Docket Nos. 18515 23902.
William B. Murray, Esq., for the petitioner. Robert G. Harless, Esq., for the respondent.
On or before June 24, 1941, petitioner acquired title to 7 chrome mining claims in exchange for its entire capital stock, and thereafter it engaged in limited exploration and development of the mining properties until April 14, 1942. On that date it entered into a lease-royalty agreement relative to these mining claims whereby the lessee agreed to pay petitioner a gross royalty of 20 per cent upon all sales of chrome ore it might extract from the mining properties. Petitioner's income in 1944 consisted entirely of royalty payments received under the lease agreement. Held, that during the taxable year 1944 petitioner was not engaged in the mining of chromite within the meaning of section 731 of the Internal Revenue Code, and therefore its adjusted excess profits net income in that year was not exempt from the excess profits tax. William B. Murray, Esq., for the petitioner. Robert G. Harless, Esq., for the respondent.
These proceedings arise by reason of respondent's determination of deficiencies in income, declared value excess profits, and excess profits taxes for the calendar years 1944 and 1945 in the following amounts:
+---------------------------------------------------+ ¦ ¦1944 ¦1945 ¦ +---------------------------------+---------+-------¦ ¦ ¦ ¦ ¦ +---------------------------------+---------+-------¦ ¦Income tax ¦$875.57 ¦$648.12¦ +---------------------------------+---------+-------¦ ¦ ¦ ¦ ¦ +---------------------------------+---------+-------¦ ¦Declared value excess profits tax¦2,651.96 ¦493.94 ¦ +---------------------------------+---------+-------¦ ¦ ¦ ¦ ¦ +---------------------------------+---------+-------¦ ¦Excess profits tax ¦15,404.74¦------ ¦ +---------------------------------------------------+
Petitioner has withdrawn its claim that in both 1944 and 1945 it was entitled to the use of cost depletion rather than percentage depletion and as this constituted petitioner's sole allegation of error in Docket No. 23902, abandonment of the claim thereby disposes of petitioner's appeal in respect to deficiencies for 1945. The respondent has also conceded that in determining the deficiencies in Docket No. 18515, he erroneously disallowed a deduction for salaries and wages in 1944 in the amount of $2,491.85.
As a result of these concessions, the sole remaining issue is whether all or any part of the petitioner's adjusted excess profits net income for the taxable year 1944 was exempt from excess profits tax by virtue of the provisions of section 731 of the Internal Revenue Code.
FINDINGS OF FACT.
Part of the facts were stipulated and are so found.
Petitioner is a corporation organized on June 13, 1941, under the laws of the State of Oregon. By its articles of incorporation it is authorized to engage in the mining, buying and selling of all kinds of ores, metals and minerals as well as to acquire and dispose of mining claims and properties. Its Federal tax returns for the years 1944 and 1945 were filed with the collector of internal revenue for the district of Oregon.
Petitioner's authorized capital stock consists of 48,000 shares of common stock of the par value of $1 per share, all of which stock is issued and outstanding. On or before June 24, 1941, the petitioner acquired title to 7 chrome mining claims located in Josephine County, Oregon, known as Agnes No. 1 to Agnes No. 7, inclusive, in exchange for its entire capital stock.
During the First World War, the Agnes mining claims had produced approximately 5,000 tons of chrome ore. As chrome ore is normally imported into this country, the prior owners allowed the claims to lapse and revert to the Government some time after the conclusion of the First World War.
Prior to June 24, 1941, title to the Agnes mining claims was held by Sig Dilsheimer for the benefit of himself and other persons who contributed various sums of money with the understanding that a corporation would be formed in which they would receive stock interests in return for such advances. Examination of the abandoned mining site had convinced them that there was a reasonable prospect of getting at least 5,000 more tons of chrome from these mining properties.
On June 24, 1941, Dilsheimer, by deed, conveyed the claims to the petitioner in return for 47,997 shares of its capital stock and thereafter distributed a portion of this stock to those persons who had contributed funds prior to the incorporation of petitioner. The remaining three shares of petitioner's stock were issued to Max Kreuger, J. C. Haas, and Garfield Voget, as qualifying shares and as part of the transaction whereby petitioner acquired the mining claims. No other consideration was received by petitioner in return for its capital stock.
