Mother Lode Coalition Mines Co. v. Commissioner , 42 B.T.A. 596 ( 1940 )

MOTHER LODE COALITION MINES COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Mother Lode Coalition Mines Co. v. Commissioner

Docket No. 98500.

United States Board of Tax Appeals

42 B.T.A. 596; 1940 BTA LEXIS 982;

August 20, 1940, Promulgated

---

1. DEDUCTION - PERCENTAGE DEPLETION - ELECTION. - An election to take percentage depletion for 1933 and subsequent years does not carry over for 1934, since section 114(b)(4) of the Revenue Act of 1934 required a new election.

2. Id. - An amended return for 1934 filed years after the 1934 return was due is not a "first return" within the meaning of section 114(b)(4) of the Revenue Act of 1934.

3. Id. - The 1935 return is likewise not a "first return" where the property was owned during 1934, a return was required for that year, and it does not appear that the taxpayer would not have been entitled to a percentage depletion deduction for 1934.

Paul E. Shorb, Esq., for the petitioner.

Conway N. Kitchen, Esq., for the respondent.

---

MURDOCK

The Commissioner determined a deficiency of $3,475.57 in income taxes for the calendar year 1935. The sole question for decision is whether or not the petitioner is entitled to a deduction in the amount of $25,276.88 for that year for percentage depletion upon its copper mining properties, under section 114(b)(4) of the Revenue Act of 1934.

FINDINGS OF FACT.

The petitioner is a corporation which was organized in 1919 under the laws of the State of Delaware. Its principal offices were in New York, New York. It filed its income tax return for the taxable year with the collector of internal revenue for the second district of New York. It reported net income upon that return after deducting $25,276.88 for percentage depletion. The return contained a statement as follows:

Under the provisions of Section 114(b)(4) of the Revenue Act of 1932 the taxpayer elected to deduct depletion on the percentage basis for the year 1933 and thereafter.

The following facts were stipulated:

Petitioner during the years 1933, 1934, and 1935 owned, and still owns, certain copper mining property located at or near Kennecott, Alaska. Petitioner acquired said mining property in 1919. During the years 1933, 1934, and 1935, petitioner was engaged in the business of mining and selling copper.

During the year 1934, petitioner's property was shut down and petitioner did not mine any of its property during that year. Petitioner did, however, sell in 1934 certain copper which it had on hand and which had been mined in prior years.

Petitioner had a profit from its mining operations in 1935 and reported a net income of $63,466.00 in its Federal income tax return for that year.

In all returns of petitioner for years subsequent to 1935, it claimed depletion on the percentage basis.

The petitioner was not entitled to any deduction for depletion on a cost basis, for its mining property at Kennecott, Alaska, for the years 1933, 1934, and 1935. If petitioner is entitled to percentage depletion for the year 1935 under the provisions of Section 114(b)(4) of the Revenue Act of 1934, the amount thereof is $25,276.88, as claimed by petitioner in its 1935 Federal income tax return; and, in such event there is no deficiency due from or refund due this petitioner for the year 1935.

The petitioner, on its Federal income tax return for 1933, deducted for depletion upon the percentage basis and stated: "Under the provisions of Section 114(b)(4) of the Revenue Act of 1932 the taxpayer elects to deduct depletion on the percentage basis for the year 1933 and thereafter."

The petitioner filed its income tax return for 1934 on March 15, 1935, showing the following items of income and deductions:

Gross income
1. Gross Sales		$81,887.37
2. Less Cost of Goods Sold:
(a) Inventory at beginning of year	$58,543.04
(c) Miscellaneous costs	6,570.19
(d) Total	$65,113.23
(e) Less inventory at end of year	10,916.22
		54,197.01
3. Gross Profit from Sales	$27,690.36
7. Interest	42.26
8. Rents	132.50
14. Total Income			$27,865.12
Deductions
19. Taxes		$7,291.44
25. Other Deductions:
N.Y. General Expense		15,029.36
Selling Commission		1,217.75
Delivery Expense on Refined Copper		1,854.89
Shutdown Expense	41,369.94
26. Total Deductions			$66,763.38
27. Net Income			$38,898.26

