author: PER CURIAM: NICHOLS, Judge

text:
    BAKERTOWN COAL COMPANY, INC., et al. v. The UNITED STATES.
    No. 53-69.
    United States Court of Claims.
    Oct. 17, 1973.
    LeRoy Katz, attorney of record, for plaintiffs; Richard L. Hirshberg, Washington, D. C., of counsel.
    Charles A. Auslander, Jr., Washington, D. C., with whom was Acting Asst. Atty. Gen. Fred B. Ugast, for defendant; Joseph Kovner, Washington, D. C., of counsel.
    Before COWEN, Chief Judge, and DAVIS, SKELTON, NICHOLS, KASHIWA, KUNZIG and BENNETT, Judges.
   OPINION

PER CURIAM:

This case comes before the court on defendant’s exceptions to a recommended decision filed January 13, 1972, by Trial Judge George Willi. The court has considered the case on the briefs and oral argument of counsel. Since the court agrees with the decision with certain modifications, it hereby affirms and adopts the same as the basis for its judgment in this case. Therefore, it is concluded that plaintiffs are entitled to recover and judgments are entered for them in the amounts and for the periods shown in the Conclusion of Law following the findings of fact.

The opinion of the trial judge, as modified by the court, is as follows:

WILLI, Trial Judge:

The determinative question in this tax refund suit challenging the Revenue Service’s denial of claimed deductions for percentage depletion is whether the inclusion of a bilateral provision for termination without cause on 30 days’ notice converts a lease agreement for the extraction and removal of coal from one that conveys an economic interest in the coal in place into one that does not.

Plaintiffs are two Virginia corporations ; Bakertown Coal Company, Inc. (Bakertown), organized as a taxable corporate entity, and Lester Coal Company (Lester), a Subchapter S corporation appearing here by its individual shareholders.

During the periods in suit, the fiscal years ended July 31, 1964 and July 31, 1965, for Bakertown and calendar 1965 for Lester’s shareholders, the two companies were involved in the drift mining of coal in southwestern Virginia under certain Agreements of Lease entered into with a lessor of various coal-bearing properties in the area.

The relevant features of the basically identical instruments can be summarized as follows:

1. In return for a tonnage royalty subject to a qualified monthly minimum, Bakertown and Lester acquired the right to mine unlimited quantities of coal from designated areas.

2. The lessees had unrestricted ownership of all coal mined and were therefore free to sell it to whomever and at whatever price they chose. Parenthetically it is noted that in practice they employed a commission agent to sell the mined coal for their respective accounts. Proceeds realized from such sales represented the sole source of revenue from which Bakertown and Lester could recover the rents and royalties that they paid for the privilege of mining. ■ The amount of rent and royalty fees payable was altogether unaffected by the price realized by the lessees from their sales of coal.

3. Either party was entitled to terminate the agreement without cause upon 30 days’ advance written notice to the other. In the event of termination, and provided that it was not then in default, the lessee had 60 days to remove any property and improvements that it had located on the leased premises.

After entering into the agreements described above, Bakertown and Lester provided the necessary coal processing and supporting facilities at the leased premises and engaged independent mining contractors for a fixed-fee-per-ton to perform the mining function and deliver the extracted coal to the tipples that the lessees had erected at the production site.

Depreciation deductions have been claimed and allowed for Federal tax purposes in respect to all of Bakertown’s and Lester’s expenditures for capital improvements pursuant to the agreements in suit. Further, current deductions for all operating expenses, including rents and royalties, incurred under the leases, as well as the selling commission separately incurred, have been similarly claimed and allowed.

As additional deductions on their returns for the periods in suit, plaintiffs claimed an allowance for percentage depletion based on the income that each of them derived from sales of coal mined under the aforementioned agreements. When the Internal Revenue Service later audited the returns in question, it disallowed the depletion deductions and assessed the resulting deficiencies in tax. Following payment of the deficiencies and formal disallowance of seasonably filed refund claims this action was brought.

Section 611(a) of the Internal Revenue Code of 1954, as amended, provides for “a reasonable allowance for depletion * •>:• according to the peculiar conditions in each case; such reasonable allowance in all cases to be made under regulations prescribed by the Secretary •» * »

Insofar as pertinent here, Treasury Regulations on Income Tax (1954 Code), Section 1.611-1 (b)(1), provides:

(b) Economic interest. (1) Annual depletion deductions are allowed only to the owner of an economic interest in mineral deposits * * *. An economic interest is possessed in every case in which the taxpayer has acquired by investment any interest in mineral in place * * * and secures, by any form of legal relationship, income derived from the extraction of the mineral * * * to which he must look for a return of his capital. But a person who has no capital investment in the mineral deposit -x- * * (joes not possess an economic interest merely because through a contractual relation he possesses a mere economic or pecuniary advantage derived from production. For example, an agreement between the owner of an economic interest and another entitling the latter to purchase or process the product upon production or entitling the latter to compensation for extraction * * * does not convey a depletable economic interest. -x- -x- * [Emphasis added.]

The concept and definition of economic interest adopted by the Treasury Regulations as the hallmark of eligibility for depletion originated with the Supreme Court in Palmer v. Bender, 287 U.S. 551, 53 S.Ct. 225, 77 L.Ed. 489 (1933). The taxpayer, a lessee of certain oil and gas properties, had transferred his interest in those properties to two oil companies in return for a cash bonus, a future payment to be made “out of one-half of the first oil produced and saved,” and an additional royalty of one-eighth of the oil produced and saved. The Court upheld the taxpayer’s right to depletion on all receipts from the oil companies on the stated grounds that a taxpayer is entitled to depletion where he has: (1) “acquired, by investment, any interest in the oil in place,” and (2) secured “by any form of legal relationship, income derived from the extraction of the oil, to which he must look for a return of his capital.” 287 U.S. at 557, 53 S.Ct. at 226. Further, the Court explained, at 558, 53 S.Ct. 225, that a lease under which the lessee has effective control over the extraction and disposition of underlying mineral constituted the lessee’s capital investment by which it acquired the requisite economic interest in the mineral in place. Such a conclusion was essentially preordained by the Court’s earlier analysis in Lynch v. Al worth-Stephens Co., 267 U.S. 364 45 S.Ct. 274, 69 L.Ed. 660 (1925), of the nature of a mineral lessee’s property interest in the contest of entitlement to depletion. There, it was said (at 369, 45 S.Ct. at 275) :

It is, of course, true that the leases here under review did not convey title to the unextracted ore deposits, United States v. Biwabik Mining Co., 247 U.S. 116, 123 [38 S.Ct. 462, 62 L.Ed. 1017]; but it is equally true that such leases, conferring upon the lessee the exclusive possession of the deposits and the valuable right of removing and reducing the ore to ownership, created a very real and substantial interest therein. See Hyatt v. Vincennes Bank, 113 U.S. 408, 416 [5 S.Ct. 573, 28 L.Ed. 1009]; Ewert v. Robinson, 8 Cir., 289 F. 740, 746-750. And there can be no doubt that such an interest is property. Hamilton v. Rathbone, 175 U.S. 414, 421 [20 S.Ct. 155, 44 L.Ed. 219]; Bryant [Bryan] v. Kennett, 113 U.S. 179, 192 [5 S.Ct. 407, 28 L.Ed. 908].

Though predicating its denial of plaintiffs’ depletion rights solely on the presence of a short-term terminability provision in the subject mining leases, the Government makes no claim that this feature of the agreements either nullifies them (as, for example, sham) or otherwise operates to impart to their remaining terms a meaning or significance materially differing from that conveyed by a natural reading of the language employed. Thus, defendant does not dispute either that these agreements were bona fide mineral leases or that, while in force, they gave plaintiffs essentially the same autonomous authority over extraction and sale of the underlying mineral as did the leases in Palmer, supra, and Alworth-Stephens, supra, where such authority was held to constitute an ample basis for a depletable interest. The property interest represented by that authority is not varied or diminished simply because the authority is subject to the possibility of extinction in the future by a termination of the leases on short notice. The legal effect of a termination on these leases is no less prospective because the advance-notice requirement is only 30 days, than it would be if the specified period were one year. Tiffany, Real Property § 159, 255-56; § 588, 511-16 (3d ed. 1939).

Considering the absence of any defensive suggestion that the depletion rights of a mineral lessee today are in some way less than or different from those confirmed in Palmer and Alworth-Stephens and subsequent definitive Treasury Regulations, and in view of the Government’s total preoccupation with the matter of terminability, we think its position in this case is the product of confusion in the economic interest area of depletion. In our view, the entire defense herein rests on a misapplication of basic principle.

It seems to us that the Government is here attempting to remove transactions from the traditional ambit of economic interest by resort to a principle that it sponsored to liberalize and expand that established concept to encompass transactions not theretofore within it. The erroneous transposition is as between lessees; persons who have acquired the right to remove and retain mineral underlying the leased premises, and mining contractors who, although functionally involved in the production of salable mineral (and therefore financially interested in the life of the deposit as a source of continuing need for their services), have no effective authority over production and acquire no ownership of the extracted mineral.

As this court has observed, aside from Commissioner v. Southwest Exploration Co., 350 U.S. 308, 317, 76 S.Ct. 395, 100 L.Ed. 347 (1956), where upland property owners were deemed to have an economic interest in offshore oil deposits extracted by slant drilling because the use of their property was physically and legally indispensable to the extractive process, the Supreme Court has never found a taxpayer to have a depletable interest in a mineral deposit in the absence of either a fee or leasehold interest in that deposit. Indeed, research has failed to disclose an instance in which any court, prior to 1950, approved a depletions deduction for a taxpayer without one or the other of those credentials. In that year, however, the Treasury first compromised the requirement of a legal interest in the mineral in place. This action, it will be seen, is the real source of the Government’s terminability argument in the present suit.

