The actual percentage depletion per ton reflected in these statistics has been arrived at by aggregating the percentage depletion allowable for the several coal properties and dividing by the total tonnage from all such properties.

The schedule reflects the amount of percentage depletion allowable (at the 5-percent rate applicable to years prior to 1951 and at the present 10-percent rate thereafter) before application of the 50-percent taxable income limitation and reflects the amount which is denied by reason of the application of said limitation (all expressed as an average amount per ton):

The foregoing statistics forcefully illustrate the significance and severity of the 50-percent taxable income limitation feature of the law which operates to completely extinguish all percentage depletion allowance in the more recent years. You will observe, for example, that for 1953 the percentage depletion allowable before the 50-percent limitation was approximately 61 cents per ton but was reduced to less than 4 cents after the application of the 50-percent limitation.

Also, you will note that for the years 1954, 1955, and 1956, the 50percent limitation removes all percentage depletion.

Although coal presently is accorded a relatively low percentage depletion rate (10 percent), the policy of the Internal Revenue Service together with the 50-percent limitation combine to deny any percentage depletion to most taxpayers in the Alabama district.

Reasons for a minimum percentage depletion allowance: Coal deposits are a vital national asset and abandonment by operators who can no longer earn a reasonable profit will render certain of these reserves inaccessible, or at least not economically recoverable in the future, due to flooding and caving of mine workings.

The coal-mining industry needs above all a chance to make the minimum profit necessary for survival. Beyond that, it needs the necessary funds for research and development of means to improve its products and to develop new uses for its products. Only a favorable earnings situation will attract the necessary new capital to accomplish these objectives.

We do not believe that anyone will argue that the objective of percentage-depletion legislation is other than to maintain and stimulate natural resource production. It is beyond dispute that this requires the expenditure of tremendous sums and great risks of capital.

The 50-percent net income limitation feature allows greater benefits to those taxpayers operating under more favorable conditions resulting in higher margins, and denies appropriate benefits to those less fortunate taxpayers in more difficult operating situations. Since the legislative objective is physical production, separate taxpayers producing a ton of coal should be accorded approximately the same benefits which are not presently accorded because of the net-income limi

tation.

While the maximum percentage depletion is defined by law as 50 percent of taxable income, a minimum percentage depletion provision should be incorporated in the law which would give appropriate recognition to physical production.

The statute provides that a reasonable allowance shall be provided. Congress recognized that the mining industry is fraught with many peculiar conditions and provided in the law for (1) a reasonable allowance, (2) according to the peculiar conditions in each case. No percentage depletion as is the case of our Alabama group certainly is not reasonable and we believe not in accordance with the intent of Congress.

We submit that Congress did not contemplate that "gross income from mining" as defined in code section 613 (c) (1) (2) would, in the case of taxpayers who process their minerals beyond the ordinary treatment processes referred to in section 613 (c) (2), be so reduced by application of unrealistic prices developed from restricted and isolated sales as to virtually eliminate percentage depletion due to the impact of the 50-percent limitation.

We believe that the conditions as brought out in this statement completely justify an equitable change in the law to provide at least a minimum amount of percentage depletion.

Summary: We have referred in the foregoing to the report of the Subcommittee on Coal Research of the House Committee on Interior and Insular Affairs, whose findings we heartily endorse.

We have outlined briefly the peculiar conditions which prevail in the Alabama coal industry.

We have cited what we consider to be a deficiency in the Internal Revenue Code, by reason of which certain inequities in the administration of the code have deprived Alabama coal producers of virtually any allowance for percentage depletion.

We have pointed out that, while the present code and regulations provide for a maximum allowance for percentage depletion of not in excess of 50 percent of taxpayer's taxable income, the code does not provide for a minimum allowance for percentage depletion.

We have, therefore, recommended an amendment to the code which would provide for a minimum percentage depletion allowance of 5 percent of the taxpayer's total allowable cost of recovery.

It is the considered opinion of the Alabama Mining Institute that this proposed amendment would not adversely affect any taxpayer, that it would not benefit any taxpayer who now enjoys a reasonable allowance for percentage depletion, and that it would provide Alabama coal operators and others similarly situated with an incentive to continue to prospect and develop mineral reserves and to improve facilities for preparation.

The opportunity to submit this statement is appreciated, and the Alabama Mining Institute earnestly requests your serious considera

tion and adoption of the recommended amendment to the Internal Revenue Code.

