*150 Decision will be entered under Rule 50.
1 and 2. In the year 1944 petitioner made expenditures for an air shaft, fan, and compressor. Held, these expenditures were incurred to maintain normal output because of the recession of the working faces of the mine and are allowable as ordinary and necessary business expenses.
3. In 1945 and 1946 petitioner constructed a rock slope. Held, this expenditure had no relation to maintaining normal output and should be capitalized.
4. Petitioner claimed accelerated depreciation for the years 1943-1946, inclusive, on two Joy loaders purchased in 1942 and 1946. Petitioner operated on a double shift. Held, petitioner failed to show that the increased use of the loaders shortened the life of the equipment. H. E. Harman Coal Corporation, 16 T. C. 787, followed.
5. Petitioner, on the accrual basis of accounting, accrued the insurance premium on a policy of catastrophe insurance it had taken out in 1943. Respondent contended it was a contingent liability. Held, deduction allowed, the liability for the premium was fixed in the taxable year.
6. In computing the deduction for percentage depletion in*151 1943, petitioner included in "gross income from the property" the sum of $ 2,031.64 representing sales price on coal mined by petitioner and used in its boiler plant during the year. Held, petitioner cannot include in gross income from the property the selling price of coal it used itself because petitioner realized no income on a sale to itself.
*389 This proceeding involves deficiencies in income and declared value excess-profits and excess profits taxes for the calendar years and in the amounts as follows:
| Declared | Excess | ||
| Year | Income tax | value excess profits | profits tax |
| tax | |||
| 1943 | $ 21,868.02 | ||
| 1944 | $ 19,482.38 | $ 3,185.38 | 17,510.02 |
| 1945 | 17,887.37 | 1,173.80 | 10,614.81 |
| 1946 | 64.95 | ||
| Total | $ 37,434.70 | $ 4,359.18 | $ 49,992.85 |
Petitioner also filed a claim for refund for income and excess profits taxes for the taxable year 1944 in the amount of $ 10,598.28. There are six issues involved in this proceeding as follows:
1. Whether the expenditure of $ 66,316 made by petitioner in 1944 in constructing an air shaft represents an allowable deduction as a current business expense or a capital expenditure.
2. Whether the expenditure of $ 4,701.55 made by petitioner in 1944 for a fan and compressor represents an allowable deduction or a capital expenditure.
3. Whether expenditures of $ 81,000 in 1945 and $ 13,411.12 in 1946 made by petitioner in constructing a rock slope in those years represent allowable deductions as current business expenses or capital expenditures.
4. Whether, *153 for each of the years 1943 to 1946, inclusive, petitioner is entitled to an allowance of any amount as abnormal or accelerated depreciation on its Joy loaders.
5. Whether petitioner is entitled to a deduction in 1943 for catastrophe insurance in the amount of $ 763.83.
6. In computing the deduction for percentage depletion for the year 1943, is petitioner entitled to include in gross income the amount of $ 2,031.64 representing the sales price of coal mined by petitioner and used in its boiler plant during that year?
FINDINGS OF FACT.
The petitioner is a corporation organized in 1908 under the laws of the State of Nebraska. Since 1908 petitioner has been engaged in the business of mining and selling coal, and its principal place of business is at Roundup, Montana. The petitioner has, at all times material to this proceeding, kept its books and filed its Federal income and excess *390 profits tax returns on the accrual basis of accounting. It filed its returns for the calendar years here involved with the collector of internal revenue for the district of Nebraska.