In promulgating G.C.M. 26290 (1950-1 Cum.Bull. 42), the Treasury confirmed an economic interest in a mining contractor whose sole connection with the subject mineral deposit was performance of the extractive function on a fixed-fee basis. The ruling described the function of such an operator as follows:

Subsequent to development of the steam shovel and other heavy excavating machinery, it was found that coal which did not lie at too great a depth could be economically mined by removing the overlying earth or strata, usually designated as overburden. The companies which first mined coal by this method operated in those parts of the country, principally the Middle West, in which the surface of the land is comparatively level and the coal lies at a fairly uniform distance beneath the surface. These companies bought their own stripping machinery. In the mountainous coal fields of the East there are few large areas which can be mined by removing the overburden, and the owner or lessee of the property does not ordinarily buy the necessary stripping equipment. Accordingly, in the case of small tracts of coal land from which the mineral cannot be economically removed by underground mining, as well as in situations in which a fringe of coal near the surface cannot be satisfactorily extracted by underground methods, the contractor who owns stripping equipment has solved a problem of the industry.

After enumerating the landmark precedents, including Palmer v.'Bender, supra, and Lynch v. Alworth-Stephens Co., supra and reciting the definitive principles of economic interest for which they stand, the ruling proceeds with the following exposition of the basis for its conclusion (at 44-45):

For the purpose of facilitating consideration of the question here involved, a number of stripping con-t tracts which it is, understood are typical of those used in the coal industry have been examined. For convenience, the parties to such contracts will be hereinafter referred to as the coal company and the contractor, respectively. In view of the contents of the contracts examined, it is the opinion of this office that, dependent upon their rights in respect of the properties involved, stripping contractors may be properly regarded as entitled to the deduction for depletion in all respects as in the case of other mineral properties. The fact that some of the contracts bear aspects of agency or employment,- or that ostensibly the contractor may not acquire legal title to the mineral, does not control. (See Caroline C. Spalding v. Commissioner, supra; Caroline C. Spalding v. United States, supra; T. W. Lee et al. v. Commissioner, supra; North Range Mining Co. v. Commissioner, supra; and Eastern Coal Corporation v. Yoke, supra.) The circumstance that stripping contractors at times engage in road building or other forms of activity also appears to be immaterial.
It is not the view of this office, however, that the deduction for depletion is to be granted in every ease. On the contrary, it seems clear that the allowance is warranted only where, under the agreement between the parties, the stripping contractor obtains a capital interest in the mineral in place and must look to severance and sale of the mineral for the return of capital consumed in that process. (See G.C.M. 22730, supra.) In this respect, it is noted that in some instances contracts may be canceled by the coal company at will. Under such circumstances, it would appear that the contractor receives no binding right to extract the mineral and thus fails to obtain a capital interest therein. Lacking such an interest in the mineral, it follows that the contractor cannot properly claim a deduction for depletion.
In the opinion of this office, a contract which is terminable by the coal company at will, and which thus fails to vest in the contractor the requisite capital interest in the mineral in place, is one in which the coal company has an absolute right to cancel at any time without cause or condition. For example, some of the contracts examined reserve to the coal company the right “at its discretion,” without liability for damage or loss to the contractor, to “terminate entirely” all or any part of the work to be done under the contract. It is also the view of this office that a contract which may be arbitrarily terminated by the coal company upon nominal notice should be regarded as one which may be canceled at will. In determining what is “nominal” notice, the essential factor to be considered is whether, as a result of the right of the coal company to issue such a notice, the contractor is left without a right to possession and emploitation of the property for a period of time sufficient to permit extraction by him of a substantial portion of the mineral deposit. In this respect, it would ordinarily seem proper to conclude that a contract which cannot be arbitrarily terminated by the coal company within less than 1 year is not subject to cancellation on “nominal” notice. [Emphasis added.] „

The significance of the ruling for present purposes is that it denominates a mining contractor’s “binding right to extract the mineral,” albeit under the direction and control of another and with no claim of ownership of the extracted product, as the constructive equivalent of the fee or leasehold rights of control over extraction and disposition of the underlying mineral historically regarded as the embodiment of the capital investment prerequisite to a depletable interest in the deposit. Clearly the ruling does not purport to imply that conventional leasehold rights will only amount to an economic interest if exercisable for at least a year or for some other minimum period. Indeed, both this ruling and the forerunner that it cites with approval, expressly and unqualifiedly affirm the depletion rights of a mineral lessee as defined in Al-worth-Stephens.

In sum, it appears that the pertinence of the terminability factor, as advanced by the Treasury, was as a device for enlarging the concept of economic interest in order to afford strip miners, who had no fee or leasehold interest, the benefits of depletion deductions to offset the income that they earned in the form of fees for their extractive services.

In 1959 the Supreme Court first examined and rejected the depletion claims of mining contractors who contended that: “ * * * their contractual right to mine coal from the designated lands and the use of their equipment, organizations and skills in doing so, should be regarded as the making of a capital investment in, and the acquisition of an economic interest in, the coal in place.” Parsons v. Smith, 359 U.S. 215, 224, 79 S.Ct. 656, 663, 3 L.Ed.2d 747. The Court enumerated no less than seven factual bars to entitlement, as follows (at 225, 79 S.Ct. at 663):

(1) that petitioners’ investments were in their equipment, all of which was moveable — not in the coal in place; (2) that their investments in equipment were recoverable through depreciation — not depletion; (3) that the contracts were completely terminable without cause on short notice; (4) that the landowners did not agree to surrender and did not actually surrender to petitioners any capital interest in the coal in place; (5) that the coal at all times, even after it was mined, belonged entirely to the landowners, and that petitioners could not sell or keep any of it but were required to deliver all that they mined to the landowners; (6) that petitioners were not to have any part of the proceeds of the sale of the coal, but, on the contrary, they were to be paid a fixed sum for each ton mined and delivered, which was, as stated in Huss, agreed to be in “full compensation for the full performance of all work and for the furnishing of all [labor] and equipment required for the work”; and (7) that petitioners, thus, agreed to look only to the landowners for all sums to become due them under their contracts. The agreement of the landowners to pay a fixed sum per ton for mining and delivering the coal “was a persona] convenant and did not purport to grant [petitioners] an interest in the [coal in place].” Helvering v. O’Donnell, 303 U.S. 370, 372 [58 S.Ct. 619, 620, 82 L.Ed. 903]. Sure ly these facts show that petitioners did not actually make any capital investment in, or acquire any economic interest in, the coal in place, and that they may not fictionally be regarded as having done so.

Though terminability was one of the seven disqualifying factors mentioned, it cannot be considered either in isolation or in the abstract, as the Government would have it. Rather, it is clear that in the context of the contractor-oriented opinion, coming in the wake of G.C.M. 26290 and the decisions that followed it, the matter of terminability becomes only a colorably relevant factor where the applicant for the allowance lacks the traditional qualifications for depletion, as reflected by the other six conditions referenced by the court.

Following the Supreme Court’s decision in Parsons, supra, the Fourth Circuit denied depletion to two mining contractors and in doing so specifically alluded to the short-term terminability of their mining agreements. Despite these specific holdings, an examination of the cases will reveal that the contractors were equally deficient under each of the six other criteria set forth by the Supreme Court. United States v. Stallard, 273 F.2d 847 (1959); McCall v. Commissioner, 312 F.2d 699 (1963).

In Paragon Jewel Coal Co. v. Commissioner, 380 U.S. 624, 85 S.Ct. 1207, 14 L.Ed.2d 116 (1965), the Supreme Court again considered the rights of contract miners to percentage depletion. The issue there was whether the Paragon Jewel Coal Co., which was the lessee of coal lands, was entitled to a percentage depletion allowance on all of the gross income derived from the sale of coal, or whether the contract miners who did the actual mining were entitled to an allocable portion of the allowance. In holding that the lessee was entitled to the depletion deduction on all of the gross income from the coal, the Supreme Court noted that the mining contractors foundered on all of the seven criteria which had been set forth in Parsons, with the possible exception of the criterion relating to terminability. Terminability was considered because the Fourth Circuit had based its decision in favor of the contractors in part upon a determination that they had the right to mine the coal to exhaustion. As to that matter, the Supreme Court declared at 634 of 380 U.S. at 1212 of 85 S.Ct.:

In any event, the right to mine even to exhaustion, without more, does not constitute an economic interest under Parsons, but is “a mere economic advantage derived from production, through a contractual relation to the owner, by one who has no capital investment in the mineral deposit.”

The Supreme Court also reiterated the rule earlier laid down in Palmer v. Bender, supra, and to a large extent rested its decision on findings that the coal company was bound to pay the com tractors the posted fee regardless of the condition of the market at the time of delivery and, thus, that the contractors did not look to the sale of the coal for a return of their investment but looked solely to the coal company.

In the context of economic interest, terminability has been specifically considered by the Supreme Court only in the evaluation of depletion claims by mining contractors. For the reasons which are so clearly stated in Paragon, we think that the mining contract cases cited by defendant are clearly distinguishable from the case at bar. However, the defendant points to three Tax Court decisions in which depletion was denied a mineral lessee, as distinguished from a mere contract mining operator, on terminability grounds. One of these decisions was affirmed by the Third Circuit.

