other than those open for the purpose of development, or when the principal activity of the mine becomes the production of developed ore rather than the development of additional ores for mining." These rules were not stimulating to mining. Development and exploration expenditures incurred prior to production could not be deducted from income from other properties and these capitalized expenditures were classified as "capital recoverable through depletion." By classifying exploration and development expenses as depletable rather than depreciable items, or deferred charges, the allowances for percentage depletion were substantially diminished. In most cases depletion allowable on cost, even with the addition of capitalized items, is still less than that allowable by percentage of income. Arguments can be presented against this classification of development and related expenditures. The word "deplete" as used in income-tax law connotes the exhaustion of a wasting natural resource through exploitation, not the loss of the useful value of capital invested in haulageways, adits, shafts, and drifts. These are similar to transportation facilities and should be depreciable, not depletable assets. The validity of regulations classifying development expenditures for oil and gas wells has been challenged before the Supreme Court. Taxpayers claimed that holes in the ground used to conduct oil to the surface are like a pipeline and as such are "depreciable," not "depletable" assets. The Supreme Court did not rule on this question; they sustained the regulations under a rule of statutory construction that any reenactment of a statute without change constitutes tacit congressional sanction of all existing regulations of the prior statute. NEW INCENTIVES In 1951 Congress provided new incentives for mining by amending the Internal Revenue Code to improve deductions for development and exploration expenditures. The first change allows deduction of development expenditures, and the second change allows deduction of exploration expenditures up to $75,000. Under both provisions the taxpayer can elect to treat the expenditures as deferred charges deductible on a ratable basis. The option to deduct expenditures currently or to defer the expenditures, and the right to keep the deferred charges out of the "depletable" category are important improvements. However, it should be borne in mind that the new laws apply only to expenditures incurred after January 1, 1951, and do nothing to change the rule for recovering adjusted bases for depletion or deferred charges for prior expenditures. LOSS OF CAPITALIZED EXPENDITURES In the past the Bureau ruled that abandonment or sale of the property upon which the work had been performed was prerequisite to deduction of capitalized exploration or development costs. The Bureau assumed that capitalized exploration and development were additional costs of mineral rights; that they were not separate assets. As they became embedded in the cost of mineral rights losses could not be taken even when facts indicated exploration and development knowledge to be worthless. The deduction must be deferred until the mineral rights are abandoned or sold. There is some authority for the statement that the Bureau has modified this rule so that deductions can be taken from income of the year in which the taxpayer can prove the knowledge acquired from the exploratory work became worthless, even if title to the mineral rights is retained. IMPROVED RULINGS The Bureau of Internal Revenue minimized benefits flowing to taxpayers from percentage depletion by various rulings. Three of these regulations should be mentioned as having been corrected. Congress improved the definition of gross income, used in determining percentage depletion allowances, by including specific processes as part of mining. The original formula allocating aggregate costs and profits between mining and metallurgical or other processes eliminated from mining profits substantial amounts emanating from fortuitous discoveries. The regulations requiring allocation on the basis of relative costs have now been amended to permit taxpayers to use more reasonable methods. Earlier regulations excluded mine to plant transportation costs and profits from determination of gross income. Congress has since provided that transportation up to 50 miles, or longer hauls where shown necessary, must now be included in determination of gross income from property. EXCESS OUTPUT AND EXCESS-PROFITS TAX To provide critical and strategic minerals for World War II producers were urged to accelerate production rates. Compliance would cost the producers excess-profits taxes which would not accrue if the deposits were mined at normal rates. To provide relief net income above that which would have been realized at normal output was exempted from excess-profits tax, the proportion freed varying inversely with mine reserves. For example a taxpayer with unlimited reserves would suffer no hardship from any acceleration of output. Not withstanding this concept, the law allowed a deduction of 50 