Denise Coal Co. v. Commissioner

Denise Coal Company, et al., 1 Petitioners, v. Commissioner of Internal Revenue, Respondent Denise Coal Co. v. Commissioner Docket Nos. 56762, 56763, 56764 United States Tax Court 29 T.C. 528; 1957 U.S. Tax Ct. LEXIS 13; December 24, 1957, Filed *13 Decisions will be entered under Rule 50. 1. Denise Coal Company, the owner and lessee of certain coal lands, entered into contracts with various strip miners whereby the strippers were to conduct strip-mining operations on Denise's property. The strippers' compensation was based in part on the market price of the coal; the contracts did not give the strippers an exclusive right to mine the coal until exhaustion but the contracts were only terminable for cause; the strippers used their own equipment; and they built some of the necessary roads and facilities. Held, that in determining Denise's "gross profit from the property" for purposes of the computation of the percentage depletion allowance it must exclude the amount paid to the strippers since the strippers acquired an "economic interest" in the property. 2. Denise, an accrual basis taxpayer, was required by Pennsylvania law to restore the properties which it stripped. During the years involved it neither restored, nor entered into any contracts to restore, any of the properties that were stripped. Denise estimated the future cost of restoring the properties stripped during each year and claimed deductions for the amounts so *14 estimated. Respondent disallowed the claimed deductions on the ground that claimed expenses were not "paid or incurred" during the years involved. Held, nothing occurred during the years involved which gave rise to an expense incurred. Held, further, that the estimated amounts did not reasonably represent the future expenses to be incurred. 3. Denise acquired surface lands overlying the coal deposits which it owned or had the right to mine. During each of the years involved Denise deducted a portion of the cost of each tract which it estimated was destroyed by stripping operations and contends that the deduction is allowable either as an ordinary and necessary business expense or as a loss. Held, that the cost of the surface lands destroyed does not represent an ordinary and necessary business expense under section 23 (a) (1) (A) or a loss under section 23 (e) or (f), I. R. C. 1939. However, the cost of the surface lands should be added to the cost of the coal in determining the basis of the property for depletion purposes. Manchester Coal Co., 24 B. T. A. 577 (1931), followed. 4. Held, that the estimated useful life of a dragline used in stripping operations on a 24-hour-a-day *15 basis was 8 years as claimed by petitioner rather than 12 years as determined by the Commissioner. 5. In 1948, Denise paid $ 7,500 for the back-page space of the 1948 Democratic National Convention program, which convention was held in Philadelphia, Pennsylvania. In that space, which was in attractive color, were printed pictures of four former Presidents of the United States, Thomas Jefferson, Andrew Jackson, Woodrow Wilson, and Franklin D. Roosevelt, with quotations from the messages and speeches of each. Below these pictures and quotations appeared the following language: "Today these still are the Democratic Party's principles and its destiny." Denise's name appears at the bottom of the page and it was evident that the advertisement was sponsored by Denise. Petitioner deducted the amount as an ordinary and necessary business expense and respondent disallowed it on the ground that the expenditure represented a political contribution. Held, that the expenditure represented an ordinary and necessary business expense and is deductible under section 23 (a) (1) (A), I. R. C. 1939. 6. Denise, an accrual basis taxpayer, accrued local coal taxes in 1948 in the amount of $ 7,599.80. It *16 paid $ 2,611.21 of that amount in 1948 and the balance in 1949. The Act imposing such taxes was declared unconstitutional by the Pennsylvania courts in April 1949 and respondent disallowed the entire $ 7,599.80 on that ground. Held, that the taxes were properly accruable and deductible in 1948 since Denise was not contesting payment but, on the contrary, actually paid the taxes in 1948 and 1949. Alexander L. Suto, Esq., and Samuel L. Goldstein, Esq., for the petitioners. George J. Rabil, Esq., for the respondent. Black, Judge. BLACK *530 The respondent has determined deficiencies in income tax as follows: Docket Petitioner Taxable Deficiency No. year 56762 Denise Coal Company 1 1946 $ 17,563.12 [1947] 58,159.01 [1948] 29,749.90 56763 Estate of Charles J. Margiotti, Deceased, et al [1944] 23,762.27 [1945] 8,420.49 [1946] 2,724.65 56764 Juliette C. Suto (Formerly Juliette C. Margiotti) [1944] 23,510.54 [1945] 6,828.79 [1946] 1,802.49 The deficiencies in all three cases are due to numerous adjustments, not all of which are in issue. The adjustments in issue all relate to the operation of a partnership (petitioners in Docket Nos. 56763 and 56764 were equal partners) known *17 as Denise Coal Company, which operated from November 4, 1943, until May 31, 1946, and of a corporation (petitioner in Docket No. 56762) known by the same name, which was organized on May 31, 1946, and succeeded to the business of the partnership. The following issues have been raised by the pleadings: (1) Whether amounts paid to strip-mining operators are excludible from gross income for the purpose of computing the percentage depletion deduction. (2) Whether the anticipated future cost of restoring stripped properties is deductible in the years in which the properties were strip mined. (3) Whether portions of the cost of surface lands claimed to have been destroyed through stripping operations are deductible in the years when the stripping operations are conducted despite the fact that there was no sale or abandonment of the properties during those periods. (4) Whether the depreciation on a Marion dragline shovel purchased in 1948 for about $ 166,000 should be based on an 8-year or a 12-year useful life. (5) Whether $ 7,500 paid for the back-page space as an advertisement in the 1948 Democratic National Convention program and claimed as an advertising expense represents an ordinary and *18 necessary business expense. (6) Whether certain township coal taxes imposed for the year 1948 are accruable and deductible in 1948 where the act imposing such taxes is declared unconstitutional in 1949. Issues (1), (2), and (3) relate to both the partnership (therefore, to the individual petitioners) and to the corporation and are involved for the years 1944 to 1948, inclusive, 1945 to 1948, inclusive, and 1944 *531 to 1949, inclusive, respectively. Issue (4) relates to the corporation for the years 1948 and 1949. Issues (5) and (6) relate to the corporation for the year 1948. No deficiency is involved for 1949; however, the year 1949 is involved in Issues (3) and (4) apparently for the purpose of determining the net operating loss for that year that is allowable as a deduction in 1947. FINDINGS OF FACT. Many of the facts have been stipulated; they are so found and are incorporated herein by this reference. Petitioner Denise Coal Company, a Pennsylvania corporation with its principal office in Pittsburgh, Pennsylvania, filed its returns for the period June 1 to December 31, 1946, and for the calendar years 1947, 1948, and 1949 with the collector of internal revenue at Pittsburgh. Denise Z. *19 Margiotti, executrix of the Estate of Charles J. Margiotti, deceased, is the petitioner in Docket No. 56763. The decedent, hereinafter sometimes referred to as Margiotti, resided in Pittsburgh and filed his individual Federal income tax returns for the calendar years 1944, 1945, and 1946 with the collector of internal revenue at Pittsburgh. Petitioner Juliette C. Suto, formerly Juliette C. Margiotti, filed her Federal income tax returns for the calendar years 1944, 1945, and 1946 with the collector of internal revenue at Pittsburgh. Margiotti and his daughter, petitioner Juliette C. Suto, were equal partners in a partnership known as Denise Coal Company. The partnership filed partnership returns for the calendar years 1944 and 1945 and for the period January 1 to May 31, 1946, with the collector of internal revenue at Pittsburgh. The partnership known as Denise Coal Company was organized on November 4, 1943, and continued operations until May 31, 1946, when the corporation Denise Coal Company was organized to succeed to its business. Both entities will hereinafter be referred to as Denise or petitioner, since it is not necessary to distinguish between them. Margiotti and his daughter, *20 Juliette, each owned 50 per cent of the stock of Denise during the years involved. Denise regularly employed an accrual method of accounting in keeping its books and filed its returns in accordance with that method. During the relevant periods Denise was engaged in the business of purchasing, mining, and selling bituminous coal. Issue 1. Economic Interest. During the years involved Denise owned or leased tracts of coal and surface lands in Somerset County, Pennsylvania. It entered *532 into written agreements with various stripping contractors whereby the stripping contractor would strip mine 2 the property. In November 1943, Denise entered into a stripping contract with B. Perini & Sons, Inc. (hereinafter sometimes referred to as Perini), which contract provided, inter