In Charles P. Mullins, 48 T.C. 571 (1967), the majority denied the lessee depletion under the so-called Bolling Lease, which was terminable by the lessor upon 60 days’ notice to the lessee. The court referred to the Supreme Court’s discussion of the economic interests of mining contractors in Parsons and Paragon and relied strongly on the decisions of the Fourth Circuit which have been previously discussed herein and which involved only mining contractors.

The holding in Mullins was adopted without further explanation or analysis in a Tax Court Memorandum Decision in Kenneth Whitmer, 28 T.C.M. 1480 (1969), denying a lessee depletion because of a 30-day terminability provision in the lease. The decision was affirmed in Whitmer v. Commissioner, 443 F.2d 170 (3rd Cir. 1971). In support of its holding, the Third Circuit cited United States v. Stallard, supra, and United States v. Wade, 381 F.2d 345 (5th Cir. 1967). The taxpayer claiming the depletion allowance in Stallard was a mining contractor who was obligated to mine and deliver the coal to the owner at a fixed price per ton. None of the coal was to be otherwise delivered or sold. Wade involved a mining contractor who was paid a fixed amount for quarrying dolomite and delivering it to the quarry owner under a contract which did not indicate an intention to convey a right or interest to the dolomite in place. His contract was terminable without cause at the end of each year or on 30 days’ notice for cause.

In Winters Coal Co., 57 T.C. 249 (1971), the Commissioner of Internal Revenue urged the court to deny a “lessee” depletion on the grounds that the indenture involved was terminable without cause on 60 days’ notice. While the court acknowledged its prior holding in Mullins, it chose not to rest its decision solely on the terminability principle for which that case stands. Significantly, it went on to find that though nominally a lessee, the petitioner was in reality the captive operator of the lessor; was economically dominated by it in practice, and consequently had no effective control over the disposition of the extracted mineral.

With deference, we decline to follow these cases in deciding the issue before us. At the end of the taxable years in suit, the lease held by the Bakertown Coal Company had been in force for more than 2 years, and the lease of the Lester Coal Company had been in effect for more than 4 years. For application to the facts in this case, we think the following passage from the dissenting opinion of Chief Judge Drennen in Charles P. Mullins v. Commissioner, supra, is a more accurate statement of the purpose for which Congress provided the depletion allowance and of the manner in which Congress intended that it be applied:

The percentage depletion deduction is geared primarily to production; it is allowable as a percentage of the gross income from the property, sec. 613(a), I.R.C.1954, which is defined in section 613(c) (except in the case of oil and gas) as “the gross income from mining.” Under the Bolling lease, as under the other two leases, petitioners were the only persons who could have any “gross income from mining” the coal that they mined under the lease, except possibly for the royalty paid to the lessor (against which the depletion deduction is not allowed under section 631(c)—see Paragon Jewel Coal Co. v. Commissioner, 380 U.S. [624], 633 [85 S.Ct. 1207, 14 L.Ed.2d 116]). Petitioners were not mining the coal for the lessor, as was the situation in the Paragon case and many of the contract miner cases which have given rise to so much litigation in this area of tax law in recent years. Under the Bolling lease petitioners were entitled to mine all the merchantable and minable coal under the leased area (unless and until the lease is terminated by the lessor), they were obligated to pay all the costs of mining plus a tonnage royalty on the coal mined, they had complete title tb the coal once it was removed, and they were entitled to sell it to whomever they wanted at whatever price they could sell it for. In other words they were required to look to the extraction of the coal and the sale thereof for a return of their investment and their profit; they were not required to deliver all the coal mined to the lessor for a fixed price or fee per ton.
If the only question here was whether the lessor or the lessees were entitled to the depletion deduction, I would have no hesitancy in saying that the lessees were entitled to it. This is because I think the lessor surrendered all or a part of his economic interest in the coal under the Bolling tract to the lessee while the lease was in effect; and we are concerned with depletion on coal that was mined while the lease was effective.
But there is no question that the case law and the Commissioner’s regulations have engrafted on the requirements of the law that to be entitled to a deduction for depletion the taxpayer must have an economic interest in the mineral deposits. I agree with the majority that the petitioners had an economic interest in the coal underlying the Blair and Clintwood leases, for the reasons stated in .the opinion. I cannot agree that they had any less economic interest in the coal underlying the Bolling lease; the only difference was that their interest under the Bolling lease was subject to divestment if the lessor exercised his right to terminate. Until such time as the lessor exercised that right, in my opinion petitioners had such an economic interest in the coal deposit that would support the depletion deduction. If the lessor exercised his right to terminate, the entire economic interest would then revert to the lessor. But we are not here concerned with coal mined after that time.

Moreover, we think the views expressed by Chief Judge Drennen in that case are supported by the following statement of the Supreme Court in Lynch v. Alworth-Stephen Co., supra:

The general provision in § 12(a), Second, is that the deduction from gross income shall include a reasonable allowance for the “exhaustion *- * 0f property.” There is nothing to suggest that the word “property” is used in any restricted sense. In the case of mines, a specific kind of property, the exhaustion is described as depletion, and is limited to an amount not exceeding the market value in the mine of the product mined and sold during the year. The interest of respondent under its leases in the mines being property, its right to deduct a reasonable allowance for exhaustion of such property, if there be any, during the taxable year results from the plain terms of the statute, such deduction, since the property is an interest in mines, to be limited to the amount of the exhaustion of respondent’s interest caused by the depletion of the mines during the taxable year. We agree with the circuit court of appeals, [8 Cir.] 294 F. [190] 194, that, “The plain, clear and reasonable meaning of the statute seems to be that the reasonable allowance for depletion in case of a mine is to be made to every one whose property right and interest therein has been depleted by the extraction and disposition ‘of the product thereof which has been mined and sold during the year for which the return and computation are made.’ And the plain, obvious and rational meaning of a statute is always to be preferred to any curious, narrow, hidden sense that nothing but the exigency of a hard case and the ingenuity and study of an acute and powerful intellect would discover.” [267 U.S. 364, 369-370, 45 S.Ct. 274, 275-276] [Emphasis added.]

There is another factor which militates in favor of the plaintiffs. Unless plaintiffs prevail, no one will be entitled to or will receive any percentage depletion allowance on the coal removed from the land during the years at issue. Under the express terms of Section 631(c) of the 1954 Code, the lessors are “relegated to capital gains treatment of the royalties received.” Paragon Jewel Coal Co. v. Commissioner, supra, 380 U.S. at 636, 85 S.Ct. at 1213. None of the independent contractors has made a claim for a percentage depletion allowance and, if they made such claims, the terms of their contracts with plaintiffs would preclude them from entitlement to such allowances.

This is not a case in which we are called upon to decide whether plaintiffs would be entitled to recover if the duration of their leases was for only one day, or if their leases were terminable at the will of the lessor without advance written notice and without cause. Through the leases which they held, plaintiffs acquired an interest in the coal in place. The leases authorized them to extract and dispose of the coal underlying the leased premises to whomever and at whatever prices they chose. The income which they received was solely derived from and tied to the extraction and sale of the coal during the taxable years involved. The existence of these factors is sufficient to constitute a depletable interest under the rules that have been laid down by the Supreme Court from Lynch v. Alworth-Stephens and Palmer v. Bender to the present time.

Accordingly, the plaintiffs are entitled to recover the deficiencies in suit.

NICHOLS, Judge

(dissenting):

I dissent because I do not think the authorities cited support the proposition that a lessee of coal lands has an economic interest in the coal in place if the lease is terminable upon 30 days notice, without cause.

In Parsons v. Smith, 359 U.S. 215, 224, 79 S.Ct. 656, 3 L.Ed.2d 747 (1959) the Supreme Court stated that terminability upon short notice was one of seven factors which required it to conclude that the taxpayer contractor did not have an economic interest in the coal entitling them to deductions for depletion. The majority has interpreted this opinion to mean that terminability is only one of seven factors that must be -balanced in determining whether a taxpayer has an economic interest. This interpretation defeats the purpose behind the “economic interest doctrine”.

“Economic interest” is a judicial concept designed to give effect to the substance as opposed to the form of a transaction. Palmer v. Bender, 287 U.S. 551, 53 S.Ct. 225, 77 L.Ed. 489 (1933). It requires that a taxpayer have an economic rather than a legal interest in the natural resource in place. Commissioner v. Southwest Exploration Co., 350 U.S. 308, 76 S.Ct. 395, 100 L.Ed. 347 (1956). The Tax Court and Fourth Circuit were clearly correct in concluding that there is no such “economic interest” where the rights of the taxpayer in the mineral in place are terminable at the whim of the landowner upon minimal notice. Charles P. Mullins, 48 T.C. 571 (1967); McCall v. Commissioner, 312 F.2d 699 (4th Cir. 1963). I do not think the difference between 30 days notice and one days notice is so great as to warrant a difference in tax treatment as the court intimates. There is nothing in the findings to show that the right to remove coal for 30 days only is of substantial value.

The royalties did not vary according to the market value of coal. It would appear, if that value appreciated, the lessors could terminate in order to preserve to themselves the benefit of the appreciation. If it declined, the lessees could terminate so as to avoid bearing the pecuniary consequences of the decline. If the value of the coal in place in the ground rose or fell according to the market price of severed coal, then the consequences, favorable or unfavorable, of market changes, inured to the lessor, not the lessee.

