Court Opinion

ID: 4597564
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:19:29.127059+00
Date Added: 2024-06-11T07:51:49.112780
License: Public Domain

QUILP GOLD MINING CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Quilp Gold Mining Co. v. CommissionerDocket No. 16400.United States Board of Tax Appeals21 B.T.A. 375; 1930 BTA LEXIS 1864; November 18, 1930, Promulgated *1864  Evidence examined and depletion allowance determined on basis of fair market value of mine as of March 1, 1913.  L. F. Reinhard, C.P.A., for the petitioner.  T. M. Mather, Esq., for the respondent.  BLACK *375  OPINION.  BLACK: This proceeding involves a deficiency in income and profits taxes for the year 1920 in the sum of $2,151.05, computed by the respondent as follows: Net loss as shown in return$21,099.31Depletion claimed$49,272.66Depletion allowed3,699.5445,573.12Balance24,473.81Net loss 19192,455.55Net income corrected22,018.26Portion of net income applicable to silver 17.393,828.98Excess-profit tax computed under section 302, as statutory invested capital is indeterminable165.80Net income$22,018.26Less:Profits tax$165.80Exemption2,000.002,165.80Balance taxable at 10 per cent19,852.46Tax at 10 per cent1,985.25Total tax2,151.05Tax previously assessedNone.Deficiency in tax2,151.05It has been held by this office that the correct value for your property is as follows: Ore reserves, shipping ore44,823 tonsAssay 0.54 ounce gold, 3.50 ounces silver.Recovery 95 per cent.*1865 *376  In arriving at the depletion allowed petitioner in determining the deficiency, respondent computed depletion as follows: Recoverable gold value, 0.54 X $20.00 X .95$10.26Recoverable silver value 3.50 X $0.65 X .952.16Total recoverable value per ton12.42Recoverable ounces gold in reserves22,994.2Total recoverable value in reserves 44,823 tons at $12.42556,701.66Estimated royalty value, 25 per cent139,175.42Less:Cost of administration and collecting royalties, etc. 41.65 per cent57,966.56Estimated net profit81,208.86Discount factor, 10 years at 12 per cent and 4 per cent.491906March 1, 1913, value operating profit39,947.12Less:Value of plant15,461.8324,485.29Depletion rate per ounce gold 24485.29/22994.21.0648Depletion scheduleYearOunces Sustained ClaimedShould begoldand shoulddisallowed19203,474.4$3,699.54$49,272.66$45,573.12The petitioner in his appeal contested the determination made by the respondent on the following grounds: The Commissioner erred in reducing total recoverable value in reserves ($556,701.66) by 75%, to an estimated*1866  royalty value of 25% - $139,175.42.  The Commissioner erred in applying discount factor of .491906 as shown by Haskolds formula and used by the Commissioner on ten-year basis to arrive at estimated operating profit.  The Commissioner erred in deducting value of plant, $15,461.83, from estimated operating profit to arrive at value of ore in block as of March 1, 1913.  The Commissioner erred in allowing depletion only on gold mined in place of value of all ore mined.  Other grounds were urged by petitioner in his appeal, but such grounds were amplification of the above stated objections and are comprehended therein.  Petitioner is a mining corporation organized under the laws of the State of Washington, with its mines and principal office at Republic, Wash.  It is engaged in gold and silver mining and is the *377  owner of the Quilp lode mine consisting of 13.532 acres in Republic Ferry County, Wash., and was the owner of same on March 1, 1913.  On September 9, 1910, petitioner entered into an agreement with J. L. Harper, by which it agreed to sell its mining claim to Harper for the sum of $250,000, of which $15,000 was to be paid in cash on or before September 24, 1910, and*1867  the balance at the rate of $5,000, every 90 days.  As security it was provided that 25 per cent of the gross value of all ores shipped to the mill or smelter should be paid over to the petitioner to be credited on the purchase price.  Harper took possession under this contract, operated the mine, and paid on account of the purchase price the sum of $58.792.29, of which $24,500 was paid direct and the balance of $34,292.29 was receipts from the mill or smelter from ore products from the mine.  These payments of 25 per cent from ore products are denominated royalty in the contract, but clearly this was a misnomer and this was merely a method of payment of a part of the purchase price.  In fact, the contract so stated.  Payments ceased June 17, 1912, and the contract was abandoned by Harper and the mine was repossessed by petitioner.  It seems to have been on account of this contract with Harper that respondent made his determination of depletion allowance to petitioner on the basis that petitioner was the owner of only a 25 per cent royalty on March 1, 1913, instead of the owner of all the ore in the mine in place.  We think this was error.  The evidence shows that petitioner was*1868  the owner of the mine on March 1, 1913, owning the same by mesne conveyances through a patent from the United States.  The depletion allowance to petitioner should be computed on basis of entire ownership of the mine, such ownership existing both on March 1, 1913, and during the taxable year 1920.  The March 1, 1913, value of petitioner's mine, exclusive of improvements thereon, was $164,036 after taking into consideration all elements which enter into value as of that date.  The depletion rate per ounce of gold for the taxable year was: $164,036.93/22994.3 = $7.1338 depletion per ounce of gold.  Depletion scheduleYearOunces Sustained ClaimedShould be goldand shoulddisallowbe allowed19203474.4$24,786.17$49,272.66$24,486.49(The depletion factor of $7.1338 per ounce gold includes the depletion on silver.) Decision will be entered under Rule 50.