
    KENNECOTT COPPER CORPORATION v. THE UNITED STATES
    [No. 493-59.
    Decided June 11, 1965.
    Defendant’s motion for rehearing and/or for modification of the judgment of the court denied October 15, 1965]
    
      
      Norris Darrell for plaintiff.
    
      M. Bernard Aidinoff, Jerome K. Walsh, Jr., and Bullirán <& Oromwell of counsel.
    
      Gilbert W. Rubloff, with, whom was Assistant Attorney General Lords F. Oberdórfer, for defendant. Lyle M. Turner, Philip R. Miller of counsel.
    Before CoweN, Chief Judge, Laramoke, Durfee, Davis and Collins, Judges.
   Per Curiam:

This case was referred pursuant to Eule 45(a), now Eule 57(a), to Trial Commissioner W. Ney Evans, with directions to make findings of fact and recommendation for a conclusion of law. The commissioner has done so in an opinion and report filed on August 2, 1963. Plaintiff requested the court to adopt the commissioner’s report in its entirety, the defendant requested the court to adopt the findings of fact with one exception and excepted to the recommended conclusion of law and opinion of the report. Briefs were filed by the parties and the case was submitted to the court on oral 'argument of counsel. Since the court is in agreement with the commissioner’s opinion and his recommended conclusion of law, as hereinafter set forth, it hereby adopts the same as the basis for its judgment in this case. Plaintiff is therefore entitled to recover and judgment is entered for plaintiff in an amount to be determined pursuant to further proceedings under Eule 47(c).

OpietioN op Commissioner

I

During the 7-year period of 1949-1955, plaintiff expended a total of $14,474,701.13 (hereinafter rounded off to $14.5 million) constructing substitute facilities for the United States Smelting Eefining and Mining Company (hereinafter abbreviated as ussrmco) to replace facilities destroyed by plaintiff in the course of stripping operations at its Utah Copper Mine in an area which, prior to the 1948 agreements between plaintiff and ussrmco, 'had been exclusively owned by ussrmco.

Plaintiff amortized the $14.5 million over the 9-year period of 1949-1957 against the tonnage estimated to be benefited, and claimed deductions for those taxable years as ordinary and necessary expenses of mining. The deductions so claimed for the taxable years 1949,1950, and 1951 were disallowed by the Commissioner of Internal Eevenue. The resulting additional amounts of tax claimed to be due, and interest, were paid by plaintiff. Claims for refund, timely filed, were formally disallowed, and this action was instituted by plaintiff to recover its alleged overpayments of tax and interest, together with interest from the dates of payment.

The parties agree that the sums so expended by plaintiff were reasonable in amount and were required in the discharge of plaintiff’s obligations under the 1948 agreements.

The principal controversy in the case is whether the Commissioner of Internal Eevenue was in error in disallowing the claimed deductions on the ground that “the expenditures made by plaintiff to acquire the various surface rights from ussrmco should have been capitalized and returned to plaintiff through annual depletion charges, rather than being deducted as an ordinary expense.”

n

Both the method (open pit mining) and the scope of operations at the Utah Copper Mine differ from the method and scope involved in most of the cases cited as precedents. The difference in method is a difference in kind. The difference in scope is one of degree.

The story had its beginning in geological time, when the' convulsion of nature, which raised the Oquirrh Mountains in Utah, created in the process two types of mineral deposits: lode deposits (or veins), primarily of lead and zinc; and disseminated deposits, primarily of copper. Both types of deposits occur in the immediate area of the Utah Copper Mine, in what is known as the Bingham Mining District (named for Bingham Canyon). While the two types of deposits lie side by side, they are not appreciably intermingled.

Prospectors were in the area staking claims during the early years of the second half of the nineteenth century. By the end of the century hundreds of claims had been staked, and the process of consolidation of claims was well under way. All exploitation during this early period was by conventional methods of underground mining, through tunnels and shafts.

Some veins of copper were found and worked, but the extent of the veins usually proved to be limited. Continuing exploration revealed in outline a very large deposit of low grade copper ore disseminated among the porphyry. The copper content of this disseminated ore was below the tail-ings of copper then being mined in the Butte District. It would therefore not warrant mining by usual underground methods.

At the turn of the century two mining engineers devised a plan for exploiting this disseminated deposit of low grade copper ore by open pit mining. The surface area overlying most of the ore body was acquired by the Utah Copper Company, and open pit mining was begun in 1906.

Open pit mining is surface, or strip mining, with the stripping done in concentric circles. In order for the pit to go deeper, the surrounding circles have to be made larger. Banks are formed of steps or benches around the perimeter. All material cut from the pit or the benches is removed. At the Utah Copper Mine, material containing ore of cutoff grade or better is sent to the concentrating mills, while material in which the copper content is below cutoff grade is sent to waste dumps.

From the outset, the amount of material removed from the mine was substantial. For example, during the first 4% years of open pit mining, some 10.8 million cubic yards of material were removed, of which at least 6 million cubic yards were deposited on the waste dumps, while 4.8 million cubic yards were sent to the concentrating mills for the extraction of copper. During the next three decades the average annual volume of production was:

As the open pit mine has grown, over the years, into the largest manmade excavation in the world, the volume of production has increased proportionately. During the 9-year period involved in this case (1949-1957), the average amount of material removed annually was 36.4 million cubic yards, consisting of 22.5 million cubic yards of waste and 13.9 million cubic yards of ore. At the time of trial (in October 1961) the mining goal called for the removal, daily, of 118,098 cubic yards of material, being 43,206 cubic yards of ore and 74,892 cubic yards of waste.

The foregoing summary of the volume of production at the Utah Copper Mine indicates the demand of the operation for space. Within the surface area owned by plaintiff (or its predecessors), f acilities had to be maintained at economic distances from the perimeter of operations, which meant that such facilities had to be moved outward from time to time. Since other mine owners held title to the land immediately adjacent to the ore body, the owners of the Utah Copper Mine bad to acquire from these owners all necessary rights of ingress and egress and, as operations at the mine were expanded, additional rights for stripping had to be obtained as well as dumping rights for the disposition of wastes from the mine and from the concentrating mills.

in

By 1947, open pit operations at the Utah Copper Mine were approaching the line dividing the properties of plaintiff and ussrmco on the southern segment of the perimeter of the mine. If plaintiff had been unable to obtain additional stripping rights from ussrmco, expansion of the concentric circles would have had to be halted in that segment. Such an interruption would have required plaintiff to move the center of the pit northward, in order to continue open pit mining without further disturbance of the southern segment.

Plaintiff had theretofore acquired rights from ussrmco, for stripping and dumping and transport (railroad rights-of-way). Some stripping rights had been previously acquired over the very segment (Tract A) which now loomed as a barrier unless additional rights could be acquired. When plaintiff approached ussrmco to acquire the needed, additional rights, ussrmco asked plaintiff to anticipate as far as possible all the rights it would need in the future: dumping, leaching, and transport rights, as well as stripping rights. Plaintiff complied with this request.

The transaction between plaintiff and ussrmco was consummated, after extended negotiations, on July 26, 1948, by the execution of a series of grants from ussrmco to plaintiff and the exchange between them of various agreements.

The grants conveyed to plaintiff a number of perpetual easements, rights, and privileges over, on, and under various surface tracts, for use in stripping, dumping, and leaching. There was no conveyance of land, in fee simple. All rights to minerals in lode deposits were reserved 'by trssRMeo.

The agreements included (1) a boundary line agreement defining the separation of their respective properties, subsurface as well as surface; (2) a royalty agreement covering any disseminated copper or copper-molybdenum ores which might be recovered from Tract A; (8) extensions of options theretofore granted for the acquisition of transport (rights-of-way), dumping, and leaching rights; and (4) an agreement whereby plaintiff undertook to provide ttssrmco with substitute facilities to replace those facilities of ttssrmco which plaintiff would have to destroy in the course of stripping operations on Tract A.

Throughout the documents evidencing the series of grants and agreements, the consideration was expressed in nominal or formal terms (such as $1 and other good and valuable considerations, or in consideration of the premises, or of mutual undertakings) except for the agreement wherein plaintiff undertook to provide substitute facilities.

The $14.5 million spent by plaintiff to provide ttssrmco with substitute facilities represented the only consideration of substance moving from plaintiff to ttssrmco. Defendant challenges plaintiff’s entire case at the threshold for lack of allocation of the expenditures to the various rights and benefits obtained. Plaintiff admits that no allocation was made, contending: that none was necessary (for reasons hereafter noted); that “No part of the substitute facilities expenditures was paid to acquire the other rights incidentally involved in the 1948 transaction”; and that “Since those expenditures constituted nothing more nor less than the price plaintiff had to pay to destroy ussrmco’s former facilities in Tract A, they are properly allocable solely to the stripping rights acquired in Tract A, and to the related dumping rights needed for disposal of the Tract A waste material.”

On the basis of this reasoning plaintiff would require as logical inferences either that ttssrmco made plaintiff a gift of the other rights or that such other rights were of no value. Neither inference is warranted.

The circumstances surrounding the transaction, as developed by the evidence, point to the conclusion, (by inference) that both plaintiff and ussrmco regarded the transaction as a whole as an entity in and of itself, of which the various grants and agreements were component parts; and that ussrmco was content to enter into the transaction in return for plaintiff’s undertaking to provide the substitute facilities.

Within this context, the acquisition of stripping rights on Tract A and dumping rights on Tract B represented plaintiff’s primary objective, and all other grants and agreements were incidental or subsidiary thereto.

The boundary line agreement was executed for the mutual benefit and convenience of the parties in clarification of their transaction as a whole.

Some of the rights for dumping and leaching were incidental to the exercise of the stripping rights on Tract A and the dumping rights on Tract B. Others were not directly related to rights in Tract A or Tract B. All were subsidiary to the main transaction.

'Classification of the royalty agreement, whereby plaintiff agreed, in effect, to a division of profits with ussrmco on disseminated copper or copper-molybdenum ores extracted from Tract A, requires some further analysis.

Plaintiff contends that the royalty agreement “stands on its own feetthat “Any copper values which plaintiff may recover from Tract A under that agreement will be paid for under the terms of the agreement itself * *

Defendant would classify the royalty agreement as a purchase of minable ore. In fact, defendant has placed such emphasis, at the trial of the case and in its brief, upon the copper content of Tract A as to warrant examination of the situation at this point in the interest of perspective.

The evidence establishes the following pertinent facts: (1) plaintiff did not purchase a fee simple title to Tract A; (2) the rights acquired in Tract A were stripping rights; (3) the purpose of the acquisition was to obtain access to ore already owned by plaintiff; (4) Tract A was known to contain disseminated copper ore below cutoff grade; (5) plaintiff anticipated stripping all or virtually all of Tract A as waste; (8) plaintiff further anticipated placing the waste from Tract A on waste dumps which would be leached for the recovery of such ore as might be so obtained; (7) the parties to the transaction (plaintiff and ussemco) recognized the possibility that minerals of value might be uncovered in the course of stripping operations; (8) ussrmco accordingly reserved to itself all minerals which might be found in lode deposits; (9) with respect to disseminated copper ore of minaJble quality, if any should be found, agreement was made for plaintiff to mine such ore in usual course and to account to tjssrmco for part (approximately half) of the profits therefrom.

When viewed in this context, the royalty agreement appears as essentially an adaptation, based on the practical aspects of mining operations, of ussemco’s reservation of mineral rights in Tract A. As such, the royalty agreement was as much an incident of the transaction as a whole as was ussRmco’s outright reservation of lode deposit minerals.

IV

The legal issues in the case include the following:

1. Whether plaintiff’s failure to make an allocation between deductible and nondeductible expenditures precludes recovery;

2. If recovery is not precluded by plaintiff’s failure to allocate, whether the amortization made by plaintiff is legally acceptable;

3. Whether the expenditures should have been listed for depletion under section 23 (m);

4. If recovery is not otherwise precluded, whether the expenditures are deductible—

a. Under the receding face doctrine; or

b. As ordinary and necessary expenses of -mining—

(1) In normal course, under section 23(a) (1) (A); or

(2) As deferred expenses representing development costs of a producing mine; and

5. Whether plaintiff is precluded, by lack of notice in its claim for refund, from raising the issue of section 23 (cc), and, if not so precluded, whether the expenditures for 1951 are deductible under tliat section, although there may be no recovery as to the years 1949 and 1950.

v

Before undertaking an analysis of the legal issues seriatim, it is appropriate to enter a caveat to the undertaking as a whole, because of the nature of the case.

As heretofore noted, both the method and the scope of operations at the Utah Copper Mine differ from the method and scope of the mining involved in most of the cases from which guidance must be drawn. Conventional underground mining is involved in most of the decided cases. There are fundamental differences between underground mining and open pit mining, which make comparison between the two methods difficult and therefore uncertain. The scope of operations at the Utah Copper Mine is so vast as to require constant checks of dollar amounts against other, related costs or returns to insure the retention in judgment of relative values.

Moreover, hardly any facet of the analysis of legal issues in this case is free from semantic difficulties.

The term “capital expenditures,” for example, is nowhere defined with precision; yet it has been variously used by tax authorities to mean expenditures deductible only'through depletion and depreciation allowances, expenditures deductible as deferred expenses over a longer period than 1 year, and expenditures which are not deductible at all.

The phrase “development costs” entered the language of tax law as descriptive of costs incurred in bringing a mine into production. Now, there is recognition of development costs incurred after the mine has reached the producing stage. Preparatory development costs have been fairly well defined. The development costs of a producing mine have not been so well defined.

The law authorizes deductions for depletion and deductions for depreciation, to permit the owner of a mine to recapture his investments in ore and in physical installations such as buildings and equipment. In both the statutes and the decided cases there are occasions when depletion allowances become depreciable and depreciation allowances are depletable.

As a final note on semantics, the cases which bear on the issues here presented involve many borderline conclusions in their appraisal of particular situations. Instances are not uncommon of oversimplification, of classification by fiat, or of a gloss of added emphasis to compensate for uncertainty. The result is that attempts to harmonize the decisions often prove futile.

Because of the difficulties inherent in the undertaking to analyze the legal issues, extended discussions of many cases bearing upon those issues have been omitted from this opinion.

VI

Defendant challenges plaintiff’s entire case at the threshold on the ground that unless plaintiff can show that it is entitled to a deduction for each and every one of the rights acquired, its action fails completely.

It is true, as noted in defendant’s brief, that where an allocation between deductible and nondeductible expenses is necessary, the taxpayer has the burden of establishing a basis upon which the court can make the necessary allocation.

Plaintiff admits that no attempt has been made to allocate portions, of the expenditures among the various rights acquired, and contends that the entire expenditure is deductible without allocation.

The parties are thus agreed that deductibility applies to all of the expenditures or none. They disagree as to the approach to be used to determine which it shall be. ■ Defendant would impose upon plaintiff the burden of proving the de-ductibility of each and every one of the rights. Plaintiff responds by saying the entire expenditure is deductible because the purpose for which it was made qualifies it as an expense of mining. The parties are thus comparing apples and oranges, and neither is quite precise in the comparison.

As noted in an earlier portion of this opinion, in listing and grouping the rights acquired by plaintiff, the writer does not agree with plaintiff’s contention that no part of the substitute facilities expenditures was paid to acquire the rights incidentally involved in the 1948 transaction, or that the “expenditures constituted nothing more nor less than the price plaintiff had to pay to destroy usskmco’s * * * facilities * * wherefore the whole of the expenditures “are properly allocable solely to the stripping rights * * * in Tract A, and to the related dumping rights * * *” in Tract B and elsewhere.

The evidence indicates that both plaintiff and ussrmco regarded the 1948 transaction as an entity, and that plaintiff’s expenditures to provide substitute facilities for ussrmco constituted the consideration moving from plaintiff to ussrmco for all of the rights and agreements embraced in the transaction.

As further noted in the same analysis, all of the rights other than the Tract A stripping rights were subsidiary to the Tract A rights, and all of the rights (including the Tract A rights) were related to the same primary purpose, which was, as plaintiff says, to enable the mine owner to continue normal production under existing plans and methods.

In short, my view of the situation is that plaintiff acquired one bundle of related rights, wherefore a separate allocation of costs would be a work of supererogation unless it should appear that some specific part of the bundle was of a nondeductible nature. This approach differs slightly from that of either of the parties.

The portion of defendant’s brief in which the allocation challenge is stated is barren of specifics. It does not refer to any one right or group of rights as being nondednctible. Elsewhere in its brief, however, the point is made that allowance of plaintiff’s substitute facilities expenditures as a deductible expense of mining would result in double deductions in relation to Tract A because of the copper content of the tract.

The occurrence of double deductions, one for expense, and one for depletion allowance, in relation to one and the same tract, rights to which were acquired in the 1948 transaction, would suggest that the bundle of rights contained some element of capital outlay, and this would be nondeductible wherefore plaintiff’s failure to allocate would preclude recovery.

The facts warrant the conclusion that double deductions would result (if plaintiff is permitted to deduct the substitute facilities expenditures as an expense of mining) in two ways: because of depletion allowances for copper ore recovered through the leaching of Tract A waste; and because of depletion allowances for copper ore mined and to be mined from Tract A.

Plaintiff knew, when it negotiated with ussrmco, that the earth in Tract A contained disseminated copper ore below cutoff grade. Plaintiff anticipated stripping all of Tract A as waste (subject only to the “possible” ore hereinafter mentioned). The waste was to be put on dumps, which plaintiff intended to leach, for the recovery of copper by that method. In time, there will be some recovery of ore by leaching. When that time comes, unless there is a change in the law meanwhile, plaintiff will be entitled to include the income from ore recovered by leaching with income from mined ore in claiming a percentage depletion. To this extent, if the substitute facilities expenditures are deductible as mining expenses, there will result a double deduction on account of Tract A.

Waste dumps must be allowed to stand for 10 years or more, to permit oxidation, before leaching is warranted. At the time of the trial of this action (in October 1961), no leaching had been done on Tract A waste.

Leaching is not a profitable enterprise, in and of itself. It is strictly a salvage operation of industrial waste. Eetums realized from the process are credited by plaintiff against the cost of stripping, and are thus reflected in its books as results of efficient operation. In time the dollar value of ore recovered by leaching Tract A waste dumps may (and probably will) be substantial, although small indeed in relation to other dollar volumes of costs or returns.

The depletion allowance on ore to be recovered through the leaching of Tract A waste will be minuscule in proportion to plaintiff’s ovei'all operations. If the occurrence in the future of a depletion allowance of such minuscule proportion must be deemed to deny deductible status to plaintiff’s substitute facilities expenditures, simply for lack of allocation, a very small tail will be wagging a very large dog. If the ore to be recovered through leaching comprised all of the ore subject to a depletion allowance in the future, I would have no hesitancy in dismissing the allocation problem as a minor incidental.

There is, however, more substance to the depletion allowance to be had upon ore mined or to be mined from Tract A, although substance in this instance does not appear to be controlling, for reasons hereinafter set forth.

As earlier noted, plaintiff and ussrmco in their negotiations recognized the possibility that mineral ores of value might be uncovered by plaintiff’s stripping of Tract A. ussrmco reserved to itself all such minerals as might be found in lode deposits, and the parties entered into a royalty agreement covering disseminated copper and copper-molybdenum ores of cutoff grade or better. Plaintiff was to mine the ore in usual course and account to ussrmco for a share of the profits. Previous analysis has recorded the writer’s judgment that this agreement was in essence an adaptation (based on practicality) of ussrmco’s reservation of mineral rights and therefore consonant with classification as merely another incidental agreement within the whole transaction.

No fact in evidence is more clearly established than the attitude of the parties to the transaction toward the copper content of Tract A. They regarded it as “possible” ore, and dealt with it as such. They made no effort to ascertain its actual presence; they merely anticipated the possibility of its presence, and agreed upon an arrangement to take care of the contingency.

In 1957, after the close of the period over which plaintiff amortized its substitute facilities expenditures, one or more stringers of disseminated copper ore of cutoff grade or better were found in Tract A. The ore was mined by plaintiff, and accounting made to ussrmco in conformity with the royalty agreement.

By the time of the trial of this case (October 1961), stripping operations on Tract A had progressed far enough to give the parties to the transaction (plaintiff and xtssrmco) clearer insight as to the presence and content of the stringers containing minable ore. The ultimate take was still conjectural, but it did appear that the quantity of minable ore from Tract A would exceed the amount of ore recoverable through leaching, wherefore the dollar value of depletion allowances may eventually prove substantial.

The fact is thus established that, in the course of stripping Tract A, and quite apart from the leaching of Tract A waste, plaintiff will obtain substantial copper ore, upon which it has received (or will receive, absent a change in the law) an allowance for percentage depletion. If, therefore, the substitute facilities expenditures are deductible as mining expenses, plaintiff’s records will ultimately show double deductions on account of Tract A.

The outstanding facts are (1) that plaintiff did not seek or obtain the Tract A rights in order to acquire mineral deposits ; (2) the actual presence of minable ore was ascertained years after the transaction was consummated; and (3) allocation of a portion of the substitute facilities expenditures to the copper content of Tract A would have been an impossibility (short of a guesstimate) at the time of the transaction.

Under the circumstances, the extent of minable ore taken or to be taken from Tract A is a misleading factor. It might have proved so small as to be negligible. It may prove more extensive than either plaintiff or ussrmco would have thought possible at the time of the transaction.

The controlling factor, in my view, is the incidental relationship of the royalty agreement to the transaction as a whole. It was, in actual fact, incidental, and a rather minor incident at that. To sever it from the remainder of the transaction and regard it as an independent transaction results in a gross distortion of emphasis.

Plaintiff contends that “[t]he law is well settled that where an expenditure is made primarily for a purpose which renders the expenditure deductible as an expense, the entire amount is deductible even though the expenditure incidentally resulted in the acquisition of benefits which would be non-deductible if obtained in an independent transaction.”

Whether “the law is well settled” or not, logic and equity favor plaintiff’s position. It is not the spirit of the law that the presence, wholly as an incident, of a nondeductible benefit among a bundle of rights acquired for a purpose which makes the bundle as .a whole deductible, should infect all of the parts like a spoiled apple in the bottom of the barrel. Instead, the presence of such a benefit in a bundle of rights is a relative thing, and should be evaluated as such. It is concluded, therefore, that if, in fact, plaintiff’s purpose in making the substitute facilities expenditures was such as to render those expenditures deductible as mining expenses, the failure to allocate costs to the copper content of Tract A should not preclude recovery.

vu

A similar standard of relativity should apply to plaintiff’s amortization of the substitute facilities expenditures. If plaintiff is otherwise entitled to recover, its recovery should not be precluded by the fact that, in the retrospect of litigation, other bases of amortization were available, as long as the basis used by plaintiff was reasonable.

Plaintiff selected as its amortization period the time extending from the beginning of stripping operations and ending with the destruction of ussrmco’s Copperfield facilities. This time was estimated as 9 years, 1949 through 1957. The estimate proved to be quite accurate, since the destruction of the facilities was completed in October 1957. Plaintiff further estimated the quantity of ore unmined at the beginning of 1949 that would be removed from the entire pit during the 9 years as 253,754,500 tons. This estimate was likewise proved to be quite accurate.

The rationale of the period and quantity elements of the amortization was that the ore to be mined while ussrmco’s facilities were being destroyed should bear the cost of those facilities. The amortization was thus consistent with plaintiff’s position, heretofore noted, that the substitute facilities expenditures represented the price plaintiff had to pay to destroy ussrmco’s former facilities, wherefore such expenditures were properly allocable solely to the stripping rights in Tract A. No consideration was given to the bundle of rights concept discussed hereinabove.

Defendant contends that the quantity of ore benefited by the expenditures is many times the amount set forth in plaintiff’s amortization computation. Insofar as this contention is predicated upon defendant’s insistence that open pit mining would have come to a halt throughout the Utah Copper Mine without the 1948 rights, the evidence does not sustain the conclusion.

As previously noted, if plaintiff had been unable to obtain stripping rights on Tract A, open pit mining would have had to be stopped in that southerly sector. Otherwise, the center of the pit could have been moved northward and open pit mining could have been continued, requiring only some readjustments of the benches and slopes surrounding the relocated pit. Thus, the Tract A rights benefited primarily only the ore within the locale of that tract.

Bases of amortization other than the one plaintiff used were available.

The basis which defendant contends plaintiff should have used would extend the time over the 40 years representing the full exercise of Tract A stripping rights and would include all of the ore to be mined from the entire pit during all of those years. While such an amortization might have been permissible, the contention that it should be required rests upon a considerable overemphasis of the tonnage benefited.

