*1022 1. Under the terms of its articles of incorporation and the laws of Colorado the term of existence of the petitioner was 20 years. Held, that petitioner may not deduct ratably over the life of the corporation, commissions paid on the sale of its preferred stock.
2. Held, that petitioner is not entitled to use a discovery value in computing the deduction for depletion of its coal properties.
*869 The petitioner seeks a redetermination of deficiencies in income taxes asserted against it for the calendar years 1925 and 1926 in the amounts of $5,616.14 and $5,750.65, respectively. The issues presented are whether respondent erred (1) in refusing to permit a deduction of any amount for amortization of commissions paid by petitioner in cash and common stock for the sale of its preferred stock, and (2) in refusing to permit the use of a discovery value as the basis for the deduction attributable to the depletion of the petitioner's coal properties.
FINDINGS OF FACT.
Petitioner is a corporation organized under*1023 the laws of the State of Colorado. Its certificate and articles of incorporation, which were duly filed in the office of the Secretary of State of Colorado, on the 16th day of October 1922, contained the provision required by the laws of Colorado to the effect that the term of existence of the corporation should be for a period of 20 years. The authorized capital stock was $1,000,000, divided into 5,000 shares of 8 percent cumulative preferred stock, having a par value of $100 per share, and 5,000 shares of common stock, also having a par value of $100 per share.
On the date of its incorporation the petitioner paid $900 cash and issued 4,991 shares of its common stock to William B. Lewis for a *870 coal-mining lease covering section 36, township 27 south, range 68 west of the sixth principal meridian, hereinafter referred to as section 36. The remaining nine shares of the common stock were purchased at par by the directors of the petitioner, each director acquiring one share. In accordance with the agreement whereunder the petitioner acquired the coal-mining lease for its common stock, 2,000 shares of the common stock were transferred to Lewis, as trustee, to be used*1024 in paying bonuses to purchasers of preferred stock and commissions to brokers for the sale thereof. Between October 16 and December 10, 1922, the petitioner's treasurer sold 500 shares of its preferred stock and with each such share of preferred stock the purchaser received one share of common stock.
In December 1922 petitioner made an agreement with H. H. Bizallion whereby Bizallion agreed to undertake the sale of the remaining 4,500 shares of petitioner's preferred stock at par. With each five shares of preferred stock so sold a bonus of one share of the common stock held by Lewis, as trustee, was to be issued. Bizallion was to receive for his services a commission on 10 percent in cash and 500 shares of common stock. He completed the sale of the preferred stock by November 1923 and received a cash commission in the amount of $45,000. The 500 shares of common stock were issued to him on October 31, 1923, in accordance with the agreement.
Except for the nine shares issued to petitioner's directors at par on the date of incorporation, the petitioner sold none of its common stock for cash. The record shows that between September 1923 and August 1925 some stockholders sold*1025 their common stock for as much as $300 per share.
Section 36, covered by the coal-mining lease acquired by the petitioner from Lewis, is located in Huerfano County, Colorado, in the northern part of what is known as the Raton Basin, which extends to the south some fifty or sixty miles to the Dawson Mine, near Raton, New Mexico. The Raton Basin was generally known as coal-bearing territory and numerous mines had been opened and worked for a great number of years. The coal was found in what is known as the Laramie formation. The Laramie formation rested on a strata of sandstone known as Trinidad. Underneath the Trinidad sandstone was the Pierre shale. In some sections of the Raton Basin the Laramie formation was overlain by more recent deposits known as Poison Canon.
The coal seams found in the Laramie formation were not continuous, but were oftentimes of a lenticular nature, being thick in the center and pinching out at the edges. The workings in the Raton Basin had also established the fact that distinctly separate veins of *871 coal were to be encountered at different levels in the Laramie formation and that in some localities one vein of coal would be found, while*1026 in others the coal would be found in an entirely different vein. Workable veins of coal did not extend throughout the basin and in many places no coal was found at all. In some parts of the basin the coal had been burned out as a result of volcanic action.
