TAXATION-PERCENTAGE DEPLETION ALLOWANCE ON INCOME RECEIVED FROM THE REWORKING OF DUMPS AND TAILINGS DEPOSITS

A dump of waste material and low-grade ore resulted from mining operations by a lessee in the American Mine. London Extension owned an undivided one-half interest in the claims which made up the mine. In 1940 London acquired the lease on the property. Chicago Mines, a wholly-owned subsidiary of London, then took a lease on the dump, agreeing to pay to London a royalty of twenty per cent of the net smelter returns. Chicago worked the dump for a few months, after which it was worked by London. In filing its income tax return for the year, Chicago claimed a percentage depletion allowance on account of its working of the dump. London claimed a percentage depletion allowance based on the amount it received from Chicago as royalties, plus the amount it received from its own working of the dump. On appeal from a Tax Court decision adverse to the taxpayer, the Court of Appeals for the Tenth Circuit held that the controlling question was whether or not the dump was a mine within the meaning of section 23(m) of the Internal Revenue Code. The court found that the dump was not a mine and therefore the depletion allowance was not available. Chicago Mines Co. v. Commissioner, (10th Cir. 1947) 164 F. (2d) 785