Mining; research and experimental expenditures . A domestic mining corporation’s expenditures incurred directly in the development of prototype mining equipment and in perfecting a new metallurgical process, including the cost of shipping mineral samples to the research laboratory, are research and experimental expenditures deductible under section 174(a) of the Code. However, the expenses for driving shafts, drifts, cross-cuts, and for other production facilities that are not limited to the research activities are mine development expenses within the meaning of section 616.

Rev. Rul. 75-122

Advice has been requested whether, under the circumstances described below, certain expenditures are deductible as research and experimental expenditures under the provisions of section 174(a) of the Internal Revenue Code of 1954.


In 1973, domestic mining company M discovered a mineral deposit that previously had not been commercially exploited and incurred expenditures do determining its location and quality. The mineral was one with respect to which a deduction for percentage depletion is allowable under section 613 of the Code. Subsequently, M incurred expenditures in driving shafts, drifts, cross-cuts, and for other production facilities that made the mineral accessible for extraction if processes could be developed to make its extraction commercially feasible. Bulk samples of the mineral were taken from the workings and shipped to M’s research laboratory located some distance from the mineral property. At the research laboratory, M incurred expenditures in developing prototype mining equipment and new metallurgical processes to recover the valuable mineral. As a result of M’s research and experimentation at its research laboratory, it obtained several United States and foreign patents covering the prototype mining equipment and metallurgical processes.

Section 174(a)(1) of the Code provides, in general, that a taxpayer may treat research and experimental expenditures that are paid or incurred by him during the taxable year in connection with his trade or business as expenses that are not chargeable to capital account. The expenditures so treated shall be allowed as a deduction.

Section 174(d) of the Code provides, in part, that expenditures paid or incurred for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral are not research and experimental expenditures.

Section 1.174-2(a)(1) of .the Income Tax Regulations provides that the term “research or experimental expenditures” as used in section 174 of the Code means expenditures that represent research and development costs in the experimental or laboratory sense and that the term includes generally all such costs incident to the development of an experimental or pilot model, a plant process, a product, a formula, or similar property, and the costs of obtaining a patent.

Section 617 of the Code provides, at the election of the taxpayer, for a deduction of expenditures incurred for the purpose of ascertaining the existence, location, extent, or quality of any mineral deposit, except oil or gas, and any mineral with respect to which a deduction for percentage depletion is not allowable under section 613.

Section 616 of the Code provides, in part, that there shall be allowed as a deduction in computing taxable income all 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.

As noted in Rev. Rul. 73-488, 1973-2 C.B. 207, expenditures for mine development are simply advance costs of mining the deposit. Development expenditures are those resulting directly from the mining process or activity of making the ore or other minerals in place accessible for extraction through the removal of mineral, the driving of shafts, tunnels, and galleries, and other mining excavations.

Rev. Rul. 74-67, 1974-1 C.B. 63, provides that additional expenditures incurred in using drill holes for the purpose of designing and testing a new and innovative method of extracting ores or minerals are research and experimental expenditures subject to the provisions of section 174 of the Code.

Accordingly, in the instant case, the, expenses incurred by M in determining the location and quality of the mineral deposit are exploration expenditures within the meaning of section 617 of the Code. The expenditures incurred in driving shafts, drifts, cross-cuts, and for other production facilities that are not limited to use in developing prototype mining equipment and prefecting a new metallurgical process, are mine development expenses within the meaning of section 616.

However, those expenditures incurred at the research laboratory, including those for shipping the samples, that are directly related to the development of prototype mining equipment and the perfecting of new metallurgical processes are research or experimental expenditures within the meaning of section 1.174-2(a)(1) of the regulations and may be deducted under section 174(a) of the Code.

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