Rev. Rul. 70-287

Advice has been requested whether a taxpayer's expenditures under the circumstances described below are "exploration expenditures" within the meaning of section 615 and section 617 of the Internal Revenue Code of 1954.

The taxpayer, a mining company, discovered mineralized outcrops (evidence of mineral) on its property. An exploration program of diamond core drilling was undertaken to ascertain whether an ore deposit existed below the mineralized outcrops. The drilling located a substantial ore deposit. Immediately thereafter, the board of directors approved a program for development of the deposit based upon engineering, financial, and economic studies showing the existence of ore in commercially marketable quantities at that time.

Section 615 and section 617 of the Code allow deductions (subject to certain limitations) at the election of the taxpayer for exploration expenditures, that is, expenditures paid or incurred during the taxable year for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral, if made prior to the beginning of the development stage of the mine or deposit.

Exploration expenditures include those expenditures paid or incurred for geological and geophysical investigations, reconnaissance, surveying, test-pitting, trenching, drilling, driving of exploration tunnels and adits, and similar types of work. However, the physical means or method by which the work is performed is not controlling in distinguishing exploration from development.

Under section 1.615-1(a) of the Income Tax Regulations, the development stage of the mine or deposit begins when, in consideration of all the facts and circumstances (including actions of the taxpayer), deposits of ore or other mineral are shown to exist in sufficient quantity and quality to reasonably justify commercial exploitation by the taxpayer.

It is held that, in the instant case, the core drilling expenditures, under all the facts and circumstances, are exploration expenditures within the meaning of section 615 and section 617 of the Code. However, any core drilling expenditures paid or incurred after the existence of ores or minerals in commercially marketable quantities was disclosed to the taxpayer are not exploration expenditures within the meaning of section 615 and section 617 of the Code.

See Revenue Ruling 70-288, page 146, and Revenue Ruling 70-289, below, concerning development and exploration expenditures.