*952 This is a proceeding for a redetermination of a deficiency in income tax in the amount of $3,138.21 for the calendar year 1922.
The petitioner alleges that the respondent erred (1) in computing the deduction for depletion; (2) in disallowing certain amounts as a deduction for depreciation on a ditch and pipe line; and (3) in refusing to allow a claimed net loss in 1921 to be deducted from income for 1922.
FINDINGS OF FACT.
The petitioner is a gold-mining corporation, organized and existing under the laws of the State of Washington, with its principal office in Seattle. The petitioner was incorporated in 1911 to take over and operate certain gold-mining claims and a ditch and pipe line, situated on the property covered by the claims, in the Candle Creek District of the Seward Peninsula near Nome, Alaska. The authorized capital stock of the petitioner was $100,000, divided into 1,000 shares of the par value of $100 per share. On June 2, 1911, the authorized capital stock was increased to $1,000,000 divided into 10,000 shares of the par value of $100*1217 per share.
These claims and the ditch and pipe line had been purchased by a man named Pritchard, acting for a syndicate which intended at that time to organize a corporation to operate the property. One of *953 the members of the syndicate was E. J. Mathews, a man experienced in the gold-mining business, who became president of the petitioner upon its incorporation.
The claims in question covered approximately 200 acres. The ditch and pipe line and some of the claims were purchased by the syndicate at a marshal's sale, under execution and judgment in the District Court, and the remaining claims were purchased at private sale.
On May 31, 1911, a part of the claims was transferred by proper corporate action to the petitioner for 1,000 shares of its capital stock and a promissory note for $20,000. On November 24, 1911, the remaining claims and the ditch and pipe line were transferred to the petitioner for 2,370 shares of its capital stock.
The total cash cost to the syndicate and/or the petitioner prior to March 1, 1913, of these properties was as follows:
| Amounts paid for the mining claim | $72,876.07 |
| Amounts paid for the ditch and pipe line | 30,000.00 |
| Amounts expended prior to March 1, 1913 in | |
| reconditioning ditch and pipe line | 53,057.21 |
| Miscellaneous | 20,566.72 |
| Total | 176,500.00 |
*1218 The claims acquired by the petitioner covered two lots of property, one part being near the mouth of Candle Creek and the other about four and one-half or five miles up the creek. In this section most of the mining is hydraulic.
The ditch in question ran through this property. Its source of water was the water shed of the Keewalik River and its tributaries. The ditch was dug in the soil of the hillsides and the pipe line consisted of siphons of hydraulic steel pipe which spanned the gulches and connected with the various sections of the ditch. It was built in 1906. The ditch and pipe line were 42 miles long, including the feeders. The ditch ran roughly parallel to Candle Creek, the water in it flowing opposite to the flow of water in the creek and starting within 2,000 feet of the mouth of the creek. Its elevation near the mouth of Candle Creek was 268 feet above the water level, the grades of ditch and creek meeting about 10 miles above the mouth of the creek. At the time the property was acquired by the petitioner the ditch and pipe line were in a very had condition.
Because of the climatic conditions the season in which ore can be extracted in that vicinity is usually*1219 limited to about 120 days out of the year. During the remainder of the year the ground is frozen so hard that it is impossible to extract the ore. In the instant case, due to the scarcity of water, the petitioner found it impossible from the date of acquisition to 1922 to operate its claims for more than 45 days a year.
*954 It is impracticable, if not impossible, to do any mining in this section without water. The property which could be served by the ditch, if there were sufficient water, was about ten times the area of the 200 acres owned by the petitioner. It was customary in that vicinity in such a situation for the owner of a ditch who had no mining ground to sell the water to the other land owners who did have mining ground.
The physical life of the ditch was indefinite and that of the pipe line 40 years, but its useful life depended upon that of the mining claims. The ditch and pipe line, without mining claims to serve, would have no value.
The following table shows the number of ounces of gold produced, the value of the gold and the results of petitioner's operations for the years 1913 to 1924:
| Ounces of | Value of | Results of operation | ||
| Year | gold produced | gold produced | Net loss | Net income |
| 1913 | 12.56 | $207.55 | $5,623.94 | |
| 1914 | 1,336.76 | 22,096.62 | 2,769.15 | |
| 1915 | 1,630.39 | 26,950.35 | $729.94 | |
| 1916 | 1,312.96 | 21,703.19 | 5,335.94 | |
| 1917 | 2,062.18 | 34,087.91 | 2,634.61 | |
| 1918 | 562.21 | 9,293.34 | 6,990.26 | |
| 1919 | 1,713.56 | 28,351.21 | 167.48 | |
| 1920 | 1,145.34 | 18,932.51 | 570.56 | |
| 1921 | 1,756.89 | 29,041.47 | ||
| 1922 | 4,209.02 | 69,575.08 | ||
| 1923 | 2,230.81 | 37,551.66 | ||
| 1924 | 1,768.41 | 29,160.17 |
*1220 The March 1, 1913, value of the mining claims and of the ditch and pipe line was not in excess of $176,500, of which $83,057.21 is allocable to the ditch and pipe line.
In an amended return for 1921, filed on April 14, 1923, the petitioner reported a net loss in the amount of $13,892.14. On the return it deducted the amount of $19,765.70 as depreciation on ditch and pipe line. The amount claimed for depreciation was on the basis of a cost on March 1, 1913, value of $359,376.28 and a useful life of 18 years from March 1, 1913. The parties have stipulated that the net income of the petitioner for 1921 before taking any deduction for depletion of depreciation was $8,974.57.
The petitioner on its return for 1922 deducted $19,765.70 as depreciation on ditch and pipe line and also deducted the amount of $13,892.14 as a net loss sustained in 1921.
