The opinion of the court was delivered by: Perry, District Judge.
This cause having been tried by the court without a jury,
and the court having considered the pleadings, the
stipulations of facts, together with exhibits attached
thereto, the exhibits introduced at the trial, the testimony
of witnesses and the oral arguments and briefs of counsel,
finds the facts and states the conclusions of law as follows:
In the spring of 1950, uranium-bearing ores were found on
Section 19, Township 13 North, Range 10 West, hereinafter
referred to as Section 19 (Haystack), located in McKinley
County, New Mexico. The mineral rights in Section
19 (Haystack) were owned by taxpayer. The
surface rights were owned by one Berryhill.
4. The mineralized outcropping on Section 19 (Haystack)
contained a yellow mineral, later identified as tyuyamunite.
It occurred in a dark gray limestone outcropping near the top
of a red sandstone mesa or bluff. The limestone formation,
known as Todilto limestone, dipped toward the north and was
covered by an overburden of earth varying in depth.
5. In September, 1950, T.O. Evans, Chief Mining Engineer of
the Atchison, was assigned to investigate this occurrence.
During September and October, Evans found that the total
length of exposed limestone outcroppings extended about 12 1/2
miles, of which 8 1/2 miles occurred on lands in which the
mineral rights were owned by taxpayer. His investigation
disclosed that mineralized outcroppings were present not only
on Section 19 (Haystack) but also on Section 13, T. 13 N., R.
11 W., Section 23, T. 13, R. 10, Section 25, T. 13, R. 10, and
Section 31, T. 13, R. 9, hereinafter referred to as Sections
13, 23, 25, and 31, respectively.
6. In the latter part of October, 1950, Evans reported that
his preliminary investigation warranted further exploration.
On November 13, 1950, F.G. Gurley, President of both the
Atchison and taxpayer, authorized Evans to proceed with
further exploration of the occurrences already found, and to
explore the entire Todilto formation from Cubero, New Mexico,
to Gallup, New Mexico, a distance of 90 miles, using geiger
counters. Prospecting with geiger counters disclosed that the
strongest showings of radioactivity occurred in six sections
approximately twenty miles northwest of Grants, New Mexico, in
the immediate area of the original occurrence. Geiger counter
and scintillometer readings disclosed the existence of
7. On December 11, 1950, Gurley and members of his staff
met with Evans to decide upon a program of detailed
investigation of the uranium occurrences. The surface exposure
of radioactive tyuyamunite ore, the shallow overburden, and
the accessibility of Section 19 (Haystack) resulted in the
choice of that section for detailed exploration. Evans
recommended the adoption of the following program:
(1) Establishment of horizontal and vertical
control with reference stakes set on North,
South, East and West lines at 100 foot centers.
(2) Removal of overburden to top of Todilto
limestone at 100 foot centers with bulldozers.
(3) Vertical control on bedrock surface of
(4) Test pitting through the Todilto limestone
on 100 foot centers to the underlying Entrada
sandstone, followed by crushing, sampling and
assaying of all test pit material as obtained
from each two feet of vertical section.
(5) Drill, blast and sample entire rim outcrop
four feet back of the rim at 10 foot intervals.
(Secondary uranium mineral is soluble and this
procedure was necessary to obtain an unweathered
face back of the outcropping.)
(6) Installation of laboratory equipment to
furnish radiometric and chemical determinations
of drill hole and test pit samples.
This program was approved by Gurley and his staff on December
11, 1950. Similar programs were subsequently adopted for
Sections 13, 23, 25 and 31.
8. At the same meeting Evans was directed to submit regular
reports to Gurley outlining the progress of the program which
had been authorized.
9. On December 14, 1950, Gurley issued a report to Atchison
stockholders reviewing the investigation and exploration
accomplished to that date, outlining the program which had
been adopted for the future and explaining the economic
potential of uranium mining. Mr. Gurley's report stated, in
"For the past four or five weeks these
preliminary investigations have been carried on.
The reports which were made currently suggested
of a worthwhile deposit. We retained the services
of consulting mining geologists, and on Monday,
December 11, at a conference on the ground in New
Mexico, which I attended, it was arranged to have
a thorough exploration made by a combination of
(1) drilling, and (2) trench pits on a 90-acre
area where previous examinations and the general
lay of the land suggested such a thorough
exploration. Work on this exploration has
started, and with good weather it should be
completed within about three months. The
elevation is approximately 7000 feet, and we
might reasonably anticipate some delay due to
snow during the next two or three months.
