UNITED STATES TAX COURT



          TEXASGULF INC. AND SUBSIDIARIES, AS
        SUCCESSOR IN INTEREST TO TEXASGULF INC.
            AND SUBSIDIARIES, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 15528-89.              Filed September 9, 1996.

     Under the Ontario Mining Tax (OMT), mine operators
are generally liable for a tax on gross receipts less
deductions for several expenses and a processing
allowance. P paid the OMT and claimed a foreign tax
credit under sec. 901, I.R.C.

     P and R agree that sec. 1.901-2, Income Tax Regs.,
applies to the years at issue. R concedes that the OMT
is a tax and that it meets realization and gross income
requirements imposed by those regulations but contends
that the OMT does not meet the net income requirement.
Sec. 1.901-2(b)(4), Income Tax Regs.

     A foreign tax meets the net income requirement if
it meets any one of three tests. Under one of those
                               - 2 -


     tests, a foreign tax meets the net income requirement
     if, judged on the basis of its predominant character,
     the base of the tax is computed by reducing gross
     receipts to permit recovery of significant expenses
     under a method that is likely to approximate or exceed
     those expenses. Sec. 1.901-2(b)(4)(i)(B), Income Tax
     Regs.

          Held: Whether, judged by the predominant
     character of the OMT, the processing allowance is
     likely to approximate or exceed expenses related to
     gross receipts which are nonrecoverable under the OMT
     is a question of fact. Accord Texasgulf, Inc. v.
     United States, 

(1989), modified per
     order (Apr. 16, 1992).

          Held, further, P has proven that, judged on the
     basis of the predominant character of the OMT, the
     processing allowance is likely to approximate or exceed
     expenses related to gross receipts which are
     nonrecoverable under the OMT. Inland Steel Co. v.
     United States, 

, 

(1982),
     distinguished (sec. 1.901-2, Income Tax Regs., did not
     apply).




     Willard B. Taylor, Richard J. Urowsky, Michael Lacovara, C.

Barr Flinn, Ann T. Kenny, Jared M. Rusman, and Scott L. Lessing,

for petitioner.

     Lewis R. Mandel, Monica E. Koch, and Christopher W. Shoen,

for respondent.



     COLVIN, Judge:   Respondent determined deficiencies in

petitioner’s Federal income tax of $563,127 for 1979, $10,998,770

for 1980, and $1,794,073 for 1981.     The sole issue for decision
                                 - 3 -


is whether the Ontario Mining Tax (OMT) is creditable under

section 901.   We hold that it is.

     Unless otherwise indicated, section references are to the

Internal Revenue Code in effect for the years in issue.    Rule

references are to the Tax Court Rules of Practice and Procedure.

                         FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

A.   Petitioner and Kidd Creek Mine

     Petitioner was a Delaware corporation the principal place of

business of which was in Stamford, Connecticut, when it filed the

petition.

     Petitioner is the successor in interest to Texasgulf Inc., a

Texas corporation which filed consolidated Federal income tax

returns for taxable years 1978, 1979, 1980, and 1981, as the

parent of Texasgulf Canada.   Texasgulf Canada discovered the Kidd

Creek mineral reserves near Timmins, Ontario, Canada, in 1964.

Texasgulf Canada explored the reserves, acquired some land claims

from current owners, and began to develop the reserves.

     Texasgulf Canada was incorporated in Delaware in 1965 as

Ecstall Mining Ltd. (Ecstall).    In 1966, Texasgulf Canada

transferred the Kidd Creek land claims to Ecstall.    At that time,

the property had a significant amount of mineral reserves and

substantial value.   Ecstall began mining and concentrating

operations at Kidd Creek Mine in 1966.    Kidd Creek Mine is an
                                - 4 -


open pit mine at which ore from a copper, zinc, lead, and silver

deposit is produced.    In 1966, Kidd Creek Mine had a concentrator

which was about 17 miles from the mine.    A railroad connected

them.

       Texasgulf Canada owned and operated the Kidd Creek Mine from

1968 to 1981.    From 1968 to 1980, Texasgulf Canada crushed the

ore from Kidd Creek Mine into pieces 7½ inches or smaller.

Texasgulf Canada then put the ore in storage bins and carried it

by rail to the concentrator for further processing.    The

concentrator further crushed, pulverized, and concentrated the

ore.