The court seems to assume plaintiffs fail under only one of the seven criteria used in Parsons, terminability, criterion 3, but they also fail under criterion 4 (359 U.S. p. 225, 79 S.Ct. p. 663):

* * * that the landowners did not agree to surrender and did not actually surrender to petitioners any capital interest in the coal in place * * *

You do not have a capital interest in what can be snatched away from you without cause.

xiie expectation that the other party to a contract, profitable to the taxpayer, will not terminate as he has a right to do, has been held to be a capital asset and the loss from cancellation a deductible loss. Parmelee Transp. Co. v. United States, 351 F.2d 619, 173 Ct.Cl. 139 (1965); Meredith Broadcasting Co. v. United States, 405 F.2d 1214, 186 Ct.Cl. 1 (1968). It is my opinion that the expectation of the taxpayers here, that the leases would not be terminated, was an intangible asset of the same kind, and not an economic interest in the coal in place.

       The dissenting opinion of NICHOLS, Judge, follows the opinion of the trial judge which has been adopted by the court.

      . Drift mining is an underground mining operation in which a horizontal coal seam is reached by clearing away a part of the mountainside with a bulldozer. Two openings are made into the coal seam. One is an entry and the other is an air course used to ventilate the mine. Coal is removed as the drift mine is driven into the mountain following the seam of coal. Paragon Jewel Coal Co. v. Commissioner, 380 U.S. 624, 629 n. 5, 85 S.Ct. 1207, 14 L.Ed.2d 116 (1965).

      . The regulation’s express declaration that a right to receive compensation for extraction of a mineral does not constitute an economic interest in it was added in 1960 by T.D. 6446, 25 Fed.Reg. (Par. 1) 482; presumably prompted by the 1959 decision in Parsons v. Smith, 359 U.S. 215, 79 S.Ct. 656, 3 L.Ed.2d 747, denying depletion to a contractor whose sole interest in a coal deposit was that of receiving a fixed price per ton for the work of removing it from the ground. In 1965 the Supreme Court declared itself explicitly on this point. Paragon Jewel Coal Co. v. United States, supra, 380 U.S. at 634, 85 S.Ct. 1207.

      . Because it is coal that is involved in this suit, the general prescription of Code Section 611(b) for an equitable apportionment of the depletion allowance between lessor and lessee is inapplicable. See Code Sec. 631(c).

      . CBN Corporation v. United States, 364 F.2d 393, 396-397, 176 Ct.Cl. 861, 866-867 (1966).

      . In 1956 the Treasury issued Rev.Rul. 56-542, 1956-2 Cum.Bull. 327, extending depletion rights to a mining company’s stockholders in respect to mineral deposits owned by the company. See National Steel Corp. v. United States, 364 F.2d 375, 176 Ct.Cl. 952 (1966).

      . G.C.M. 22730 (1941-1 Cum.Bull. 214).

      . As previously noted in footnote 2, supra, beginning in 1960 the applicable Treasury Regulations expressly deny depletion deductions in respect to such income. Moreover, in 1970 G.C.M. 26290 was formally rescinded as obsolete. Rev.Rul. 70-277, 1970-1 Cum.Bull. 280-281.

      . Merritt v. Comm’r and Comm’r v. Paragon Jewel Coal Co., 330 F.2d 161 (1964).


source: Caselaw Access Project

author: PER CURIAM:

license: Public Domain

text:
    Thelma W. SPEIR et al. v. The UNITED STATES.
    No. 728-71.
    United States Court of Claims.
    Oct. 17, 1973.

      David H. Fritts, Savannah, Ga., attorney of record for plaintiffs.
    J. Hank Meshorer, Washington, D. C., with whom was Asst. Atty. Gen. Wallace H. Johnson, for defendant.
    Before CO WEN, Chief Judge, and DAVIS, SKELTON, NICHOLS, KUNZIG and BENNETT, Judges.
   OPINION

PER CURIAM:

This case comes before the court on plaintiffs’ motion, filed July 19, 1973, requesting that the court adopt, as the basis for its judgment in this case, the recommended decision, filed April 24, 1973, by Senior Trial Judge Mastín G. White pursuant to Rule 134(h), defendant having filed no exceptions thereto and the time for so filing pursuant to the Rules of the court having expired. Upon consideration thereof, without oral argument, since the court agrees with the decision, as hereinafter set forth, it hereby affirms and adopts the same as the basis for its judgment in this case. Therefore, it is concluded that plaintiffs are entitled to recover for the temporary taking of an avigation easement over their property during the period that began on October 18, 1967, and ended on March 22, 1972, and judgment is entered for plaintiffs to that effect with the amount of recovery to be determined in subsequent proceedings under Rule 131(e).

OPINION OF TRIAL JUDGE

WHITE, Senior Trial Judge:

The plaintiffs are the owners of a 683-acre tract of land commonly known as the “Tipperary Tract,” which is located in a sparsely settled portion of Chatham County, Georgia, approximately 16V2 miles west of Savannah, Georgia. They sue in the present case because of the alleged taking by the defendant of a so-called avigation easement, or easement of flight, for military aircraft over their property.

It is my opinion that the plaintiffs are entitled to recover, but not the amount requested in the petition.

About one-half of the Tipperary Tract is cleared and, at all times material to this case, has been used by the plaintiffs for the growing of crops and the raising of beef cattle. The remainder of the tract is pine woodland, with the exception of approximately 70 acres in the eastern portion of the property, where there is a hardwood swamp adjacent to the Little Ogeechee River. The farming operations on the Tipperary Tract are performed by a farm hand, who is employed by, and receives wages from, the plaintiffs for this purpose. The farmer, together with other members of his family, lives in a small frame dwelling that is located near the center of the Tipperary Tract.

In addition to the farming operations previously mentioned, the Tipperary Tract has been used to some extent through the years for recreational purposes, particularly dove hunting and quail hunting.

Sometime prior to June 1967, and as a result of the intensification of the war in Vietnam, Hunter Army Airfield at Savannah, Georgia, was assigned the mission of training Army helicopter pilots. In order to augment this mission, the Army constructed at various locations in Chatham County, Georgia, staging fields where helicopter pilots involved in the training program could practice landings and takeoffs. One of these staging fields, commonly known as “Cu Chi,” was located approximately I, 490 feet southeast of the Tipperary Tract.

Upon the completion of Cu Chi in the fall of 1967, the field consisted of six paved parallel runways, running in a northwesterly-southeasterly direction. In addition, a metal building on a concrete slab, a brick building, and an air-traffic control tower 25 feet tall were constructed at Cu Chi. The buildings were used for the storage of equipment, while the tower contained a console and radio equipment for communicating with airborne pilots. The buildings at Cu Chi were heated, but no running water was available. The field was furnished with an outdoor latrine.

Army helicopter flights began at Cu Chi on October 18, 1967. On the first day, there were approximately 60 to 70 flights by helicopters over the Tipperary Tract. Thereafter, the helicopter flight training at Cu Chi continued until March 22, 1972, on the basis of 6 days per week, with the daily flight program beginning around 7 a. m. and continuing until the late afternoon or into the evening (e. g., until 8 p. m. or 9 p. m.). The number of helicopter flights over the Tipperary Tract gradually increased until 1969, when such flights averaged II, 533 per month. The number of helicopter flights over the Tipperary Tract gradually decreased after 1969, but even in 1972, up until March 22, such flights totaled 9,434.

When flying over the Tipperary Tract before landing at, or aftér taking off from, Cu Chi, helicopters flew at 'an altitude that varied between a minimum of about 250 feet above the surface (over the portions of the Tipperary Tract near Cu Chi) and a maximum of about 700 feet above the surface (over portions of the Tipperary Tract distant from Cu Chi). Helicopters were generally at a height of less than 500 feet above the surface when they flew over the farmhouse on the Tipperary Tract.

There is a public right of freedom of transit in the airspace over privately owned land beginning at the 500-foot level above the surface of the ground in uncongested areas, and the public has the right to travel in this airspace with the same freedom as it has to travel on the public highways or on navigable waters. Aaron v. United States, 311 F.2d 798, 801, 160 Ct.Cl. 295, 300 (1963); Town and Country Motor Hotel, Inc. v. United States, 180 Ct.Cl. 563, 570-571 (1967). On the other hand, numerous court decisions have held that where flights by Government-owned aircraft over privately owned land at altitudes of less than 500 feet from the surface of the ground have been of such frequency and have created such conditions as to constitute a direct, immediate, and substantial interference with the use and enjoyment of the property, there has been a taking by the Government of an avigation easement, or easement of flight, in the airspace over the property, and this taking is compensable under the Fifth Amendment to the Constitution (e. g., United States v. Causby, 328 U.S. 256, 266, 66 S.Ct. 1062, 90 L.Ed. 1206 (1946); Mid-States Fats and Oils Corp. v. United States, 159 Ct.Cl. 301, 309 (1962); A. J. Hodges Industries, Inc. v. United States, 355 F.2d 592, 594, 174 Ct.Cl. 259, 262 (1966)).

As previously indicated in this opinion, Government-owned helicopters flew above the Tipperary Tract with great frequency during the period from October 18, 1967, to March 22, 1972, and apparently each of these flights was at an altitude of about 250 feet above the surface of the ground as the helicopter passed over the portion of the Tipperary Tract near Cu Chi, immediately before landing at or taking off from Cu Chi. Although these helicopter flights at low altitudes were wrongful invasions into the airspace as to which the plaintiffs had a legally protected property interest, such flights did not amount to a taking of an avigation easement unless they interfered substantially with the use and enjoyment of the property. Adaman Mutual Water Co. v. United States, 181 F.Supp. 658, 659, 143 Ct.Cl. 921, 923 (1958).

