and the allocation of general overboard expenses, on a proportionate basis.

Those are difficult allocations and perhaps beyond the ability of the bookkeeping departments of most small companies. The large companies, with expert accountants in their service, will be able to make those allocations.

The CHAIRMAN. What is the practical way of handling it?

Mr. O'BRIEN. We recommend amending the statute to include dust allaying treatment as an ordinary process. In that method the computation need never be made. As Mr. Parker points out, to handle it just as the statute now provides, you handle cleaning, breaking, sizing and loading for shipment.

The Chairman. This would not be interpreted as cleaning?

Mr. O'BRIEN. The majority of the Tax Court so concluded. Judge Arundell, in his dissenting opinion said that in his opinion it shouldn't make any difference whether the cleaning is done with water, which is the method accepted by the Bureau for cleaning, or whether it is done by the application of an oil spray.

In our opinion, there is no essential difference between cleaning with the application of water or cleaning with the application of an oil spray.

The CHAIRMAN. When you clean it with water, you get a better coal product, but you also clean it to allay dust, don't you?

Mr. O'BRIEN. That is correct, sir.

The CHAIRMAN. And you do much the same thing with oil?
Mr. O'BRIEN. That is correct, sir.

The difference apparently, in the opinion of the Tax Court, was that in coal you are applying only-that in the water process you are applying only water, but in this process you are applying an oil spray. And my own opinion is that perhaps they were under the impression, although they stated to the contrary in the decision, that in some way this is added for the purpose of making the coal burn better. It doesn't beneficiate the burning qualities at all. If so, the scientists have not been able to measure the extent to which it adds to the burning quality, it is so small.

The CHAIRMAN. Proceed.

Mr. O'BRIEN. In conclusion, I would like to read to you a couple of paragraphs from Judge Arundell's dissenting opinion. He said:

There is no question that the oil treatment was a process applied by mine owners to obtain a commercially marketable products, but the majority have conIcluded that the oil treatment was not an ordinary treatment process normally applied by mine owners. This conclusion is based largely on statistics.

Certainly the oil process was not unusual or extraordinary, for the amount of coal treated with oil or in a similar manner to allay the coal dust ran into millions and millions of tons a year, and a very large part of the bituminous coal which was used for heating homes was so treated. In fact, it is doubtful if there there would have been any considerable market for bituminous coal for home heating purposes if the coal had not been given this treatment. In a competitive economy, there are always new and better methods being used to accomplish the same end, and whether the coal was washed with water or oil to allay the coal dust should not be a determinative matter in the construction of this statute. ***

I would hold that the oil treatment was an ordinary process normally applied by mine owners in order to obtain a commercially marketable product within the meaning of the statute.

The CHAIRMAN. I hope the staff will give special attention to that and bring it to the attention of the committee.

Mr. SMITH. We will, Senator, and I hope Mr. OBrien will furnish us with statistical data relating to the amount of expense incurred. The CHAIRMAN. It seems there is a very large gap in the figures here.

Mr. O'BRIEN. We will be glad to furnish that.

Thank you very much.

The CHAIRMAN. Thank you.

Hon. EUGENE D. MILLIKIN,

NATIONAL COAL ASSOCIATION,
Washington, D. C., April 22, 1954.

Chairman, Senate Finance Committee, Senate Office Building,

Washington, D. C.

DEAR SENATOR MILLIKIN: On April 20 I testified before your committee and asked, on behalf of the bituminous coal industry, that subsection (c) (4) (A) of section 613 of H. R. 8300 be amended to include in the ordinary treatment process for coal, dust-allaying and antifreeze treatment.

You were kind enough to exhibit considerable interest in this matter, and suggested that additional statistics should be furnished for the use of the staff. The attached document contains statistics on this matter for the years 1948-52, inclusive. Statistics are not available later than the year 1952. I am furnishing copies of this material to the staff and to the clerk of your committee.

Your interest in this problem is deeply appreciated.
Respectfully submitted.

W. BRICE O'BRIEN,

Assistant Counsel.

Summary data on treatment of bituminous coal at mines for allaying dust in the United States, 1948-52, inclusive

Cols. (1), (2), and (3) contained in Weekly Coal Report No. 1909, issued on April 16, 1954, by the U. S. Department of the Interior, Bureau of Mines.

Col. (4) obtained from U. S. Bureau of Mines publications.

Col. (5) computed-col. (2) divided by col. (4).