"The indications given on geiger counters and
scintillometers suggest the possibilities of
uranium minerals on some other sections of Santa
Fe Pacific land, but plans about exploration in
other areas await the result of the 90-acre
exploration. The reactions of geiger counters and
scintillometers are indications only and are not
conclusive. The only way in which one can
determine conclusively whether there is a deposit
of uranium minerals in commercial quantities is
by the process described in the preceding
"In brief summary, we have knowledge of uranium
bearing ores which warrant thorough investigation
to determine whether the deposits are of mineable
proportion, or merely interesting
phenomena. * * *"
10. On December 15, 1950, taxpayer entered into a contract
with F.D. Shufflebarger to do test drilling, excavate pits,
and perform other work in connection with the program.
11. The initial work was undertaken on Section
19 (Haystack). As a horizontal control for the work and to permit
accurate mapping of the surface and sub-surface, a grid system
lined to approximately the cardinal directions was established
and staked out on the ground. In setting out this grid system,
wooden stakes were placed at 100 foot intervals and identified
as to location by a letter of the alphabet indicating its
position on a north-south coordinate line, and a number
indicating its position on a west-east coordinate line. This
grid system was later used on all sections by taxpayer.
12. In the work on Section 19 (Haystack) scintillometer
readings indicating gamma ray counts-per-second were taken at
50 foot intervals at the surface of the ground over the entire
97 acres. From this information an Isorad map was completed,
prior to January 3, 1951, showing lines of equal radioactive
intensity. It was hoped that a correlation could be
established between the intensity of radioactivity and the
approximate grade and extent of underlying ore. This
correlation was not established because of the shielding
effect of the overburden and the existence of radon gas.
Therefore, the taxpayer found it necessary to undertake a
program of sampling to obtain more accurate information as to
the location, grade and extent of uranium deposits.
13. Three methods were used on Section 19 (Haystack). One
method was applied to the investigation of the mineralized
outcroppings of the mesa. To determine the effect of
weathering on the Todilto limestone outcroppings, a line of
drill holes placed 5 to 10 feet apart and 4 to 5 feet back
from the rim were charged with dynamite and the face of the
outcroppings blown off to expose the unaltered limestone. The
results of this operation were somewhat inconclusive because
of the extension of the weathered limestone back to and beyond
the line of holes. It was established, however, that the
mineralization of the rimrock was not continuous. This fact
was later verified by the assay grade of drill hole and bulk
samples taken near the rim.
The second method consisted of drilling holes 2 1/2 inches
in diameter into the Todilto limestone and collecting the
drill cuttings in a metal container surmounted by a canvas bag
at the collar of the hole. After the overburden had been
bulldozed from each corner location of
the surface rim, a drill hole was put down (at each 100 foot
interval) until the drill cuttings indicated that the
sandstone underlying the limestone had been reached. In
Section 19 (Haystack) the thickness of the Todilto limestone
seldom exceeded 18 feet, which depth was easily attained by
jack-hammer drills. Samples were taken from the limestone at
2 foot vertical intervals until the underlying sandstone was
The third method consisted of the removal of bulk quantities
of limestone rock from pits located at the center of each 100
foot grid square. These samples, blasted from pits of 5 x 5
feet, were taken at 2 foot intervals. At the conclusion of
each day's field operation, the collected samples were brought
to the field laboratory, pulverized and placed in envelopes
and labelled with the grid system letters and numbers to show
its origin. The envelopes were then forwarded to the assay
14. The data gathered on Section 19 was kept current by
daily postings on records and maps. By the establishment of
the grid system each point on the 97 acres of Section
19 (Haystack) could be identified. Each hole or pit was assigned
a letter and number showing its position relative to the grid
system and information was entered on a 4" x 6" file card for
that point. The information entered included the elevation at
top of ground, elevation of bedrock, scintillometer readings,
and the results of assays. However, because of the delay in
receiving laboratory equipment, a delay was experienced in
assaying the samples taken from the drill holes and center
pits. In a report to Mr. Gurley dated January 26, 1951,
concerning progress, Mr. Evans stated that although 709
samples from 161 drill holes and center pits had been
delivered to the laboratory, the assays had been completed on
only 257 samples from 95 drill holes and center pits. Mr.
Evans wrote that "Inasmuch as the samples are coming in about
2 1/2 times as fast as we can assay them, we are planning to
put on two shifts in our assay laboratory and also in the
crushing and pulverizing department. With the receipt of
another assaying instrument, expected on January 27th, we
shall be able to catch up on our sampling program."
