THE INTERNAL REVENUE CODE OF 1954 MONDAY, APRIL 19, 1954 UNITED STATES SENATE, The committee met, pursuant to recess, in room 312, Senate Office Building, at 10:05 a. m., Senator Eugene D. Millikin (chairman) presiding. Present: Senators Millikin, Butler, Flanders, Malone, Carlson, George, Frear. The CHAIRMAN. The meeting will come to order. Mr. Fernald. We are glad to see you, Mr. Fernald. Sit down and be comfortable. Identify yourself to the reporter. STATEMENT OF HENRY B. FERNALD, CHAIRMAN, TAX COMMITTEE, AMERICAN MINING CONGRESS Mr. FERNALD. I am Henry B. Fernald, of Montclair, N. J., chairman of the tax committee of the American Mining Congress. I am appearing on behalf of the mining industry with respect to the pending bill H. R. 8300, Internal Revenue Code of 1954. Speaking briefly, I can mention only a few points, noting others in statements I shall file with you. First, as to the bill in general: We appreciate the immense amount of work in its preparation, with a result far better than many of us felt would be possible. Some revision we believe should be made before its passage, which will not change the purpose of the bill, will better express its intent, enable it better to carry out the thought expressed in the committee report, and will aid in its administration. Undoubtedly some changes will prove necessary after its passage, and as these become manifest, there should be a willingness to make needed amendments. We accordingly urge the passage of this bill, with such revisions as we believe can and should be made prior to enactment. We particularly urge the following points for revision: 1. DEPLETION, SECTIONS 611-614, PERCENTAGE DEPLETION We are in accord with the plan of the bill to include a blanket provision extending percentage depletion to minerals in general, and to omit the discovery depletion provision. Some do not like to see their minerals, previously specified, no longer mentioned by name, fearful that adverse inference may be drawn therefrom. A major reason, however, for their disturbance, and for disturbance of others who would be newly included in the blanket clause, is because of the limitations or qualifications written into section 613 (b) (6). The first qualification is that a 5 percent, rather than a 15 percent, rate shall apply to such "other minerals" when "used or sold for use as riprap, ballast, road material, rubble, concrete aggregates, dimension stone, ornamental stone, or for similar purposes. "As written, the taxpayer might be put to a negative proof of ultimate use of all or some part of the mineral. If, for example, rock containing a valuable mineral were sold for its mineral content, the taxpayer certainly should not be prejudiced if some remainder, after extraction of the valuable mineral, should be used for road fill or similar purpose. The law should make this clear by amending the section to read "when used, or sold for use, by the mine owner or operator as Further qualifications are set forth in subparagraph (B). Exclusion from percentage depletion of "minerals from sea water or the air" does not seem objectionable, since it is merely the expression of an existing rule that the taxpayer has no depletable interest in minerals in place in the air or in sea water. The difficulty comes with the further wording which would make the exclusion applicable to minerals "from sources which, by commonly accepted economic standards, are regarded as inexhaustible." This is new wording, never heretofore used, and is subject to much uncertainty as to its meaning and the burden of proof it might impose on the taxpayer. One reason for adopting percentage depletion was the difficulty of establishing what mineral there might be below the surface in any property, its extent, its character, and its recoverability. No such test should now be reimposed. We believe the full intent would be met by making the specification read simply "minerals from sea water, the air, or similar inexhaustible sources." We understand there is no intention to allow depletion on ordinary water, although water itself may be classed as mineral. This purpose could be clearly evidenced by including "water" specifically under subparagraph (A) in addition to the specification of "soil, sod, dirt, turf, or mosses" which are excluded from the percentage depletion allowance. This, of course, will not affect the depletion allowance on minerals extracted from brines or mixtures of brines. The Supreme Court has laid down the basic rule that depletion— percentage or otherwise is allowable only to the taxpayer having an economic interest in the mineral in place. If deemed necessary, this test might be specifically written into the law and would certainly be better than introducing new and uncertain wording as a new limitation. Those are simply details of expression in the law and there is no intent to change the purpose of the provisions. (b) Waste or residues: Provision is made in sections 611 (a) and 613 (c) (3) for depletion on the extraction by mine owners or operators of ores or minerals from the waste or residue of prior mining. This is very desirable, from the standpoint of equity and to avoid present uncertainty and conflict of decisions. Such right is denied to a purchaser of such waste or residue or rights thereto. There should not, however, be such denial in case of acquisition of the mine, together with waste or tailings of prior mining. In such case the acquiring owner of the mine should be entitled to the depletion on any production from such waste or tailings previously mined in the same way as he is entitled to depletion on the waste or tailings which result from his own operation of the property. This should be made clear by inclusion of a specification to that effect in section 613 (c) (3). Certainly, there should be no question that such a carryover right should be granted where the property was acquired in a tax-free transaction. That could be covered by including in section 381 (c). new paragraph which would state this as one of the carryovers specified in that section. (c) Definition of property, section 614: There should be a rule in the law to permit the taxpayer to aggregate his mineral interests for computing depletion; cost as well as percentage depletion. Anyone acquainted with mining will