On July 2, 1941, petitioner borrowed the sum of $5,000 from Garfield Voget to use for operating expenses in developing the Agnes mining claims. Prior to April 12, 1942, petitioner completed several hundred feet of tunnel work and engaged in raising, drifting and cross-cutting to find ore.
On April 14, 1942, petitioner entered into a written lease with William S. Robertson whereby petitioner leased the Agnes mining claims to Robertson. The terms of the lease stated in pertinent part:
The lessor agrees:
1. Oregon Chrome Mines, Inc., leases to William S. Robertson the above claims for a period of two years from date with an option of two additional years if the recovery from said claims is reasonably successful during the first two years.
2. Oregon Chrome Mines, Inc., agrees that each year it will file with the proper authorities proof of labor for the past year so that title to said claims will remain in the corporation and locations to said claims be kept valid.
3. Oregon Chrome Mines, Inc., will keep its corporate franchise intact, keep its corporate taxes paid, and will pay all governmental and state charges against said claims.
The lessee agrees:
1. To furnish such equipment, tools, and machinery, and labor as will be necessary to work said claims, and to explore said ground to determine if the said land contains chrome ore and if the said claims contain chrome ore he agrees to mine said claims and to ship said ore to market and to sell same to his best advantage.
2. The lessee, above named, shall open, use, and work said mines as is usual and customary in the skillful and proper mining operations of similar character, and shall perform or cause to be performed at least 1,000 man hours labor at said claims, beginning not later than May 20, 1942 and ending not later than August 20, 1942 and after he has expended said hours labor on said claims he shall have the right to cancel this lease by giving ten days written notice to the lessor and then he shall have the right to forthwith remove any and all equipment, tools, and machinery that he has placed on said claims.
3. The lessee, above named, shall pay all expenses of operation including labor, and shall pay all state and governmental taxes in connection with his own operation. He shall carry state industrial accident insurance.
4. The lessee, above named, agrees to pay the lessor as rent and royalty for the use and depletion of said claims and the taking of said chrome ore one-fifth or 20 per cent of any and all amounts he shall receive from sale of said ore. This 20 per cent to be a gross royalty and from 80 per cent of the amount he shall received from the sale of said ore he shall pay for the expense of operation. In other words, the lessee is to pay the lessor a 20 per cent gross royalty.
The lessee agrees to seasonably sell the ore that he has mined and to furnish the lessor a duplicate statement of the amount received by him for the sale of said ore. Ten days after he has received his pay for the ore he agrees to pay one-fifth thereof of 20 per cent to the lessor.
The lease was modified subsequently but such modification related only to the amount of the gross royalty to be paid to the petitioner under the lease. The lease, as modified, was in effect during the period under consideration. Subsequent to the execution of the lease and during the taxable year in question, petitioner's income consisted entirely of royalty payments received under the lease agreement. Subsequently to April 12, 1942, petitioner neither directly nor indirectly took part in completing the development of these mining properties or the extraction and marketing of chrome therefrom.
The chrome ore extracted from the Agnes mining claims was of a very high grade and during the period under consideration constituted one of the largest sources of high grade chrome in the United States.
Petitioner occasionally made inquiries concerning the purchase of other chrome mining properties, but at the close of 1944 had not closed any deals for the acquisition of additional mining claims. In July 1944 petitioner's directors did authorize Heitschmidt, the company attorney, to purchase some previously mined chrome ore which the latter had been dickering for on his own and a check for $3,000 was issued to him for that purpose.
In 1944 petitioner addressed a letter to the Commissioner of Internal Revenue requesting advice. In a reply thereto dated November 20, 1944, the Commissioner advised the petitioner that it was not considered to be a domestic corporation engaged in mining as contemplated by section 731 of the Internal Revenue Code and consequently its adjusted excess profits net income was not exempt from the excess profits tax.
During the taxable year 1944 petitioner was not ‘engaged in the mining‘ of chromite within the meaning of section 731 of the Internal Revenue Code.
The narrow question for our determination in this proceeding is whether petitioner was ‘engaged in the mining‘ of chromite within the meaning of section 731 of the Code during the taxable year 1944 so that its adjusted excess profits net income was exempt from the excess profits tax. Section 731 was first enacted into law as part of the Second Revenue Act of 1940. The purpose of the statute was to stimulate the domestic discovery and production of certain strategic materials, including chromite, of which there was a shortage in this country. The exemption granted by section 731 was withdrawn by the Revenue Act of 1941 with respect to taxable years beginning after December 31, 1940. The exemption was subsequently restored in substantially the same form by the Revenue Act of 1942. Section 207 of the Revenue Act of 1943 added to the list of strategic materials set out in the statute.