There is no evidence in the record indicating that flights by helicopters over the Tipperary Tract during the period October 1967-March 1972 interfered with the crops, the cattle, or the timber on the Tipperary Tract. On the other hand, the evidence shows that helicopter flights at altitudes of less than 500 feet over the farmhouse on the Tipperary Tract interfered with television reception there, causing the TV picture to “jump” and drowning out the sound from the TV set; that a telephone conversation at the farmhouse was impossible when a helicopter was flying overhead at an altitude of less than 500 feet; that a conversation face-to-face anywhere on the Tipperary Tract was impossible when a helicopter was flying overhead at a height of less than 500 feet; that the noise from helicopters flying overhead caused doves to leave the Tipperary Tract, and thus ruined the dove hunting on the tract; and that the noise from helicopters flying overhead also seriously interfered with the quail hunting on the Tipperary Tract. The noise from helicopters flying over the Tipperary Tract at low altitudes was variously described as “bad,” “rather piercing,” “weird,” “annoying,” “most definitely bothersome,” “very irritable [irritating],” and “unbearable.”

The facts summarized in the preceding paragraph of this opinion warrant the conclusion, and it is found, that flights by Government-owned helicopters over the Tipperary Tract at low altitudes interfered substantially with the use and enjoyment of the property, and, therefore, that the defendant took an avigation easement, or easement of flight, for flights by Government-owned helicopters through the airspace over this property at altitudes of 250 feet and higher above the surface of the ground. The avigation easement began in the airspace at the lowest elevation regularly and frequently affected by the intrusions of the Government-owned helicopters; and the easement pertained to the airspace over the entire tract of land. A. J. Hodges Industries, Inc. v. United States, supra, 355 F.2d at 596-597, 174 Ct.Cl. at 266.

The taking occurred on October 18, 1967, when the defendant began to fly its helicopters regularly and frequently through the airspace at low altitudes above the Tipperary Tract, with the intent to continue to fly the helicopters over the property at will. Highland Park, Inc. v. United States, 161 F.Supp. 597, 600, 142 Ct.Cl. 269, 273 (1958).

However, it appears that the defendant, at the time when its helicopters began to fly regularly and frequently through the airspace above the Tipperary Tract at low altitudes, did not intend to utilize the airspace for such flights on a permanent basis. The establishment of Cu Chi was an outgrowth of the intensification of the war in Vietnam, and the evidence indicates that it was the defendant’s intention to utilize Cu Chi only so long as there was a heavy demand for Army helicopter pilots in Vietnam. As this country’s participation in the Vietnam war wound down, the need for Cu Chi ended, and that field was closed on March 22, 1972. The runways were painted with X’s, indicating that the field was closed; the gate to the field was locked; the console and radios were removed from the tower; the contract providing for electrical power to the field was cancelled; and all persons who had previously provided support for the operations at Cu Chi— such as crash rescue, air traffic control, and fuel — were notified that they were no longer needed at Cu Chi. Since March 22, 1972, the training arm of Hunter Army Airfield has not had any need for or interest in Cu Chi; and the Army does not have any plan to reactivate Cu Chi. In fact, Hunter Army Airfield is in jeopardy of being closed.

The Government’s intention— at the time when it first caused its helicopters to fly over the Tipperary Tract at low altitudes — with respect to the permanent or temporary use of such airspace is an important factor in determining whether the avigation easement was a permanent one or a temporary one. Aaron v. United States, supra, 311 F.2d at 802, 160 Ct.Cl. at 312. Since Cu Chi, from its inception, was a temporary facility and was to be used only for a temporary period (although the length of that period was unknown at the beginning), it is concluded that the avigation easement taken by the defendant in the airspace over the Tipperary Tract was a temporary one and terminated on March 22, 1972.

Under the Fifth Amendment to the Constitution, the plaintiffs are entitled to “just compensation” for the property interest that was taken by the defendant for the period from October 18, 1967, to March 22, 1972. Just compensation is the value of the interest taken; and the term “value” is ordinarily used in the sense of “market value” or “fair market value,” i. e., “market value fairly determined.” United States v. Miller, 317 U.S. 369, 374, 63 S.Ct. 276, 87 L.Ed. 336 (1943); General Motors Corp. v. United States, 323 U.S. 373, 379, 65 S.Ct. 357, 89 L.Ed. 311 (1945).

Compensation for the taking of an easement of flight is to be determined as of the time and place of the taking. Mid-States Fats and Oils Corp. v. United States, supra, 159 Ct.Cl. at 309. Unfortunately, the evidence in the present record does not permit a determination to be made concerning the value of the avigation easement that was taken temporarily by the defendant in the airspace above the Tipperary Tract on October 18, 1967. The plaintiffs’ theory of the case was that the defendant took a permanent avigation easement in the airspace over their property, and that this forever deprived them of any opportunity to develop the Tipperary Tract for residential use. In this connection, the evidence shows that, as of October 1967, it was the intention of the plaintiffs to develop the Tipperary Tract for residential use by subdividing it into small farm tracts whenever conditions might seem to be right for such development.

However, the conditions were not right in October 1967 for the residential development of the Tipperary Tract. As of October 1967, the general area surrounding the Tipperary Tract was very sparsely populated, and it was the slowest-growing part of Chatham County. The Tipperary Tract itself was relatively inaccessible, as it could be reached only by way of a couple of unpaved dirt roads, which were so narrow that it was difficult for two automobiles to pass each other on either of these roads. Because of the dirt surface, the two roads were virtually unusable in wet weather. There was no public water system or sewer system in the area, and none was planned for the area. Consequently, the conclusion seems inescapable that the highest and best use of the Tipperary Tract as of October 1967 was for agricultural purposes, and not for residential development by being divided into small farm tracts.

Furthermore, as indicated in an earlier portion of this opinion, the Government’s action in temporarily taking an avigation easement in the airspace above the Tipperary Tract did not permanently deprive (and it probably did not even delay) the plaintiffs in carrying out their plan of ultimately developing the Tipperary Tract for residential use whenever conditions might seem to be right for such development. The defendant’s avigation easement terminated on March 22, 1972, and since that date the defendant has not had any right to operate its aircraft in the airspace above the Tipperary Tract at low altitudes. Consequently, that particular factor will not hamper the plaintiffs in the development of the Tipperary Tract for residential use whenever they decide that such development is expedient.

As the plaintiffs’ evidence in the present record on the subject of damages is not helpful in determining the value of the property interest which the defendant actually took, it will be necessary for the issue of damages to be determined in subsequent proceedings under Rule 131(c), unless the parties are able to reach an agreement on that point.

       Whereas the court adopts the trial judge’s separate findings of fact which are set forth in his report filed April 24, 1973, they are not printed herein since sucli facts as are necessary to the decision are contained in his opinion.


author: KUNZIG, Judge:

text:
    Donald Q. COSTER v. The UNITED STATES.
    No. 328-72.
    United States Court of Claims.
    Oct. 17, 1973.
    Irving R. M. Panzer, Washington, D. C., for plaintiff.
    Rose E. Adewale-Mendes, with whom was Acting Asst. Atty. Gen. Irving Jaffe, Washington, D. C., for defendant.
    Before COWEN, Chief Judge and DAVIS, SKELTON, NICHOLS, KASHIWA, KUNZIG and BENNETT, Judges.
    ON DEFENDANT’S MOTION AND PLAINTIFF’S CROSS MOTION FOR SUMMARY JUDGMENT
   KUNZIG, Judge:

In this civilian pay case, both parties have sought, by cross motions for summary judgment, a determination as to which statute, the Foreign Service Act of 1946, as amended, 22 U.S.C. § 1008 (1970), or the Veterans’ Preference Act of 1944, as amended, 5 U.S.C. § 7512 (1970) and 5 U.S.C. § 7701 (1970), is controlling over the dismissal of a Foreign Service Reserve Officer who was serving under a time-limited appointment.

We hold that the clear language of the statutes necessitates a finding that the Foreign Service Act is controlling and that the Veterans’ Preference Act is not applicable to this plaintiff. Since there is no alternative claim that the dismissal pursuant to the Foreign Service Act was improper, we find no impropriety in the dismissal. Accordingly, the Government’s motion for summary judgment should be granted.

On November 1, 1959, plaintiff was appointed by the International Cooperation Administration (ICA) as Deputy Mission Director for the United States Operations Mission for Vietnam. The Standard Form 50 (SF-50) effecting his appointment designated the position as “Excepted Appointment (Indefinite).” On November 4, 1961, plaintiff was transferred from ICA to the Agency for International Development (AID) when the former was abolished. Soon after his transfer, plaintiff requested that he be covered under the Civil Service Retirement System rather than the Social Security System. Accordingly, an SF-50 was issued on November 30, 1961 stating that plaintiff’s appointment was changed to “Excepted Appointment— Foreign Service Reserve (CORRECTION).”

On June 24, 1962, an SF-50 was issued reassigning plaintiff from Vietnam to the AID mission in Tunisia. Item 5 of the SF-50 stated: “Excepted Appointment Foreign Service Reserve Limited (NTE December 23, 1964 COB).” This was plaintiff’s first “Not to Exceed” appointment. Thereafter, a series of SF-50’s were issued, all in the “Not to Exceed” form, extending plaintiff’s appointment to July 31, 1970.

Plaintiff was notified by letter dated April 21, 1970 that he would be terminated at the expiration of his then existing time-limited appointment (July 31, 1970) due to the lack of a suitable available reassignment. After a one month extension to August 30, 1970, plaintiff’s termination was implemented by an SF-50 issued September 1, 1970 under the authority of section 638 of the Foreign Service Act.

