1928 BTA LEXIS 3788">*3788 Held, on the evidence, that the petitioners are not entitled to a depletion deduction based on the discovery value of a gravel deposit.
11 B.T.A. 489">*490 The above entitled proceedings, consolidated for hearing and decision, involve deficiencies in income taxes as follows:
| Docket No. | Year | Deficiency | |
| M. W. Brellahan | 14579 | 1921 | $4,238.65 |
| M. W. Brellahan | 14580 | 1920 | 1,354.18 |
| Helen Perkins | 15500 | 1921 | 1,556.48 |
| P. M. Perkins | 15501 | 1921 | 1,556.48 |
Each petitioner contends that the respondent erred in his determination by not allowing a proper deduction for depletion on the discovery value of a gravel mine or pit operated by and claimed to have been discovered by the Pelican Gravel Co., a partnership composed of P. M. Perkins and M. W. Brellahan, in the net income of which Helen Perkins, the wife of P. M. Perkins, had a community interest in her husband's distributable portion thereof. Brellahan further contends that the respondent erred in not allowing him, as a deduction for 1921, an amount paid by him to certain employees1928 BTA LEXIS 3788">*3789 as wages.
Counsel for the respondent conceded at the hearing that Brellahan was entitled to a deduction for 1921 in the amount of $1,872.93 for wages paid as claimed in the proceeding under Docket No. 14579.
FINDINGS OF FACT.
The petitioners are residents of Louisiana. Perkins was formerly an owner of one-half of the stock of the Cady Gravel Co., a corporation, which was engaged in the business of mining and selling gravel. The Cady Gravel Co. was the successor to the Alexandria Gravel Co., a Louisiana corporation.
On December 15, 1914, Frank S. Norfleet leased to the Alexandria Gravel Co. the following described lands in the Parish of Rapides, La., for the purpose of mining gravel and sand:
Township One (1) North, Range One (1) West.
Section 8: South Half of Northeast Quarter.
Southeast Quarter and
East Half of Southwest Quarter.
Southwest Quarter of Section Six.
Section 9: East Half, Southwest Quarter.
South half of Northwest Quarter.
The lease was for a period of 5 years from December 15, 1914, provided for the payment by the lessee to the lessor of $2 per car for merchantable pit run gravel, and contained the following stipulation:
It is1928 BTA LEXIS 3788">*3790 further agreed and understood that the Alexandria Gravel Company shall excavate for gravel in regular and uninterrupted order according to the 11 B.T.A. 489">*491 lay of the land, always considering that in the event the gravel or pocket of gravel is exhausted the said Gravel Company can remove its steam shovel to better advantage for the mining of gravel.
The other provisions of the lease are not pertinent to the issue here involved.
The Alexandria Gravel Co., and later the Cady Gravel Co., its successor, operated upon the aforesaid premises under said lease.
On May 31, 1919, the Cady Gravel Co., Inc., as lessee, and Frank S. Norfleet as lessor, entered into a lease agreement with respect to the same property for the purpose of mining gravel and sand for a period of 5 years commencing December 16, 1919. The lessee under the terms of the agreement was to pay the lessor $3 per car for all merchantable pit run gravel removed; $1.25 per car for all sand taken from said land; $3 per thousand board measure for all pine timber removed. The lease contained substantially the same provisions as the lease to the Alexandria Gravel Co., including the provision above quoted.
Perkins was general1928 BTA LEXIS 3788">*3791 manager of the Cady Gravel Co., Inc. He went with that company in 1917, while it was operating under the lease dated December 15, 1914. He had been in the business of operating gravel pits since 1915. During the time he was general manager of the Cady Gravel Co., Inc., that company made test borings on several hills located on the land included in the lease and excavated gravel from several hills.
In 1919 the Cady Gravel Co. was excavating gravel from a hill, designated as hill A for purposes of convenience and reference in this proceeding, and continued to operate on that hill up to the time that company was dissolved in December, 1919. In June or July, 1919, Brellahan approached Perkins with respect to forming a partnership for the purpose of excavating gravel on the property described. In the fall of 1919, Cady, who owned one-half of the stock of the Cady Gravel Co., decided to sell his stock. After some negotiations, Brellahan purchased it, the transaction being completed on December 19, 1919. Thereafter the stock of the Cady Gravel Co. was owned by Brellahan and Perkins in equal proportions.
