*1441 1. Where a corporation acquired the assets of a predecessor organized under the laws of a different state by the issue of its stock for the stock of the predecessor, it is not entitled to discovery value for depletion purposes on the value of an ore body developed by the predecessor before the reorganization.
2. Petitioner is entitled to recover its entire capital investment by depletion and depreciation ratably over the terms of the lease under which it operated the mines.
3. Certain sales of ore were made in 1925, even though payment was not received until 1926, and the amounts thereof should, with proper adjustments, be included in income for 1925.
*980 The respondent has asserted deficiencies for the years 1926, 1927 and 1928 in the respective amounts of $4,947.12, $5,821.03 and *981 $2,911.47. After abandoning certain allegations of error the petitioner asks the Board to decide six issues, which may be summarized as follows:
(1) Overstatement of income for 1926 resulting from including 1925 sales of ore in the computation*1442 thereof;
(2) Insufficient deduction for depreciation for 1926 and 1927;
(3) Insufficient deduction for depletion in the years 1926 and 1927;
(4) Disallowance of discovery values to which a predecessor corporation was entitled as the basis for depletion;
(5) Refusal to allow the deduction of certain alleged development costs incurred in 1927 as ordinary and necessary expenses;
(6) Disallowance of an alleged statutory net loss in 1926 as an element in the computation of tax liability in 1927.
The two proceedings were consolidated for hearing.
FINDINGS OF FACT.
The petitioner is a Delaware corporation, with its principal place of business at Picher, Oklahoma, where it was engaged in mining lead and zinc ores in the taxable years. It was organized on January 1, 1926, at which date its capital stock was issued for the capital of the Rialto Mining Company, an Oklahoma corporation, which had been in existence since some time in the year 1917. The stockholders, directors and officers of the petitioner and its predecessor were the same. The total authorized stock of each company was in the same amount, but the par value of each share was different.
A. G. Hull was the*1443 president and principal stockholder of the Oklahoma corporation and of the petitioner. In 1923 he acquired three 10-year leases, each covering twenty acres of adjoining, undeveloped mineral lands in Ottawa County, Oklahoma. Such leases provided that the three tracts might be worked as single operations and, except for the royalties reserved to the fee owners, were without consideration. In 1925 he executed three subleases on the three tracts to the Oklahoma corporation for no consideration except certain reserved royalties. Two of such subleases expired on June 12, 1925, and the third on June 12, 1927. None of said leases was renewed at date of expiration. On January 9, 1926, Hull gave the petitioner an option expiring December 31, 1927, to purchase the three original leases for $250,000. The option was not exercised nor were any payments made under the terms thereof.
The Oklahoma corporation discovered commercial ore bodies on the lands covered by the three leases, opened up the mine, constructed an operating plant and installed necessary equipment prior to January 1, 1926, and on its tax return prior to such date was allowed depletion on a discovery value which is not in*1444 controversy.
*982 The estimated recoverable mineral reserve in the three tracts at January 1, 1926, was 25,502 tons of concentrates. Production and sales of concentrates in 1926, 1927 and 1928 were as follows:
| Year | Tons produced | Tons sold |
| 1926 | 10,354 | 9,530 |
| 1927: | ||
| 1-1-27 to 6-12-27 | 4,207 | 2,202 |
| 6-13-27 to 12-31-27 | 6,333 | 4,567 |
| 1928 | 12,309 | 11,205 |
The underpreciated cost, less salvage, of plant and equipment acquired by petitioner at January 1, 1926, plus additions in that year, was $32,712.36, and additions thereto were made in 1927 at a cost of $4,519.23.
Including 1926 additions thereto, the undepleted amount of capitalized development and drilling expense at January 1, 1926, was $12,032.20. Additional development expense in 1927 was incurred and capitalized in the amount of $291.50. On January 1, 1926, the undepleted balance of the discovery value which had theretofore been allowed to the Oklahoma corporation was $64,828.51.