Petitioner's principal mine was opened in 1908 and is known as Roundup Mine No. 3. The mine was in the developed*154 stage during the tax years here involved. During the period from 1908 to 1920 the mine workings were driven in a southwesterly direction from the mine entrance. In 1920 the mine workings were driven easterly under the Musselshell River. Thereafter, and until the present time, the mine workings continued in an easterly direction from the mine opening. In 1920 petitioner constructed a vertical air shaft at a point across the river from the mine entrance and installed an exhaust fan at the top of the shaft. During the period from 1920 to 1928 air was introduced into the mine by a blower fan located at the mine opening. The current of air circulated through the mine workings went under the river and came out of the air shaft constructed in 1920. In 1928 petitioner constructed an air shaft about one-half mile north of the 1920 air shaft. The blower fan located at the opening of the mine was then reinstalled at the new air shaft location. This fan was in operation during the entire period from 1908 to 1944 and is still in working condition. During the period from 1928 to 1944 air was introduced into the mine by a blower fan, located at the air shaft which was constructed in 1928, *155 and was conducted for about 3 miles through worked-out areas which were subject to cave-ins to the working faces. The air current circulated through the mine workings and came out of the opening of the mine about 3 1/2 miles from the working faces. The availability of a sufficient supply of air was therefore subject to chance in that a cave-in in the worked-out areas through which air was introduced might at any time block the air intake. In addition to this hazard the haulageway at a point between the air intake and the working faces was also subject to cave-in, thus preventing escape of men working at the faces. This danger was created by the seepage of water from flooded mines adjoining petitioner's mine on the north and south. It, therefore, became necessary to provide an additional means of both ventilation and escape for the miners as the working faces receded to the east of the danger point.
Because of these facts, petitioner in 1943 began the construction of a vertical air shaft at a location of approximately 3 1/2 miles east of the opening of the mine and a short distance east of the area subject to cave-in because of water seepage. The construction of the air shaft*156 was completed in 1944. The air shaft was sunk a distance of 466 feet from the surface of the ground to the bottom of the mine. The walls of the shaft are supported by timbers. The shaft also contains a wooden stairway. In its income tax return for the calendar year 1944 *391 petitioner claimed a deduction of $ 66,316 representing the cost of constructing the air shaft in that year. In the notice of deficiency respondent disallowed the claimed deduction on the ground that the cost of the air shaft should have been capitalized and recovered through deductions for depletion.
In 1944 petitioner purchased a fan and compressor for the total sum of $ 4,701.55. The fan was installed in that year at the top of the air shaft which was constructed in 1944. It was a blower type fan of excellent construction. The fan has a capacity of supplying an air current of about 80,000 cubic feet per minute and is presently supplying an air current of about 70,000 cubic feet per minute. This fan is still in excellent condition and is used for the purpose of ventilating the mine at the present time. Prior to the construction of the air shaft and the installation of the fan in 1944 petitioner's*157 miners did not have sufficient air at some of the working faces of the mine. After the new fan was installed and in operation the miners received additional amounts of air which improved the working conditions of the miners. In its income tax return for the calendar year 1944 petitioner claimed a deduction of $ 4,701.55 representing the cost of the fan and compressor. In the notice of deficiency respondent disallowed the claimed deduction on the ground that the cost of the fan and compressor should have been capitalized and recovered through an annual deduction for depreciation based upon an estimated useful life of 20 years. Respondent has allowed deductions in 1944, 1945, and 1946 for depreciation on the fan and compressor.
The above-mentioned air shaft and fan were needed to maintain production as the mine spread out and the working faces in the mine receded. They did not increase the value of the mine.
Petitioner began the construction of a rock slope in 1945 which was sunk approximately 4 1/2 miles east of the opening of the mine. The rock slope was driven a distance of 1,421 feet from the surface of the ground at a 15-degree angle. The area where the slope was driven *158 was unmined and undeveloped. On December 31, 1945, the working faces of the mine were approximately three-fourths of a mile west of the rock slope. The rock slope was constructed about 8 feet high and 18 feet wide. The roof and walls of the slope are supported by steel "timbers" which are set approximately 5 feet apart. The slope contains a flight of concrete stairs about 2 feet wide which extends from the surface of the ground to the bottom of the mine. There is a standard gauge steel track in the slope which extends from the surface of the ground to the base of the slope. The rails are the same weight and gauge as those used in the main haulageway of the mine. The base of the rock slope was not connected with the main haulageway until August 18, 1950, so that during each of the years 1945 and 1946 the *392 rock slope could not be used and was not used as an escapeway or for ventilation purposes. In its income tax returns for 1945 and 1946 petitioner claimed deductions in the respective amounts of $ 81,000 and $ 13,411.12 representing expenditures incurred in constructing the rock slope. In the notice of deficiency respondent disallowed the claimed deductions on the *159 ground that such expenditures should have been capitalized and recovered through deductions for depletion.
