to mean the overhead relating to the property but shall exclude deductions and expenses of financial overhead of the taxpayer, such as interest, taxes based on or measured by income, capital stock taxes, and the like."

There are two other items which we believe merit the consideration of this committee. They are: (1) the allowance of depletion to stockholders; and (2) the deduction of the cost of facilities installed to abate water and air pollution. We submit as an appendix a statement covering these items with the request that it be included in the printed record.

Mr. Chairman, this concludes our statement.

APPENDIX

A. Allowance of depletion to stockholders

The iron-ore industry believes that the stockholder of a corporation engaged in mining should receive some benefit from the depletion deduction allowed to the corporation.

Under our present system of taxation the owner of an economic interest in virtually all minerals is entitled to an allowance for depletion, this allowance representing the exhaustion of his capita asset-the mineral in the ground. The owner of a direct interest in a mineral property, including the owner of a royalty interest, qualifies for the percentage depletion allowance. On the other hand, a taxpayer who invests in the same type of property through the purchase of stock in a mining corporation is denied any allowance for percentage depletion.

The important party in interest is the person who puts up the money and the fact that one individual does not generally have enough money to risk on a large exploration and mining program and must, of necessity, join with several individuals to form a corporation to do this exploring and mining should not deny those individuals the benefits of depletion. There can be no doubt that the allowance of percentage depletion provides a powerful stimulus for the investment of private capital in mining ventures. To provide the same encouragement to the indirect investor in stock of a producing mining company, we believe our income-tax laws should provide for the allowance of percentage depletion to the stockholders of a company whose profits are derived from the operation of a mineral property.

The Canadian tax law recognizes this principle and the stockholder who receives a dividend from a corporation, the income of which includes "mineral profits," is allowed to deduct depletion based upon certain fixed percentages.

We urge, therefore, that the stockholder of a corporation taxable under United States law which owns or operates mineral property or which receives dividends from another corporation, whose income is derived principally through mining, be allowed to deduct a reasonable percentage of the dividends received from such corporation in determining his taxable income.

B. Facilities to abate water and air pollution

Legislation has been enacted by all the States regulating in some degree the pollution of streams, rivers, etc. In addition, many of the States have obligated themselves by interstate treaties to establish and enforce standards directed toward the abatement of pollution in watersheds in which they have a common interest. The Federal Government also exercises some control with respect to pollution of interstate streams.

Facilities which taxpayers are required to install under these laws and treaties usually have no useful value for other purposes. Accordingly, the cost of such facilities should not be required to be recovered by way of depreciation as in the case of facilities used in the production of income.

Since facilities of this nature are intended to benefit the community and the public generally, they partake of the nature of contributions to the community. As in the case of contributions, expenditures for stream pollution facilities should be deductible currently rather than through the depreciation allowance. Such treatment will encourage more prompt compliance with the stream pollution laws and thereby aid in the early completion of this important national program. We believe the same principle should be extended to facilities for the prevention or abatement of air pollution.

Mr. PETERS. The American Iron Ore Association, formerly the Lake Superior Iron Ore Association, represents producers of about 90 percent of the iron ore mined in the United States. Appearing with me

is Franklin G. Pardee, president of the association. Mr. Pardee is here to answer any questions dealing with the iron-ore industry in general.

Our principal point involves a treatment of exploration expenses, which Mr. Arnold covered in his statement just a moment ago. endorse his suggestion for eliminating the limitations on the allowance of the full deduction for exploration expenses.

We realize, however, that this may not be practicable at this session of the Congress, because of budgetary problems and other matters, so we have here four alternative suggestions in connection with exploration expenditures which we have listed, starting on page 5 of the

statement.

Our first alternative suggestion is to renew the 4-year limitation for another 4-year period. Beginning with 1958, we ask that those mining companies or industries which have already used up their 4-year period may have another 4 years within which to deduct the $100,000 limitation.

The second alternative suggestion is to remove the annual limitation so that a taxpayer may have the full benefit of the total $400,000 over the 4-year period. As the law is now written, he may not receive all of the $400,000 total benefit.

The third alternative suggestion is to increase the $100,000 limitation to $200,000 per year, due to increasing costs from inflationary pressures and the increased costs generally of exploration work.

Our fourth alternative suggestion is a very complicated question arising between the difference in language in section 615, covering exploration expenditures, and section 616, covering development expenditures. As we understand the intent of the Senate when they inserted the deduction for exploration expenditures in the Revenue Act of 1951, the cutoff point for exploration and development was to be the time when ores in commercially marketable quantities are disclosed, so that all expenditures up to that point would be treated as exploration expenditures, and all expenditures after that point would be treated as development costs.

