Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 75-60

1975-1 C.B. 179

Sec. 167
Sec. 616

IRS Headnote

Mining; underground pumping facilities. Expenditures incurred at a producing mine to excavate for and install underground pumping facilities are subject to the allowance for depreciation provided in section 167 of the Code as improvements to the property and neither the expenditures nor the depreciation on the facilities is deductible under section 616.

Full Text

Rev. Rul. 75-60

Advice has been requested whether, under the circumstances described below, expenditures incurred in the excavation for, and the installation of, underground pumping facilities at a producing mine are deductible as development expenditures under the provisions of section 616(a) of the Internal Revenue Code of 1954.

A mining company installed underground pumping facilities in an area at the bottom of a deep shaft of a producing mine. The underground pumping facilities required the excavation of a pump station, a long drainage crosscut, several storage rooms, a maintenance and repair shop room, an underground reservoir, two settling basins, and other additional rooms for pump control equipment. The various rooms and chambers used to house and service the pumping plant and equipment were lined with concrete. The long drainage crosscut was supported by roof bolts. The mine water, which flowed along the drainage crosscut to the pumping plant, was pumped to the surface. At the surface, the water drained along a concrete-lined ditch a sufficient distance so that the water could not reenter the mine area. The excavations were required for the installation of the underground pumping plant and equipment and did not provide access to the ore in place for its extraction, but were a part of the production facilities.

Section 616(a) of the Code provides, in pertinent part, that there shall be allowed as a deduction in computing taxable income all expenditures paid or incurred during the taxable year for the development of a mine or other natural deposit if paid or incurred after the existence of ores or minerals in commercially marketable quantities has been disclosed. Section 616(a) does not apply to expenditures for the acquisition or improvement of property of a character which is subject to the allowance for depreciation provided in section 167, but certain allowances for depreciation may be considered as development expenditures.

Section 1.616-1(b) of the Income Tax Regulations provides, in part, that section 616 is not applicable to expenditures which are reflected in improvements of property subject to allowances for depreciation under sections 167 and 611.

Section 167(a) of the Code provides that there shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence) of property used in the trade or business or of property held for the production of income.

The purpose of the excavations in the instant case was not to physically obtain, remove, or transport ore through the same openings used to reach the ore. Instead the excavations and other improvements were a part of the pumping plant project and represented an improvement of property of a character which was subject to an allowance for depreciation under the provisions of section 167 of the Code.

See Rev. Rul. 60-386, 1960-2 C.B. 107, which holds that the expenditures for the construction of sea walls, dikes, bulkheads, pumps, and drainage systems, to counteract the effect of land subsidence, are capital expenditures that are recoverable through depreciation allowances over the useful life of the facilities.

Accordingly, in the instant case, the expenditures incurred in the excavation for, and installation of, underground pumping plant facilities (including the pump station chamber, a long drainage crosscut, several storage rooms, a maintenance and repair shop room, an underground reservoir, two settling basins, other additional rooms for pump control equipment, the concrete lining for the excavations, and the roof bolting in the drainage crosscut) and the concrete lined ditch were for the improvement of property and are subject to the allowance for depreciation provided in section 167 of the Code. Therefore, these expenditures are not deductible as development expenditures under the provisions of 616(a). Further, since these facilities were not used in development but were used solely in the production of the mineral, the depreciation of these facilities is not deductible under section 616(a).