The rock slope had no relationship to the maintenance of production in 1945 or 1946.
On January 1, 1942, petitioner purchased a Joy loader for the sum of $ 13,029.60. In its income tax returns for each of the years 1943 to 1946, inclusive, petitioner claimed a deduction of $ 1,861.37 for accelerated depreciation on its Joy loader based upon an estimated useful life of 7 years. In the notice of deficiency respondent allowed a deduction of $ 698.02 for depreciation on such Joy loader for each of the years 1943 to 1946, inclusive, based upon an estimated useful life of 17 years. Respondent disallowed the remainder of the claimed deductions. On January 1, 1946, petitioner purchased another Joy loader for the sum of $ 11,062.49. On its income tax return for 1946 petitioner claimed a deduction of $ 1,580.35 for accelerated depreciation on its Joy loader based upon an estimated useful life of 7 years. In the notice of deficiency respondent allowed a deduction of $ 650.73 for depreciation on such Joy loader for the year 1946 based upon an estimated useful life of 17 years. Respondent*160 disallowed the remainder of the claimed deduction. During each of the years 1943 through 1946 petitioner's daily mining operations were on the basis of two shifts of 9 hours each. Petitioner claims its deductions for depreciation of its mining equipment on the straight line method.
On April 19, 1943, petitioner purchased a 4-year catastrophe insurance policy from Lloyd's of London. The premiums were based upon a monthly rate of 20 cents per $ 100 pay roll. The determination of the amount of the yearly premiums was subject to an annual audit. On April 28, 1943, petitioner paid to Lloyd's of London a premium deposit of $ 600. As of December 31, 1943, the sum of $ 763.83 was shown as a credit balance on the books of petitioner in a reserve account entitled "Reserve for Catastrophe Insurance." In its income tax return for the calendar year 1943 petitioner claimed a deduction for catastrophe insurance in the amount of $ 763.83. In the notice of deficiency respondent disallowed the claimed deduction on the ground that such amount represented a contingent liability.
For the year ending December 31, 1943, payrolls and amount of accrued premium per month as set up on petitioner's books*161 were as follows: *393
| Total | Premium | |||
| Year | Month | payroll | Rate | accrued |
| 1943 | Apr. 19 to 30 | $ 16,325.80 | 20 cents per $ 100 | $ 32.65 |
| May | 44,213.34 | 20 cents per $ 100 | 88.43 | |
| June | 39,201.18 | 20 cents per $ 100 | 78.40 | |
| July | 47,345.10 | 20 cents per $ 100 | 94.69 | |
| August | 44,386.37 | 20 cents per $ 100 | 88.77 | |
| September | 47,581.50 | 20 cents per $ 100 | 95.16 | |
| October | 45,701.11 | 20 cents per $ 100 | 91.40 | |
| November | 42,666.20 | 20 cents per $ 100 | 85.33 | |
| December | 54,500.88 | 20 cents per $ 100 | 109.00 | |
| Total | 381,921.48 | 763.83 |
Petitioner was liable for the full amount of the premium on its catastrophe insurance during the year 1943.
In its income tax return for the calendar year 1943 petitioner reported gross income from sales of coal in the amount of $ 970,808.23 for the purpose of computing the deduction for depletion on the percentage basis. That sum included the amount of $ 2,031.64 which represented the sales price of coal mined by petitioner but used in its boiler plant during that year. Petitioner deducted the $ 2,031.64 as a cost of operation in computing gross profit on sales. In the notice of deficiency respondent determined that such amount*162 should have been excluded from gross income in computing the depletion allowance. Accordingly, respondent determined that the claimed deduction for depletion was excessive in the amount of $ 101.58.
OPINION.
