Montreal Mining Co. v. Commissioner

THE MONTREAL MINING COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Montreal Mining Co. v. Commissioner Docket No. 93428. United States Board of Tax Appeals 41 B.T.A. 399; 1940 BTA LEXIS 1188; February 16, 1940, Promulgated *1188 In computing petitioner's net income for percentage depletion, under the provisions of section 114(b)(4) of the Revenue Act of 1934, amounts paid in settlement of silicosis claims must be deducted from its gross income. Helvering v. Wilshire Oil Co.,308 U.S. 90. R. H. Weir, for the petitioner. Thomas F. Callaghan, Esq., and R. W. Patterson,Esq., for the respondent. VAN FOSSAN *399 This proceeding was brought for the redetermination of a deficiency in income tax for the fiscal year ended November 30, 1935, in the amount of $9,990.82. The sole issue is the propriety of deducting payments of silicosis claims from gross income in computing the petitioner's depletion allowance under the provisions of section 114(b)(4) of the Revenue Act of 1934. Of three other issues originally presented by the pleadings, two were settled by the parties by stipulation and the other was conceded by petitioner upon brief. Recognition will be given to these adjustments on recomputation. The facts were stipulated and we adopt the stipulation as out findings of fact in this proceeding. FINDINGS OF FACT. The facts material to the*1189 issue are substantially as follows: The petitioner is a Wisconsin corporation having its principal office at Montreal, Wisconsin, and an accounting office in the Hanna Building, Cleveland, Ohio. It is engaged in the business of mining, shipping, and selling iron ores from its mines in Iron County, Wisconsin. During the fiscal year ended November 30, 1935, the petitioner made expenditures aggregating $115,954.94 in connection with the settlement of occupational disease claims for silicosis, filed against the petitioner. All of these claims (except two filed in January 1935, aggregating $4,500) were filed before the year 1935, under the Workmen's Compensation Act and amendments thereto of the State of Wisconsin, by men who were employees of petitioner prior to but not during the fiscal year 1935 and who had contracted silicosis prior to the fiscal year 1935. None of the men who filed such claims rendered any services during 1935 for the petitioner in connection with the production *400 of any iron ore on which the allowance for percentage depletion is computed. In its income tax return for the fiscal year 1935, the petitioner deducted from gross income in computing*1190 taxable net income the above mentioned $115,954.94 as an expense and that amount was allowed by the respondent. The petitioner kept its books and filed its income tax returns on the accrual basis. OPINION. VAN FOSSAN: In the single issue before us the petitioner contends that the respondent erred in deducting from its gross income from the property amounts expended in the payment of silicosis claims, in order to arrive at net income therefor in computing percentage depletion under the provisions of section 114(b)(4) of the Revenue Act of 1934, 1 maintaining that such expenditures were in no way connected with the product of the property on which depletion was computed. It argues that operating expenses and any other deductions which must be deducted in arriving at net income, as contemplated by section 114(b)(4) and article 23(m)-1(h) of Regulations 86, 2 must be attributable to the mineral property on which the depletion is claimed (as required by the regulations) and must be related to the taxable year at issue. *1191 The petitioner's position here is similar to that of the respondent in . In that case the taxpayer, *401 consistent with a previously made election, took as deductions in the taxable year development expenses which were incurred in prior years. Such expenses had no direct relation to the production of oil from the taxpayer's property during the taxable years. So here, the settlement of silicosis claims was, under the requirements of the Wisconsin Workmen's Compensation Act, a normal incident in the operation of petitioner's iron mines. While the contraction of the disease had no direct relation to the current year's output, the disease itself directly grew from and had an immediate relation to the petitioner's mining operations. The payment of silicosis claims must be placed in the same category as the development expenses which the Supreme Court held in the Wilshire Oil Co. case are required to be deducted from gross income in computing net income for depletion purposes. In line with and upon the authority of the decision in the Wilshire Oil Co. case, we sustain the respondent's action. The respondent*1192 points out that in its income tax returns for the year in question the petitioner claimed the benefit of the deduction of the amounts it paid in settlement of the silicosis claims and that such deduction was allowed in computing taxable net income. The petitioner argues, however, that although the deduction was proper for the year in which the claims were finally adjusted and paid, such payment was not an "operating expense" of that year, and that only operating expenses are deductible in computing net income as a depletion basis under the statute. This argument is answered by the decision in the Wilshire Oil Co. case. There development cost was certainly not an "operating expense" of the current year, yet it was recognized as deductible in computing net income for depletion purposes. Decision will be entered under Rule 50. Footnotes 1. SEC. 114. BASIS FOR DEPRECIATION AND DEPLETION. * * * (b) BASIS FOR DEPLETION. - * * * (4) PERCENTAGE DEPLETION FOR COAL AND METAL MINES AND SULPHUR. - The allowance for depletion under section 23(m) shall be, in the case of coal mines, 5 per centum, in the case of metal mines, 15 per centum, and, in the case of sulphur mines or deposits, 23 per centum, of the gross income from the property during the taxable year, excluding from such gross income an amount equal to any rents or royalties paid or incurred by the taxpayer in respect of the property. Such allowance shall not exceed 50 per centum of the net income of the taxpayer (computed without allowance for depletion) from the property. * * * ↩ 2. ART. 23(m)-1. - Depletion of mines, oil and gas wells, other natural deposits, and timber; depreciation of improvements - * * * When used in these articles (23(m)-1 to 23(m)-28) covering depletion and depreciation - * * * (h) "Net income of the taxpayer (computed without allowance for depletion) from the property," as used in section 114(b)(2), (3), and (4) and articles 23(m)-1 to 23(m)-28, inclusive, means the "gross income from the property" as defined in paragraph (g) less the allowable deductions attributable to the mineral property upon which the depletion is claimed and the allowable deductions attributable to the processes listed in paragraph (g)↩ in so far as they relate to the product of such property, including overhead and operating expenses, develpment costs properly charged to expense, depreciation, taxes, losses sustained, etc., but excluding any allowance for depletion. Deductions not directly attributable to particular properties or processes shall be fairly allocated. * * *