The initial interview should establish when the taxpayer first went into production and if any gold was on hand, either obtained with the claim or produced in the exploration or development stages. The general rules of inventory apply here, that is, how much gold was on hand at the beginning of the year, how much was produced during the year, how much was sold, and how much was on hand at the end of the year. IRC section 471 establishes that an inventory must be kept. Reg. section 1.471-7 establishes the need for inventories of miners and manufacturers and is supported by Treas. The Uniform Capitalization rules require the capitalization of the costs of producing real and tangible personal property.
Mining operations involve the production of both real and tangible personal property.
Until the gold is extracted from the land, the taxpayer is engaged in the production of tangible personal property. The gold is inventory in the hands of the taxpayer. The direct and indirect costs that benefit or that are incurred by reason of the production of the mineral property must be capitalized to that property. The direct and indirect costs that directly benefit or are incurred by reason of the gold must be included in the inventoriable cost of the gold.