Item 19. Taxes. - Was explained in schedule E as follows:

State of Delaware	$6,275.00
Capital Stock Tax	1,000.00
Territory of Alaska	15.00
Federal Check Tax	1.44
	$7,291.44

The return contains no further explanation of the items of income and deductions. No deduction of any kind for depletion was claimed on that return. The treasurer of the petitioner prepared that return after reading the instructions attached thereto and section 114(b)(4) of the Revenue Act of 1934. He believed that the election to take percentage depletion made on the 1933 return was still binding, the petitioner would not benefit from and was not entitled to any deduction for percentage depletion for 1934, and consequently, he made no reference to percentage depletion on the 1934 original return. The Commissioner made no adjustments for 1934.

A revenue agent's report dated January 19, 1939, first advised the petitioner that its claim for percentage depletion for 1935 was to be disallowed. The petitioner filed a protest on January 27, 1939. The Commissioner mailed the notice of deficiency on February 18, 1939, disallowing the percentage depletion deduction for 1935 and explained:

This office holds that under Section 114(b)(4) of the Revenue Act of 1934 a new election of the basis for computing depletion is required and that the failure on your part to make an affirmative election in 1934 is in the terms of the Statute an election to compute depletion without reference to percentage depletion. The method of computing depletion, having become fixed at the time of filing the 1934 return, may not thereafter be changed in 1935. Since the allowable cost basis of depletable assets, plus the capitalized development costs was fully recovered through a cost basis depletion by 1925, it follows that no further depletion is allowable.

The petition in this proceeding was filed on May 12, 1939. The petitioner on May 29, 1939, filed an amended return for 1934 which was a duplicate of the original except that it contained a statement as follows:

Notice

This taxpayer elects percentage depletion for this and all subsequent years thus reiterating its election of percentage depletion made in its 1933 return for 1933 and all subsequent years which included this year of 1934.

OPINION.

MURDOCK: The petitioner makes three arguments to support its claim for a percentage depletion deduction for 1935. One is that its election made on its 1933 return under the Revenue Act of 1932 was a continuing valid election to claim percentage depletion under section 114(b)(4) of the Revenue Act of 1934. Another is that its amended return for 1934 was timely filed and constituted the "first return" under the Revenue Act of 1934, so that the election made therein to take percentage depletion for 1934 and subsequent years was an effective election under section 114(b)(4) of the Revenue Act of 1934. The other argument is that the 1935 return was the "first return" within the meaning of section 114(b)(4), since no depletion deduction upon a percentage basis was allowable for 1934.

The Board has held that the 1934 Act, in section 114(b)(4) ¹, required a new election by taxpayers as to whether or not they desired percentage depletion for 1934 and subsequent years. ; ; reversed on other grounds, . Thus the election made by this taxpayer in its return for 1933 does not constitute the election required by the Revenue Act of 1934.

The Supreme Court has held, in , that the term "first return," as used in section 215(f) of the National Industrial Recovery Act, "means a return for the first year in which the taxpayer exercises the privilege of fixing its capital stock value for tax purposes, and includes a timely amended return for that year." The timely amended return in that case was filed within the time fixed by statute (and an extension thereof) for filing the return. The Court was not influenced by a later regulation providing that the value declared in the original return could not be changed by an amended return filed within the statutory limits. There is a reference in the opinion to , wherein the Circuit Court of Appeals for the Fourth Circuit held that an amended return for 1934, electing percentage depletion and filed before the return for 1935 was due, was sufficient to support a deduction of percentage depletion for 1934. See also . The Board, in , interpreted the Haggar decision as recognizing only an amended return filed within the time for filing the return for the period and held that one filed thereafter was ineffective. The Circuit Court of Appeals for the Ninth Circuit, in , made a similar interpretation of the Haggar decision and expressed disapproval of the test of timeliness given in the Mead case. The petitioner in the Riley case was engaged in mining gold. It had exhausted its cost basis for depletion and claimed no deduction for depletion on its return for 1934. It filed an amended return on March 3, 1936, electing and claiming percentage depletion. The court held that the amended return was not timely and did not entitle the taxpayer to percentage depletion. The opinion contains a discussion of several of the points urged by the present petitioner. The Board held in , that an amended return, filed after the return for the next year was due, was ineffective for making an election of percentage depletion under section 114(b)(4).