Plaintiff, contending that he was a “preference eligible employee,” filed an appeal with the Civil Service Commission (the Commission) which was denied as untimely. Upon reconsideration, the Commission reopened the case and permitted the parties to file briefs on the issue of whether AID was required to separate Mr. Coster under the Veterans’ Preference Act and the applicable regulations of the Commission (5 C.F.R. Part 752) or whether the Agency was authorized to separate him without regard to that statute and those regulations, under section 638 of the Foreign Service Act. The Commission also placed in issue the basic problem of whether plaintiff was entitled to appeal his separation from AID to the Commission pursuant to 5 U.C.S. § 7701 (1970). In a decision dated June 21, 1972, the Commission held that plaintiff was not protected by the Veterans’ Preference Act and, consequently, that the removal action by AID was not subject to appeal to the Commission. Having exhausted his administrative remedies, plaintiff turns to this court for relief, seeking back wages allegedly due him as a result of his removal. The same issues raised before the Commission are presented in this action and are ripe for decision.

The two statutes here in issue provide conflicting provisions concerning dismissal of an employee. The Veterans’ Preference Act specifies procedural safeguards which are a prerequisite to dismissal of a preference eligible employee. Section 638 of the Foreign Service Act, on the other hand, empowers the Secretary of State to terminate at any time the services of any reserve officer without precondition. Thus, with regard to dismissals, these statutes are inconsistent. Obviously this inconsistency is in issue only if both statutes are applicable to plaintiff’s situation.

The Foreign Service Act applies only to Foreign Service employees serving under a limited appointment. Plaintiff clearly held such a position. Although he originally received an “indefinite appointment,” this was changed in June 1962 and all of his subsequent appointments were of a limited nature couched in “Not to Exceed” terms. Thus, the Foreign Service Act was applicable to plaintiff. Accordingly, he was subject to termination at any time by the Secretary of State without prior notice and without a right of appeal to the Civil Service Commission.

The Veterans’ Preference Act, on the other hand, applies to preference eligible employees, which are defined as permanent or indefinite preference eligibles who have completed a probationary period. 5 U.S.C. § 7511 (1970). It is plaintiff’s position that, although his appointment at the time of dismissal was a limited one, it was also indefinite for the purposes of the Veterans’ Preference Act. In support of this position, plaintiff cites Born v. Allen, 110 U.S.App.D.C. 217, 291 F.2d 345 (1960), in which an appointment which was “limited to four years or need of employee’s services, whichever is less,” qualified as “permanent or indefinite” within the meaning of the Veterans’ Preference Act. This court has adhered to the Born reasoning in Ainsworth v. United States, 180 Ct.Cl. 166 (1967).

There is no need in this case either to challenge or to affirm the Born and Ainsworth opinions because, even if plaintiff’s appointment is considered limited and indefinite, there is other language in the Foreign Service Act which compels the conclusion that it supersedes the Veterans’ Preference Act, thus avoiding a conflict between the two laws. Such language is crucial to the disposition of this case.

Section 638 of the Foreign Service Act begins with the following phrase: “Notwithstanding the provisions of this or any . other law * * *.” This clearly demonstrates that the Act was intended to supersede all previous laws including the Veterans’ Preference Act. It is difficult to imagine any clearer statutory language that Congress could have employed to convey its intent that a particular statute should prevail over other possibly conflicting provisions. This court has recently held that language such as “notwithstanding the provisions of this or any other law” covers the waterfront regarding the operational scope of the statute. Guarriello v. United States, 475 F.2d 640, 642, 201 Ct.Cl. 129, 133 (1973).

Despite the foregoing, plaintiff relies heavily on the Supreme Court opinion in Cole v. Young, 351 U.S. 536, 76 S.Ct. 861, 100 L.Ed. 1396 (1956), for the proposition that a statute alleged to cut across the Veterans’ Preference Act is to be narrowly construed. In Cole, the Supreme Court held that the mandate of the Summary Suspension Act of 1950, as construed, was not strong enough to overcome the procedural rights of a preference eligible employee under the Veterans’ Preference Act.

Although the situation in Cole was similar to that in the instant case, there was one critical distinguishing factor. The Cole Court concluded that no real conflict existed between the Veterans’ Preference Act and the Summary Suspension Act as only the former statute actually applied to petitioner’s situation. Id. at 557-558, 76 S.Ct. 861. In the present case, on the other hand, as has been explained above, plaintiff’s discharge was clearly authorized by the Foreign Service Act, and thus a genuine conflict between it and the Veterans’ Preference Act is presented. In such a case, the mandate of the “notwithstanding” clause must be construed to make the Foreign Service Act prevail over the Veterans’ Preference Act and any other apposite law.

This court has also permitted another statute to “cut across” the Veterans’ Preference Act. In Kirschner v. United States, 172 Ct.Cl. 526 (1965), this court held that section 621(d) of the Foreign Assistance Act (together with the implementing delegations) gave the Administrator full discretion to decide which employees of ICA should be transferred to AID without regard to the provisions of the Veterans’ Preference Act. As in the instant case, section 621(d) provided that the decision as to transferring personnel rested with the President (or his delegates) “notwithstanding any other provision of law.” Thus, the court’s position in this case is not new, but is consistent with previous case law construing the same type of language.

In light of the foregoing, we hold the Foreign Service Act is controlling over plaintiff’s dismissal. The clear statutory language necessitates a finding that Congress intended that it should govern such situations notwithstanding any other provisions of any other law. Accordingly, the Government’s motion for summary judgment is granted; plaintiff’s cross motion for summary judgment is denied; and the petition is hereby dismissed.

      . Section 7512 reads in pertinent part:
      “(b) A preference eligible employee against 'whom adverse action is proposed is entitled to—
      “(1) at least 30 days’ advance written notice, except when there is a reasonable cause to believe him guilty of a crime for which a sentence of imprisonment can be imposed, stating any and all reasons, specifically and in detail, for the proposed action ;
      “(2) a reasonable time for answering the notice personally and in writing and for furnishing affidavits in support of the answer; and
      “(3) a notice of an adverse decision.”

      . Title 22 § 1008 reads in part:
      “Notwithstanding the provisions of this or any other law, the Secretary may, under such regulations as he may prescribe, terminate at any time the services of any Reserve officer or staff officer or employee serving under limited appointment * * ’

      . The Court found that petitioner’s position did not involve “national security,” as was required by the terms of the Summary Suspension Act.


author: PER CURIAM: COLAIANNI, Trial Judge:

text:
    EMECO INDUSTRIES, INC. v. The UNITED STATES.
    No. 547-71.
    United States Court of Claims.
    Oct. 17, 1973.

      Alexander M. Heron, Washington, D. C., atty. of record, for plaintiff. Murray S. Simpson, Jr., Pope, Ballard & Loos, Washington, D. C., of counsel.
    Russell W. Koskinen, Washington, D. C., with whom was Acting Asst. Atty. Gen. Irving Jaffe, for defendant.
    Before COWEN, Chief Judge, and DAVIS, SKELTON, NICHOLS, KASHIWA and BENNETT, Judges.
   OPINION

PER CURIAM:

This case comes before the court on plaintiff’s motion, filed. August 23, 1973, for judgment and for adoption of the recommended decision filed May 30, 1973, by Trial Judge Joseph V. Colaianni pursuant to Rule 134(h), defendant having withdrawn its previously filed notice of intention to except to said decision. Upon consideration thereof, without oral argument since the court agrees with the Trial Judge’s decision, as hereinafter set forth, it hereby affirms and adopts the same as the basis for its judgment in this case. Therefore, plaintiff is entitled to recover and judgment is entered for plaintiff with the amount of recovery to be determined pursuant to Rule 131(c).

OPINION OF TRIAL JUDGE '

COLAIANNI, Trial Judge:

The claim in this case arises from a September 24, 1969, solicitation from defendant, acting through the Federal Supply Service of its General Services Administration, hereinafter referred to as “GSA,” for the manufacture of 31,896 index card boxes. The solicitation indicated that the boxes were to be delivered in varying specified quantities to 1,500 addresses, and bids were requested F.O.B. destination.

Following the bid opening, defendant on October 16, 1969, requested a plant inspection report to determine if plaintiff’s facilities were capable of producing the entire 31,896 boxes within the time specified by the solicitation. The inspection was completed on October 24, 1969, and the report indicated that plaintiff was capable of performing the contract within the 70 days required by the contract, notwithstanding that plaintiff had never manufactured index card boxes before. The report further noted that plaintiff had made arrangements to purchase four dies, at a total cost of $10,300, which were essential in order for it to manufacture the boxes. The dies were to be delivered within 30 days after defendant had approved plaintiff’s preproduction sample.

In the meantime, although unknown to plaintiff, defendant on October 17, 1969, received a late bid from Art Steel Company, Inc. On October 22, 1969, following an investigation, defendant’s contracting officer concluded that the late receipt of Art Steel's bid was due solely to a delay in the mail and that the bid should therefore be considered for award. Art Steel offered to build boxes to defendant’s specifications at a price of $2.78 each, but limited its bid by the following clause, to only 29,183 boxes:

Bidding on quantity less than specified, in accordance with provision contained in paragraph IOC of Standard Form 33A. Bid covers all quantities specified except 2,713 boxes for Navy requirements * * *.

The fact that Art Steel’s offer to manufacture and ship 29,183 boxes was low was not communicated to plaintiff or any of the other six bidders whose offers had been opened on October 14, 1969.

