Court Opinion

ID: 4609506
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:44:52.628764+00
Date Added: 2024-06-11T07:53:53.977005
License: Public Domain

LONDON-BUTTE GOLD MINES COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.London-Butte Gold Mines Co. v. CommissionerDocket No. 95858.United States Board of Tax Appeals41 B.T.A. 852; 1940 BTA LEXIS 1134; April 16, 1940, Promulgated *1134  Petitioner sold ore to two smelters in 1933 and 1934, when in its developmental stage.  Payments were withheld pending litigation to determine whether petitioner owned the ores.  In February of 1935 petitioner entered into its production stage.  On May 20, 1935, it was judicially determined that petitioner owned the ores and thereafter petitioner received payment from the withheld funds.  Petitioner kept its books on the accrual basis.  The payments in question would not have been taxable income in 1933 and 1934 if they could have been accrued on books in those years, according to stipulation of the parties.  Held, (1) the payments were not accruable on petitioner's books prior to May 20, 1935, since its right to receive the payments had not been determined; (2) the payments could not be credited to developmental expense in 1935, under articles 235(a) and 23(m)-15 of Regulations 77 and 86, since they were accruable only after petitioner had entered into its production period; (3) the payments constituted taxable income to petitioner in 1935.  Lewis A. Dick, Esq., for the petitioner.  Gene W. Reardon, Esq., for the respondent.  HARRON *852 *1135  The Commissioner determined a deficiency for the year 1935 in income tax in the amount of $5,488.62 and in excess profits tax in the amount of $1,176.44.  The only question involved is whether the sum of $48,289.63 received by petitioner in 1935 constitutes taxable income.  The facts, which have been stipulated, are not in dispute.  FINDINGS OF FACT.  The petitioner was organized as a corporation under the laws of Colorado, on February 4, 1932, for the purpose of taking title to and operating certain mining property located in Park County, Colorado.  In June 1933, two shipments of ore were sold by the petitioner to the American Smelting & Refining Co., and delivered to its smelter at Leadville, Colorado.  The petitioner requested payment for the ore, and when payment was refused, instituted suit on August 29, 1933, in the District Court for the Eleventh District, sitting in Park County, Colorado, to recover $3,622.19.  On September 16, 1933, the American Smelting & Refining Co. deposited $3,622.19 in the registry of the court and asked to be discharged.  At the same time Mosquito Gold Mines, Inc., filed a motion stating that the American Smelting & Refining Co. had been notified*1136  on May 27, 1933, that the ore delivered by the petitioner was mined from the Mosquito property.  An *853  order was entered substituting Mosquito as defendant in place of the American Smelting Co.  On July 23, 1933, a shipment of ore was forwarded to the smelter of the Golden Cycle Corporation, at Colorado Springs, Colorado.  This corporation was also notified by the Mosquito Gold Mines, Inc., of its claim to ownership of the extracted ores.  The Golden Cycle Corporation also refused to make payment of $899.04 until the pending case between petitioner and Mosquito Gold Mines, Inc., was finally decided.  On May 21, 1934, the District Court found that "the ore in question and the proceeds thereof now on deposit in the Registry of this court, was and is the property of plaintiff [London-Butte Gold Mines Co.]." The District Court entered judgment pursuant to such finding as follows: * * * the plaintiff do have and recover of and from the defendant, Mosquito Gold Mines, Inc., a corporation, the sum of $3,622.19, as damages, together with the costs of this action to be taxed; and that execution issue therefor.  And the American Mining and Smelting Company having deposited*1137  the sum of $3,622.19 in the Registry of this court to abide the decision of this court as to which of the parties to this action is entitled thereto, it is further ordered and adjudged that the Clerk of this Court do at once pay over said sum so deposited to the plaintiff.  Action on the judgment of the District Court was stayed to allow application to and final determination by the Supreme Court of the State of Colorado.  A writ of error, which had been substituted for an appeal under the 1911 laws of Colorado, was filed in the Supreme Court of Colorado on August 31, 1934.  The judgment of the District Court was affirmed by the Supreme Court of Colorado, on April 29, 1935, in the decision entitled ; . A rehearing was denied on May 20, 1935.  The petitioner continued to ship ore to the American Smelting & Refining Co.  The price of the ore shipped in 1933 and 1936, exclusive of the first two shipments, amounted to $43,768.40.  