Full opinion text
PER CURIAM: This case was referred pursuant to Rule 45(a), now Rule 57(a), to Trial Commissioner W. Ney Evans, with directions to make findings of fact and recommendation for a conclusion of law. The commissioner has done so in an opinion and report filed on August 2, 1963. Plaintiff requested the court to adopt the commissioner’s report in its entirety, the defendant requested the court to adopt the findings of fact with one exception and excepted to the recommended conclusion of law and opinion of the report. Briefs were filed by the parties and the case was submitted to the court on oral argument of counsel. Since the court is in agreement with the commissioner’s opinion and his recommended conclusion of law, as hereinafter set forth, it hereby adopts the same as the basis for its judgment in this case. Plaintiff is therefore entitled to recover and judgment is entered for plaintiff in an amount to be determined pursuant to further proceedings under Rule 47 (c). OPINION OF COMMISSIONER I During the 7-year period of 1949-1955, plaintiff expended a total of $14,474,701.-13 (hereinafter rounded off to $14.5 million) constructing substitute facilities for the United States Smelting Refining and Mining Company (hereinafter abbreviated as USSRMCO) to replace facilities destroyed by plaintiff in the course of stripping operations at its Utah Copper Mine in an area which, prior to the 1948 agreements between plaintiff and USSRMCO, had been exclusively owned by USSRMCO. Plaintiff amortized the $14.5 million over the 9-year period of 1949-1957 against the tonnage estimated to be benefited, and claimed deductions for those taxable years as ordinary and necessary expenses of mining. The deductions so claimed for the taxable years 1949, 1950, and 1951 were disallowed by the Commissioner of Internal Revenue. The resulting additional amounts of tax claimed to be due, and interest, were paid by plaintiff. Claims for refund, timely filed, were formally disallowed, and this action was instituted by plaintiff to recover its alleged overpayments of tax and interest, together with interest from the dates of payment. The parties agree that the sums so expended by plaintiff were reasonable in amount and were required- in the discharge of plaintiff’s obligations under the 1948 agreements. The principal controversy in the case is whether the Commissioner of Internal Revenue was in error in disallowing the claimed deductions on the ground that “the expenditures made by plaintiff to acquire the various surface rights from USSRMCO should have been capitalized and returned to plaintiff through annual depletion charges, rather than being deducted as an ordinary expense.” II Both the method (open pit mining) and the scope of operations at the Utah Copper Mine differ from the method and scope involved in most of the cases cited as precedents. The difference in method is a difference in kind. The difference in scope is one of degree. The story had its beginning in geological time, when the convulsion of nature, which raised the Oquirrh Mountains in Utah, created in the process two types of mineral deposits: lode deposits (or veins), primarily of lead and zinc; and disseminated deposits, primarily of copper. Both types of deposits occur in the immediate area of the Utah Copper Mine, in what is known as the Bingham Mining District (named for Bingham Canyon). While the two types of deposits lie side by side, they are not appreciably intermingled. Prospectors were in the area staking claims during the early years of the second half of the nineteenth century. By the end of the century hundreds of claims had been staked, and the process of consolidation of claims was well under way. All exploitation during this early period was by conventional methods of underground mining, through tunnels and shafts. Some veins of copper were found and worked, but the extent of the veins usually proved to be limited. Continuing exploration revealed in outline a very large deposit of low grade copper ore disseminated among the porphyry. The copper content of this disseminated ore was below the tailings of copper then being mined in the Butte District. It would therefore not warrant mining by usual underground methods. At the turn of the century two mining engineers devised a plan for exploiting this disseminated deposit of low grade copper ore by open pit mining. The surface area overlying most of the ore body was acquired by the Utah Copper Company, and open pit mining was begun in 1906. Open pit mining is surface, or strip mining, with the stripping done in concentric circles. In order for the pit to go deeper, the surrounding circles have to be made larger. Banks are formed of steps or benches around the perimeter. All material cut from the pit or the benches is removed. At the Utah Copper Mine, material containing ore of cutoff grade or better is sent to the concentrating mills, while material in which the copper content is below cutoff grade is sent to waste dumps. From the outset, the amount of material removed from the mine was substantial. For example, during the first 4% years of open pit mining, some 10.8 million cubic yards of material were removed, of which at least 6 million cubic yards were deposited on the waste dumps, while 4.8 million cubic yards were sent to the concentrating mills for the extraction of copper. During the next three decades the average annual volume of production was: As the open pit mine has grown, over the years, into the largest manmade excavation in the world, the volume of production has increased proportionately. During the 9-year period involved in this case (1949-1957), the average amount of material removed annually was 36.4 million cubic yards, consisting of 22.5 million cubic yards of waste and 13.9 million cubic yards of ore. At the time of trial (in October 1961) the mining goal called for the removal, daily, of 118,098 cubic yards of material, being 43,206 cubic yards of ore and 74,892 cubic yards of waste. The foregoing summary of the volume of production at the Utah Copper Mine indicates the demand of the operation for space. Within the surface area owned by plaintiff (or its predecessors), facilities had to be maintained at economic distances from the perimeter of operations, which meant that such facilities had to be moved outward from time to time. Since other mine owners held title to the land immediately adjacent to the ore body, the owners of the Utah Copper Mine had to acquire from these owners all necessary rights of ingress and egress and, as operations at the mine were expanded, additional rights for stripping had to be obtained as well as dumping rights for the disposition of wastes from the mine and from the concentrating mills. Ill By 1947, open pit operations at the Utah Copper Mine were approaching the line dividing the properties of plaintiff and USSRMCO on the southern segment of the perimeter of the mine. If plaintiff had been unable to obtain additional stripping rights from USSRMCO, expansion of the concentric circles would have had to be halted in that segment. Such an interruption would have required plaintiff to move the center of the pit northward, in order to continue open pit mining without further disturbance of the southern segment. Plaintiff had theretofore acquired rights from USSRMCO, for stripping and dumping and transport (railroad rights-of-way). Some stripping rights had been