Another basis of amortization could have rested on the quantity of ore at the southerly edge of the pit, adjacent to or in the immediate vicinity of Tract A, being the ore made available for open pit mining by the 1948 rights. Plaintiff asserts that, by coincidence, the quantity of this adjacent ore was roughly the same as the quantity estimate used by plaintiff, based on ore to be removed from the entire pit.

If amortization had been based upon this adjacent ore, to the extent that such ore would be mined during the period ending with the removal of ussrmco’s Copperfield facilities, the time element of the amortization would have been the same as the time element used by plaintiff, while the quantity of tonnage benefited would have been much less than the quantity used by plaintiff. If the amortization had been based upon all of the adjacent ore, the quantity of the tonnage benefited might have been roughly the same as the quantity used by plaintiff, but the time element would have been much greater than the time used by plaintiff.

All factors considered, the conclusion is warranted that the quantity of the adjacent ore represents a reasonable base for estimating the tonnage to be benefited by the whole bundle of 1948 rights.

The question remains as to what is a reasonable time factor.

The alternative to the 9-year period used by plaintiff would be the 40-year period estimated as the time required for the full exercise of the Tract A stripping rights. The 40-year span would likewise encompass, for all practical purposes, the useful life of the incidental rights in the 1948 bundle

Argument that plaintiff’s 9-year period was too short, representing less than one-fourth of the whole life span of the 1948 rights, may be immediately countered by the argument that a 40-year period would distort the application of benefits. Adjacent ore immediately available would be favored over ore farther down in the pit.

Thus, the appraisal of the reasonableness of plaintiff’s amortization runs full cycle, and returns to plaintiff’s initial proposition that an estimate reasonably made at the time should not he upset even if subsequent events prove it to have been erroneous.

vm

The Commissioner of Internal Revenue disallowed the claimed deductions on the ground that “the expenditures made by plaintiff to acquire the various surface rights from ttssrmco should have been capitalized and returned to plaintiff through annual depletion charges, rather than being deducted as ordinary expense.” (Emphasis supplied.)

Plaintiff maintains that the expenditures are not recoverable under the depletion allowance provided in section 23 (m) of the Internal Revenue Code of 1939.

Defendant’s position is that, while it is unnecessary for the court to decide whether the expenditures should have been added to the depletion account as subsequent capital additions, the costs to plaintiff of obtaining some (if not all) of the 1948 rights are, in defendant’s view, capital additions which should have been added to the depletion account.

Since allowances for depletion of a capital investment and deductions of ordinary expenses are mutually exclusive as applied to a single outlay, in that the mine owner may have one or the other but not both, it is once more pertinent to inquire, in the interest of clarity, whether recovery in this action is precluded by plaintiff’s failure to capitalize its substitute facilities expenditures for return to it through annual depletion charges.

As indicated in the ruling by the Commissioner of Internal Revenue, the issue relates to depletion charges for the recovery of the cost of surface rights obtained by plaintiff from ussrmco.

Following are pertinent provisions of section 23 of the Internal Revenue Code of 1939:

Sec. 23. Deductions from Gross Income.
In computing net income there shall be allowed as deductions:
fa) Expenses. —
(l)Trade or Business Expenses.—
(A) In General. — All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business H*. * ❖
(l) Depreciation. A reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence) of property used in the trade or business * * *.
(m) Depletion. In the case of mines, oil and gas wells, other natural deposits, and timber, a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each case; such reasonable allowance in all cases to be made under rules and regulations to be prescribed by the Commissioner, with the approval of the Secretary. * * *
(n) Basis for Depreciation and Depletion. The basis upon which depletion, exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be as provided in section 114.

Section 114 provided, in pertinent part, as follows:

114. Basis for depreciation and depletion —
(a) Basis for depreciation. The basis upon which exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be the adjusted basis provided in section 113(b) for the purpose of determining the gain upon the sale or other disposition of such property.
(b) Basis for depletion—
(1) General rule. The basis upon which depletion is to be allowed in respect of any property shall be the adjusted basis provided in section 113(b) for the purpose of determining the gain upon the sale or other disposition of such property, except as provided in paragraphs (2), (3), and (4) of this subsection.
Jfs H*
(4) Percentage Depletion for Coal * * * and Metal Mines and Sulphur. The allowance for depletion under section 23 (m) shall be, in the cáse of * * * metal mines, * * * 15 per centum * * * of the gross income from the property during the taxable year * * *. Such allowance shall not exceed 50 per centum of the net income of the taxpayer (computed without allowance for depletion) from the property * * *.

The “adjusted basis” provided in section 113(b) was the adjustment to cost or to market value as of March 1, 1913.

Depletion provisions have been in the Eevenue Acts since 1916. These Acts have uniformly provided that depletion allowances are to be granted under rules and regulations to be prescribed either by the Secretary of the Treasury or by the Commissioner of Internal Eevenue with the approval of the Secretary. The Acts themselves have never undertaken to define in detail the scope of depletion allowances.

Pertinent Eegulations have included Eegulations 33 (Eev.), of 1918; Eegulations 45, of 1920; Eegulations 77, of 1932; and Eegulations 111, of 1942.

Percentage depletion was first authorized by the Eevenue Act of 1926. The Eevenue Acts of 1932 and 1934 required taxpayers to state in their returns (for 1933 and 1934, respectively) whether they elected to use percentage depletion under section 114(b) (4) or to continue under the general rule provided by section 114(b) (1). Thereafter, the Office of the General Counsel of the Treasury was asked by representatives of the mining industry for its opinion “on the question whether the percentage depletion allowance * * * under section 114(b) (4) * * * should be held to provide, in lieu of any other form of deduction, for the return of ‘amounts spent for development (including shaft sinking, tunneling, stripping, etc.) * * * which, have been capitalized (a) while the mine is in the development stage and (b) after the mine has reached the producing stage.’ ”

The Opinion, now known and cited as G.C.M. 13954, was written by Assistant General Counsel Eobert H. Jackson (later Mr. Justice Jackson).

After noting that the Revenue Acts of 1932 and 1934 required an election by the taxpayer, the Opinion stated the question as follows:

* * * In order to make the election certain mine owners have requested to be advised whether all the capitalized mine development costs are to be allowed as deductions separately in computing net income, in addition to the percentage depletion allowance, or whether the percentage depletion allowance is in lieu of all or some part of such capitalized costs.

By way of further analysis of the question at issue, the Opinion continued:

* * * If capitalized mine development costs are not included within the capital to be recovered through depletion, they must be treated as deferred expenses of mine operation deductible separately in the determination of taxable net income. If treated on the latter basis, they will reduce the amount of the net income by which the limitation of the percentage depletion allowance to 50 per cent of the net income from the property is to be determined. It is nevertheless urged on behalf of the taxpayers that such development costs should not be held to be capital costs recoverable through depletion under the Revenue Acts of 1932 and 1934.

After noting the pertinent statutory provisions, and stressing the fact that “neither of these Acts goes into the detail of what subsequent expenditures are properly chargeable to capital account for depletion,” and the further fact that “the reasonable allowance for the taxable year is in all oases to be made under rules and regulations * * the Opinion turned to Regulations 11 and quoted excerpts from various Articles therein. In snnnnarizing the effect of them, the Opinion stated:

* * * the rules and regulations prescribed under the Revenue Act of 1932 indicate no change was contemplated or was made in the capital to be recovered through depletion allowances under the Revenue Act of 1932 from the scope of the allowance under the Revenue Act of 1928 and prior Revenue Acts. Therefore, the rule is that capitalized costs of development during the development stage of a mine are recoverable through depletion, and it would appear to be equally definite that so-called capitalized Costs of development after the mine has reached the producing status are not chargeable to the capital account recoverable through depletion, but are deductible from gross income for the proper taxable years as operating costs. * * *

The Opinion then noted a contention that “* * * all development costs, whether capitalized in the development stage or expended after the mine reached the producing status, have in a great many cases been carried by taxpayers in their accounts separately from the capital account recoverable through depletion, and for all practical purposes have been allowed by the Bureau as deductions on the deferred expense basis.” The effect of the practice, the Opinion observed, would be to treat all capitalized development costs, whether incurred in the development stage or thereafter, as deferred expense; but, it further observed that no precise differentiation was required by the Regulations prior to 1932, because:

* * * Capitalized costs during the development stage were considered as benefiting the entire ore body blocked out by the preparatory entries. Such costs after the producing status was reached were deemed to benefit smaller bodies of the same ore and all such costs were to be accounted for as and when the ore was produced and sold. The deductions for tax purposes were in the aggregate in the same amount whether or not any part of those costs was recovered through the depletion account as distinguished from the prepaid or the deferred expense account. Therefore, in the absence of any percentage depletion provisions for mines, no precise determination of what portion of such total development costs should be classified as depletion or as deferred operating expenses was necessary for practical purposes. * * *

Further differentiation between the two types of development costs was found to be required in the application of Article 605 of Regulations 77, which contained the following provision:

Art. 605. Adjusted basis for determining gain or loss. The adjusted basis for determining the gain or loss from tho sale or other disposition of property, is the cost of such property * * * adjusted to the extent provided in this article.
The cost or other basis shall be properly adjusted for any expenditure, receipt, loss, or other item, properly chargeable to capital account, including the cost of improvements and betterments made to the property. In the case of mines and oil or gas wells the following shall not be considered as items properly chargeable to capital account: (1) Expenditures made in the taxable year 1932 or subsequent taxable years which are allowable under article 235 or article 236 as deductions in computing net income; (2) expenditures made in taxable years prior to 1982 which were allowed, or which may hereafter 'be allowed, as deductions in computing the net income of the taxpayer for such taxable years. * * *

Following is the pertinent language of Article 235 :

Art. 235. 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 stage. The mine will be considered to have passed from a development to a producing status when the major portion of the mineral production is obtained from workings other than those opened for the purpose of development, or when the principal activity of the mine becomes the production of developed ore rather than the development of additional ores for mining.

The Opinion gave the following interpretation of Article 605:

* * * The law prescribes that the reasonable allowance for depletion in all oases shall be made under rules and regulations prescribed by the 'Commissioner, with the approval of the Secretary. The legal basis for the allowance for income tax purposes of capitalized development costs during the development stage of a mine is through, the capital account recoverable through depletion. This being the law, the language of article 605 of Regulations 77 * * * must be interpreted _ accordingly, and the term “allowed” as used in connection with deductions in computing net income for taxable years prior to 1932 must be deemed not to apply to development stage capitalized development costs, but should be limited to development costs after the beginning of the producing stage. * * *

The Opinion stated the following conclusion as “responsive to the legal question submitted * *

* * * it is the opinion of this office that the capital to be recovered through depletion allowance under the general rule set forth in section 114 (b)l of the Revenue Acts of 1932 and 1934, which the depletion allowances under such Acts are to be taken in lieu of, is composed in part of the capitalized development expenditures during the development stage of the mine; and that so-called capitalized development costs after the mine has reached the producing status should not he treated as capital charges recoverable through depletion, hut as operating expenses deductible in the year in which the ore benefited by such expenditures is produced and sold. [Emphasis supplied/]

In the instant case, plaintiff claimed deductions under the provisions of the Internal Revenue Code of 1939, as amended, pertinent provisions of which have been quoted hereinabove. The governing rules and regulations were in Regulations 111, of 1940. Pertinent excerpts follow:

Sec. 29.23(m)-ll. Depletion and depreciation accounts on books. — Every taxpayer claiming and making a deduction for depletion and depreciation of mineral property shall keep accurate accounts in which shall be recorded the cost or other basis * * * of the mineral deposit and of the plant and equipment^ together with subsequent allowable capital additions to each account. * * *
* * * These accounts shall thereafter be credited annually with the amounts of the depletion and depreciation computed in accordance with section 29.23 (m)-2, 29.23 (m) -3,29.23 (m) -4, or 29.23 (m) -5; or the amounts of the depletion and depreciation so computed shall be credited to depletion and depreciation reserve accounts, to the end that when the sum of the credits for depletion and depreciation equals the cost or other basis of the property, plus subsequent allowable capital additions, no further deductions for depletion and depreciation with respect to the property shall be allowed, except such depletion deductions as may thereafter be allowable under section 114(b) (2), or (3), or (4) and section 29.23 (m)-3,29.23 (m)-4, or 29.23 (m)-5.
Seo. 29.23 (m)-15. 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 stage. The mine will be considered to have passed from a development to a producing status when the major portion of the mineral production is obtained from workings other than those opened for the purpose of development, or when the principal 'activity of the mine becomes the production of developed ore rather than the development of additional ores for mining.

Plaintiff’s brief asserts:

Since the issuance of Regulations 33 (Rev.) on January 2, 1918, the regulations dealing with expenditures which may be added to the depletion account for recovery through depletion deductions have never specified expenditures of the type made by plaintiff under the 1948 agreements with ussrmco. Regulations 111 does not differ from its predecessors in this respect.

Comparison of Regulations 111 with its predecessors bears out plaintiff’s assertion in the concluding sentence above.

Plaintiff’s brief continues:

The necessary implication of the absence from a regulation entitled “Allowable Capital Additions In Case of Mines” of any reference to such additions subsequent to the development stage of a mine is that no such additions to depletion account are permissible after the producing stage has been reached. [Emphasis added.]

The foregoing assertion is qualified by the following footnote:

_ This implication is in no way weakened by the possibility of an expenditure, after the producing stage has been reached, made for the purpose of acquiring additional minable ore. Such an expenditure would, of course, be depletable as an acquisition of a new mineral deposit.

This is the essence of plaintiff’s case in support of its contention that the Commissioner of Internal Revenue erred in holding that the expenditures made by plaintiff to acquire the various surface rights from ttssrmco should have been capitalized and returned to plaintiff through annual depletion charges.

Inherent in the argument are (1) the distinction between depletion and depreciation and (2) the inference that plaintiff’s expenditures for surface rights constituted development costs of a mine in the producing stage.

Defendant does not challenge the classification of the Utah Copper Mine as having been in the producing stage at times material to this controversy. It does challenge plaintiff’s implication that no additions to the depletion account (other than costs of additional minable ore) are permissible after the producing stage has been reached, although it does not suggest specifically the nature of additions that might be made; and it does challenge the inference, inherent in plaintiff’s contention, that the expenditures made for surface rights represented development costs. The essence of defendant’s contention is that G.C.M. 13954 has no application to this case.

The writer’s view is that no decision need be made as to whether or not an implication as sweeping as the one for which plaintiff contends is warranted. When the Commissioner of Internal Revenue ruled that plaintiff’s expenditures should have been capitalized in the depletion account, he had reference, in specific terms, to the cost to plaintiff of acquiring the various surface rights from ttssrmco. The only question here is whether or not those costs were de-pletable; and their exclusion from the depletion account, in conformity with plaintiff’s contention, depends upon whether or not they were development costs.

Gr.C.M. 13954 points out that:

* * * The term “development” is a term which is widely used to apply to substantially all mining operations, whether in the making of preparatory openings or later additional openings of any character for extracting the mineral. * * *

This observation was made in the course of distinguishing the “development” stage from the “producing” stage, and was followed by the further observation that the distinction “would appear to apply to all systems of mining, whether by underground methods or by open pit or open cut methods.”

With respect to the specifics of development costs, as distinct from development stages, the Opinion refers only to shaft sinking, tunneling, and stripping operations. This is the point at which defendant levels its challenge of the applicability of the Opinion to the instant case. Plaintiff’s expenditures were made to acquire surface rights in land. The costs of stripping, dumping, and tunneling operations came later, and are not in issue in this litigation.

Insofar as defendant’s position rests on the contention that plaintiff’s “surface rights” included minable ore, the facts, as hereinabove recited, do not sustain it. The “possible” ore in Tract A was a contingency only, and the ore recoverable from waste through leaching was an incidental. The facts of the case, viewed in proper perspective, do not warrant the conclusion that plaintiff acquired depletable assets from ussemco in terms of mineral deposits.

The distinction of course remains as between the cost of acquiring the surface rights and the costs of exploiting them. In this context, the one word which best describes the surface rights, to distinguish them from their exploitation, is access. The question therefore is whether or not the cost of access to such developmental activities as stripping, dumping, building roadways, tunneling, laying pipe for leaching, is part of the development costs as a whole.

Defendant cites “* * * two cases in which stripping rights were involved * * and avers that “in both cases, it was held that the cost of acquiring surface stripping rights was to be capitalized and recovered through depletion.' '’ The two cases are: Manchester Coal Co. v. Commissioner, 24 B.T.A. 577 (1931), and Denise Coal Co. v. Commissioner, 29 T.C. 528 (1957), “affirmed on this point” 271 F. 2d 930 (3d Cir. 1959).

In Manchester (which was controlling of Denise, the facts being the same), the taxpayer, holding mineral rights in coal lands by lease from the owner, purchased for cash the surface rights to covering and adjacent lands needed for access to the coal seams by strip mining. As noted by the Board:

* * * By these transactions the petitioner became the owner of two separate and distinct property rights, namely, (1) the right to extract and market the coal, acquired by lease, and (2) the surface of the land acquired by purchase.

Taxpayer destroyed the surface lands in the course of stripping and claimed deductions of the cost of the lands by way of depletion. The Commissioner disallowed the deductions on the ground that the surface had been damaged but not destroyed. Finding the destruction of value to be complete, the Board allowed the deduction, saying “the cost of the land should be added to the cost of the coal in determining the depletion allowable.”

Plaintiff contends that “the Manchester and Denise cases are wholly inapposite on their facts to this action,” because (1) “the expenditures in [those cases] for surface rights required to institute mining operations were * * * ‘starting up’ costs * * * incurred prior to the * * * producing stage * * and (2) “the result [in each instance] of the taxpayer’s acquisition of the surface lands was, in effect, to merge the separate interests [surface and underground mineral] and give the taxpayer fee simple title to the properties involved,” wherefore the rule that the cost of land is never deductible applies.

In relation to the instant case, the persuasiveness of Manchester and Denise is indeed superficial, because of the manifest, although unmentioned, relationship of the expenditures for “access” to the costs of “starting up” the mine. In both cases the depletion of the cost of the surface rights was indissolubly linked to the underlying purpose of depletion deductions — the recapture of the capital investment in minerals. Neither of the cases is controlling of the situation here involved, where the taxpayer acquired additional access to ore in a producing mine.

Plaintiff cites the case of J. Shelton Bolling, 37 T.C. 754 (1962), as a precedent wherein “the Tax Court rejected the suggestion that expenditures for surface rights and other access rights by a contract stripper were recoverable through depletion deductions.” This case is even less persuasive than Manchester and Denise. It was concerned with whether or not the taxpayers, who were lessees, had acquired an economic interest in the coal to be mined, or only an economic advantage. The Tax Court, finding that the lease conveyed no economic interest in the coal, held that taxpayers were not entitled to deductions for percentage depletion. The costs to them of surface and other access rights were, therefore, expenses, and were deductible as such. On these facts, it is apparent that the decision does not mean that plaintiff here is entitled, under comparable reasoning, either to a deduction for depletion or a deduction for expense.

The three cases have one point in common. In each instance, a deduction claimed by the taxpayer was disallowed by the Commissioner, under circumstances which would have deprived taxpayer of any tax recognition of the transaction. And, in each instance, the Tax Court allowed a deduction which gave tax recognition to the transaction.

Whether or not the cost of access to areas in which to carry on such developmental activities as stripping, dumping, transport, and leaching is a part of the cost of development in a producing mine remains for consideration without benefit of controlling precedent. If the cost of access is a part of such development cost, plaintiff’s expenditures fall squarely within the reasoning of Gr.C.M. 13954 and are deductible as deferred expenses. If the cost of access is not part of the development cost, the question would still remain as to whether the cost of access should have been added to the depletion account. Unless the cost of access should have been added to the depletion account, plaintiff’s failure to seek recapture by depletion deduction would not defeat recovery in this action, if such recovery is warranted on other grounds. This is the narrow question to which the present portion of this opinion is directed.

Defendant’s brief asserts that “* * * it is * * * our view that the cost of acquiring the dumping, stripping, tunneling, and pipeline rights (all of which are interests in land) is recoverable only through the depletion allowance,” and that “Taxpayer has not shown that the rights acquired * * * were depreciable assets of the type covered by the regulation” relating to the receding face doctrine. Separate consideration is given, hereinafter, to the receding face doctrine. Meanwhile, it is pertinent to review briefly the depreciation provisions in the regulations to ascertain the lines of demarcation between depreciation and depletion.

What constitutes depreciable property is defined in Regulations 111, sections 29.23(1)-2 and 29.23(1)~3, as follows (in pertinent part):

Sec. 29.23(1)-2. Depreciable Property. The necessity for a depreciation allowance arises from the fact that certain property used in the business * * * gradually approaches a point where its usefulness is exhausted. The allowance should be confined to property of this nature. In the case of tangible property, it applies to that which is subject to wear and tear, to decay or decline from natural causes, to exhaustion, and to obsolescence due to the normal progress of the art, as where machinery or other property must be replaced by a new invention, or due to the inadequacy of the property to the growing needs of the business. It does not apply to * * * stock in trade, or to land apart from the improvements or physical development added to $ $ $
Sec. 29.23(1)-3. Depreciation of Intangible Property. Intangibles, the use of which in the trade or business or in the production of income is definitely limited in duration, may be the subject of a depreciation allowance. Examples are patents and copyrights, licenses, and franchises. Intangibles, the use of which * * * is not so limited, will not usually be a proper subject of such an allowance. If, however, an intangible asset acquired through capital outlay is known from experience to be of value * * * for only a limited period, the length of which can be estimated from experience with reasonable certainty, such intangible asset may be the subject of a depreciation allowance * * *. * * *

Depletion, as distinguished from depreciation, is allowable by section 29.23 (m)-2 on the value (as adjusted) of the mineral deposit, and is to be computed in terms of mineral units remaining and mineral units sold.

The surface rights acquired by plaintiff were easements in, over, and under land. An easement is a right of one in the land of another. It is not the land itself. The owner of the easement has a right, as against the owner of the land, to impose a servitude upon the land. While an easement is not as evanescent as an incorporeal hereditament, neither is it as tangible as corporeal property. As between the “land” mentioned in section 29.23(1)-2 and the “intangible property” mentioned in section 29.23(1)-3, it is closer to a license or franchise.

No suggestion is intended that plaintiff’s costs of acquiring the surface rights should be depreciable as intangible property under section 29.23 (l)-3. The easements were perpetual in nature. The only fixed limitation upon duration of their value, as applied to the whole bundle of rights, would be the producing life of the mine. This analysis is confined to a grasp of the nature of the rights, as depreciable or depletable. In this context, other requirements being equal, the surface rights would appear more readily identifiable with intangible property, which would be depreciable, than with tangible mineral deposits, which would be depletable.

On the other hand, because of their indefinite life and more especially because of the use to be made of them, any computation of capitalized deduction that might be allowed would more readily be made in terms of mineral units than in terms of limited life or exhaustion. Wear and tear and obsolescence are of course inapplicable.

It is the natural affinity of computation with mineral units which suggests depletion rather than depreciation. While taxation is a practical science, convenience is not the measure of a taxpayer’s rights. Logically, Hie most natural affinity of plaintiff’s expenditures in acquiring the rights of access is with the expense of exploiting them, which would make the costs of acquisition development costs along with the costs of exploitation.

During years prior to 1946 (when plaintiff elected percentage depletion), it had consistently added the costs of acquiring rights of access to the costs of exploiting such rights, and had deducted the whole as ordinary or deferred expense, with the approval of the Commissioner of Internal Eevenue. Prior experience and approved practice therefore indicated to plaintiff that the cost of acquisition of access rights was a part of development costs. While this precedent is. not now controlling of the Commissioner of Internal Eevenue, it is indicative of the understanding in the industry. That such an understanding was general throughout the industry is attested by the circumstances recited in and wbicli gave rise to G.C.M. 18954.

It is therefore my conclusion that plaintiff’s failure to list its expenditures in its capital account for recovery through, depletion allowances should not bar recovery in this action, if the right to recover is indicated on other grounds.

IX

The provision of Regulations 111 applicable to the receding face doctrine appears in section 29.23 (m) -15(b) as follows:

(b) Expenditures for plant and equipment and for replacements, not including expenditures for maintenance and for ordinary and necessary repairs, shall ordinarily be charged to capital account recoverable through depreciation. Expenditures for equipment (including its installation and housing) and for replacements thereof, which are necessary to maintain the normal output solely because of the recession of the working faces of the mine, and which (1) do not increase the value of the mine, or (2) do not decrease the cost of production of mineral units, or (8) do not represent an amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made, shall be deducted as ordinary and necessary business expenses.

