Cut-off points for depletion purposes;

              Cut-Off Points for Depletion Purposes
BY CHARLES F. REINHARDT Partner, Los Angeles Office
Presented at Tax Meeting of the National West-ern Mining Conference, Denver — April 1960
ALL OF us who deal with the determination of the taxable income and tax liability of an enterprise are well aware that the entire field is confused. About the only things certain are that taxes are too high, relief is not in sight, and that the rules, law, and regulations are be­coming
more complicated.
It seems that the mining industry is one that has more than its share of problems. We have to know what expenditures are explora­tion,
when exploration stops and development begins, when develop­ment
stops and operation begins, what type of property right con­stitutes
an economic interest, what properties shall be aggregated, what rate of percentage depletion applies, what is gross income from the property, what is net income from the property, and what is the cut-off point.
The purpose of this paper is to discuss cut-off points. Normally a mine owner extracts the ore or other natural resource and must apply a number of treatment processes before the material extracted is ready for sale. Frequently mine owners do not sell the material until it has undergone a considerable amount of processing. Some of these processes are basic and are needed to obtain something that is saleable, whereas in other cases the process may be thought akin to manu­facturing.
The determination of a cut-off point becomes important to find out how much of the income realized may become the base on which depletion can be computed.
The Internal Revenue Code provides that percentage depletion shall be allowed at a specified rate on gross income from the property. The Code further states that gross income from the property means the gross income from mining. The term mining is defined as "including not merely the extraction of the ores or minerals from the ground but also the ordinary treatment processes normally applied by mine owners or operators to obtain the commercially marketable product or products and transportation of ores or minerals from the point of extraction from the ground to the plants or mills in which the ordinary treatment processes are applied." (Transportation values for distances
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