previously acquired over the very segment (Tract A) which now loomed as a barrier unless additional rights could be acquired. When plaintiff approached USSRMCO to acquire the needed, additional rights, USSRMCO asked plaintiff to anticipate as far as possible all the rights it would need in the future: dumping, leaching, and transport rights, as well as stripping rights. Plaintiff complied with this request. The transaction between plaintiff and USSRMCO was consummated, after extended negotiations, on July 26, 1948, by the execution of a series of grants from USSRMCO to plaintiff and the exchange between them of various agreements. The grants conveyed to plaintiff a number of perpetual easements, rights, and privileges over, on, and under various surface tracts, for use in stripping, dumping, and leaching. There was no conveyance of land, in fee simple. All rights to minerals in lode deposits were reserved by USSRMCO. The agreements included (1) a boundary line agreement defining the separation of their respective properties, subsurface as well as surface; (2) a royalty agreement covering any disseminated copper or copper-molybdenum ores which might be recovered from Tract A; (3) extensions of options theretofore granted for the acquisition of transport (rights-of-way), dumping, and leaching rights; and (4) an agreement whereby plaintiff undertook to provide USSRMCO with substitute facilities to replace those facilities of USSRMCO which plaintiff would have to destroy in the course of stripping operations on Tract A. Throughout the documents evidencing the series of grants and agreements, the consideration was expressed in nominal or formal terms (such as $1 and other good and valuable considerations, or in consideration of the premises, or of mutual undertakings) except for the agreement wherein plaintiff undertook to provide substitute facilities. The $14.5 million spent by plaintiff to provide USSRMCO with substitute facilities represented the only consideration of substance moving from plaintiff to USSRMCO. Defendant challenges plaintiff’s entire ease at the threshold for lack of allocation of the expenditures to the various rights and benefits obtained. Plaintiff admits that no allocation was made, contending: that none was necessary (for reasons hereafter noted); that “No part of the substitute facilities expenditures was paid to acquire the other rights incidentally involved in the 1948 transaction”; and that “Since those expenditures constituted nothing more nor less than the price plaintiff had to pay to destroy USSRMCO’S former facilities in Tract A, they are properly allocable solely to the stripping rights acquired in Tract A, and to the related dumping rights needed for disposal of the Tract A waste material.” On the basis of this reasoning plaintiff would require as logical inferences either that USSRMCO made plaintiff a gift of the other rights or that such other rights were of no value. Neither inference is warranted. The circumstances surrounding the transaction, as developed by the evidence, point to the conclusion (by inference) that both plaintiff and USSRMCO regarded the transaction as a whole as an entity in and of itself, of which the various grants and agreements were component parts; and that USSRMCO was content to enter into the transaction in return for plaintiff’s undertaking to provide the substitute facilities. Within this context, the acquisition of stripping rights on Tract A and dumping rights on Tract B represented plaintiff’s primary objective, and all other grants and agreements were incidental or subsidiary thereto. The boundary line agreement was executed for the mutual benefit and convenience of the parties in clarification of their transaction as a whole. Some of the rights for dumping and leaching were incidental to the exercise of the stripping rights on Tract A and the dumping rights on Tract B. Others were not directly related to rights in Tract A or Tract B. All were subsidiary to the main transaction. Classification of the royalty agreement, whereby plaintiff agreed, in effect, to a division of profits with USSRMCO on disseminated copper or copper-molybdenum ores extracted from Tract A, requires some further analysis. Plaintiff contends that the royalty agreement “stands on its own feet;” that “Any copper values which plaintiff may recover from Tract A under that agreement will be paid for under the terms of the agreement itself * * Defendant would classify the royalty agreement as a purchase of minable ore. In fact, defendant has placed such emphasis, at the trial of the case and in its brief, upon the copper content of Tract A as to warrant examination of the situation at this point in the interest of perspective. The evidence establishes the following pertinent facts: (1) plaintiff did not purchase a fee simple title to Tract A; (2) the rights acquired in Tract A were stripping rights; (3) the purpose of the acquisition was to obtain access to ore already owned by plaintiff; (4) Tract A was known to contain disseminated copper ore below cutoff grade; (5) plaintiff anticipated stripping all or virtually all of Tract A as waste; (6) plaintiff further anticipated placing the waste from Tract A on waste dumps which would be leached for the recovery of such ore as might be so obtained; (7) the parties to the transaction (plaintiff and USSRMCO) recognized the possibility that minerals of value might be uncovered in the course of stripping operations; (8) USSRMCO accordingly reserved to itself all minerals which might be found in lode deposits; (9) with respect to disseminated copper ore of minable quality, if any should be found, agreement was made for plaintiff to mine such ore in usual course and to account to USSRMCO for part (approximately half) of the profits therefrom. When viewed in this context, the royalty agreement appears as essentially an adaptation, based on the practical aspects of mining operations, of USSRMCO’S reservation of mineral rights in Tract A. As such, the royalty agreement was as much an incident of the transaction as a whole as was USSRMCO’S outright reservation of lode deposit minerals. IV The legal issues in the case include the following: 1. Whether plaintiff’s failure to make an allocation between deductible and nondeductible expenditures precludes recovery ; 2. If recovery is not precluded by plaintiff’s failure to allocate, whether the amortization made by plaintiff is legally acceptable; 3. Whether the expenditures should have been listed for depletion under section 23 (m); 4. If recovery is not otherwise precluded, whether the expenditures are deductible— a. Under the receding face doctrine; or b. As ordinary and necessary expenses of mining— (1) In normal course, under section 23(a) (1) (A); or (2) As deferred expenses representing development costs of a producing mine; and 5. Whether plaintiff is precluded, by lack of notice in its claim for refund, from raising the issue of section 23 (cc), and, if not so precluded, whether the expenditures for 1951 are deductible under that section, although there may be no recovery as to the years 1949 and 1950. V Before undertaking an analysis of the legal issues seriatim, it is appropriate to enter a caveat to the undertaking as a whole, because of the nature of the case. As heretofore noted, both the method and the scope of operations at the Utah Copper Mine differ from the method and scope of the mining involved in