The CHAIRMAN. Does that complete your statement, Mr. Garrett? Mr. GARRETT. Yes. Thank you, Mr. Chairman.

The CHAIRMAN. Are there any questions?

If not, we thank you for the information you have given to the committee. Would you like also that the statement that is before me, prepared by the chairman of your group, Mr. W. H. Parker, appear in the record?

Mr. GARRETT. I would, sir.

Mr. FORAND. Without objection, that statement will appear in the record.

Mr. GARRETT. Thank you, sir.

(The statements referred to follow :)

STATEMENT OF ALABAMA MINING INSTITUTE WITH RESPECT TO AMENDMENT OF THE PROVISIONS OF THE 1954 INTERNAL REVENUE CODE PERTAINING TO PERCENTAGE DEPLETION ALLOWANCE

The Alabama Mining Institute is a trade association, whose members produce more than 80 percent of the coal mined in Alabama. Currently, Alabama ranks eighth as a bituminous coal producing State.

PURPOSE OF STATEMENT

It is our purpose to direct this committee's attention to a deficiency in the Internal Revenue Code of 1954. This deficiency has permitted an inequity to exist in the administration of the percentage depletion provisions of the code. The deficiency in the code, with the resultant inequity, has served to create an acute hardship in the coal mining industry in Alabama. It is also our purpose to suggest an amendment which will at least partially eliminate the inequity, and which will serve to reduce the extreme hardship now generally prevailing in the coal industry.

INEQUITY IN ADMINISTRATION OF THE CODE

The inequity results from the fact that the Internal Revenue Service has and is applying unrealistic market or field prices to coal processed beyond the ordinary treatment processes to establish gross revenues from coal-mining properties. Gross revenues so determined serve to establish taxable income for percentage depletion purposes. The limitation that the percentage depletion allowance shall not exceed 50 percent of the taxable income from the property has resulted in Alabama coal producers being allowed little or no percentage depletion from their properties. There is presently no indication that the Internal Revenue Service intends to change this practice. To the contrary the proposed regulations are even more restrictive than those currently in effect.

PROPOSED AMENDMENT TO 1954 INTERNAL REVENUE CODE

The Congress apparently intended that those who discover, develop, and deplete mineral resources should have a reasonable allowance for depletion. Therefore, in order to provide a minimum percentage depletion allowance, we respectfully suggest your serious consideration and adoption of an amendment to the present code, section 613 (a). The effect of this suggested change would be to provide a minimum depletion allowance of 5 percent of taxpayer's total allowable cost of recovery. It would not otherwise change the existing provisions of the code, the only changes from existing law being the addition of the underscored portion of code section 613 (a), which would then read as follows:

Sec. 613. Percentage depletion

(a) General Rule.-In the case of the mines, wells, and other natural deposits listed in subsection (b), the allowance for depletion under section 611 shall be the percentage, specified in subsection (b), of the gross income from the property excluding from such gross income an amount equal to any rents or royalties

paid or incurred by the taxpayer in respect to the property. Such allowance shall not exceed 50 percent of the taxpayer's taxable income from the property (computed without allowance for depletion) but, notwithstanding this limitation, such allowance shall not be less than 5 percent of the costs allowable in computing taxable income from the property. In no case shall the allowance for depletion under section 611 be less than it would be if computed without reference to this section.

CONDITION OF THE COAL INDUSTRY NATIONALLY

The report of the Subcommittee on Coal Research of the House Committee on Interior and Insular Affairs (findings and recommendations of the Special Subcommittee on Coal Research, House Report No. 1263) contains significant data with reference to the coal industry. On page 14 of this report it is stated "The history of the coal industry since the end of World War I has been one of erratic production, declining and uncertain markets, and at least 35 years of either net losses or exceedingly low net income." On page 5 the report states, “To encourage concurrent scientific research and development in the production, transportation, and utilization of coal within the industry, the subcommittee recommends further that Congress act to bring about a more equitable depletion allowance rate for the bituminous coal and anthracite industries."

Our group endorses the subcommittee's report as being entirely factual and setting forth conditions in our industry.

CONDITION OF THE COAL INDUSTRY IN ALABAMA

The coal industry in Alabama is subject to all of the ills that beset the industry nationally, and in addition has serious ailments brought about by peculiar local conditions.

General types of Alabama coals

Alabama coals may be roughly divided into three classes: 1. Those suitable only for use as fuel. 2. Those suitable for blending with other coals to produce coke. 3. Those suitable for the production of coke without blending with other coals.

