Grand River Gravel Co. v. Commissioner

GRAND RIVER GRAVEL COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Grand River Gravel Co. v. Commissioner Docket No. 23085. United States Board of Tax Appeals 22 B.T.A. 1124; 1931 BTA LEXIS 2015; April 8, 1931, Promulgated *2015 1. Depreciation of petitioner's plant and operating equipment should be computed on a unit-of-production basis. 2. Depletion of a gravel deposit based on discovery value is disallowed. Parker Gravel Co.,21 B.T.A. 51, followed. E. M. Connor, Esq., for the petitioner. P. M. Clark, Esq., for the respondent. LANSDON *1124 The respondent has asserted a deficiency in income tax for 1923, in the amount of $1,332.58. Two issues are presented for determination: (1) Whether the petitioner is entitled to use discovery value as a basis for computing depletion deductions; and (2) the proper allowance for depreciation of petitioner's plant and operating equipment. At the hearing the respondent moved to increase the deficiency and disallow any deduction on account of depletion. FINDINGS OF FACT. The petitioner is an Oklahoma corporation with its principal office at Muskogee. Throughout the taxable year it operated a drag line gravel plant located on Grand River near Fort Gibson, Okla. In the early part of 1922, the petitioner acquired a ten-year lease with an option to renew for ten years, covering a narrow strip of land*2016 1,000 feet long situated between Grand River and a branch line of the St. Louis & San Francisco Railway. The lease granted the right to mine and market any adjacent gravel and to construct upon the premises all necessary machinery and equipment for taking gravel from the river bed. The lessor was to receive a royalty of 2 cents per ton on all gravel recovered. By August 1, 1922, the petitioner had constructed a semipermanent plant which included a wooden mast, wooden bins, screens, a hoist, and boiler, all of which were set on concrete foundations. Gravel was taken from the river bed by means of a drag bucket running on a cable which extended across the river. After the gravel was washed and screened, it was loaded into railroad cars and delivered for transportation to the nearby railroad over a spur track constructed by the petitioner. Operations were begun in August, 1922, but due to difficulty in getting the plant to working, only a small quantity of gravel was removed prior to January 1, 1923. The parties have stipulated that the cost of petitioner's depreciable property, as of January 1, 1923, was $27,457.77, and that additions were made during the year of $2,062.42. *2017 *1125 The estimated reserve of gravel, as of January 1, 1923, was 463,536 tons. During the taxable year the petitioner recovered 73,491 tons of gravel. Certain items of petitioner's plant, such as the Sauerman outfit, the boiler, rails, and cars, were moveable. Such property had a salvage value of $2,500. The remaining items of the plant had a useful life coextensive with the life of the gravel deposit. OPINION. LANSDON: The petitioner claims an additional allowance for depletion based on a discovery value of $49,326.60. We have heretofore decided, in , that a gravel pit or deposit is not a "mine" within the meaning of that word as used in section 204(c)(1) of the Revenue Act of 1926, and may not be the subject matter of a deduction for depletion based on discovery value. Upon authority of our decision in that proceeding the deduction claimed must be disallowed. Furthermore, the petitioner has failed to establish either that it discovered the gravel deposit or the value at date of discovery or within 30 days thereafter, which facts are essential to an allowance for depletion based on discovery value. *2018 , and . The evidence does not establish that the petitioner acquired its lease on the gravel deposit without cost, an issue raised affirmatively by the respondent at the close of the hearing. His motion to increase the deficiency by disallowing any deduction for depletion will, therefore, be denied. In its income tax return for the taxable year petitioner deducted the amount of $5,819.33 for depreciation of its plant and equipment which figure is based on a useful life of five years. Upon audit of such return the respondent determined that the property had a useful life of fifteen years and recomputed the deduction on that basis. In view of our findings above that the life of petitioner's plant and operating equipment was practically coextensive with the life of the gravel deposit, we are of the opinion that deduction for depreciation should be computed on a unit-of-production basis as follows: Divide original cost of $27,457.77, plus cost of additions in the amount of $2,062.42, averaged for six months, less salvage value of $2,500, by the estimated reserve of 463,536 tons*2019 and multiply by the 73,491 tons of gravel recovered during the taxable year. Cf. ; ; affd., ; certiorari denied, . Decision will be entered under Rule 50.