most of the cases from which guidance must be drawn. Conventional underground mining is involved in most of the decided cases. There are fundamental differences between underground mining and open pit mining, which make comparison between the two methods difficult and therefore uncertain. The scope of operations at the Utah Copper Mine is so vast as to require constant checks of dollar amounts against other, related costs or returns to insure the retention in judgment of relative values. Moreover, hardly any facet of the analysis of legal issues in this case is free from semantic difficulties. The term “capital expenditures,” for example, is nowhere defined with precision; yet it has been variously used by tax authorities to mean expenditures deductible only through depletion and depreciation allowances, expenditures deductible as deferred expenses over a longer period than 1 year, and expenditures which are not deductible at all. The phrase “development costs” entered the language of tax law as descriptive of costs incurred in bringing a mine into production. Now, there is recognition of development costs incurred after the mine has reached the producing stage. Preparatory development costs have been fairly well defined. The development costs of a producing mine have not been so well defined. The law authorizes deductions for depletion and deductions for depreciation, to permit the owner of a mine to recapture his investments in ore and in physical installations such as buildings and equipment. In both the statutes and the decided eases there are occasions when depletion allowances become depreciable and depreciation allowances are depletable. As a final note on semantics, the cases which bear on the issues here presented involve many borderline conclusions in their appraisal of particular situations. Instances are not uncommon of oversimplification, of classification by fiat, or of a gloss of added emphasis to compensate for uncertainty. The result is that attempts to harmonize the decisions often prove futile. Because of the difficulties inherent in the undertaking to analyze the legal issues, extended discussions of many cases bearing upon those issues have been omitted from this opinion. VI Defendant challenges plaintiff’s entire case at the threshold on the ground that unless plaintiff can show that it is entitled to a deduction for each and every one of the rights acquired, its action fails completely. It is true, as noted in defendant’s brief, that where an allocation between deductible and nondeductible expenses is necessary, the taxpayer has the burden of establishing a basis upon which the court can make the necessary allocation. Plaintiff admits that no attempt has been made to allocate portions of the expenditures among the various rights acquired, and contends that the entire expenditure is deductible without allocation. The parties are thus agreed that deductibility applies to all of the expenditures or none. They disagree as to the approach to be used to determine which it shall be. Defendant would impose upon plaintiff the burden of proving the deductibility of each and every one of the rights. Plaintiff responds by saying the entire expenditure is deductible because the purpose for which it was made qualifies it as an expense of mining. The parties are thus comparing apples and oranges, and neither is quite precise in the comparison. As noted in an earlier portion of this opinion, in listing and grouping the rights acquired by plaintiff, the writer does not agree with plaintiff’s contention that no part of the substitute facilities expenditures was paid to acquire the rights incidentally involved in the 1948 transaction, or that the “expenditures constituted nothing more nor less than the price plaintiff had to pay to destroy USSRMCO’S * * * facilities * wherefore the whole of the expenditures “are properly allocable solely to the stripping rights * * * in Tract A, and to the related dumping rights * * * ” in Tract B and elsewhere. The evidence indicates that both plaintiff and USSRMCO regarded the 1948 transaction as an entity, and that plaintiff's expenditures to provide substitute facilities for USSRMCO constituted the consideration moving from plaintiff to USSRMCO for all of the rights and agreements embraced in the transaction. As further noted in the same analysis, all of the rights other than the Tract A stripping rights were subsidiary to the Tract A rights, and all of the rights (including the Tract A rights) were related to the same primary purpose, which was, as plaintiff says, to enable the mine owner to continue normal production under existing plans and methods. In short, my view of the situation is that plaintiff acquired one bundle of related rights, wherefore a separate allocation of costs would be a work of supererogation unless it should appear that some specific part of the bundle was of a nondeductible nature. This approach differs slightly from that of either of the parties. The portion of defendant’s brief in which the allocation challenge is stated is barren of specifics. It does not refer to any one right or group of rights as being nondeductible. Elsewhere in its brief, however, the point is made that allowance of plaintiff’s substitute facilities expenditures as a deductible expense of mining would result in double deductions in relation to Tract A because of the copper content of the tract. The occurrence of double deductions, one for expense, and one for depletion allowance, in relation to one and the same tract, rights to which were acquired in the 1948 transaction, would suggest that the bundle of rights contained some element of capital outlay, and this would be nondeductible wherefore plaintiff’s failure to allocate would preclude recovery. The facts warrant the conclusion that double deductions would result (if plaintiff is permitted to deduct the substitute facilities expenditures as an expense of mining) in two ways: because of depletion allowances for copper ore recovered through the leaching of Tract A waste; and because of depletion allowances for copper ore mined and to be mined from Tract A. Plaintiff knew, when it negotiated with USSRMCO, that the earth in Tract A contained disseminated copper ore below cutoff grade. Plaintiff anticipated stripping all of Tract A as waste (subject only to the “possible” ore hereinafter mentioned). The waste was to be put on dumps, which plaintiff intended to leach, for the recovery of copper by that method. In time, there will be some recovery of ore by leaching. When that time comes, unless there is a change in the law meanwhile, plaintiff will be entitled to include the income from ore recovered by leaching with income from mined ore in claiming a percentage depletion. To this extent, if the substitute facilities expenditures are deductible as mining expenses, there will result a double deduction on account of Tract A. Waste dumps must be allowed to stand for 10 years or more, to permit oxidation, before leaching is warranted. At the time of the trial of this action (in October 1961), no leaching had been done on Tract A waste. Leaching is not a profitable enterprise, in and of itself. It is strictly a salvage operation of industrial waste. Returns realized from the process are credited by plaintiff against the cost of stripping, and are thus reflected in its books as results of efficient operation. In time the dollar value of ore recovered