This provision has appeared without substantial change in all regulations since Regulations 77 under the Revenue Act of 1932. It had its origin in Article 222 of Regulations 45 (Rev.), under the Revenue Act of 1918, which provided in pertinent part:

* * * After a mine has been developed and equipped to its normal and regular output capacity, however, the cost of additional minor items of equipment and plant, including mules, motors, mine cars, trackage, cables, trolley wire, fans, small tools, etc., necessary to maintain the normal output because of increased, length of haul or depth of working consequent on the extraction of mineral, and the cost of replacements of these and similar minor items of wornout and discarded plant and equipment, may be charged to current expense of operations, unless the taxpayer elects to write off such expenditures through charges for depreciation.

As noted in Commissioner v. H. E. Harman, Coal Corp., 200 F. 2d 415, 418 (4th Cir.1952), the current provision is a confirmation of the decision in Harsh Fork Coal Co. v. Lucas, 42 F. 2d 83 (4th Cir. 1930), which held that the cost of electric locomotives, mine cars, and steel rails in an underground mine should be considered as expenditures incident to the removal of the coal. In Harman, the court said “the reasoning underlying this regulation was expressed * * * in Marsh Fork * * * in the following language:

“ ‘Ordinarily it is true that the purchase of machinery having a life greater than one year is to be charged to capital and not to expense for ordinarily such machinery is purchased either to increase production or to decrease cost and in either event to add to the value of the property. Expenditures such as those here involved, however, are not made either to increase production or to decrease cost of operation. They do not add to the value of the property, and are not made for that purpose. They are made solely for the purpose of maintaining the capacity of the mine as the working faces of the coal recede. They represent the cost, as it were, of bringing forward the working plant of the operator, which is made necessary as the coal is removed from the mine and the tunnels increase in length.
“ ‘It is possible, of course, to think of the increased trackage and the increased number of mine cars and locomotives made necessary fey the lengthening tunnels as an increase of the capital investment in the mine; but the trouble is that this theory leads to the ridiculous result that, with the increase of investment, the property becomes less valuable, and that, when the investment is complete, the property is practically worthless. It is much more reasonable, we think, to consider expenditures for trackage, cars, amd locomotives to maintain normal output as being an expense necessitated by the removal of the coal which has lengthened the tunnels, and an expense which, in any fair system of accounting, should be charged against the coal so removed.
“‘When an operator has removed sufficient coal to extend his funnels so that he cannot maintain production with the equipment which he has, he must as a matter of course lay down more track and put in more cars and locomotives. The question is, 'Shall the expense thereby incurred be charged against the coal, the removal of which necessitated the expenditure to maintain normal operation, or against the coal yet unmined? We think it is but fair to charge against the coal which has been mined the expense which its removal has necessitated. We think, also, that this is the only practicable method of accounting. To capitalize the expenditures made to maintain normal output means that the cost of removal is pyramided against the coal farther back in the mine, with the result that the coal nearest the head house will appear to have 'been mined at abnormal profit and that farther back at a loss. [Italics supplied.]’”

The limitation in Begulations 45 (Bev.) to “the cost of additional minor items” is no longer applicable. In Roundup Coal Mining Co., 20 T.C. 388 (1953), the Tax Court said:

* * * Bespondent now, as he has so persistently in the past, seeks to add another condition which must be met before taxpayer may be permitted to expense the cost of facilities “necessary to maintain the normal output” of a mine. That condition is that the taxpayer must show the expenditure to have been minor rather than major. We find no authority for his contention. The terms are entirely relative and indeterminable. We must decide this issue upon the basis of Begulations 111, section 29.23 (m)-15 (a) and (b), because that regulation sets forth the only recognized pattern upon which to base decision.
In the cases last above cited and in Winding Gulf Colliery Co. v. Brast, 13 F. Supp. 743, affd. 94 F. 2d 179, it was, in effect, established that it no decrease in the cost of production resulted from an expenditure and no portion thereof was used in the restoration or making good the exhaustion of property, no increase in value of a mine occurred within the meaning of section 24(a) (2). If in addition to the foregoing it is shown that an expenditure is brought about because of the recession of the mine working faces the amount so expended may be expensed.

Plaintiff contends that its expenditures for substitute facilities are deductible as current mining expenses under the receding face doctrine. Such expenditures are said to meet all of the required criteria in that:

(1) They were necessary to maintain the normal output of the Utah Copper Mine solely because of the recession of the working faces of the mine;

(2) They did not increase the value of the mine;

(3) They did not decrease the cost of production of mineral units;

(4) They did not represent an amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made; and

(5) “Although the * * * doctrine is specifically adverted to in the regulations only in connection with the treatment of depreciable items such as equipment, the scope of the doctrine is by no means limited to expenditures for items which would be depreciable if not permitted to be charged to current expense.”

Defendant challenges plaintiff’s position on the grounds that:

(1) The expense required to obtain Tract A was not merely an expenditure for equipment to reach the receding face; it was paid to obtain the land upon which work will occur for many years in the future, thus clearly benefiting future production;

(2) The rights which plaintiff acquired from ussrmco added to the value of the mine;

(8) The rights decreased the cost of production of mineral units; and

(4) Plaintiff has not shown that the rights acquired in 1948 were depreciable assets of the type covered by the regulation.

No question has been raised as to plaintiff’s assertion that the expenditures did not represent an amount expended in restoring the property or in making good the exhaustion thereof.

By way of establishing the fact of the recession of the face of the mine, plaintiff relies on a stipulation of the parties that:

Recovery of ore within plaintiff’s mine, and particularly from the lower benches thereof, by the open pit, bench and slope method of mining required extending the upper benches of the open pit toward and into areas that included those occupied by the facilities of ussrmco at the southeasterly edge of plaintiff’s open pit mine.

Defendant, as above noted, does not specifically deny the fact of recession of the face of the mine. Its challenge lies in its assertion that the expense was incurred to obtain the land upon which work will continue for many years, wherefore the benefit extends not only to the receding face but to additional production far in the future.

With respect to benefits to future production, it may be observed that seams of coal ordinarily lie in relatively straight lines which are more horizontal than vertical. The face of the Utah Copper Mine was circular and more vertical than horizontal. Otherwise, there would appear to be no marked difference between the two in terms of the receding face immediately to be benefited and ore to be benefited in the future.

When track is laid in an underground mine to reach the receding face of the ore, the track -would, to the extent laid, benefit the mineral beyond the immediate face to be reached. In Roundup Coal Mining Co., supra, capitalization was required of the cost of constructing a rock slope 3,500 feet from the working face for the benefit of future production. Such anticipation of future needs is in a different category from an immediate approach to the receding face, although that approach will be usable in the future. The approach to the face of the Utah Copper Mine through the stripping of Tract A was of the latter category. Defendant’s argument, as made, is therefore unconvincing.

In this connection, however, further comment is appropriate to orient the contentions of both parties into the frame of reference heretofore outlined in this opinion. Plaintiff, for its part, once more equates its expenditures with the cost of substitute facilities removed from Tract A, rather than with the whole bundle of rights obtained from ttssemco. Defendant, likewise, again adverts to the acquisition of rights in Tract A as the acquisition of land. Viewed in proper perspective, plaintiff incurred the expense of substitute facilities in order to obtain from tjssemco various surface rights, for stripping, dumping, transport, and leaching.

Was the acquisition of these rights “necessary to maintain the normal output” of the Utah Copper Mine “solely because of the recession of the working faces of the mine” ? The facts of the case require an answer in the negative.

Defendant cites various cases as going to show that the standards of the regulation, with particular reference to the word “solely,” are to be strictly construed. Its primary reliance on this point is upon Commissioner v. Harman Coal, supra. In that case the same court which had decided Marsh Fork, while citing its former opinion with approval, held that the cost of certain mining equipment, consisting of conveyors, loaders, slate-chutes, cutting machines, mine cars, and electric mine jeeps should be capitalized. The court said (pp. 418-419):

_ It is clear that neither the language of the regulation nor the reasoning of the Marsh Fork case has application to the expenditures here involved. They have been necessitated not by the removal of the coal during the years in which they were made but by the thinness of one of the seams, the radical change in the nature of another and the shortage of available manpower. They were thus expenditures made in the interest of economy and efficiency and not “solely because of the recession of the working faces of the mine.” They unquestionably added to what the value of the mine would have been without them and they decreased “the cost of production of mineral units” within the meaning of the regulation. We think that it is not only required by the regulation but by principles of sound accounting that they be capitalized and their cost spread over the years of their effective life rather than charged off as expense of a single year.
We do not think it determinative that the mine had been developed to full capacity prior to 1944 or that the equipment was purchased in an effort to maintain production. The thin seam of coal, the greater amount of slate and other refuse encountered as a result of the change in the character of the seam being mined and the increasing difficulty of obtaining manpower necessitated additional capital investment as additional mechanization was required for the proper working of the mine; and there is no reason why such investment should be charged against the coal mined during the current year instead of being amortized like other capital investments made in the interest of economy and efficiency.

“Marsh Fork and * * * Harman * * * make it clear that an expenditure qualifies as a receding face deduction only when it is necessitated solely by the recession of the working faces of the mine.” United States Gypsum Co. v. United States (N.D. Ill., 1962), CCH, U.S. Tax Cases, 62-1, par. 9367. This case involved many items, some of which were allowed as receding face expenditures while some were required to be capitalized.

Plaintiff’s primary purpose in acquiring the rights from trssRMCO was to obtain the stripping rights in Tract A. Dumping rights on Tract B were a concomitant of the stripping rights. If these had been the only rights acquired, the acquisition could well be said to have 'been made solely to reach the receding face of the mine. Stripping and dumping rights were not, however, the only rights acquired. In addition, there were rights relating to transport (rights-of-way) and to leaching (including rights to run water lines). Eights in these categories were essential to plaintiff to maintain normal output in regular course over a period of years, but the 'acquisition of them was not necessary solely because of the recession of the working faces of the mine.

Inasmuch as there has been no allocation of costs among the various rights acquired by plaintiff, it is impossible to apply the methods of the Gypsum case by allowing some and disallowing others. Plaintiff’s efforts to qualify under the receding face doctrine must therefore fail.

Otherwise, the facts of the case warrant the conclusions that the acquisition of the 1948 rights did not add to the value of the mine or decrease the cost of production of mineral units. Plaintiff’s costs of production went up, not down, after the acquisition of the 1948 rights. As for addition to the value of the mine, the decided cases do not take into consideration the fact that a mine with equipment in place to reach 'a receding face may have a greater value, at least to the extent of the added equipment, than the same mine before the equipment was installed.

Defendant’s final point, that plaintiff has not shown that the rights acquired hi 1948 were depreciable assets of the type covered by the regulation, would, if it had to be decided, present difficulties similar to those discussed hereinabove in relation to depletion. Whereas development costs ordinarily relate to active operations rather than access, so do costs deductible as expenses under the receding face doctrine usually relate to depreciable assets in the nature of equipment or installations. It is true, as defendant notes in its brief, that plaintiff has not attempted to attribute a useful life in terms of years to any of the rights acquired. Moreover, for other reasons noted in the discussion of depletion, the 1948 rights appear to be nondepreciable. If capitalized in any form for deferred recovery, they would have to be related to mineral units and treated either as deferred expenses or as depletable assets.

In view of the determination hereinabove made that the 1948 rights were not acquired solely because of the recession of the face of the mine, it is unnecessary to examine plaintiff’s contention that the scope of the receding face doctrine is not limited to expenditures for items which would be depreciable if not deductible as expenses.

X

The main thrust of plaintiff’s case — the position set forth at the opening of its brief — is based on the contention that the 1948 expenditures were “ordinary and necessary” expenses of mining, within the meaning of section 28 (a) (1) (A). In support thereof plaintiff relies upon (1) the purpose of the expenditures; (2) the recurrent nature of the expenditures in the context of its business; and (3) the long-standing practice in the industry respecting such expenditures.

A

Reference has been made heretofore to the practices in the industry. G.C.M. 13954 adverted to an industry representation “that al'l development costs, whether capitalized in the development stage or expended after the mine reached the producing status, have in a great many cases been carried by taxpayers in their accounts separately from the capital account recoverable through depletion, and for all practical purposes have been allowed by the Bureau on the deferred expense basis.” The Opinion further noted that “for audit purposes [prior to 1932, -under the regulations then in force], in mining cases there was no practical necessity for any precise distinction between development costs recoverable through depletion account and such costs recoverable through deferred expense deductions, inasmuch as all such costs were prorated over the ore benefited;” and that “capitalized costs * * * after the producing status was reached were deemed to benefit smaller bodies of * * * ore and all such costs were to 'be accounted for as and when the ore was produced and sold.”

The result of the earlier practices, the Opinion continued, was that “deductions for tax purposes were in the aggregate in the same amount whether or not any part of those costs was recovered through the depletion account as distinguished from the prepaid or deferred expense account. Therefore, in the absence of any percentage depletion provisions for mines, no precise determination of what portion of the total development costs should be classified as depletion or as deferred operating expenses was necessary for practical purposes.”

Plaintiff relies on the origin and the authority of G.C.M. 13954 in support of its contention that the claimed deductions were sanctioned by long standing and approved practice in the industry. In further support of the “recognized and approved * * * practice * * * of deducting as deferred mining expenses development expenditures incurred after the producing stage of a mine was reached” plaintiff cites the “recognition and approval” of the practice by the Congress, as evidenced (1) by reenactment without change of the applicable Code provisions in the years following the issuance of G.C.M. 13954 and (2) by the liberalization of “the previously existing law” in 1951 “to accord current expense deductibility to substantially all mine development costs.”

The Internal Revenue Code of 1939 was amended in 1951 by the enactment of section 23(cc), which provided for a deduction as follows:

(cc) Development of Mines.
(1) In General. — Except as provided in paragraph (2), all expenditures paid or incurred during the taxable year for the development of a mine or other natural deposit (other than an oil or gas well) if paid or incurred after December 31,1950, and after the existence of ores or minerals in commercially_ marketable quantities has been disclosed. This subsection shall not apply to expenditures for the acquisition or improvement of property of a character which is subject to the allowance for depreciation provided in section 23(1), but allowances for depreciation shall be considered, for the purposes of this subsection, as expenditures.
(2) Election of Taxpayer. — At the election of the taxpayer, made in accordance with regulations prescribed by the Secretary, expenditures described in paragraph (1) paid or incurred during the taxable year shall be treated as deferred expenses and shall be deductible on a ratable basis as the units of produced ores or minerals benefited by such expenditures are sold. ***

The Senate Report on the bill which contained section 23 (cc) summarized the then existing law as follows:

10. Expenditures in the development of mines.
Under existing law and regulations all expenditures made with respect to a mine prior to the time it has reached the production stage must be capitalized, except that incidental income from the production of ore while the mine is being developed is offset by development expenditures, only the excess of such expenditures over such receipts being capitalized. Amounts so capitalized are deductible for income tax purposes only through depletion allowances.
& # * ❖
After a mine reaches the production stage continued expenditures must be made to extend tunnels, galleries, etc., as the working face of the ore or other mineral recedes. Such expenditures are deductible currently, unless extraordinary in scope, in which case they are treated as prepaid expenses to be deducted ratably as the ore benefited by the expenditure is produced and sold.
It is believed that the expenditures for the development of a mine — those incurred after the existence of ores or minerals in commercially marketable quantities has been disclosed — are essentially similar to those incurred after the production stage has been reached, and, like those, should be treated as expenses relating to the production of the ore or minerals.

The bill as submitted by the House Ways and Means Committee provided only that all development expenditures incurred after the discovery of ores or minerals in commercially marketable quantities were to be deductible ratably over the period during which the ores or minerals benefited by such expenditures were sold. The House Report explained the proposal as follows:

Section 302 of this bill changes the treatment of development expenditures in the case of mines and other natural deposits except oil and gas wells. Under existing law and regulations all such expenditures in excess of net receipts from minerals sold are charged to capital account so long as the mine is in the development stage. When the mine has passed into the production stage such expenditures are deductible in the year in which the ore or mineral benefitting from such expenditures is sold. * * *
* * * * *
Witnesses appearing at the committee’s public hearings on this bill emphasized the serious tax consequences which result from the requirement that development costs must be capitalized added to the depletion account] if incurred while the mine is in the development stage. It was emphasized that this rule raises a serious obstacle to expansion in the mining industry. * * *

The House bill was broadened in the Senate to provide for (1) current expense deductibility for all development costs incurred subsequent to the discovery of ores or minerals in commercially marketable quantities, or (2) at the election of the taxpayer, deferred expense deductions with respect to any such costs. The enactment of the section, through the election so provided, enabled mine owners for the first time to amortize and deduct development stage expenditures as deferred expenses.

The significance of G.C.M. 13954 and of section 23 (cc) to the discussion in its present context lies in the confirmation of plaintiff’s contention that the practice of deducting the development costs of a producing mine by amortizing them as deferred expenses has long been in use by the industry; that it has had the consistent approval of the Bureau of Internal Revenue; and that it has been recently reviewed, considered, and approved by the Congress.

As heretofore noted in the portion of this opinion relating to depletion, defendant does not seriously question the origin and evolution of the law applicable to development costs, as outlined by plaintiff. Defendant’s refutation of plaintiff’s conclusions rests upon denial of the characterization of plaintiff’s expenditures as development costs, for reasons which have likewise been previously noted.

B

Again, as previously indicated in the discussion of depletion, the most persuasive precedent for characterizing plaintiff’s expenditures (viewed as the cost of obtaining access) as development costs is to be found in the treatment accorded by the Bureau in prior years to similar expenditures by plaintiff.

The evidence fully establishes the continuity of expenditures by plaintiff for the replacement of facilities that had to be destroyed as a result of the progressive expansion of the pit of the Utah Copper Mine. Some of these facilities were the property of plaintiff; some were the property of others. In either event, the purpose of the replacement was the acquisition of needed space, i.e., access to the ore body.

Over the years, plaintiff has repeatedly destroyed its own facilities and constructed substitutes therefor as necessitated by the expansion of the pit in all directions, including all of the original mine facilities.

Similarly, on a number of occasions prior to 1948 plaintiff replaced facilities which were the property of others as such facilities were found to interfere with the growth of the pit.

Plaintiff is warranted in the assertion that expenditures to destroy and rebuild facilities — both plaintiff’s own facilities and those of others — as a direct result of the continuous expansion of the pit have been a commonplace occurrence at the Utah Copper Mine in the years since 1910. Such expenditures have been normal, usual, and customary.

While plaintiff’s expenditures under the 1948 agreements were substantially larger than the costs incurred in any of the earlier, similar transactions, they were not of such size as to be extraordinary considering the ever-increasing scale of operations at the Utah Copper Mine. However large the costs may appear in the abstract, they were in fact relatively modest.

Expenditures for substitute facilities in prior years were deducted by plaintiff as ordinary and necessary expenses of mining, with the approval of the Commissioner of Internal Revenue. Plaintiff therefore argues that the similar treatment accorded to its expenditures under the 1948 agreements was in accord with the accounting practices it had previously followed.

Defendant’s challenge of this line of argument would, if sustained, be dispositive at the threshold. The “long history of [similar] expenditures” is not disputed in fact; it is challenged in law as irrelevant on the ground that: “Whatever taxpayer’s treatment of similar acquisitions in the past may have been, it is without significance in the present case.”

The fact that the Commissioner of Internal Revenue is not estopped by previous action in relation to similar expenditures from applying a different treatment to the expenditures in the instant case does not mean that his earlier action or similar outlays is wholly without significance.

Moreover, plaintiff cites the history as “persuasive, support.” Such history merits consideration on that basis. The question is not estoppel of the Commissioner, but the persuasiveness of prior experience in determining the classification of the ussrmoo expenditures as expenses, current or deferred.

C

In citing prior outlays plaintiff relies on the role of precedent as a circumstance pointing to deductibility under section 23(a)(1)(A) as noted in Deputy v. DuPont, 308 U.S. 488 (1940) :

* * * One of tbe extremely relevant circumstances is the nature and scope of the particular business out of which the expense in question accrued. The fact that an obligation to pay has arisen is not sufficient. It is the kind of transaction out of which the obligation arose and its normalcy in the particular business which are crucial and controllmg. [Emphasis added by plaintiff.]

The foregoing observation was made in connection with ascertaining the meaning of “ordinary,” and Mr. Justice Douglas noted that the term as used in section 23 (a) (1) (A) “has the connotation of normal, usual, or customary.”

What is “normal, usual, or customary” ordinarily has bearing.on purpose, and it is the purpose of the expenditures upon which plaintiff rests primary reliance for deductibility under section 23(a) (1) (A). In Welch v. Helvering, 290 U.S. 111 (1933), the Supreme Court ruled that the terras “ordinary and necessary” as used in the statute are not to be given a narrow, restricted, dictionary-type meaning, but are to be applied in each case in the context of the taxpayer’s business and the circumstances occasioning the expenditure. The court said (pp. 113-15):

We may assume that the payments * * * were necessary for the development of the petitioner’s business, at least in the sense that they were appropriate and helpful * * *. He certainly thought they were, and we should be slow to override his judgment. But the problem is not solved when the payments are characterized as necessary. Many necessary payments are charges upon capital. There is need to determine whether they are both necessary and ordinary. Now, what is ordinary, though there must always be a strain of constancy within it, is none the less a variable affected by time and place and circumstance. Ordinary in this context does not mean that the payments must be habitual or normal in the sense that the same taxpayer will have to make them often. * * *
* * * Here, indeed, as so often in other branches of the law, the decisive distinctions are those of degree and not of kind. One struggles in vain for any verbal formula that will supply a ready touchstone. The standard set up by the statute is not a rule of law; it is rather a way of life. Life in all its fullness must supply the answer to the riddle.
‡ *?•
Many cases in the federal courts deal with phases of the problem presented in the case at bar. To attempt to harmonize them would be a futile task. They involve the appreciation of particular situations, at times with borderline conclusions. * * *

That purpose is an important criterion in distinguishing between capital outlays and ordinary and necessary expenses was noted by the Tax Court in American Bemberg Corp., 10 T.C. 361 (1948), aff'd, 177 F. 2d 200 (6th Cir. 1949) :

In deciding whether the expenditures * * * may be classed as expenses of the business, as petitioner contends, or whether they were expended in the acquisition of capital assets, as respondent contends, we think it is appropriate to consider the purpose * * * of the work for which the expenditures were made.
In connection with the purpose of the work, the * * * program was intended to avert a plantwide disaster and avoid forced abandonment of the plant. The purpose was not to improve, better, extend, or increase the original plant, nor to prolong its original useful life. Its continued operation was endangered; the purpose of the expenditures was to enable petitioner to continue the plant in operation not on any new or better scale, but on the same scale and, so far as possible, as efficiently as it had operated before. The purpose was not to rebuild or replace the plant in whole or in part, but to keep the same plant as it was and where it was. * * *

Plaintiff says that its primary purpose in making the expenditure was to enable it to continue normal production on the same scale under existing plans and methods. So stated, the evidence of record sustains plaintiff’s contention. Indeed, this one fact is discernible as a constant thread throughout all details of the controversy. It is the dominant theme.

The result of the outlay was to preserve and maintain an existing business or income producing property.

The motivating purpose of plaintiff in negotiating ,and consummating the transaction with ttssemoo was to obtain the right to extend the benches of the mine into Tract A. The dumping rights on Tract B were ancillary to tins acquisition. In addition to Tracts A and B, the transaction was somewhat broadened by reason of ussrmco’s request that plaintiff put all of its begs into one ask-it, so to speak, but the incidental rights of dumping, leaching, and transport were all consonant with continuation of normal production under existing plans and methods.

In the opinion of the writer, plaintiff’s purpose in entering into the transaction with ttssrmco (i.e., the acquisition of the surface rights in consideration of which the substitute facilities expenditures were made) meets the test as a highly persuasive factor in the ultimate conclusion as to whether those expenditures should be considered a capital outlay or as ordinary and necessary expenses of mining. As such, it points quite definitely toward the latter category.

XI

Plaintiff makes the further contention that the substitute facilities expenditures incurred in the year 1951 are deductible in full in that year under section 23(cc). The origin and text of that provision are set forth hereinabove.

Defendant once more injects a threshold issue, viz, that plaintiff’s claim for refund for 1951 did not cite section 23 (cc) as a ground for recovery, wherefore, recovery on that ground is barred, inasmuch as “a taxpayer is not permitted under the law. to advance one ground for recovery in his claim for refund and thereafter rely upon a different ground in a subsequent suit for refund, the purpose of the requirement being to afford the Commissioner the opportunity in the first instance to correct claimed errors and, if disagreement persists, to limit the litigation to issues which he has reexamined and is prepared to defend.”