SEC. 731. CORPORATIONS ENGAGED IN MINING OF STRATEGIC MINERALS.In the case of any domestic corporation engaged in the mining of * * * chromite * * *, the portion of the adjusted excess profits net income attributable to such mining the United States shall be exempt from the tax imposed by this subchapter. The tax on the remaining portion of such adjusted excess profits net income shall be an amount which bears the same ration to the tax computed without regard to this section as such remaining portion bears to the entire adjusted excess profits net income.
See H. Rep. No. 3002, 76th Cong., 3d sess., 1940-2 C.B. 548, 559; 86 Cong. Rec., pp. 12347, 12348, 12920; H. Rep. No. 1040, 77th Cong., 1st Sess., 1941-2 C.B. 413, 434; 87 Cong. Rec., pp. 7610-11, 7625-26, 7440-41; S. Rep. No. 1631, 77th Cong., 2d sess., 1942-2 C.B. 504, 536-538.
Our first consideration is the scope Congress intended to give the phrase ‘engaged in mining.‘ No definition of these words is contained within section 731. We have carefully searched the legislative history of this section and found no clear-cut standards set forth for determining whether a corporation is ‘engaged in mining‘ within the statute. The regulations relating to section 731, Regulations 109, section 30,731-1 and its successor, Regulations 112, section 35.731-1, are of no help in clarifying the statutory phrase in question, and no court decisions have interpreted the language. Elsewhere in the Code under section 114(b)(4)(B) Congress gave a broader than usual definition of ‘mining‘ and by the express language of that subparagraph its principles are applicable in determining gross income attributable to mining for the purposes of section 731. It states that mining,‘ as used therein, includes ‘not merely the extraction of the ores or minerals from the ground but also the ordinary treatment processes normally applied by mine owners or operators in order to obtain the commercially marketable mineral product or products.‘ The more usual and ordinary definition of ‘mining‘ does not include the treatment processes. Webster's New International Dictionary, 2d Ed., states that ‘mining‘ is the ‘Act or business of making or of working mines.‘ Black's Law Dictionary, 3d Ed., defines ‘mining as ‘the process or business of extracting from the earth the precious or valuable metals, either in their native state or in their ores. ‘ Corpus Juris Secundum, Vol. 58, page 35, section 3, declares that ‘'mining’, as generally defined, is the process of extracting from the earth the rough ore or mineral; the act or business of making mines or working them. ‘ The Court of Appeals for the Tenth Circuit stated in Chicago Mines Co. v. Commissioner, 164 Fed.(2d) 785, 787 that ‘'mining’ thus connotes the removal of minerals from a natural deposit * * *.‘
SEC. 114. BASIS FOR DEPRECIATION AND DEPLETION.(b) BASIS FOR DEPLETION.—(4) PERCENTAGE DEPLETION FOR * * * METAL MINES * * *(B) Definition of Gross Income From Property.— As used in this paragraph the term ‘gross income from the property‘ means the gross income from mining. The term ‘mining‘, as used herein, shall be considered to include not merely the extraction of the ores or minerals from the ground but also the ordinary treatment processes normally applied by mine owners or operators in order to obtain the commercially marketable mineral product or products. * * * The principles of this subparagraph shall also be applicable in determining gross income attributable to mining for the purposes of section 731 and 735.
It is possible that Congress intended that the broad definition of ‘mining‘ set forth in section 114(b)(4)(B) should serve not only to determine income attributable to mining within section 731, but also that this definition should furnish a guide post for determining whether a corporation was ‘engaged in mining‘ under the same section. In any event, whether we are guided by the statutory definition or by the usual and ordinary definition of ‘mining‘, we are convinced by the evidence that petitioner was not engaged in the mining of chromite for the purposes of section 731 in the taxable year.