Between July and December, 1919, Brellahan and Perkins had discussed the1928 BTA LEXIS 3788">*3792 prospect of excavating gravel on a hill located on the leased premises and designated in this proceeding, for the purposes of convenience and reference, as hill B. Hill B was about 250 yards and across a ravine from hill A.
In the latter part of 1919 it became evident that the gravel in hill A would soon become exhausted and borings had been made on other parts of the leased premises for the purpose of locating other gravel in order to continue operations. Operations were begun on hill B in April, 1920, and gravel was thereafter excavated from that hill. Prior to April, 1920, some test holes had been put down on this hill 11 B.T.A. 489">*492 and indications were from the "blossom" that there was a good gravel deposit there. Prior to beginning operations on hill B, the petitioners purchased a locomotive and about a month later purchased a second locomotive and about a mile of steel for extension to the railroad, the two locomotives having cost $25,000, including freight, and the steel rail having cost $4,400, plus freight. The amount of the freight was not definitely known.
A trestle was constructed across the ravine prior to beginning operations in May, 1920, on hill designated1928 BTA LEXIS 3788">*3793 as hill B. The gravel in hill B was in a different strata from that in hill A. The petitioners went into hill B with steam shovels and made a cut through the hill.
The Cady Gravel Co. was dissolved in December, 1919, and a partnership was formed December 19, 1919, the partnership agreement being reduced to writing on August 5, 1920. The agreement provided, however, that it would be effective from December 19, 1919.
Brellahan and Perkins had discussed the proposition of excavating for gravel on hill B prior to December, 1919. The outward indications were that there was a good deposit of gravel in that hill. Prior to the time Brellahan purchased the stock of the Cady Gravel Co. he had been over the property and investigated it and had talked with Perkins about the prospects. It was known that the gravel in pit A which was then being operated would soon be exhausted and it would be necessary to operate another pit.
Between April 10 and June 10, 1920, three cuts were made across hill B in a vertical line. On or about June 10, the third cut was finished and it was found that the gravel deposit in that hill was 10 or 11 feet deep and of a good quality. There were no operations1928 BTA LEXIS 3788">*3794 on hill A after March 17, 1920.
The amount of royalties paid by the partnership for April, 1920, was the largest amount paid for any month in that year. These royalties were based upon gravel removed in the third cut across hill B in April, 1920.
In their income-tax returns the petitioners claimed depletion on the gravel based upon discovery value of the deposit in hill B as of June 10, 1920, when the third vertical cut across that hill was completed. The respondent disallowed any depletion based upon discovery value.
OPINION.
TRAMMELL: Since the respondent conceded at the hearing the contention of the petitioner, Brellahan, that he was entitled to a deduction for 1921, in the amount of $1,871.93, as ordinary and necessary expenses, there is only one question for determination, and that is whether the petitioners are entitled to depletion deductions for the years involved based upon discovery value of the gravel pit.
11 B.T.A. 489">*493 It was claimed by the petitioner that discovery was made of gravel in the hill designated as hill B in June, 1920, after the third cut had been made through the hill with a steam shovel. Evidence was introduced as to the value of the leasehold1928 BTA LEXIS 3788">*3795 as of that date.
There was testimony to the effect that operations were begun on hill B in May, 1920. On the other hand, there is testimony that in April, 1920, when the company was not operating any other pit, it paid to the lessor larger royalties than for any other month during 1920. We are convinced that hill B was actually being operated in April, 1920 and that the discovery of gravel on that hill was made prior to that time. The petitioners claimed that it could not determined with any degree of accuracy what the quantity of the gravel was until they had gone to the bottom of the deposit which they did not do until June 10, 1920. It is upon this principle that the petitioners claimed discovery value as of June 10, 1920. We are of the opinion that the discovery was made at least more than thirty days prior to June 10, 1920, and the value of the leasehold as it existed on June 10, 1920, which is more than thirty days after the discovery of the gravel, can not be used as a basis for depletion.
On the facts in this case the petitioners are not entitled to discovery value as of June 10, 1920, even if the statute, in any event, provided for depletion based on discovery value1928 BTA LEXIS 3788">*3796 of a gravel pit or mine, and it therefore becomes unnecessary for us to decide whether, in any case, discovery value may be used as a basis for depletion of gravel. It also becomes unnecessary for us to discuss the evidence as to the valuation of the gravel deposit on June 10, 1920, or within thirty days thereafter.
Judgment will be entered on 15 days' notice, under Rule 50.