by leaching Tract A waste dumps may (and probably will) be substantial, although small indeed in relation to other dollar volumes of costs or returns. The depletion allowance on ore to be recovered through the leaching of Tract A waste will be miniscule in proportion to plaintiff’s overall operations. If the occurrence in the future of a depletion allowance of such miniscule proportion must be deemed to deny deductible status to plaintiff’s substitute facilities expenditures, simply for lack of allocation, a very small tail will be wagging a very large dog. If the ore to be recovered through leaching comprised all of the ore subject to a depletion allowance in the future, I would have no hesitancy in dismissing the allocation problem as a minor incidental. There is, however, more substance to the depletion allowance to be had upon ore mined or to be mined from Tract A, although substance in this instance does not appear to be controlling, for reasons hereinafter set forth. As earlier noted, plaintiff and USSRMCO in their negotiations recognized the possibility that mineral ores of value might be uncovered by plaintiff’s stripping of Tract A. USSRMCO reserved to itself all such minerals as might be found in lode deposits, and the parties entered into a royalty agreement covering disseminated copper and copper-molybdenum ores of cutoff grade or better. Plaintiff was to mine the ore in usual course and account to USSRMCO for a share of the profits. Previous analysis has recorded the writer’s judgment that this agreement was in essence an adaptation (based on practicality) of USSRMCO’S reservation of mineral rights and therefore consonant with classification as merely another incidental agreement within the whole transaction. No fact in evidence is more clearly established than the attitude of the parties to the transaction toward the copper content of Tract A. They regarded it as “possible” ore, and dealt with it as such. They made no effort to ascertain its actual presence; they merely anticipated the possibility of its presence, and agreed upon an arrangement to take care of the contingency. In 1957, after the close of the period over which plaintiff amortized its substitute facilities expenditures, one or more stringers of disseminated copper ore of cutoff grade or better were found in Tract A. The ore was mined by plaintiff, and accounting made to USSRMCO in conformity with the royalty agreement. By the time of the trial of this case (October 1961), stripping operations on Tract A had progressed far enough to give the parties to the transaction (plaintiff and USSRMCO) clearer insight as to the presence and content of the stringers containing minable ore. The ultimate take was still conjectural, but it did appear that the quantity of minable ore from Tract A would exceed the amount of ore recoverable through leaching, wherefore the dollar value of depletion allowances may eventually prove substantial. The fact is thus established that, in the course of stripping Tract A, and quite apart from the leaching of Tract A waste, plaintiff will obtain substantial copper ore, upon which it has received (or will receive, absent a change in the law) an allowance for percentage depletion. If, therefore, the substitute facilities expenditures are deductible as mining expenses, plaintiff’s records will ultimately show double deductions on account of Tract A. The outstanding facts are (1) that plaintiff did not seek or obtain the Tract A rights in order to acquire mineral deposits; (2) the actual presence of min-able ore was ascertained years after the transaction was consummated; and (3) allocation of a portion of the substitute facilities expenditures to the copper content of Tract A would have been an impossibility (short of a guesstimate) at the time of the transaction. Under the circumstances, the extent of minable ore taken or to be taken from Tract A is a misleading factor. It might have proved so small as to be negligible. It may prove more extensive than either plaintiff or USSRMCO would have thought possible at the time of the transaction. The controlling factor, in my view, is the incidental relationship of the royalty agreement to the transaction as a whole. It was, in actual fact, incidental, and a rather minor incident at that. To sever it from the remainder of the transaction and regard it as an independent transaction results in a gross distortion of emphasis. Plaintiff contends that “[t]he law is well settled that where an expenditure is made primarily for a purpose which renders the expenditure deductible as an expense, the entire amount is deductible even though the expenditure incidentally resulted in the acquisition of benefits which would be non-deductible if obtained in an independent transaction.” Whether “the law is well settled” or not, logic and equity favor plaintiff’s position. It is not the spirit of the law that the presence, wholly as an incident, of a nondeductible benefit among a bundle of rights acquired for a purpose which makes the bundle as a whole deductible, should infect all of the parts like a spoiled apple in the bottom of the barrel. Instead, the presence of such a benefit in a bundle of rights is a relative thing, and should be evaluated as such. It is concluded, therefore, that if, in fact, plaintiff’s purpose in making the substitute facilities expenditures was such as to render those expenditures deductible as mining expenses, the failure to allocate costs to the copper content of Tract A should not preclude recovery. VII A similar standard of relativity should apply to plaintiff’s amortization of the substitute facilities expenditures. If plaintiff is otherwise entitled to recover, its recovery should not be precluded by the fact that, in the retrospect of litigation, other bases of amortization were available, as long as the basis used by plaintiff was reasonable. Plaintiff selected as its amortization period the time extending from the beginning of stripping operations and ending with the destruction of USSRMCO’S Copperfield facilities. This time was estimated as 9 years, 1949 through 1957. The estimate proved to be quite accurate, since the destruction of the facilities was completed in October 1957. Plaintiff further estimated the quantity of ore unmined at the beginning of 1949 that would be removed from the entire pit during the 9 years as 253,754,500 tons. This estimate was likewise proved to be quite accurate. The rationale of the period and quantity elements of the amortization was that the ore to be mined while USSRMCO’S facilities were being destroyed should bear the cost of those facilities. The amortization was thus consistent with plaintiff’s position, heretofore noted, that the substitute facilities expenditures represented the price plaintiff had to pay to destroy USSRMCO’S former facilities, wherefore such expenditures were properly allocable solely to the stripping rights in Tract A. No consideration was given to the bundle of rights concept discussed hereinabove. Defendant contends that the quantity of ore benefited by the expenditures is many times the amount set forth in plaintiff’s amortization computation. Insofar as this contention is predicated upon defendant’s insistence that open pit mining would have come to a halt throughout the Utah Copper Mine without the 1948 rights, the evidence does not sustain the conclusion. As previously noted, if plaintiff had been unable