The court must draw all reasonable inferences in favor of the non-moving party, including questions of credibility and of the weight to be accorded particular evidence. Masson v. New Yorker Magazine, Inc., 501 U.S. 496, 111 S.Ct. 2419, 2434-35, 115 L.Ed.2d 447 (1991) (citing Anderson, 477 U.S. at 255, 106 S.Ct. 2505); Matsushita Elec. Indus. Co. v. Zenith Radio, 475 U.S. 574, 588, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986); T.W. Elec. Service v. Pacific Elec. Contractors, 809 F.2d 626, 630 (9th Cir. 1987). It is the court's responsibility "to determine whether the `specific facts' set forth by the nonmoving party, coupled with undisputed background or contextual facts, are such that a rational or reasonable jury might return a verdict in its favor based on that evidence." T.W. Elec. Service, 809 F.2d at 631. "[S]ummary judgment will not lie if the dispute about a material fact is `genuine,' that is if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson, 477 U.S. at 248, 106 S.Ct. 2505. However, "[w]here the record taken as a whole could not lead a rational trier of fact to find for the non-moving party, there is no `genuine issue for trial.'" Matsushita, 475 U.S. at 587, 106 S.Ct. 1348.
Plaintiff concedes that, as a general principle, the cost of a capital asset which has a life of more than one year is not deductible as an ordinary and necessary business expense in a single tax year, but must be depreciated over time. Since the new conveyor belt system has a useful life of more than one year, its cost may not ordinarily be deducted as a business expense in a single tax year. However, a long-recognized exception to this general principle is the "receding face doctrine." Under this doctrine, the cost of equipment required to remedy a condition caused by recession of the working face of a mine is deductible in a single tax year, so long as the remedial action only maintains or restores normal output. See Marsh Fork Coal Co. v. Lucas, 42 F.2d 83, 84-85 (4th Cir. 1930). The doctrine is recognized in Section 1.612-2(a) of the Treasury Regulations, which states that expenditures for equipment which are necessary to maintain the normal output solely because of the recession of the working face of the mine and which do not increase the value of the mine shall be deducted as ordinary and necessary business expenses. 26 C.F.R. § 1.612-2(a).
In this instance, Plaintiff argues that the new conveyor belt system meets the requirements of the receding face doctrine since the system was necessitated solely as a result of the recession of the mining face. Plaintiff also contends that the new system did not increase the value of the granite mine since it merely replaced the prior conveyor belt system.
The "receding face" occurs when, as the result of mining, the working face of the mine where the ore is dug out gets farther away from the opening of the mine. Based on the progressively increasing distance between the working face and the outside of the mine, additional machinery and equipment is necessary in order to maintain the normal output of the mine. Therefore, it is deemed fair that the expenses of the additional machinery and equipment should be charged against the ore that has been mined as a capital expenditure rather than as a long-term depreciation expense. See e.g., Roundup Coal Mining v. Commissioner, 20 T.C. 388, 1953 WL 56 (1953).
In this case, the IRS contends that the conveyor belt system was not necessitated solely as a result of the recession of the mining face. Rather, the IRS argues, a new dumpsite for the overburden was needed and, therefore, Plaintiff decided to install a new conveyor belt system to carry the overburden to the new dumpsite. Had a new dumpsite not been necessary, the IRS asserts that no new conveyor belt system would have been installed. The IRS contends that the receding face doctrine does not apply. Consequently, the IRS argues that Plaintiff cannot deduct the entire cost of the new system in one tax year.
Since under the Regulation, the receding face doctrine applies only in instances where an expense has been incurred "solely because of the recession of the working face of the mine," the Court must assess whether the cost of the new conveyor belt system was incurred solely due to the recession of the mine face and not due to any other factor.
The leading case which applies and discusses the receding face doctrine is Marsh Fork Coal Co. v. Lucas, 42 F.2d at 84. In Marsh, the taxpayer was required to acquire and install additional rail cars, track and a locomotive in order to lengthen its mine tunnel due to the recession of the mine's working face. The Fourth Circuit upheld the taxpayer's deduction based on the receding face doctrine, finding that the expenditures for those items should be fairly charged against the coal which had been mined since its removal had necessitated such additional expense.
In Commissioner v. H.E. Harman Coal Corp., 200 F.2d 415, 418 (4th Cir. 1952), the Court discussed the application of the "solely" requirement. In Harman, the "coal seam" being mined changed in geologic character as the working face of the mine receded. This change in the character of the seam necessitated a change in the mining operation and required the taxpayer to acquire new equipment to continue efficient mining operations. The taxpayer claimed a deduction for the cost of the new equipment based on the receding face doctrine. The IRS disallowed the deduction. On appeal, the Fourth Circuit affirmed the government's denial of the deduction on the basis that the new equipment was not necessitated solely by the receding face but by the geologic change in the character of the coal seam. The Circuit concluded that although the change appeared as the face receded, the associated expenses were due to the geologic changes and were not due solely to the recession of the mine face.
In this case it is undisputed that the new conveyor belt system would not have been built had the original dumpsites for the overburden not reached their capacity. Therefore, the new system was required because the dumpsites were full and not solely as a result of the recession of the mine face. Had Plaintiff simply sought to extend the existing conveyor belt system to remove the overburden created as a result of the receding mine face, the costs of such expansion would have been deductible as a capital expense under the receding face doctrine. Therefore, the Court finds that the receding face doctrine is not applicable in this instance and that the IRS properly disallowed Plaintiff to expense the entire cost of the new conveyor belt system in tax year 1995.
The Court grants Defendant's motion for summary judgment and denies Plaintiffs' cross-motion for summary judgment.