During the month of December, 1925, the petitioner sold 39 cars of ore concentrates for shipment to the Athletic Mining and Smelting Company for $71,140.25. The mining costs applicable to such ores was $37,683.38. *1445 The practice of the industry is to sell ores of this nature f.o.b. the producers' binds at a certain price subject to adjustment after assay. Samples are taken by buyer and seller and if the variation of mineral content on assay varies no more than sixtenths of one per cent settlement is made on the basic price. If there is a greater variation a third sample is assayed by an umpire and the basic price is adjusted in conformity therewith.
In the taxable years the petitioner kept its books and made its income-tax returns on the accrual basis. The shipments of 39 cars of concentrates in December of 1925 were entered on the books as "ores in transit," but were not included in petitioner's inventory of December 31, 1925. Final settlement after assay was made on February 3, 1926. The petitioner included the $71,140.25 in its sales for 1925. Upon audit the respondent allocated such sales to 1926 and increased petitioner's income for that year in the amount thereof less the $37,683.38 cost of production, or $33,456.87.
Prior to 1927 Hull was the owner of certain Government mineral claims located in Arizona, upon which he had given the petitioner an option to buy for $300,000, *1446 of which $100,000 was paid in cash, with the remainder if and when the petitioner decided to take up the option, which was to expire on November 15, 1927, and was never exercised. *983 During the year 1927 the petitioner expended $24,930.01 in prospecting the properties covered by such claims. Similar expenses were incurred in 1928 in the amount of $15,561.98. The development operation consisted of drifting, sinking a shaft 400 feet, crosscutting and pumping. In determining the deficiency for 1927 here involved, the respondent disallowed the amount so expended as ordinary and necessary expenses for the taxable year. At the end of 1928 there had been no discovery of ore in commercial quantities. The deductions now claimed are for payments listed on petitioner's books as follows: Salary of superintendent in charge, $6,375; labor, $6,517.21; mining supplies, $5,707.49; insurance, $230.69; hauling, $1,113.25; gas and oil, $1,361.77; groceries, $1,252.52; machine work, $108.97; freight, $153.91; taxes, $182; miscellaneous expense, $489.53; traveling expense, $214.98; hospital bills, $354.50; rock drill, $418.89; horse, $449.30.
OPINION.
LANSDON: In the original petition*1447 it is alleged that the respondent erroneously disallowed as ordinary and necessary expenses certain expenditures incurred for drilling in the years 1926 and 1927 in the respective amounts of $2,782.75 and $291.50. This allegation of error was abandoned at the hearing and accordingly the determination of the respondent is affirmed. Petitioner offered no evidence in support of its allegation at Docket No. 48692 that the cost of ores in transit at the close of 1925 was erroneously understated in the amount of $21,354.75 and now agrees that such cost was $37,683.38. An allegation at Docket No. 56877 that petitioner's income from sales for the year 1927 was improperly increased was abandoned. The allegations of error as to cost of depreciable property have been settled by stipulation and the agreed facts are set out in our findings of fact above. The controversy over the application of the net loss provision of the Revenue Act of 1926 in computing the petitioner's tax liability for 1927 is automatically decided by our conclusions in respect of the alleged errors discussed and decided hereinafter.
In respect of the petitioner's claim for depletion and depreciation deductions not*1448 allowed by the respondent, two questions are involved, viz., (1) whether discovery value allowed a predecessor corporation is the proper basis for determining depletion for the petitioner in the taxable years, and (2) whether under the facts herein petitioner is entitled to the return of its capital investment through depletion and depreciation, free from tax, at June 12, 1927. The first question requires little discussion. The Oklahoma corporation made the discovery of ore in commercial quantities prior to *984 January 1, 1926, when the property in question was acquired by the petitioner, which has made no discovery and therefore may not claim depletion on a value to which only the actual discoverer, its predecessor, was entitled under the law. The petitioner's only basis for this claim is that the reorganization was no more than a change of name and that the two corporations were practically identical. This may be true, but the fact remains that there were two corporate entities, the second replacing the first for some reason that must have been advantageous to the interests in control, and we can not disregard this situation and permit a corporation that has risked nothing*1449 in exploring for mineral to enjoy the benefits of a statutory provision enacted for the benefit of actual discoverers.