percent of the net income from excess output in the case of coal and iron mines. The excess profits act of 1950 extended these World War II provisions, and the 50-percent rule, which had applied only to coal and iron, was extended to cover metal mines. Under the excess-profits-tax laws of World War II, coal and iron mines which had no base period experience, because the mines were new or reactivated, were entitled to deduct one-sixth of total net income in determining excess-profits tax. In the act of 1950 this exemption was increased from one-sixth to one-third and the metal mines were given the same coverage. REDEMPTION OF CAPITAL Mining stockholders are denied the right to redeem their investment from dividends as the mines are being depleted. Under the law all corporate distributions are ordinary taxable income so long as the corporations earnings and profits exceed the amount distributed. As a consequence stockholders generally receive no redemption of the cost of their shares until the mineral deposits of the company are depleted and assets are being liquidated. Thus the shareholders are forced to take long-term capital losses subject to severe restrictions. As a general rule, such long-term losses give little if any tax benefit to the shareholders. SUGGESTED IMPROVEMENTS Suggestions for improvement represent unfinished tasks. In addition to these tasks there is the incessant job of maintaining the improvements in tax structure which contribute to a more healthful atmosphere for the mining industry. A proposal for specific agenda follows: 1. Strive to maintain depletion allowances based upon income percentge. In specific cases where the situation is still unfair, strive to procure more equitable rates. This involves the instruction of law makers and the public about facts which justify the allowances the capital gain point-the facts about the creation of new national wealth and income through discoveries-that the number of discoveries varies with the amount of exploratory work-that percentage depletion allowances tend to increase exploration activities. 2. (a) The removal of the $75,000 limitations on annual exploration deductions and the 4-year limitation. (b) The procurement from the Bureau of fair and equitable regulations and rulings pertaining to the new exploration and development provisions. (c) The adoption of regulations or statutes which will convert the adjusted basis as of January 1, 1951, of capitalized exploration and development costs into deferred charges extinguishable at rates commensurate with exhaustion of mineral deposits served. 3. Procure clearer and more dignified rulings which will permit, without any question, deductions for loss of useful value of capitalized exploratory and development expenditures from income of the years when these capital items lose their utility. 4. Procure amendments, having retroactive application, which will allow deduction for carryforward and carryback operating losses without reductiion for the excess of percentage depletion over cost depletion of the years to which the deductions are carried. 5. (a) Strive to maintain the improvements and rulings related to the determination of gross income from the property-the inclusion of the several processes the allocation formula-the transportation inclusion. (b) Strive for amendments of all percentage depletion rulings which appear unfair. 6. (a) Strive to retain the law relating to exempt income for excess output. (b) Strive for clarifying and simplifying amendments to the complex, confusing, regulations, 7. Procure satisfactory rulings pertaining to allowances of exemptions for bonus and subsidy payments, particularly as to amounts received under procurement contracts and irrdeemable loans. 8. Procure laws which will permit mining stockholders to amortize their investments out of corporate distributions while the minerals are being exploited. OPINIONS OF EXPERTS Executives of 21 of the large metal mining companies gave the author their opinions on certain specific points pertaining to the subject matter of this paper. The results of this poll are: Question. Should appreciation realized from conversion of mineral deposits into money through ordinary mining operations be taxed at capital gain rates? Answer. Thirteen-yes, on a technical and equitable basis, but not on a practical basis. They believed that the point should be used to justify and defend the merits of percentage depletion allowances. Six-yes, without qualification. Two-no, "percentage depletion is adequate.” Question. As a general rule, do percentage depletion allowances fully compensate for taxing such realized appreciation as ordinary income subject to the normal tax, the surtax, and the excess profits tax, instead of at long-term capital gain rates? Question. As discoveries of unknown natural deposits create new sources of taxation, and as the allowances of depletion based upon a percentage of income create incentives and provide cash reserves for exploration, is it your opinion that the allowances of percentage depletion as deductions from gross