H. M. Holloway, Inc. v. Commissioner

H. M. Holloway, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent H. M. Holloway, Inc. v. Commissioner Docket No. 26737 United States Tax Court 21 T.C. 40; 1953 U.S. Tax Ct. LEXIS 51; October 12, 1953, Promulgated *51 Decision will be entered under Rule 50. Depletion -- Discovery Value, Sections 23 (m) and 114 (b) (2), I. R. C. -- The petitioner is engaged in the business of exploring for, mining, and selling gypsum. The evidence establishes (1) that the petitioner made a discovery of a gypsum deposit; (2) the date of its discovery; (3) the fair market value of the property on the date of discovery; and (4) that the fair market value of the property on the date of discovery was materially disproportionate to the cost. Held, petitioner is entitled to the allowance of depletion deductions based upon discovery value. Adam Y. Bennion, Esq., for the petitioner. H. Arlo Melville, Esq., for the respondent. Harron, Judge. HARRON *40 The Commissioner determined deficiencies in the petitioner's income and excess profits taxes for the taxable years, and in the amounts as follows: Fiscal year ending June 30 Income tax Excess profits tax [1946] $ 11,306.15 $ 14,450.17 [1947] 17,660.48 The deficiencies result, principally, from the disallowance by the Commissioner of deductions claimed by the petitioner, in each of the taxable years, for depletion based on discovery value in connection *41 with the petitioner's*53 mining and sale of gypsum from sections 11 and 14 of a lease from the Richfield Oil Corporation. The only issue for decision is whether the respondent erred in disallowing the claimed depletion deductions based upon discovery value under the provisions of sections 23 (m) and 114 (b) (2), of the Internal Revenue Code. Other adjustments made by the respondent are not contested by the petitioner. The petitioner's returns for the years involved were filed with the collector for the sixth district of California. FINDINGS OF FACT. The facts which have been stipulated are found as facts and the stipulation is incorporated herein by this reference. The petitioner was incorporated under the laws of California on July 10, 1944, and commenced business on August 1, 1944. Its principal office address is P. O. Box 310, Lost Hills, California. The petitioner is engaged in the business of exploring for, mining, and selling gypsum. Gypsum is a nonmetallic mineral used in its natural state for agricultural purposes as a soil conditioner. It is mined by means of an open-face mining operation. The petitioner's 800 shares of capital stock were issued to H. M. Holloway in exchange for cash, a gypsum*54 mining lease, and equipment theretofore used by him in the gypsum mining business. Prior to organizing the petitioner corporation, H. M. Holloway conducted the principal gypsum mining operations in the Lost Hills area of the San Joaquin Valley in California. He became established in the gypsum mining business in that area in about 1935. On August 21, 1944, H. M. Holloway and his wife made the following gifts of the petitioner's capital stock: 333 shares to their son, Harvey S. Holloway; 333 shares to their daughter, Marian S. Knox; and 111 shares to their son-in-law, Claude O. Knox, who had been associated with H. M. Holloway in the gypsum mining business since December 1941. After the aforementioned gifts, H. M. Holloway held 23 shares of the petitioner's stock. Harvey S. Holloway has been the president and treasurer of the petitioner since its organization, and Claude O. Knox has been the vice president and secretary. H. M. Holloway was the assistant secretary of the petitioner until his death in 1947. Gypsum deposits in the Lost Hills area of the San Joaquin Valley had been exploited by H. M. Holloway and others for several years prior to the date the petitioner was incorporated. *55 Surface outcroppings of gypsum occurred all along the top and flanks of the Lost Hills which range for a distance of several miles. The Richfield Oil Corporation, hereinafter referred to as Richfield, owned land in the Lost *42 Hills area on which gypsum deposits occurred. Early in 1940, H. M. Holloway, in addition to two or three small gypsum operators, made inquiries of Richfield relative to securing gypsum leases on portions of the Richfield land. As a result of these inquiries Richfield directed Tom Ricco, a geologist in its Land and Lease Department, to investigate the gypsum beds lying in the Lost Hills area. Ricco submitted a written report of his investigation to Richfield dated March 20, 1940. The report, in pertinent parts, stated as follows: In the Lost Hills area, these gypsum beds are exposed on both flanks of the topographical expression of the Lost Hills structure consisting of a deposit from one to four feet in thickness. Down dip and away from the topographic high, the beds become thinner and are not commercially valuable due to the difficulty in stripping overburden and recovering the thin layer. * * * * * * * Richfield Oil Corporation holds acreage *56 on which gypsum deposits occur in the Lost Hills District in Sections 1, 2, 3, 4, 10, 11, 12, 13 and 14 T. 26 S., R. 20 E., M. D. B. & M. and