       Ecstall changed its name to Texasgulf Canada Ltd. in 1975

and to Kidd Creek Mines Ltd. in 1981.    Texasgulf Canada was

subject to the OMT because it mined and processed ore at Kidd

Creek Mine.    Texasgulf Canada paid OMT of $934,238 for 1978,

$12,437,280 for 1979, and $18,307,052 for 1980.

B.     The Ontario Mining Industry and the Production of Metal

       Many metallic and nonmetallic minerals are mined and

produced in Ontario.    Metallic minerals mined in Ontario include

base metals such as nickel, copper, and zinc, and precious metals

such as gold, silver, and platinum.     Nonmetallic minerals mined

in Ontario include asbestos, peat, gypsum, talc, and salt.
                                - 5 -


     Generally, metal production in Ontario and elsewhere has

four phases:    (1) Exploration; (2) development; (3) mining; and

(4) processing.

     1.    Exploration

     The exploration phase consists of finding and delineating

ore reserves.   These activities range from prospecting to

exploring by aircraft with advanced scientific techniques such as

electromagnetic and seismic surveying.    Texasgulf Canada

discovered minerals near the Kidd Creek Mine by using airborne

exploration techniques.

     2.    Development

     The development phase includes activities needed to bring a

mineral reserve into production.    For an underground mine,

development activities include sinking a shaft, adit (an almost

horizontal entrance to a mine), or ramp from the surface of the

ground into the mineral reserves.    For an open pit mine, such as

the Kidd Creek Mine, development activities include removing

waste rock that separates the ore from the surface.

     3.    Mining

     The mining phase is the process of extracting ore from the

ground, typically by blasting and mechanical removal.

     4.    Processing

     The processing phase generally includes three different

stages:   (a) Milling or concentrating; (b) smelting; and (c)
                                - 6 -


refining.   Milling is the process of separating waste rock from

ore, generally through chemical treatment, to produce “concen-

trate”.   Copper concentrate, for example, is approximately 20-25

percent copper.   A mill or concentrator is built at or near

virtually every mine in Ontario.

     Smelting is the process of converting concentrate into a

relatively pure product.    A copper smelter, for example, produces

about 99 percent pure copper.

     Refining is the process of producing pure metal from smelted

product by heat-induced chemical reactions, electrolytic methods,

solvent extraction, hydro metallurgical methods, or

vapometallurigical methods.

     It is rare for a mining company to buy mineral property

outright in Ontario.   For this reason, Ontario mining companies

typically do not incur high costs to acquire reserves and,

consequently, do not have high cost depletion.

     Small entities called junior exploration companies do much

of the exploring for new mining properties in Ontario.

Typically, junior exploration companies do not have enough

financial resources to produce the ore they find.   The junior

company, once it has identified a body of ore, usually enters

into an agreement with an established producer under which the

producer does additional work on the property in exchange for an

ownership interest in it.   If the additional work by the senior
                                 - 7 -


company shows that the property should be developed, the junior

company and the senior company typically agree for the junior

company to keep an ownership interest in the property.

C.   The Ontario Mining Tax (OMT)

     1.   Application of the OMT

     The OMT applies to every mine in Ontario to the extent that

its OMT profits exceed a statutory exemption.     Mining Tax Act

(MTA), Rev. Stat. Ont. (R.S.O.), ch. 140, sec. 3 (1972).        In most

cases, the OMT is imposed on the mine operator.      

The mine operator is the party that has the right to produce and

sell minerals from the mine.     

  The OMT does not

apply to holders of royalties.

     2.   OMT Profit

     Profit for OMT purposes is the difference between either

gross receipts from production or pit’s mouth value and certain

expenses, payments, allowances, and deductions.      

Under the MTA, there are three ways to calculate the amount from

which deductions and allowances are subtracted to compute profit

for OMT purposes.   

(b), and (c).    First, if an

OMT taxpayer sells ore without processing it, gross revenues are

the total receipts from selling the ore.     

Second, if an OMT taxpayer processes ore before selling it, the

OMT taxpayer subtracts deductions and allowances from the market

value at the pit’s mouth of the mined minerals.      

