BIR Ruling No. 008-65

April 12, 1965 BIR RULING NO. 008-65 Mr. Allison J. Gibbs Ozaeta, Gibbs & Ozaeta Attorneys-at-Law 520 San Luis St., Manila S i r : This refers to your request for a ruling on the question of whether or not under Section 30(g) of the Tax Code, as amended by Republic Act No. 2698, the percentage depletion allowance of your client, the Lepanto Consolidated Mining Company, is limited to its recoverable cost or capital investment. In reply, I have the honor to inform you that a perusal of the discussion in Congress of the bill which became Republic Act No. 2698 reveals that the purpose of the law is to benefit operators of mining concessions by granting them greater allowable deduction for depletion. This is clearly gleaned from the following discussion of the bill: Mr. Leido: . . . In the past and until now the allowance has been based on capital investment in the mine but now it will be based on gross income. What I am trying to find out is the connection between capital and gross income. . . .. Now I would like to know why the principle should be changed, why the depletion allowance is not based on capital but on gross income. Mr. Peralta: Mr. Speaker, this new measure is patterned after progressive legislation in other oil economies of the world. . . . Under the old formula, it is very obvious that the oil entrepreneur or the miner is not given sufficient inducement or incentive because the depreciation rate or depletion charge, in effect, does not give rise to substantial exemption from taxes; and yet it is too obvious for two considerations; that this particular group of entrepreneurs need special treatment, first because the assets they are dealing with are wasting or non-renewable; secondly, that it takes a lot of venture capital to be invested before a mineral is discovered. Consequently, because of this special burden that an entrepreneur has to assume before he is really productive, the law has conceded to him special treatment in the matter of tax allowances. "Mr. Leido: So my observation is correct that there is a change in principle. "Mr. Peralta: Yes, . . .. "Mr. Leido: . . . I do not question the wisdom of the bill. . . .. I am in full accord with his theory. I just wanted to bring out the fact that the bill contemplates a change in principle." (Congressional Record, Vol. III, No. 74, pp. 3314-33-5) The author of the bill also revealed that the said bill was patterned after that of the United States and Canada. "Mr. Peralta: We are now operating on what we call the cost basis. We are introducing a new feature in our legislation concerning oil and mineral reserves patterned after that of the United States and Canada." (p. 3312 of the same Congressional Record) The rule in the United States is that percentage depletion is not limited to cost or capital investment. "The total of allowances under percentage depletion is in no way limited by the cost of other adjusted basis of the property. Thus even though the basis of depletable property is reduced by the amount of percentage depletion currently deductible, percentage depletion deductions will not be denied simply because the basis of the property has been exhausted or reduced to zero. On the other hand, cost depletion is no longer applicable once the basis of the property has been exhausted." (Vol. 4 CCH (1961). "But the percentage depletion actually allowed is a percentage of the gross income from the property (limited by a percentage of the net income), and this deduction goes on without limit, and without regard to the recovery of the cost or the discovery value or anything else. It is simply an annual deduction . . . of the taxable income from the property . . ." (Griswold, Federal Taxation, 4th Ed., pp. 387-388) "The words of the statute and the legislation history do not justify the contention of respondent that percentage depletion is no longer allowable after the cost of the property has been recovered tax-free. . . . The Statute ignores all such inequalities and allows the deduction regardless of whether or not cost has been recovered." (Louisiana Iron and Supply Co., Inc. 44 BTA 1244) In the light of the foregoing, and following the jurisprudence of the country after whose law Republic Act No. 2698 was patterned, it is our considered opinion that percentage depletion is not limited to the recovery of cost or capital investment. cdta Very truly yours, (SGD.) BENJAMIN N. TABIOS Acting Commissioner of Internal Revenue