alia: Whereas, the party of the first part [Denise] is in possession and control of certain tracts of land and coal leases located in Stonycreek Township, Somerset County, Pennsylvania, *21 known as the Cambria Fuel Coal properties, situated in the vicinity of Dovey, and may from time to time procure additional tracts of land and coal leases from which land party of the first part desires the party of the second part [Perini] to mine, excavate and remove coal by the stripping or daylight process, in which business the party of the second part is engaged; and Whereas, the party of the second part desires to enter into an agreement whereby it shall mine, excavate, remove and load onto railroad cars coal from the tracts of land and coal leases aforesaid: Now Therefore It Is Agreed by and Between the Parties Hereto as Follows: 1. The party of the second part agrees to excavate, mine and remove only all merchantable strippable coal that can be practicably, economically and profitably stripmined by the party of the second part -- and provided that stripping will not require continuous and systematic blasting for the removal of the overburden, -- and profitably sold by the party of the first part, from the several seams of coal from the tracts of land hereinabove designated and any other nearby and contiguous tracts hereafter acquired and designated by the party of the first part. *22 The tracts of land hereinabove designated will be available to the party of the second part for said work and said work may be commenced upon the signing of this agreement. The party of the second part shall first remove all overburden [down to a certain level] * * * for which the party of the first part agrees to pay to the party of the second part compensation at the rate of One Dollar and ninety cents ($ 1.90) per net ton of 2,000 pounds for all coal mined, removed, and loaded onto railroad cars adjacent or near tipple of Cambria Fuel Company, at Dovey, at site to be agreed upon by parties hereto, this price to include the mining, preparation and placing of the coal on railroad cars. If the Bituminous Coal Commission, or any other governmental body, should increase the present maximum price, or if the market price of the coal should be so increased, then it is expressly understood and agreed that the difference between the present maximum price and the selling price of said coal shall be divided equally between the party of the first part and the party of the second part, after deducting therefrom any sales commission on the price in excess of the present maximum price. If the *23 said commission, or any other governmental body, should lower the maximum price, or if the market price should be so lowered, then the price to be paid to the party of the second part shall be mutually agreed upon by the parties to this contract. 2. The party of the second part shall prepare, clean, remove bone, and properly load all coal so that the same will be marketable. The party of the first part shall inspect all coal at the pit, and rejection of any coal by it must take place *533 in writing at the pit, and not thereafter. All coal leaving the pit must be paid for, and no penalties or adjustments charged to the party of the second part. 3. The party of the second part agrees to make, build, construct and maintain all structures, buildings, roads, drains and other facilities necessary for the mining, removal and transportation to and into railroad cars of the said coal, with the exception of loading docks, and/or conveyors and sidings; it being expressly understood and agreed that loading docks and/or conveyors are to be built by the party of the first part and maintained by the party of the second part, and sidings are to be built and maintained by the party of the first part. The *24 party of the second part agrees also to be responsible for and pay employees required at the dock for loading the coal and in the movement of the railroad cars, and keeping the tracks clean of debris and coal; provided, however, that if the party of the first part desires to further clean the coal at the dock by hand-picking, it must do so at its own expense. The party of the second part agrees also that if it should be necessary to drill in order to locate coal on the property aforesaid, it will do so at its own expense. 4. The party of the second part is to do its work in a workmanlike manner, and shall otherwise operate and strip, excavate, remove and transport to and load into railroad cars the said coal in accordance with the laws * * *. The party of the second part further agrees to strip the property in the manner and at the points designated by the party of the first part; provided, however, that the party of the second part shall be permitted to strip in a continuous and orderly manner when same is practicable. * * * [Progress reports and maps required of Perini.] 5. [Perini agrees to indemnify Denise for claims against Denise based on Perini's negligence.] 6. [Perini agrees *25 to carry all insurance relating to its operations.] 7. The party of the second part hereby agrees to devote its best efforts to the stripping and excavation of as much coal as is reasonably practicable from the coal tracts aforementioned. The party of the second part hereby agrees to mine, remove and load onto railroad cars an average of at least 50,000 net tons of coal per month during the term of this agreement, beginning with the month of February, 1944; and it agrees to have upon the premises aforesaid, by February 1, 1944, sufficient equipment, such as stripping shovels, draglines, loading shovels, bulldozers, drilling machines, etc., to accomplish this result. The party of the first part agrees to provide coal lands sufficient to permit the party of the second part to strip and remove the said minimum of 50,000 net tons a month, and if the coal lands specifically hereinabove mentioned are not sufficient for this purpose, then the party of the first part shall furnish other lands that generally are comparable to the lands hereinabove mentioned, in Somerset County, from which coal may be stripped by the party of the second part; provided, however, that said lands shall compare *26 favorably as to nature and quantity of overburden, quality of coal, location of railroad loading facilities from the property, and so forth. If the party of the first part is unable to provide such other lands for stripping, then this contract may be cancelled by the party of the first part notifying the party of the second part of its inability to furnish such lands, and all of the rights of the parties hereunder shall terminate, save and except as to any payments which may be due the party of the second part by the party of the first part. The obligations of the party of the second part hereunder shall be suspended or reduced in proportion to any interruption or delay in the mining, removal or loading of coal contemplated hereby, caused by strikes, riots, fires, floods, acts of God, failure for any reason of the party of the first part to provide *534 railroad cars for the loading of coal, or any other cause beyond the control of the party of the second part. 8. The party of the first part shall remit to the party of the second part payment on the 10th day of each month for all coal mined and sold between the first and fifteenth day of the preceding month, and on the 25th day of each *27 month for all coal mined and sold between the fifteenth and thirtieth or thirty-first of said month. 9. This agreement shall be in full force and effect until April 1, 1945, and shall be renewed automatically from year to year thereafter, unless either the party of the first part, or the party of the second part shall, sixty (60) days prior to April 1, in any such year, give notice in writing to the other party of its intention not to renew the agreement. 10. [No assignment by Perini without consent of Denise.] 11. [Perini may sublet the trucking of coal from the pits to the cars.] 12. It is expressly understood and agreed that the party of the first part may cancel this agreement by giving ten days written notice to the party of the second part of such intention, in either of the following events: (a) After February 1, 1944, if the coal contemplated under this agreement, for any reason whatsoever, cannot be sold at a profit of 10% exclusive of unusual salaries and expenses. (b) If the party of the second part, during the period of three consecutive months beginning with February 1, 1944, shall fail to mine, remove and load upon railroad cars 125,000 net tons of coal in accordance with this *28 agreement, subject, however, to the provisions of the last sentence of Section 7 of this agreement. It is also expressly understood and agreed that the party of the second part may cancel this agreement if it cannot excavate, mine and remove merchantable and strippable coal that can be strip-mined and placed on railroad cars at a profit of 10% exclusive of unusual salaries and expenses. It is also understood and agreed that the party of the second part may cancel this agreement if the party of the first part shall default in the payment of any installment of compensation to the party of the second part, as provided in section 8 of this agreement, and said default shall continue for ten days after written notice thereof delivered to the party of the first part by the party of the second part. The exercise of said right of cancellation by the party of the second part shall be evidenced by a notice in writing delivered by the party of the second part to the party of the first part after the expiration of said ten days notice. 