15. On December 28, 1950, approximately five tons of uranium
ore (tyuyamunite in limestone) were shipped from Section
19 (Haystack) to the mill of American Smelting and Refining
Company in Monticello, Utah. On or about January 17, 1951,
settlement sheets were mailed to the taxpayer entitling it to
payment of $112.40 for this ore. Assay returns on such ore
from American Smelting and Refining Company showed 0.39%
U3O8 (uranium oxide) and 0.30% V2O5 (vanadium oxide). Aside
from the assaying of the sample, the purpose of the shipments
was to attempt to determine a method by which the uranium oxide
could be recovered from the ore. The processing mills then in
operation obtaining uranium from secondary uranium minerals
were equipped to handle carnotite, a secondary uranium mineral
in the host rock, sandstone. The recovery method employed for
the sandstone could not be used where, as here, the host rock
16. Amenability tests performed on the ore from Section
19 (Haystack) by the United States Bureau of Mines showed that
92.5% of the uranium oxide contained in the ore could be
extracted by means of an alkaline leach process. The recovery
of the uranium from the limestone on any but an experimental
basis required the construction of a processing mill designed
for that purpose. Just when the final decision on such a mill
was made is not clear. However, the decision apparently had
not been made as of March 27, 1951. In a report to Mr. Gurley
on that date, Mr. Evans stated, in part:
"Representatives of the Bureau of Public Roads,
accompanied by Atomic Energy Commission men,
called at this office March 23d. They believed
that a program of road improvement and building
should be inaugurated to facilitate movement of
ore to the mill site. In our opinion this action
on the part
of the authorities seems premature inasmuch as we
are unaware of any decision to erect a mill, nor
of its location if erected."
17. The activity on the other sections, while carried on at
different times after the beginning of the exploration of
Section 19 (Haystack), followed the same exploration program
and employed the same or comparable techniques. The other
sections, all in McKinley County, New Mexico, were:
(1) Section 13, T. 13 N., R. 11 W.
(2) Section 19, T. 13 N., R. 9 W. (Poison
(3) Section 23, T. 13 N., R. 10 W.
(4) Section 25, T. 13 N., R. 10 W.
(5) Section 31, T. 13 N., R. 9 W.
18. Uranium mineralization was first found on Section 19
(Poison Canyon) on January 20, 1951, and work was begun there
on July 9, 1951. It was a small outcropping of carnotite in
the Westwater sandstone of the Morrison formation. The
mineralization on Section 19 (Poison Canyon) differed from
those on other Santa Fe properties in that the host rock was
sandstone rather than limestone. Also, tunneling was attempted
initially but the condition of the sandstone was such that the
cost and labor involved in shoring up the tunnels was
prohibitive. Consequently, this plan was abandoned in favor of
trenching. In the course of the tunneling and trenching
operations, some ore was found and stockpiled. However, such
activity did not constitute development (or, much less,
production) since that which was found and stockpiled was
merely that which was removed from the trench or tunnel during
excavation. The primary purpose of the tunneling and trenching
was to search for and locate ore. In his report of July 27,
1951, addressed to Mr. Gurley, Mr. Evans stated, in part:
"Section 19, Township 13 North, Range 9 West
"Exploration work on this section was begun
July 9, and the work consists of excavating a
trench across a finger of the Morrison formation
to develop information concerning the ore
deposition. In order that you may recall the
location of this work, it is being done at the
point you visited on the small hill in Poison
19. "Exploration" is generally defined by all authorities as
the search for or or investigation of a mineral deposit. The
techniques employed in exploration, such as core drilling,
bulk sampling by means of pits and assaying the samples
obtained have as their immediate object the determination of
the existence, location, extent and/or quality of a mineral
20. "Development" as generally defined by the authorities is
the preparation of the explored deposit for extraction and
exploitation. The techniques employed, such as stripping,
shafting or tunneling, have, as their immediate object, the
opening up of the deposit or the gaining of access to the
deposit so that the actual mining of the deposit may take
21. On all sections involved, the program of exploration
proposed by Mr. Evans and authorized by Mr. Gurley at the
meeting of December 11, 1951, was carried out with but minor
variation or alteration. The taxpayer set out to make a
thorough exploration of the properties and that is precisely
what was done.
22. Aside from the fact that the exploration schedule as
initially proposed and authorized was followed throughout,
other facts also establish that development did not ensue
during the period in dispute.
The uranium deposits were not in continuous veins or solid
beds but were in isolated, disconnected pockets of varying
grade. These pockets could be located only by means of the
core drilling and center pitting.
Because of the relatively shallow overburden, strip mining
was contemplated. Thus, it was necessary not only to find
where the deposits were but also to determine where they were
not so that the overburden would not be pushed to an area
which might later be discovered to be of high mineralization.
All sales of ore were governed by the Atomic Energy
Commission and payment
was pursuant to a schedule which provided for different prices
for different grades as well as penalties or bonuses depending
upon the grade. Thus, the blending of deposits of different
grades became desirable so as to achieve the highest return on
the overall operation.
