Rev. Rul. 55-47

Advice has been requested (1) whether haulage allowances granted by the Atomic Energy Commission for the transportation of uranium ore from the mine to the custom mill or purchase depot should be taken into consideration in arriving at the representative market or field price for percentage depletion purposes, and (2) whether development allowances, which are not handled as loans or grants, but are paid on a unit basis as ores are delivered to purchase depots, constitute an addition to gross income and are subject to depletion.

The Atomic Energy Commission pays a fixed price for all ore produced within a hundred miles of the purchase depot plus an additional haulage allowance to cover transportation to the depot rather than pay a fixed price for ore at the purchase depot or custom mill. The Commission is the only purchaser of uranium ore and it sets a price for the ore with a view to treating alike all producers within one hundred miles of the purchase depot.

Where a haulage allowance is sufficient to cover transportation costs the depletable gross income for uranium producers is the Atomic Energy Commission's purchase price paid for the ore without addition of the haulage allowance, and the net income for the percentage depletion limitation is that purchase price, less mine operating costs. If the haulage allowance exceeds the haulage cost, the profit is ordinary income from an activity other than mining. Where, however, the haulage costs exceed the allowance, such excess must be used to reduce the depletable gross income.

These results are illustrated below, (1) where transportation costs exceed allowances, and (2) where allowances exceed costs:

                                        (1)                (2)

With respect to the issue of development allowances, section 22(b)(15) of the Internal Revenue Code of 1939 provides for the exclusion from gross income of certain amounts received for the encouragement of exploration, development, or mining of critical and strategic minerals or metals.

Section 39.22(b)(15)-1 of Regulations 118 provides in part that section 22(b)(15) of the Code is `applicable only to amounts (1) which are paid to a taxpayer (i) by the United States or by an agency or instrumentality of the United States; (ii) as a grant, gift, bounty, bonus, premium, incentive, subsidy, loan, or advance; (iii) for the encouragement of exploration for, or development or mining of, a critical and strategic mineral or metal; and (iv) pursuant to or in connection with an undertaking by the taxpayer to explore for, or develop or produce, such mineral or metal and to expend or use any amounts so received for the purpose and in accordance with the terms and conditions upon which such amounts are paid, which undertaking has been approved by the United States or by an agency or instrumentality of the United States. * * *.'

Development allowances here considered are consistently made on a unit basis as the ores are delivered to the purchase depots. They are not handled as loans or grants specifically made or arranged for before the exploration and development work is undertaken as provided for in section 22(b)(15) of the Code. Accordingly, it is held that development allowances, which are not handled as loans or grants, are taxable in the year of receipt and, since they are based on production, are depletable