13. The party of the first part warrants the title to the lands and coal which may be designated to be stripped, as well as the right of ingress, egress and regress *29 over and through the said properties from the pit to the docks, and will save the party of the second part harmless from any damage that should accrue to them by reason of defective title in the party of the first part. The party of the first part does not, however, warrant the quantity, quality, or existence of coal in the lands involved, or the nature of the overburden. 14. The party of the first part agrees to order the railroad cars required for the coal to be strip-mined from the property aforesaid, and to do such clerical work as is necessary relative to the shipment of the coal. The contract with Perini was modified on May 1, 1944, so as to provide that (1) Perini would receive an additional 15 cents per ton (or a total of $ 2.05 per ton) because the price of coal was increased 30 cents per ton; (2) Perini would receive an additional 15 cents per ton (or a total of $ 2.20 per ton) in consideration of Perini's placing *535 and maintaining an "8-yard Page Dragline or other satisfactory high lift stripping equipment" on the property; and (3) Denise would install an additional sidetrack for loaded cars and pay for the rail, equipment, and labor, and Perini would rebuild the present temporary *30 dock and do all of the grading and filling. On September 12, 1944, Denise entered into a stripping contract with Sanders & Bills (a partnership) providing for the stripping of the Barrows property in Somerset County, Pennsylvania. The contract was substantially similar to the Perini contract set out in detail above except that (1) the coal was to be loaded on trucks at the operation (rather than loaded on railroad cars at the docks); (2) the price was to be $ 1.60 per ton; (3) Denise would maintain the loading docks, conveyors, or tipples; (4) Sanders & Bills agreed that the contract was not an exclusive contract for the mining of the coal on the subject property; (5) Sanders & Bills agreed to mine, remove, and load on trucks an average of at least 10,000 tons per month; and (6) Denise could cancel the contract in 10 days if Sanders & Bills did not mine at least 25,000 tons during any 3 consecutive months. On March 20, 1945, the contract with Sanders & Bills was modified so that it (Sanders & Bills) would receive an additional 15 cents per ton. On March 26, 1945, Denise entered into a stripping contract with Bozeman & Gray (a partnership) providing for the stripping of certain properties *31 in Somerset County, Pennsylvania. The contract was substantially similar to the Perini contract set out in detail above except that (1) Bozeman & Gray was required to deliver the coal to the docks; (2) the price was $ 2 per ton; [3] Both parties to this agreement are governed by market conditions, and this contract is subject to same. If the party of the first part fails to sell all the coal produced by the party of the second part, the party of the second part, may at its option, after twenty-four (24) hours written notice to the party of the first part, sell in its own name the coal at OPA ceiling prices or market prices agreed upon by both parties, and upon receipt of payment remit to the party of the first part the amount above the contract price, to wit Two Dollars ($ 2.00) per net ton, and any sales commission not to exceed twenty cents (20 cents) per net ton. (4) Bozeman & Gray agreed to mine and deliver at least 20,000 tons of coal per month; [5] The party of the first part shall remit to the party of the second part payment on the 10th day of each month for all coal mined and delivered to tipple between the first and fifteenth day of the preceding month, and on the 25th day *32 of each month for all coal mined and delivered to tipple between the 15th and 30th or 31st of said month. (6) Denise could cancel the contract in 10 days if Bozeman & Gray failed to deliver 50,000 tons during any 3 consecutive months; and *536 (7) Bozeman & Gray agreed that the contract was not an exclusive contract for the mining of coal on the subject properties. Denise voluntarily agreed, effective October 1, 1945, to increase Bozeman & Gray's compensation to $ 2.25 per ton for coal extracted from one of the seams because of unusual conditions encountered. On July 1, 1946, Denise and Bozeman & Gray entered into a contract superseding their prior contract. This contract was substantially similar to the prior contract except that (1) Bozeman & Gray was required to load the coal at the docks, (2) the price was to be $ 2.50 per ton, and (3) Bozeman & Gray agreed to man the tipple and supply the power to operate it. On November 15, 1946, the contract between Denise and Bozeman & Gray was modified as follows: (1) The price was reduced to $ 2.25 per ton, (2) Denise was to maintain the tipple, and (3) Bozeman & *33 Gray was to load the coal on trucks furnished by Denise rather than on railroad cars. On August 23, 1947, and again on October 29, 1947, the contract between Denise and Bozeman & Gray was again modified, regarding the price of the coal, to provide for certain losses claimed by Bozeman & Gray and to provide for certain price increases. On April 1, 1945, Denise entered into a stripping contract with Juliette Coal Co., hereinafter sometimes referred to as Juliette, providing for the stripping of some of the Denise properties. This contract was substantially similar to the Perini contract except that (1) coal was to be loaded on trucks at the operating pit and Denise was to furnish trucks for delivery to the tipple, (2) coal was to be weighed after cleaning at tipple, (3) Juliette was required to deliver 10,000 tons per month, and (4) Denise could cancel with 10 days' notice if Juliette failed to mine and deliver 25,000 tons in any 3 consecutive months. On August 1, 1946, Denise and Juliette entered into another stripping contract providing for the stripping of other Denise properties. This contract was substantially similar to the other contract between the parties except that (1) the *34 price was to be $ 2.50 per ton, (2) the coal was to be loaded on railroad cars at the tipple or dock, (3) a market price provision permitted Juliette to sell the coal under certain circumstances (similar to that contained in the Bozeman & Gray contract of March 26, 1945), (4) Juliette was to man the tipple and supply the power, (5) Denise agreed to reimburse Juliette for the cost of maintaining and erecting a 5-yard Page dragline, (6) Juliette agreed that the contract was not an exclusive contract for the mining of coal on the subject property, and (7) there was no 10-day cancellation provision. The August 1, 1946, contract between Denise and Juliette was modified on January 1, 1947, August 23, 1947, and October 1, 1947, mainly *537 to provide for price increases for Juliette so as to insure it (Juliette) an adequate gross profit. The October 1, 1947, modification was due to (1) greater overburden, (2) weather conditions, and (3) heavy investment of Juliette at the operation. Denise and the various strippers substantially conformed with the provisions of the various contracts. None of Denise's tax returns showed any opening or closing inventories of coal. Denise, or Juliette at the direction *35 of Denise, did the exploration work on Denise's properties. Denise furnished the bonds to the Commonwealth of Pennsylvania for the rehabilitation of stripped properties, see Issue 2, infra, paid the real estate taxes on the properties, and furnished guards and watchmen. The following schedule shows the amounts of Denise's "Plant & Equipment" and "Natural Resources" as per its books without reductions for accumulated depreciation or depletion at December 31 of the following years (cents omitted): Year Plant and Natural equipment resources [1944] $ 48,476 $ 169,032 [1945] 168,141 237,897 [1946] 249,501 248,054 [1947] $ 265,891 $ 274,254 [1948] 448,781 288,964 [1949] 408,392 283,584 Pursuant to the above-described contracts the stripping contractors mined the following quantities of coal, in tons (.00 omitted): Sanders Bozeman Period & Perini Juliette & Total Bills Gray [1944] 27,777 259,834 287,612 [1945] 61,972 28,916 22,069 76,247 189,205 1946 1 70,365 70,365 1946 2 15,764 151,494 167,259 [1947] 63,040 157,627 220,668 [1948] 180,123 180,123 The following schedule shows the proceeds from the sale of coal by Denise, the amounts paid as royalties to lessors pursuant to agreements, the amounts paid to the various contract *36 strippers pursuant to contract, and the amounts of sales of purchased coal: Proceeds from Royalties paid Amounts paid Sales of Period sale of coal lessors contract purchased coal strippers [1944] $ 996,722.94 $ 123,027.23 $ 620,889.20 [1945] 666,840.03 68,319.83 407,755.35 1946 1 270,471.20 24,335.17 181,086.18 1946 2 691,547.61 65,331.48 393,506.95 [1947] 1,367,715.79 57,104.10 585,257.14 $ 119,511.18 [1948] 1,378,845.98 37,773.36 774,529.80 267,994.07 *538 In computing its gross income from the property for the purpose of percentage depletion Denise deducted the amounts paid as royalties and the amounts of sales of purchased coal but did not deduct from its gross "proceeds from the sales of coal" the amounts paid to contract strippers. The respondent determined that the amounts paid to contract strippers should also be deducted from the gross receipts in computing the gross income from the property for the purpose of computing the percentage depletion, and he decreased petitioner's depletion allowance accordingly. The various contract strippers were economically interested in the production of the coal and looked to the severance and sale of the coal for their compensation. The various *37 contract strippers by virtue of the above-described contracts had an economic interest in the coal. Issue 2. Future Restoration Expenses. The Legislature of the Commonwealth of Pennsylvania during its regular session for the year 1945 promulgated an act known as the Bituminous Coal Open Pit Mining Conservation Act. It was an act -- Providing for the conservation and improvement of land affected in connection with the mining of bituminous coal by the open pit mining method; regulating such mining; and providing penalties. The Act provided, inter alia, for the registration of open-pit mining operations and that -- Within one year after the operation is completed, the operator shall place sufficient overburden in the open cut to cover the exposed face of the unmined coal, * * * and the peaks and ridges of spoilbanks shall be leveled and rounded off to such an extent as will permit the planting of trees, grasses or shrubs, and rejected coal and combustive material shall not be used on the high wall bank: * * * It also required the planting of trees, grasses, or shrubs. Operators were required to file bonds in the amount of $ 200 per acre based on the number of acres of coal which the operator *38 estimated would be stripped during the year immediately thereafter to insure faithful compliance with the requirements of the Act. Denise was subject to the provisions of the Act. During the taxable years 1945 through 1948, Denise did not (a) complete any backfilling, restoration, or other rehabilitation work on any of the tracts upon which mining operations were conducted, or (b) enter into any contracts for the performance of any backfilling, restoration, or rehabilitation work. On some of the tracts that Denise had strip mined, other parties were deep mining. Under agreement with those doing the deep mining, Denise did not backfill these properties. *539 Some properties which had been stripped in 1944 were stripped deeper in the subsequent years involved. During the years involved Denise did not have sufficient equipment available to do the backfilling. The State authorities and Denise have worked together regarding the backfilling problem, and strict compliance with the provisions regarding time for backfilling has not been required. During the periods involved the restoration requirement was never immediate. Denise did not forfeit any bonds by its failure to restore any property *39 during the years involved. During the years involved Denise estimated the future anticipated cost of backfilling and restoring the properties which had been strip mined. Its own employees, including its engineers, and the employees of some of the stripping contractors participated in making the estimates. Denise also made inquiries of various third parties regarding the cost of backfilling, some of whom were in the business of backfilling and others who had had backfilling performed on their own properties. In arriving at the estimated cost Denise considered the amount and type or character of overburden (average in feet) that would have to be replaced in the pits; the height or thickness of the coal seam (inches); the width of the different pits involved; the character of water and drainage problems; the type of equipment that had been used in the stripping operations; the distance between the pits to be backfilled and the points where the spoil banks had been piled; the various angles (varying from 90 degrees to 45 degrees) at which the strippers had cut; and, particularly, the physical composition of the overburden, whether composed of big boulders, shale, or dirt. Denise also *40 considered the bids submitted by contractors. Denise estimated that it would recover 4,000 tons of coal per acre. It also estimated for the years 1945 and 1946 that backfilling would cost $ 300 per acre. It converted the per-acre cost into a per-ton cost of 7 1/2 cents ($ 300 per acre/4,000 tons per acre). For 1947, it used per-ton cost greatly in excess of the previous per-ton cost. 3 One of the reasons for the 1947 rate increase was the fact that greater amounts of overburden were uncovered in some areas. In 1948, a per-ton cost of 15 cents was used. Also in 1948, the 1946 (June 1 to December 31, 1946) cost of 7 1/2 cents was revised upward to about 15 cents and the 1947 cost was revised downward to 15 cents. The following schedule shows the tonnage, acres stripped, and amounts presently claimed as proper, accrued expenses for rehabilitation of stripped properties: *540 Period Acres Coal extracted Amount stripped (tons) [1945] 28.83 115,389.65 $ 8,654.22 Jan. 1 to May 31, 1946 18.03 72,116.40 5,408.73 June 1 to Dec. 31, 1946 41.80 167,177.86 1*41 23,565.44 [1947] 54.56 218,303.38 2 32,793.57 [1948] 45.05 180,254.40 3 27,040.68 Denise reflected the above estimates on its books by charging an expense account, sometimes called "Provision for rehabilitation of land destroyed through stripping," and crediting an account shown as a liability, sometimes called "Reserve for property destroyed by stripping operations." The amounts charged to the former account were taken as deductions, viz, ordinary and necessary business expenses, on its returns for the respective years. Other parties engaged in backfilling as required by the Pennsylvania law found that the cost of backfilling varied greatly with each job. In the years 1950 to 1956, Denise backfilled and restored some of the properties which had been stripped in the years 1945 to 1949. The following schedule shows the tracts rehabilitated, the acres filled, and the amounts expended as per Denise's books. Also shown is the *42 average cost per acre (amount/acres): Property Acres Amount Average cost backfilled per acre Gladen Walker 9.48 $ 690.42 $ 73 Josiah Weigle (Burke) 3.15 3,492.69 1,109 James R. Will 29.78 16,659.25 [560] Robert Weaver 7.48 11,704.06 1,565 H. Knepper 13.35 2,830.32 [212] Charles E. Walker 34.81 11,413.26 [328] The respondent, in his notice of deficiency, disallowed all of the amounts claimed in the years 1945 to 1948, inclusive, for backfilling and restoration expenses and explained the disallowance as follows: (a) The deduction of [amount] claimed for "Provision for rehabilitation of land destroyed through stripping" is disallowed in its entirety because no such amount or any part thereof was "paid or accrued" or "paid or incurred" in the taxable year. No expense for restoration work was paid or incurred during the years involved. The amounts that would be expended for backfilling and restoration in future years were not known during the years involved. The amounts claimed by petitioner as backfilling and restoration expenses *541 did not accurately reflect the future anticipated costs to be incurred. The amounts claimed by petitioner as accruals for backfilling and restoration expenses were not ordinary and necessary expenses *43 paid or incurred during the taxable years in carrying on its business. Issue 3. Destruction of Surface Lands. During the course of its strip-mining operations Denise acquired surface lands overlying the mineral deposits which it owned, leased, or had the right to mine. The surface lands were acquired so that Denise would be able to extract the underlying coal by strip mining. After the coal had been strip mined there would be a pit where the overburden had been removed. The overburden which had been removed was placed upon the surrounding surface which had not been excavated. It would usually take about 1 1/2 acres of surface to hold the overburden removed from each acre. Roads were built over some area of the land so that the coal that was removed could be transported to the tipple. Heavy equipment had been walked across the surface. In most instances any buildings on the land when the land was acquired were destroyed. Water facilities on the properties were also destroyed as a result of the operations. After the coal was removed the acres actually stripped were worthless for the purpose for which Denise had acquired them. During the years involved, Denise estimated the percentage *44 of each tract of land which it considered destroyed during each year as a result of stripping operations. Its own employees, including its engineers, the employees of some of the stripping contractors, and other persons who were involved in the purchase and sale of coal lands participated in making the estimates. In making the estimates Denise considered the loss of roads, ditches, drains, and water facilities resulting from the stripping operations, the overflow of the spoil from the strip pits, the loss of water, the acid conditions resulting from the existence of the spoil banks, and the existence of buildings or other structures before and after the stripping. The coal remaining, if any, was also considered. The estimate of the portions of land destroyed did not coincide with the number of acres stripped. For example, 5 acres of a 100-acre tract might