Further, although the date of its occurrence is not established in the record, there is no doubt that the contracting officer signed plaintiff’s offer to supply the entire quantity of boxes. Equally well established, however, is the fact that the signed contract was never delivered to plaintiff. The record also indicates that defendant originally intended to award the entire contract to a single bidder. However, following the receipt of Art Steel’s late bid, the contracting officer apparently decided that it would be in the best interest of the Government to split the award between plaintiff and Art Steel. The offerors whose bids had been opened on October 14, 1969, were not told of defendant’s intention to split the award.

Plaintiff on December 8, 1969, received defendant’s December 3, 1969, purchase order for 2,713 boxes, representing the entire requirement of the Navy, at a total price of $8,247.52. The 2,713 boxes were to be shipped to 1,355 of the contract’s 1,500 destinations. Immediately upon receipt of the purchase order, plaintiff set about to manufacture a preproduction sample by hand. After receiving defendant’s approval of its preproduction sample, plaintiff began placing orders for the necessary dies. The dies and other necessary tooling were on hand by February 1970. Plaintiff had also, by December 16, 1969, begun 'to place orders for the necessary material for the production of the entire quantity of 31,896 boxes, and by February 23, 1970, all of the necessary material had been ordered.

Plaintiff began producing boxes on February 4, 1970. The 2,713 boxes covered by the December 3, 1969, purchase order were completed and delivered to the specified destinations within the agreed time. Plaintiff, however, did not discontinue production upon completion of the 2,713 boxes. Plaintiff, apparently with an eye towards manufacturing all of the 31,896 boxes called for by defendant’s original solicitation, instead continued with the production of the re- ’ maining number of boxes.

During early March of 1970, while checking a delivery requirement with the Department of Defense, plaintiff accidentally, and for the first time, learned that defendant had placed an order for the remaining 29,183 boxes with Art Steel Company, Inc. Plaintiff immediately stopped its production process, but by this time it had already completed some 6,000 boxes over the 2,713 required by defendant’s purchase order. In addition, plaintiff wrote a letter of protest to the defendant.

In an exchange of letters that followed, plaintiff learned of Art Steel’s late bid to manufacture 29,183 boxes for delivery to the 145 destinations at a price of $2.78 each. Plaintiff was further advised that Art Steel’s bid was determined to have been timely, since the delay in its arrival was found to be the fault of the Post Office. Defendant further advised plaintiff that Art Steel’s bid, although not directed to the entire quantity of boxes stated in the solicitation, was still felt to be responsive since a partial bid was authorized by article 10(c) of the instructions that accompanied the solicitation. Defendant went on to admit that it had originally intended to award the entire contract at a single price to a single bidder, but that upon reflection it was felt to be in the Government’s best interest to resort to a split award between plaintiff and Art Steel. After failing to resolve the matter on an informal basis, plaintiff filed suit in this court on July 19, 1971.

The questions which must be resolved are whether plaintiff was justified under the circumstances of this case in incurring expenses which would only have been required and necessary if it had been awarded a contract for manufacturing the entire quantity of boxes covered by defendant’s solicitation, and, if it was, what is it entitled to recover?

I. Solicitation did not Preclude Split Awards

Plaintiff, in the main, argues that the solicitation as written was intended to obligate defendant to purchase the entire quantity of 31,896 boxes from a single source. Building on that theme, plaintiff argues that the solicitation was for a definite quantity and that a split award was therefore not permitted. In support of its position, plaintiff initially points to the schedule section of the solicitation which contains the following notation under the “Supplies/Services” column:

Definite Quantity Contract for FSC Class 7520 — Box, Index Card

In addition, plaintiff argues that the continuation page of the solicitation was set up to require a single bid on the definite quantity of 31,896 boxes. Plaintiff further contends that defendant, by its own admission, intended to award the contract to a single bidder.

Finally, plaintiff argues that if the contract can be construed to permit partial awards to more than one source, it is ambiguous and defendant, as author of the contract, should suffer the consequences.

Defendant argues that the intention to award the contract to a single bidder does not appear in the solicitation, and that in any event—

* * * in view of the fact that Art Steel’s bid was responsive and low, the contracting officer had no choice except to make the award to Art Steel up to the limitation specified in * * * [Art Steel’s] bid, as well as the * * * award to plaintiff for the balance of the quantity.

Defendant further contends that article 10(c) of the solicitation was designed to permit a bidder to place limitations on the quantities bid, and to reserve to the Government the right to make awards on such a basis unless the bidder otherwise specified in its bid.

A careful reading of article 10(c) supports defendant’s position. In the first place, the article clearly allows the Government to—

* * * accept any item or group of items of any offer, unless the offeror qualifies his offer by specific limitations.

Plaintiff placed no limitations on its bid. Going on, the article further provides that the—

* * * Government reserves the right to make an award on any item for a quantity less than the quantity offered at the unit prices offered unless the offeror specifies otherwise in his offer.

Again plaintiff placed no conditions on its bid, and in the light of this defendant made an award to plaintiff for 2,713 boxes instead of the entire quantity of 31,896. Furthermore, plaintiff’s argument that article 42, entitled “All or None” bids of the GSA supplemental provisions, prevented it from limiting its bid to an “all or none” offer, is incorrect. That article clearly was intended to limit the use of an “all or none” bid in requirements and indefinite quantity contracts. Since the solicitation in question is entitled a definite quantity contract, article 42 was clearly not applicable, and plaintiff could have conditioned or limited its offer.

Further, plaintiff’s argument alleging an ambiguity in the terms of the solicitation is found to be unpersuasive. An objective reading of the entire contract fails to indicate the existence of an ambiguity with respect to the specifications. Article 10(c) clearly, and in bold face type, informs the bidders of their right, in the absence of language to the contrary in the schedule section of the solicitation, to submit offers on less than the quantity specified. Nothing in the schedule of the solicitation in question conflicts with the option given to the bidders by article 10(c). It is, accordingly, concluded that the terms of the specifications are clear and unambiguous.

In sum, there is nothing in the solicitation which precluded defendant from making a split award to both plaintiff and Art Steel Company, Inc.

II. Parties Did Not Enter Into a Formal Contract for Manufacture and Delivery of 31,893 Boxes

Plaintiff makes much of the fact that defendant’s contracting officer signed the solicitation which plaintiff had filled out, signed, and submitted in time for the October 14, 1969, bid opening. Plaintiff contends that the signing of its solicitation by defendant’s contracting officer amounts to an acceptance by defendant of its offer. Defendant, on the other hand, points out that a signed copy of plaintiff’s solicitation has never been delivered to plaintiff. Defendant then argues that a binding contract cannot come into existence if defendant’s acceptance was never communicated to the offeror. While the record is not clear, it appears that plaintiff was not aware that defendant had signed its solicitation until after the split awards to both it and Art Steel for the manufacture of the 31,896 boxes had been made.

Plaintiff’s argument is unpersuasive, for while there is no single or best way for an acceptance to be communicated to an offeror, there is no doubt that an acceptance must be communicated. In a case involving a similar issue, this court, after a thorough review of relevant law, held that communication of an acceptance must be made before a valid contract can come into being. See Slobojan v. United States, 136 Ct.Cl. 620 (1956). Specifically, this court stated, at p. 626:

The Federal courts follow the principles set forth above and hold that where the validity of a bilateral contract is involved it is necessary that acceptance of the offer be communicated to the offeror before a valid and binding contract is made. Burton v. United States, 202 U.S. 344, 384-385, [26 S.Ct. 688, 50 L.Ed. 1057] (1906); Dickey v. Hurd, 33 F.(2d) 415, 418 (C. A. 1, 1929), certiorari denied, 280 U.S. 601 [50 S.Ct. 82, 74 L.Ed. 646]; Barnebey v. Barron G. Collier, Inc., 65 F.(2d) 864, 868 (C.A. 8, 1933); Shubert Theatrical Co. v. Rath, 271 Fed. 827, 833-834 (C.A. 2, 1921). * * * This court has recently held that even if a letter containing an acceptance of an offer is mailed, the acceptance is not final until the letter reaches its destination, and can be withdrawn at any time prior to receipt by the offer-er. Rhode Island Tool Company v. United States, 130 C.Cls. 698, 128 F.Supp. 417 (1955); Harvey Franklin Dick v. United States, 113 C.Cls. 94, 82 F.Supp. 326 (1949).

Plaintiff also argues that the purchase order for 2,713 boxes was merely defendant’s way of making payment, and that a contract nonetheless existed for the definite quantity of 31,896 boxes. In support of its position, plaintiff points to box 27 of the solicitation, which is entitled “Payment Will Be Made By” and contains the insertion “To Be Shown On Orders Issued Under This Contract.”

The mere statement of the proposal indicates the fallacy of plaintiff’s position. The quoted language does indeed suggest a program by which payments were to be made, but that program presupposed the existence of a contract. As has been previously pointed out, no contract for 31,896 boxes was ever entered into by plaintiff and defendant.

In sum, it is concluded that the mere signing of plaintiff’s offer by defendant’s contracting officer did not result in a contract authorizing plaintiff to manufacture 31,896 recipe card boxes.