The first two issues are whether the petitioner may deduct from gross income as ordinary and necessary expenses the cost of constructing an air shaft and the cost of a fan and compressor placed on top of the air shaft. The record shows that from 1908 to 1920 air was blown into petitioner's mine by a fan placed at the mine entrance. In 1920 the mine had been driven under the Musselshell River. During that year another air shaft was constructed just across the river. An exhaust fan was installed atop this shaft. Air was blown in from the mine entrance and drawn out through the 1920 air shaft. With the recession of the working faces of the mine, there developed a shortage of air and it became necessary to provide ventilation at a point nearer the working faces. In 1928 a new air shaft was built and the blower fan theretofore installed at the mine entrance was moved to this point. By 1943 operations were 3 1/2 miles from the mine entrance and air was being blown through worked-out*163 areas with only a minimum of the ventilating current reaching the working sections. Because of the shortage of air, petitioner constructed another air shaft in 1944 at a cost of $ 66,316. Petitioner left in place the blower fan that was operating at the 1928 *394 air shaft for use in emergency. It was merely turned off, although still in working order. Its capacity was not sufficient to provide adequate ventilation at the receded working faces, but it was an integral part of the ventilating system of the mine. Petitioner purchased a new blower fan and compressor in 1944 for $ 4,701.55 and placed it atop the new 1944 air shaft. Respondent has disallowed as deductions the expenditures for the 1944 shaft, fan, and compressor on the ground that they constituted capital expenditures.
Respondent contends that the expenditure for the 1944 air shaft must be considered a major capital item of improvement which enhanced the value of the mine and cannot be considered a minor item of equipment used solely for the purpose of maintaining normal production. As to the fan and compressor, respondent contends they were major capital improvements subject to exhaustion, wear, and tear, and*164 had a useful life of not less than 20 years. We do not agree with respondent's contention.
Generally speaking, expenditures for plant, equipment, etc., having a useful life beyond a year should be capitalized. Regs. 111, sec. 29.41-3 (a). In the case of mining equipment, an exception is provided by Regulations 111, section 29.23 (m)-15 (a) and (b):
Expenditures * * * necessary to maintain the normal output solely because of the recession of the working faces of the mine, and which (1) do not increase the value of the mine, or (2) do not decrease the cost of production of mineral units, or (3) do not represent an amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made, shall be deducted as ordinary and necessary business expenses.
See Marsh Fork Coal Co. v. Lucas, 42 F. 2d 83; United States v. Roden Coal Co., 39 F. 2d 425. Respondent now, as he has so persistently in the past, seeks to add another condition which must be met before taxpayer may be permitted to expense the cost of facilities "necessary to maintain the normal output" *165 of a mine. That condition is that the taxpayer must show the expenditure to have been minor rather than major. We find no authority for his contention. The terms are entirely relative and indeterminable. We must decide this issue upon the basis of Regulations 111, section 29.23 (m)-15 (a) and (b), because that regulation sets forth the only recognized pattern upon which to base decision.
In the cases last above cited and in Winding Gulf Colliery Co. v. Brast, 13 F. Supp. 743">13 F. Supp. 743, affd. 94 F. 2d 179, it was, in effect, established that if no decrease in the cost of production resulted from an expenditure and no portion thereof was used in the restoration or making good the exhaustion of property, no increase in value of a mine occurred within the meaning of section 24 (a) (2). If in addition to the foregoing it is shown that an expenditure is brought about because *395 of the recession of the mine working faces the amount so expended may be expensed.
Ventilation and escape shafts such as those here involved are not movable and therefore may not like trackage be brought or extended to working faces. *166 Indeed, it was necessary in petitioner's mine to keep operable sufficient of such shafts to provide emergency ventilation and escapeways. The necessity could have arisen only through recession of the working faces. Air and escapeways are as necessary to maintain the output of petitioner's mine as trackage and locomotives. The particular shaft here involved was necessary in order to operate the mine at all, for it is apparent that it provided the only means of escape should cave-ins result in the sump area which was between the shaft and the mine opening. There is an analogy between the shaft and trackage. Both are part of a system which must be enlarged and extended as the working faces recede. While the shaft alone might serve as an escapeway it could not alone serve as a complete answer to petitioner's ventilation problem. Air might be drawn into the mine through the shaft or it might serve as an exhaust, but in either event other ventilating facilities must of necessity take over the opposite function. The whole mine had to be ventilated, not just the working faces. This shaft is as properly considered a part of a system of ventilation as is a section of trackage a part*167 of the mine railway system.