have been stripped, yet Denise might have estimated that 50 acres were destroyed. Denise applied the percentage of destruction arrived at to the original cost of each tract of land and arrived at an amount destroyed during each year. The following schedule shows the surface lands acquired, the acreage in each tract, the amounts estimated *45 as destroyed, and the assessed value of each tract: *542 Amount of destruction claimed Original Property Acres cost [1945] Jan. 1 to May 31, 1946 Bisic [17] $ 857 $ 856 Hiest [70] 5,050 2,499 $ 1,287 Jones [750] Pile [196] 10,500 8,625 [825] $ 1,049 Reiman [124] 2 4,275 5,040 2 561 Shaulis [130] 9,570 Walker, A. F. [234] 11,230 6,750 1,111 [506] Walker, L. A. [199] Walker, C. E. [249] 23,042 Wills, M. R. [6] 1,100 [274] Wills, R. H. [16] 2,600 1,950 [649] Long [167] 10,250 Burke [87] 7,300 Svonevec [183] 22,000 Pletcher [118] 12,000 Will, J. R. [114] 20,250 8,100 1,000 Burgess [2] 1,200 Sipe [9] 1,820 Datko [12] 2,325 Hunter Sch [175] Woy [9] 1,000 Weaver [20] 5,000 Walker, L. W. [160] Martin 3 [130] Meyers 3 [9] 3,050 2,287 [457] Pugh 3 [160] Miller 3 [7] 1,400 1,050 [210] Walker, G. D. 3 [250] Wilmore 3 [500] Pitts. Con. 4*47 1,128 93,037 Stutzman 4 [145] 25,000 Leadbetter 4 [560] 5,000 Micholotti 4 [850] Foy 4 [200] Total per returns 5 30,937 13,205 6 3,216 Amount of destruction claimed Assessed Property value 1*46 June 1 to [1948] Total Dec. 31, 1948 Dec. 31, 1946 Bisic $ 856 $ 200 Hiest $ 169 3,956 1,600 Jones [300] Pile 10,499 3,140 Reiman 2 5,601 2,000 Shaulis $ 5,742 [367] 6,109 [950] Walker, A. F. $ 2,021 10,388 3,677 Walker, L. A. [40] Walker, C. E. 11,521 [88] 11,609 3,520 Wills, M. R. 1,099 Wills, R. H. 2,599 [800] Long [512] 2,600 Burke 1,825 1,825 [600] Svonevec [965] 1,845 5,000 Pletcher [873] 2,600 Will, J. R. 4,456 5,062 18,618 3,400 Burgess [50] Sipe 1,819 1,819 [300] Datko 1,051 1,051 [50] Hunter Sch [50] Woy [220] Weaver Walker, L. W. Martin 3 [785] Meyers 3 2,745 Pugh 3 [362] Miller 3 1,260 Walker, G. D. 3 Wilmore 3 Pitts. Con. 4 32,563 5,582 38,145 Stutzman 4 5,500 2,750 8,250 Leadbetter 4 Micholotti 4 [212] Foy 4 [80] Total per returns 5 8,296 63,721 6 12,383 131,560 *543 The number of acres actually stripped out of the total acreage of each tract during the years involved constituted a small percentage of the total acreage of each tract. The ratio that the number of acres actually stripped bore to the total number of acres in each tract was not in proportion to the ratio that the portion of cost claimed as a deduction bore to the total cost of each tract. The latter ratio was greater than the former. The acres actually stripped were totally destroyed for all practical purposes. The portions *48 of each tract of land that were stripped and the portions which were unstripped formed irregular patterns. Denise has continued to pay real estate taxes on the above-listed properties. Denise was under an obligation to rehabilitate the above-listed properties in the future (those stripped subsequent to June 1, 1945), see Issue 2, supra. More rehabilitation than that required by the State might be necessary to make the stripped properties fit for agricultural purposes. After stripped properties are rehabilitated, crops can be grown there in 4 to 8 years. Trees planted on stripped properties are usually not valuable until a substantial number of years afterward. The following surface lands claimed as destroyed in whole or in part during the taxable years 1944 to 1948 were later sold by Denise: Date Acreage Amount Property September 1956 [70] $ 1,400 Reuben Heist. December 1956 [124] 1,200 Paul R. Reiman. September 1950 193.70 4,000 Allen F. Walker. October 1955 [114] 3,000 James R. Wills. September 1956 [1] Robert B. and Edith Weaver. April 1956 [196] 1,500 Lester Pile. The respondent disallowed the entire amounts claimed as deductions for property destroyed through stripping operations, explaining *49 such disallowances as follows: (b) The deduction of [amount stated] claimed for "Property destroyed by stripping operations" is disallowed in its entirety as this property (surface land) was not destroyed nor was it sold or otherwise disposed of in the taxable year. Issue 4. Depreciation. On September 21, 1948, Denise purchased a new model 7200 Marion dragline shovel at a cost of $ 166,304.30. The dragline was used in stripping operations in Somerset County. The maximum overburden uncovered by the dragline was about 75 feet and the average amount was 40 to 50 feet. The dragline was operated 24 hours a day (three 8-hour shifts), 12 months a year from the time when it was purchased *544 through 1952. In 1952 or 1953, it was sold. The party who owned it in 1956 and early 1957 made extensive repairs on it in those years. On its corporate return for the taxable years 1948 and 1949, Denise deducted the amounts of $ 2,771.82 and $ 19,748.55, respectively, as depreciation on said machine, based upon an estimate that the useful life of the machine was 8 years. In his notice of deficiency the Commissioner disallowed the deductions so claimed for depreciation to the extent of $ 462.04 and $ 5,889.86, *50 respectively, based upon his determination that the useful life of the machine was 12 years. The estimated useful life of the model 7200 Marion dragline shovel used in the coal-stripping operation in the manner used by Denise was 8 years from the time of purchase. Issue 5. Advertising Expense. Early in 1948, the advertising agency which was handling the advertising for the official program of the Democratic National Convention of 1948 contacted Denise about the possibility of subscribing to advertising space in the program. Denise's sales department which was interested in securing export business thought that an advertisement in the program might get Denise's name before persons who handled export business. The sales department recommended that an advertisement be taken and Margiotti approved the recommendation. During 1948, Denise paid $ 7,500 to William Teefy, treasurer of the Democratic National Convention program. The payment was made for the outside back-cover space of the official program of the Democratic National Convention held in Philadelphia, Pennsylvania, in July 1948. The inside back-cover space contained an advertisement in color of Old Grand-Dad bourbon whiskey with *51 a picture of "Old Grand-Dad" himself, which it described as "Head of the Bourbon Family," National Distillers Products Corporation, New York, New York. The outside back-cover space which was taken by petitioner was about 9 1/2 by 12 1/2 inches. The space contained printed words and pictures in color arranged in an artistic manner. At the top of the page was printed "Principles of American Progress." The pictures of four former Presidents of the United States, Thomas Jefferson, Andrew Jackson, Woodrow Wilson, and Franklin D. Roosevelt, were printed in color. A quotation from each of these former Presidents took up a great portion of the body. Below the quotations and pictures was printed, "Today these still are the Democratic Party's principles and its destiny." Near the bottom of the page was "Denise Coal Company [in bold letters] Chas. Margiotti, President, Pittsburgh, Pennsylvania." Margiotti, the president of Denise, who, along with his daughter, owned all of the stock of Denise, was active in Pennsylvania politics *545 and had served as attorney general of Pennsylvania under three different governors (both Republican and Democratic). During the taxable years 1944 to 1955, inclusive, *52 Denise claimed advertising expenses on its returns filed for those years as follows: Year Amount [1944] $ 5.00 [1945] 25.00 [1946] 1,160.00 [1947] 1,369.28 [1948] 8,767.00 [1953] $ 235 [1] Included in the advertising expense claimed for 1948 is the above-mentioned $ 7,500 payment. The respondent disallowed the $ 7,500 payment in 1948, explaining the adjustment as follows: (d) The deduction of $ 7,500.00 claimed by you as advertising expense is disallowed in its entirety as said item represents a political contribution and as such is not deductible nor is it an ordinary and necessary business expense. The item consists of the amount of $ 7,500.00 paid to William Teefy, Treasurer of the 1948 Democratic National Convention. The $ 7,500 paid by Denise for the back-page space of the 1948 Democratic National Convention program was an ordinary and necessary expense paid or incurred in carrying on petitioner's business. Issue 6. Unconstitutional Taxes. During the year 1948, Denise accrued as township coal taxes the amount of $ 7,599.80. Of this amount, $ 2,611.21 was paid in 1948 and the balance in 1949 to the school districts of Somerset Township and Stoney Creek *53 Township, Pennsylvania. Denise deducted the amount of $ 7,599.80 on its 1948 return as taxes (accrued or paid). The Act under which those taxes had been assessed was declared unconstitutional in 1949 in the case of Jamison Coal & Coke Co. v. School Dist. of Unity Tp., 362 Pa. 389, 66 A. 2d 759 (1949). In his notice of deficiency the Commissioner disallowed the claimed deduction in its entirety. He explained the disallowance as follows: "The deduction of $ 7,599.80 claimed by you as township coal taxes is disallowed in its entirety as these taxes were found unconstitutional in 1949." Denise was not a party to the above-mentioned suit and did not contest its liability for the above-mentioned taxes. The taxes accrued in 1948. OPINION. The issues