Col. (6) computed by taking 80 percent of col. (4). Retail dealer deliveries contain substantial tonnage which reaches markets other than domestic heating and apartment and small commercial heating, such as small industrials and other types of uses which do not necessarily require dust treatment. Census of housing figures for 1950 show the number of residences (including small apartment houses) heated by bituminous coal, and the average number of rooms per residence. Using this information, and the B. t. u. required per room as shown by a study published by Housing and Home Finance Agency, we have computed the tonnage used in 1950 for heating residences and small apartment houses at 50,990,163 tons, or 59 percent of retail dealer deliveries for that year. However, qualified industry members estimate that when the tonnage used for schools, hospitals, and small commercial space heating of the type which requires dust-treated coal is added to the tonnage used in residences, the total is approximately 80 percent of the total tonnage represented by retail dealer deliveries. The tonnage set forth in column (6) is, therefore, the best judgment of qualified members of the industry as to the amount of coal used for purposes which require dustless coal, including homes, hospitals, schools, and small commercial space heating.

Col. (7) computed-col. (6) divided into col. (2).

NOTE. Dust treatment of coal is confined almost wholly to coal shipped to retail dealers. Practically no coal is sold by retail dealers for domestic use unless it is dusttreated. Testimony of expert witnesses, James R. Henderson and Joseph F. Bigane, Sr., on Mar. 3, 1953, before the Tax Court in Black Mountain Corporation v. Commissioner-transcript of trial, pp. 65-67 and pp. 80-81.

(The prepared statement of Mr. O'Brien follows:)

STATEMENT OF W. BRICE O'BRIEN, ASSISTANT COUNSEL, NATIONAL COAL ASSOCIATION, WASHINGTON, D. C.

Mr. Chairman and members of the committee, 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.

DUST-ALLAYING AND ANTIFREEZE TREATMENT

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 by mine owners or operators in order to obtain the commercially marketable mineral product or products." Subsection (c) (4) (A) of section 613 provides that the term “ordinary treatment processes" includes the following:

The

"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 24, 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. 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."

In its decision in the Black Mountain case the Tax Court recognized 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. The oil spray is applied for the purpose of allaying dust for a normal storage period, and dust is also allayed by the use of calcium chloride and other materials. It is not feasible for anyone other than the mineowner or operator to apply the dust-allaying treatment. Dust-allaying treatment developed in efforts to meet the competition of oil and gas as a domestic heating fuel. In 1949 (last year for which figures were available) more than 41 million tons of bituminous coal were treated at the mines for allaying dust.

Apparently the Tax Court based its decision on the erroneous conception that there would be a market for such coal even if it were not dust treated. For practical purposes, this just isn't the case. The primary factor in the determination of whether coal will be dust treated is the available market. If the domestic heating market is its destination, the coal must be, and is, treated to allay dust. The majority of the Tax Court felt that the untreated coal could be sold to other markets. Unfortunately, in the coal industry today there are no alternative markets for surplus coal. Our markets have declined from 630 million tons in 1947 to 453 million tons in 1953. So far this year production is running more than 16 percent below that of last year. Under those circumstances, a market loss cannot easily be replaced.

For many years the industry considered, without question, that dust-allaying treatment was an ordinary treatment process. A few years ago, however, the Commissioner began to assert, in individual cases, the position that it was not included within the terms of the statute. Because the amount of tax liability in any one year was not large for any one taxpayer, no taxpayer took the matter to court prior to the Black Mountain case. However, the situation involves some tax liability (although a small one) for every coal producer, and this tax liability is a recurring matter. Moreover, if the decision is allowed to stand, every producer will be forced to protect himself by establishing accurate accounting records on the total cost of all items which enter into the dust-allaying treatment. In the Black Mountain case the Tax Court reduced the gross income by the amount charged because of dust treatment (about 15 cents per ton), and reduced the net income by the Government's interpretation of the "profit" involved, which was the amount charged minus the cost of the oil. If this decision stands, the taxpayer will be entitled to reduce the profit by the depreciation of equipment involved, by the manpower involved, and by the overhead applicable to this treatment. The net result will be that in most cases this decision eventually will have no effect on the revenue, but it will cause a substantially increased accounting cost and nuisance both to the Government and the taxpayer.

Indeed, it is theoretically possible that the Black Mountain decision might reduce tax liability. For dust treatment most companies charge only a few cents per ton, and in many cases the charge is not sufficient to cover the cost. If the Black Mountain decision is correct, then the net income should be increased by the amount of the loss where a loss results from dust treatment. Undoubtedly the Internal Revenue Service would seriously object to such a situation, but the possibility illustrates the type of annoying problems which may arise from the Black Mountain holding. Reduction of the gross income by the amount of the small charge involved will not produce any additional revenue, because under today's economic conditions few, if any, coal companies have sufficient earnings to measure their percentage depletion by gross income.

