concurrence">Nims, J.,

concurring: I agree with and concur in the majority opinion. In the words of Judge Hufstedler, speaking for the Ninth Circuit in a somewhat analogous situation, “Congress did not create the lacuna through which the taxpayer has tried to leap.” United States v. Regan, 410 F.2d 744, 745 (9th Cir. 1969). The taxpayer there had argued that Congress intended to give taxpayers in her position not only the benefit of capital gains treatment of the income derived from cutting timber, but also the extra tax dividend of deductibility of expenses incurred in reaching the timber. Here, the taxpayer sought capital gains on the sale of coal and deductibility of the cost of the coal.

In the case before us, section 631(c) expressly provides that “the word ‘owner’ means any person who owns an economic interest in coal or iron ore in place, including a sublessor.” (Emphasis added.) Cumberland was a sublessor. Section 631(c), like section 631(b) in the case of timber, measures gain on disposal of the asset (in this case coal) by “the difference between the amount realized from the disposal of such coal * * * and the adjusted depletion basis thereof plus the deductions disallowed for the taxable year under section 272.” The section provides that such gain is capital gain.

As explained in Regan, to find the definition of “adjusted depletion basis” one must pursue a clutch of related Code sections. Section 612 tells us that the basis on which depletion is to be allowed is provided in section 1011. Section 1011 says that basis is cost (sec. 1012) subject to adjustments as provided in section 1016. Section 1016 requires that “proper adjustment * * * be made — (1) for expenditures * * * properly chargeable to capital account.” 410 F.2d at 746. Section 1.631-2(b)(2), Income Tax Regs., then requires that “The depletion unit of coal or iron disposed of shall be determined under the rules provided in the regulations under section 611, relating to cost depletion.”

Further paraphrasing the Regan court’s language, when all of the pieces are pasted together, we can see that section 631(c) contains a direction to subtract capital expenditures, i.e., cost, from the amount realized to determine the capital gain.

Are the royalties which Cumberland paid to the landowners capital expenditures? I think they are. The royalties are directly related to the acquisition and disposal of the coal and should be offset against capital gains realized on the disposal of the coal. For this reason, the majority properly denies the claimed deduction for royalties paid and requires, instead, their inclusion in adjusted depletion basis.

In addition, I would like to point out that the adjusted depletion basis determined by the Commissioner — the amount of royalties paid and sought to be deducted by Cumberland — is consistent with the regulations under sections 631(c) and 611.

The method of allocation of costs to the units disposed of in a given year, pursuant to sec. 1.611-2(a), Income Tax Regs., is reflected in the following formula:

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In order properly to allocate a proportionate part of the adjusted depletion basis to the units of coal sold in a given taxable year, the total cost of all coal purchased and included in the numerator of the above fraction must directly correspond to the total units included in the denominator. It offends logic, and would be grossly unfair to petitioner, to suggest that a single year’s cost may be reflected in the numerator, whereas the coal to be acquired in the current and all future years must be included in the denominator.

For example, Cumberland paid “earned” royalties of $10,723.51 during 1967 and it is assumed that these royalties were paid at the rate of 10 cents per ton. Cumberland therefore in effect sold 107,724 tons of coal to Webster during that year. Applying the formula to these facts, the adjusted depletion basis of the coal disposed of in 1967 was $10,724, determined as follows:

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(The denominator includes only the units of mineral purchased with the $10,724 earned royalties paid in 1967; i.e., the 107,240 tons sold during the year. Whatever reserves remained on the landowners’ property, and for which no payment had yet been made, cannot be said to have been “acquired” by Cumberland until later mined.)

It will be observed that the same result would be reached by applying the example at sec. 1.631-3(b)(3)(ii)(&), Income Tax Regs. The adjusted depletion basis, so determined, also exactly equals the amount of earned royalty for which a deduction is sought. Of course, if Cumberland had incurred other costs disallowed as current deductions under section 272, such costs would properly be added to the numerator of the fraction, thereby proportionately decreasing taxable capital gain.

Fay and Chabot, JJ., agree with this concurring opinion.

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