Lapas attēli
PDF
ePub

CHAPTER 34

DEDUCTION OF ALLOWANCE FOR DEPLETION OF MINES

The 1916 Law provides that individuals and corporations may deduct a reasonable allowance for the depletion of mines, not to exceed the market value in the mine of the product thereof which has been mined and sold during the year for which the return and computation are made.1 The allowance is to be made under rules and regulations to be prescribed by the Secretary of the Treasury. The purpose of permitting the allowance is to enable the taxpayer having capital invested in the mining deposit to receive back the capital originally invested, or in the case of purchase made prior to March 1st, 1913, the fair market value of the deposit, or his interest therein, as of that date, and when the aggregate of allowances reaches such sum no further allowance is permitted. Under this provision of the law, the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, has made regulations which are discussed in the following paragraphs.

Depreciation Not Included in Depletion. It should be borne in mind that depletion is an allowance for the wasting of the natural resources and does not include any allowance for loss due to exhaustion, wear and tear of physical property used in the discovery or removal

1 Act of September 8, 1916, § 5 (a) and § 12 (a).

of such natural resources. An allowance for depreciation should be claimed separately and apart from the allowance for depletion and should be determined according to the rules laid down with respect to depreciation.2 Depletion is a deduction allowed for the purpose of returning the capital invested by a taxpayer in natural resources at or about the time the natural resource is exhausted. In addition to the deduction allowed to measure the loss due to depletion the taxpayer will also be allowed the usual depreciation of the machinery, equipment, etc., used in connection with the operation of removing the natural resource.3

Who May Claim Deduction. The owner of the mine content or of an interest therein is the one who may claim the allowance for depletion. Ownership at the time for which the computation is made is essentially prerequisite. Lessees or operators are not entitled to any allowance for depletion, if they have no capital invested in the deposit, but they may, of course, deduct the royalties or rentals paid from year to year to the owner. If, however, a lessee has paid a fixed sum to the owner for the right to explore, develop or operate a mine, the amount so paid is capital invested by him and may be ratably distributed, either over the life of the lease, or the probable life of the mine under ordinary operating conditions, whichever is the shorter, and he may deduct annually, an aliquot part of the amount so paid, until such amount has been extinguished.*

Basis of Deduction. The purpose of the deduction is to permit the return to the taxpayer, free from tax, of

2 T. D. 2446; see Chapter 32.

3 Reg. 33, Art. 143.

4 T. D. 2446.

either (a) the amount of capital invested in the mine (not including the amount invested in mining machinery, buildings or other physical property subject to depreciation) or (b) the fair market value of his interest in the mine itself (that is, the mineral deposit not including machinery, buildings, etc.) on March 1, 1913, if the property was acquired prior to that date. When the amount of capital invested, or value at the incidence of the tax, has been extinguished by a series of annual allowances, no further allowance will be permitted. For this purpose the taxpayer is required to keep an accurate ledger account showing the amount on the basis of which he claims depletion and the amount of depletion deductions allowed each year; when the account balances no further deductions should be made. The amount of invested capital once fixed is final, and a re-valuation will not be allowed during the period of the ownership under which it was determined, although it may later develop that the estimated quantity of the mineral deposit was understated at the time such amount was fixed. If the property changes hands, the new owner, of course, establishes a new basis, which will be the price he pays for the mineral deposit.5

CAPITAL INVESTED. This phrase, as used in the preceding paragraph, means the actual cost to the owner 6 and, it seems, should include not only the original cost of the property (excluding physical appurtenances subject to wear and tear and consequently treated under the head of depreciation) but also the cost of development work to bring the property to an operating condition, such as, wages, fees, taxes and other necessary expenses.

5 T. D. 2446.

6 T. D. 2446.

Amounts expended after the property begins to produce income, should not be charged to capital if they are items which may be deducted from net income for the year, except to the extent that such expense of development exceeds the income."

FAIR MARKET VALUE AS OF MARCH 1, 1913. If the taxpayer acquired mineral deposit, or interest therein, prior to March 1, 1913, the amount of capital invested, which may be extinguished through annual depletion deductions, is the fair market value of the deposit or interest therein as of March 1, 1913. This value must not be based upon the assumed salable value of the output under current operative conditions less cost of production, for the reason that the value under such conditions would comprehend the earning capacity of the property. Neither should the value be speculative, but must be determined upon the basis of the salable value en bloc as of that date, of the entire deposit of minerals contained in the property owned, exclusive of the improvement and development work; that is, the price at which the natural deposits or mineral property, as an entirety, in its then condition, could have been disposed of for cash or its equivalent. The precise detailed manner in which the estimated fair market value of mineral deposits as of March 1, 1913, shall be made, must naturally be determined by the taxpayer. It must be on such basis as will not comprehend any operating profits. The estimate in all cases is subject to the approval of the Commissioner of Internal Revenue, and once the value has

7 Ascertaining the cost for purpose of depletion should be governed by the same general rules as apply to ascertaining the cost of assets for the purpose of computing the profit on the sale thereof. See Chapter 20.

been fixed there can be no re-valuation if it should be found that the estimated quantity of the mineral deposit was understated at the time the value was fixed. If the value as of March 1, 1913, cannot be ascertained in any more definite way, the original cost of the mineral deposit may be taken, allowance being made for minerals which have been removed prior to that date.8

Rate of Annual Deductions. The amount of allowance for depletion, which may be deducted each year is required by the law to be reasonable, and is held by the Treasury Department to be such sums as will reasonably amount, in the aggregate, to the capital invested at or about the time the deposit is exhausted. The annual allowance is limited, however, to an amount not to exceed "the market value in the mine of the product thereof which has been mined and sold during the year. 779 Το determine what is a reasonable amount and to fix the limit of the annual allowance, the Treasury Department has ruled that at the time of acquiring ownership, or as of March 1, 1913, as the case may be, an estimate must be made of the number of units (tons, pounds, etc.) in the deposit. The capital invested (or the value of the deposit on March 1, 1913) divided by this estimated number of units will determine the per unit value of the deposit in the mine, and this per unit value multiplied

8 T. D. 2446.

9 A question arises here as to whether the product mined in one year and sold in the next can be considered in fixing this limit. It does not seem likely that Congress in using the phrase "mined and sold" contemplated that both operations must take place in the same year, but rather that the limit should be determined by the product sold during the year, mined on the particular property for which allowance is claimed.

« iepriekšējāTurpināt »