Rev. Rul. 70-289

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's underground mine was fully developed and it had attained its optimum production rate. Although the ore deposit has sufficient ore reserves for several more years production, the taxpayer decided to explore for new ore deposits on its mining property. Geologic evidence in the mine indicated that exploration below the known deposit was justified. An underground drilling program conducted from within the producing mine found another separate deposit, but the low grade of the deposit indicated that under existing economic conditions further exploration was not warranted at that time. When economic conditions later became more favorable, further exploration from within the producing mine was conducted and the other ore deposit was ascertained to be commercially marketable at the later time. Thereafter, development of the new deposit was begun.

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 before the beginning of the development stage of the mine or deposit.

Exploration may be undertaken to test beyond the known limits of a developed ore deposit. A producing underground mine often can serve as a better location for doing exploration work for a new and different ore deposit, as were the facts in the instant case, than would be the case if done from the surface of the ground, particularly where, because of the nature of the ore deposit, the mine is developed vertically. Thus, "exploration" within the meaning of section 615 and section 617 of the Code and "production" may occur simultaneously from within a developed mine.

It is held that, in the instant case, the expenditures by the taxpayer for drilling from within the existing mine to ascertain the existence of a new and different ore deposit are exploration expenditures within the meaning of section 615 and section 617 of the Code.

See Revenue Ruling 70-287, and Revenue Ruling 70-288, pages 146 and 146 of this Bulletin, concerning exploration and development expenditures.