III. Defendant is Estopped to Deny the Existence of a Contract With Plaintiff for 31,896 Boxes

The final question to be considered is whether or not sufficient grounds exist for applying the doctrine of equitable estoppel against the defendant. The recent case of Manloading & Management Assoc., Inc. v. United States, 461 F.2d 1299, 198 Ct.Cl. 628, (1972), indicates that this court will, in appropriate cases, apply that doctrine to prevent defendant from denying the existence of a contractual agreement. In order to establish an estoppel it is necessary for plaintiff to show, as this court has previously held in the case of Stevens Manufacturing Co. v. United States, 8 F.Supp. 720, 80 Ct.Cl. 183, 192-193, (1934), that:

* * * the party against whom an equitable estoppel is set up acquiesced in the transaction in such a manner as to change the relationship of the parties and make its repudiation of the proceedings contrary to equity and good conscience.

It is not, however, essential that the party against whom an estoppel is urged to have made a representation of any kind. See Robbins v. United States, 21 F.Supp. 403, 86 Ct.Cl. 39 (1937). This latter view is in accord with those cases that hold that a party who engages in a course of conduct, even without misrepresentation, upon which another party has a right to believe he is intended to act or upon which the first party intends him to act, will be estopped from repudiating the effect of such conduct. See United States v. Georgia-Pacific Co., 421 F.2d 92, 96 (9th Cir. 1970). Of course, it is essential to a holding of estoppel against the United States that the course of conduct or representations be made by officers or agents of the United States who are acting within the scope of their authority. See United States v. Georgia-Pacific Co., supra, at 100-101; Manloading & Management Assoc., Inc. v. United States, supra, 461 F.2d at 1302-1303, 198 Ct.Cl. at 634-635.

After a complete consideration of the controveisy between the parties, it is concluded, for reasons which follow, that grounds for estoppel against the defendant exist.

The court in Georgia-Pacific, supra, 421 F.2d at 96, indicated that the following four elements must be present in order to establish an estoppel:

(1) The party to be estopped must know the facts; (2) he must intend that his conduct shall be acted on or must so act that the party asserting the estoppel has a right to believe it is so intended; (3) the latter must be ignorant of the true facts; and (4) he must rely on the former’s conduct to his injury.

All of these essential elements are present in the case at bar.

A. Defendant Knew the Facts

As has been previously discussed, only defendant knew all of the facts and the complete story surrounding the solicitation in question. It should be initially pointed out that plaintiff submitted the lowest of the six bids which were received in time for the October 14, 1969, opening. The fact that defendant on October 17, 1969, received a bid from Art Steel that had been delayed by the Post Office was not made known to plaintiff or any of the five other bidders. Further, plaintiff was not aware of the October 22, 1969, decision by defendant’s contracting officer to consider Art Steel’s bid in making the award. The failure of defendant to so inform plaintiff appears to be particularly regrettable since plaintiff’s offer was the lowest received at the public bid opening of October 14, 1969, and plaintiff could therefore reasonably conclude that it would be given the contract. In fact, the failure of defendant to notify plaintiff of the receipt of a lower successful bid is a violation of its own procurement regulation dealing with such matters, and which provides in pertinent part that:

(2) Notification of rejection also shall be given to any unsuccessful higher bidder where the circumstances were such that he may have had reason to believe he might receive an award, e. g., the bidder was requested to extend his bid acceptance time or clarify his bid, or the bidder knew that his bid was the lowest received by bid opening time (but the lower successful bid was received late).

Further support for plaintiff’s expectations can reasonably be inferred from defendant’s request of October 16, 1969, to its resident inspector at plaintiff’s plant to conduct a plant facility survey to determine if plaintiff was capable of satisfactorily performing the contract requirements, i. e., building 31,896 boxes within 70 days after being awarded the contract. As plaintiff further points out, the preaward on-site inspection is significant since defendant’s own published regulations indicate that it is not necessary in connection with contracts of less than $10,000 Thus, plaintiff argues that the inspection was another reason why it could logically assume that it was being seriously considered to manufacture all 31,896 boxes.

Although the inspection was not completed until October 24, 1969, defendant made no attempt to inform plaintiff of Art Steel’s late bid or to cancel the inspection because of the receipt of the late bid.

Furthermore, defendant was aware that plaintiff had never manufactured boxes before and that it was necessary for it to purchase dies at a cost of over $10,000 in order to be able to perform the contract. This is of particular importance since it is inconceivable that plaintiff would have incurred such an expense if it had known that it would only receive an $8,247.52 award.

Defendant obviously also knew that plaintiff’s bid of $3.04 per box was an average that took into consideration the costs for manufacturing the 31,896 boxes, and, as well, the costs involved in shipping the boxes to the 1,500 addresses. It also goes without saying that defendant must have known that the Navy’s portion of the solicitation, which called for 2,713 boxes to be sent to some 1,355 destinations, was the most costly and the least desirable segment of the contract.

B. Plaintiff Had Right to Act in Reliance on Defendant’s Conduct

From the facts outlined in section III (A), it is not necessary to consider if defendant and/or its representative intended that plaintiff act in reliance on defendant’s actions and/or inactions, for it is clearly established that plaintiff had a reasonable right to act in reliance thereon. From all of defendant’s actions or inactions, plaintiff could reasonably conclude that it was to receive the $96,963.84 contract for the entire quantity of boxes. It is only necessary to focus on a few of the above facts to illustrate why it was reasonable for plaintiff, being the low bidder at the October 14, 1969, bid opening, to assume that it would receive a contract for the entire quantity. Under the circumstances of this case, it is important to stress the failure of defendant to inform plaintiff of the receipt of Art Steel’s late bid, for only when this is kept clearly in mind is one able to understand why plaintiff acted as it did. Along the same line, it is important to refrain from evaluating plaintiff’s acts from a hindsight vantage point, based on all the facts, since all the facts were not known to plaintiff at the time it acted.

At the time plaintiff received the $8,247.52 order for the 2,713 boxes, it was unaware of Art Steel’s bid. In addition, the Government had concluded an on-site inspection, which is not normally-done where contracts of less than $10,000 are involved. Further, defendant knew that plaintiff, not previously having manufactured such boxes, would have to purchase dies that cost several thousand dollars more than the $8,247.52 award. Under these circumstances alone, it was reasonable for plaintiff to conclude that the 2,713 box award, which dealt solely with the Navy’s requirements, was only the first of several orders, and that it would shortly receive orders for the Army, Marine and Air Force requirements.

C. Plaintiff Was Ignorant of True Facts

Plaintiff did not know of defendant’s award to Art Steel to manufacture 29,183 boxes until, by chance, it was so advised in early March 1970. Until that time, plaintiff was under the impression that it had received the entire 31,896 box award. Moreover, by that time plaintiff had already procured the necessary dies, tooling and material to manufacture the entire quantity of boxes.

D. Plaintiff Relied on Defendant’s Acts to Its Detriment

The record clearly establishes that plaintiff relied on defendant’s action and/or inaction to its detriment. Specifically, upon receipt of the 2,713 order, plaintiff immediately ordered dies at a cost of $10,300. In addition, since plaintiff reasonably assumed that the order was only the first, and that others would follow until all 31,896 boxes were manufactured, material for the production of the entire quantity was immediately ordered. As further justification for its action, plaintiff explains that the solicitation required the entire 31,896 boxes to be produced within 70 days. Accordingly, plaintiff concluded that it would have to immediately assemble all of the necessary material, if it hoped to meet the 70-day delivery schedule.

Of course, plaintiff stopped its manufacturing process in early March of 1970 when it learned of defendant’s award to Art Steel for the remaining 29,183 boxes. But by this time it had already ordered and received all of the necessary material and tooling for completion of the entire quantity of boxes.

It is found that defendant knew all of the facts surrounding the placement of awards to both plaintiff and Art Steel, and plaintiff did not; that plaintiff had a right to act in reliance upon defendant’s conduct; and that in reliance upon defendant’s action plaintiff incurred expenses in connection with the necessary dies, tooling and material to manufacture 31,896 boxes. It is, therefore, concluded that defendant is estopped to deny the existence of a contract with plaintiff for 31,896 boxes.

IV. Recovery

Having concluded that defendant is estopped to deny the existence of a contract with plaintiff for 31,896 boxes, it follows that plaintiff is entitled to recover. However, this court has already held in Manloading & Management Assoc., Inc. v. United States, supra, that in contracts, such as the one at bar, which contain a termination for convenience article, recovery must be calculated in accordance with that article and should not include prospective profits, or consequential damages. The parties have not addressed themselves to the question of what plaintiff is entitled to recover on the basis of the termination for convenience article, and, the record is accordingly devoid of the needed information to make the required calculations. It is, therefore, necessary that the amount of recovery be determined in subsequent proceedings under Rule 131(c), unless the parties are able to reach an agreement on that point.

CONCLUSION OF LAW

Upon the findings of fact and the foregoing opinion, which are adopted by the court and made a part of the judgment herein, the court concludes as a matter of law that plaintiff is. entitled to recover and judgment is entered to that effect. The amount of recovery will be determined in subsequent proceedings pursuant to Rule 131(c).

       Whereas the court adopts the trial judge’s separate findings of fact, -which are set forth in his report filed May 30, 1973, they are not printed herein since such facts as are necessary to the decision are contained in his opinion. KUNZIG, Judge, took no part in the consideration and decision of this case,

      . 41 C.F.R. § 1-2.408, Information to bidders.

      . See 41 C.F.R. § 1-1.310-9, Pre-award on-site evaluation:
      “(b) Pre-award on-site evaluations need normally not be performed when the information sources stated in § 1-1.310-7 yield sufficient data to enable a contracting officer to make a determination regarding the responsibility of a prospective contractor. Generally, pre-award on-site evaluations are not necessary in connection with contracts of less than $10,000.”