income have, over the years, resulted in a net diminution or a net increase in the flow of revenue into the United States Treasury? Answer. Nineteen-“believed there had been a net increase in the revenue to the United States." Two-"there had been a net decrease." Question. Have the numerous attacks, starting in 1935 by the Administration, on the percentage depletion provisions deterred exploration activities? Answer. Fifteen-yes. Three-no. Three "no comment." Question. Has the new tax legislation in the Revenue Act of 1951, pertaining to the treatment of exploratory and development expenditures, stimulated and accelerated explorations? Answer. Twenty-yes. One "it is too early to forecast." Question. Has this new legislation had any impact upon the policies of your companies which govern appropriations for explorations and/or developments? Answer. Sixteen-yes. One-no. One "it is too early to make a statement." Three "no comment." Question. Would you regard favorably and sponsor efforts by a committee representing taxpayers (possibly the tax committee of American Mining Congress) to procure, through every available legal procedure, regulations which would construe doubtful questions in the new legislation fairly and reasonably? (In this connection, bear in mind the statement of President Truman in his address to Congress on the State of the Union on January 9, 1952, in which he stated that: "We are going to encourage exploration for new mineral deposits.") Answer. Twenty-yes, fourteen specifically commending the tax committee of American Mining Congress. One-"no comment." 34376-53-14 IDAHO MARYLAND MINES CORP., To: Select Committee on Small Business of the House of Representatives of the 83d Congress of the United States of America. From: Sigfried Bechhold, Idaho Maryland Mines Corp. At the hearings before the sub-committee (Congressmen Riehlman, McCulloch, and Hosmer) in San Francisco on April 25, 1953, in the course of the presentation of a paper entitled "A Proposal for Relief of the Domestic Gold Miner," by Granville S. Borden, Congressman Hosmer asked Mr. Borden a question which in effect solicited information on the benefits accruing to America from any increase in the production of gold from the mines within the boundaries of the United States or its territories. Mr. Borden requested permission to file a supplementary statement on this matter and has requested the undersigned to submit to the committee this supplemental statement relevant to the question. On this authority the following is respectfully submitted for your consideration: Throughout the West, ages ago, the Almighty God built stronger vaults in His granite banks than we have in Fort Knox. He filled His vaults with gold, silver, copper, and many other metallic elements. He has broadcast to certain prospectors knowledge which has guided them to the doors of some of these vaults which He has constructed. Acting on the basis of the information received from these broadcasts, from station GOD, some prospectors with drills, dynamite, and mucking tools, have broken the combination of these locks and entered into these hordes of gold. This activity is not a crime but a virtue which inures to the benefit of every citizen in the United States. But for Him, the promissory notes of this country would be like the currency of 1857. But for Him this Government of ours would be bankrupt. These mineral deposits are analogous to a crop which is already ripe and ready to be harvested. Every ounce of gold which is discovered processed, and produced constitutes a permanent contribution to the wealth of our Nation. It forms a basis for credit upon which the country can import wealth far in excess of the gold reserves. It augments the faith of our citizens in the stability and integrity of our Government. It dilutes the apprehension that our printing presses will manufacture worthless currencies. Wealth gathered from the mines immortalized King Solomon. Mining has contributed most substantially to the production of an America which is the richest Nation in the world. Show me a country without mines and I will show you a poverty-stricken community of indefensible individuals. Without mining, we would not have a frying pan, a spoon, a safety pin, an automobile, a tank, an airplane, a gun, or a monetary circulation medium. If you devastate this activity you will set civilization back to the Dark Ages. Notwithstanding this fact, gold mining in America is rapidly being devastated because of an unrealistic, unsound, uneconomic price of gold established and maintained for 20 years from 1933 to date. On information and belief the present administration intends to remove this hazard of chaos and the mining industry, I am sure, has confidence in their present leadership to cure this disability which may lead to our demise. The future prosperity of our country depends on our ability to maintain a healthful economic climate at our mines. Every discovery of a new mineral deposit contributes to the forces fighting aggression, inflation, and depression. It adds new sources of revenue from