Payment of this amount was refused during the pendency of the litigation between petitioner and the Mosquito Gold Mines, Inc.  The American*1138  Smelting & Refining Co. set up an account payable to the petitioner on its books of account and held the $43,768.40 as a stakeholder, which sum was to be paid either to petitioner or to the Mosquito Gold Mines, Inc., depending upon the final outcome of the litigation between the two mining companies.  The fund of $48,289.63 first became available to petitioner upon the final judicial determination of ownership of the extracted ores by the Supreme Court of Colorado, on May 20, 1935.  This fund *854  comprised the $3,622.19 deposited by the American Smelting & Refining Co. with the registry of the District Court, on September 16, 1933, the $899.04 withheld by the Golden Cycle Corporation for the ore shipment of July 23, 1933, and the $43,768.40 withheld by the American Smelting & Refining Co. for ore shipments received in 1933 and 1934.  Immediately after May 20, 1935, petitioner received $41,651.20, and the balance, $6,638.43, was received in July 1935, including $899.04 paid to petitioner on July 25, 1935, by the Golden Cycle Corporation.  The total sum of $48,289.63 received in May and July of 1935 constituted a withheld fund from proceeds of sales of ore made in 1933 and*1139  1934.  Title and ownership of the impounded moneys aggregating $3,622.19 and of the $44,667.44 withheld by the two smelting companies was determined to be in the petitioner on May 20, 1935.  The petitioner had charged the amounts of the various shipments of ore during the time of the dispute relative to the ownership thereof to accounts receivable from the two smelters.  On and after May 20, 1935, when the money was first made available and paid, the amounts received by petitioner were credited to the accounts receivable, wiping them out.  The petitioner keeps its books on the accrual basis.  The petitioner's gold mine was in the development stage from its organization until February 20, 1935, when it passed into the production stage.  Upon audit of petitioner's income tax return for 1935, the respondent added to reported income the amount of $48,289.63 as taxable income.  He computed depletion on a percentage basis, resulting in an allowance of $26,887.76, of which amount $7,243.44 applied on the withheld fund of $48,289.63.  The actual increase made by the respondent in the taxable income in the determination of the deficiency was $41,046.19 ($48,289.63 - $7,243.44).  The*1140  amount of $48,289.63 received by petitioner in 1935 constituted taxable income to it in 1935.  OPINION.  HARRON: During its development stage, the petitioner in 1933 and 1934 mined and sold ore to two smelters for prices totaling $48,289.63, which amount was in part impounded with the District Court and in part withheld by the smelters pending the outcome of the litigation between petitioner and another mining company to determine the rightful owner of the ore mined and sold by petitioner.  On May 20, 1935, after the petitioner had passed into its production stage, the Supreme Court of Colorado finally determined that the *855  petitioner was the owner of the ore and therefore entitled to the impounded funds.  Thereafter those who had withheld funds made payments to petitioner as the owner of those funds.  The respondent included the amount of $48,289.63 in the 1935 taxable income of petitioner.  The petitioner assails respondent's action in this respect as erroneous.  Disregarding momentarily the special facts that petitioner is a mining company and that its business was in the developmental stage prior to February 20, 1935, and, in the production stage thereafter, could*1141  petitioner have accrued on its books in 1933 and 1934 the proceeds from the sales of ore made in those years, or were those proceeds accruable on the books only after May 20, 1935?  Petitioner keeps its books and reports its income for taxation on the accrual basis.  It is a settled rule that income is not accruable until the right to receive the income and the amount of income to be received is established.  Income is not accruable unless the taxpayer has good reason for believing that the income can be collected.  ; . In , the court said: * * * if income has neither actually been received during the taxable year, nor the right to its receipt been definitely fixed during the year, as to both the existence of an obligation on the part of the payor and the amount to be paid, such income is properly to be allocated only to that year in which it was in fact received or in which the right to receipt became fixed and liquidated.  Herein the ownership of the ore which petitioner sold to the two smelters was in dispute*1142  until May 20, 1935.  While the smelters did not deny their obligation to pay for the ore, the right of petitioner, as opposed to another mining company, to receive payment for the ore was not fixed and certain until May 20, 1935.  