I think this is made plain by the statement of the Senate Finance Committee on the Revenue Act of 1951, at page 64, part II, where they say that:

the determination of the beginning of the development stage is to be made by reference to the time when the existence of ores in commercially marketable quantities is disclosed.

There has been some thought that perhaps the existing language of the statute permits an overlap whereby, after a commercial ore body has been disclosed, there may still be work of an exploration nature which could not qualify for the development expense deduction. We would like to see the code amended so that that uncertainty is removed, and we have recommended certain language, beginning at the top of page 8, to accomplish that result.

Our remaining points were more than adequately covered by Mr. Arnold in his statement, so that I do not believe it is necessary to go into those questions.

That concludes our statement, Mr. Chairman, and we thank you very much.

The CHAIRMAN. Are there any questions of Mr. Peters?

Mr. KEOGH. Yes, Mr. Chairman.

The CHAIRMAN. Mr. Keogh will inquire, Mr. Peters.

Mr. KEOGH. Mr. Peters, I was reading your item A under the appendix on page 14, and I wonder if you would briefly have the record show what you mean to tell us.

Mr. PETERS. Item A of the appendix recommends that the depletion allowance allowed to corporations in the case of minerals be passed on to the stockholder of a corporation in some reasonable manner. Today, the stockholder, who is the principal investor in the mining operations or the mining corporation, receives no benefit from the depletion allowance as such as he receives his dividends.

Mr. KEOGH. In other words, you are telling us that you would like us to consider extending the depletion allowance to the owners of the corporation owning the depletable resource.

Mr. PETERS. That is correct, sir. That is done in Canada, Mr. Keogh, on a percentage basis, and has worked out very satisfactorily up there.

Mr. KEOGH. Thank you.

The CHAIRMAN. Mr. Simpson will inquire, Mr. Peters.

Mr. SIMPSON. I wanted to inquire, Mr. Peters, whether the limitation to which you referred was a 4-year limitation. My recollection is that this body did not impose that limitation originally in the law.

Mr. PETERS. I believe that is correct, Mr. Simpson. The House in 1951 adopted a provision for development expenses alone and did not touch on exploration. The Senate inserted the section covering exploration expenses with these limitations, and this has been carried forward in the 1954 code.

Mr. SIMPSON. If I understand you correctly, I conclude that representing the budgetary picture, what you are earnestly requesting now is (a) on page 5.

Mr. PETERS. We would like to see that as a minimum, Mr. Simpson, a further extension of the 4-year period, plus item (d), the fourth item, a clarification of the cutoff point between exploration and development costs.

Mr. SIMPSON. Thank you.

The CHAIRMAN. Are there any further questions?

Mr. HOLMES. Yes.

The CHAIRMAN. Mr. Holmes will inquire.

Mr. HOLMES. I was interested in the reference to the Canadian procedure. Would you advocate such procedure as that depletion allowance to stockholders in all corporations that are involved with depletion allowances; that is, all types of corporations?

Mr. PETERS. I can't think of any situation where we have thought there should be a distinction drawn. I do not believe we have considered it that carefully, Mr. Holmes.

Mr. HOLMES. Secondly, would you withhold from depletion allowance some reserve before distribution to the stockholder, or would you put it all out?

Mr. PETERS. As I understand the Canadian system, upon the distribution of a dividend to a shareholder, a certain part of that dividend, if it is all from mining, let us say, is treated as a depletion deduction which the shareholder takes into account in reporting his income to the Canadian Government. I do not recall the percentage, but that can be furnished for the record if you would like to have it, sir.

Mr. HOLMES. Would it indirectly require a heavier depletion allowance, if such is the procedure?

Mr. PETERS. The Canadian depletion allowance, as I understand it, and I would like to submit a statement on this if I am not correct, is 33 percent or, roughly, one-third of the net income from the mining.

Mr. HOLMES. I think you are right. It is 33% of the entire income. Mr. PETERS. It may be that 3313 could be higher or it could be less than the amount allowed under our law. For example, where a corporation in the United States is subject to the 50 percent limitation, they are allowed depletion at the rate of 50 percent. One that is not subject to that limitation may be allowed less.