The amended return of the present petitioner for 1934 was filed on May 29, 1930, more than four years after the time for filing the return for 1934, more than four months after it learned that its percentage depletion for 1935 might be disallowed, more than three months after the deficiency notice for 1935 was mailed, and after the petition in this case was filed. It was not timely filed and was not the first return for 1934 within the meaning of section 114(b)(4). ;Cf. The conclusion is also supported by

The remaining argument of the petitioner is that its return for 1935 was its "first return" within the meaning of section 114(b)(4) of the Revenue Act of 1934, since it was the first return under that provision in which it was entitled to any deduction for percentage depletion. This argument is based upon the conclusion that no deduction for percentage depletion was allowable for 1934. The petitioner merely points to the net loss for 1934. The net loss shows that a deduction for percentage depletion in 1934 would not have reduced taxes for 1934 but it does not show that such a deduction was not allowable under the statute.

Section 114(b)(4) allowed a deduction of 15 per centum "of the gross income from the property during the taxable year" but not to "exceed 50 per centum of the net income * * * from the property" excluding depletion. The terms "gross income from the property" and "net income from the property" are not necessarily synonymous with the terms "Gross Income" and "Net Income" appearing on the return. Cf. ; affd., ; certiorari denied, . See Regulations 86, article 23(m)-1, defining gross and net income from the property. The record shows that the petitioner had gross income from the property which would support a deduction for percentage depletion and it fails to show that there was no net income from the property for 1934. Not all deductions shown upon a return are necessarily deductible in determining net income from the property, since only those are deductible which are attributable or properly allocable to the mineral property and process upon which the depletion is claimed. Regulations 86, art. 23(m)-1. Cf. ; affd., ; ;; ; ; affd., ; certiorari denied, ; ; affd., ; certiorari denied, .

The record does not show whether or not the petitioner had other properties in 1934, or what part of the taxes might be deductible in computing net income from the property upon which depletion is being claimed. The same is true of the item "N.Y. General Expense." "Selling Commission" and "Delivery Expense on Refined Copper" are not further explained. We may not assume, in the absence of proof, that those items are deductible in their entirety, or in any particular part, in the computation of "net income from the property." The same and more may be said in regard to the large item of "Shutdown Expense." The meager description given of that item strongly suggests that it is not all deductible in determining net income from the property for 1934. The copper sold in 1934 was mined previously. Should the entire shutdown expense be charged against 1934 sales? Did the petitioner refine its copper, and, if so, what allocation of income and deductions would that require.

The petitioner has failed to show that it would not have been entitled to any percentage depletion deduction for 1934 under section 114(b)(4) and the main support of its third argument must fall. Furthermore, there is language in the Dorothy Glenn Coal Mining Co. case, supra, and in , which may mean that the election must be made for 1934 and that no election made in a later return will do, where the property was owned in 1934 and an election could have been made upon the return for that year.

The legislative history of the provision and its effect upon taxpayers situated like the present one has been fully considered and discussed in prior opinions cited herein. Since this petitioner did not make the election required by section 114(b)(4), it may not have any deduction for percentage depletion for 1935.

Decision will be entered for the respondent.

---

Footnotes

• 1. SEC. 114. BASIS FOR DEPRECIATION AND DEPLETION.

  * * *

  (b) BASIS FOR DEPLETION. -

  (4) * * * A taxpayer making his first return under this title in respect of a property shall state whether he elects to have the depletion allowance for such property for the taxable year for which the return is made computed with or without regard to percentage depletion, and the depletion allowance in respect of such property for such year shall be computed according to the election thus made. If the taxpayer fails to make such statement in the return, the depletion allowance for such property for such year shall be computed without reference to percentage depletion. The method, determined as above, of computing the depletion allowance shall be applied in the case of the property for all taxable years in which it is in the hands of such taxpayer, or of any other person if the basis of the property (for determining gain) in his hands is, under section 113, determined by reference to the basis in the hands of such taxpayer, either directly or through one or more substituted bases, as defined in that section. ↩