The respondent in determining the deficiency herein for 1922 added to the petitioner's income the amount of $19,765.70 claimed as depreciation, on the ground that expenditures on account of ditch and pipe line represented development returnable through depletion, *955 and disallowed the amount of $13,892.14 claimed as a net*1221 loss for 1921, upon the ground that the depreciation claimed on the 1921 return on the ditch and pipe line had been disallowed the depletion shown on the same return increased $4,404.52, resulting in a net income for 1921 instead of a net loss.
OPINION.
MATTHEWS: While this proceeding is one for a redetermination of a deficiency for 1922, the petitioner claims a net loss for 1921 resulting from the respondent's refusal to allow sufficient depreciation and depletion in that year and the same question as to the proper allowance for depreciation and depletion arises for 1922, so we have to decide the correct amount allowable for both years.
The respondent has used the amount of $176,500, which represents the combined cost of the claims and the ditch and pipe line in 1911, plus the cost of additions to March 1, 1913, as the March 1, 1913 value, $83,057.21 being allocable to the ditch and pipe line, and has allowed depletion on both the mining claims and the ditch and pipe line on the unit-of-production method at the rate of $4.16 per ounce of gold produced. The petitioner attacks both the basis and the method used by the respondent, claiming that the March 1, 1913, value of the*1222 claims and of the pipe line is greater than that used by the respondent, which would result in an increase in the allowance for exhaustion of both the claims and the ditch and pipe line, and that, also, it is entitled to an allowance for depreciation on the ditch and pipe line based on its useful life, rather than an allowance for depletion computed on the unit-of-production basis of the mine.
In considering both these questions it should be borne in mind that the mining claims and the ditch and pipe line are dependent for their usefulness one upon the other. The mining claims, without water to work them, are practically worthless and the ditch and pipe line have no value without ore reserves to which they can furnish water.
In order to sustain its claim as to the value on March 1, 1913, of these properties the petitioner introduced, in addition to the documentary evidence, two witnesses, E. J. Mathews, its president, and C. L. Morris, a mine operator who had been in charge of the construction of the pipe line. These witnesses testified that the ditch and pipe line had a value on the basic date of $300,000. This was based on reconstruction cost computed on the theory that*1223 the original cost in 1907 was $251,154, and that since the cost of labor had increased it was estimated that the reconstruction cost must have been at least $300,000. However, the evidence shows that the ditch was in such bad repair in the latter part of 1912 and the early part of 1913 that it could not be used and that it was only after considerable amounts had been spent on reconditioning it that it was available for *956 use in the late summer of 1913. Upon a careful consideration of the evidence, we are of the opinion that the ditch and pipe line did not have a value on March 1, 1913, in excess of that determined by the respondent.
As to the claims, Morris did not give any detailed explanation of the manner in which he arrived at his opinion as to the value. Although there was other mining property adjacent to that of the petitioner, there is no evidence as to whether there were any sales of it, or as to what it sold for. Between $30,000 to $40,000 worth of gold ore had been extracted on the petitioner's property between 1906 and 1913, but there is no evidence as to exactly how much the cost of extraction had been or that Morris took this cost into consideration in*1224 arriving at his valuation. There is no other evidence as to the value of these claims on the basic date. Mathews' opinion as to value is at most an estimate, not even based on prior production. He admitted that when he made this valuation he thought the mine could be operated from 90 to 100 days a year and that the cost of extraction would be 25 cents per cubic yard. As a matter of fact, due to the scarcity of water, the number of days the property was operated up to 1917 did not exceed 45 days a year, and the actual cost of extraction was 80 or 90 cents per cubic yard.
We are, therefore, of the opinion that upon a consideration of all the evidence, the respondent's determination of the value on March 1, 1913, of the mining claims and of the ditch and pipe line is correct. See ; ; ; and .
We shall now consider the question of the correct method to be used in computing the allowance. The petitioner does not contest the method used for computing*1225 the depletion on the mining claims and, therefore, we sustain the respondent's allowance in this respect. As to the ditch and pipe line, it is immaterial whether we refer to the claimed allowance as depreciation or depletion. As we understand the situation, the real issue is whether the allowance for exhaustion of the ditch and pipe line should be computed on the same basis as that of the gold-mining claims, by the unit-of-production method, or whether on the basis of the useful life of the ditch itself.
In the case of ; affd., , the court held it proper to compute depreciation or depletion on coal-mining equipment on the unit-of-production basis where the life of the equipment was coextensive with the life of the mine. The petitioner contends that the useful life of the ditch was not dependent on the production of ore from the petitioner's mining claims, but that it had a usefulness arising from the service it could render to other mining claims. Although there was *957 testimony that the ditch and pipe line could be used for other adjoining claims, there is no evidence as*1226 to the nature of these claims or as to whether any mining was being done upon them. But the chief weakness in the petitioner's contention is that there was not a sufficient water supply for the petitioner to mine its own claims more than 30 to 45 days a year. Moreover, while the physical life of the ditch was indefinite, and that of the pipe line was perhaps 40 to 50 years, the testimony as to the length of its useful life was merely an estimate made by one of the witnesses without giving any basis for his estimate. Upon this evidence we are unable to find that the ditch and pipe line had a useful life any longer than that of the petitioner's mining claims and, therefore, we sustain the respondent's action in computing the allowance on the same basis as that of the mining claims.
As to the petitioner's contention that it sustained a net loss in 1921, the respondent determined that the petitioner had net income in that year, after allowing a deduction for depreciation computed on the same basis and in the same manner as the allowance for 1922. A net loss would result only if the petitioner was entitled to an additional allowance for depreciation or depletion for that year. In*1227 view of our decision that the respondent's computation of depletion was correct, it is clear that there was no net loss for 1921.
Judgment will be entered for the respondent.