in Section 8, T. 27 S., R. 21 E., consisting of a total of 1125 acres of possible gypsum lands, of which amount the mineral rights on 260 acres are held 50/50 by Richfield Oil Corporation and Standard Oil Company of California. About one-half of the total acreage, or approximately 595 acres, can be considered to have a preferred commercial value, this area being composed of 375 acres of 100% ownership and 220 acres held 50/50 with Standard Oil Company. The writer estimates that the recoverable gypsum from these properties amounts to approximately 300,000 tons with a royalty value of $ 60,000, taken at 20 cents per ton. In previous years, numerous attempts have been made by operators to secure the privilege of mining these properties with royalty offers up to 50 cents per ton (1930) but there is no evidence in the files that a lease was granted by the Company. The gypsum deposits on which the petitioner claims depletion based upon discovery value are contained within an area comprising approximately 34 acres of sections 11 and 14 of the Richfield*57 land. The 34-acre area is located out on the floor of the basin of the Lost Hills. There were no surface outcroppings on the floor of the basin to indicate the presence of the deposit in question which was covered by an overburden of sand and clay. The bulk of the deposit is contained in section 11. A highway, running in a southeast to northwest direction traverses sections 11 and 14. The deposit lies on both the east and the west side of the highway. About 40 per cent of the deposit is contained in areas of sections 11 and 14 lying west of the highway. Prior to the date the petitioner was incorporated, H. M. Holloway had secured two letter authorizations from Richfield to engage in exploratory work, and had entered into two gypsum mining lease agreements with Richfield, which letter authorizations and leases covered first a part and later all of the area in which the deposit involved herein is located. By letter dated July 18, 1940, Richfield authorized H. M. Holloway, for a period of 30 days, to enter upon certain specified parts of nine *43 sections of Richfield's land in the Lost Hills area for the purpose of conducting exploratory work, including the making of borings, *58 to determine which of the lands H. M. Holloway wished to include in a prospective gypsum mining lease. The areas specified in the letter authority included acreage in sections 11 and 14 which contains a part of the deposit in question. On January 8, 1941, Richfield leased 270.54 acres to H. M. Holloway for the purpose of exploring for, mining, and extracting gypsum, for a term of 5 years and thereafter until 60 days' notice in writing by either party of intention to terminate. The 270.54 acres covered by the lease included that part of section 11 lying east of the highway which contains about 60 per cent of the deposit here involved. The lease provided for the payment to Richfield of a minimum royalty of $ 0.25 a ton, and for the payment of a specified annual rental in advance which was to be credited to H. M. Holloway's account for royalty payable. H. M. Holloway agreed not to assign the lease or any interest therein without the prior written consent of Richfield. On November 5, 1943, H. M. Holloway secured from Richfield a letter agreement authorizing him to do exploratory boring on an additional 1,102.80 acres of Richfield's land for a period of 6 months. The letter agreement*59 gave H. M. Holloway the option to include the additional acreage, or any part thereof, in the lease of January 8, 1941, and provided for extending the term of the lease for a period of 5 years from the date of the exercise of the option. The additional acreage covered by the letter agreement included the acreage in section 11 lying west of the highway which contains about 40 per cent of the deposit in question. Before the 6-month period for exploratory work had expired, Richfield and H. M. Holloway entered into a new lease dated May 1, 1944. Under the provisions of the lease of May 1, 1944, a total of 1,422.60 acres of land, including those parts of sections 11 and 14 containing the deposit in question, were leased to H. M. Holloway, for the purpose of exploring for, mining, and extracting gypsum, for a term of 5 years and thereafter until 60 days' notice in writing by either party of intention to terminate. He agreed to pay Richfield a royalty of $ 0.25 per ton for each ton of gypsum removed from the property, with an annual rental payable in advance of $ 3 per acre. Rentals were to be credited to Holloway's account for royalty payable. H. M. Holloway, also, agreed, in paragraph*60 2 (e) of the lease, "not to assign this lease or any interest therein, nor to sublease said premises or any part thereof, nor to occupy the same or any part thereof as trustee of an express or implied trust for or on account of any other person whomsoever, without the written consent of lessor first obtained." The lease of May 1, 1944, superseded both the lease of January 8, 1941, and the letter agreement of November 5, 1943. *44 The only gypsum mined by H. M. Holloway under the Richfield lease of January 8, 1941, consisted of about 1,700 