8 -


(3)(3)(b).    Third, if an OMT taxpayer does not know the market

value of the output at the pit's mouth, deductions and allowances

are subtracted from the value of the ore at the pit's mouth as

appraised by the mine assessor to compute profit for OMT

purposes.    

     Most OMT taxpayers use the third method, also known as the

“appraisal” method, to calculate profit for OMT purposes.       This

method is not based on the on-site value of ore; it is based on

financial statements and other information included on an OMT

return.

     The OMT exempts some taxable profit.       Ontario has increased

the exemption over the years.      The statutory exemption was (a)

$10,000 before 1969, MTA, R.S.O., ch. 242, sec. 3(1) (1960); (b)

$50,000 from 1969 to 1973, An Act to Amend The Mining Tax Act,

R.S.O. ch. 69, sec. 2(1) (1969); (c) $100,000 from 1974 to 1979,

An Act to Amend The Mining Tax Act of 1972, R.S.O. ch. 132, sec.

2(1) (1975); and (d) $250,000 beginning in 1979, An Act to Amend

The Mining Tax Act of 1972, R.S.O. ch. 40, sec. 1 (1979).

     3.     Deductions for Expenses

     An OMT taxpayer calculates its profit for OMT purposes by

deducting specified expenses from either the pit’s mouth value or

its gross receipts from production.        MTA, R.S.O., ch. 140, sec.

3(3).   The MTA allows an OMT taxpayer to deduct expenses for:

(a) Scientific research in Canada relating to mining in Ontario
                                - 9 -


(added MTA, R.S.O., ch. 269, sec. 3(7)(d) (1980)); (b) working

the mine above and below the ground, including salaries and wages

for miners and office workers; (c) operations and maintenance

(added MTA, R.S.O., ch. 269, sec. 3(7)(d) (1980)); (d) power and

light for mining; (e) transportation of minerals; (f) food and

provisions; (g) explosives, fuel, and other supplies; (h)

safeguarding the mine and its output; (i) insurance on the

output, mining plant, machinery, equipment, and buildings; (j)

depreciation of the mining plant, machinery, equipment, and

buildings; (k) charitable donations; and (l) certain costs of

developing a mine.    

through (n).   In 1978, 1979

and 1980, an OMT operator could claim a depreciation allowance

from 5 to 15 percent of the remaining undepreciated cost of its

depreciable assets.   

(1972).

     An OMT taxpayer may not deduct expenses for (a) plant,

machinery, equipment, or buildings except as described above; (b)

investment capital, investment interest, or stock dividends; (c)

depreciation in the value of the mine, mining land, or mining

property due to exhaustion of the ore or mineral; (d) royalties

paid for the output of a mine on private (i.e., non-Crown) land;

and (e) the cost of developing a mine, except as described above.

  Exploration expenses were not recoverable in

1965, but are recoverable in the years in issue.
                               - 10 -


     4.    Processing Allowance

     Most OMT taxpayers can deduct a processing allowance under

the third method for calculating OMT profit.1     

and (ii) (as amended in 1975); Ont. Rev. Regs. 126/75,

sec. 4 (1975).   During the years in issue, the processing

allowance was calculated at a rate prescribed by the regulations

or determined by the mine assessor.     MTA,   R.S.O., ch. 269, sec.

3(7)(c)(ii).   The processing allowance was a percentage of the

cost of assets used to process a mined product (asset cost basis)

or a percentage of profits from mining and processing activities

(combined profits).   Ont. Rev. Regs. 126/75, sec. 5 (1975).       An

OMT taxpayer which used the asset cost basis method multiplied

the original cost of assets by a percentage which varied based on

which processing assets the mine operator owned (e.g.,

concentrator, smelter, refinery, and semi-fabricating plant) and

where those assets were located (e.g., in Northern Ontario).        

processing allowance was 15 percent of combined

profits.   

  The maximum processing allowance was 65

percent of the OMT taxpayer's combined profits.      

operators claimed the 65 percent amount.      The

processing allowance was zero if an operator had no taxable


     1
      The processing allowance is not available to mining
companies that do not process mined material, e.g., gypsum, salt,
etc. These are very insignificant in numbers and dollars in
Ontario.
                              - 11 -


profits or had a loss for a taxable year.   There is nothing

analogous to the processing allowance in financial accounting.