Plaintiff’s responses are (1) that defendant’s contention, as made, is in error on the law and (2) that the claim of lack of notice is not supported by the facts.

On the factual issue, plaintiff asserts that its “Claims for Eefund for 1949, 1950 and 1951 * * * show that the grounds for recovery stated in the Claim for Eefund for 1951 differ slightly from the grounds stated for the two earlier years”; and that “[d]ue to the enactment of Section 23(cc) applicable to taxable years ending after 1950, plaintiff inserted the following phrase at the end of the first paragraph of its 1951 Claim for Eefund, which was in other respects identical to the first paragraph of its Claims for earlier years: ‘either on an amortization basis or as an immediate deduction when the costs were incurred.’ (Italics added.) ”

The added phrase “gave the tax authorities all the information necessary to answer the legal question as to tax-ability.” New Oakmont Corporation v. United States, 114 Ct. Cl. 671, 686, 86 F. Supp. 897, 901 (1949). This being true, further analysis of defendant’s proposition that a taxpayer may not advance one ground for recovery in a claim for refund and rely upon a different ground in a subsequent suit for refund is unnecessary.

On the merits of the issue defendant challenges the validity of plaintiff’s contention on the ground that the substitute facilities expenditures were not made “for the development of a mine” within the meaning of section 23 (cc).

Thus, for the third time in the course of the present anaIj- sis, the question arises as to whether the expenditures Which plaintiff seeks to deduct as expenses (current or deferred) reflect the costs of development of the mine. Defendant’s challenge of the applicability, of section 23 (cc) turns on the meaning of development costs in the same manner and to the same extent as its challenge of development costs as used in G.C.M. 13954. Section 23 (cc) was an evolutionary step in the treatment of the development costs of a mine in the development stage. The distinction drawn by G.C.M. 13954 was as between the development stage and the producing stage. Development costs, as such, were the same in either stage.

Plaintiff’s brief notes that its section 23 (cc) contention is an “alternative position,” in that “if the substitute facilities expenditures incurred in the year 1951 were not deductible ratably over the ore benefited thereby, as claimed in plaintiff’s tax return for that year, they are currently deductible in full for income and excess profit tax purposes in 1951 under the terms of section 23 (cc).”

The “alternative,” as stated by plaintiff, requires some analysis to place it in proper focus. If the expenditures made in 1951 are deductible under section 23 (cc), they would be deductible currently and in full, in the year made, since section 23 (cc)‘(l) so provides. Only if the taxpayer made the election provided by section 23 (cc) (2) could such expenditures “be treated as deferred expenses * * * deductible on a ratable basis * * Under the express terms of section 23(cc)(l), however, the taxpayer is not given the opportunity to make the election unless the expenditures were made “for the development” of the mine.

Aside from its position under section 23 (cc), and its relation of the expenditures to the receding face doctrine, plaintiff does not contend that its substitute facilities expenditures were deductible currently, in the year made. It amortized the expenditures over the tonnage of ore estimated to be benefited, and only .the amortized portions of the expenditures allocated to the tonnages mined in the years 1949,1950, and 1951 were claimed as deductions for those years. This treatment was in accord with the accounting practices which plaintiff had followed for many years.

The amortization of expenses, for deduction rat'ably, marks a middle ground between costs deductible currently as expenses (as is usually the case with ordinary and necessary expenses deductible under section 23(a) (1) (A)), and costs deductible as capital outlays by way of depreciation or depletion (under sections 23(1) and 23 (m)). In Regulations 111, section 29.23 (m) -1(g), defining net income, refers to “overhead and operating expenses, development costs properly charged to expense^ depreciation, taxes, losses sustained, etc.,” as deductible from 'gross income. The section then expressly excludes from deduction “any allowance for depletion.”

Under section 29.23 (m)-15 of Regulations 111, as interpreted by Gr.C.M. 13954, development costs incurred after the mine has passed into the producing stage are “properly charged to expense” within the meaning of section 29.23 (m)-1(g), but are to be charged ratably, if their nature so indicates. The test of ratability ordinarily is in terms of ore benefited. Section 23 (cc) likewise authorizes deduction of expenditures “for the development of a mine.”

The crucial distinction at this point is not between deferred expenses, deductible ratably, and ordinary and necessary expenses, usually deductible currently, since section 23(a) (1) (A) as administratively interpreted 'and applied by the Commissioner of Internal Revenue with the approval of the courts over many years, authorizes expense deductions to be appropriately deferred. The line of demarcation now to be sought is the difference between deferred expenses and depletion. Plaintiff’s expenditures may not be deducted as deferred expenses unless they represented development costs.

What, then, are “development” costs and how are they to be distinguished from capital outlays subject to depletion?

As indicated in an earlier approach to this question, plaintiff’s expenditures should be considered, in terms of development, as the cost to it of acquiring access (through easements) for use in development operations. Reference to the expen-ditnres merely as the cost of providing ussrmco with substitute facilities is an oversimplification, which might prove misleading.

The dictionary definition of “development” is of no more assistance in the interpretation of the meaning of the word in tax law than is the dictionary definition of “ordinary.” As expressed by Mr. Justice Cardozo, in Welch v. Helvering, supra, “* * * the decisive distinctions are those of degree and not of kind.”

From a purely factual standpoint, the writer has no difficulty in relating the cost of access to the cost of development operations. When the owner of a mine — any mine — finds it necessary, in providing a haul road to acquire an easement across the corner of an adjoining owner’s land, would there be serious question of the cost of the easement being a part of the cost of the road? If plaintiff’s transaction with ussRmco had been fragmented, so that in one transaction it acquired an easement to run a water pipe across ussrmco’s land for use in leaching operations; and in another transaction, it acquired dumping rights on a parcel of ussrmco’s land; and in still another transaction, it acquired the right to strip a segment of ussrmco’s land: would there not be a natural affinity between the costs of the several easements and the costs of leaching, dumping, and stripping ?

The same natural affinity would be present if all four transactions were merged into one. The relationship is still there, in my view, when the one transaction is amplified into a series of agreements covering a bundle of rights and carrying a consideration of $14.5 million.

The Commissioner of Internal Revenue disallowed the deductions which plaintiff had claimed as expenses on the ground that the expenditures should have been capitalized and returned to plaintiff through annual depletion charges. Manifestly, the Commissioner considered the expenditures to represent a capital outlay rather than an expense.

Defendant’s brief asserts that the Commissioner “properly determined that taxpayer was not entitled to a deduction in addition to percentage depletion for the amounts spent in acquiring various property rights * * * from ussrmco.”

Thus, both the Commissioner and defendant (in its brief) imply that addition of the amount of the expenditures to the depletion account would give tax recognition to plaintiff’s transaction with ussemco. The Commissioner’s ruling carries an implied assurance that the expenditures, if capitalized, would be “returned to plaintiff through annual depletion charges.” Defendant’s brief would deny deduction as expenses as being “in addition to percentage depletion,” ostensibly for the same reason. The obvious inference to be drawn is that recovery through depletion charges is more reasonable, under all of the circumstances, than the more liberal allowances of deferred expenses.

Reference to the applicable portions of Regulations 111 shows that:

(1) Plaintiff was obligated to maintain the depletion and depreciation accounts required by section 29.23 (m) -11.

(2) Section 29.23 (m)-l authorized “as a deduction in computing net income * * * a reasonable allowance for depletion * * *” which, according to section 29.23 (m)-2, was to be computed as follows:

“* * * If the amount of the basis as adjusted applicable to the mineral deposit has been determined for the taxable year, the depletion for that year shall be computed by dividing that amount by the number of units of mineral remaining as of the taxable year, and by multiplying the depletion unit, so determined, by the number of units sold within the taxable year. * * *”

(3) Section 29.23 (m) -5 authorized percentage depletion, which, in the case of metal mines, meant that “a taxpayer may deduct for depletion an amount equal to * * * 15 percent of the gross income from the property during the taxable year * * * not in any case [to] exceed 50 percent of the net income * * * (computed without allowance for depletion) * *

(4) Section 29.23 (m) -11 required the accounts for depletion and depreciation to—

* * * be credited annually with the amounts of the depletion and depreciation computed in accordance with section 29.23 (m)-2 * * * or 29.23 (m) -5; * * * to the end that when the sum of the credits for depletion and depreciation equals the cost or other basis of the property, plus subsequent allowable capital additions, no fur-tber deductions for depletion and depreciation with respect to the property shall be allowed, except such depletion deductions as may thereafter be allowable under section * * * 114(b) (4) and section * * * 29.23. (m)-5. [Emphasis supplied.]

Plaintiff elected in 1946 to use percentage depletion, and has since taken depletion deductions on that basis.

It is apparent from the provisions of the regulations that under the “adjusted basis” in use prior to 1946, the $14.5 million expended for the acquisition of surface rights from tjssrmco could have been added to the depletion account and recovered through annual deductions computed under section 29.23 (m)-2. It is equally apparent that, while the $14.5 million could have been added to the depletion account after plaintiff elected percentage deductions, such addition would not have resulted in recovery of the amount through annual deductions computed under section 29.23 (m) -5, for the reason that the exhaustion of the account through prior credits was no longer applicable, under the exception contained in section 29.23 (m) -11.

Consequently, the effect of the ruling by the Commissioner of Internal Revenue, and the result of the contention in defendant’s brief is that, inasmuch as plaintiff has the benefit of percentage depletion, it must be content with that deduction, and its outlay for acquisition of surface rights from trssRMCO is entitled to no further tax recognition. This result is quite the opposite of the holding in G.C.M. 13954, which allowed “so-called capitalized development costs” to be deducted as deferred expenses, the percentage depletion allowance to the contrary notwithstanding.

Defendant cites Repplier Coal Co. v. Commissioner as a case wherein the Tax Court, when confronted with G.C.M. 13954, specifically rejected its authority if it were to be read as sanctioning what the Tax Court said amounted to deductions for depletion on both the percentage and the cost basis.

Repplier had constructed a mine tunnel in 1936 at a cost of $86,394.03, thereby making available for production 394,000 tons of coal. Some 5,000 tons were sold in 1936. Eepplier contended, and both the Tax Count and the Circuit Court of Appeals accepted as fact, that the mine had passed its development stage some time before and was in a producing status in 1936. The taxpayer sought to deduct as a deferred operating expense a proportionate part of the cost of the tunnel. The Commissioner of Internal Eevenue treated the cost as a capital expenditure, recoverable only through depletion. Taxpayer had elected to deduct depletion on the percentage basis in 1935 and 1936.

The Tax Court, in sustaining the Commissioner, said:

In effect, petitioner’s method is to capitalize the expenditure over the period of production and sale of the coal made available by 'the tunnel, and to secure the return of that investment by annual deductions spread over a like period. At the same time, however, petitioner having elected percentage depletion, will secure a recovery of the same investment by depletion computed upon the income derived from such coal.
’Such facts as have been stipulated leave us little doubt th'at the expenditure is of a capital nature, and certainly there is nothing in the stipulated facts to rebut the Commissioner’s determination to that effect. As such the cost is to be recovered through depletion, and this it has elected to take on the percentage of income basis. We have found no provision in the revenue acts or the regulations promulgated thereunder, and petitioner has cited none, that would justify the double deduction sought. Petitioner relies upon G.OM. 1395Ji, * * *; but if that ruling is to be read as sanctioning what amounts to deductions for depletion on both the percentage and cost basis, we cannot agree with it. [Emphasis added by defendant.]

The Tax Court thus (1) rejected the concept developed in G.C.M. 13954 of “so-called capitalized expenses”; (2) equated deductions by way of deferred expenses with depletion based on cost; and (3) held that such depletion based on cost, if allowed in addition to percentage depletion, would result in a double deduction.

Thirteen months after the Tax Court’s decision in Bepplier, the Supreme Court held, in Dobson v. Commissioner, 320 U.S. 489 (1943), that a determination by the Tax Court of the appropriate rule of accounting was a determination of a question of fatot; th'at as such it was solely within the Tax Court’s competence; and that it was not subject to review. The Dobson rule was discarded by Public Law No. 773, 80th Congress, 2d Sess., § 36 (1948). United States Gypsum Co. v. United States, CCH U.S. Tax Cases, 62-1, par. 9367 (1962).

Meanwhile, Bepplier came before the Circuit Court of Appeals on separata appeals by the taxpayer and the Commissioner. On 'appeal, the taxpayer amplified its case by adding the contention that the cost of the tunnel was deductible as an ordinary and necessary expense under the receding face doctrine. The court affirmed the decision of the Tax Court, without reaching the receding face contention, on the ground that, under Dobson, “it could not disturb the finding of fact of the Tax Court that the expenditure was a capital expenditure.” United Stales Gypsum Co., supra.

The Gypsum decision contained the following further observations:

Apparently, the plaintiff [in Bepplier] was contending that the expenditure constituted ,a development expenditure incurred after the production stage was reached; the opinion in G.C.M. 13954 ruled that development expenditures at that stage should be treated as deferred operating expenses (For a discussion of this ruling of the Bepplier case, as altered by the Eevenue Act of 1951, see Alexander & Grant, “Mine Development and Exploration Expenditures,” supra.) * * *
* * # # *
Mine Development Costs Before 1951.
It should be noted that prior to 1951 mine development costs incurred prior to the production stage of the mine were not deductible as ordinary and necessary business expenses. Section 29.23 (m) -15 of Treasury Eegulations 111 * * * . After the production stage of the mine was reached, development expenditures, made to maintain the output of the mine were deductible as operating costs. Clear Fork Coal Co. v. Commissioner * * * 229 F. 2d 638 (6th Cir.1956) reversing * * * 22 T.C. 1075 (1954). Such expenditures were generally treated as deferred costs, deductible in the years in which the ore benefited by the expenditures was produced and sold. See G.C.M. 13954, XIII-2 Cum. Bull. 66, 72 (1934); Alexander & Grant, “Mine Development and Exploration Expenditures,” 8 Tax L. Eev. 401, 414 (1952-53); * * *. Since 1951, development costs incurred both before and after the production stage is reached have been deductible as expenses. § 39.23 (cc)-l, Treasury Eegulations 118.

In Alsted Coal Co. v. Yoke, 200 F. 2d 766 (4th Cir. 1952), the mine had been dormant for 17 years, during which time water had accumulated in the mine, supporting timbers had rotted, and debris had accumulated from roof falls. Another company acquired the property to mine pillar coal, pumped out the water, cleared the debris, retimbered, and put in a new tipple. Holding the expenditures were “development costs” chargeable to capital, the court said (p. 767):

* * * While these expenditures were being made, the old mine was just as truly in a development status within the meaning of the regulation * * * as an ordinary mine would be when expenditures are being made preparatory to initial operation. The operation here was not unlike that involved in Repplier Coal Co. v. Com'r, 1 T.C.M. 141, Id., 3 Cir. 140 F. 2d 554, where the cost of constructing a tunnel in a/n old mine to reach a new vein of coal was held 'properly charged to capital and not to expense. * * * [Emphasis added.]

Plaintiff’s reply brief, citing Alsted, would distinguish Repplier as involving a mine in the development stage, although both the Tax Court and the Court of Appeals specifically adverted to its production status.

The court, in Alsted, referred to Guanacevi Mining Co. v. Commissioner, 43 B.T.A. 517, aff'd, 127 F. 2d 49 (9th Cir. 1942) as “directly in point.” There, the court said:

* * * an old abandoned mine was opened up for operation by new methods and it was sought to charge to expense the cost of driving tunnels to new bodies of ore, erecting an ore mill and purchasing necessary equipment. In holding that these expenditures should be capitalized and not expensed, the Board of Tax Appeals said: “The new cost was not to maintain production by continuing existing methods, but to institute a new method and provide for new production. In practical effect it was an investment in a new mining venture with a new period of development. It was not unlike the opening of a newly discovered mine. The expenditure was therefore a capital investment and not an ordinary and necessary expense of operation.”

Following are pertinent excerpts from the article in the Tax Law Beview, cited in the Gypsum decision:

* * * After the extension of percentage depletion in 1932 to * * * metal mines, representatives of the mining industry regularly contended before Congress and the Bureau of Internal Bevenue that mine development costs should be deducted separately and in addition to depletion. In 1951 a receptive Congress enacted provisions allowing deduction of development expenditures and exploration costs. * * * section 23 (cc) * * * section 23 (ff) * * *.
* * * Under prior law there was no distinction between exploration and development expenditures, but both were considered to be costs of development. All expenditures with respect to a mine in excess of net receipts from minerals sold were charged to capital account while the mine was in the development stage and were recovered through depletion allowances. After a mine reached the producing stage, ordinary development expenditures required to maintain the output of the mine due to the recession of the working faces were deductible in the year paid or incurred. Expenditures for extraordinary development during the producing stage, however, were considered to be deferred operating expenses deductible ratably as the produced ores or minerals benefited thereby were produced and sold. * * *
* * * Although no court has yet found that expenditures in the case before it were made for extraordinary development m the producing stage and were, therefore, to be treated as deferred expenses of production, two cases have arisen involving expenditures of considerable magnitude for the purpose of reviewing dormant mines for operations of a different type than those formerly conducted. * * * [Citing Alsted Coal Co. v. Yoke, and Guanacevi Mining Co. v. Com'r, both reviewed herein-above.] [Emphasis supplied.]
* * * Some confusion is introduced into an otherwise stable pattern by Repplier Coad Company * * *.
* * * As affirmance of the ReppHer decision was based solely upon the application of the Dobson rule, now discarded, it may not be of great significance. By straining somewhat at the facts, one may fit the case under the rule of the Alsted and Guanaeevi decisions, although it is hardly as close a fit as admirers of legal symmetry might desire. * * *
* * * The new provision [section 23 (cc) ] gives taxpayers the right to take current or deferred deductions for extraordinary development expenditures in the producing stage. To the extent that the Bepplier case is in conflict with G.C.M. 13954, it is directly overruled. * * *

In Clear Fork Coal Co. v. Commissioner, 22 T. C. 1075 (1954), the Tax Court held that “the driving of the entry ways in 1947 and 1948 was for the development of additional ore for mining and, by reason thereof, [the mine] during those years was in the development stage within the meaning of section 29.23 (m)-15 of Regulation 111 * * *,” wherefore the expenditures in those years which were in excess of net receipts from the coal sold should be charged to capital account and be recoverable through depletion. In its opinion the Tax Court cited Alsted, supra, and Guanacevi, supra, for the proposition that “* * * a mine, though previously and for an extended period in a production status, may again be in the development stage within the meaning of the regulation, even though the new development was not that of other or newly discovered bodies of ore but of ore bodies which previously had been worked.”

The Court of Appeals reversed, on the ground that “the reliance of the tax court for its conclusion upon the two cases cited, is not well placed.” Holding that Clear Fork was in a production status rather than in the development stage, the court quoted with approval the following excerpt from the opinion in Guanaeevi:

* * * The teaching of the opinions in Marsh Fork Coal Co. v. Lucas, 4 Cir. 42 F. 2d 83, 85, 86, and Enterprise Coal Co. v. Phillips, D. C. Pa., 12 F. Supp. 49, 50, 51, affirmed 3 Cir., 84 F. 2d 565, impresses upon us that if an expenditure is made to attain an intended output, it is properly chargeable to capital as a cost of development ; if the expenditure is made to maintain an output, it is properly chargeable to operating expense. * * * [Emphasis by the court.]

It is thus abundantly clear from the decided cases that the reasoning of G.C.M. 13954 has stood the test of time while that of Repplier has not.

It is equally clear from the facts in the instant case that the expenditures made by plaintiff to acquire surface rights in land from ussrmco were made, not to attain, but to maintain, production. As heretofore noted, the evidence fully sustains plaintiff’s assertion that its primary purpose in making the expenditures was to enable it to continue normal production on the same scale as before, using existing plans and methods. The conclusion follows that the expenditures represented the costs of development of a producing mine.

xxn

Deferred expenses are deductible as ordinary and necessary expenses under section 23 (a) (1) (A). In this instance, plaintiff’s expenditures represented the “so-called capitalized development costs after the mine has reached the producing status” to which reference was made in G.C.M. 13954, or the costs of “extraordinary development in the producing stage” as characterized by Alexander and Grant in 8 Tax Law Keview 401.

While it may be true, as defendant urges, that “section 23(a)(1)(A) is intended primarily to cover, expenditures of a recurring nature where the benefit derived from the payment is realized and exhausted within the taxable year,” the fact that the benefit is not realized or exhausted within the taxable year does not, if so facto, deprive the payment of classification as ordinary. Instead, the extension of the benefit over a period of time is a flag of caution, signaling one to examine further to see if the payment was for a capital expenditure. The statute does not authorize a deduction of capital expenditures.

Defendant would have the court look “to the extent and permanency of the benefit derived from [plaintiff’s] outlay,” note that “the benefit of the expenditure is [to be] enjoyed over a comparatively lengthy period of business operation,” and conclude that the “expenditure should be treated as one in the nature of a capital outlay * * * [since] it brings about the acquisition of an asset having a period of useful life in excess of one year * * *.”

Plaintiff rests its case, on this issue, on the proposition that “ordinary and necessary * * * are to be ■ applied in each case in the context of the taxpayer’s business and the circumstances occasioning the expenditure * * as indicated by the Supreme Court in Welch, v. Helvering, supra. The facts sustain plaintiff’s position that its expenditures under the 1948 agreements with ussRMCo’were “ordinary and necessary” mining expenses within the rule of Welch v. Helvering, and were “so-called capitalized development costs” within the meaning of G.G.M. 18954 or “were made for extraordinary development in the producing stage” within the meaning of the phrase used by Alexander and Grant.

Similar expenditures for access (by way of substitute facilities) in prior years were deducted by plaintiff as ordinary and necessary expenses of mining (in some instances deferred) with the approval of the Commissioner of Internal Revenue. The treatment accorded the expenditures under the 1948 agreements was in accord with accounting practices previously followed by plaintiff. Sueh treatment was also in accord with the recognized and accepted practice in the mining industry of amortizing the costs of development projects required to maintain the current rate of output of a producing mine. This practice has been confirmed by administrative interpretation over' a period of many years.

Inasmuch as the Treasury has consistently followed G.C.M. 13954; since the Utah Copper Mine, in 1948, had been in the producing stage for more than 40 years; and since the Congress, in 1951 (when it adopted section 23 (ce) ), wrote into legislative history an express reaffirmation of the law as interpreted by G.C.M. 13954: plaintiff rightly insists that the Commissioner of Internal Revenue was bound by administrative practice to recognize the deductions as made by plaintiff, and that his failure to do so violated an established principle expressed by the Supreme Court as follows:

* * * against the Treasury’s prior longstanding and consistent administrative interpretation its more recent ad hoc contention as to how the statute should be construed cannot stand. Moreover, that original interpretation has had both express and implied congressional acquiescence * * * [through an amendment to the statute] and through Congress having let the administrative interpretation remain undisturbed for so many years * * *.

XIV

Although plaintiff is entitled to recover under section 23(a) (1) (A), as for deferred expenses for the years 1949, 1950, and 1951, some further comment on its rights under section 23 (cc) is warranted in the interest of clarity.

Plaintiff amortized its expenditures over the period of time required to provide the substitute facilities for ttsskmco, taking as the ore benefited the quantity of ore mined from the pit as a whole during that time. In an earlier portion of this opinion, analysis was made of the method of amortization used by plaintiff and of the alternative methods that might have been used; and the conclusion was reached that the results achieved by plaintiff’s method were reasonable and legally acceptable.

Defendant strongly urges, throughout its brief, that the useful life of the rights acquired by plaintiff is coterminous with the useful life of the mine, wherefore the ore to be benefited encompasses all of the ore yet to be mined plus the ore to be recovered by leaching the waste dumps after active mining ceases.

If it be deemed, arguendo, that plaintiff’s method of amortization was not reasonable, or that otherwise it is legally unacceptable, the question would arise as to whether a revision of the amortization might now be made to achieve a legally acceptable basis of deferral, or whether plaintiff is bound in this respect by the position formerly taken.

At this point, the provisions of section 23 (cc) would become pertinent. Failure by plaintiff to use a legally acceptable method of amortization would not affect the nature of the expenditures as development costs within the meaning of section 23 (cc). Plaintiff would therefore have the right to abandon its claims for deduction of amortized expenses for the years 1949 and 1950, and to deduct currently, in the years made, the expenditures made in 1951 and subsequent years.