The surface of section 36 consisted of the Poison Canon formation and there were no surface signs of coal whatever. It does appear, however, that there were outcroppings on section 25, immediately north of section 36, and on section 35 to the west, of what appeared to be Trinidad sandstone and the Laramie formation, definitely placing section 36 in the Raton Basin. This fact was noted by employees of the United States in making a geological survey of that territory in 1908, and at the same time other sections adjoining section 36 were classified by the Government as coal-bearing lands. Section 36 was omitted because of the fact that it had previously been granted to the State of Colorado as school lands. In 1921 Lewis also noted the outcroppings of the Trinidad sandstone and Laramie formation on sections 25 and 35 and concluded that section 36 contained workable coal deposits. As a result, he negotiated the lease in question*1027 with the Huerfano Realty & Securities Co., owner of the property, on October 1, 1921. The lease, which covered all of section 36, was for a period of 30 years and required the lessee to prospect and explore the lands for mineable deposits of coal and to continue such work until July 1, 1922, unless coal in mineable veins should be encountered prior to that time. The lease further provided that if coal in workable veins should not be discovered on or before the date mentioned, the lessee should have the option of surrendering the lease; otherwise he should immediately commence the work of opening up a mine. The lease also carried a provision for the payment of royalties on a minimum tonnage, the royalty fixed by the lease being 12 cents per ton.
On the 11th day of December 1921, Lewis, using a churn drill, commenced drilling on the leased premises. The drill hole was completed on the 17th day of February 1922, at a depth of 785 feet. On the 28th day of January 1922, at a depth of 566.5 feet, a vein of coal was encountered, which, by further drilling, was shown to be about 6.5 feet thick, and on February 9, 1922, at a depth of 612 feet, 2 inches, a second vein of coal was encountered, *1028 which, by further drilling was shown to be about 10 feet, 10 inches thick. Thereafter, by the same method, Lewis drilled seven additional holes upon the premises. The date of beginning and date of completion of each hole, the depth of each hole, the point at which veins of coal were *872 encountered, and the approximate thickness of each vein are as follows:
| Hole | Beginning | Completion | Depth | Depth |
| number | date | date | in feet | in vein |
| 1 | Dec. 11, 1921 | Feb. 17, 1922 | 785 | 566 ft. 6 in. |
| 612 ft. 2 in. | ||||
| 2 | Mar. 7, 1922 | Apr. 7, 1922 | 496 | 335 ft. |
| 3 | Apr. 12, 1922 | Apr. 15, 1922 | 227 | No vein. |
| 4 | May 1, 1922 | June 27, 1922 | 802 | 679 ft. |
| 753 ft. | ||||
| 5 | Apr. 18, 1922 | Apr. 27, 1922 | 300 | No vein. |
| 6 | July 12, 1922 | Sept. 8, 1922 | 851.6 | 722 ft. |
| 842 ft. | ||||
| 7 | Sept. 12, 1922 | Oct. 10, 1922 | 619 | 386 ft. |
| 8 | Oct. 28, 1922 | Dec. 9, 1922 | 580 | 499 ft. |
| 588 ft. |
| Hole | Approximate |
| No. | thickness of vein |
| 1 | -6 ft. 6 in. |
| -10 ft. 10 in. (with 4-in. bone)* | |
| 2 | -4 ft. 7 in. (with 4-in. shale)* |
| 3 | |
| 4 | -3 ft. 9 in. |
| -3 ft. 9 1/2 in. | |
| 5 | |
| 6 | -3 ft. |
| -9 ft. 7 in. (with 1 ft. 6 in.* shale). | |
| 7 | -4 ft. (with 2.5 in. smut and |
| -1 ft. sandstone). | |
| 8 | -4 ft. 6 in. (with 2-ft. shale). |
| -9 ft. (with 2.5 in. smut). |
*1029 In prospecting and exploring the lands for mineable deposits of coal and in drilling thereon, Lewis expended the sum of $10,484.29.
At or about the same time that Lewis acquired the lease to section 36, the Victor American Fuel Co., second only in size to the Colorado Iron & Fuel Co. in the State of Colorado, leased the lands lying north and east of the Alamo property. Early in 1922 the Fuel Co. drilled the land, prospecting for coal, drilling 34 diamond drill holes and about 25 churn holes. The latter holes were put down along a sandstone outcropping which was identified as Trinidad sandstone. The diamond drill holes were located further back from this outcropping. The engineers of the Fuel Co. failed to discover any evidence of a coal outcrop, but their first diamond drill hole, which was commenced on section 25, township 27 south, range 68 west, on or about January 13, 1922, encountered the bottom of a 10-foot, 7-inch seam of coal on April 3, 1922, at a depth of 575 feet.