The operation involved the first investigation of any size
of a uranium occurrence in limestone. Little was known of the
characteristics of such occurrences. Consequently, a
conservative procedure of exploration was most prudent and
would offer, ultimately, the best chance for the recovery of
optimum profit from the operation.
Until a method of extracting the uranium oxide from the
limestone was devised it was not known whether the deposit
would be susceptible of profitable exploitation.
Even after the extraction process was devised, until such
time as a mill was constructed, there was no commercial market
for the ore. However certain it may have been that the
facilities for the purchase of the ore would be established,
it is a fact that until such facilities were established there
was no market.
23. These facts establish that not only was the initial
exploration program followed but that common sense and sound
business practice would dictate that no other course was
24. Even though on some sections bodies of ore or potential
ore had been located, the taxpayer made no effort to "develop"
these bodies, that is, to open up the deposits to make them
accessible and susceptible to extraction. To have done so
would have jeopardized the profit potential of the overall
operation because not enough was known about the
mineralization on the balance of the particular section.
25. Also, at the time these ore bodies were located there
were no facilities for the purchase of such materials except
on a sample basis for study and experimental purposes.
Consequently, the ore deposits cannot be regarded as having
been "commercially marketable" as required by the statute.
And, as stated, in any event, the taxpayer took no steps to
employ the techniques of development. Rather, it continued
exploration to gain further information about the size, shape,
and quality of the ore bodies and to locate other possible ore
26. The taxpayer maintains that after the following
"cut-off" dates, all expenditures on a given property were
"development" expenses rather than "exploration" expenses:
Section 13 May 15, 1951
Section 19 (Haystack) January 24, 1951
Section 19 (Poison Canyon) August 31, 1951
Section 23 June 30, 1951
Section 25 February 21, 1951
Section 31 August 31, 1951
The taxpayer's assistant engineer, James E. Inman, testified
that in December of 1951, at the request of the taxpayer's
auditor, he went back over the records of the operations and
from those records established the above dates. This was
clearly a hindsight determination. Mr. Inman was able to rely
on, not only the overall technical knowledge of the
characteristics of tyuyamunite not available at the time, but
also of assay reports not available at those times. Although
the drill holes and some center pits may have existed as of
those dates, the assays of the samples taken would not have
been completed. Also, the center pitting and bulk sampling had
not been completed. Although this process was
later discontinued, in January of 1951, the bulk samples were
deemed necessary as a check on the core drill samples.
27. This hindsight determination indicates that at those
purported "cut-off" dates the men on the sites were unaware of
having supposedly passed from the exploration to the
development of a property. Rather, they continued with their
established plan of exploration.
28. The evidence presented at the trial falls far short of
sustaining plaintiff-taxpayer's required burden of proof that
any of the expenditures in dispute here were paid or incurred
"for the development of a mine or other natural deposit" or
that any of the expenditures in dispute here were paid or
incurred "after the existence of ores in commercially
marketable quantities had been disclosed."
CONCLUSIONS OF LAW
1. The court has jurisdiction of the parties and of the
2. Any finding of fact which might be deemed a conclusion of
law is hereby concluded as a matter of law.
3. The plaintiff-taxpayer has failed to carry its burden of
proof of the elements of its case.
4. The law is with the Government and against the
plaintiff-taxpayer on the issues in dispute.
5. The applicable provisions of the Internal Revenue Code of
1939, namely, subsections 23(cc) and 23(ff), require, for
purposes of the case at bar, that two conditions be met before
a given expenditure may be deducted as a development expense:
(1) The expenditure must have been paid or incurred "after the
existence of ores or minerals in commercially marketable
quantities has been disclosed," and (2) the expenditure must
have been paid or incurred "for the development of a mine or
other natural deposit." Plaintiff-taxpayer has failed to show
that any of the expenditures which it incurred after the
so-called "cutoff" dates alleged were paid or incurred after
either one of these two conditions had been met.
6. The taxpayer wholly failed to establish any subsequent
dates as "cutoff" dates, and therefore all of the expenditures
in dispute must be regarded as exploration costs. The
expenditures in dispute must, therefore, be treated as
exploration costs and not as development costs for federal
income tax purposes.
7. Each of the fractional sections involved in this cause
did not constitute a single and separate "mine or other
natural deposit" within the meaning of Section 23(cc) of the
Internal Revenue Code of 1939.
8. Plaintiff has filed all necessary claims for refund of
income taxes for the calendar years 1951-1953, inclusive, in
the manner and within the time required by law and has brought
this suit based on those claims within and in conformance with
the time limits required by law.
9. A judgment order should be entered herein in favor of
defendant Government following a computation to be made by
defendant Government of the amount of the judgment, in
conformity with the decision of this court, and after
submission of such computation to the plaintiff for inspection
as to accuracy.
© 1992-2003 VersusLaw Inc.