PHYSICAL AND ECONOMIC CONDITIONS IN THE ALABAMA COAL FIELDS

For many years prior to 1946 the coal mines in Alabama competed in the open market for the commercial fuel business which was largely fuel coal, and to a lesser degree for the blending coal business. However, beginning in 1946 the market for Alabama commercial coals began to weaken. Competition with other fuel and power sources plus steadily rising costs of production, gradually caused commercial markets in our area to practically disappear.

Alabama coal, although of good quality for industrial and domestic uses, is beset by more difficult and costly mining conditions than those in other fields competing with our area. Alabama mines cannot, because of their physical conditions, fully mechanize their mining operations. Rock partings and gaseous conditions prevalent in this area increase maintenance costs, and in some mines seriously retard the use of the most modern mechanical equipment. Generally, Alabama coal requires tremendous investment in processing equipment-as much as 50 percent of gross tonnage extracted from mines in this area constitutes waste material which must be removed in surface cleaning plants. These local conditions are responsible for the relatively high cost of production of coal mined in Alabama.

The effect of these difficult conditions can only be minimized by additional research and experimentation and the development of more efficient mining equipment and processes for cleaning and preparation. Expenditures for research and development can be justified only if a reasonable profit can be expected. A health and vigorous coal industry is essential to the safety and welfare of our Nation.

The disappearance of the commercial coal market is reflected by the following statistics of coal tonnages produced in Alabama from railroad connected mines as taken from reports compiled and published by the State of Alabama Department of Industrial Relations. These statistics also show the relatively stable condition (productionwise) of the so-called captive mines (those who process beyond ordinary treatment processes, i. e., coal into coke).

It will be noted from the above schedule that in 1947 the commercial coal tonnage accounted for more than 48 percent of the total production, whereas in 1956 commercial coal accounted for less than 17 percent of the total production. It will also be noted that the 1956 commercial coal tonnage is but 23 percent of the commercial coal produced in 1947. What has been happening to the industry in this district is further indicated by the fact that at September 30, 1946, there were 73 railroad-connected mines in Alabama and 10 years later there were only 32 such mines-a reduction of 56 percent. From the standpoint of the number of operators on railroad-connected mines, the number decreased from 44 in September 1946 to 21 ten years hence a reduction of 52 percent. During this same period the number of nonrailroad-connected mines decreased from 270 to 168 and the number of operators of nonrailroad-connected mines decreased from 269 to 159. The above-mentioned statistics relative to mines and mine operators are also taken from reports compiled and published by the State of Alabama Department of Industrial Relations. Basically, the story presented is the drying up of the commercial coal usage and the marked reduction in the number of mines and mine operators in this district.

EFFECT OF ECONOMIC CONDITIONS ON PERCENTAGE DEPLETION

During the years when there was a fairly good market for coal, the commercial coal operators were able to earn a profit. During this period it was possible for them to secure a small amount of percentage depletion. This served to encourage rather than discourage the operators to stay in business, explore for deposits, and develop processes for recovery and treatment of the coal.

It naturally followed that the sharp decline in the demand for commercial coal was accompanied by a most uneconomic price structure, until many producers were selling the product below cost. This is evidenced by the number of mines and companies that have gone out of business. Those who continue to operate do so under extremely abnormal conditions. These conditions permit little or no profit-hence little or no percentage depletion.

For many years during the period when there was a reasonably free market for commercial coal, prices at which such coal was sold were used to establish representative market or field prices for so-called captive coal (coal processed beyond the normal treatment processes). These prices were then used to calculate gross revenues from the properties for percentage depletion purposes. The Internal Revenue Service insists on the continued use of this method which is clearly unrepresentative and inequitable.

It is an established fact that the relatively high cost of production per ton of high quality coking coal by the captive operators is incurred because the coal is not otherwise available. This cost per ton is in most instances in excess of what the Internal Revenue Service claims to be the representative market or field price. Further, it would be a physical impossibility for the captive operators to purchase their requirements of high quality coking coal in the open market in Alabama. Simply put, there is no such market.

It is apparently the adopted policy of the Service to establish market prices based on isolated and completely unrepresentative transactions. As a result, the Service has taken the unreasonable position that profits of captive companies accrue entirely from manufacturing and no part of such profits are attributable to mining. This policy has resulted in practically no percentage depletion allowances in the Alabama district since the prices used by the Service provide little if any profit and the 50 percent limitation generally eliminates any percentage depletion.