PINDINGS OP PACT I.The taxpayer,._ 1

II.Nature of the Claim_ 2-4

III. The Utah Copper Mine_ 5-18

A. Location_ 5

B. Geology_ 6

C. The Ore Body_ 7-8

D. The Gemmell-Jaclding Report_ 9

E. The Open Pit Method_10-11

F. Economic Factors_ 12-18

1. Waste Removal_ 12-13

2. The Stripping Ratio_ 14

3. Grade Cutoffs and Stripping Ratios_15-16

4. Extent of Ore Body in Terms of Cutoff Grades_ 17

5. Leaching of Waste Dumps_ 18

IV. Incidents of Operation Before 1948_ 19-24

A. Early Development_ 19

B. The Situation in 1910_ 20

C. The Succession of Substitute Facilities_21-22

1. Surrounding Properties_ 21

2. The Continuing Expansion_ 22

D. The Situation in 1947_23-24

1. Open Pit Expansion Reaches ussemco. 23

2. Culmination of Negotiations_ 24

V.Rights Acquired From xtssemco_25-42

A. Comprehensive Coverage_ 25

B. Nature of Rights Acquired_ 26

C. Reservations_27-28

1. Lode Ore_ 27

2. Disseminated Copper Ore_ 28

D. Consideration_29-31

E. Projected Use_ 32

CONTENTS

V.Rights Acquired From ussrmco — Continued Findings

F. Tract A_33-42

1. Location, Size, Depth, and Volume_33-34

2. Mineralization_ 35

3. Use of Tract A_36-38

a. Anticipated_ 36-37

b. Actual. Use: 1949-1960_ 38

4. Recovery of Ore Through Leaching_ 39

5. Estimates of Value of Copper in

Tract A_ 40-42

VI.Scope of Operations at Utah Copper Mine_43-48

A. Equipment__ 43

B. Volume_44-45

. C. Costs_46-47

D. Income_1- ' 48

VII.Expenditures for Substitute Facilities---49-53

A. Amount_ 49

B. Nature of Expenditures_50-51

1. Physical Structures_ 50

2. Relation to Previous Expenditures_ 51

C. Amortization_52-53

VIII.The Payment of Taxes and the Disallowance of (A) Deductions and (B) Claims for Refund_54-59

1949_ 54r-55

1950___56-57

1951_ 58-59

IX.Recapitulation and Conclusions_._60-67

A. Nature of ussrmco Transaction_60-61

1. As' an Entity_ 60

2. Plaintiff’s Purpose_ 61

B. Ore in Tract A_62-65

1. Minable Ore_62-64

2. Leaching_ 65

C. The Receding Face_ 66

D. Accounting_ 67

recommended conclusion op law

appendix: tables

Table 1. Table 2. Table 3. Table 4. Table 5. Table 6. Table 7. Table 8.

I. THE TAXPAYER

1. (a) Plaintiff, Kennecott Copper Corporation (sometimes hereinafter called either plaintiff, Kennecott, or taxpayer) is a New York corporation. It brings this action in its own right.

(b)Plaintiff keeps its accounts and files its returns of United States income tax and United States income and excess profits tax on the accrual basis and on the basis of calendar year accounting periods.

H. NATURE OE THE CLAIM

2. (a) By this action plaintiff seeks to recover income and excess profits taxes for its taxable years 1949, 1950, and 1951, in the amounts of $49,451.95, $288,212.59, and $696,-376.21, respectively.

(b) These are the income and excess profits taxes attributable to the disallowance by the Commissioner of Internal Kevenue of deductions claimed by plaintiff in the amounts of $130,136.71, $548,748.30, and $981,235.90 for the years 1949,1950, and 1951, respectively.

(c) The deductions were claimed by plaintiff as amortization of amounts expended at its Utah Copper Mine in connection with the acquisition of certain rights from the United States Smelting Refining and Mining Company (hereinafter usskmco).

(d) The Commissioner of Internal Revenue disallowed the deductions claimed by plaintiff on the ground that “the expenditures made by plaintiff to acquire the various surface rights from tjssemco should have been capitalized and returned to plaintiff through annual depletion charges, rather than being deducted as ordinary expenses.”

3. (a) Until 1946, plaintiff olaimed depletion on its Utah Copper Mine on a unit basis, using the March 1, 1913, value as its base amount and the reserves estimated on the same date as the number of units involved.

(b) For the calendar year 1946 and thereafter, plaintiff has claimed depletion on the percentage of income method. The depletion allowance so computed is greater than that which would be allowable under the unit method.

(c) One of defendant’s contentions in the present litigation is that, by reason of plaintiff’s reliance in 1946 and subsequent years upon percentage-of-income depletion, validation of its deduction of expenditures for the acquisition of the rights from ussrmco as expenses of operation would result in dual allowances.

4. (a) During the years 1949 through 1955, plaintiff’s expenditures for rights acquired from ussrmco totaled $14,474,701.13. By these expenditures plaintiff discharged its obligations to ussrmco insofar as such obligations pertained to the furnishing by plaintiff to ussrmco of substitute facilities for facilities of ussrmco destroyed by plaintiff.

(b) The parties have stipulated that the sums expended by plaintiff as set forth above were reasonable in amount and were required to discharge plaintiff’s obligations to ussrmco under their 1948 agreements.

(c) The evidence in the case covers all of the years during which these expenditures were made.

(d) At the trial of the action a severance was ordered of the issues relating to refining expenses and vacation pay expenditures, set forth in paragraph 11 of plaintiff’s First Amended and Supplemental Petition. No evidence relating to these claims was offered.

HI. THE UTAH COPPER MINE

A. Location

5. (a) The Utah Copper Mine, now the largest manmade excavation in the world, transects Bingham Canyon in the Oquirrh Mountains of Utah, some 30 miles southwest of Salt Lake City.

(b) Mineral ores in or near Bingham Canyon have caused the area to be know as the Bingham Mining District. Before the Utah Copper Mine was opened (by the Utah Copper Company in 1904), there were numerous lead-zinc mines operating in lode deposits near the site of the present Utah Copper Mine. Some such mines have continued in operation since the opening of the Utah Copper Mine, notably those of TJSSRMCO.

B. Geology

6. (a) In the course of the convulsion of nature which formed the Oquirrh Mountains, two large and many small masses of molten rock were forced upward and later solidified to form granite-porphyry bodies of various shapes and sizes. Among them were zones of other faulted and folded sediments (i.e., sandstones, quartzite, and limestone), which were fractured and shattered. The two largest of these masses, roughly rectangular in horizontal cross section and extending to unknown depths, are known as the Bingham porphyry stock (or Bingham stock) and the Last Chance porphyry stock.

(b) A portion of the Bingham stock (which is the more easterly of the two porphyry stocks) and some of the surrounding and interspersed sedimentary rock were further fractured and shattered. Metal bearing solutions, passing upward through the shattered portions of the granite-porphyry, deposited small grains and films of copper as well as iron sulphides (principally the minerals chalcopyrite and iron pyrite), together with traces of molybdenum sulphide and gold, in tiny cracks and cavities in the shattered porphyry. The rock so mineralized constitutes the disseminated ore body of the Utah Copper Mine.

(c) The parts of the Bingham stock mineralized were the northerly and easterly portions of it, which were appropriately shattered to form a hydraulic channel for the mineral bearing solutions and to furnish an environment satisfactory for the deposition of ore. The southerly and western portions of the Bingham porphyry were shattered and mineralized to a lesser degree.

(d) The Last Chance porphyry stock (lying westerly of the Bingham stock and at some distance) was not shattered or mineralized, nor were any of the smaller porphyry masses located farther from the center of the Utah Copper Mine.

C. The Ore Body

7. (a) The ore body of the Utah Copper Mine is a tremendously large, low-grade ore body, classified geologically as a porphyry copper deposit, or as a disseminated copper deposit. It is not a vein or fissure or bedded replacement ore body of the kind mined by other interests in the Bingham Mining District.

(b) The roughly oval and generally concentric benches of the Utah Copper Mine are centered on the highest grade copper mineralization. Such mineralization coincides with the center of concentration of the myriads of fractures in the Bingham porphyry stock which formed the paths of escape to the surface of the mineralizing solutions. North and east of the ore body, the sediment-porphyry contact generally marks the ore limit.

(c) The grade of ore diminishes outwardly from the higher grade central pit area. Lines drawn through points of equal grade of copper occurrence within the pit describe a succession of roughly concentric circles marking stages of diminution of grade from the pit center outward.

8. (a) Tracings by Kennecott, in 1946, 1948, and 1955, of the limits of the ore body showed no substantial variation from tracings made by the Utah Copper Company in 1917.

(b) All known major boundaries of the ore are vertical or only slightly inclined from the vertical. The easterly boundary appears to conform, to the vertical contact of porphyry and sediment. The northerly boundary, also conforming to the porphyry-sediment contact, dips 65 degrees to 85 degrees to the north. The southerly boundary is generally vertical, but somewhat irregular, following the contacts of porphyry and sediment in the direction of the Last Chance stock. Westerly, the boundary has not been fully defined. The ore follows a known tongue of porphyry protruding to the southwest, but the disseminated mineralization dies out as the distance from the central ore mass increases.

(c) Proceeding southward from the center of the. mine pit, the porphyry is less shattered and fractured. Mineralization drops below the cutoff grades which were in effect during the years 1949 through 1957.

D. The Gemmell-Jackling Report

9. (a) The first written report evaluating the ore body and outlining plans for its exploitation was prepared in 1899-1900 by Messrs. E. C. Gemmell and D. C. Jackling and is known as the Gemmell- Jackling Eeport.

(b) At the time of the Gemmell-Jackling Eeport, the ore body was not susceptible of being mined by the underground mining methods of that period, since the grade of the ore was not higher than the grade of the tailings from the underground mines of the Butte District. A much higher grade of ore was requisite to the underground mining methods of the early 1900’s.

(c) While the application of the open pit method of mining to a copper ore body was a novelty in 1900, the Gemmell-JacMing Report proposed the nse of open pit methods on the Utah Copper Mine ore body. Drilling and blasting were to be used as the means of breaking the ore for removal by steam shovels. Transport of ore and waste was to be by rail, using steam locomotives.

(d) The methods proposed in the Gemmell-Jackling Report were in fact applied, and have been in use ever since, resulting in the open pit, bench and slope method of mining copper ore. The first shovel was placed in operation in 1906.

E. The Open Pit Method

10. (a) Open pit mining is essentially strip mining applied in concentric circles. The pit, in the center, grows ever deeper as the circles multiply and grow ever wider in diameter.

(b) Mining begins with the removal of the overburden, to reach the ore. From the outset there must be an engineering plan for the establishment of steplike levels, or benches, with provision for drainage, for transport in and out of the mining area, and for the use of mining equipment at the site. All requirements for these factors must be rigorously observed as mining progresses.

(c) At the outset the Utah Cooper Company mounted its steam shovels on rail transport and set them on tracks separate from, those used for hauling ore and waste cars. The benches therefore 'had to be wide enough to accommodate at least two railroad tracks, one for the trains and another for the shovel. Kennecott eventually shifted to electric power for both the shovels and the locomotives, thereby necessitating the placement of electric power standards on the benches in addition to the tracks.

(d) The flat part of an open pit bench, called the “berm,” must be at least 65 feet wide in order to 'accommodate the power shovel, the standard gage railroad track for the trains operating outside the power shovel and the powerline standards mounted near the edge of the berm and outside the railroad track. A width of 85 feet is desirable for the efficient operation of shovel rand train, since the broken ore and waste blasted out of the bank falls in a loose mass, and must come to rest wholly inside of the track.

(e) At the Utah Copper Mine the ore is broken from the bank at each bench by toe-hole drilling- and blasting. A hole is drilled for a distance of approximately 28 feet into the toe of the bank (where bank meets berm) at a slight downward angle. The bottom of the 28-foot drill hole is loaded with a series of light charges which are fired to break out a hollow chamber in the bank large enough to receive a full charge of explosive. When the final charge is detonated, the bank breaks down into a fragmented mass, spilling outward and downward on the berm.

(f) The mining operation must proceed from the highest level or bench downward. Before a lower bank can be blasted, the berm above it must be so widened as to make room (well inside the 30-foot area to be blasted) for the tracks, powerlines, and shovels to be located. When ore removal is begun on the lower berm, the process is repeated: that berm is widened to make room for equipment and future operations before the next lower level can be developed.

(g) In this way a shovel cut of approximately 30 feet is gouged into and sliced out of the bank. The broken ore is loaded into railroad cars and sent to the mill. (If the cut happens to be waste, the material is loaded into cars of a different type and sent to the waste dump.) After the shovel has completed removal of the broken material, the next section of the same bank is shot back in the same way, until the shovel cuts and ore removal have progressed the entire length of the level. The process is then repeated in the reverse direction.

(h)! The vertical height of the banks of benches is ideally the height at which maximum fragmentation is achieved on blasting. Well-broken material is more easily handled. In hard rock, bank height must be lower to get the best fragmentation; in softer rock, higher banks are feasible.

(i) The slopes of individual banks at the Utah Copper Mine vary considerably. The average is 48 degrees. The overall slope of the whole open pit (representing the interrelation of berm width, vertical bank height, and individual bank slopes) ranges from 21°02' to 28°21'.

11. (a) At the end of open pit mining the berms can.be narrowed by the elimination of the room needed for railroad tracks, powerline standards, and shovels. A different overall slope of the pit may then be developed. What that slope will be depends upon the strength and character of the geological structure (the joint and slip planes and fault lines of the rock) ,

(b) Kennecott’s present pit design at the Utah Copper Mine is based on the assumption that it will be possible to develop and maintain an ultimate pit slope of 35 degrees overall.

F. Economic Factors 1. Waste Removal

12. (a) Material containing no ore (or so little ore as not to warrant sending it to the concentrating mill) has to be removed constantly. The proportion of waste in the Utah Copper Mine is (and consistently has been) so great as to warrant the use of specially designed cars in hauling it to the waste dumps.

(b) The volume of waste material has presented the mine owners with a continuing problem of finding, acquiring, and developing suitable locations for waste dumps.

13. (a) At the time of the trial of this action there was practically no ore on the east side of Bingham Canyon above the A level (elevation 6,340 feet); and on the west side, from the J level (elevation 6,900 feet) up to the top of the hill (elevation 7,800 feet), all was waste. Most of the J level was in waste, and waste occurred in levels below the J level to the A level.

(b) The mine had been opened down to the level of 5,490 feet (850 feet below the A level) and ore was being taken from elevations 5,640 and 5,590 feet.

(c) With so much waste at the upper levels, the flattening of the working slopes of the pit meant that more and more waste had to be taken from the upper levels for each ton of ore produced from the lower levels.

2. The Stripping Ratio

14. (a) The ratio of waste removed to ore recovered represents what is known as the stripping ratio.

(b) As indicated in footnote 9, the stripping ratio established by 55 years of operation (1906-1960) has been 1.4 to 1. This is, of course, an average. The ratio is not constant. It is, however, an economic factor in the profitable operation of the mine at any given time.

3. Grade Cutoffs and Stripping Ratios

15. (a) The grade cutoff, as applied to pit mining practice, is the grade of ore (in terms of percentage) at which material can be sent to the concentrating mill on a breakeven basis. The reason for the break-even basis, in lieu of a margin of profit, is that it absorbs the cost that would otherwise 'be incurred in placing the material on the dumps.

(b) The overall factors that determine cutoff grade are (1) the metal content of the ore; (2) the value of the contained metal; and (3) the aggregate costs of recovering it.

(c) Manifestly, grade cutoff affects stripping ratio, since the ratio rests on the relation of min'able ore (at or above cutoff grade) to waste (below cutoff grade).

16. (a) At the time of the trial of this action, Kennecott’s grade cutoff was 0.4 percent copper. The 'grade cutoff had been successively lowered, over the years, from, percentage 1.0 to 0.8 to 0.7 to 0.6 to 0.4.

(b) The establishment of the current cutoff grade does not mean that the mine could be worked economically with only ore of 0.4 percent grade. The ore as a whole must average a higher grade than the cutoff grade. At the time of the trial of this action the ore was averaging about 0.8 percent copper, although Kennecott anticipated a drop in such average sometime in the future.

(c) Neither does the establishment of a cutoff grade mean that all material of that grade, wherever located and whatever its quantity, will be sent to the concentrating mills as ore. Small quantities of ore are not selectively mined but are sent to the dumps with and as waste.

(d) Reduction of grade cutoff increases the tons of ore recoverable in the mining operation. Since what is economic ore is a function of costs, reductions in the cost of mining have increased the ore reserves of the mine through reduction of the cutoff grade, notwithstanding the absence of any ob- ]' ective increase in the material involved.

4. Extent of Ore Body in Terms of Cutoff Grades

17. (a) Inasmuch as the grade of ore in the Utah Copper Mine diminishes outwardly from the center of the ore body, the effect of lowering the cutoff grades is to extend the ore body laterally.

(b) Diminution of grade cutoff has likewise resulted in extension of the ore body in depth. Generally, the grade of ore is lower in depth as it is laterally. Little or no ore above 0.8 percent copper is found below elevation 5,200 feet.

(c) The expansion in depth of the ore body, through lowering the cutoff grade, increases the stripping ratio as the pit is deepened to reach the lower grade ore.

(d) Over the years Kennecott has gone deeper in its mining for poorer ore. In the process of doing so, its stripping ratio has increased. At the time of the trial of this action the stripping ratio was 2.5 tons of waste to 1 ton of ore.

5. Leaching of Waste Dumps

18. (a) Copper contained in waste material becomes amenable to partial recovery through leaching after the copper sulphides have oxidized in place. The leaching process consists of percolating water through the coarse waste dumps, either from natural rainfall or by spraying or pumping water onto the dumps, catching the runoff water, with copper in solution, passing the solution through launders containing detinned iron scrap and so precipitating “cement” copper. The precipitate averages 75 to 90 percent copper.

(’b) Precipitation operations at the Utah Copper Mine were initiated in 1913, using meteoric water only (rain and snow). Beginning in 1939, waters have been pumped into shallow ponds or lakes fashioned by bulldozers on the tops of waste dumps.

(c) Over a period of 45 years, from August 1906 through 1951, the volume of waste stripped from the pit and placed on waste dumps ran slightly over 750 million tons. The average grade of this material was 0.1353 percent copper. Leaching made possible the recovery of 14.3 percent of the aggregate copper theoretically present in this mass of waste.

(d)' The progressive lowering of the cutoff grade and the expansion of the stripping limits ever more distantly from the central ore body signifies that the average grade of waste placed on the dumps since 1951 would be lower than the 0.1353 percent copper established as the average through 1951. While plaintiff anticipates that recovery of the copper content of dump materials will be improved in the future to a recovery of 20 percent, it is doubtful that such an improvement would compensate for the progressive lowering of the grade of ore in the dumps.

IV. INCIDENTS OP OPERATION BEPORE 1948

A. Early Development

19. (a) As early as 1863, a tunnel was driven into the ore body of what has since become the Utah Copper Mine in ore averaging around 2.5 percent copper. Other claims were located but were allowed to lapse. The ore body was of such low grade as to discourage exploitation by underground mining.

(b) The Utah Copper Company began operations in 1904. Tunnels were driven into the sides (east and west) of Bingham Canyon to survey the ore body, and ore was removed by underground mining during the next 10 years. The first shovel went into operation in 1906, and by 1910 more ore was coming from the surface than from the underground operation.

(c) Before surface mining operations were begun, the topography of the Utah Copper Mine site consisted of two mountain peaks on either side (east and west) of Bingham Canyon. The higher reaches of both peaks were largely' waste. The ore body (generally vertical) rose close to the surface on the lower slopes of the peak on the west side of the canyon. Mining by the Utah Copper Company was begun at this point.

(d) The Utah Copper Company owned the east side of the site and the lower reaches of the peak on the west side. The higher reaches of the western peak were owned by the Boston Consolidated Mining Company. In 1910, these two companies merged, and their properties were thereafter mined as one.

B. The Situation in 1910

20. (a) In 1910, stripping was proceeding in one small area along the face of tlie west side of the canyon. Some benches had been cut, but the general contour of the mountain had not been altered. The only dumps around the area of the stripping operation were on the fringes of the pit.

(b) The main production of ore was from the pit at the A level, where the bank was then 225 feet high. Some ore was being produced at the H and I levels, above the A level. Stripping of waste was going forward on intermediate levels or in intermediate sections of the producing levels.

(c) Waste was removed from the slopes over the “H” Line bridge, across Bingham Canyon, and dumped in two nearby gulches on the east side of the canyon and north of the pit area.

(d) All of the railroad tracks on the benches in the pit area were connected together by a series of switchbacks that went from one level upgrade to the next higher level, thus integrating all of the track in one pattern.

(e) Ore and waste were removed from the pit in exactly the same way, by power shovel loading to railroad ore cars or dump cars (for waste) which were taken off the benches by locomotives. The ore trains were drawn down to an auxiliary train assembly yard (known as the Auxiliary Yard or Aux Yard) at approximately the A level (6,340 feet altitude) and were there picked up by the Denver & Eio Grande Western Eailway (hereinafter the D&EG) which took them to the Cuprum Yard and thence to the concentrating mills at Magna via the D&EG High Line.

(f) The Utah Copper Company had a number of surface facilities in Bingham Canyon between the east and west sides. Among them were machine shops (providing maintenance for all types of equipment: locomotives, shovels, and railroad cars); a compressor building; a water tank; an office building; the Auxiliary Yard; the “C” Line trestle bridge across the canyon; and a number of small buildings including residences for personnel. Higher up the mountain on the west side were another machine shop, another compressor building, and a number of mine buildings including a boarding house for personnel.

(g) The village of Copperfield was south of the main pit area, extending north and south along the bottom of the canyon. At the north end of the upper canyon was the town of Bingham. The two settlements were connected by a county road running along the natural bottom of Bingham Canyon.

C. The Succession of Substitute Facilities

1. Surrounding Properties

21. (a) Before the Utah Copper Mine was opened in 1904 by the Utah Copper Company, there were numerous lead-zinc mines operating (by underground methods) in lode deposits all around and very close to the site of the Utah Copper Mine.

(b) For a short while after the beginning of open pit operations at the Utah Copper Mine, the owner was able to dump waste stripped from the mine in three gulches on its own land. Thereafter, dumps had to be established on land lying outside of the owner’s property line. For the purpose, rights had to be acquired from neighboring owners for rail lines as well as dumping sites.

(c) Among the owners of property adjacent to the Utah Copper Mine or nearby was ussrmco.

2. The Continuing Expansion

22. (a) As the pit has expanded, each level or bench has moved steadily outward from the center of the pit. This expansion of the pit has made it necessary for the owners of the Utah Copper Mine to acquire rights on the lands of adjacent companies for stripping as well as dumping.

(b) Since 1910, the expansion of the open pit mine (accompanied, of course, by extensive growth of the mining companies operating it) has required the removal and replacement of virtually all of the facilities listed in finding 20, including the village of Copperfield and the town of Bingham.

(c) In many instances, the substitute facilities themselves have been caught in the path of progress and replaced (sometimes a second or third time) at different locations and greater distances away.

(d) This succession of substitute facilities has involved properties and facilities of other, neighboring mining companies, wherefore the owners of the Utah Copper Mine have had to provide substitute facilities for such neighboring mining companies incident to the acquisition of rights requisite .to the continued expansion of the open pit mine. Among -these were certain facilities of the Ohio Copper Company and of Bingham Mines Company, acquired and removed in 1912; facilities of the National Tunnel and Mines Group, acquired in 1988 by the provision of substitute facilities; and facilities of ussrmco in the Copperfield area, for which substitute facilities were provided in 1941 and 1942.

(e) During, the 80-year period extending from 1919 through 1949, plaintiff and its predecessors in interest at the Utah Copper Mine entered into some 220 transactions, involving upward of 200 individual owners at a cost of almost $3 million, for tbe acquisition of dumping, stripping, and railroad rights in connection with the continued operation of the mine. Stripping rights were involved in 81 of these transactions. In many instances, payment was made by provision of substitute facilities. In some instances, payment was made by cash in lieu of providing substitute facilities. Others were straight cash transactions.

D. The Situation in 1947

1. Open Pit Expansion Reaches USSRMCO

23. (a) By 1947, it was apparent that the further recovery of ore from the southern segment of the Utah Copper Mine, particularly from the lower benches, would soon require extension of the upper benches into areas occupied by substantial installations of ussrmco in or near the village of Copperfield. These facilities, near the southeasterly, edge of Kennecott’s open pit, were used by ussrmco in the conduct of underground mining on its own property.

(b) It was necessary for Kennecott to obtain stripping rights from ussrmco along the southeasterly edge of the pit in order to continue open pit mining in that area. If plaintiff had not been able to secure stripping rights in that area, it would have been compelled to move the central pit northward and to adjust the slopes and benches in such way as to leave undisturbed ussrmco’s Copperfield area.