tons extracted in 1943, from a surface deposit located on the flank of one of the Lost Hills in section 14. No gypsum was mined by H. M. Holoway under the Richfield lease of May 1, 1944. Both prior to and at the time the lease of May 1, 1944, was entered into, H. M. Holloway held leases and was conducting his gypsum mining operations on two other properties, referred to herein as the Lang property and the Security Oil Company property. The Lang and the Security Oil Company properties are adjoining properties situated near sections 11 and 14 of the Richfield land. H. M. Holloway assigned his lease on the Security Oil Company property to the*61 petitioner upon incorporation. The only core holes drilled by H. M. Holloway, at any time, on sections 11 and 14 of the Richfield land, were drilled on the ridges and flanks of the Lost Hills with a hand auger to determine the depth of the exposed surface deposits and outcroppings. In the spring of 1944, H. M. Holloway was considering reorganizing his gypsum mining business, either as a partnership or a corporation, for the purpose of bringing his son, Harvey S. Holloway, into the business, and of giving an ownership interest in the business to his daughter, Marian, and her husband, Claude O. Knox, who had been active in the business since December 1941. Prior to June 30, 1944, Harvey S. Holloway was employed by the Hancock Oil Company of California. In May or June 1944, H. M. Holloway and Harvey S. Holloway had a conference with Ricco with whom all negotiations with Richfield concerning gypsum leases were conducted. At the conference Ricco was advised of H. M. Holloway's plans to create a partnership or corporation, and he was asked whether Richfield would have any objection to the assignment of the lease of May 1, 1944, to the new business entity. Ricco stated that, so far *62 as he was concerned, his company would have no objection to the assignment of the lease, provided H. M. Holloway continued liable as a guarantor for the performance of the lease, but that the assignment would have to be approved by his superiors in Richfield. After the petitioner was incorporated and prior to September 20, 1944, it was understood and agreed, orally, between the petitioner's officers, Harvey S. Holloway and Knox, and H. M. Holloway that the latter would assign the Richfield lease of May 1, 1944, to the petitioner. Richfield's written consent to the assignment was requested by H. M. Holloway on November 14, 1944, and obtained on November 17, 1944. H. M. Holloway and his wife executed a written assignment of the Richfield lease to the petitioner on December 8, 1944, reserving to H. M. Holloway an overriding royalty. The petitioner, in reliance upon the aforementioned oral agreement and before the written assignment of the Richfield lease was executed, *45 entered upon the property embraced within the lease, and on September 20, 1944, commenced the drilling of test core holes in sections 11 and 14. The drilling operations were supervised by Knox. The core holes*63 were drilled by a machine which could penetrate to a depth of over 20 feet. The drilling was commenced in section 11 on the edge of the basin area on the west side of the Lost Hills structure. There were no surface outcroppings in this basin area revealing the presence of the gypsum deposit encountered by the petitioner's drilling operations. Each core hole drilled was numbered in chronological order, and the data disclosed by each hole, as to the amount of overburden, the thickness of the gypsum layer, if any, encountered, and the depth of the hole, was logged. The core holes were drilled, in most instances, about 100 feet apart with the findings from hole to hole determining where the next hole should be drilled. The first 30 core holes drilled were not encouraging due to the depth of the overburden and the thinness of the gypsum beds encountered. As the drilling progressed in a generally northwesterly direction, away from the Lost Hills structure and out into the basin area, the deposit widened, the amount of overburden became less, and the thickness of the gypsum beds encountered increased. The petitioner drilled 254 core holes between September 20, 1944, and November 3, *64 1944. The thickness of overburden and gypsum logged for each hole drilled and the depth to which each hole was drilled varied. The holes were drilled to depths of from about 8 to 21 feet. Some holes disclosed no gypsum layers, and some holes disclosed a thin layer of gypsum under 10 feet or more of overburden. Some holes disclosed gypsum beds of up to about 13 feet in depth under 3 or 4 feet of overburden. Drilling operations were discontinued on November 3, 1944, due to the fact that the mining and sale of gypsum from another property required the attention of all of the petitioner's employees. The petitioner's gypsum business is seasonal, with the bulk of its sales occurring between October and April. In October 1944, the petitioner retained John H. Wents, a consulting geologist, who advised and assisted the petitioner in the conduct of its drilling operations. After the drilling was discontinued in November 1944, Wents prepared a working map on