*60 Decision will be entered under Rule 50.
Petitioner and Lee, the owner of a mining concession in Mexico, entered into an agreement whereby the latter assigned to petitioner the privilege of developing the property for a period of nine years, and petitioner agreed to supply the funds necessary to put the property in a "good and proper state of exploitation." It was also agreed that the total value of the net products of the mine should be divided as follows: 100 per cent to petitioner until he was reimbursed for expenditures made in preparing property for exploitation; thereafter 60 per cent to Lee and 40 per cent to petitioner until Lee received an amount equal to 50 per cent of the total sums furnished and invested by petitioner; and, from that date on, the net proceeds of the mine were to be divided equally between petitioner and Lee. During the taxable years petitioner paid Lee 60 per cent of the net profits. Held, payments made to Lee during the taxable years are excludible from petitioner's gross income.
*957 This matter*61 is before this Court to procure redetermination of deficiencies declared by the Commissioner for the years 1940 and 1941 in the respective amounts of $ 8,571.16 and $ 4,022.64. The deficiencies were occasioned by the refusal of the Commissioner to permit the taxpayer *958 to exclude from his income percentages of net profit paid to the owner of a mining concession in Mexico which was being operated during those years by the taxpayer.
Question involved. -- Are payments of 60 per cent of net profits from mining operations, paid by petitioner during the taxable years to the lessor of mining concession, excludible from petitioner's gross income as rents or royalties paid, as petitioner contends, or are they payments on the purchase price of the mining privilege and nonexcludible capital expenditures, as respondent contends?
FINDINGS OF FACT.
Petitioner is an individual American citizen, whose address is 314 Loring Avenue, Los Angeles, California.
During the years involved his income tax returns, on the cash basis, were filed with the collector of internal revenue for the sixth district of California.
At some time prior to August 20, 1937, Fred R. Lee procured from the Mexican Government*62 a concession for an indeterminate period of time to conduct mining operations on a certain mining lot in Mexico known as "El Fenomeno."
On August 20, 1937, petitioner and Fred R. Lee acknowledged before a duly authorized official in Mexico the entering into of a contract in the nature of a lease, whereby Fred R. Lee granted to the taxpayer the privilege of developing the mining property then under concession to Fred R. Lee for a period of nine years. The determinant clauses of the contract are as follows:
Third. Mr. Hiram T. Horton is under obligation to furnish and invest such sums of money as are necessary, so as to put in good and proper state of exploitation said mining lot called "El Fenomeno", as well as for the benefit, and, as the case may be, for the exportation of the products of the same mining lot.
Fourth. It is expressly understood between both parties, that the total value of the net products, which may be obtained or extracted from said mining lot, will be applied entirely to Mr. Hiram T. Horton, until he is reimbursed of the sums of money, which he is under obligation to furnish and invest, as per clause number three of this contract.
Fifth. It is equally understood*63 by both parties that, once Mr. Hiram T. Horton has been reimbursed of the sums of money, as is stated in clause number three of this contract, then the value of the products of said mining lot, called "El Fenomeno", will be divided in the following percentage: 60% -- sixty per cent for Mr. Fred R. Lee and 40% -- forty per cent for Mr. Hiram T. Horton, until such time when Mr. Lee will have received an amount equal to 50% -- fifty per cent of the total sums of money furnished and invested by the same Mr. Horton, according to the already mentioned third clause of this contract. Once Mr. Lee will have received said amount, from that date on, then, the net value of the products extracted (from the mine) will be divided in half, between the two contracting parties.
*959 During the years 1940 and 1941 the taxpayer paid 60 per cent of the net profits to Lee and retained forty per cent to himself. He excluded these payments from his gross income.
In Mexico the Government owns all minerals and substances that compose the subsoil. Under Mexican law concessions are granted to foreigners to operate the extraction of minerals provided the alien agrees in advance not to appeal to his native*64 government for the protection of his rights in said concession and also provided that the Mexican Government can at any time cancel the concession if the concessionaire does not engage in operations according to the terms of his concession or if the concessionaire does not pay his legally imposed tax on the minerals when removed from the mine. The concessionaire is granted the privilege of transferring his rights under the concession or any portion thereof to other individuals, who are subject to the same restrictions and conditions as are imposed upon the original concessionaire.
The respondent disallowed the exclusion of the 60 per cent of the net profits from the operation of the El Fenomeno mine claimed by petitioner in his return for the taxable years.
OPINION.
Petitioner contends that 60 per cent of the net profits from the operation of El Fenomeno mine is excludible by him in computing his taxable income for the taxable years.
Subsequent to the trial in this proceeding, the Supreme Court of the United States, on April 22, 1946, rendered its decision in , which case, in its essential facts, *65 is on all fours with the instant proceeding. The Court held that payments by a lessee to a lessor of a proportion of the profits from mining operations constituted rents or royalties and not capital investments, and were excludible by the lessee from gross receipts for income tax purposes. Following this decision, we reach the same conclusion in this proceeding and hold that payments of 60 per cent of the net profits from the operation of the El Fenomeno mine, made by petitioner to Lee during the taxable years, are excludible from his gross income for those years.
Decision will be entered under Rule 50.