involved herein will be discussed in the same order as the findings of fact relating to them. *546 Issue 1. Economic Interest. Denise owned or leased certain coal lands. It entered into contracts with various stripping contractors to mine the coal. It sold the coal which was mined by the strippers and, for the purpose of computing its percentage depletion deduction under sections 23 (m) and 114, I. R. C. 1939, 4 it treated the gross proceeds from *54 the sale of coal, less the amount that it paid as royalties to lessors, as its gross income from the property. The respondent determined that it must also deduct the amounts paid to the contract strippers in computing its gross income from the property. Whether the amounts paid to the contract strippers must be deducted in computing Denise's gross income from the property depends upon whether the contract strippers had an "economic interest" in the property. The determination of this question is dependent upon the facts and, in particular, upon the contract and arrangements between the parties. The various contracts between Denise and the stripping contractors were substantially similar. They provided that the strippers would strip the overburden and remove, prepare, clean, remove the bone, and load the coal so that it would be marketable. Denise had the right to inspect and reject any coal at the pit. Some of the contracts required the strippers to haul the coal in the strippers' trucks from the pit to the tipple and to load it on the railroad cars; other contracts required the coal to be hauled in the *55 strippers' trucks to the tipple, while one contract required only that the coal be loaded on Denise's trucks at the pit. All coal leaving the pit was required to be paid for. Denise was to pay a certain price per ton but all the contracts provided that if the selling price of the coal was increased both Denise and the stripper would share in the increase. If the selling price decreased, the price to be paid the stripper was to be mutually agreed upon. Some of the contracts provided that if Denise failed to sell all of the coal produced by the stripper, the stripper could sell the coal and remit to Denise any amount in excess of the contract price. Some of the contracts provided for payment by Denise on certain dates for all coal mined and sold during prior periods, while others provided for payment for all coal mined and delivered during certain prior periods. None of the contracts gave the stripper the exclusive right to mine the subject property. Denise was to designate the areas to be stripped but the strippers were permitted to strip in an orderly and continuous manner. The stripper was to remove and deliver at least the designated quantity per month and Denise agreed that *56 if the *547 properties it designated were not sufficient to produce that quantity it would provide other similar properties. Denise built the tipple and main roads, explored the properties, guarded the properties, paid the real estate taxes, and provided the bonds for the rehabilitation of the properties. The strippers used their own machinery for stripping and built roads for access to the pits and other facilities necessary for conducting their operations. Under some of the contracts the strippers manned and supplied the power for the tipple. The contracts were automatically renewable on a yearly basis unless either party desired to terminate. Denise could cancel on 10 days' notice if it could not sell the coal at a 10 per cent profit or if the stripper failed to remove the quantity of coal called for. The stripper could cancel if it could not realize a 10 per cent profit or because of Denise's default in payment. We agree with respondent that the contracts gave the strippers an economic interest. The inescapable conclusion gleaned from a reading of the contracts is that the parties were engaged in a type of joint venture. The stripper's compensation was fixed but he was to share *57 in any fluctuation in the market price. See Virginia B. Coal Co., 25 T. C. 899 (1956). Each party had an investment in equipment and each party built or maintained a part of the necessary facilities. Although there was no express provision giving the stripper the exclusive right to mine any tract until exhaustion, neither party could cancel the contract without cause. However, a cancelable cause was the failure of either party to earn a profit of 10 per cent. These factors, we think, are clear indications that both Denise and the strippers were interested in the production of coal and that both looked to the severance and sale of the coal for their compensation. Cf. Virginia B. Coal Co., supra. Petitioner insists that the phrase in the contracts "all coal leaving the pit must be paid for" renders the strippers mere hirelings who looked only to Denise for their compensation. We disagree. That phrase, in context, apparently relates to the inspection and rejection of coal at the pits. Denise had the right to inspect and reject coal at the pits but not thereafter. Once it left the pits Denise had to pay for it. But both parties contemplated the sale of all coal mined. The fact *58 that Denise showed no coal inventory on any of its returns indicates that all coal mined was sold. The view is reinforced by the fact that some of the contracts provided only for payment by Denise for all coal mined and sold. Since the various strippers had an economic interest it follows that the amounts paid by Denise to the strippers must be deducted from its gross proceeds from the sale of coal in determining its gross *548 income from the property for purposes of computing percentage depletion. The respondent's determination regarding this issue is upheld. Issue 2. Future Restoration Expenses. Denise was required (as of June 1, 1945) by Pennsylvania law to restore stripped properties (i. e., backfill and plant trees, shrubs, and grass) within 1 year after the strip-mining operation was completed. Denise did not, during any of the taxable years involved, complete any, nor enter into any contract for the performance of, restoration work on any of the stripped properties. During each of the years, however, it estimated the future cost of restoring the properties stripped during the year. On its books it made entries charging an expense account, sometimes called "Provision for rehabilitation *59 of land destroyed through stripping," and crediting an account shown as a liability, sometimes called "Reserve for property destroyed by stripping operations." The amounts charged to the former account were taken as deductions, viz, ordinary and necessary business expenses, on its returns for the respective years. Respondent disallowed these amounts in their entirety determining that no such amounts were "paid or accrued" or "paid or incurred" during the years in which the deductions were claimed. We agree with the respondent. Section 23 (a) (1) (A) allows a deduction for ordinary and necessary business expenses "paid or incurred during the taxable year." Since Denise is an accrual basis taxpayer, the relevant question is whether the claimed expenses were incurred during the taxable year. Secs. 43 and 48 (c). During the years in question no restoration work was actually performed; if there had been, the cost of such work could be treated as an expense incurred regardless of whether the payment for that work was actually due during the year. Cf. United States v. Anderson, 269 U.S. 422, 440-441 (1926). Also, no amount was owed to any third party for restoration work that had been, *60 or was to be, performed; if there was, this amount, under certain circumstances, might be treated as an expense incurred. Cf. Brown v. Helvering, 291 U.S. 193, 200 (1934). Here, nothing occurred which gave rise to an expense incurred. It is true that petitioner had an obligation to obey the Pennsylvania law; but the obligation did not give rise to an expense incurred, because the obligation was in futuro. The record shows that during the years involved compliance with the restoration provisions of the law was never immediately required. In fact, no restoration work was done until 1950, and it appears that Denise did not violate the law or forfeit its bonds by not commencing the restoration sooner. *549 It may well be prudent to create a book reserve for contingent liabilities or future expenses. See Lucas v. American Code Co., 280 U.S. 445, 452 (1930). And correct corporate accounting may permit the concomitant charge to be made against income, rather than earned surplus, so as to match income against expenses considered necessary to earn it. "But the form * * * reflected by correct corporate accounting opens questions as to the proper application of a taxing statute; it does not *61 close them." Bazley v. Commissioner, 331 U.S. 737, 741 (1947). The petitioner relies heavily on Harrold v. Commissioner, (C. A. 4, 1951) 192 F. 2d 1002, where items similar to those here involved were allowed as a deduction on the ground that the amount was susceptible of estimate with reasonable accuracy. The rationale of the Harrold case, supra, conflicts with our view of the relevant statutory provisions. However, even under that view the amounts in question here could not be allowed as deductions because there has been no showing to our satisfaction that the amounts estimated were reasonably accurate. Patsch v. Commissioner, (C. A. 3, 1953) 208 F. 2d 532; Commissioner