PROBLEM 133 Illustrating Depletion of Mining Properties Acquired Prior to March 1, 1913—March 1, 1913, Value FACTS: Equal to Cost The Miles Mining Company was organized January 2, 1912. It issued its entire capital stock for $200,000 cash. The company then purchased iron mining properties consisting of 1,000 acres of ore lands and mining equipment. The cost of the ore property was $140,000 and the equipment $60,000. A survey of the ore properties at date of purchase indicated an ore content of 1,500,000 tons. The surface value of the land for purposes other than mining was $5 per acre. The value of the properties March 1, 1913, was equal to the cost and no discoveries resulting in a material appreciation of market value were made subsequent to March 1, 1913. In 1921, 150,000 tons of ore were extracted. QUESTION: What would be the basis for depletion in 1921 and the amount of depletion deductible? ANSWER: The depletion would be based upon the cost of the ore properties, $140,000, minus the surface value of the land, $5,000, applied to the estimated ore content at the date of purchase, 1,500,000 tons, which would give a depletion unit of 9¢ per ton. Since 150,000 tons were extracted in 1921, the deductible depletion would be $13,500. REFERENCE: Sec. 234 (a): "That in computing net income there shall be allowed as deductions: . . . (9) In the case of mines, oil and gas for depletion. . . based upon cost. .. Provided, That in the case of such properties acquired prior to March 1, 1913, the fair market value of the property (or the taxpayer's interest therein) on that date shall be taken in lieu of cost up to that date." See also Sec. 214 (a) (10) for like depletion allowance in the case of individuals. PROBLEM 134 Illustrating Depletion of Mining Properties Acquired Prior to March 1, 1913-March 1, 1913, Value Greater Than Cost FACTS: The Minter Mining Company in 1921, extracted 15,000 tons of ore from its properties, which properties on March 1, 1913, had a fair market value of $215,000, as compared with a cost of $140,000. The estimated ore content of the properties on March 1, 1913, was 175,000 tons. The surface value of the properties on that date was $5,000. QUESTION: What is the basis for, and the amount of, depletion allowable as a deduction in 1921? ANSWER: The value per ton of ore in the ground for tax purposes would be based upon the March 1, 1913, fair market value of the properties, $215,000, minus the surface value, $5,000, applied to an estimated ore content of 175,000 tons which would give $1.20 per ton as the depletion unit. With an extraction of 15,000 tons of ore in 1921, the depletion deduction would be $18,000. REFERENCE: Sec. 234 (a) (9) and Sec. 214 (a) (10): (Quoted under Problem 133.) PROBLEM 135 Illustrating Computation of Allowance for Depreciation of Mining Property FACTS: The Morris Mining Company has mine buildings and improvements on its ore properties costing $10,000. The ore properties have a value for depletion purposes of $75,000, based on an estimated content, at the basic date, of 100,000 tons of ore. QUESTION: Must the taxpayer depreciate the improvements on the basis of the amount of ore extracted from the properties in the taxable period or may rates of depreciation based upon the life of the particular equipment and structures be used? ANSWER: Assuming that the practice under the 1918 Revenue Act will be continued under the 1921 Act, the method to be used is optional with the taxpayer, that is, whether the improvements and capital additions are depreciated in the taxable period in an amount equal to the portion of their cost or March 1, 1913, value if acquired prior thereto, represented by the ratio of ore extracted in the taxable period to the total ore content in the properties at the basic depletion date, or whether specific rates of depreciation based upon the life of the equipment shall be applied to the cost or March 1, 1913, value if acquired prior to that date. In the use of either method, however, the salvage value of the equipment must not be lost sight of. REFERENCE: Art. 224 (b), Regulations 62: "It shall be optional with the taxpayer, subject to the approval of the Commissioner, (1) whether the value of the mining property plus allowable capital additions but minus estimated salvage value shall be recovered at a rate established by current exhaustion of mineral, or (2) whether the value of the mineral deposit on the basic date plus allowable capital addi tions shall be recovered through depletion and the cost of plant and equipment less the estimated salvage value shall be recovered by reasonable charges for depreciation. at the rate determined by its physical life or its economic life or, according to the peculiar conditions of the case, by a method satisfactory to the Commissioner." PROBLEM 136 Illustrating Deductions Allowed Individuals Contributions FACTS: James Forbes, a resident of the United States, had a net income for the taxable year 1921, of $20,000, before deducting contributions. During the year he made the following donations and contributions: 6. 25 Society for the Prevention of Cruelty to 7. 125 Community Fund (covering all charities of the City) 8. A plot of ground to the Y. M. C. A. on which it was assessed at $2,500 by the city and cost 10. $200 To a distant relative in poor circumstances. QUESTIONS: Which of these contributions satisfies the requirements as to deductible contributions? What amount may Mr. Forbes take as a deduction from gross income? ANSWER: The first nine of the contributions or gifts listed above satisfy the requirements as being allowable deductions. In the case of the gifts of land to the Y. M. C. A., and to the City of Yonkers, N. Y., the cost is the basis for computing the amount of the gifts. The gift to the distant relative is not deductible. However, as the total is more than 15% of his net income before deducting contributions, the amount allowable as a deduction would be 15% of $20,000, or $3,000. REFERENCES: Sec. 214 (a): "That in computing net income there shall be allowed as deductions: . (11) Contributions or gifts made within the taxable year to or for the use of: (a) The United States, any State, Territory, or any political subdivision thereof, or the District of Columbia, for exclusively public purposes; (b) any corporation or community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, including posts of the American Legion or the Women's Auxiliary units thereof, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual; or (c) the special fund for vocational rehabilitation authorized by section 7 of the Vocational Rehabilitation Act; to an amount which in all the above cases combined does not exceed 15 per centum of the taxpayer's net income as computed without the benefit of this paragraph. . . . Such contributions or gifts shall be allowable as deductions only if verified under rules and regulations prescribed by the Commissioner, with the approval of the Secretary;" Art. 251, Regulations 52: "... Where the gift is other than money the basis for calculation of the amount of the gift shall be the cost of the property, if acquired after February 28, 1913, or its fair market value as of March 1, 1913, if acquired prior thereto, after deducting from such cost or value the amount sustained and allowable as a deduction in computing net income. . . ." CORPORATIONS: In general, Corporations are not permitted deductions for contributions. REFERENCE: Art. 562, Regulations 62: "Corporations are not entitled to deduct from gross income charitable or other contributions which individuals may deduct under paragraph 11 of section 214 (a). Donations made by a corporation for purposes connected with the operation of its |