recognize the difficulties which may arise from the assembling of various property interests or claims-sometimes conflicting and overlapping, sometimes complicated by an applicable apex law-which may be brought together to make a single successful operating property. Simplicity of operation and of administration, in the interest of the Treasury as well as the taxpayer, will result if the same aggregate rule is applied both to cost and percentage depletion. There are also technicalities of the rule as stated in the bill which should be amended. These are more fully set forth in exhibit A hereto, and we urge that these changes be made. 2. EXPLORATION EXPENDITURES, SECTION 615 The bill continues the present limitation of $75,000 in any year and for 4 taxable years. We urge these limitations be removed for the reasons set forth in exhibit B. 3. FOREIGN INCOME, SECTIONS 901-958 The American mining industry operates throughout the world and is therefore particularly interested in foreign income, the tax imposed thereon, and the foreign tax credit allowable. The provisions of the bill with respect to foreign income are generally desirable and will be of benefit to this country as well as to the general development of the world. However, we feel there are a number of important changes needed so that the provisions may be more practically applicable and may better meet their intent. We urge their revision as set forth in exhibit C. Time does not permit statement as to certain other points, also important to the mining industry, set forth in exhibit D attached, including: (a) Consolidated returns, sections 1501-1733. (b) Net operating loss, section 172. (c) Depreciation, section 167. (d) Corporate distributions, liquidations, etc., sections 301-382. (e) Advance declarations and tax payments by corporations, sections 6016, etc. (f) Deduction for charitable contributions, section 170. (g) Ordinary treatment processes-coal, section 613. (h) Silver bullion tax, sections 4891-4897. We again repeat what we have stated earlier, that with the chang made which we believe can and should be made before passage of th bill, and with recognition that other changes may later be required, urge the enactment of the new code at this session of Congress. Exhibits A, B, C, and D, above referred to, follow :) EXHIBIT A DEFINITION OF PROPERTY, SECTION 614 It is desirable that there should be a rule in the law to permit the taxpay to aggregate his mineral interests for the purpose of computing depletion. T rule should not, however, be limited, as it is in the bill, merely for the purpose computing percentage depletion, but the same rule should also be applicable computing cost depletion. Only confusion and difficulties will arise from tryi to have one rule or series of rules as to the property unit for percentage der tion and different rules for cost depletion. For simplicity of operation and administration it is in the interest of the Treasury as well as the taxpayer th the rule should apply both to cost and percentage depletion. This has long been recognized by the Treasury in its administration. In t beginning, when 1913 valuations were first being made, the operating unit w generally recognized and made the basis for depletion allowances. The sa principle has to a considerable extent been followed through the subseque years. There is need for definite statement of the appropriate rule for co bining separate acquisitions and separate interests into appropriate aggre tions, both for percentage and for cost depletion. Often a single mining property may be the result of acquisition of many ferent claims, sometimes conflicting and overlapping one another. Frequen a successful mining operation has been made possible only by assembling a nu ber of differently owned properties to constitute an operating unit, whet or not all property interests are actually contiguous. Sometimes there may reason why each should be subject to separate accounting. In general, howev it is not necessary and it may be quite difficult, if not impracticable, to try keep the separate accounting as to the ore which may come from each of several acquisitions or interests which have been brought together in a sin operating unit. This is particularly true in States where the so-called apex 1 is in effect. We accordingly urge that section 614 should be made applicable both for and percentage depletion, but with certain further changes as follows: The rule as stated permits forming one aggregate group of interests in operating unit but requires that all others not included in the single aggreg should continue to be treated as separate properties. The limitation to aggregate group in an operating unit introduces a most undesirable element rigidity both with respect to past practices as well as future operations. some cases it may be appropriate to form more than one of such aggregate gro For example, acquisitions A, B, and C might well form one group, where ac sitions D and E might well form another. This should be permitted. It is ur that section 614 (b) (1) should be modified so that the taxpayer may elect form one or more aggregations of operating mineral interests within one operat unit. The provisions for taxpayer's election as stated in section 614 (b) (2) s unduly restrictive. There is no question that when the taxpayer has establis his operating unit and made his election as to a property aggregate he sho expect to follow that election consistently so long as the conditions un which the election was made continue unchanged. However, circumstances change. Properties which have been separately operated may be brought gether as a single operating unit. Additional properties may be acquired previously owned properties may be disposed of. There may be question whet properties not yet in production should or should not be included in the aggreg These and other changes in the circumstances might dictate a different ag gation of properties than the circumstances which existed at the time of origi election. The taxpayer should be permitted a new election at any time w any such material change in circumstances and conditions arise. If the taxpayer is permitted to aggregate his interests for cost depletion the same manner as for percentage depletion, certain provisions which relat |