v. Gregory Run Coal Co., (C. A. 4, 1954) 212 F. 2d 52, 57-58. Denise computed the amounts at certain rates per ton of coal mined, viz, 7 1/2 cents for 1945 and 1946, 37 cents for 1947, 5 and 15 cents for 1948. Also in 1948 it recomputed the period from June 1 to December 31, 1946, and the year 1947 at 15 cents per ton. The rates were computed by dividing the average yield per acre (estimated at 4,000 tons) into the average cost per acre. Denise's witnesses testified as to the factors considered in arriving at *62 the average cost per acre but there is nothing in the record showing the weight given to each factor and whether the average cost which was used was a weighted average of the separate costs of each acre to be restored. The latter appears especially significant in view of the evidence showing that cost of restoring each acre or tract varied greatly. Also significant is the fact that the actual cost in 1950 to 1956 (see findings of fact, supra) for backfilling the properties strip mined during the periods in question varied substantially from the amounts estimated. Ralph L. Patsch, 19 T. C. 189, 198 (1952). We, accordingly, uphold the respondent's determination regarding this issue. Issue 3. Destruction of Surface Lands. Denise acquired various tracts of surface lands overlying the coal deposits which it owned or had the right to mine. When the tracts were acquired it treated them as capital assets and the cost of the *550 tracts was capitalized. During the years involved Denise conducted strip-mining operations on those tracts and as a result the stripped areas were destroyed. Each year it estimated the portion of each tract destroyed through stripping (which portion *63 did not coincide with the area actually stripped) and deducted a pro rata part of the cost of the land on its returns. The respondent has disallowed the entire amounts claimed. The petitioner contends that it is entitled to the claimed deductions under section 23 (a) (1) (A) as an ordinary and necessary business expense or under section 23 (e) or (f) as a loss and relies heavily on the case of Manchester Coal Co., 24 B. T. A. 577 (1931). In Manchester Coal Co. the fact situation was almost identical. The taxpayer was engaged in strip-mining operations. It acquired the mineral rights from one party and, in order to mine the coal, it acquired from numerous unrelated grantors the surface rights overlying the coal. The portions of the surface which were strip mined were completely destroyed. The question involved in that case was whether the taxpayer was entitled to a deduction by way of depletion on account of the exhaustion of its investment in the surface lands destroyed by the strip-mining operations. There, as here, the Commissioner argued that no identifiable event had occurred which gave rise to a deductible loss, relying on Mrs. J. C. Pugh, Sr., Executrix, 17 B. T. A. 429, *64 affd. (C. A. 5, 1931) 49 F. 2d 76. However, we held (24 B. T. A. at 582): where the land itself is destroyed or the coal is mined, we think that the cost of the land should be added to the cost of the coal in determining the depletion allowable. As each ton is mined a proportionate part of the cost of the land should be attributed to it. We know the number of acres and their cost and the estimated number of tons. The total cost of the land divided by the number of tons of coal would give a fair and reasonable basis for depletion for each ton mined. [Emphasis added.] The Commissioner published a nonacquiescence in that decision. See XI-1 C. B. 10 (1932). However, it appears that his regulations are, and have been, in accord with Manchester Coal Co., supra.Section 29.23 (m)-2, Regs. 111, provides that the basis of the property for depletion purposes (other than discovery or percentage depletion) is as provided in section 113, except that -- In determining the amount of the basis as adjusted applicable to the mineral deposit there shall be excluded (a) amounts representing the cost or value of the land for purposes other than mineral production, * * * The apparent import of such *65 provision is that the basis of property for depletion purposes should be allocated between the surface rights and the mineral rights, see Potts Run Coal Co., 19 B. T. A. 1, 5 (1930), except when the surface rights are used for purposes of mineral production. *551 For example, in deep-mining operations or oil drilling the surface remains substantially untouched and it is not subject to depletion, but in strip-mining operations where, as here, the surface is removed and destroyed in order to remove the minerals, the entire basis (the portion applicable to both mineral and surface) is subject to depletion. We think the holding in Manchester Coal Co., supra, is in point and we follow it here. The petitioner's argument that it is entitled to a deduction as a business expense or as a loss cannot be sustained. The Manchester Coal Co. case is not authority for that argument. It is authority for the proposition that the cost of the land is deductible as it is used up in mining operations; it is included in the depletion allowance provided for in section 23 (m). Being deductible under that section it is not deductible under section 23 (a) (1) (A) or 23 (e) or (f). The sections are mutually *66 exclusive. Compare Spring City Foundry Co. v. Commissioner, 292 U.S. 182, 189 (1934). A contrary holding would allow a double deduction; such a result is not sanctioned by the purpose or intent of the various sections involved. As stated previously, the issue was argued by the parties on the theory of whether or not the cost of the land constituted either a business expense or a loss, rather than on the theory under which we have decided the issue. Our holding under this issue will naturally affect the computation of the depletion allowance. It must be pointed out though that Denise is not entitled to cost depletion for the cost of the surface lands in addition to the percentage depletion already taken for the coal underlying these surface lands. Cf. L. S. Munger, 14 T. C. 1236, 1240 (1950). What it must do is add the cost of the land to the cost of the coal and divide the number of tons into the total cost. See Regs. 111, sec. 29.23 (m)-2. By cost of the land we mean the cost of the land overlying coal recoverable by the strip-mining method. If, for example, a 100-acre tract contains only 40 acres which has been and will be stripped, only 40 per cent of the cost of the 100-acre *67 surface can be recovered by way of depletion. That portion of the cost will be recovered as the surface is removed and actually destroyed in the process of extracting the coal. All of the relevant amounts needed for that computation are not in the record but presumably they have been ascertained and are available to both parties. The computation, therefore, can be made under Rule 50. The amount so determined shall be used as the allowance under section 23 (m) unless it is less than the amount computed under section 114 (b) (4), which provides for percentage depletion. If cost depletion is less than percentage depletion then, of course, petitioner is entitled to use percentage depletion. *552 Issue 4. Depreciation. The petitioner acquired a Marion dragline shovel in 1948 at a cost of $ 166,304.30. On its 1948 and 1949 returns it deducted depreciation based on an estimated useful life of 8 years. The respondent partially disallowed the claimed depreciation, determining that the estimated useful life of the dragline was 12 years. Thus, the only question is the estimated useful life of the property. This determination is essentially factual in nature. The dragline in question was operated *68 on a 24-hour-a-day basis in a strip-mining operation. The average overburden that it was uncovering was about 50 feet; however, in some instances it uncovered up to about 75 feet. It was used in this manner from the time of purchase until 1952, when it was sold. Parties familiar with the machine and the circumstances under which it was used considered 8 years to be the maximum useful life. Considering the use to which the dragline was put we are satisfied the useful life did not exceed 8 years. Respondent offered no evidence to rebut the testimony of the expert witnesses produced by petitioner. He contends, however, that the dragline in question was still being used in 1957. The record shows that substantial repairs were being made on the dragline in 1957 but its use, if any, subsequent to its sale in 1952 does not appear in the record. We think Denise has borne its burden of proof and uphold it on this issue. Issue 5. Advertising Expense. In 1948, Denise paid $ 7,500 for the back-page space of the official program of the 1948 Democratic National Convention held in Philadelphia and deducted that amount on its 1948 return as an ordinary and necessary business expense. The respondent *69 disallowed the claimed deduction on the ground that it represented a political contribution. The respondent has expressly recognized that an expenditure for the purchase of advertising space in a political convention program can represent an ordinary and necessary business expense, see Rev. Rul. 56-343, 1956-2 C. B. 115, and no contrary contention is made here. The respondent does contend, however, that the expenditure represents a political contribution mainly because Margiotti, the president and 50 per cent shareholder of Denise, was a political