Mr. HOLMES. Then, another point I wanted to bring out. I do not want to belabor the point. I am just seeking information. Of course, depletion allowances in different businesses are in varying percentages, as you know. Would that have any effect on the procedure in the depletion allowance?

Mr. PETERS. That might require different percentages for different minerals in the United States.

Mr. HOLMES. That is what prompted the first question I asked you. Mr. PETERS. I see what you mean.

Mr. HOLMES. You get the point?

Mr. PETERS. Yes.

Mr. HOLMES. Thank you very much. I appreciate the information. The CHAIRMAN. Are there any further questions of Mr. Peters? If not, Mr. Peters, we thank you for your appearance and the information given us today.

Mr. PETERS. Thank you very much.

The CHAIRMAN. Our next witness is Mr. Otto Gressens. Mr. Gressens, for purposes of the record would you please identify yourself by giving your name, address, and the capacity in which you appear.

STATEMENT OF OTTO GRESSENS, CHAIRMAN, TAX COMMITTEE, NATIONAL COAL ASSOCIATION

Mr. GRESSENS. My name is Otto Gressens. I am executive vice president of Peabody Coal Co., which operates coal mines in Illinois, Indiana, Kentucky, Missouri, and Oklahoma. I am a member of the board of directors of the National Coal Association, and I appear today as the chairman of the tax committee of that association.

The CHAIRMAN. Mr. Gressens, we are pleased to have you with us today, and you are recognized for 20 minutes.

Mr. GRESSENS. Thank you, Mr. Chairman.

The National Coal Association is the trade organization of bituminous coal mine owners and operators throughout the United States. Its members mine more than two-thirds of the commercially produced bituminous coal in this country. We have also been authorized to speak for the American Coal Sales Association, the Anthracite Institute, and the Bituminous Coal Operators' Association.

We propose five revisions of the tax laws. Only one of these relates exclusively to coal. That is our request for an equitable depletion allowance for coal. Whenever I refer to coal in the course of my testimony, I am also including lignite as part of bituminous coal.

Two other proposals relate to the entire mining industry. They are removal of the limits on exploration expenses, and a clarification

of the items taken into consideration in computing taxable income from mining properties.

Our fourth and fifth proposals are covered in written material already filed with your committee. They are repeal of the 2-percent penalty on the filing of consolidated returns, and repeal of the tax on intercorporate dividends.

REMOVAL OF LIMITATION ON EXPLORATION EXPENSES- -SECTION 615

Our recommendation is that the present limitation on exploration expenses be removed. The Internal Revenue Code of 1954 allows a deduction up to $100,000 a year for exploration expenditures before the beginning of the development stage of a mineral deposit, and further limits such deduction to a total of 4 years. No carryover is allowed so that if the entire $100,000 is not used in any particular year, the unused portion is lost as a deduction.

Once ores or minerals in commercially marketable quantities are found, there is no limit to the amount that can be deducted for development expenditures.

Since the Congress adopted the principle of allowing a deduction for the cost of exploration, there appears to be no logical reason for an arbitrary limitation on the amount. The existence of this limitation, in contrast to the unlimited deductibility of development expenditures, has led to confusion and uncertainty. There is great administrative difficulty in establishing a cutoff point between exploration and development.

AN EQUITABLE DEPLETION ALLOWANCE FOR COAL- -SECTION 613 (B) (4)

The National Coal Association's principal tax revision proposal is a more equitable depletion rate than the present 10 percent.

The Congress many years ago stated the underlying principle that there should be a reasonable allowance for depletion of mines and other workings of natural deposits. This allowance is based on cost or on a percentage of gross income, whichever yields the greater deduction.

Not only the Congress, but the courts and the executive branch, have recognized the broad principles and general purposes of percentage depletion. The allowance is based on the concept that when a company mines and markets minerals, it is consuming part of its capital assets and should be allowed to replace them.

The report of the President's Materials Policy Commission recognized this in 1952 when it said in a report by Eugene E. Oakes of the National Security Resources Board:

The depletion deduction is a recognition of the gradual exhaustion of a depleteable asset. A deduction for this purpose has been allowed under the Federal income tax law since 1913 * * *.

A taxpayer is entitled to a deduction for depletion if he has what the courts call an economic interest in the mineral in place which is depleted by production. As the Supreme Court stated in 1956, the depletion allowance "is designed to permit a recoupment of the owner's capital investment in the minerals so that when the minerals are exhausted the owner's capital is unimpaired." The Court pointed out that percentage depletion "continues so long as minerals are extracted."