to obtain stripping rights on Tract A, open pit mining would have had to be stopped in that southerly sector. Otherwise, the center of the pit could have been moved northward and open pit mining could have been continued, requiring only some readjustments of the benches and slopes surrounding the relocated pit. Thus, the Tract A rights benefited primarily only the ore within the locale of that tract. Bases of amortization other than the one plaintiff used were available. The basis which defendant contends plaintiff should have used would extend the time over the 40 years representing the full exercise of Tract A stripping rights and would include all of the ore to be mined from the entire pit during all of those years. While such an amortization might have been permissible, the contention that it should be required rests upon a considerable overemphasis of the tonnage benefited. Another basis of amortization could have rested on the quantity of ore at the southerly edge of the pit, adjacent to or in the immediate vicinity of Tract A, being the ore made available for open pit mining by the 1948 rights. Plaintiff asserts that, by coincidence, the quantity of this adjacent ore was roughly the same as the quantity estimate used by plaintiff, based on ore to be removed from the entire pit. If amortization had been based upon this adjacent ore, to the extent that such ore would be mined during the period ending with the removal of USSRMCO’S Copperfield facilities, the time element of the amortization would have been the same as the time element used by plaintiff, while the quantity of tonnage benefited would have been much less than the quantity used by plaintiff. If the amortization had been based upon all of the adjacent ore, the quantity of the tonnage benefited might have been roughly the same as the quantity used by plaintiff, but the time element would have been much greater than the time used by plaintiff. All factors considered, the conclusion is warranted that the quantity of the adjacent ore represents a reasonable base for estimating the tonnage to be benefited by the whole bundle of 1948 rights. The question remains as to what is a reasonable time factor. The alternative to the 9-year period used by plaintiff would be the 40-year period estimated as the time required for the full exercise of the Tract A stripping rights. The 40-year span would likewise encompass, for all practical purposes, the useful life of the incidental rights in the 1948 bundle. Argument that plaintiff’s 9-year period was too short, representing less than one-fourth of the whole life span of the 1948 rights, may be immediately countered by the argument that a 40-year period would distort the application of benefits. Adjacent ore immediately available would be favored over ore farther down in the pit. Thus, the appraisal of the reasonableness of plaintiff’s amortization runs full cycle, and returns to plaintiff’s initial proposition that an estimate reasonably made at the time should not be upset even if subsequent events prove it to have been erroneous. VIII The Commissioner of Internal Revenue disallowed the claimed deductions on the ground that “the expenditures made by plaintiff to acquire the various surface rights from USSRMCO should have been capitalized and returned to plaintiff through annual depletion charges, rather than being deducted as ordinary expense.” (Emphasis supplied.) Plaintiff maintains that the expenditures are not recoverable under the depletion allowance provided in section 23 (m) of the Internal Revenue Code of 1939. Defendant’s position is that, while it is unnecessary for the court to decide whether the expenditures should have been added to the depletion account as subsequent capital additions, the costs to plaintiff of obtaining some (if not all) of the 1948 rights are, in defendant’s view, capital additions which should have been added to the depletion account. Since allowances for depletion of a capital investment and deductions of ordinary expenses are mutually exclusive as applied to a single outlay, in that the mine owner may have one or the other but not both, it is once more pertinent to inquire, in the interest of clarity, whether recovery in this action is precluded by plaintiff’s failure to capitalize its substitute facilities expenditures for return to it through annual depletion charges. As indicated in the ruling by the Commissioner of Internal Revenue, the issue relates to depletion charges for the recovery of the cost of surface rights obtained by plaintiff from USSRMCO. Following are pertinent provisions of section 23 of the Internal Revenue Code of 1939: Sec. 23. Deductions from Gross Income. In computing net income there shall be allowed as deductions: (a) Expenses. — (1) Trade or Business Expenses.— (A) In General. — All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business * * * ****** (l) Depreciation. A reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence) — (1) of property used in the trade or business * * *. (m) Depletion. In the case of mines,'oil and gas wells, other natural deposits, and timber, a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each case; such reasonable allowance in all cases to be made under rules and regulations to be prescribed by the Commissioner, with the approval of the Secretary. * * * (n) Basis for Depreciation and Depletion. The basis upon which depletion, exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be as provided in section 114. Section 114 provided, in pertinent part, as follows: 114. Basis for depreciation and depletion — (a) Basis for depreciation. The basis upon which exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be the adjusted basis provided in section 113(b) for the purpose of determining the gain upon the sale or other disposition of such property. (b) Basis for depletion— (1) General rule. The basis upon which depletion is to be allowed in respect of any property shall be the adjusted basis provided in section 113(b) for the purpose of determining the gain upon the sale or other disposition of such property, except as provided in paragraphs. (2), (3), and (4) of this subsection. ****** (4) Percentage Depletion for Coal * * * ancj Metal Mines and Sulphur. The allowance for depletion under section 23 (m) shall be, in the case of * * * metal mines, * * 15 per centum * * * of the gross, income from the property during the taxable year * * *. Such allowance shall not exceed 50 per centum of the net income of the taxpayer (computed without allowance for depletion) from the property * *. The “adjusted basis” provided in section 113 (b) was the adjustment to cost or to market value as of March 1, 1913. Depletion provisions have been in the Revenue Acts since 1916. These Acts have uniformly provided that depletion allowances are to be granted under rules and regulations to be prescribed either by the Secretary of the Treasury or by the Commissioner of Internal Revenue with the approval of the Secretary. The Acts themselves have never undertaken to define in detail the scope of depletion allowances. Pertinent Regulations have included Regulations 33 (Rev.), of 1918; Regulations 45, of 1920; Regulations 77, of 1932; and Regulations 111, of 1942. Percentage depletion was first authorized by the Revenue Act of 1926. The Revenue Acts of 1932 and 1934 required taxpayers to state in their returns (for 1933 and 1934, respectively) whether they elected to use percentage depletion under section 114(b) (4) or to continue under the general rule provided by section 114(b) (1). Thereafter, the Office of the General Counsel of the Treasury was asked by representatives of the mining industry for its opinion “on the question whether the percentage depletion allowance * * * under section 114(b) (4) * * * should be held to provide, in lieu of any other form of deduction, for the return of ‘amounts spent for development (including shaft sinking, tunneling, stripping, etc.) * * which have been capitalized (a) while the mine is in the development stage and (b) after the mine has reached the producing stage.’ ” The Opinion, now known and cited as G.C.M. 13954, was written by Assistant General Counsel Robert H. Jackson (later Mr. Justice Jackson). After noting that the Revenue Acts of 1932 and 1934 required an election by the taxpayer, the Opinion stated the question as follows: * * 'x' In order to make the election certain mine owners have requested to be advised whether all the capitalized mine development costs are to be allowed as deductions separately in computing net income, in addition to the percentage depletion allowance, or whether the percentage depletion allowance is in lieu of all or some part of such capitalized costs. By way of further analysis of the question at issue, the Opinion continued: * * * If capitalized mine development costs are not included within the capital to be recovered through depletion, they must be treated as deferred expenses of mine operation deductible separately in the determination of taxable net income. If treated on the latter basis, they will reduce the amount of the net income by which the limitation of the percentage depletion allowance to 50 per cent of the net income from the property is to be determined. It is nevertheless urged on behalf of the taxpayers that such development costs should not be held to be capital costs recoverable through depletion under the Revenue Acts of 1932 and 1934. After noting the pertinent statutory provisions, and stressing the fact that “neither of these Acts goes into the detail of what subsequent expenditures are properly chargeable to capital account for depletion,” and the further fact that “the reasonable allowance for the taxable year is in all cases to be made under rules and regulations * * the Opinion turned to Regulations 77 and quoted excerpts from various Articles therein. In summarizing the effect of them, the Opinion stated: * * * the rules and regulations prescribed under the Revenue Act of 1932 indicate no change was contemplated or was made in the capital to be recovered through depletion allowances under the Revenue Act of 1932 from the scope of the allowance under the Revenue Act of 1928 and prior Revenue Acts. Therefore, the rule is that capitalized costs of development during the development stage of a mine are recoverable through depletion, and it would appear to be equally definite that so-called capitalized costs of development after the mine has reached the producing status are not chargeable to the capital account recoverable through depletion, but are deductible from gross income for the proper taxable years as operating costs. * * # The Opinion then noted a contention that “ * * * all development costs, whether capitalized in the development stage or expended after the mine reached the producing status, have in a great many cases been carried by taxpayers in their accounts separately from the capital account recoverable through depletion, and for all practical purposes have been allowed by the Bureau as deductions on the deferred expense basis.” The effect of the practice, the Opinion observed, would be to treat all capitalized development costs, whether incurred in the development stage or thereafter, as deferred expense; but, it further observed that no precise differentiation was required by the Regulations prior to 1932, because: * * * Capitalized costs during the development stage were considered as benefiting the entire ore body blocked out by the preparatory entries. Such costs after the producing status was reached were deemed to benefit smaller bodies of the same ore and all such costs were to be accounted for as and when the ore was produced and sold. The deductions for tax purposes were in the aggregate in the same amount whether or not any part of those costs was recovered through the depletion account as distinguished from the prepaid or the deferred expense account. Therefore, in the absence of any percentage depletion provisions for mines, no precise determination of what portion of such total development costs should be classified as depletion or as deferred operating expenses was necessary for practical purposes. * * * Further differentiation between the two types of development costs was found to be required in the application of Article 605 of Regulations 77, which contained the following provision: Art. 605. Adjusted basis for determining gain or loss. The adjusted basis for determining the gain or loss from the sale or other disposition of property, is the cost of such property * * * adjusted to the extent provided in this article. The cost or other basis shall be properly adjusted for any expenditure, receipt, loss, or other item, properly chargeable to capital account, including the cost of improvements and betterments made to the property. In the case of mines and oil or gas wells the following shall not be considered as items properly chargeable to capital account: (1) Expenditures made in the taxable year 1932 or subsequent taxable years which are allowable under article 235 or article 236 as deductions in computing net income; (2) expenditures made in taxable years prior to 1932 which were allowed, or which may hereafter be allowed, as deductions in computing the net income of the taxpayer for such taxable years. * * # Following is the pertinent language of Article 235: Art. 235. Allowable capital additions in case of mines, (a) All expenditures in excess of net receipts from minerals sold shall be charged to capital account recoverable through depletion while the mine is in the development stage. The mine will be considered to have passed from a development to a producing status when the major portion of the mineral production is obtained from workings other than those opened for the purpose of development, or when the principal activity of the mine becomes the production of developed ore rather than the development of additional ores for mining. The Opinion gave the following interpretation of Article 605: * * * The law prescribes that the reasonable allowance for depletion in all cases shall be made under rules and regulations prescribed by the Commissioner, with the approval of the Secretary. The legal basis for the allowance for income tax purposes of capitalized development costs during the development stage, of a mine is through the capital account recoverable through depletion. This being the law, the language of article 605 of Regulations 77 * * must be interpreted accordingly, and , the term “allowed” as used in connection with deductions in computing net income for taxable years prior to 1932 must be deemed not to apply to development stage capitalized development costs, but should be limited to development costs after the beginning of the producing stage. * * * The Opinion stated the following conclusion as “responsive to the legal question submitted * * * ”: * * * it is the opinion of this office that the capital to be recovered through depletion allowance under the general rule set forth in section 114(b)l of the Revenue Acts of 1932 and 1934, which the depletion allowances under such Acts are to be taken in lieu of, is composed in part of the capitalized development expenditures during the development stage of the mine; and that so-called capitalized development costs after the mine has reached the producing status should not be treated as capital charges recoverable through depletion, but as operating expenses deductible in the year in which the ore benefited by such expenditures is produced and sold. [Emphasis supplied.] In the instant case, plaintiff claimed deductions under the provisions of the Internal Revenue Code of 1939, as amended, pertinent provisions of which have been quoted hereinabove. The governing rules and regulations were in Regulations 111, of 1940. Pertinent excerpts follow: Sec. 29.23(m)-ll. Depletion and depreciation accounts on books.