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Santa Fe Pacific Railroad Co. v. United States

May 17, 1967

SANTA FE PACIFIC RAILROAD COMPANY, PLAINTIFF-APPELLANT,
v.
UNITED STATES OF AMERICA, DEFENDANT-APPELLEE



Castle, Swygert, and Cummings, Circuit Judges.

Author: Swygert

SWYGERT, Circuit Judge.

Santa Fe Pacific Railroad Company, a subsidiary of the Atchison, Topeka and Santa Fe Railway Company, appeals from a judgment of the district court denying in part a claim for a refund of federal income taxes for the year 1951.*fn1 The questions presented concern the interpretation of sections 23(cc) and (ff) of the Internal Revenue Code of 1939.*fn2

The taxpayer owned the mineral rights on certain lands in McKinley County, New Mexico upon which uranium-bearing ores were discovered in 1950.*fn3 Preliminary investigation proved encouraging and in December 1950 the taxpayer embarked upon a detailed program of investigation on the first of the five sections of land involved in this appeal. Similar programs were adopted for the remaining sections at various times in 1951. Perhaps because these operations concerned the first significant discoveries of uranium occurrences in limestone, the procedures employed were painstaking. It is not necessary to relate each of the specific activities engaged in by the taxpayer. In general, the programs consisted of several techniques for determining the nature, quality, and extent of the uranium occurrences previously discovered, including the establishment of grid systems staked out at 100-foot intervals, extensive sampling by means of core drilling, center pitting, and blasting, and assaying the samples taken.*fn4 The district court found, and there is substantial evidence in the record to support the ultimate finding, that all the operations undertaken by the taxpayer during the period in question were in the nature of "exploration" activities as that term is commonly understood in the mining industry. The taxpayer does not challenge this determination.

In its refund suit for overpayment of income taxes, the taxpayer alleged that in its 1951 federal income tax return it was entitled, but had failed, to deduct as "exploration" expenses under section 23(ff) of the Internal Revenue Code of 1939 a certain portion of the expenses incurred in its investigation of uranium occurrences during 1951. The taxpayer also alleged that it was entitled, but had failed, to deduct its remaining expenses during 1951 as "development" expenses under section 23(cc) of the Code. The district court held that all the expenses in question were exploration expenses and that consequently the taxpayer's deduction was limited as provided by section 23(ff).

The pertinent language of section 23 is as follows:

In computing net income there shall be allowed as deductions:

(cc) Development of mines

(1) * * * all expenditures paid or incurred during the taxable year for the development of a mine or other natural deposit * * * if paid or incurred after December 31, 1950, and after the existence of ores or minerals in commercially marketable quantities has been disclosed.

(ff) Deduction of exploration expenditures

(1) * * * In the case of expenditures paid or incurred during the taxable year for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral, and paid or incurred prior to the beginning of the development stage of the mine or deposit, so much of such expenditures as does not exceed $75,000.

The taxpayer's principal contention is that in order to qualify as a development expense under section 23(cc), it is only necessary that an expenditure be incurred "after the existence of ores or minerals in commercially marketable quantities has been disclosed." The taxpayer argues that once a commercially marketable quantity of a mineral is shown to exist, all expenses subsequently incurred in connection with it are automatically deductible as development expenses. The taxpayer contends that the district court erred by considering evidence, in the form of expert testimony, as to the meaning of the word "development" in the mining industry. It says that by doing so the district court imposed a "double standard" not contemplated by the statute, that is, to qualify an expenditure as a development expense the court required (1) that the expenditure have been made for the purpose of "development" as that term is understood in the mining industry, and (2) that the expenditure have been incurred after commercially marketable quantities of ore had been disclosed. In computing the deduction to which it claims to be entitled, the taxpayer assigned a date to each of the sections and partial sections of land on which it owned the mineral rights in order to identify the time at which the taxpayer had sufficient knowledge to determine that commercially marketable quantities of uranium-bearing ores existed. The taxpayer then claimed all its expenses in connection with the ore deposits on the respective properties after the "cut-off" dates as development expenses. The district court, in addition to finding that all the expenditures claimed were exploration expenses, found that the "cut-off" dates chosen by the taxpayer were incorrect and held that the taxpayer had failed to prove that any of its expenditures were made after the existence of commercially marketable quantities of ores had been disclosed.*fn5

We think the interpretation of section 23(cc) by the district court is correct. The statute, by its terms, pronounces the very double standard which the taxpayer contends is repugnant to a reading of it. The first requirement of the statute is that the expenditure must be incurred "for the development of a mine or other natural deposit." That such an expenditure must be incurred after commercially marketable quantities of ore have been disclosed is then expressly stated as an additional requirement. The statute does not, as the taxpayer would have it, define development expenses in terms of expenditures occurring subsequent to the discovery of a commercially exploitable deposit; in fact, the statute does not purport to define "development" at all. Under such circumstances it is proper, even necessary, to attribute the same meaning to the term as is generally ascribed to it by those whose activities the statute was designed to cover.

As the district court found, the development of a mine or deposit is commonly understood by authorities in the mining field to mean the activity necessary to make a deposit accessible for mining. Cf. Kennecott Copper Corp. v. United States, 171 Ct. Cl. 580, 347 F.2d 275, 281, 301-302 (Ct. Cl. 1965). The techniques employed in development -- stripping the overburden and constructing means for its removal (in the case of open pit mining), or sinking shafts and installing raises, tracks, pumps, et cetera (in the case of underground mining) -- are all designed to prepare the deposit for extraction or exploitation. The development of a mine or deposit is to be distinguished from exploration, which the mining industry generally defines as the activity undertaken to ascertain the existence, location, extent, or quality of a mineral deposit. The techniques employed in exploration -- drilling, trenching, pitting, sampling, assaying, et cetera -- are calculated to achieve these objectives. As has already been stated, the operations engaged in by the taxpayer were exploration ...


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