Under date of June 12, 1922, Lewis advised the Huerfano Realty & Securities Co. as follows regarding his activities on section 36:
Referring to the agreement between your Company and myself, dated*1030 October 1st, 1921, covering a lease for coal mining purposes of Section 36 in Township 27 South Range 68 West of the Sixth Principal Meridian, I desire to inform you that I have prospected and explored the land by churn drilling for mineable deposits of coal as provided in the agreement, and that I believe that workable and mineable coal has been discovered there. Furthermore, that a test water well has been drilled and cased with pipe, with indications that sufficient water can be developed for camp purposes and for a large steam plant.
I therefore notify you that I will continue to carry out my obligations under the said agreement and open up a mine upon the said lands as soon as it can reasonably be done, and construct, or cause to be constructed, suitable and adequate railway transportation facilities, and will supply and install the necessary and proper coal mining equipment in order that the coal mined from the premises may be transported and sold.
Thereafter, and on October 16, 1922, Lewis submitted the following proposition to the directors of the petitioner:
*873 Knowing of your desire to acquire a coal property suitable for the coal mining operation for which*1031 your company is incorporated, I desire to call your attention to a property now under lease to me. This property is all of Section 36, Township 27 South, Range 68 West of the 6th Principal Meridian, containing six hundred forty (640) acres more or less, according to the Government survey therefor, and was placed under lease to me on the 1st day of October, A.D. 1921 by the owner thereof, The Huerfano Realty and Securities Company, for a term of thirty (30) years from that date, upon the usual conditions of such mining leases. The royalties and minimums stated in this lease are favorable, and I have caused the lands to be drilled and will be glad to show you the logs of the different drill holes, which have demonstrated the existence of two merchantable veins of coal. I shall be glad to furnish an engineer's report and map, if desired.
I propose to sell, convey and assign to your company the said coal mining lease, with the assent of the lessor, together with a water right or an appropriation of water as filed in the office of the State Engineer of the State of Colorado known and described as the H. F. Nash Well and Pipe Line, upon the payment to me of Nine Hundred (900) Dollars*1032 cash, and the issuance to me of Four Thousand Nine Hundred Ninety-one (4991) shares of the common stock of your corporation, Alamo Coal Company, full paid and nonassessable, and issued as the full equivalent of the value of the said sale and assignment of said lease.
This is upon the condition and understanding that upon the acceptance of this proposition, you will notify me and immediately take possession of said property and thereafter perform all of the terms and conditions of the lease to be kept and performed by the lessee.
The minutes of this directors' meeting show their action with respect to Lewis' offer as follows:
A discussion was had among the Directors as to the proposition submitted by Mr. Lewis, several of the Directors having been kept fully advised as to the drilling campaign upon said Section 36, mentioned in said proposition, as well as drillings on adjacent lands, and four of the Directors, having visited the property, expressed their approval of the possibilities of said land as the basis for a large mining operation.
Thereupon the following resolution was introduced, duly seconded, put to a vote and unanimously adopted, all of the Directors voting for*1033 the adoption of said resolution and no Director voting against it, save and except that Director William B. Lewis was excused from voting because of his interest:
RESOLVED, that this company accept the proposition this day made by William B. Lewis, whereby he proposes to sell and assign to this company the lease, and also the water right mentioned and described in his proposition; and that the Treasurer be authorized to pay the sum of Nine Hundred Dollars ($900.00) in cash to him, and that the President and Secretary of this company be authorized to issue to said William B. Lewis, or to his nominees, as soon as the assignment of said lease with the consent of the lessor, and a proper deed for said water right, is received, Four Thousand Nine Hundred Ninety-one (4991) shares of the commonstock of this company, issued as full paid and non-assessable stock; that this company declare that the said assignment of said lease and water right to this company is the full equivalent and value of the cash sum of Nine Hundred Dollars ($900.00) and the stock issued in payment therefor; that this company assume and agree to perform all of the terms and conditions of said lease to be kept and performed*1034 by the lessee thereof.
