Rev. Rul. 70-288

Advice has been requested whether a taxpayer's expenditures under the circumstances described below are "development expenditures" within the meaning of section 616 of the Internal Revenue Code of 1954.

The taxpayer ascertained that there existed on its property a deposit of ore of sufficient quantity and quality to reasonably justify commercial exploitation by him. Plans to mine the deposit were made and the work to accomplish that purpose began. Additional core drilling was done to further delineate the extent and location of the commercially marketable ore reserves in order to facilitate development of the ore. Next, a shaft and drifts on several levels were driven for mining the ore deposit. Underground drilling was done in order to plan the proper layout of mine working places and to set production rates in various parts of the mine.

Section 616 of the 1954 Code applies to expenditures paid or incurred during the taxable year for the development of a mine or other natural deposit (other than an oil or gas well) if paid or incurred after the existence of ores or minerals in commercially marketable quantities has been disclosed. These expenses may be deducted currently or, if the taxpayer so elects, may be treated as deferred expenses in accordance with section 616(b) of the Code.

In general, a deposit is commercially marketable (and hence no longer in the exploration stage) at the time when, in consideration of all the facts and circumstances (including actions by the taxpayer) the ore or mineral deposit is determined to exist in sufficient quantity and quality to reasonably justify commercial exploitation by the taxpayer. For an example of such facts and circumstances (including action by the taxpayer), see Revenue Ruling 70-287, below. If the facts and circumstances with respect to an ore or mineral deposit disclosed to a taxpayer that it is not commercially marketable at that time because of economic factors, examples of which are inadequate quantities of ore, inaccessibility, or an inadequate market, then the deposit has not reached the development stage. However, the development stage may be entered at a later time when development by the taxpayer is justified because these factors have changed.

It is held that the expenditures in the instant case, including those for the additional core drilling to further delineate the extent and location of the commercially marketable ore reserve in order to facilitate development of the ore, are development expenditures within the meaning of section 616 of the Code.

See Revenue Ruling 70-287 below and Revenue Ruling 70-289, page 147, concerning exploration expenditures.