MINE ACCOUNTING AND REPORTS TO TAX COMMISSIONS In order to secure justice among the mines in appraising for the purpose of taxation it is obviously necessary that uniform methods of accounting be followed, at least in so far as the accounts affect the reports filed with the Tax Commission. In a number of the states there has been friction due to irregularities in accountancy. The laws of certain of the western states are not sufficiently specific in the statement of what deductions may be made from gross earnings in order to determine the net. It is possible that the requirements enforced by the Federal internal revenue officers in connection with the Federal income tax may be of some assistance to the state officials in prescribing similar rules controlling the accounting as it affects the records upon which the state appraisal is made. Uniform accounting has been urged by the state associations of operators in several of the important coal mining states and by the Federal Trade Commission. The tendency of the tax commissions is to refrain from interfering in any way with the private records of the operators so long as the data requested are furnished in good form and are found to be accurate and complete. The recent law of New Mexico has been cited previously.99 The Tax Commission is given power to prescribe the method of keeping accounts of mine companies.100 In determining the net income of a corporation for a given year on which it is subject to the excise tax under the Act of August 5, 1909, the corporation is entitled to a "reasonable allowance" for depreciation of its property.101 Under such provision a mining corporation engaged in extracting ore from its mines is entitled to an allowance for depreciation equal to the value in place of the ore extracted and disposed of during the year. REDEMPTION OF CAPITAL AND DEPRECIATION While the subject of depreciation 102 of mines103 had previously received consideration, the enactment of the Federal 99 Supra, chap. IV. 100 Laws of New Mexico, 1915, chap. LV, sec. 2. 101 United States v. Nipissing Mines Co., 202 Fed. 803, (1912). 102 See Saliers, E. A. Principles of Depreciation. New York, 1915. 103 Mr. Finlay uses the term "depreciation" as meaning current construction costs. He says: "By depreciation I mean current construction costs; improvements. Depreciation means literally the process of losing corporation excise tax and of the Federal income tax focused attention upon this phase of mining finance. Under the Federal income tax a deduction of not to exceed five percent of the gross value of the output at the mine may be permitted, but this depreciation must be based upon the actual cost of the properties containing the deposits. Unearned increment will not be considered in fixing the value on which depreciation shall be based. A general rearrangement of the system of accounting of some of the large companies has resulted from this ruling.104 value: practically it means the exact opposite; it means expenses undertaken to counteract loss of value. It is maintenance. It only seems not to be maintenance because the items that compose these charges have the appearance of being new plant, not merely replacements of old plant." Cost of Mining, p. 42. 104 The following quotation, from the annual report for 1912 of the North Star Mines Co., illustrates this forcibly: "The cost price of the mining property as at January 1, 1909, when the excise-tax law went into effect, was taken as $1,778,245, which distributed among 1,039,871 tons of ore, the amount estimated to have been contained in the mine at the beginning of the company's operations in 1899, gives a cost rate of $1.71 per ton. The application of this rate for the period up to January 1,1909, on the 464,871 tons of ore then milled, reduced the cost value of the mining property to $983,316; while the continuation of the principle through the years 1909, 1910, 1911 and 1912, according to the tonnage milled, has reduced the cost value of the original property to $336,420 on which depreciation will continue at the rate of $1.71 per ton until the balance of cost price is extinguished. In making this adjustment of the original cost of the property as at January 1, 1909, the company has also written up the value of the property as at that date, to the extent of $1,136,684 to represent with the remaining cost value a fair estimate of the salable value of the mineral contents at January 1, 1909, according to data furnished by the company's engineers. The total amount charged against property account, therefore, on January 1, 1909, was $2,120,000, which has been reduced by subsequent allowances for depreciation as above stated, to the sum of $1,473,104. The company has been inclined to hold that the additional value written up to property account representing unearned increment accrued before the excise tax went into effect should also be subject to an allowance for depreciation; but the present ruling of the Treasury Department is not favorable to this view." Another interesting complication is that resulting from the accounting methods of a large Nevada Corporation. The estimated average cost per ton of ore to the company for its entire tonnage was found to be $16.36. The factors employed in establishing this per-ton-unit were the mine property cost and the estimated total tonnage acquired at the time Corporations leasing oil or gas territory are permitted to base depreciation upon the cost of the lease and not upon the estimated value, in place, of the oil or gas. Operations carried on only upon a royalty basis may not make any deductions for depreciation. An investigation of the records of a number of American mining companies demonstrated that sinking-funds are now being established in order to replace the capital invested. the mine was purchased. During the early years of the operations, the best ore was mined at a considerable profit. By the time the Federal excise corporation tax was levied practically all of the best grades of ore had been mined and operations were being continued on the poorer grades of ore which, however, were returning a good profit. According to the regulations of the Internal Revenue Department, the income of the company might be determined in part from apparent profits measured by the net recovery per ton in excess of the estimated cost per ton. The accounts of the company showed in 1912 that the net realization from operations was $11.75 per ton while the estimated cost per ton of all the ore at the time of purchasing the mine was $16.36. On this basis the amount written off for depreciation of the property during 1912 exceeded the net earnings by $2,043,888.61. During the calendar year of 1912, the dividends paid aggregated $5,694,636.80. Under the present Federal income tax, not more than five percent of the gross value of the ore may be charged to depreciation. CHAPTER VIII THE TAX BURDEN In this chapter it is proposed to present the available data showing the amount of taxes paid by various types of mining properties and to compare the taxes paid per unit of product by mines operating under the different tax systems. The data used have been secured from tax commission and other official state reports, United States census reports, annual reports of mining companies, and by correspondence with tax officials and mining companies. Tables No. 12 to 26 inclusive are based upon data selected from Volume XI of the Thirteenth Census. They show the taxes paid in 1909 by the mines of the various states. Table No. 12 includes data on the value of the product of the entire mining industry of each state; the total cost of securing this product, but not including taxes; the surplus above operating costs before taxes are paid; and the total amount of taxes paid by the mines in each state. From these data the ratio between the amount of taxes paid and the surplus above operating expenses has been calculated and the total amount of the taxes paid is given as a percentage of the surplus. For a number of the states the census statistics are not detailed enough to determine this percentage. Under the assumption that the data as given are complete or at least representative, it is at once evident that the ratio of surplus and of gross earnings to taxes varies widely among the states. If the data for the twenty-one leading mining states are considered, it will be noted that the percentages of surplus paid as taxes range from 3.56 to 12.78, except for five states three of which are above this range and two below. Examining the list of sixteen still closer, it will be noted that nine of them range from 3.56 to 6.44 percent and seven from 8.01 to 12.78 percent. Each group includes some states employing the general property tax and states using a system of taxing output or earnings. The aggregate of the taxes paid in 1909 by all mines in the United States was $17,796,793, which was 1.44 percent of the reported |