which he plotted the location of each of the 254 core holes drilled, the thickness of overburden and gypsum logged for each hole, and the total depth of each hole. The data disclosed by the first 254 core holes drilled was not sufficient*65 to determine the boundaries of the deposit, the commercial grade, and the probable quantity and extent of the deposit. Wents so advised the petitioner's officers and he indicated on the working map where additional drilling should be made. The petitioner resumed the drilling of core holes on April 6, 1945, and thereafter drilled 182 additional core holes in accordance with *46 the suggestions made by Wents. The data disclosed by each of the 182 additional core holes was plotted on the working map. The working map, on which the location and findings for each of the 436 core holes drilled were plotted, was received in evidence as exhibit 27, and the exhibit is incorporated herein by this reference. The commercially valuable character of the deposit, the boundaries of the deposit, and the probable quantity and extent of the deposit were determined, with reasonable certainty, as a result of the drilling of the additional 182 core holes, which was completed late in the summer of 1945. The deposit of gypsum disclosed by the petitioner's drilling operations was an underground deposit in an area containing approximately 34 acres. The deposit was located in the floor of the basin*66 of the Lost Hills area. It was separate and distinct, physically and geologically, from the surface deposits present along the ridges and flanks of the Lost Hills structure. The underground deposit of gypsum in the basin area differs from the surface deposits and outcroppings present on the ridges and flanks of the hills in physical appearance, color, and consistency, and its origin and mineral characteristics are different, geologically, from the surface deposits. There had been no drilling of core holes in the deposit area prior to the petitioner's drilling. The deposit encountered by the petitioner's drilling was not an extension of, or connected with, any other known deposit of gypsum in the Lost Hills area. The petitioner commenced mining gypsum from the deposit on or about October 1, 1945. During the fiscal years ended June 30, 1946, and June 30, 1947, the petitioner mined and sold from the deposit 120,247 and 158,327 tons of gypsum, respectively. The petitioner, on its income tax returns for the same years, deducted depletion allowances based upon discovery value in connection with the gypsum mined and sold from the deposit, in the amounts of $ 29,284.32 and $ 41,233.79, *67 respectively. The petitioner computed the discovery depletion allowances at the unit rate of $ 0.34093 per ton, limited in each instance to 50 per cent of the net income from the property. The respondent determined that the petitioner was not entitled to the claimed deductions for depletion based upon discovery value, and, in his notice of deficiency, allowed the petitioner depletion deductions in each of the taxable years based on cost, in the amounts of $ 928.43 and $ 1,222.44, respectively. The respondent computed the depletion allowances based on cost at the unit rate of $ 0.007721. The gypsum deposit in question was discovered by the petitioner. The date of the petitioner's discovery was October 1, 1945. The estimated recoverable gypsum in the deposit on October 1, 1945, was 410,200 tons. The fair market value of the petitioner's interest in the deposit on October 1, 1945, was $ 139,850. The fair market value of the property on October 1, 1945, was materially disproportionate to the cost. *47 OPINION. The issue in this proceeding is whether the petitioner is entitled to depletion allowances based upon discovery value, as provided in sections 23 (m) and 114 (b) (2), *68 Internal Revenue Code, in connection with its operations, during the taxable years, in the mining and sale of gypsum from sections 11 and 14 of the Richfield lease. The petitioner, in its income tax returns for the fiscal years ended June 30, 1946, and June 30, 1947, claimed depletion deductions based upon discovery value in the amounts of $ 29,284.32 and $ 41,233.79, respectively. The respondent determined that the petitioner was not entitled to the claimed deductions for depletion based upon discovery value, and, in his notice of deficiency, allowed the petitioner depletion deductions in each of the taxable years, based on cost, in the amounts of $ 928.43 and $ 1,222.44, respectively. Section 23 (m), Internal Revenue Code, provides that in computing net income there shall be allowed as deductions, in the case of mines, a reasonable allowance for depletion, 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. In the case of leases the deduction shall be equitably apportioned between the lessor and lessee. Section 23 (n), Internal Revenue Code, provides that the basis upon which *69 depletion is to be allowed shall be as provided in section 114. Section 114 (b) (2), Internal Revenue Code, establishes the basis for discovery depletion, in the case of mines discovered by the taxpayer after February 28, 1913, as the fair market value of the property at the date of discovery or within 30 days thereafter, if such mines were not acquired as the result of purchase of a proven tract or lease, and if the fair market value of the property is materially disproportionate to the cost. Section 114 (b) (2) of the Code, as of the applicable date, is printed in the margin. 