We are satisfied that the fan and compressor here involved are also properly to be treated as expense items. There is no real difference between the category of the fan and compressor and that of the locomotive in Marsh Fork Coal Co., supra. The utility of both depends upon a conduit, in one case the shaft and in the other trackage. Both perform a function at the mine faces and each furnishes the motive power to operate a system, one being a ventilation system and the other a railway system.
The case of Commissioner v. H. E. Harman Coal Corporation, 200 F. 2d 415, is distinguishable as in that case the expenditures were "in the interest of economy and efficiency and not 'solely because of the recession of the working faces of the mine.'"
We can see no essential difference between expenditures made for the addition of track, or mine cars and wheels, or water pipes, or locomotives, or switches, to maintain production, which were allowed in United States v. Roden Coal Co., supra;Marsh Fork Coal Co. v. Lucas, supra; and Commissioner v. Brier Hill Collieries, 50 F. 2d 777,*168 and the expenditures here made for an air shaft, fan, and compressor.
The expenditures for the 1944 shaft, compressor, and fan must be allowed as deductions as ordinary and necessary expenses necessary for the maintenance of production.
*396 The third issue for determination is whether expenditures of $ 81,000 in 1945 and $ 13,411.12 in 1946 made by petitioner in constructing a rock slope are deductible in the years made or whether they should have been capitalized.
Petitioner contends that the rock slope was necessary to provide ventilation for the miners, that it was constructed for the purpose of providing an escapeway in case of a mine disaster, and that it was necessary to maintain normal production. Petitioner cites West Virginia-Pittsburgh Coal Co., 24 B. T. A. 234; United States v. Roden Coal Co., supra;Marsh Fork Coal Co. v. Lucas, supra; and Commissioner v. Brier Hill Collieries, supra, as sustaining its contention. These cases are distinguishable as the expenditures there involved were made to maintain normal production, while in the*169 instant case it is clear the expenditure for the construction of the slope had no bearing upon petitioner's production during the tax years at issue.
Petitioner had constructed in 1944 the aforementioned air shaft for ventilating purposes and also installed steps in the shaft which could be used as an escapeway. These two items helped to maintain normal production. The rock slope was about 3,500 feet from the working faces in 1945 and 1946 and was not connected to the working faces until 1950. It had been driven in new and undeveloped territory beyond the then existing mine workings. We cannot see any relation between the maintaining of production in 1945 and 1946 and the construction of the rock slope. Cf. New Pittsburgh Coal Co. v. United States, 200 F. 2d 146. It is our opinion that this expenditure was in the nature of a development expense.
The expenditure was for future production and should be capitalized.
The fourth issue to be considered is whether petitioner is entitled to accelerated depreciation on a Joy loader purchased on January 1, 1942, for $ 13,029.60 and another on January 1, 1946, for $ 11,062.49. On its income tax returns*170 for the years 1943 through 1946, inclusive, petitioner computed depreciation on the straight line basis on an estimated useful life of 7 years. Respondent allowed depreciation based on an estimated useful life of 17 years and disallowed depreciation deducted on a shorter life. Petitioner does not argue this issue in its brief, but there is testimony to the effect that it operated on a double shift. Apparently its position is based on its increase in operating hours which necessarily required using the loaders twice as much, thus justifying accelerated depreciation. This same issue was before this Court recently in H. E. Harman Coal Corporation, 16 T. C. 787, affirmed on this point, 200 F.2d 415">200 F. 2d 415. There the Court stated that in addition to showing extra usage of the equipment the petitioner must show that such extra usage did actually reduce the estimated useful life of the equipment. Petitioner has not met this requirement. See *397 also Copifyer Lithograph Corporation, 12 T.C. 728">12 T. C. 728; Harry Sherin, 13 T.C. 221">13 T. C. 221.
Respondent's action is sustained.
The fifth*171 issue involves the deduction of $ 763.83 as accrued premium on catastrophe insurance. On April 19, 1943, petitioner purchased catastrophe insurance from Lloyd's of London at a cost of 20 cents per $ 100 of payroll, subject to annual audit, and deposited a premium of $ 600 on April 28, 1943. The cost of the premium based on the actual payroll from April 19, 1943, to December 31, 1943, was $ 763.83. Petitioner was on the accrual basis of accounting.