Judge Arundell's dissenting opinion in the Black Mountain case indicated a clear and practical approach to the situation. Part of his opinion is quoted

here:

"There is no question that the oil treatment was a process applied by mineowners to obtain a commercially marketable product, but the majority have concluded that the oil treatment was not an ordinary treatment process normally applied by mineowners. This conclusion is based largely on statistics. "Certainly the oil process was not unusual or extraordinary, for the amount of coal treated with oil or in a similar manner to allay the coal dust ran into millions and millions of tons a year, and a very large part of the bituminous coal which was used for heating homes was so treated. In fact, it is doubtful if there would have been any considerable market for bituminous coal for home heating purposes if the coal had not been given this treatment. In a competitive economy, there are always new and better methods being used to accomplish the same end, and whether the coal was washed with water or oil to allay the coal dust should not be a determinative matter in the construction of this statute *

"I would hold that the oil treatment was an ordinary process normally applied by mineowners in order to obtain a commercially marketable product within the meaning of the statute."

In our suggested amendment we specify, in addition to dust-allaying treatment, antifreeze treatment. While this particular treatment has not been the subject of a decision as yet, it appears to fall within the same category as dust treatment. Depending on the climate at the time of shipment, it is often necessary to treat coal to prevent freezing during shipment. Like dust-allaying treatment, this antifreeze treatment involves only minor cost and is applied only when necessary. The industry has always regarded this as a part of the production of coal. However, in the face of the surprising decision on dustallaying treatment, it appears necessary to obtain congressional protection on antifreeze treatment also.

NET OPERATING LOSS DEDUCTION

Section 172 of H. R. 8300 rewrites the net operating loss provisions of the 1939 code. In rewriting this provision, several major substantive changes have been made.

Under the present law the net operating loss must be reduced, both in the year in which the loss is sustained and in all years to which the loss is carried, by the excess of percentage depletion over cost depletion.

Section 172 of H. R. 8300 makes a change which has the effect of eliminating this double penalty insofar as it involves the first of the 7 years to which a net operating loss may be carried, although the double penalty is retained with respect to the other 6 years to which the loss may be carried. The reasons for this change are set forth in the Ways and Means Committee report at page 27, as follows:

"Your committee has also made changes in the method of computing the net operating loss deduction, in order to lessen the differences in tax treatment of firms with fluctuating and those with stable incomes. Under present law the loss is reduced for certain items with respect both to the loss year and the income year to which the loss is carried, before the loss can be offset against taxable income of the latter year. Thus under existing law taxpayers with loss carryovers are denied the use of tax benefits which are fully available to those with stable incomes."

This recognized inequity has been carried by section 172 to the extent that it involves the first year to which a loss may be carried, although it has not been corrected with respect to the other 6 years to which a loss may be carried. We feel the Congress should be commended for this step forward.

Unfortunately, however, subsection (e) of section 172 provides that:

"In determining the amount of any net operating loss carryback or carryover to any taxable year, the necessary computations involving any other taxable year shall be made under the law applicable to such other taxable year. The preceding sentence shall apply with respect to all taxable years, whether they begin before, on, or after January 1, 1954."

It is, of course, true that subsection (e) merely writes into law a rule already laid down by the courts-Reo Motors, Inc. v. Commissioner (338 U. S. 442, 70 S. Ct. 283). However, the courts based their ruling on an interpretation of the intent of Congress, and on nothing else. There is no reason why Congress is not free to change that rule by statute.

Under subsection (e) of section 172 the partial correction of inequity accomplished by section 172, as outlined above, will not become effective until 1956. Losses sustained in 1954 may be carried back to 1952, and under subsection (e) the law of 1952 will govern the double penalty will still be imposed. Losses sustained in 1955 may be carried back to 1953, and under the 1953 law the double penalty will still be imposed. Section 172 does not eliminate the double penalty for any years to which a loss may be carried except the earliest of such years, and therefore will not be of any benefit in this respect insofar as losses incurred in 1954 or 1955 are concerned.

In practically all other respects it is the obvious intent of Congress to make the changes accomplished in H. R. 8300 effective with respect to the taxable year 1954 and subsequent years. It is unreasonable to postpone until 1956 the application of a change which is recognized as the correction of an inequity.

We urge the committee to amend subsection (e) of section 172 to read as follows: