence other than opinion testimony of expert wit

nesses.

The CHAIRMAN. Is the treatment done by the mines or by the distributor?

Mr. O'BRIEN. The treatment is done at the mine. The Tax Court recognized that it is not feasible for this dust treatment to be done anywhere other than at the mine, before shipment. Early in the game, in the 1930's, when this treatment first developed, some retailers did try to apply their own dust treatment.

The CHAIRMAN. Is it a patented process?

Mr. O'BRIEN. There may have been some patents on it. I think there are no royalties being paid on the processes at the present time. The CHAIRMAN. You are talking about patent royalties or royalties on coal?

Mr. O'BRIEN. I am speaking of patent royalties.

The CHAIRMAN. Have you got a definite position as to whether it is or is not patented?

Mr. O'BRIEN. I am sorry, sir, I do not have. I didn't go into that question. There are, however, numerous methods of applying dust treatment. Most of it is done through the application of a fine oil spray; some of it is done with calcium chloride.

The CHAIRMAN. What does that add to the cost of a ton of coal? Mr. O'BRIEN. The ordinary charge runs between 10 and 15 cents a ton. In the Black Mountain case they charged 15 cents a ton on the average, and the Government used for its cost in that process merely the amount of oil. No figures were available, in the taxpayer's records, to show other costs which are attributable to the process, such as manpower, depreciation of equipment, or allocation of overhead. So the cost of oil amounted to approximately 13 cents a ton, leaving, in the Government's estimation, a profit of approximately 2 or 3 cents a ton out of the dust treatment process.

That is an important point, in our opinion, because we believe that if this decision is allowed to stand, the coal companies will then be forced to protect themselves by setting up their books with proper records to show how much of this overhead and depreciation is allocable to this proposition. Once they have done that, we believe that in the ordinary case-and we are so advised by our members-there will be no profit to the coal operator out of the dust-treatment process. So, therefore, the decision will not in the long run gain revenue for the Government.

The CHAIRMAN. Why does a man produce coal without making a profit?

Mr. O'BRIEN. Because he cannot sell it to the domestic market until it is so treated.

The CHAIRMAN. That is what you make a profit on, isn't it?

Mr. O'BRIEN. Perhaps I didn't make myself clear. My point is that there is no profit in the dust-treatment process. There may be a profit in the mining of the coal.

The CHAIRMAN. But you add that to the cost of the coal, don't you, when you sell it?

Mr. O'BRIEN. Yes, sir.

The CHAIRMAN. And that is what you make your profit on, isn't it, if you make a profit?

Mr. O'BRIEN. You make a profit on the price of the coal, yes, sir. The ordinary billing is perhaps

The CHAIRMAN. I don't care about the billing. I am asking a very simple question: This is a cost of operation, is it not?

Mr. O'BRIEN. Yes, sir.

The CHAIRMAN. And you aim to make a profit on your cost of operation, don't you?

Mr. O'BRIEN. That is correct.

The CHAIRMAN. You are not throwing any part of your operation in free, are you?

Mr. O'BRIEN. No, sir.

The CHAIRMAN. No. Thank you.

Mr. O'BRIEN. We would like to point out further that if the decision is allowed to stand, in order to protect their depletion allowance, the operators will be put to considerable accounting expense, as I think I already stated, and in the long run proper accounting will show that the amount of profit involved only in the oil treatment is either nonexistent or extremely small. The oil-treatment process itself is applied not as a source of profit, but as a means of selling the coal, which does furnish the source of profit.

The CHAIRMAN. Well, unless you have a very peculiar type of business, you add up all of your costs and figure what profit you want to make on it, and that includes, I assume, all your dust-treating processes, doesn't it? Do you have some part of your operation where you merely figure on getting your money back, and no more?

Mr. O'BRIEN. In this case I believe that is correct, sir. At least we are so advised by our people.

We do have, as you know, Senator, a peculiar type of business in that unlike most businesses we can't figure our cost and add our profit and set the price. The coal industry today is forced to start with the price. The price has to be sufficiently low to sell the coal. They

work backwards on the proposition. The price is established by market, and if your cost can be kept within that price, you keep operating. Otherwise, you go under.

The CHAIRMAN. Well, do you, in figuring out what it costs you to run your coal-producing operation, disregard the cost of the oil treatment? Don't you figure that in?

Mr. O'BRIEN. It is computed in, yes, sir.

The CHAIRMAN. Well, of course. Unless you are in an awfully peculiar position, you don't omit any item of your cost, and you are trying to keep your head above water.

Mr. O'BRIEN. We did have many companies in that position last year and this year.

The CHAIRMAN. I have no doubt of that.

Mr. O'BRIEN. I think probably in our discussion

The CHAIRMAN. I want to ask you another question: How usual is this in the business?

Mr. O'BRIEN. Only 9 percent of the total production is dust treated, approximately 9 percent or 10 percent. However, over 90 percent of coal which goes into homes is dust treated. Now, practically every mine of any size, practically everything but the gopher hole, has dust treatment equipment. They use that dust treatment equipment and process only for the coal which goes into the home.

I should correct that statement: In some cases they use it for other types of coal. I believe certain types of slack are dust treated, so it won't all blow away during shipment. But primarily it is used almost totally for coal which goes into the home.

The CHAIRMAN. A wagon mine wouldn't have any dust treatment, would it?

Mr. O'BRIEN. They wouldn't, and ordinarily they would sell to a mine which has a preparation plant, and it would then be dust treated in that preparation plant, if it were going into the home. But the wagon mine that is selling to a truck, that coal will not be dust treated, and the chances are 9 to 1 that it will not go into the home because of the fact that it is not dust treated.

Dr. Parker has reminded me that the average mine sells its industrial coal without dust treatment. And ordinarily they use the same price or a relative price. And where dust treatment is applied, they add an amount which, in their opinion, is sufficient to reimburse them for the expense involved in that oil treatment.

I would like to quote to you a paragraph or two from Judge Arundell's dissenting opinion in the Black Mountain case. I believe his opinion indicated a very clear and practical approach to the situation. He said, and I quote

The CHAIRMAN. Could there be same feasible way of finding the cost where you have it, as against your other costs where you don't have it?

Mr. O'BRIEN. I think there is, sir. Not under the present record of most companies. The present bookkeeping records of most companies will show merely the cost of the oil which was used in the dust process.

If this decision is allowed to stand, however, I believe that within 2 or 3 years the records of most companies will show not only that oil cost but the depreciation cost of the equipment which is used in the process, and the allocation of the applicable manpower to that process,