(c) Kennecott accordingly opened negotiations with ussrmco for the acquisition of the needed rights. ussrmco ashed Kennecott to anticipate all the rights it would ever need in future open pit mining of the ore body. Kennecott did so, and the negotiations proceeded accordingly.

(d) During these negotiations Kennecott never seriously considered resort to underground mining as an alternative to the continuation of open pit mining.

2. Culmination of Negotiations

24. The results of the negotiations between Kennecott and ussrmco are summarized in the following excerpts from a resolution adopted by plaintiff’s board of directors on July 18,1947.

* * * The President next advised that negotiations had been conducted with adjoining property owners, United States Smelting Befining and Mining Company and its subsidiary, Montana-Bingham Consolidated Mining Company, looking toward agreements that would permit the extension in a southerly direction of Kennecott Copper Corporation’s pit operations at Bing-ham Canyon; grant Kennecott Copper Corporation certain stripping, dump and other rights — or options thereon — required in connection therewith or with the expansion of general operations; grant Kennecott Copper Corporation certain spray and leaching rights; extend for a period of twenty (20) years certain agreements granting Kennecott Copper Corporation the option to acquire easements, rights of way, and other rights and privileges; and establish vertical boundary lines between the properties of Kennecott Copper Corporation and United States Smelting Befining and Mining Company.
The President pointed out that in connection with the extension of the operations, southerly, it would be necessary to remove the United States Smelting Befining and Mining Company’s plant from the present site in Bingham Canyon to Lark, Utah, at Kennecott’s expense and that the expense is presently estimated to be $5,250,-000.00.
The President then reviewed the matter in detail, presenting to the meeting drafts of documents which, with minor changes, appeared to counsel for the corporation satisfactorily to accomplish the ends sought. He added that an agreement between Montana-Bingham Consolidated Mining Company and Kennecott Copper Corporation for the mining and treatment of and payment for disseminated copper and copper-molybdenum ores and a lease from Kennecott Copper Corporation to United States Smelting Refining and Mining Company, covering the so-called Markham area, had been agreed upon but had not yet been prepared.
Thereupon, after full discussion of the entire subject, on motion duly made, seconded and carried, it was
resolved, that the proper officers of tins Corporation be and they hereby are authorized and empowered, on behalf of this Corporation, to execute the following documents:
A. Deed between United States Smelting Refining and Mining Company, Grantor, and Kennecott Copper Corporation, Grantee, whereby Kennecott Copper Corporation is granted (1) the right to strip and remove material on approximately 340 acres of ground of United States Smelting Refining and Mining Company with the right in the 'latter to take all the silver-lead-zinc ores; (2) the right to take disseminated copper or copper molybdenum ores upon paying a royalty therefor; (3) the right to dump stripping in Galena Gulch; (4) the right to spray and leach materials deposited in Niagara and Galena Gulches and certain areas in lower Bingham Canyon; (5) the right to dump in Muddy Gulch, Tie-waukee ’and the so-called Tom Moore area; (6) the right to install pipe lines and pumping plants in Niagara Tunnel ; (7) and the right to drive one or two deeper tunnels through the property known as the “Tom Moore Group.”
B. Extension of Option between United States Smelting Refining and Mining Company and Kennecott Copper Corporation which extends the Indenture of February 15, 1929 * * * for an additional period of twenty (20) years to February 15,1969.
C. Boundary. Line Agreement between United States Smelting Refining and Mining Company and Kennecott Copper Corporation which establishes a vertical boundary line between the Commercial Group of claims owned by United States Smelting Refining and Mining Company and property owned by Kennecott Copper Corporation.
D. Indenture between Montana-Bingham Consolidated Mining Company and Kennecott Copper Corpora- . tion which grants the latter spraying and leaching rights on dumps where such rights had not previously been granted.
E. Of tion and Extension of Option between Montana-Bingham Consolidated Mining Company and Kennecott Copper Corporation which extends the Indenture dated February 19,1929 * * * for an additional term of twenty (20) years to February 19, 1969; and grants to( Kenne-cott Copper Corporation the option to purchase certain stripping and removal rights and other rights over property adjacent to the shovel pits.
F. Agreement between United States Smelting Refining and Mining Company and Kennecott Copper Corporation which provides for the removal of the United States Smelting defining and Mining Company’s plant at Bingham, Utah, and the construction by Kennecott Copper Corporation of certain new facilities for United States Smelting Refining and Mining Company at Lark, Utah, the driving of funnels and shafts, and the installation of other facilities.
G. Agreement of Lease between Kennecott Copper Corporation and United States Smelting Refining Mining Company which provides for the 'leasing to the latter of the so-called Markham area for the purpose of exploration and mining.
H. Agreement between United States 'Smelting Refining and Mining Company and Kennecott Copper Corporation, which provides for the mining and treatment of and payment for disseminated copper and copper-molybdenum ores which may be uncovered as a result of Kennecott’s operations under the agreement designated as “A” above.
I. Agreement between Montana-Bingham Consolidated Mining Company and Kennecott Copper Corporation which provides for the mining and treatment of and payment for disseminated copper and copper-molybdenum ores which may be uncovered under Kennecott’s operations pursuant to the agreement designated as “E” above.
and it Was further
resolved, that the proper officers of the Corporation be and they hereby are authorized and empowered to execute any other papers or documents, do any other acts or take any other steps that may seem proper, necessary or convenient in order fully and properly to carry out and accomplish the purposes described in the foregoing-preamble and resolution.

V. EIGHTS ACQUIRED FROM USSRMCO

A. Comprehensive Coverage

25. (a) On July 28, 1948, Kennecott and ussrmco (and ussrmco’s affiliate, the Montana-Bingham Consolidated Mining Company) executed a series of 'documents in consummation of the transaction outlined by the resolution of Kenne-cott’s board of directors, as set forth in the preceding finding.

■(b)' The transaction as a whole was one of comprehensive' coverage. It was designed to satisfy Kennecott’s needs in relation to the properties of ussrmco and its affiliate, for many years to come.

(c) The various documents fall into four categories: (1) grants (by deed or indenture); (2) options and extensions, of options; (3) a boundary line agreement; and (4) agreements governing Kennecott’s obligations to ussrmco (i) for substitute facilities and (ii) in accounting for disseminated copper and copper-molybdenum ores.

(d) The various grants uniformly conveyed “certain perpetual easements, rights and privileges.” No conveyance of land in fee simple was made.

B. Nature of Rights Acquired

• 26. (a) The rights acquired by Kennecott (other than the boundary line agreement) fall into four categories: (1) stripping rights; (2) dumping rights; (3) leaching rights; and (4) rights-of-way.

(b) Rights-of-way were covered in options and extensions of options. Two extensive option agreements, previously made (in 1929), were to expire in February 1949. These were extended for another 20 years.

(c) Leaching rights were the subject of one grant (by indenture) from ussrmco’s affiliate, and were made parts of other agreements and grants. The purposes served by these arrangements were (1) to grant to Kennecott the right to leach waste dumps (sometimes by spraying and ponding, as well as by meteoric waters; sometimes by meteoric waters only); and (2) to protect tbe underground workings of tbe grantors.

(d) Tbe boundary line agreement established a vertical boundary between a group of mining claims owned by ussemco and known as “the Commercial Group,” and the adjacent property of Kennecott.

(e) Dumping and stripping rights accounted for the major portion of ussRmco’s grant (by deed) to Kennecott, and for the major acreage involved. Of the two principal tracts (Tract A and Tract B), Tract A was the larger and involved all of the stripping rights granted.

C. Reservations 1. Lode Ore

27. Except for disseminated copper and copper-molybdenum ores, hereinafter mentioned, ussemco reserved its rights to all other ores in the areas on which easements or rights were granted.

2. Disseminated Copper Ore

28. (a) In the grant (by deed) of the easement on Tract A, Kennecott agreed to account to ussrmco for disseminated copper and copper-molybdenum ores found in Tract A, as more specifically provided in a separate agreement pertaining thereto.

(b) The separate agreement required Kennecott to mine the disseminated ores, to keep strict account (with ussemco fully informed at all times), and to pay to ussemco a royalty per ton.

D. Consideration

29. Except for Kennecott’s agreement to account for and pay royalties on disseminated copper and copper-molybdenum ores removed from Tract A, and except as hereinafter specified, all considerations for the grants, indentures, and agreements which gave form to the transaction between Kennecott and ussemco were expressed as formalities, such as “in consideration of One Dollar and of other good and valuable considerations.”

30. (a) The deed containing the major grants by ussemco conveyed specified easements, rights, and privileges “[f]or and in consideration of the covenants, promises and agreements hereinafter expressed * * One of its closing paragraphs referred to the furnishing by Kennecott of “the substituted facilities required by that agreement companion hereto * *

(b) Following is the “Witnesseth” clause of the companion agreement:

United States Company owns and operates mining properties in the West Mountain Mining District, in Salt Lake County, Utah, which properties are contiguous to mining property to the north owned and operated by Kennecott. In the further course of Kennecott’s mining operations, including the extension thereof in a southerly direction, Kennecott must acquire certain rights, easements and privileges in, over and upon ground owned by United States Company, which said certain rights, easements and privileges are granted, referred to and described in and by those certain Indentures of even date herewith, wherein United States Company is the Grantor and Kennecott is the Grantee. Kennecott’s use and enjoyment of said certain rights, easements and privileges will result in Kennecott’s appropriation and destruction of certain of the underground workings, buildings, surface plant, mining facilities and equipment of United States Company, and will require the substitution of other suitable underground workings, buildings, surface plant, mining facilities and equipment whereby United States Company may continue its mining operations. It is Kennecott’s position that by the statutes of the State of Utah the power of eminent domain has been conferred in behalf of said uses, which power Kennecott is prepared to invoke to the end that said premises may be subjected to the respective uses of the parties hereto without substantial impairment of either. Accordingly, in exchange for said rights, easements and privileges Kennecott requires, Kennecott proposes at Kennecott’s expense to furnish, construct and install the substitute facilities hereinafter referred to and otherwise to proceed as hereinafter provided, to all of which United States Company is agreeable.

(c) The formal consideration clause of the companion agreement follows:

Now, therefore, in consideration of the premises, of the execution and delivery of said Indentures, of the obligations of the parties respectively by said Indentures defined and assumed, and for other good and valuable consideration, it is agreed: * * *.

(d) The agreement was, in substance, that Kennecott would “furnish, construct, and install the works, workings, buildings, equipment and other facilities enumerated in” three schedules thereto attached.

31. No allocation was made in any of the documents of the expenditures to be made by Kennecott in behalf of ussrmco among the various rights obtained by Kennecott; neither did plaintiff suggest any such allocations at the trial of this case.

E. Projected Use

32. (a) In conformity with ussrmco’s desire for Kenne-cott to anticipate all the rights that it would ever need in the future mining of the ore body, Kennecott outlined its needs (in terms of Tract A) on the basis of an arbitrary assumption that stripping would be carried to the bottom of Galena Gulch. Beyond that point the stripping ratio (waste in relation to ore) would be prohibitive.

(b) At the time of the trial of this action (in October 1961), plans for the open pit mine had been projected 20 to 80 years in the future. While the options and extensions of options (primarily for rights-of-way) were formally extended to 1969 only, the exercise of them would give Kenne-cott perpetual easements. In terms of Tract A the rights acquired in 1948 are not only sufficient to last beyond all projected plans for the open pit mine, but are estimated to suffice (at the mining rate in use in October 1961) for 40 or 50 years from that date.

(c) In preparation for the use of Tract A, Kennecott anticipated the completion of substitute facilities for ussrmco and the removal of ussrmco installations on Tract A during the years 1949-1957.

F; Tract A

1. Location, Size, Depth, and Volume

33. (a) Tract A was located on the southern edge of Ken-necott’s open pit mine. Its surface covered 340 acres.

(b)1 ttssrmco’s grant to Kennecott anticipated the stripping of Tract A and the creation of benches and slopes commensurate with the basic design of the open pit mine. The conveyance therefore covered not only the surface but the soil to a depth averaging, overall, some 800 feet/

34. (a) The easement conveyed in 1948 underlay a stripping right granted to Kennecott by ttssrmco in 1937, and also underlay waste material in the Galena Gulch area dumped there by Kennecott before 1948 under dumping rights previously granted.

(b) The total material originally contained in Tract A (excluding the part embraced in the 1937 grant and the dump material) was 508,439,000 tons.

2. Mineralization

35. (a) No lode deposits of copper or other minerals were known to exist in Tract A at the time of the conveyance.

(b)- At the time of the conveyance Kennecott had no data (nor did ussrmco) indicating that there was mineralization of the then (1948) current cutoff grade (0.6 percent copper) in Tract A except for narrow stringers in wedge-shaped strips.

3. Use of Tract A

a. Anticipated

36. (a) Kennecott did not acquire the stripping rights for the purpose or in the expectation of obtaining disseminated copper or copper-molybdenum material of cutoff grade (or higher) suitable for shipment to its mills.

(b) Kennecott did anticipate placing waste material from Tract A on dumps where leaching would make possible the recovery of some of the copper content of the Waste.

37. (a) At the time of the conveyance Kennecott anticipated that, if the ultimate slope of the pit would stand at the angles permitted under the grant, the total tons of waste stripped from Tract A and put on the dumps would be the whole 508,439,000 tons.

(b) If only the working slopes then current could be maintained, the amount of material to be removed from Tract A would be 351,454,000 tons.

(c)' The period of time required for the periphery, or surface intercept, of the open pit to re'ach the limits of Tract A extends beyond any presently projected mining plans and would approximate 40 to 50 years.

b. Actual Use: 1949-1960

38. (a) During the years 1949-1960 (both inclusive), Ken-necott removed from Tract A (exclusive of material removed under the 1937 rights) a total of 45,869,000 tons.

(b) Contract stripping, begun in 1956, has revealed no mill grade copper ore, but has uncovered some lead-zinc ore in limestone deposits. This ore has been set aside for USSRMCO.

(c) Beginning in 1957, Kennecott cut into one of the stringers mentioned in finding 35 (b) and, as of December 31, 1960, had mined therefrom a total of 138,904 tons of ore, the average assay of which was 0.81 percent copper. Kennecott has accounted to ussrmco for this ore in conformity with the 1948 companion agreement.

4. Recovery of Ore Through Leaching

39. (a) Some copper content is contained in waste stripped from Tract A (as in waste stripped from other areas). This copper becomes amenable to partial recovery through, leaching after the copper sulphides have oxidized in place, as described in finding 18. Approximately 10 years is required for this oxidization to take place after the material is placed on the dumps.

(b) All copper recovered through precipitation belongs to Kennecott, without obligation to account to ussRMCO for the proceeds.

5. Estimates of Value of Copper in Tract A

40. (a) An expert witness for defendant estimated the quantity of ore of mill grade (0.4 percent copper or better) in Tract A as being a total of 240 million pounds (120,000 tons). Plaintiff challenges the estimate as unrealistic.

(b) The same witness estimated that recovery through leaching of waste materials from Tract A would eventually account for 292.8 million pounds (146,400 tons) of copper. Plaintiff likewise challenges this estimate as unrealistic.

(c) The dollar value placed upon the copper in both categories by defendant’s expert witness, in terms of anticipated profits at values current at the time of trial, was $15 million before Federal income tax.

41. (a) The difficulties of estimating the amount of copper contained in Tract A preclude a finding of a valid estimate in terms of tons of ore, pounds of copper, or dollar return.

(b) No drill holes have been made in Tract A by Kennecott and, at the time of trial, none was projected. Two shallow drill holes made by tjssrmoo revealed copper content below Kennecott’s cutoff grade.

At the time of trial, the stripping operation had not removed all of the overlying dirt capping, estimated as 40 to 200 feet in depth. As the stripping operation proceeds, ore samples (described in the evidence as toe samples) are taken from the intersection of the bank and bench for the purpose of assaying the mineral content. Kennecott’s toe sample map as of August 1960 contained 1,200 samples from Tract A, reflecting an average assay of 0.1529 percent copper.

(c) The estimate of copper to be recovered through, leaching, made by defendant’s expert witness, is predicated upon an average assay of 0.1439 percent copper throughout the 508,439,000 tons of material in Tract A. This average is higher than the assay of 0.1353 percent copper reflecting the average of waste material placed on the dumps over a period of 45 years (1906-1951) during which the cutoff grade was double or treble to 0.4 percent cutoff currently in use.

42. (a) No estimate of the quantity of copper ore in Tract A of mill grade or better was made by plaintiff or by ussrmco at the time of the 1948 transaction. Both parties regarded it as “possible” ore only, and made their agreement concerning it accordingly.

(b) The evidence of record is insufficient to warrant an estimate as of the date of trial of the amount of mill grade ore in Tract A. The fact that some such ore was present had been established. The quantity ultimately to be recovered was altogether conjectural. It might prove to be minimal, or it might prove to be substantial.

(c) Plaintiff made no estimate at the time of the transaction with tjssrmco of the amount of ore below mill grade (subject to recovery through leaching) in Tract A. Evidence adduced at the trial affords a basis for a computation of the theoretical potential, as indicated in finding 41(c). The theoretical potential is subject to variables, however, and will not support a firm estimate.

(d) Both types of ore (mill grade or better, subject to mining; and ore below mill grade, subject to recovery through leaching) represent values in the nature of byproducts incidental to the main and much larger undertaking. These values, in terms of pounds of copper and dollar values, may prove in time to be substantial, although their ratio to the end product of the mine as a whole will always be minor.

VI. SCOPE OP OPERATIONS AT UTAH COPPER MINE

A. Equipment

43. (a) In October 1961 (the date of trial) the mining goal for the Utah Copper Mine was 90,000 tons of ore per day. This operation involved the daily removal of 246,000 tons of material (90,000 tons of ore; 156,000 tons of waste). In terms of carloads, the ore required shipment of 1,047 carloads daily, and the waste made up 2,130 carloads daily.

(b) Among the items of equipment used at the mine were:

(1) 800 ore cars, of which 722 were in daily service while 78 were tied up in repairs. Each ore car was óf 100-ton capacity. Each load averaged 86 or 87 tons of ore. Each ore car made, on the average, 1% round trips daily from the pit to the concentrating mill.- Each dump car made an average of 8 round trips daily from the pit to the dumps.

(2) 75 electrical locomotives, used at the mine, 8 of which were 125-ton units, while 67 were 85-ton units. Seven additional electric locomotives were used for hauling ore, and an unspecified number of diesel locomotives were used to haul concentrates from mill to smelter.

(3) A fleet of 65 diesel units, including 28 large bulldozers.

(4) 38 power shovels, with dipper sizes averaging about 6 cubic yards or approximately 12y2 tons.

(5) Nine different types of cranes and motor graders.

B. Volume

44. (a) The total tons of ore and waste removed during the years 1949-1957 (both inclusive) and the total tons of waste removed from Tract A during the same period are shown in Table 1, incorporated herein.

(ib) Averages for the 9-year period follow:

(1) Tons of ore mined: 28,824,911.

(2) Tons of waste mined: 47,001,260.

(3) Total tons, ore and waste: 75,826,171.

45. (a) The total pounds of copper (precipitates and mill copper) produced during the years 1949-1957 (both inclusive) are shown in Table 2, incorporated herein.

(b) Averages for the 9-year period follow :

(1) Pounds of precipitates: 14,858,812.

(2) Pounds of mill copper: 479,671,546.

(3) Pounds of precipitate and mill copper: 494,529,858.

C. Costs

46. (a) Table 3, incorporated herein, shows, for the years 1949-1957 (both inclusive) : (1) the total of production costs; (2) the average of such production costs per pound of copper; (3) the total mining costs; (4) the average mining costs per pound of copper; and (5) the total pounds of copper produced.

(b) Averages for the 9-year period follow:

(1) Pounds of copper produced: 494,529,858.

(2) Production costs (in dollars): $54,167,263.

(3) Production costs (in cents per pound) : 11.019.

(4) Mining costs (in dollars): $18,553,170.

(5) Mining costs (in cents per pound): 3.884.

(c) Table 3 also shows the total amortization of Kenne-cott’s expenditures for the ussemco substitute facilities and the average amount per pound of copper produced of such amortization.

47. (a) Table 4, incorporated herein, shows, for the years 1949-1957 (both inclusive): (1) the stripping ratio (ratio of waste to ore in stripping operations); (2) the cubic yards stripped; (3) the cost per cubic yard; and (4) the total expense.

(b) Averages for the 9-year period follow:

(1) Stripping ratio: 1.613:1.

(2) Cubic yards stripped: 22,629,398.

(3) Cost per cubic yard: $0.4818.

(4) Total expense: $11,210,355.45.

(c) Table 5, incorporated herein, shows, for the years 1949-1957 (both inclusive), the cost (in cents per pound) of producing copper from the dumps through leaching and precipitation. As shown, the cost includes smelting, blister freight, and refining, as well as leaching, but excludes stripping costs. The average for the 9-year period is 13.394 cents.

D. Income

48. (a) Table 6, incorporated herein, contains a summary of production costs and earnings of the Utah Copper Mine for the years 1949-1957 (both inclusive).

(b) Averages for the 9-year period follow:

(1) Net earnings per ore ton: $3.24.

(2) Tonnage mined: 28,824,911.

(3) Pounds of copper produced: 494,529,585.

(i) From mill tonnage: 479,671,546.

(ii) By leaching dumps: 14,858,312.

(4) Sales: $169,898,285.42.

(5) Production costs: $54,167,263.40.

(6) Net income: $93,920,886.22.

(c) Table 6 also shows (1) the estimated tonnage benefited by the substitute facilities provided to ttssrmco and (2) the amortization by Kennecott of the costs of such substitute facilities.

VII. EXPENDITURES FOR SUBSTITUTE FACILITIES

A. Amount

49.(a) Table 7, incorporated herein, contains an analysis of the expenditures made by Kennecott in providing substitute facilities for ussrmco.

(b) The aggregate of such expenditures for all years was $14,474,701.13. The expenditures by years were as follows:

Tear Amount Expended

1949-$3,157,059. 54

1950 _ 2,180,827.57

1951 - 3,688,175.10

1952 _ 4,484, 625. 72

1953 _ $934,193.36

1954 - 16,814.52

1955 - 13, 005.32

(c) The actual cost of the substitute facilities exceeded the estimate of cost made by Kennecott during the negotiations by more than 275 percent.

B. Nature of Expenditures

1. Physical Structures

50. The physical structures comprising the substitute facilities included surface and subsurface installations. Surface structures included buildings, machinery, equipment, and changes in railway lines. Subsurface installations included tunnels and their equipment (machinery and rolling stock)- and mining shafts, with similar equipment.

2. Relation to Previous Expenditures

51. (a) The cost of providing ussrmco with substitute facilities in exchange for the rights granted to Kennecott in 1948 was some five times the cost theretofore expended by Kennecott and its predecessors in interest for substitute facilities for other mine owners.

(b) Except for the disparity in cost, there were many similarities between tbe provision of substitute facilities in exchange for the 1948 rights and the provision of substitute facilities in exchange for similar rights in earlier years.

■ All expenditures for substitute facilities were essentially of a recurrent kind. They were not made to purchase mineral property. Their purpose was directed to the most economical means of continuing the open pit mining operation in the manner, by the method, and on the scale of the continuing development of the ore body. The ore body itself was not expanded by the purchases of rights. The acquisition of rights made possible lateral and depth extensions of mining operations which in turn gave access to economic ore as redefined from time to time by the lowering of the cutoff grade.

C. Amortization

52. (a) Table 8, incorporated herein, reflects Kennecott’s amortization of the cost of providing substitute facilities for USSRMCO.

In Table 8, the balance in the account at the first of each year after the first year represents the total amount expended for substitute facilities less the amount of amortization charged off in the preceding year or years. The column “New Expenditures During the Year” corresponds to the total amount shown by years in Table 7. The column headed “Amount Used for Rate Determination” is equal to the balance in the account at the first of each year (being total expenditures, less amortization, to the first of such year) plus one-half of the new expenditures during the year (as shown in the second column of Table 8), representing the average of unamortized expenditures during the year in respect of which the amortization is claimed. The column headed “Estimated Tonnage Benefited” states as to 1949 the tonnage unmined at the beginning of 1949 which plaintiff calculated to be benefited by the expenditures then in prospect. The estimated tonnage is, for each year after 1949, reduced by the tonnage mined in the preceding year. Table 8 shows the mining of tonnage equal to the amount estimated as benefited by 1957. The column headed “Rate per Ton” is derived by dividing the unmined estimated tonnage benefited in the indicated year into the amount used for rate determination as set forth in the third column. The amount of amortization for each year is the product of tonnage mined and rate per ton; the sum of the amortization amounts is equal to the total amount expended in providing the ussrmco substitute facilities.