taxation, gainful employment and prosperous trade. Idaho Maryland Mines Corp. in 1952 produced $1,394,314.77 in gold bullion, but to remove this gold from mother earth it cost the stockholders $1,633,279.93 so that they sustained a net loss of $238,965.16. The payroll for the year approximated $1 million. The power bill for the year was $130,000. Without this operation the community of Grass Valley would become a ghosttown. There are 2,500 stockholders living in all parts of the United States. Because of infiation and other restraints upon the operation of the mine no dividends have been paid for 12 years. Gold production has been reduced by 70 percent since 1940. In the past the mine has yielded nearly $80 million in gold. There is in reserve many millions of dollars of ore-if ore is defined as a commercialbearing rock containing gold which can be mined and processed at a profit. The company is prohibited from selling its products on the open market to industrial users in the arts and sciences notwithstanding the fact that the purchases from the United States Treasury at $35 an ounce of gold by these industrial users exceeds the domestic production of gold in the United States. Obviously, the law which restrains the producers from selling at a price which the gold could command tends to impoverish this industry, close down its operating properties, make ghosttowns out of thriving communities, restrict the explorations for new deposits and retard the wheels of this indispensable industry. A PROPOSAL FOR RELIEF OF THE DOMESTIC GOLD MINER The gold miners have been practically put out of business by the current national policy with regard to gold. With ownership of gold virtually forbidden except in very limited forms, and with producers required to sell their gold to the Treasury at $35 per ounce a price unchanged for the past 19 years—and with cost of labor and supplies in depreciated paper dollars steadily mounting, profits from most small gold mines have been completely wiped out. The few mines which are operating are sustaining heavy operating losses and depleting their mines of gold-bearing rock which in normal times would be commercial ore. Ultimate correction of the situation will require restoration of the gold standard with a dollar convertible into gold at a price that per se will be neither deflationary or inflationary. What price should be selected may be highly controversial as far as the experts are concerned; but the depreciation of the dollar since 1934 is painfully obvious. If referred to gold as the stable base during this period the dollar is clearly worth less-or putting it the other way the price of gold that would reflect its buying power in the free market has risen to some level higher than $35 per ounce. In the meantime the situation of the gold miners is becoming more and more painful. The gold producers have pleaded with Congress upon many occasions to cure this inequity by raising the statutory price of gold or by creating a free market for gold. Every attempt to procure relief through these means has gone down to defeat— why? Obviously a change in the statutory price of gold generates clashes of interest in broad problems in the fields of international finance, international exchanges and currencies, international monetary agreements, tariffs, etc. The gold miners have been told that the cure proposed for their troubles involves too much trouble in world affairs. "You gold miners, although we are sympathetic, are talking in terms of a percentage of a production of $50 million annually. A change in the price of gold would involve billions. To cure a slight injury to the body of our national economy we cannot risk a permanent disability to the whole body. Of course this argument is not founded on sound premises from the gold miner's viewpoint because he believes the remedy which would cure him would not be detrimental but very beneficial to all Americans. But this is where the problems is stalemated—and in the meantime our gold miners are out of business-their mines are being flooded and the timbers rotting, and the walls in underground excavations are caving. To give some measure of relief without modifying present monetary policies at the moment and without providing an unfair or special subsidy to the industry, we urge: (1) That the present restrictions on ownership of gold by American citizens be removed; and (2) That the Treasury cease selling gold to the arts, industries, and professions at $35 per ounce but otherwise leave unchanged its policies with regard to gold. This action would effectively terminate the extremely unfair situation whereby the industrial users of gold are actually subsidized by the Treasury at the expense of the gold mines. Under the proper arrangements, industrial users would buy their gold on the free open market at whatever price was determined by the available supply and demand. It is noteworthy that the consumption of gold in the United States for so-called industrial needs since the war has exceeded the total output of its domestic mines by $205 million. |