The proceeds of the sales, therefore, would not have been accruable as income, ordinarily, until May 20, 1935, when the right to receive such proceeds was established.  ; . The respondent so determined and included the proceeds from the sales of ore made in 1933 and 1934 in the taxable income of petitioner for 1935.  The petitioner, however, contends that since under the provision contained in articles 235(a) and 23(a)-15 of Regulations 77 and 86, respectively, the proceeds would have constituted a capital receipt or reinvestment of capital in 1933 and 1934, if then received or accruable, such proceeds constituted a return of capital in 1935 when received.  The petitioner's contention that net receipts from minerals *856  sold during the development stage of a mine constitute a return of capital*1143  because the above articles permit the crediting of net receipts against development expenses is not sound.  Articles 235(a) and 23(a)-15, supra, in so far as applicable provide as follows: Allowable capital additions in case of mines. - (a) All expenditures in excess of net receipts from minerals sold shall be charged to capital account recoverable through depletion while the mine is in the development state.  On stipulation it was agreed by petitioner and respondent "that if the proceeds from the ore sales had been received by petitioner during its development stage, that is prior to February 20, 1935, it would have been credited to development expense and not classed as income under Article 235(a) of Regulations 77, and Article 23(m)-15 of Regulations 86." While the above stipulation refers to the term "income", it can only mean that the proceeds from the 1933 and 1934 sales, if they had been received in such years, and assuming that the development expenses were in excess thereof, would not have been taxable income, but income nevertheless and not a return of capital.  Section 22 of the Revenue Acts of 1932 and 1934 provides that gross income includes: * * *1144  * gains, profits, and income derived from * * * sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from * * * the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever.  Articles 55 and 22(i)-5 of Regulations 77 and 86, respectively, provide that: In the case of a manufacturing, merchandising, or mining business "gross income" means the total sales, less the cost of goods sold, plus any income from investments and from incidental or outside operations or sources.  It is stated in , that, on an accrual basis, "total sales" are manifestly accounts receivable arising from sales, and these accounts receivable, less the cost of the goods sold, are includable in "gross income." Apparently by "net receipts from minerals sold" referred to in article 235(a) and 23(m)-15, supra, is meant the total value or aggregate accounts receivable arising from total sales, less the cost of the goods sold.  Under such regulations a mining company, during its development stage, *1145  is permitted to credit "net receipts from mineral sold", if any, against development expenses.  In this case, did petitioner have any net receipts from mineral sold in 1933 and 1934 to credit against development expenses?  The answer must be in the negative because it was not until May 20, 1935, that the petitioner's right to receive the *857  proceeds of sales was established.  Under its system of accounting it could not properly accrue the amounts in question as income or receipts from sales prior to May 20, 1935.  The petitioner points to the fact that it set up the sales as accounts receivable in 1933 and 1934 and that when the proceeds were received in 1935 they were credited to such accounts.  However, bookkeeping entries are not determinative of tax liability.  . It is held that the petitioner had no "net receipts from minerals sold" in 1933 and 1934 which it could accrue on its books to be credited to expense during its development stage under articles 235(a) and 23(m)-15, supra. It is further held that, since the proceeds of the sales here in question were not properly accruable*1146  as income prior to May 20, 1935, such proceeds can not be treated in 1935 for income tax purposes except upon the same basis as any other income received or accrued in 1935.  Petitioner had reached the production stage of its business on February 20, 1935.  Thereafter, receipts in 1935 from sales of ore not properly accruable in prior years could not be credited against development expense under articles 235(a) and 23(m)-15, supra, which permit such credit only during the development stage of the mine.  The amount of $48,289.63 constituted taxable income in 1935.  The action of the respondent in including the amount of $48,289.63 in petitioner's taxable income for 1935 is approved.  Decision will be entered for respondent.