figure of prominence in Pennsylvania and because the matter printed on the space purchased extolled the Democratic Party rather than Denise's products. On the facts in the record we disagree with respondent's determination as to this item and think that the record fairly supports a *553 finding that the expenditure in question represents an ordinary and necessary business expense incurred in Denise's business. The facts show that the sales department of Denise was approached by the advertising agency which was handling advertising for the program and that the sales department recommended that the expenditure be made. This recommendation by the *70 sales department was approved by Margiotti. The fact that the space was not used to extol the virtues of Denise's product does not require a holding that the expenditure represented a political contribution rather than a bona fide advertisement representing an ordinary and necessary business expense. It has long been recognized that advertisements do not have to directly praise the taxpayer's product in order to be considered ordinary and necessary business expense. See e. g., B. F. Boyer Co., 4 B. T. A. 180 (1926); Sanitary Farms Dairy, Inc., 25 T. C. 463 (1955); I. T. 3564, 1942-2 C. B. 87. Advertising of that type tends to create goodwill and to place the name of the advertiser before the audience of the medium used. And, as stated previously, the respondent has recognized that the political convention programs do have an audience to which it is permissible (for tax purposes) to place the taxpayer's name before, and to appeal to. From the record we are satisfied that the purpose in making the expenditure was to publicize and create goodwill for Denise. Denise's name clearly appears on the page, the page itself is printed in very attractive color form, and readers of the program *71 undoubtedly knew who sponsored the page in question. The fact that Denise's advertising expenses in other years were much less than in 1948 does not render the expense nondeductible. Also, the fact that advertising in a different medium or in a different manner might have achieved more desirable results does not require us to substitute our judgment for that of the taxpayer. A copy of the front page and the back page of the program has been introduced in evidence. The front page is a handsome picture of the American eagle and Independence Hall in Philadelphia, with no advertising on the page. The inside back-cover page of the program is a full-page advertisement in color of Old Grand-Dad bourbon whiskey with a picture of "Old Grand-Dad" himself, which is denominated "Head of the Bourbon Family." We, of course, do not have before us the question of whether the amount which National Distillers Products Corporation paid for its full-page advertisement in color of Old Grand-Dad bourbon is deductible as a business expense. Nor do we know whether the head of National Distillers Products Corporation was a member of the Democratic Party, as was Charles Margiotti, the president of petitioner. *72 We do not think that makes any difference in determining whether the item in question is deductible *554 as an ordinary and necessary business expense. The main question is, was the advertisement a legitimate advertising expenditure, and we think that question must be answered in the affirmative as we have already stated. Another phase of the question, we think, merits some discussion in view of respondent's brief and that is that there would be no reason to deny the deduction merely because it would be difficult for petitioner to show that immediate increases in coal sales resulted from the advertisement. The Tax Court would have a very difficult task in cases involving advertising expenses if it had to go into the question of how soon immediate increases in sales resulted from a particular advertisement. It is doubtless true that the makers of Old Grand-Dad bourbon whiskey might naturally expect quicker results from their page advertisement, especially among the delegates to the Democratic National Convention, than petitioner could expect from its advertisement of the more prosaic commodity of bituminous coal. But again we say we think these things make no difference. The main thing *73 is, was the advertisement a legitimate expenditure for advertising petitioner's product, and we hold that it was. On this issue petitioner is sustained. Issue 6. Unconstitutional Taxes. Denise, an accrual basis taxpayer, accrued and deducted on its 1948 return township coal taxes in the amount of $ 7,599.80. As to this fact there seems to be no dispute. Of this amount, $ 2,611.21 was actually paid to the taxing authorities in 1948 and the balance was paid in 1949. In April 1949, the Act under which the taxes were imposed was found unconstitutional by the Supreme Court of Pennsylvania in a suit brought by someone other than petitioner. The respondent disallowed the claimed deduction in its entirety on the ground that "these taxes were found unconstitutional in 1949." No question is raised but that the normal accrual date for the taxes in controversy was during 1948. And the facts here present do not justify a postponement of that normal accrual date. Denise was not a party to the suit in which the taxing Act was declared unconstitutional. Denise actually paid the taxes in 1948 and 1949. This fact prohibits a finding that unpaid, contested taxes are involved. Cf. Security Flour Mills Co. v. Commissioner, 321 U.S. 281 (1944). *74 The fact that some other taxpayer is contesting the constitutionality of the tax does not affect its accrual. If at a later date the tax is held to be unconstitutional, the original deduction will be allowed to stand and the refund of the tax, if there is ever any, will be taxed in the year when received. See Mim. 6444, 1949-2 C. B. 11. Even if petitioner had been contesting the constitutionality of the tax in 1948, which it was not, it would have been entitled to deduct the *555 $ 2,611.21 which it actually paid in that year. See Western Cartridge Co., 11 T. C. 246 (1948). We hold for the petitioner on Issue 6. Decisions will be entered under Rule 50. Footnotes 1. The following proceedings are consolidated herewith: Estate of Charles J. Margiotti, Deceased, Denise Z. Margiotti, Executrix, Docket No. 56763; Juliette C. Suto (formerly Juliette C. Margiotti), Docket No. 56764.↩ 1. June 1 to December 31, first taxable period of corporation.↩ 2. Strip mining (sometimes called open-pit mining) is a process of mining whereby the strata or material which overlies or is above the coal deposit or seam in its natural condition is removed so that the coal can be mined with shovels and drills.↩ 1. January 1 to May 31.↩ 2. June 1 to December 31.↩ 1. January 1 to May 31.↩ 2. June 1 to December 31.↩ 3. There is testimony to the effect that the per-ton cost used for 1947 was 25 cents. However, the record shows the 1947 tonnage to be 218,303.38 and the amount originally claimed as a deduction to be $ 80,305.74. The per-ton rate would therefore be about 37 cents.↩ 1. $ 12,538.44 claimed on 1946 return and disallowed by respondent. 2. $ 80,305.74 claimed on 1947 return and disallowed by respondent.↩ 3. On 1948 return there was a credit to expense of $ 36,305.07 which represents the difference between the amounts deducted originally for 1946 and 1947 (notes 1 and 2, supra↩) and the amounts shown above for 1946 and 1947. 2. The stipulation shows the cost of the Reiman tract to be $ 4,275. Other exhibits show the cost to be $ 7,000. Apparently the $ 7,000 figure was used to compute the destruction claimed. The discrepancy is unexplained.↩ 3. The stipulation states that Denise leased, rather than purchased, the surface rights to the properties denoted by the number 3, and that the items denoted by the number 4 represent the purchase of coal in place, rather than the purchase of surface rights. Counsel for Denise, at the hearing and on brief, stated that these properties are not in dispute. However, Denise claimed portions of the cost, as shown above, as deductions and respondent disallowed those amounts in their entirety. Denise's position regarding these properties is not clear; we, therefore, treat them similar to the properties where the surface was purchased.↩ 4. The stipulation states that Denise leased, rather than purchased, the surface rights to the properties denoted by the number 3, and that the items denoted by the number 4 represent the purchase of coal in place, rather than the purchase of surface rights. Counsel for Denise, at the hearing and on brief, stated that these properties are not in dispute. However, Denise claimed portions of the cost, as shown above, as deductions and respondent disallowed those amounts in their entirety. Denise's position regarding these properties is not clear; we, therefore, treat them similar to the properties where the surface was purchased. 5. These amounts were claimed as deductions on Denise's returns and disallowed in their entirety by the respondent.↩ 6. The amounts purportedly comprising this total are $ 100 less than the total. The discrepancy is unexplained.↩ 1. The list of assessed values submitted by respondent was only partial. No inference is drawn as to the assessed values of the properties not contained on the list. 1. No consideration.↩ 1. None.↩ 4. All section references are to the Internal Revenue Code of 1939, as amended.↩ 5. See footnote 3, supra↩.