*874 BE IT FURTHER RESOLVED, that the officers of this company be authorized and instructed to cause immediate possession to be taken of said lease-hold and water right in the name of and in behalf of this corporation, and that the officers of this company be authorized and instructed to prepare plans for the erection of the necessary tipple and machinery, plant, housings and other facilities and appliances, and supplies necessary to commence the driving of a mining slope and air course, and that they be authorized to obtain from the engineer of the company plans for the prosecution of said development work and the erection of said plant; and to proceed with and prosecute the mining operation generally.
On or about December 4, 1923, the petitioner began the driving of a main slope and air course to intercept the two veins of coal on section 36 which had been disclosed by the churn drill holes, and also began the erection, construction, and installation of the necessary buildings, machinery, equipment, railroads, etc., as was required by the terms of the lease.
A summary of the expenditures so made by the petitioner up to and including the year*1035 1926 is shown as follows:
| Expenditures - 1922 | $15,052.92 | ||
| 1923 | 631,219.74 | ||
| 1924 | 64,739.26 | ||
| ----------- | |||
| 711,011.92 | |||
| Less: | |||
| Railway tracks | $77,633.26 | ||
| Refundable by D&RGW Ry. 1924 Development Credit (being | |||
| the excess of the amounts received from coal mined and | |||
| sold during 1924 over operating expenses of the year) | 2,573.02 | ||
| Miscellaneous credits | 211.13 | ||
| ----------- | |||
| 80,417.41 | |||
| ----------- | |||
| 630,594.51 | |||
| Less depreciation, 1924 | 1,843.29 | ||
| ----------- | |||
| Cost of development and plant as of December 31, 1924 | 628,751,22 | ||
| ----------- | |||
| Divided into cost of plant | 456,242.94 | ||
| And cost of development | 172,508.28 | ||
| There was expended in further development in 1925 | 3,199.32 | ||
| ----------- | |||
| Making total cost of development as of Dec. 31, 1925 | 175,707.60 | ||
| There was expended in further development in 1926 | 2,080.60 | ||
| ----------- | |||
| Making total cost development as of Dec. 31, 1926 | 177,788.20 |
The lower vein of coal was encountered by the main slope and by the air course about September 25, 1923. The first railroad car of coal was shipped from the*1036 mine October 2, 1923. The output of the mine for the year 1924 was 84,639 tons; for the year 1925, 122,040.15 tons; and for the year 1926, 115,662.95 tons.
*875 As of December 31, 1924, the coal content of the 10-foot seam in the Alamo Mine was 7,045,000 tons and the fair market value of the coal in place at that date was $2,000,000.
On December 12, 1924, the main slope had been driven to a depth of approximately 2,400 feet from its mouth, 700 feet of which was in the vein of coal. At that time an entry had been driven approximately 1,400 feet into the vein of coal toward the right from the main slope. Another entry had been driven to the left in a similar manner approximately 1,500 feet.
The respondent has refused to allow as deductions any portion of the cash or stock paid to Bizallion as commissions for selling the petitioner's preferred stock. The respondent has further determined the development expenses of the mine for 1925 and 1926 to be $156,174.36 and $158,254.96, respectively, and has allowed a depletion deduction for each year at the rate of 2.2 cents per ton. On this basis, the allowance for depletion was $2,684.79 for 1925 and $2,958.12 for 1926.
*1037 OPINION.
TURNER: The first issue for determination is the right of the petitioner to amortize the commissions paid in connection with the sale of its preferred stock by deducting one twentieth of such costs for each year of its corporate existence. It now contends that the commissions so paid amounted to $195,000, $45,000 representing a cash payment and the remainder the 500 shares of common stock at a value of $300 per share.