; ; affd., .
The petitioner's second contention as to depletion, which also applies to depreciation, is that it was entitled to recover its entire capital investment free from tax not later than June 12, 1927, when the last of the three leases under which the mining property in question was operated as a unit expired. There was no renewal clause in either of the leases, nor any extensions by written or oral agreement. The petitioner, however, continued to operate the property until December 31, 1928, the last date here involved, and derived substantial income therefrom in the latter half of 1927 and in 1928. The respondent has allowed deductions for depreciation and depletion ratably over the period from January, 1926, to December 31, 1928, that have returned the entire capital of the petitioner as of the former date plus additions thereto made before the latter, and both dates are within the time covered by this appeal. If the petitioner's*1450 contention as to this issue is in conformity with law, its income for the period from January 1, 1926, to June 12, 1927, should be decreased by the amount of its undepleted and undepreciated investment at the later date plus capital addition, if any, made prior to the former, and its income from June 12, 1927, to December 31, 1928, is not subject to any deduction for depletion and depreciation unless additional capital costs were incurred in that period.
It is now well settled that the capital cost of a leasehold is deductible ratably over the term thereof. ; ; . The fact that the lessee remained in possession and operated the property after the lease expired is not material. It was there from June 12, 1927, to December 31, 1928, either as a trespasser or on sufferance and was entitled to all income from operation in that period, subject to an accounting to the owner of the lease for rents or royalties, but owned no interest subject *985 to depletion or depreciation. *1451 . Even if continued possession and operation as a trespasser or by consent effected an implied renewal of the lease, as contended by the respondent, the situation is not changed. Where a lease contains a renewal clause its capital must nevertheless be amortized over the original term. ; . If the lease is renewed the date of renewal marks the beginning of a new period of amortization which from that time must be computed under the terms of the renewed lease on facts in existence at or after its renewal. . On this question the determination of the respondent is reversed.
In respect of the sales of ore made in December, 1925, for which payment was made in 1926, the petitioner contends that title passed to the purchaser at the date of the sale. The facts show that ores were sold f.o.b. the petitioner's bins. The purchaser took possession, loaded out the ore and thereafter was the owner. All the evidence indicates that the parties intended a sale at the*1452 time a basic price was agreed to between vendor and vendee. Where there is actual delivery this is sufficient to effect transfer of title. ; ; see also ; . The fact that the basic price might later be adjusted to conform to assays of the ore is not controlling. ; . The petitioner was on the accrual basis. The ores in question were sold and delivered in 1925 and the income derived therefrom is taxable in that year. The amount of $71,140.25 was not income in 1926 and should be deducted from the gross income of the petitioner for that year as determined by the respondent. It follows also that the cost of producing such ore allowed in 1926 in the amount of $37,683.38 must be added back to income in that year, with the result that the petitioner's taxable income for 1926 is reduced by the amount of $33,456.87.
In 1927 petitioner expended $24,930.01*1453 for exploration and development on certain mineral claims in Arizona which it alleges were held under lease with an option to purchase. The option agreement is not in evidence, but Hull, president of the petitioner and owner of the claims, testified that he gave the petitioner an option to purchase at any time before November 15, 1927, and received therefor $100,000 in cash, with the understanding that the petitioner would pay him an additional amount of $200,000 as and when it exercised the option. The petitioner discovered no mineral on the claims, but after December 15, 1927, continued to explore and develop the property, *986 and for that purpose expended some $15,000 in 1928. We conclude, upon the meager facts that have been entrusted to us, that the expenditures here involved were made in connection with the survey and exploration of mining property which the petitioner owned or expected to own and that they were of a capital nature and not deductible from income in the taxable year. ; *1454 .
Upon the record it is clear that petitioner's loss in 1926, if any, was sustained in the operation of a business regularly carried on. If the recomputation required by our conclusions above indicate a net loss in 1926, the amount thereof should be applied to the reduction of its tax liability in 1927, under the provisions of section 206 of the Revenue Act of 1926.
Decision will be entered under Rule 50.