In 1944 petitioner played an entirely passive role in the chrome mining industry as lessor of the Agnes mining claims, and received all of its income in the form of royalties from Robertson, the lessee. Following the lease agreement of April 14, 1942, petitioner had performed no function nor taken any financial risk in exploring these mining properties for ore, developing mines, extracting chromite therefrom and marketing the same. Nor was petitioner engaged in any other mining operations during the taxable year. There is evidence that it directed a few inquiries toward the purchase of other chrome mining claims and on one occasion authorized the expenditure of $3,000 to acquire chrome which had already been mined. These negligible activities fall far short of any active policy of locating and developing other chrome deposits. We do not attach much significance to the fact that in the brief period from June 24, 1941, until April 12, 1942, petitioner explored and developed the Agnes mining properties to a limited extent. These same claims had previously been located and worked in World War I and were relocated and examined prior to petitioner's incorporation. There is no affirmative evidence that petitioner found any mineable deposit of chromite therein prior to April 12, 1942, and the express terms of the lease on that date plus the small capital commitment by petitioner for exploration refute any conclusion that it completed the exploration and development work there. Finally we give little weight to this limited action on the part of petitioner because no further steps were taken towards active participation in mining operations there or elsewhere subsequent to April 14, 1942. Such activity was a mere isolated occurrence. Thus we conclude that in 1944 petitioner was not engaged in discovering deposits of chrome ore, building mines, extracting ore or treating same. It was not engaged in ‘mining‘ in the usual sense or as defined in section 114(b)(4)(B).
It is a well recognized principle that tax exemptions are not to be lightly inferred, Heiner v. Colonial Trust Co., 275 U.S. 232; United States v. Stewart, 311 U.S. 60. In view of Congressional silence regarding lessors of mining properties, we are convinced it would be an undue extension of the statutory language to hold that section 731 covers a corporation such as petitioner, which bought up a few mining claims in a proven area, which started but never completed the exploration or development of any mining properties nor extracted ore therefrom, and which quickly lapsed into the passive role of a lessor holding its claims for lease to a producer willing to carry out all the mining operations necessary to mine and market chromite. We therefore hold that in 1944 petitioner was not entitled to the exemption contained in section 731. The concessions set forth in the stipulation of facts will be taken into account in the recomputation herein directed.
Petitioner abandoned the only error assigned as the basis of its petition in Docket No. 23902.
Reviewed by the Court.
In Docket No. 18515, decision will be entered under Rule 50. In Docket No. 23902, decision will be entered for respondent.
ARUNDELL, J., dissenting: It seems to me that the construction given to section 731 in the majority opinion is entirely too narrow and serves to defeat the very purpose of its enactment.
In 1940, there was a crying need for the production of certain strategic war materials, of which chromite was one. We had depended on foreign sources for our supply and the war activities of the enemy made likely the stoppage of our importations. To give encouragement to the discovery and development of our domestic sources of supply, Congress enacted section 731 of the Internal Revenue Code which provided that:
In the case of any domestic corporation engaged in the mining of * * * chromite * * *, the portion of the adjusted excess profits net income attributable to such mining the United States shall be exempt from the tax imposed by this subchapter.
There can be no question but that the income with which we are concerned was attributable to the mining of chromite. But it is said that the petitioner was not engaged in mining and therefore may not have the benefit of the statute.
The petitioner was organized in 1941 for the sole purpose of taking title to a group of mining claims believed to contain chromite and with the view to their exploration and development. By April 1942, it had opened tunnels and had performed various other work in order to locate the deposits of chromite and to prepare for the actual removal of the ore. Apparently the petitioner was financially unable to carry out the operation itself and a lease arrangement was made with Robertson under which the petitioner was to receive a gross royalty of 20 per cent of the amounts realized from the sales of ore.
To deny petitioner the benefits of section 731 because it did not engage in the actual extraction of ore from the claims is to say that Congress intended only to accelerate the production of chromite from mines already existing and operating within the United States or to benefit only those firms possess of sufficient financial resources to undertake and complete the exploitation of mining properties without outside assistance. In my opinion, this result is in direct conflict with the intent evidenced by Congress in its Committee Reports,1 which indicated that the Statute was designed to encourage the discovery, exploration and development of mines containing these strategic metals as well as to encourage the day-to-day removal of the ore. Therefore, it seem to me that recognition of the underlying necessity for the extension of this exemption and the specific purposes of Congress in granting this benefit require that the petitioner be regarded as having been engaged in the mining of chromite within the meaning of section 731 during 1944.
Van fossan, JOHNSON, and TIETJENS, JJ., agree with this dissent.