Mining operations: the receding-face doctrine.

• Author: Goldberg, Michael J.
• Position: Capital additions as business expenses

Minerals are extracted from the ground through surface and underground mining methods. A mine goes through three principal operational stages during its life--exploration, development and production. At the production stage, a mine will produce a consistent level of ground minerals each year. Over time, a recession of the mine's working face will occur, necessitating that support services be extended up the mine's face to maintain a normal production output.

Under Regs. Sec. 1.612-2(a), taxpayers can claim certain capital additions at mines as ordinary and necessary business expenses instead of capitalizing them as depreciable assets, if the expenditures are necessary to maintain normal output of a mine. These regulations specifically state:

... (a) In general. Expenditures for improvements and for replacements, not including expenditures for ordinary and necessary maintenance and repairs, shall ordinarily be charged to capital account recoverable through depreciation deductions. Expenditures for equipment (including its installation and housing) and for replacements thereof, which are necessary to maintain the normal output solely because of the recession of the working faces of the mines and which--

(1) Do not increase the value of the mine, or

(2) Do not decrease the cost of production of mineral units, or

(3) Do not represent an amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made shall be deducted as ordinary and necessary business expenses.

Background

The facts of a particular situation determine if an expenditure qualifies for receding-face treatment. Currently, no Code section exists that covers this area of tax law. Not until after Marsh Fork Coal Co., 11 BTA 685 (1928), rev'd, 42 F2d 83 (4th Cir. 1930)), did Treasury issue regulations covering the receding-face issue. The language contained in Regs. Sec. 1.612-2(a) is virtually identical to the language of T.R. 111, Section 29.23(m)-15, issued in 1939.

The concept of an ordinary and necessary business expense versus a capital expenditure dates back to the Revenue Act of 1918 and early mining-industry accounting practices. During this time period, most discussion focused on the need to have different tax treatments for expenditures made to maintain the normal output of a mine from a recession of the working face versus expenditures made to increase mine production.

In the event that expenditures made by a taxpayer...