('b) The deductions claimed by plaintiff in 1949,1950, and 1951 (and disallowed by the Commissioner of Internal Revenue) for the expenditures for substitute facilities for ussrmco were computed by plaintiff by amortizing the expenditures over the years 1949 through 1957 as set forth in Table 8.

(’c)1 Defendant, in its Requested Findings of Fact, has directed attention to the column in Table 8 headed “Estimated Tonnage Benefited.” This column, as devised by plaintiff, begins in 1949 with the tonnage unmined at the beginning of that year which plaintiff Calculated to be benefited by the total expenditures then in prospect. For each year after 1949, the estimated tonnage is reduced by the tonnage mined in the preceding year, as shown in the next to the last column of Table 8. The figures in the Estimated-Tonnage-Benefited column therefore show declining values until reduced to zero in October 1957.

The starting point of the column is an arbitrary figure (253,754,500 tons) derived from plaintiff’s estimate of the point at which the old Copperfield facilities of ussrmco near the southwestern fringe of plaintiff’s open pit mine would be destroyed as plaintiff extended benches of the mine into that area. The point was reached in October 1957.

Defendant would stress the fact that plaintiff did not anticipate that the stripping rights in Tract A would be exhausted when the 253,754,500 tons of ore had been taken from the mine; but that, on the contrary, only a small percentage of the total material contained in Tract A would have been removed by the time the 253,754,500 tons of ore had been mined.

It follows, therefore, that the total quantity of ore which will have been mined 'by the time the stripping rights in Tract A are exhausted will be several times plaintiff’s arbitrary figure of 253,754,500 tons.

53. In years prior to the tax years here involved, plaintiff’s computations of recoverable ore reserves for purposes of cost depletion limited the extent of recovery by the property rights which it then possessed.

VIH. THE PAYMENT OE TAXES AND THE DISALLOWANCE OP (A) deductions AND (B) CLAIMS EOR REFUND

1949

54. (a) Plaintiff paid income tax and interest thereon in respect of its tax liability for the calendar and taxable year 1949 on the following dates and in the following amounts:

(b) The amount of income tax collected from plaintiff by reason of the disallowance as a deduction for the year 1949 of the amount of $130,136.71 claimed on account of substitute facilities is $49,451.95 in principal amount of tax.

(c) On December 5, 1956, plaintiff timely filed a claim for refund (Form 843) of income tax paid for the calendar year 1949 in the amount of $49,451.95 or such greater amount as is by law refundable, including interest thereon.

(d) The foregoing claim for refund was formally disallowed by registered mail on March 21,1958.

55. The amount of $130,136.71, claimed by plaintiff as a deduction in its 1949 tax return, was computed at the rate of 0.622 cents per ton on 20,922,300 tons of ore mined at the Utah Copper Mine during the calendar year 1949, representing amortization of amounts expended in 1949 as part of the series of substitute facilities expenditures made in the years 1949 through 1955.

1950

56. (a) Plaintiff paid income and excess profits tax and interest thereon in respect of its tax liability for the calendar and taxable year 1950 on the following dates and in the following amounts:

■ (b) The amount of income and excess profits tax collected from plaintiff by reason of the disallowance as a deduction for the year 1950 of the amount of $548,748.30 claimed on account of substitute facilities is $288,212.59 in principal amount of tax.

(c) On July 12, 1957, plaintiff timely filed a claim for refund (Form 843) of income and excess profits tax paid for the calendar year 1950 in the amount of $313,463.07 or such greater amount as is by law refundable, including interest thereon.

(d) The foregoing claim for refund was formally disallowed by registered mail on March 21,1958.

57. The amount of $548,748.30, claimed by plaintiff as a deduction in its 1950 income and excess profits tax return, was computed at the rate of 1.768 cents per ton on 31,037,800 tons of ore mined at the Utah Copper Mine during the calendar year 1950, representing amortization of amounts expended in 1949 and 1950 as part of the series of substitute facilities expenditures.

1951

58. (a) Plaintiff paid income and excess profits tax and interest thereon in respect of its tax liability for the calendar and taxable year 1951 on the following dates and in the following amounts:

(b) The amount of income and excess profits tax collected from plaintiff by reason of the disallowance as a deduction for the year 1951 of the amount of $981,235.90 claimed on account of substitute facilities is $696,376.21 in principal amount of tax.

(c) On January 23,1959, plaintiff timely filed a claim for refund (Form 843) of income and excess profits tax paid for the calendar year 1951 in the amount of $606,283.16 or such greater amount as is by law refundable, including interest thereon.

(d) The foregoing claim for refund was formally disallowed by registered mail on December 16,1959.

59. The amount of $981,235.90, claimed by plaintiff as a deduction in its 1951 income and excess profits tax return, was computed at the rate of 3.223 cents per ton on 30,444,800 tons of ore mined at the Utah Copper Mine during the calendar year 1951, representing amortization of amounts expended in 1949, 1950, and 1951 as part of the series of substitute facilities expenditures.

IX. RECAPITULATION AND CONCLUSIONS

A. Nature of USSRMCO Transaction

1. As an Entity

60. (a) The circumstances surrounding the 1948 transaction, as developed by the evidence, point to the conclusion (by inference) that both plaintiff and ussrmco regarded the transaction as a whole as an entity in and of itself, of which the various grants and agreements were component parts; and that ussrmco was content to enter into the transaction in return for plaintiff’s undertaking to provide the substitute facilities.

(b) The boundary line agreement was executed for the mutual benefit and convenience of the parties in clarification of their transaction as a whole.

(c) Some of the rights for dumping and leaching were incidental to the exercise of the stripping rights on Tract A and the dumping rights on Tract B. Others were not directly related to rights in Tract A or Tract B. All, however, were subsidiary to the main transaction.

(d) Throughout the documents evidencing the series of grants and agreements, tbe consideration was expressed in nominal or formal terms (such as $1 and other good and valuable considerations, or in consideration of the premises, or of mutual undertakings) except for the agreement wherein plaintiff undertook to provide substitute facilities.

(e) Plaintiff’s expenditures to provide substitute facilities for ttsshmco constituted the consideration moving from plaintiff to ttssrmco for all of the grants and agreements embraced in the transaction.

2. Plaintiff’s Purpose

61. (a) Plaintiff’s primary purpose in entering into the transaction with ttssrmco was to acquire surface rights in land owned by ttssrmco to serve as access to ore already owned by plaintiff, to enable it to continue normal production on the same scale under existing plans and methods. This one fact is discernible as a constant thread throughout all details of the controversy. It is the dominant theme.

(b) Plaintiff did not acquire a fee simple title to any land. It did not seek or obtain the Tíact A or other rights to acquire mineral deposits.

(c) The result of the outlay was to preserve and maintain an existing business or income producing property.

B. Ore in Tract A

1. Minable Ore

62. (a) No fact in evidence is more clearly established than the attitude of the parties to the 1948 transaction toward the copper content (of minable ore) in Tract A. They regarded it as “possible” ore, and dealt with it as such. They made no effort to ascertain its actual presence; they merely anticipated the possibility of its presence, and agreed upon an arrangement to take care of the contingency.

(b) By the time of the trial of this case (October 1961), stripping operations on Tract A had progressed far enough to give the parties to the transaction (plaintiff and ttssrmco) greater insight than they had in 1948 as to the presence and content of the stringers containing minable ore. The ultimate take was 'conjectural, 'but it did appear that the quantity of min'able ore from Tract A would exceed the amount of ore recoverable through leaching, wherefore the dollar Value of percentage depletion allowances based on the income from such ore may feventu'ally prove substantial, albeit minor in relation to income from the mine as a whole.

(c)' The evidence does not sustain defendant’s contentions that the gross income from minable ore in Tract A will run into tens of millions of dollars, or that plaintiff will recover, from the copper content of Tract A (through leaching and mining combined), the cost of the substitute facilities.

63. (a) Throughout the years 1949-1957, none of the ore mined and sent to the mill from the Utah Copper Mine Was extracted from Tract A, wherefore plaintiff had no occasion to account to tjssrmco for copper or copper-molybdenum ore.

:(b) In 1957, after the close of the period over which plaintiff amortized its substitute facilities expenditures, one or more stringers of disseminated copper ore of cutoff grade or better were found in Tract A. The ore was thereafter mined by plaintiff, and an accounting was made to tjssrmco in conformity with the royalty agreement.

64. (a) The actual presence of minable ore in quantity in Tract A was ascertained years after the consummation of the 1948 transaction. At the time of that transaction, the allocation of a portion of the substitute facilities expenditures to the copper content (of minable ore) in Tract A would have been an impossibility, short of a “guesstimate.”

(b) Under the circumstances, consideration of the extent of minable ore taken or to be taken from Tract A in terms of depletion allowance is fraught with uncertainty. The amount might have proved to be so small as to be negligible. It may in time prove more extensive than either plaintiff or tjssrmco would have thought possible at the time of the transaction.

2. Leaching

65. (a) Plaintiff knew, when it negotiated with tjssrmco, that the earth in Tract A contained disseminated copper ore below cutoff grade. Plaintiff anticipated stripping all of Tract A as waste (subject only to the “possible” ore herein-above mentioned). The waste was to be put on dumps, which plaintiff intended to leach, for the recovery of copper by that method.

(b) At the time of the trial of this action (in October 1961), no leaching had been done on Tract A waste.

(c) Leaching is not a profitable enterprise, in and of itself. It is strictly a salvage operation of industrial waste. Be-tums realized from the process are credited by plaintiff against the cost of stripping, and are thus reflected in its books as results of efficient operation. In time the dollar value of ore recovered by leaching Tract A- waste dumps may (and probably will) be substantial, although small indeed in relation to other dollar, volumes of costs or returns.

C. The Receding Face

66. (a) The face of the Utah Copper Mine was in fact receding at the time plaintiff found it necessary to seek from ussrmco the additional stripping rights on Tract A.

(b) The expenditures made by plaintiff for substitute facilities as the cost of acquiring the various surface rights from ussrmco :

(i) Were necessary to maintain the normal output of the mine, but not solely because of the recession of the working faces of the mine;

(ii) Did not increase the value of the mine;

(iii)' Did not decrease the cost of production of mineral units; and

(iv) Did not represent expenditures to restore the property or to make good the exhaustion thereof.

D. Accounting

67. (a) The tax treatment which plaintiff accorded to its expenditures for substitute facilities was in accord with accounting practices previously followed by it.

(b) Expenditures for substitute facilities — both plaintiff’s own facilities and those of others — as a direct result of the continuous expansion of the pit have been a frequent and commonplace occurrence at the Utah Copper Mine since 1910. Such expenditures have been normal, usual, and customary. They have been consistently treated by plaintiff as mining expense items, deductible currently or appropriately deferred, since 1920.

(c) While plaintiff’s expenditures under the 1948 agreements were substantially larger than the costs incurred in any of the earlier, similar transactions with neighboring owners, they were not of such size as to be disproportionate to the ever-increasing scale of operations at the Utah Copper Mine.

(d) The evidence sustains the following assertions in plaintiff’s brief:

The expenditures here in suit fall into proper perspective when viewed alongside some of the other “ordinary and necessary” expenses of mining 90,000 tons of ore per day * * * with a current stripping ratio * * * of 1.73 tons of waste removed for each ton of ore, or 156,000 tons of waste per day * * *. For example, the entire amount expended for substitute facilities for tjssrmco, $14.5 million, amounted to less than 3% of the total production costs ($487,505,370.60) of the 4,450,788,725 pounds of copper produced * * * in the period 1949 through October, 1957 — the period over which the * * * expenditures were amortized by plaintiff. * * *

CONCLUSION OE LAW

Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that the plaintiff is entitled to recover, and it is therefore adjudged and ordered that plaintiff recover of and from the United States an amount to be determined pursuant to further proceedings under Kule 47(c).

Appendix : Tables

Table 1. — Tons of Ore and Waste Removed From XJtah Copper Mine, 19^9-1957

Table 2. — Schedule of Production

Table 4. — Stripping Expense

Table 5. — Costs of Recovery of Copper Through Leaching 
      
       While only the taxable years 1949, 1950, and 1951 are immediately at issue in this ease, the facts developed at the trial covered the full 9-year period; and the deeision in this ease will control the remaining taxable years.
     
      
       As noted in the opening paragraph above, the $14.5 million expenditure was made to provide for ussrmco substitute facilities for facilities destroyed by plaintiff in stripping operations pursuant to rights obtained by plaintiff from ussrmco. These stripping rights were in an area known as Tract A. As further noted in the paragraph immediately above, plaintiff acquired various rights from ussrmco. The stripping rights on Tract A represented only one of four or more categories of rights acquired. The $14.5 million expenditure reflected the whole of the consideration moving from plaintiff to ussrmco in the transaction.
     
      
       The language quoted is from the stipulation of the parties.
     
      
       At the outset, ownership of the area, overlying the ore body was divided between the TJtah Copper Company and the Boston Consolidated Mining Company. IThese two companies were merged in 1910.
     
      
       Prom August 1, 1906, through December 31,1910.
     
      
      
        For a visual concept of these volumes the writer has translatea them into acre-feet. Since it is essential to avoid confusion: between waste and ore, the figures used in this note relate only to waste.
      The daily removal of 74,892 cubic yards of waste in 1961 represents the daily equivalent of 46 acre-feet: enough to provide a cover of 1 foot over 46 acres, or of 46 feet on 1 acre.
      (In mountainous terrain space is available vertically as well as horizontally. It is therefore physically possible to cover 1 acre to a depth of 1,000 feet or more. The figures which follow are therefore intended as visual aids only.)
      The annual average removal of 22.5 million cubic yards of waste, in 1949-1957, represents the equivalent of 13,946 acre-feet: enough to provide a cover of 21.79 feet over 1 section of land (640 acres). Nine years of such an average would provide a similar cover for 9 sections of land (5,760 acres).
      Krom the inception of the mine to the end of 1960, waste removed from the mine totaled 580.9 million cubic yards, or 360,000 acre-feet: enough to cover 27 sections of land (17,280 acres) to a depth of 21, feet.
      In terms of a potential highway, 100 feet wide, 360,000 acre-feet of material would provide a 21-foot fill over a distance of 1,414 miles.
     
      
       Minable ore was removed to concentrating mills, where the process of extracting the copper was begun. While the evidence contains little detail concerning waste from the mills as distinguished from waste from the mine, the inference is that mill wastes were also in huge volume, since the copper content of minable ore accounted for 1 percent or less of the total volume. iEYom the inception of the mine to the end of 1960, 417 million cubic yards of ore were sent to the concentrating mills. If 75 percent of this volume emerged as waste, it would account for 193,853 acre-feet: enough to cover another 14 sections of land (8,960 acres) to a depth of 21 feet, or to provide a 21-foot fill over another 761 miles of a 100-foot-wide highway.
     
      
       Plaintiff and defendant have stipulated that under ütah law plaintiff had the power of eminent domain; andi ussrmco, in one of the documents, recognized that such power was a “claimed right” of plaintiff.
     
      
       For example, the regulations which permit costs Incurred to reach the receding face of a mine to be deducted as expense rather than as a capital outlay were written in terms of the mechanics of underground mining. Since the face of an open pit mine may recede as clearly as the face of a seam of underground coal, there is no reason im principle why an open pit mine should not have the benefit of the regulations. In practice, however, the methods of catching up to the receding faces of open pit and underground mines differ so radically that it is quite difficult to apply the terminology of the regulations to the open pit mine.
     
      
       The very first fact of moment in this case is that plaintiff spent $14.5 million to provide substitute facilities for üssrmco. Thus, the amount spent was sizable, and it was obviously used for extensive, durable, physical structures. As a consequence, the uninitiated is likely to enter the case with an impression almost as strong as a rebuttable presumption that the expenditure was a capital outlay.
     
      
       Citing Brinson v. Tomlinson, 264 F. 2d 30 (5th Cir. 1969), cert. denied, 361 U.S. 830; Nowland v. Commissioner, 244 F. 2d 450, 454 (4th Cir. 1957) ; Harden Mortgage Loan Co. v. Commissioner, 137 F. 2d 282, 284 (10th Cir. 1943), cert. denied, 320 U.S. 791.
     
      
       The evidence does not sustain defendant’s contentions that the gross income from minable ore in Tract A will run into tens of millions of dollars, or that plaintiff will recover, from the copper content of Tract A (through leaching and mining combined), the cost of the substitute facilities.
     
      
       While the evidence on the point is not clear, it is to be inferred that plaintiff will have the benefit of one-half of the depletion allowance on all of the copper ore taken from Tract A.
     
      
       Citing: Rassenjoss v. Commissioner, 158 F. 2d 764 (7th Cir. 1946) ; Hochschild, v. Commissioner, 161 F. 2d 817 (2d Cir. 1947) ; Sergievsky v. McNamara, 135 F. Supp. 233 (S.D.N.Y. 1955) ; and Marsh v. Squires, 38 Am. Fed. Tax Rep. 1681, 1584 (W.D. Wash. 1947).
     
      
       Plaintiff’s reply brief states (p. 14) : “A reasonable estimate Is all that Is required of a taxpayer In estimating such matters for future years for tax purposes. An estimate such as that made by plaintiff should not be upset if reasonably made at the time even if subsequent events prove it to have been erroneous.” Citing: Commissioner v. Mutual Fertilizer Co., 159 F. 2d 470, 471-472 (5th Cir. 1947) ; Commissioner v. Cleveland Adolph Mayer Realty Corp., 160 F. 2d 1012, 1014 (6th Cir. 1947) ; § 29.113(b) (1)-1, Regulations 111.
     
      
       Plaintiff advances the further contention that, inasmuch as it has, since 1946, elected to compute its depletion deductions by the percentage of income method, the practical result of the Commissioner’s action is to deny to plaintiff any tax recognition of its substitute facilities expenditures.
     
      
       26 U.S.C. 1962 ed., § 23.
     
      
       As amended by § 121(a) of the Revenue Act of 1942, ch. 619, 56 Stat. 798.
     
      
       As amended by § 121 (e) of the Revenue Act of 1942, supra.
      
     
      
       26 U.S.C. 1952 ed., § 114.
     
      
       As amended by § 145(a) of the Revenue Act of 1942, supra, and § 124 of the Revenue Act of 1943, ch. 63, 58 Stat. 21.
     
      
       Promulgated January 2, 1918; relating to Income tax Imposed by the Revenue Act of 1916.
     
      
       Relating to the Income tax under the Revenue Act of 1918.
     
      
       Relating to the income tax under the Revenue Act of 1932.
     
      
       Relating to the income tax under the Internal Revenue Code (applicable only to years beginning after December 31,1941).
     
      
       Section 23(1) of the Revenue Act of 1932 and § 23(m) of the Revenue Act of 1934.
     
      
       As governing under the Revenue Act of 1932.
     
      
       Articles 2211, 227, 231, 235, 236, and 605.
     
      
       Section 29.23(m)-15(b), Regulations 111.
     
      
       Other cases cited by defendant as Indicating the limited application of the regulation include:
      
        W. M. Ritter Lumber Co. v. Commissioner, 30 B.T.A. 231 (1931), requiring capitalization of the expense of making tipple alterations which improved quality of output, although it did not increase normal production.
      
        Franklin Coal Mining Co. v. United States, 15 Am. Fed. Tax R. 860 (N.D. Ala. 1932), requiring capitalization of the expense of making a power line replacement which increased output by preventing further shutdowns caused by repeated failures of the old line.
      
        Preston County Coke Company v. Commissioner, 24 B.T.A. 646 (1931), requiring capitalization of the cost of a coke machine and steam shovel used not in mining but in a manufacturing process.
      
        United States v. Amherst Coal Company, 272 F. 2d 930 (4th Cir. 1959), remanded for determination of whether newly installed high-voltage equipment and substations were procured solely because of the recession of the working faces or whether such expenditure increased the value of the mine or decreased the cost of production of mineral units.
     
      
       As indicated in the headnote: “Capital expenditures v. expenses: Gypsum mine improvements. — Expenditures for the construction of a new ore pocket and the cost of mine equipment such as hoist motors, skips, roundhouse, powder magazine, and air compressors were properly chargeable as current expenses which were necessary to maintain production solely because of the recession of the working faces of the gj’psum mines. However, expenditures in the case of other gypsum mines for the construction of an air and escape hatch, power shovel, tractor carry-all, and air compressors were capital expenditures, since these expenditures were not necessitated because of the recession of the working faces of the mines, but were improvements made to increase the value of the properties.”
     
      
       In this connection plaintiff further asserts that “ [t] he long-standing practice of amortizing development costs and deducting them as deferred mining expense is reflected in the provisions of section, 29.23(m)-l(g), which defines ‘net income’ of a mine as gross income less allowable deductions, ‘including overhead and operating expenses, development costs properly charged to expense, depreciation, taxes, losses sustained, etc. * * *' ” [Emphasis added by plaintiff.].
     
      
       65 Stat. 486-487.
     
      
       Senate Report No. 781, 82d Cong., 1st Sess., p. 43 (1951-1952 Cum. Bull. 458, 489-490).
     
      
       House Report No. 586, 82d Cong., 1st Sess. (1951-1952 Cum. Bull. 351, 879-380).
     
      
       Among the plaintiff’s own facilities so replaced have been: railroad assembly yards; numerous bridges and railroad trestles; railroad switchbacks; personnel living quarters; electrical facilities; water tanks and a tank house; and repair shops.
     
      
       During the period 1910-1947, plaintiff entered into some 200 transactions with as many owners for various stripping, dumping, leaching, and transport rights, for which in some instances it paid cash; in others, cash in lieu of providing substitute facilities; and in still others, substitute facilities were provided. -These substitute facilities have included mine tunnels, ventilating shafts, a 7,000-foot vehicular tunnel, railroad spurs, and surface plants (mine buildings, shops, and residences).
     
      
       These expenditures have been consistently treated by plaintiff as mining expense items, either currently or appropriately deferred, since 1920.
     
      
       The cost to plaintiff in providing substitute facilities for others during the years prior to 1948 was of the order of $3 million. With respect to replacement, through removal, of its own facilities, plaintiff’s expenditures were much larger. One tunnel, for example, cost $10 million.
     
      
       The evidence sustains the following assertions in plaintiff’s brief (p. 16) : “The expenditures here in suit fall into proper perspective when viewed alongside some of the other ‘ordinary and necessary’ expenses of mining 90,000 tons of ore per day » * * with a current stripping ratio * * * of 1.73 tons of waste removed for each ton of ore, or 186,000 tons of waste per day * * «. For example, the entire amount expended for substitute facilities for ussumco, $14.5 million, amounted to less than 3% of the total production costs ($487,-505,370.60) of the 4,450,788,725 pounds of copper produced * * * in the period 1949 through October 1957 — the period over which the * * * expenditures were amortized by plaintiff * *
     
      
       Defendant’s brief continues: “The law is clear that the Commissioner is not estopped by such action. Automobile Club of Michigan v. Commissioner, 353 U.S. 180 ; Exchange Parts Co. of Fort Worth v. United States, [150 Ct. Cl. 538], 279 F. 2d 251; Martin’s Auto Trimming, Inc. v. Riddell, 283 F. 2d 503 (C.A. 9th) ; Polt v. Commissioner, 233 F. 2d 893 (C.A. 2d) ; 10 Mertens, Law of Pederal Income Taxation (Rev.), Secs. 60.14-60.17. The question in the instant case is simply to determine the proper tax treatment for the expenditures involved. Taxpayer’s treatment of supposedly similar acquisitions in prior years, particularly in view of the fact that it did not claim percentage depletion until 1946 * * *, provides the court with no help in- resolving that question.”
     
      
      
         Ii the taxpayer’s purpose In mating the outlay was to preserve and maintain an existing business or income producing property, the expenditure has been held to be an “ordinary and necessary” expense even though the outlay was not of a recurrent nature and its benefits extended over a long period of time. Illinois Merchants Trust Co., 4 B.T.A. 103 (1926) ; Hogg v. Allen, 105 F. Supp. 12 (M.D. Ga. 1952) ; Midland Empire Packing Co., 14 T.C. 635 (1950) ; Farmers Creamery Co. of Fredericksburg, Va., 14 T.C. 879 (1950).
     
      
      
         Without the Tract A rights plaintiff could not have continued its “normal production under existing plans and methods.” There would have been some interruption of accepted plans and customary procedures.
     