1 *70 *48 The burden of proof is upon the petitioner to establish (1) that it made the discovery, which was made after February 28, 1913; (2) the date of its discovery; (3) the fair market value of the property on the date of discovery or within 30 days thereafter; (4) whether such fair market value was disproportionate to the cost; and (5) other facts necessary for the computation of the depletion allowances. See Regulations 111, sec. 29.23 (m)-1, 3, 7, and 14; Reinecke v. Spalding, 280 U.S. 227; H. O. Miller, 10 B. T. A. 450; M. W. Brellahan, et al., 11 B. T. A. 489; Robert Roberts, 20 B. T. A. 345; Parker Gravel Co., 21 B. T. A. 51; Dunn & Baker, Inc., 30 B. T. A. 663, affirmed per curiam 80 F. 2d 1010. The principal question presented is when and by whom the deposit was discovered which is a question of fact, essentially. The petitioner makes two contentions, that it made the discovery, and that the date of discovery was on October 1, 1945. The respondent argues *71 that discovery was made at sometime prior to October 1, 1945, the discovery date urged by the petitioner, either by Richfield, or by H. M. Holloway, or by the petitioner. He argues, further, that, if the Court should find that the deposit was discovered by the petitioner prior to December 8, 1944, the petitioner had no depletable economic interest in the deposit on the discovery date, since the Richfield lease was not formally assigned to the petitioner until December 8, 1944. The respondent takes the position that, in order for a taxpayer to qualify for discovery depletion, the taxpayer must have a depletable economic interest in the deposit on the discovery date. We have carefully considered certain circumstances emphasized by the respondent in his arguments, namely, the report prepared by Ricco at the direction of Richfield in 1940, and the fact that, prior to the date the petitioner was incorporated, H. M. Holloway secured letter authority to do exploratory work and obtained two leases from Richfield, which letter authorizations and leases embraced first a part, and later all, of the discovery area. We are satisfied, however, from all the evidence and the record before us, and*72 we have found as a fact, that the deposit was discovered by the petitioner. Both Ricco and H. M. Holloway died prior to the trial of these proceedings. It is evident, however, from the report prepared by Ricco that the gypsum deposits therein referred to were the surface deposits and outcroppings present along the ridges and flanks of the Lost Hills structure. The deposit in question is an underground deposit situated in the basin or low lands of the Lost Hills area. The evidence also shows that the underground deposit was not connected, physically or geologically, with any surface deposits and outcroppings. The deposit in question was therefore unknown to, and was not discovered by Richfield as a result of Ricco's investigation and report. *49 We are also satisfied that the deposit was not discovered by H. M. Holloway. There is nothing in the record to support the inference urged by the respondent that H. M. Holloway had knowledge of the existence of the deposit prior to the date petitioner commenced its drilling operations. There were no surface outcroppings in the discovery area to indicate the presence of an underground deposit. Knox worked for H. M. Holloway continuously*73 from December 1941 until the date the petitioner was incorporated. His testimony that there was no evidence of any drilling having been done in the discovery area by H. M. Holloway prior to December 1941, and that there was none thereafter is convincing. Furthermore, we think it is a fair inference from the facts that if H. M. Holloway had done any drilling in the discovery area pursuant to the letter authority of July 18, 1940, and had any knowledge of the deposit, he would have included in the lease of January 8, 1941, the acreage in section 11 lying west of the highway which contains about 40 per cent of the deposit. We therefore conclude that the deposit in question was discovered by the petitioner. The authorities relied on by the respondent, principally, Alamo Coal Co., 31 B. T. A. 869, and Clarence P. Sidwell, 11 T. C. 826, are distinguishable on their facts from this proceeding. In each of the cited cases, it was found as a fact that the taxpayer had purchased or leased a proven tract of land. We turn next to a consideration of when the discovery date within the meaning of section 114 (b) (2) of the Code occurred. *74 The Code does not contain a definition of the term "discovery." The regulations, Regulations 111, section 29.23 (m)-14 (b), define the term discovery as follows: (b) A mine or minerals of a kind not excepted by this section may be said to be discovered when (1) there is found a natural deposit of mineral, or (2) there is disclosed by drilling or exploration, conducted