— Every taxpayer claiming and making a deduction for depletion and depreciation of mineral property shall keep accurate accounts in which shall be recorded the cost or other basis * * * of the mineral deposit and of the plant and equipment, together with subsequent allowable capital additions to each account. * * * * * * These accounts shall thereafter be credited annually with the amounts of the depletion and depreciation computed in accordance with section 29.23 (m)-2, 29.23 (m)-3, 29.23(m)-4, or 29.23 (m)-5; or the amounts of the depletion and depreciation so computed shall be credited to depletion and depreciation reserve accounts, to the end that when the sum of the credits for depletion and depreciation equals the cost or other basis of the property, plus subsequent allowable capital additions, no further deductions for depletion and depreciation with respect to the property shall be allowed, except such depletion deductions as may thereafter be allowable under section 114(b) (2), or (3), or (4) and section 29.23 (m)-3, 29.23 (m)-4, or 29.23 (m)-5. Sec. 29.23(m)-15. Allowable capital additions in case of mines, (a) All expenditures in excess of net receipts from minerals sold shall be charged to capital account recoverable through depletion while the mine is in the development stage. The mine will be considered to have passed from a development to a producing status when the major portion of the mineral production is obtained from workings other than those opened for the purpose of development, or when the principal activity of the mine becomes the production of developed ore rather than the development of additional ores for mining. Plaintiff’s brief asserts: Since the issuance of Regulations 33 (Rev.) on January 2, 1918, the regulations dealing with expenditures which may be added to the depletion account for recovery through depletion deductions have never specified expenditures of the type made by plaintiff under the 1948 agreements with USSRMCO. Regulations 111 does not differ from its predecessors in this respect. Comparison of Regulations 111 with its predecessors bears out plaintiff’s assertion in the concluding sentence above. Plaintiff’s brief continues: The necessary implication of the absence from a regulation entitled “Allowable Capital Additions In Case of Mines” of any reference to such additions subsequent to the development stage of a mine is that no such additions to depletion account are permissible after the producing stage has been reached. [Emphasis added.] The foregoing assertion is qualified by the following footnote: This implication is in no way weakened by the possibility of an expenditure, after the producing stage has been reached, made for the purpose of acquiring additional min-able ore. Such an expenditure would, of course, be depletable as an acquisition of a new mineral deposit. This is the essence of plaintiff’s case in support of its contention that the Commissioner of Internal Revenue erred in holding that the expenditures made by plaintiff to acquire the various surface rights from USSRMCO should have been capitalized and returned to plaintiff through annual depletion charges. Inherent in the argument are (1) the distinction between depletion and depreciation and (2) the inference that plaintiff’s expenditures for surface rights constituted development costs of a mine in the producing stage. Defendant does not challenge the classification of the Utah Copper Mine as having been in the producing stage at times material to this controversy. It does challenge plaintiff’s implication that no additions to the depletion account (other than costs of additional minable ore) are permissible after the producing stage has been reached, although it does not suggest specifically the nature of additions that might be made; and it does challenge the inference, inherent in plaintiff’s contention, that the expenditures made for surface rights represented development costs. The essence of defendant’s contention is that G.C.M. 13954 has no application to this case. The writer’s view is that no decision need be made as to whether or not an implication as sweeping as the one for which plaintiff contends is warranted. When the Commissioner of Internal Revenue ruled that plaintiff’s expenditures should have been capitalized in the depletion account, he had reference, in specific terms, to the cost to plaintiff of acquiring the various surface rights from USSRMCO. The only question here is whether or not those costs were depletable; and their exclusion from the depletion account, in conformity with plaintiff’s contention, depends upon whether or not they were development costs. G.C.M. 13954 points out that: * * * The term “development” is a term which is widely used to apply to substantially all mining operations, whether in the making of preparatory openings or later additional openings of any character for extracting the mineral. * * * This observation was made in the course of distinguishing the “development” stage from the “producing” stage, and was followed by the further observation that the distinction “would appear to apply to all systems of mining, whether by underground methods or by open pit or open cut methods.” With respect to the specifics of development costs, as distinct from development stages, the Opinion refers only to shaft sinking, tunneling, and stripping operations. This is the point at which defendant levels its challenge of the applicability of the Opinion to the instant case. Plaintiff’s expenditures were made to acquire surface rights in land. The costs of stripping, dumping, and tunneling operations came later, and are not in issue in this litigation. Insofar as defendant’s position rests on the contention that plaintiff’s “surface rights” included minable ore, the facts, as hereinabove recited, do not sustain it. The “possible” ore in Tract A was a contingency only, and the ore recoverable from waste through leaching was an incidental. The facts of the case, viewed in proper perspective, do not warrant the conclusion that plaintiff acquired depletable assets from USSRMCO in terms of mineral deposits. The distinction of course remains as between the cost of acquiring the surface rights and the costs of exploiting them. In this context, the one word which best describes the surface rights, to distinguish them from their exploitation, is access. The question therefore