Rev. Rul. 68-28

Advice has been requested whether, in the case of a "captive mining company," as described in Revenue Ruling 56-542, C.B. 1956-2, 327, the right to an investment credit extends to the stockholders of the captive mining company by virtue of rights acquired under a contract entitling them to the ore produced and obligating them as joint venturers to furnish the funds, both capital and operative, needed by the mining company to develop and operate the mine.

Revenue Ruling 56-542 provides, in part, that under a so-called "captive mine" arrangement, the Federal income tax consequences are:

(1) The mining company will file a corporate return showing no income and no deductions on its face, but containing schedules showing the gross income and deductions allocable to the participants.

(2) The participants will be deemed to share the economic interest in the mineral in place and so long as the agreement continues in effect and unchanged (and in the absence of other material circumstances) they shall make their accounting for Federal income taxes in accordance with the following terms and conditions:

(a) All income * * * of the mining Company shall be included by the participants * * * in proportion to their respective shares in the mining operations.

(b) In computing their gross and net incomes, the participants, in proportion to their shares, shall deduct * * * all operating costs including * * * depreciation, * * * which, under the Internal Revenue Code of 1954 are of the character allowable as deductions in computing gross and net income; * * *

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(d) Any funds or credits transferred or furnished to the mining company by the participants shall not be regarded as indebtedness incurred by the mining company, and the participants shall not be entitled to any Federal tax credits arising from such transactions.

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Section 38 of the Internal Revenue Code of 1954 allows a credit against Federal income tax for qualified investments in "section 38 property" for the taxable year such property is placed in service.

The investment credit provisions, and the Income Tax Regulations published with respect thereto, indicate that generally the credit is to benefit the taxpayer who is entitled to the depreciation deduction for the property. Under Revenue Ruling 56-542 the stockholder-participants of the captive mining company are entitled to the depreciation deduction with respect to the captive mine facilities in proportion to their shares of ownership.

For an example of the allowance of the investment credit based upon proportionate ownership of "section 38 property" see section 1.48-5 (a) of the regulations which provides generally, in the case of an electing small business corporation (as defined in section 1371(b) of the Code), the basis (or cost) of section 38 property placed in service during the taxable year shall be apportioned pro rata among the persons who are shareholders of such corporation on the last day of such corporation's taxable year.

It is held that in the case of a so-called "captive mine" to which Revenue Ruling 56-542 applies, the stockholders of the captive mining company are entitled, in proportion to their respective shares, to the investment credit on "section 38 property" placed in service by the captive mining company. Each stockholder shall include its proportionate share of such "section 38 property" in computing its investment credit.

Revenue Ruling 56-542 is amplified.