It is well settled that commissions paid in connection with the issue and sale by a corporation of its stock are not deductible as ordinary and necessary business expenses for the year paid or incurred. Corning Glass Works,9 B.T.A. 771">9 B.T.A. 771; affd., 37 Fed.(2d) 798; certiorari denied, 281 U.S. 742">281 U.S. 742; Simmons Co.,8 B.T.A. 631">8 B.T.A. 631; affd., 33 Fed.(2d) 75; certiorari denied, 280 U.S. 577">280 U.S. 577; Emerson Electric Manufacturing Co.,3 B.T.A. 932">3 B.T.A. 932; Odorono Co.,26 B.T.A. 1355">26 B.T.A. 1355. In Simmons Co., supra, the Circuit Court of Appeals said:
Commissions paid for marketing stock simply diminish the net return from the stock issue. Financially they*1038 are equivalent to an issue of stock at a discount from par; the par value must be carried as a liability without an offsetting, equal, amount of cash or property.
In Corning Glass Works, supra, it is said that the payment of such commissions "represents a capital expenditure, and should be charged against the proceeds of the stock, and not be recouped out of operating earnings." These pronouncements, in our opinion, rather than the reasoning of the court in Hershey Manufacturing Co. v. Commissioner, 43 Fed.(2d) 298, relied on by the petitioner. *876 give the correct answer to the question here involved. We have previously considered the question and held that a corporation may not amortize or deduct commissions so paid ratably over the life of the stock. Commercial Investment Trust Corporation,28 B.T.A. 143">28 B.T.A. 143; Surety Finance Co. of Tacoma,27 B.T.A. 616">27 B.T.A. 616. On the basis of these latter decisions, which are directly in point, the first issue is decided for the respondent. See also *1039 James I. Van Keuren,28 B.T.A. 480">28 B.T.A. 480.
On the second issue the petitioner contends that it discovered the Alamo Mine, within the meaning of the statute, section 204(c)(1) of the Revenue Act of 1926, 1 and under its provisions is entitled to compute the depletion thereof on the basis of a discovery value. The date of discovery of the Alamo Mine fixed by the petitioner is December 31, 1924, when the vein of coal had been opened up and developed to such extent that all of its characteristics and the mining conditions became known. In other words, the petitioner contends that while Lewis discovered the seams of coal which lay under section 36, the petitioner, by virtue of its development work and operations along the seams, discovered the mine and that the discovery was not complete until December 31, 1924, at which time the seam had been sufficiently explored and opened up to determine its size and extent.
*1040 In support of this contention, the petitioner points out that Webster's New International Dictionary defines a mine as "a subterranean cavity or passage" from which coal, ores, etc., "are taken by digging." From this it is concluded that the discovery of a vein or deposit of coal is not the discovery of a mine, since at that time there is no underground cavity or passage. In further support of its position in this respect, the petitioner cites numerous cases to show that the term "mine" means a mineral deposit which has been opened up and which is being worked. In a quotation from one of these cases, Astry v. Ballard, 2 Mod. 193 (8 Morrison Mining Report *877 316), decided in England some 250 years ago, it is interesting to note that the court, after stating that a mine is not properly so-called until it is opened, refers specifically to opened and unopened mines. The same is true of the quotation from Westmoreland Co.'s Appeal,85 Pa. State, 344, 346. We do not believe that any of the cases cited on petitioner's behalf are authority for construing the term "mine", as used in the statute, in the restricted sense contended for. Neither*1041 do we believe that Congress had in mind any such interpretation when the statute was enacted. We are convinced that the discovery of the mine, as contemplated by the statute, refers not to the finding of a mine in the sense of a complete operating unit, but the ascertainment of a natural deposit of coal or mineral previously unknown. We seriously doubt whether there could be a date of discovery of a mine in the sense contended for by the petitioner. The gradual development of a coal seam or mineral deposit results in constant enlargement of the field of activity of the mine until the deposit is exhausted, and it is not until the deposit is exhausted that any one can positively and definitely determine the exact amount and quality of the coal or mineral that can profitably be removed and all of the working conditions to be encountered in connection with its extraction. An arbitrary date would have to be fixed at some time in its operations, just as the petitioner has done here. The petitioner recognizes this weakness in its position and in its brief states that it "would be impossible to point to a particular day as the date of discovery, or to fix a day when it could be said *1042 with certainty that the development had proceeded to such an extent that the vein was no longer merely a vein but was a mine." The foregoing quotation graphically depicts the uncertainty which attaches to efforts to determine a discovery date under the petitioner's interpretation of the term "mine."