is whether or not the cost of access to such developmental activities as stripping, dumping, building roadways, tunneling, laying pipe for leaching, is part of the development costs as a whole. Defendant cites “ * * * two cases in which stripping rights were involved * * and avers that “in both cases, it was held that the cost of acquiring surface stripping rights was to be capitalized and recovered through depletion.” The two cases are: Manchester Coal Co. v. Commissioner, 24 B.T.A. 577 (1931), and Denise Coal Co. v. Commissioner, 29 T.C. 528 (1957), “affirmed on this point” 271 F.2d 930 (3d Cir. 1959). In Manchester (which was controlling of Denise, the facts being the same), the taxpayer, holding mineral rights in coal lands by lease from the owner, purchased for cash the surface rights to covering and adjacent lands needed for access to the coal seams by strip mining. As noted by the Board: * * * By these transactions the petitioner became the owner of two separate and distinct property rights, namely, (1) the right to extract and market the coal, acquired by lease, and (2) the surface of the land acquired by purchase. Taxpayer destroyed the surface lands in the course of stripping and claimed deductions of the cost of the lands by way of depletion. The Commissioner disallowed the deductions on the ground that the surface had been damaged but not destroyed. Finding the destruction of value to be complete, the Board allowed the deduction, saying “the cost of the land should be added to the cost of the coal in determining the depletion allowable.” Plaintiff contends that “the Manchester and Denise cases are wholly inapposite on their facts to this aetion,” because (1) “the expenditures in [those cases] for surface rights required to institute mining operations were * * * ‘starting up’ costs * * * incurred prior to the * * * producing stage * * and (2) “the result [in each instance] of the taxpayer’s acquisition of the surface lands was, in effect, to merge the separate interests [surface and underground mineral] and give the taxpayer fee simple title to the properties involved,” wherefore the rule that the cost of land is never deductible applies. In relation to the instant case, the persuasiveness of Manchester and Denise is indeed superficial, because of the manifest, although unmentioned, relationship of the expenditures for “access” to the costs of “starting up” the mine. In both cases the depletion of the cost of the surface rights was indissolubly linked to the underlying purpose of depletion deductions — the recapture of the capital investment in minerals. Neither of the cases is controlling of the situation here involved, where the taxpayer acquired additional access to ore in a producing mine. Plaintiff cites the case of J. Shelton Bolling, 37 T.C. 754 (1962), as a precedent wherein “the Tax Court rejected the suggestion that expenditures for surface rights and other access rights by a contract stripper were recoverable through depletion deductions.” This case is even less persuasive than Manchester and Denise. It was concerned with whether or not the taxpayers, who were lessees, had acquired an economic interest in the coal to be mined, or only an economic advantage. The Tax Court, finding that the leáse conveyed no economic interest in the coal, held that taxpayers were not entitled to deductions for percentage depletion. The costs to them of surface and other access rights were, therefore, expenses, and were deductible as such. On these facts, it is apparent that the decision does not mean that plaintiff here is entitled, under comparable reasoning, either to a deduction for depletion or a deduction for expense. The three cases have one point in common. In each instance, a deduction claimed by the taxpayer was disallowed by the Commissioner, under circumstances which would have deprived taxpayer of any tax recognition of the transaction. And, in each instance, the Tax Court allowed a deduction which gave tax recognition to the transaction. Whether or not the cost of access to areas in which to carry on such developmental activities as stripping, dumping, transport, and leaching is a part of the cost of development in a producing mine remains for consideration without benefit of controlling precedent. If the cost of access is a part of such development cost, plaintiff’s expenditures fall squarely within the reasoning of G.C.M. 13954 and are deductible as deferred expenses. If the cost of access is not part of the development cost, the question would still remain as to whether the cost of access should have been added to tb/i depletion account. Unless the cost of access should have been added to the depletion account, plaintiff’s failure to seek recapture by depletion deduction would not defeat recovery in this action, if such recovery is warranted on other grounds. This is the narrow question to which the present portion of this opinion is directed. Defendant’s brief asserts that “ * * it is * * * our view that the cost of acquiring the dumping, stripping, tunneling, and pipeline rights (all of which are interests in land) is recoverable only through the depletion allowance,” and that “Taxpayer has not shown that the rights acquired * * * were depreciable assets of the type covered by the regulation” relating to the receding face doctrine. Separate consideration is given, hereinafter, to the receding face doctrine. Meanwhile, it is pertinent to review briefly the depreciation provisions in the regulations to ascertain the lines of demarcation between depreciation and depletion. What constitutes depreciable property is defined in Regulations 111, sections 29.23(1) — 2 and 29.2S(l)-3, as follows (in pertinent part): Sec. 29.23 (l)-2. Depreciable Property. The necessity for a depredation allowance arises from the fact that certain property used in the business * * * gradually approaches a point where its usefulness is exhausted. The allowance should be confined to property of this nature. In the case of tangible property, it applies to that which is subject to wear and tear, to decay or decline from natural causes, to exhaustion, and to obsolescence due to the normal progress of the art, as where machinery or other property must be replaced by a new invention, or due to the inadequacy of the property to the growing needs of the business. It does not apply to * * * stock in trade, or to land apart from the improvements or physical development added to it. •fc * * Sec. 29.23 (1) — 3. Depreciation of Intangible Property. Intangibles, the use of which in the trade or business or in the production of income is definitely limited in duration, may be the subject of a depreciation allowance. Examples are patents and copyrights, licenses, and franchises. Intangibles, the use of which * * * is not so limited, will not usually be a proper subject of such an allowance. If, however, an intangible asset acquired through capital outlay is known from experience to be of value * * * for only a limited period, the length of which can be estimated from experience with reasonable certainty, such intangible asset may be the subject of a depreciation allowance * * *. # # Depletion, as distinguished from depreciation, is allowable by section 29.23 (m)-2 on the value (as adjusted) of the mineral deposit, and is to be computed in terms of mineral units remaining and mineral units sold. The surface rights acquired by plaintiff were easements in,