Respondent's deficiency notice stated:
Deduction claimed for the year 1943 for catastrophe insurance in the amount of $ 763.83 has been disallowed on grounds that such amount represents a contingent expense which is not allowable as an ordinary and necessary business expense under Section 23 (a) (1) (A) of the Internal Revenue Code.
We do not think respondent was correct in disallowing the deduction.
Taxpayers using the accrual basis of accounting are allowed to deduct expenses as they are incurred. Charles Weisbecker, 18 B. T. A. 766. The only contingent factor with respect to the accrual of the insurance premiums is the fact that the payroll had to be audited annually. We do not think this prevents*172 the deduction of the premiums, as it has been held that when a liability has accrued during the year it may be the basis for a deduction, although the amount of the liability has not been definitely ascertained. United States v. Anderson, 269 U.S. 422">269 U.S. 422; Brown v. Helvering, 291 U.S. 193">291 U.S. 193.
This record does not indicate a contingent liability with respect to the insurance premiums as petitioner was on the accrual basis and had entered into a contract which by its terms established liability for the insurance premiums. Petitioner's liability became fixed as the payroll was built up. The extent of its liability was not contingent but was determinable by simple computation at the close of any tax year.
Petitioner is entitled to deduct the accrued insurance premium of $ 763.83 on its catastrophe insurance policy.
The last issue involves the computation of percentage depletion. Petitioner reported on its 1943 income tax return gross income from coal sales in the amount of $ 970,808.23 for computing the depletion deduction. That sum included the amount of $ 2,031.64 which represented the sales price of coal mined by petitioner*173 and used as powerhouse fuel. In computing gross profit from sales, the petitioner deducted the amount of $ 2,031.64 as a cost of operation and also deducted as depletion 5 per cent of the $ 2,031.64. Respondent in determining the deficiency did not change the deduction of $ 2,031.64 taken as a cost of operation but disallowed $ 101.58 of the deduction taken for depletion.
*398 Petitioner does not present any argument in its brief on this issue. The testimony was that it priced the coal used in its powerhouse at sales price. We can only assume petitioner contends that since it included the selling price of the coal it used in gross income from the property, 1 it should be allowed depletion on the entire amount. We do not agree with the petitioner.
*174 Petitioner's gross income included an amount on which he realized no income. He made no sale and received no income as such. This was merely a bookkeeping entry, at best, as petitioner could not realize any income on a sale to itself. The Supreme Court said in Helvering v. Mountain Producers Corp., 303 U.S. 376">303 U.S. 376:
The term "gross income from the property" means gross income from the oil and gas (Helvering v. Twin Bell Syndicate, supra) and the term should be taken in its natural sense. * * * We do not think that we are at liberty to construct a theoretical gross income by recourse to the expenses of production operations. * * *
Petitioner increased its gross sales by the cost of the coal it used and at the same time decreased the gross profit on sales by including this same amount as a cost of operation. This resulted in no profit or loss to petitioner as far as its income was concerned.
Petitioner realized no gross income from property within the meaning of section 114 (b) (4) (B). Respondent's disallowance will be sustained.
Decision will be entered under Rule 50.
Footnotes
1. SEC. 114. BASIS FOR DEPRECIATION AND DEPLETION.
(b) Basis for Depletion. --
* * * *
(4) Percentage depletion for coal * * *. --
* * * *
(B) Definition of Gross Income From Property. -- As used in this paragraph the term "gross income from the property" means the gross income from mining. The term "mining, as used herein, shall be considered to include not merely the extraction of the ores or minerals from the ground but also the ordinary treatment processes normally applied by mine owners or operators in order to obtain the commercially marketable mineral product or products. The term "ordinary treatment processes," as used herein, shall include the following: (i) In the case of coal -- cleaning, breaking, sizing, and loading for shipment; * * *. The principles of this subparagraph shall also be applicable in determining gross income attributable to mining for the purposes of sections 731 and 735↩.