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Market Segment Specialization Program (MSSP)

Placer Mining Industry

Table of Contents

Chapter 12 - Fuel Excise Tax

Taxpayers may be eligible to claim a credit or refund of excise tax included in the price of fuel if it was for off-highway use. Publication 378 defines off-highway business use as any use of fuel in a trade or business other than as a fuel in a registered highway vehicle. A highway vehicle is "any self-propelled vehicle designed to carry a load over public highways, whether or not also designed to perform other functions."

These are vehicles not considered highway vehicles:

  1. Specially designed mobile machinery for non-transportation functions. A self-propelled vehicle is not a highway vehicle if it consists of a chassis that:
    1. has permanently mounted to it machinery or equipment used to perform certain operations if the operation of the machinery or equipment is unrelated to transportation on or off the public highways;
    2. has been specially designed to serve only as a mobile carriage and mount for the machinery or equipment, whether or not the machinery or equipment is in operation; and
    3. could not be used, because of its special design, as part of a vehicle designed to carry any other load without substantial structural modification.


  2. Vehicles designed for off-highway transportation. A self-propelled vehicle is not a highway vehicle if:
    1. the vehicle is designed primarily to carry a specific kind of load other than over the public highway for certain operations; and
    2. the vehicle's use of carrying this load over public highways is substantially limited or impaired because of its design.

Fuels used in off-highway business use include fuels for stationary machines such as generators, compressors, power saws, and similar equipment; for cleaning purposes; forklift trucks and bulldozers; and cars and trucks operating off the highway in construction, mining, or timbering activities, if the vehicles are neither registered nor required to be registered.

A credit or refund is allowable only if tax has been imposed on the fuel. All gasoline and undyed (clear) diesel fuel have been taxed by the time these fuels are used at the mine. Dyed diesel fuels generally do not qualify for a credit or refund. Other types of fuel (such as propane) generally are bought tax free and are not eligible for a credit or refund.

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Chapter 13 - Inventories and Uniform Capitalization

It is the Government's position that, under IRC section 471(a), in order to achieve the matching of income to expenses, the taxpayer is required to maintain in inventory the gold extracted from the mining operation. This is necessary in order to determine the income of the taxpayer. The matching of expense to income follows the generally accepted accounting principal. A matching principal issue generally arises when the taxpayer is in the production stage deducting expenses related to the production phase of mining with little or no income. It is not uncommon to examine a return where the taxpayer claims to be in production yet keeps no inventory. Since the gold recovered must eventually be recognized as income, inventories must be maintained.

The initial interview should establish when the taxpayer first went into production and if any gold was on hand, either obtained with the claim or produced in the exploration or development stages. The general rules of inventory apply here, that is, how much gold was on hand at the beginning of the year, how much was produced during the year, how much was sold, and how much was on hand at the end of the year. This will provide the physical amounts used in computing the cost-of-goods sold.

IRC section 471 establishes that an inventory must be kept. Treas. Reg. section 1.446-1(a)(4)(i) recognizes the need for inventories and makes reference to IRC sections 263A and 471. Treas. Reg. section 1.471-7 establishes the need for inventories of miners and manufacturers and is supported by Treas. Reg. section 1.61-3 which provides that in a manufacturing, merchandising, or mining business, gross income means total sales less cost-of-goods sold. Cost-of-goods sold should be determined in accordance with the method of accounting consistently used by the taxpayer.

Treas. Reg. section 1.471-11(a) states that:

* * * In order to conform as nearly as possible to the best accounting practices and to clearly reflect income (as required by section 471 of the Code), both direct and indirect production costs must be taken into account in the computation of inventoriable costs in accordance with the "full absorption" method of inventory costing.

The Uniform Capitalization rules require the capitalization of the costs of producing real and tangible personal property. See IRC section 263A(b)(1). Mining operations involve the production of both real and tangible personal property. Until the gold is extracted from the land, the taxpayer is engaged in the production of tangible personal property. The gold is inventory in the hands of the taxpayer.

The costs that must be capitalized are: (1) the direct costs, and (2) a properly allocable share of the indirect costs that benefit or are incurred by reason of the production of the mineral property. See IRC section 263A(2) and Treas. Reg. section 1.263A-1(e)(3)(i). Treas. Reg. section 1.263A-1(e)(ii) provides an illustrative list of indirect costs required to be capitalized. In addition, IRC section 263A(f) requires the capitalization of interest incurred with respect to the production of real property.

IRC section 263A(c)(3) provides that the general rules of IRC section 263A do not require the capitalization of any cost that is allowable as a deduction under IRC sections 263(c), 263(i), 291(b)(2), 616, or 617.

The direct and indirect costs that benefit or that are incurred by reason of the production of the mineral property must be capitalized to that property. See IRC section 263A(a)(1)(B). The direct and indirect costs that directly benefit or are incurred by reason of the gold must be included in the inventoriable cost of the gold. See IRC section 263A(a)(1)(A).

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Page Last Reviewed or Updated: 30-Aug-2012