Irwin v. Commissioner

ROYAL W. IRWIN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Irwin v. Commissioner Docket No. 79044. United States Board of Tax Appeals 37 B.T.A. 51; 1938 BTA LEXIS 1094; January 11, 1938, Promulgated *1094 The petitioner was regularly engaged in the mining business in 1931 and he was entitled to carry over a net loss from that year to offset income of 1932. Peter L. Wentz, Esq., for the petitioner. Elmer L. Corbin, Esq., for the respondent. MURDOCK *52 The Commissioner determined a deficiency of $3,201.61 in the petitioner's income tax for 1932. The only adjustment made was the disallowance of $32,379.32 as a net loss carried over from 1931. The only error assigned is the disallowance of that item. FINDINGS OF FACT. The petitioner is an individual, who filed his income tax return for 1932 with the collector of internal revenue for the first district of Illinois. He is a lawyer, practicing his profession in Chicago. He had an ambition to own a mine, had investigated a number of mining properties over a period of years, and had invested in three. His interest in these had ceased long prior to 1931. He entered into an agreement in 1922 with N. B. Holter, who owned mineral-bearing lands in Montana. This agreement was followed by four others between the same parties relating to the same or some of the same properties. The differences*1095 in these agreements are not now material. The last of the series was dated November 15, 1926. It gave the petitioner an option to purchase the property for $125,000 and the right to mine and remove ore upon payment of royalties to Holter. All royalties paid were to be applied as payments on the option price, but were to be retained as rent in case of termination for failure of the petitioner to comply with the agreement. He was required to do at least a designated amount of work each month. There were at least two openings on the property, and through these openings a considerable quantity of ore was blocked off at the time the petitioner took possession in 1922. The mine had been operated many years previously and there were about 40,000 tons of tailings on the property. The petitioner planned to block out additional ore deposits and thereafter to rebuild an old mill which was on the property and to develop a separating process, so that he could market his product on a sound financial and commercial basis. During the first several years of his proprietorship additional tunnels and driftings were made, a new deposit was opened, and water power was developed. He rebuilt the*1096 mill in 1926 and equipped it with second-hand machinery. From 1926 to 1931 some additional digging was done on the property and a great deal of effort was expended in an attempt to discover a satisfactory separating process for the rather complicated ore found on the property. The petitioner during 1930 failed to comply with the provision of the agreement which required him to do a certain amount of work on the property in each month. The owner in December 1930 gave notice to the petitioner under which the lease was terminated in the early part of 1931. The petitioner thereupon lost all of the interest *53 which he formerly had in the property. During the period from 1922 until the termination of the agreement the petitioner was regularly and continuously engaged in the business of mining the ore from this property. He made frequent visits to the property and regularly communicated with his mining engineer, who resided at the property and was in charge of the work there. The petitioner expended $65,217.80 during the period from 1922 until the termination of the lease in attempting to develop the property for commercial mining purposes. The money was expended for salaries, *1097 wages, mining supplies, and mining equipment. The mill was completed in 1926, but a satisfactory method for separating the ore was never developed. The petitioner never completely developed the property for commercial mining purposes. A small amount of ore was removed from the property and sold for experimental purposes in an effort to determine whether or not it would smelt properly and in an effort to develop a satisfactory process for separating the various minerals in the ore. The total amount received from sales was $4,136.15. Part of this was paid to Holter as royalties and the petitioner retained $3,667.46 as the entire proceeds which he received from the property. Although the petitioner never succeeded in producing ore from the property on a commercial basis, he continued his efforts to do so until the termination of the lease. He never claimed and he was not allowed any deduction from income in connection with his development work on this property for years prior to 1931. He deducted $6 ,570.44 as a loss on his income tax return for 1931. The Commissioner allowed the loss for 1931. Thirty-two thousand three hundred and seventy-nine dollars and thirty-two cents*1098 of the loss was not needed to offset income of 1931 and was claimed on his return for 1932 as a net loss of 1931, completely offsetting all net income for 1932. The Commissioner disallowed the claimed net loss as a deduction from income for 1932. OPINION. MURDOCK: The figures involved are not disputed. The Commissioner suggests that the loss may not have been from a business regularly carried on by the petitioner. Sec. 117(a)(1), Revenue Act of 1932. The evidence shows, however, that the petitioner was regularly engaged in the mining business in connection with this particular property during all of the period from 1922 until the termination of the agreement in 1931. He gave the work a part of his personal attention, made frequent visits to the property, received regular reports from his mining engineer, wrote frequently to the latter instructing him in the conduct of the work, and was personally responsible for all decisions. He was also engaged in other business and *54 he failed to develop this property commercially, but those facts did not prevent him from being regularly engaged in this mining business. *1099 ; affd., ; certiorari denied, ; ; affd., ; ; . Since the expenditures were all made in an effort to develop the property, they were not deductible in years prior to 1931. Art. 235, Regulations 77. Cf. . The net receipts were from sales made from ore produced for experimental purposes. No deduction for depreciation or depletion was ever claimed or allowed. None was allowable to the petitioner. The capital net loss section has no application, since the expenditures did not result in the acquisition by the petitioner of any capital asset and since his loss did not result from a sale or exchange. Sec. 101 (c)(2) and (8); ; affd., ; ; affd., *1100 . Decision will be entered for the petitioner.