above or below the ground, a mineral deposit not previously known to exist and the existence of which was so improbable that such deposit had not and could not have been included in any previous valuation for the purpose of depletion, and which in either case exists in quantity and grades sufficient to justify commercial exploitation. Subsection (e) of the same regulation provides as follows: (e) The value of property claimed as the result of a discovery must be the fair market value, as defined in section 29.23 (m)-7, based on what is evident within 30 days after the commercially valuable character and extent of the discovered deposits of mineral have with reasonable certainty been established, determined, or proved. The respondent contends that, if the petitioner in fact made the discovery, the discovery*75 date occurred in November 1944, after the drilling of the first 254 core holes by the petitioner disclosed substantial underground deposits of gypsum in the discovery area. The petitioner argues that the date of discovery, within the meaning of the *50 statute and the Commissioner's regulations, did not occur until October 1, 1945, after the data ascertained by the drilling of 182 additional core holes by the petitioner established, with reasonable certainty, the commercial grade, the boundaries, and the probable extent and tonnage of the deposit. We agree with the petitioner. The fact that a mineral deposit in substantial quantity is disclosed by the drilling of test core holes does not, of itself, give rise to a discovery date within the meaning of the statute and the regulations. The date of discovery, as contemplated by the statute and the regulations, in our opinion, occurs when the commercial grade, the extent and probable tonnage of the deposit, and the fact that commercial exploitation of the deposit is justified, have been ascertained with reasonable certainty from investigation and analyses. This appears evident from the requirement of the statute that the deposit*76 be valued, for discovery depletion purposes, as of the date of discovery, or within 30 days thereafter. Unless the commercial grade and the probable extent and tonnage of the deposit are determined with reasonable accuracy, valuation of the deposit would become a speculation based on unfounded assumptions. The evidence and record in this proceeding establishes, and we have found as a fact, that the date of discovery by the petitioner was October 1, 1945. The discovery, and valuation date of October 1, 1945, are supported by the testimony of Wents, the petitioner's consulting geologist, and by the plottings and data appearing on the working map prepared by Wents. We note, also, that while the respondent claims the discovery was evident in November 1944, he does not contend that delay, if any, by the petitioner in making claim therefor has resulted or will result in excessive allowances for depletion. See Regulations 111, sec. 29.23 (m)-14 (c). The respondent concedes that the petitioner had a depletable economic interest in the property at all times subsequent to December 8, 1944, and that the fair market value of the petitioner's interest in the deposit on October 1, 1945, *77 was $ 139,850. His argument, on brief, that the petitioner failed to prove that the fair market value of the property on the date of discovery was materially disproportionate to the cost, is without merit. It is held that the petitioner is entitled to depletion allowances based upon discovery value in connection with its operations, during the taxable years, in the mining and sale of gypsum from sections 11 and 14 of the Richfield lease. Since other adjustments made by the respondent have been conceded by the petitioner Decision will be entered under Rule 50. Footnotes 1. SEC. 114. BASIS FOR DEPRECIATION AND DEPLETION. (b) Basis for Depletion. -- * * * * (2) Discovery value in case of mines. -- In the case of mines (other than metal, coal, or sulphur mines) discovered by the taxpayer after February 28, 1913, the basis for depletion shall be the fair market value of the property at the date of discovery or within thirty days thereafter, if such mines were not acquired as the result of purchase of a proven tract or lease, and if the fair market value of the property is materially disproportionate to the cost. The depletion allowance under section 23 (m) based on discovery value provided in this paragraph shall not exceed 50 per centum of the net income of the taxpayer (computed without allowance for depletion) from the property upon which the discovery was made, except that in no case shall the depletion allowance under section 23 (m)↩ be less than it would be if computed without reference to discovery value. Discoveries shall include minerals in commercial quantities contained within a vein or deposit discovered in an existing mine or mining tract by the taxpayer after February 28, 1913, if the vein or deposit thus discovered was not merely the uninterrupted extension of a continuing commercial vein or deposit already known to exist, and if the discovered minerals are of sufficient value and quantity that they could be separately mined and marketed at a profit.