Corra Resources, Ltd. v. Commissioner

In 1978, Corra Resources, Ltd. (plaintiff) entered a lease with Salem Minerals (Salem) for the right to mine coal in the Pikeville Quadrangle. Corra Resources paid $77,500 in prepaid royalties, hired Hurricane Mining Company to mine the coal, and hired Euran Energy to manage Corra Resources’ interests. Salem promised Corra Resources and other investors in the Pikeville Quadrangle tax benefits, and Corra Resources took tax deductions that led to tax savings of over $250,000. However, the tax benefits depended on coal being mined from the Pikeville Quadrangle, and coal was not being mined, allegedly due to weather and market issues. In 1981, the Internal Revenue Service (IRS) (defendant) notified investors in the Pikeville Quadrangle that their tax returns were being investigated. Corra Resources’ accountant became suspicious of the Pikeville Quadrangle venture and advised Corra Resources’ principal, Edwin Corra, to exit the project. In 1984, the IRS assessed deficiencies against Corra Resources and the other investors. The Pikeville Quadrangle lease expired in 1986. In 1987, the United States Tax Court held in a binding decision that the deductions taken by Corra Resources and the other investors were invalid. Corra Resources then tried to assert that it was entitled to deduct its original $77,500 in prepaid royalties as the cost of an abandoned asset (i.e., the lease). Corra Resources claimed that it abandoned the lease during the 1981 fiscal year because that was when the accountant told Edwin Corra to leave the project. However, Corra Resources did not take any concrete steps to leave the project in 1981. The tax court concluded that Corra Resources did not abandon the lease in 1981 and entered judgment against Corra Resources. Corra Resources appealed.