In our opinion the facts clearly indicate that the discovery of the Alamo Mine was made prior to the acquisition of the property by the petitioner on October 16, 1922. Lewis acquired the lease in 1921, and immediately started the work of exploration. He employed Muiry, a churn driller with years of experience in that territory, to sink eight drill holes. The results are shown in the findings of fact. Testimony was offered, both on behalf of the petitioner and on behalf of the respondent, by experienced coal men who were familiar with the territory in which the petitioner's mine is located and familiar with the results of the drilling tests. The testimony of these men convinces us that these drill tests disclosed deposits of good and mineable coal. The chippings from the drill holes were carefully examined and analyzed and the results were considered sufficient, by all parties*1043 testifying, to justify the development of the mine. Some of the witnesses were more positive than others in their conclusions *878 as to the extent and quality of the coal indicated by the tests, but those who were most reluctant to state that a workable vein of coal had been discovered were of the opinion that the results justified the opening of the mine. Lewis indicated that he was satisfied on the point in his communication to the lessor company, stating that he intended to exercise his option and to carry out the terms of the lease. The same views were disclosed in his communication to the board of directors of the petitioner company. The directors of the petitioner company, according to the minutes of their organization meeting, were convinced that a vein of commercially mineable coal had been discovered and immediately took the necessary steps for installing and erecting the machinery and equipment required for an extensive coal-mining operation. They based their conclusions not only on the results of the drill holes sunk on section 36, but on tests made by the Victor American Fuel Co. on section 25, immediately to the north of section 36.
*1044 We accordingly conclude that the Alamo Mine was discovered within the meaning of the statute prior to the petitioner's acquisition of the lease and that the petitioner is not entitled to compute depletion on the basis of a discovery value. Darby-Lynde Co.,20 B.T.A. 522">20 B.T.A. 522; affd., 51 Fed.(2d) 32; Hoffer Oil Corporation,27 B.T.A. 98">27 B.T.A. 98; Rialto Mining Corporation,25 B.T.A. 980">25 B.T.A. 980; Melville G. Thompson,10 B.T.A. 25">10 B.T.A. 25; Boucher-Cortright Coal Co.,7 B.T.A. 1">7 B.T.A. 1.
In the petition there is a claim in the alternative to the effect that depletion should be computed on the basis of the value of the lease on section 36 at the time of its acquisition by the petitioner from Lewis. This alternative contention was not discussed at the hearing, nor is there any supporting argument to be found in the brief, but in any event the contention is disposed of by the provisions of sections 204(a)(8) and 203(b)(4) of the Revenue Act of 1926, which, when applied to the facts in this case, provide that the basis for depletion of the lease so acquired by the petitioner is the same in its hands as in the hands of Lewis, from*1045 whom it was acquired. The record does not indicate that Lewis paid anything for the lease, and the method used by the respondent of computing depletion on the basis of development expense will not be disturbed. The facts do show, however, that development expense on December 31 of each of the years herein involved is greater than that used by the respondent in his determination of the deficiencies. There is also a variation in the number of tons of coal mined in the taxable years. The depletion deductions should be revised on the basis of the figures shown in our findings of fact.
Decision will be entered under Rule 50.
Footnotes
1. SEC. 204(c) The basis upon which depletion, exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be the same as is provided in subdivision (a) or (b) for the purpose of determining the gain or loss upon the sale or other disposition of such property, except that -
(1) In the case of mines discovered by the taxpayer after February 28, 1913, the basis for depletion shall be the fair market value of the property at the date of discovery or within thirty days thereafter, if such mines were not acquired as the result of purchase of a proven tract or lease, and if the fair market value of the property is materially disproportionate to the cost. The depletion allowance based on discovery value provided in this paragraph shall not exceed 50 per centum of the net income of the taxpayer (computed without allowance for depletion) from the property upon which the discovery was made, except that in no case shall the depletion allowance be less than it would be if computed without reference to discovery value. Discoveries shall include minerals in commercial quantities contained within a vein or deposit discovered in an existing mine or mining tract by the taxpayer after February 28, 1913, if the vein or deposit thus discovered was not merely the uninterrupted extension of a continuing commercial vein or deposit already known to exist, and if the discovered minerals are of sufficient value and quantity that they could be separately mined and marketed at a profit. ↩