      
      
         Citing Real Estate-Land Title & Trust Co. v. United States, 309 U.S. 13 ; Carmack v. Scofield, 201 F. 2d 360 (5th Cir.1953) ; Campagna v. United States, 290 F. 2d 682, 685 (2d Cir. 1961) ; and see also First National Bank of Montgomery v. United States, 150 Ct. Cl. 798, 280 F. 2d 818 (1960) ; and Williamson v. United States, 155 Ct. Cl. 279, 292 F. 2d 521 (1961).
     
      
       See National Forge & Ordnance Company v. United States, 139 Ct. Cl. 222, 151 F. Supp. 937 (1957), where the court said] (p. 223) : “Attorneys for the Government frequently ash us to apply to claims for refund a requirement of particularity almost as strict as is customarily applied to indictments for crime. The rule of strictissimd juris is not applicable to claims for refund. All that is required of them, as a predicate for suit in this court is that they put the Commissioner of Internal Revenue on notice of the ground of the taxpayer’s claim that his taxes were erroneously computed. (Phis does not have to be stated with any greater particularity than is necessary to draw the Commissioner’s attention to the claim he malees in his subsequent suit.”
     
      
      
         Since section 23 (cc) applies to taxable years after 1950, the contention, if valid for the year 1951, -would' be equally valid for other, subsequent years in which substitute facilities expenditures were incurred.
     
      
      
         Emphasis supplied.
     
      
       Decided November 24, 1942, 1 T.C.M. 141 (1942 P-H T.C. Memorandum Decisions, par. 42, 621), aff’d, 140 F. 2d 554 (3d Cir., 1944).
     
      
      
        Repplier Coal Co. v. Commissioner, and Commissioner v. Repplier Coal Co., 140 F. 2d 554 (3d Cir. 1944).
     
      
       Mine Development and Exploration Expenditures, by Donald C. Alexander and James P. Grant, 8 Tax Law Rev. 401 (1952-1953).
     
      
      
        Clear Fork Coal Co. v. Commissioner, 229 F. 2d 638 (6th Cir. 1956).
     
      
       P. 642.
     
      
      
         Id.
      
     
      
       unless, of course, one accepts the characterization of BeppUer by the court ip Alsted as a case -wherein “the cost of constructing a tunnel in an old mine to reach a new vein * * in which event Reppluier conforms to the reasoning of Alsted and Guanacevi.
      
     
      
       The authors of “Mine Development and Exploration Expenditures,” supra, asserted in 1952 (8 Tax Law Review 401, 416) that “* * * no court has yet found that expenditures in the case before it were made for extraordinary development in the producing stage,” wherefore such expenditures were “to be treated as deferred expenses of production.” No such case has been cited in this proceeding by plaintiff; nor has defendant cited any case other than Bep-plier directly bearing on the issue. The instant case may be the first wherein expenditures involved in litigation are found to have been “made for extraordinary development in the producing stage” within the meaning of the phrase as used by these writers.
     
      
       In Louisiana Land & Exploration Co. v. Commissioner, 7 T.C. 007, 515 (aff’d without discussion on this point, 161 F. 2d 842 (5th Cir. 1947)) the Tax Court said: “The distinction between capital expenditures and business expenses is generally made by looking to the extent and permanency of the benefit derived from the outlay. The benefit from business expense is generally realized and exhausted within a year and the expense is therefore said to be of a recurring nature. * * * On the other hand, an item of expense is of a capital nature where, it results in the taxpayer’s acquisition or retention of a capital asset, or in the improvement or development of a capital asset in such a way that the benefit of the expenditure is enjoyed over a comparatively lengthy period of business operation. * * * A capital expenditure is thus non-recurring, even though many similar expenditures are made by the taxpayer.”
     
      
       See United States v. Akin, 248 F. 2d 742 (10th Cir. 1957), where the court said: “But the statute is limited to ordinary and necessary expenses paid or incurred in the conduct of a trade or business and does not authorize a deduction, for capital expenditures. * * * It is not always easy to find a verbal formula which readily supplies an unerring guide in drawing the boundary line between current expenses and capital outlays. Put it may be said in general terms that an expenditure should be treated as one in the nature of a capital outlay if it brings about the acquisition of an asset having a period of useful life in excess of one year or if it secures a like advantage to the taxpayer which has a life of more' than one year.”
     
      
       Following is a portion of the argument in defendant’s brief in support of these contentions: “* * * the rights taxpayer obtained in 1948 from usskmco and its subsidiary are many and varied, nearly all of which are perpetual, including rights to strip, dump and leach, options to acquire similar rights in the future, a boundary-line agreement, tunnel and pipe-line rights, etc. The evidence has further made clear that, in the ordinary course of events, many years will elapse before any of the rights will be exhausted. The expenditures incurred in the acquisition of these rights were purely and simply expenditures for the acquisition of capital assets, some of which were land or interests in land perpetual in nature, the benefit of which will be enjoyed over a lengthy period of business operation. Indeed, taxpayer has not attempted to place a useful life on the rights acquired. IThe only testimony in the record is in regard to Tract A, solicited on cross-examination, to the effect that if mime production continues at its present rate, the material contained therein will last another forty or fifty years from date of trial. Even after that, the material removed, valuable in and of itself, will still belong to taxpayer. But what about the leaching rights, the dumping rights, the boundary-line agreement, etc. ? These rights are perpetual. The evidence does not provide us with any indication as to when, if at all, the usefulness of those rights will terminate.
      “The conclusion, we submit, is inescapable, vis, that the expenditures involved were capital expenditures. * * *”
     
      
       290 U.S. 111, 113-115 (1933).
     
      
       (m “* * * administrative practice, consistent and generally unchallenged, will not be overturned escept for very cogent reasons if the scope of. the command is indefinite and doubtful * » * [citing cases],. She practice has peculiar weight when it involves a contemporaneous construction of a statute by the men charged with the responsibility of setting its machinery in motion, of making the parts work efficiently and smoothly while they are yet untried and new.” Norwegian Nitrogen Products Co. v. United States, 288 U.S.- 294, 315 (1933).
     
      
      
        United States v. Leslie Salt Co., 350 U.S. 338, 396-97 (1956).
     
      
       Of the $14,474,701.13 spent by plaintiff for substitute facilities for tjsskhco, the expenditures made in 1949 and 1950 totaled $5,337,887.11, while the balance of $9,136,814.02 was spent during the years 1951 — 1955.
     
      
       The corporation was organized In 1915. Its head executive office is located at 161 East 42d Street, New York, N.Y.
     
      
       The action was filed on November 23, 1959, and was brought under the provisions of section 1491 of title 28 and section 3,772 of title 26, united States Code.
     
      
       The language quoted is from the stipulation of the parties.
     
      
      
         TMs contention has two facets. One is predicated on possible double deductions because of the mineral content of Tract A, recoverable both as minable ore and through the leaching of waste dumps. The other is predicated on the theory that, irrespective of the mineral content of Tract A, deduction of the substitute facilities expenditures as ordinary and necessary expenses, while plaintiff likewise has the benefit of depletion on the basis of percentage-of-income, would result in dual allowances.
     
      
       For a list of the expenditures by years, see finding 49(a).
     
      
       There is pending in this court another action (No. 283-62, filed August 24, 1962) wherein plaintiff seeks recovery of taxes paid for 1952 and 1953 because of the disallowance of deductions similarly claimed by it for those years. Presumably, these claims, and claims for the years 1954-1957, will be handled administratively following final decision of the instant case.
     
      
      
         Filed June 5, 1961.
     
      
       Both granite and porphyry are igneous roclo of crystalline nature, having feldspar (a silicate) as their common denominator.
     
      
      
         The magnitude of tbe ore body is reflected by tbe volume of mine production. From tbe inception of tbe mine in 1904 through 1960, production accounted for 869 million tons of ore, from 'which 15 billion pounds (7.5 million tons) of copper -were recovered. Waste removal (principally from the slopes of the mine) has been of the order of 1 billion 210 million tons. (The ratio of waste to ore is thus seen as 1.4 to 1.)
     
      
       As of January 1,1918, the Utah Copper Company plotted the ore boundaries ori the basis of a cutoff grade of 1.0 percent copper. In 1946, 1948, and 1955, Kennecott plotted the boundaries on the basis of cutoff grades of 1.2 percent, 0.8 percent, and 0.4 percent copper. a?he 1910 plotting does not differ materially from the later 0.8 percent cutoff plotting. iThere was evidence of lateral extension of the ore body but with diminishing content of copper as far as the cutoff grade of 0.4 percent. Below that grade there was no essential difference.
     
      
       During these years the cutoff grades were 0.6 percent to 0.4 percent copper. Material containing copper below these grades was not shipped to the mill, but was placed in the waste dumps.
     
      
       Mr. Gemmell became, and continued as, general manager of tbe Utah Copper Mine until his death in 1923. Mr. JacMing was the guiding hand in the actual mining and milling of the ore body until his retirement in the 1940’s. He also developed the flow-sheet and treatment method for upgrading the low grade ore which could not be smelted directly.
     
      
       The term “overburden” is used to describe what overlies minable ore and not in the restricted sense of the soil mantle. The original overburden of the Utah Copper Mine ore body was comparatively thin, being only 60 to 100 feet deep. It constituted an oxidized portion of the ore body.
     
      
       The vertical height of the banks at the utah Copper Mine above the A level (6,340 feet altitude) averages 68 feet, and 50 feet below the A level.
      Bank heights above the A level were influenced by the levels of the approach tracks Into the pit area, which were in turn affected by the topography of the areas adjoining the pit. This factor did not affect bank heights below the A level.
     
      
       Above the A level, where the vertical height of the bank averages 68 feet, the overall working slope is 28°21' for a minimum berm width of 65 feet, and 24°58' for a berm width of 85 feet. (Below the A level, where the vertical height of the bank is 50 feet, the overall working slope is 24°27' for a minimum berm width of 65 feet, and 21°02' for a berm width of 85 feet.
     
      
       At the end of open pit mining the pit can be steepened from the topmost levels downward by sequential abandonment of work on the top levels followed by sequential narrowing of the berm of each abandoned level through making shovel cuts in the nest lower level, thus cutting back the higher berm to the narrowed and nonworking width permitted by the capacity of the rock wall to stand.
     
      
       At a 35° overall ultimate slope, the berm widths in the levels above A (where the vertical bank height is 68 feet) would be reduced to 36 feet. Below the A level (where the vertical bank height is 50 feet), the berm width would be reduced to 26 feet.
     
      
       Prom 1906 through 1960, the total waste removed amounted to 1 billion 210 million tons, or 880.9 cubic yards.
      During the first 4% years of open pit mining, some 10.8 million cubic yards of material were removed, of which at least 6 million cubic yards were deposited on the waste dumps, while 4.8 million cubic yards were sent to the concentrating mills for the extraction of copper. During the next three decades, the average annual volume of production was:
      Years Millions of cubic yards removed
      Waste Ore Total
      1911-1920.. 4.68 3.80 8.38
      1921-1930. 5.76 5.44 11.19
      1931-1940. 7.00 5.70 12.70
      During the 9-year period involved in this case (1949-1957), the average amount of material removed annually was 36.4 million cubic yards, consisting of 22.5 million cubic yards of waste and 13.9 million cubic yards of ore. The mining goal at the time of trial was 118,098 cubic yards daily, being 43,026 cubic yards of ore and 74,892 cubic yards of waste.
     
      
       While the market price of the finishes metal is theoretically a factor in the determination of the cutoff, Kennecott’s experience with the utah Copper Mine has indicated that determining the minimum costs of production, in terms of copper content and the effect of those costs on permissible stripping ratio effectively establishes cutoff grade without reference to current market price, although the validity of such a formula assumes the continuation of copper prices at levels which have generally prevailed in recent years.
     
      
       Successively lowered grade cutoffs were made possible by continuing refinements and improvements of mining methods, resulting in lowered costs of production.
     
      
       Generally, 50 linear feet of material averaging at and above cutoff grade will permit the mining of the material as ore.
     
      
       recent years consideration has been given to a grade cutoff of 0.3 percent copper, but the survey indicated that such a further diminution would not add tonnage of consequence to the ore body.
     
      
       jf a grade cutoff of 0.8 percent copper had been maintained, the mine would have been near the end of its life at the time of the trial of this action.
     
      
       When the lowest level of the open pit was at a relatively high elevation (as in 1925, for example), the pit itself, particularly on the west side, was substantially entirely in ore. .Only the topmost levels or benches were in waste, and the ratio of levels in waste to levels in ore was low. As the pit has deepened, and will continue to deepen, only the lower levels will remain in ore, and that ore will be in large part ore of lower grade than that taken in earlier periods. The higher and outer levels of the pit are now largely in waste and will increasingly be in waste, wherefore the ratio of levels or benches in waste to levels in ore will rise in number of levels and in total miles of working levels.
     
      
       Experience has indicated the value of a 10-year period of oxidization before leaching is begun.
     
      
       The precipitate copper, sometimes called cement copper, is a metallic mud containing substantial impurities. 'No gold or silver values are associated with it. Xt comes down from the dumps in the leaching water as copper sulphate in solution and is conveyed to a precipitation plant where the cement copper Is precipitated out through contacting it with iron. It is then smelted and refined. Cement copper loses its identity as precipitate copper at the smelter, where it is mixed with the copper concentrate from the concentrate mills for smelting.
     
      
       Theoretically, the low-grade dump mass represented 1,015,000 tons (2,030,-000,000 pounds) of copper. (Leaching made possible the recovery (and subsequent refinement and sale) of approximately 145,000 tons (290,000,000 pounds) of copper.
     
      
       Tie economic significance of leacMng is difficult to define. The precipitation operation could never be justified economically as a copper producing operation. On tbe other band, the expense of removing -waste is a dea,d charge against the cost of pit ore. Since the -waste has to be removed to obtain the ore the economic significance of the precipitation operation emerges as a lowering of the cost of the removal of waste. In these terms, the results of leaching more than warrant the expense of the operation.
     
      
       Underground operations were suspended in 1914 or 1915.
     
      
       As the pit expands outward and in circumference, these peaks are being removed and now occasion high stripping ratios.
     
      
       Except for some narrow gage and 3-rail track on levels formerly operated by Boston Consolidated, all track installed by the ütali Copper Company and Kennecott has been standard gage.
     
      
       The d&rg High Line went down the lower east side of Bingham, Canyon and switched across the canyon, from the Auxiliary Yard on a wooden trestle.
      (The D&EG had another line into Bingham Canyon called the Copper Belt Line, which for some time had served and continued to serve mines that had started working in Bingham Canyon before the Utah Copper Mine was opened. The Copper Belt used Shay locomotives which could operate at a grade up to 7 percent. This line had a separate crossing of Bingham Canyon and extended around the north end of the west side mountain into Carr Fork.
     
      
       In normal operations nearby gulches -were first filled with waste; then gulches at greater distances had to be used. As distances Increased, so, of course, did the length of the rail lines, the time required for hauling, and the equipment used in stripping and hauling.
     
      
       For example, the toe of the A level (elevation 6,340 feet) has been moved outward (1) to the west some 2,300 feet between 1925 and 1960 and (2) to the east some 1,600 feet between 1932 and 1960.
     
      
       Whenever the owners of the ütah Mine ha>ve had to deal with neighboring mining companies for. stripping rights on the properties of such mining companies, the owners of the properties have uniformly reserved mineral rights (while granting stripping rights) whenever there was reason to believe that minerals might be in the area. No mineral ground' as such has been purchased for the ütah Copper Mine from these neighboring mining companies.
     
      
       In 1910, the ütah Copper Company organized as a subsidiary company the Bingham and Garfield Railway as a common carrier, thereby making it possible to acquire railroad rights-of-way in the vicinity of the mine. A rail line was completed in 1911 connecting the Auxiliary and Bingham yards with the concentrating mills at Magna, and was used for hauling ore. While the line was never used for the hauling of waste, the company remained in existence as a common carrier (with the power to acquire rights-of-way) for several years.
     
      
      
         Also included were mine tunnels, ventilating shafts, a 7,000-foot vehicular tunnel, railroad spurs, and surface plants (mine buildings, shops, and residences).
     
      
       These costs are exclusive of the amounts expended in 1949 to provide substitute facilities to ussrmco.
     
      
       The parties have stipulated that: “Recovery of ore within plaintiff’s mine, and particularly from the lower benches thereof, by the open pit, bench and slope method of mining required extending the upper benches of the open pit toward and into areas that included those occupied by the facilities of ussrmco at the southeasterly edge of plaintiff's open pit mine.”
     
      
       under the law of Utah, Kennecott had the legal right by condemnation to acquire, upon payment of an award of damages or upon the furnishing of substitute facilities or both, the right to extend its open pit mine over and upon the areas owned by ussrmco at the southeasterly edge of the open pit, and in so doing to remove the facilities of ussrmco.
     
      
       Plaintiff has requested a finding that “[underground mining of the Utah Copper Mine orebody was a feasible alternative to acquiring additional rights from ussrmco in 1948.” While plaintiff presented evidence in support of this proposition, the requested finding overshoots the mark which the evidence will sustain. .The evidence establishes the fact that if and when open pit mining is brought to an end, and assuming the presence at that time of ore in substantial quantities in the undisturbed soil, underground mining by a method known as block caving may (and probably will) be a feasible undertaking. The evidence does not establish the fact that such underground mining would be as profitable as open pit mining. Plaintiff does not contend that in 1947 and 1948 the possibilities of underground mining were surveyed intensively as an alternative to the acquisition of rights from ussrmco which would permit continuation of open pit mining in the affected area.
     
      
       Defendant’s Reguested Findings of Fact guote extensively from the documents exchanged, as the means of defining the rights acguired and the obligations imposed. The length and detail of the quoted material tend more to confuse than to clarify. For this reason, summaries have been used herein.
     
      
       Neither did plaintiff set any time limit on any of the rights as representing useful life.
     
      
       The major contentions of both parties center on Tract A.
     
      
       In precise terms the acreage was 339.751.
     
      
       Beneath the surface of Tract A were many hundreds of miles of underground workings established by ussrmc before 1948 to recover lead, zinc, and lode copper. Replacement of these facilities accounted for some $13 million of the $14.5 million expended for substitute facilities.
     
      
       The parties nevertheless contracted for the possibility of lode deposits being uncovered, ussemco reserved the right to take any such minerals that might be found. Some were found: see finding 38(b).
     
      
       Drill holes around the perimeter of the ore body and toe samples have verified the location of these stringers. At the time of the transaction, however, both plaintiff and tjsskmco viewed these stringers as "possible” ore.
     
      
       It was anticipated that substantially ail of the material removed from Tract A would be deposited in waste dumps. At the time of trial (October 1961) all available geological data indicated that in practically all of the material in Tract A the copper content was belotv the then (1961) minimum milling grade (0.4 percent copper) ; and no lower cutoff grade was contemplated.
     
      
       Including the material removed under the 1937 grant, the total removed through 1960 was 59,466,172 tons.
     
      
       under the terms of the ussrmco grant, title to material in Tract A vests in Kennecott when it is severed from the land, except that ussrmco can elect to take title to any of the material other than disseminated copper and copper-molybdenum ores and material. As to such latter ores and! material, Kennecott is required (1) to mine and send to the mill all such ores that are of like grade to that which Kennecott is then currently shipping to its concentrators from elsewhere in the mine; and (2) to pay ussrmco a royalty therefor, the effect of which is, roughly, a division of profits on the ore.
     
      
       As of the date of trial, no leaching had been done on waste from Tract A.
     
      
       Defendant urges the further consideration that plaintiff would also obtain, absent a change in the law, the benefits of percentage depletion on the income derived from all such copper (mined or recovered).
     
      
       Whether or not these 1,200 samples included samples from the stringerB containing mill grade ore or better does not affirmatively appear. The inference to be drawn from the evidence as a whole is that samples of mill grade ore or better were included.
     
      
       Computed in reverse order, 146,400 tons multiplied by 5 (since 20 percent recovery is the maximum anticipated) equals 732,000 tons of copper. Dividing 732,000 by 508,439,000 (the number of tons of material in Tract A) indicates an, assay of 0.1439 percent copper.
     
      
       During the 9-year period involved in. this action, the ratio of precipitates to mill copper was 3 percent. Cf. Table 2, infra.
      
     
      
       The stripping ratio was at the rate of 1.73 tons of waste to 1 ton of ore.
     
      
       Unless there were some steps in the operation not explained by the evidence, the number of power shovels appears inadequate for the volume involved. In order for 38 shovels of 12%-ton capacity to move 246,000 tons of materials per day, each shovel would have to make more than 500 passes per day, reflecting a rate of 1 pass every 3 minutes around the clock.
     
      
       Table 1 appears in the Appendix.
     
      
       The significance of averages, as shown here and in findings 45-48, is limited to the purpose of showing at a glance the scope of operations ait the mine.
     
      
       Table 2 appears in the Appendix.
     
      
       Table 3 appears in the Appendix.
     
      
       The total figures shown as costs of production have been reduced) by the credit to costs for gold and silver values contained in the mine product. Column 4 of Table 3 shows the total production costs after the credit for such gold and silver values, while column 11 shows the gross production costs (before the credit for such gold and silver values).
     
      
       This average is taken from production cost figures reduced by credits for gold and silver values.
     
      
       Id.
     
      
       Table 4 appears in the Appendix.
     
      
       Table 5 appears in the Appendix.
     
      
       Table 6 appears in the Appendix.
     
      
       From Table 1 average, finding 44(b) (1).
     
      
       From Table 3 average, finding 46(b) (1).
     
      
       Before amortization (of ussbmco facilities), depletion, and taxes.
     
      
      
         Table 7 appears In the Appendix.
     
      
      
         Kennecott’s president reported to tbe board, of directors an estimate of $5,250,000. Finding 24. Estimates contained in detailed schedules submitted in evidence by plaintiff total $4,838,296.
     
      
       Two tunnels (the Bingham Tunnel and the Maseott Tunnel) accounted for $13 million of the total cost.
     
      
       See finding 22 (e), wherein the cost of substitute faculties over a 30-year period (1919-1949) is reported as almost $3 minion.
     
      
       Table 8 appears in tlie Appendix.
     
      
      
         As of October 1960, 46,896,000 tons of material bad been removed from Tract A, representing 9.02 percent of tbe 508,439,000 tons of material in the tract.
     
      
       For the year 1935, the Commissioner of Internal Revenue proposed an additional assessment of tax based upon a disallowance of a portion of the claimed depletion deduction attributable to a proposed increase in the number of recoverable units of ore. iOn the basis of a series of documents submitted by plaintiff reflecting its methods of calculating ore reserves, and of plaintiff’s representations that property rights then owned were a limiting factor, the proposed assessment was withdrawn.
     
      
       See Table 8.
     
      
       In Its return of Income tax for tbe calendar year 1949, plaintiff deducted from gross sales in Schedule A as “Other Costs of Goods Sold” $69,184,133.85 and included in such Other Costs of Goods Sold, as part of costs of Mining and Concentrating aggregating $45,469,908.52, the sum of $130,136.71 as a part of the cost of mining incurred in its Utah Copper Division of $14,781,513.05.
     
      
       See Table 8.
     
      
       In its return of Income and excess profits tax for the calendar year 1950, plaintiff deducted from gross sales In Schedule A as “Other Costs of Goods Sold” ?93,438,219.52 and Included In such Other Costs of Goods Soldi as part of costs of Mining and Concentrating aggregating $60,183,566.82, the sum of $548,748.30 as a part of the cost of mining incurred in its ütah Copper Division of $20,011,320.13.
     
      
       The claim for refund for 1951 contained the following phrase which was not in the claims for refund for the two earlier years: “either on an amortization basis or as an immediate deduction when the costs were incurred.’’
      
     
      
       See Table 8.
     
      
       In its return of income and excess profits tax for the calendar year 1951, plaintiff deducted from gross sales in Schedule A as “Other Costs of Goods Sold” $105,193,565.33 and included in such Other Costs of Goods Sold, as part of costs of Mining and Concentrating aggregating $71,182,128.32, the sum of $981,235.90 as a part of the cost of mining and ore haulage incurred in its Utah Copper Division of $25,326,161.04.
     
      
       Here is no question involved as to possible mineral content of any other tract.
     
      
       Plaintiff Ras not attempted to attribute a useful life (by way of a definitive term of years) to the rights In Traet A, or to other rights.
     
      
       The acquisition of stripping rights on Tract A was necessary to reach the receding face. jThe dumping rights on Tract B were ancillary to the stripping rights on Tract A. The leaching rights on Tract B were ancillary to the dumping rights on that tract. Other rights, however, for leaching and rights-of-way, were necessary to maintain normal output but were not directly related to the recession of the working faces.
     
      
       Plaintiff’s costs of production went up, not down, after the acquisition of the 1948 rights.
     