     5.   Calculating OMT Liability

     Most OMT taxpayers started to calculate the OMT with net

income from mining and processing reported on their financial

statements.   OMT taxpayers adjusted their financial statement net

income by adding expenses which the MTA did not allow to be

recovered and subtracting items of income not related to Ontario

mining and processing.   OMT taxpayers made these adjustments by

reconciling OMT taxable income and financial statement net

income.   OMT taxpayers computed taxable profit by deducting

specified expenses, payments, allowances, and deductions as

described above.   MTA, R.S.O., ch. 140, sec. 3(3) (1972).

D.   The Mine Assessor

     During the years in issue, the Mine Assessor was responsible

for enforcing the Mining Tax Act.   The Mine Assessor encouraged

taxpayers to comply with the MTA, administered the MTA,

interpreted and applied the MTA and its regulations, recommended

policy related to mineral taxation, and developed and implemented

tax assessment standards.   The Mine Assessor reviewed all OMT

returns, either confirmed or changed the liability that the OMT

taxpayer reported, and assessed the OMT due from operators.

     Mine operators who disagreed with the Mine Assessor's

determinations could appeal to the Minister of Natural Resources.
                               - 12 -


The Minister of Natural Resources referred the appeal to the

Mining Commissioner or the Ontario Municipal Board to be tried

and decided.

     In 1986, the position of Mine Assessor was renamed Senior

Manager of the Mining Tax.    In 1993, it was renamed Manager of

the Mining Tax.    The duties of these positions are the same as

those of the Mine Assessor described above.

     Kumara Rachamalla (Rachamalla) was appointed Mine Assessor

in 1980 and served in that position (as renamed) until the date

of trial.

E.   Texasgulf Canada’s OMT Liability, Nonrecoverable Expenses,
     and Processing Allowance

     Texasgulf Canada's total processing allowance for 1968 to

1980 was Can$468,106,000, and its nonrecoverable expenses were

Can$340,787,000.    Texasgulf Canada had financial statement net

income, OMT profit and depreciation, nonrecoverable expenses, and

processing allowances as follows:
                                   - 13 -


                            (Thousands of Can$)

                    Financial
           OMT      Statement       OMT       Nonrecoverable   Processing
Year      Profit    Net Income   Depreciation    Expenses      Allowance
1968      56,814      68,843       11,710         8,712          10,026
1969      47,423      61,049       12,384        10,793           8,368
1970      46,834      62,730       14,509        10,203           8,264
1971      32,033      49,479       16,057        11,705           6,032
1972      33,559      43,844        9,100        23,000          17,843
1973      99,548     109,706        9,591        31,809          22,985
1974     109,383     162,537       32,503        32,400          37,973
1975      34,737      90,809       30,081        21,042          42,622
1976      32,529      79,506       16,296        25,545          60,411
1977         100      39,515       54,147        27,245             185
1978       6,521      38,610       57,843        38,378          12,111
1979      51,742     130,249        6,755        39,827          96,092
1980      78,181     199,546       14,636        60,128         145,194
Total    629,404   1,136,423      285,612       340,787         468,106

        The nonrecoverable expenses are as follows:

             Financial                                Other Non-
             Statement               Private          recoverable
Year         Depreciation     Interest Royalties      Expenses      Total
1968             5,188           -0-       3,249         275        8,712
1969             5,589           -0-       2,959       2,245       10,793
1970             4,213            146      5,425         419       10,203
1971             4,089          4,031      3,074         511       11,705
1972             6,757         12,072      2,787       1,384       23,000
1973             9,577         15,590      5,011       1,631       31,809
1974             8,246         11,879      8,639       3,636       32,400
1975             6,553          8,289      5,037       1,163       21,042
1976             8,221         10,769      3,428       3,127       25,545
1977             7,771         14,820        485       4,169       27,245
1978            10,993         21,521      2,451       3,413       38,378
1979             8,321         24,009      2,569       4,928       39,827
1980             9,937         30,688     10,743       8,760       60,128
Total           95,455        153,814     55,857      35,661      340,787

F.      Comparison of Processing Allowances and Nonrecoverable
        Expenses for Other OMT Taxpayers

        From 1968 to 1980, the processing allowance exceeded

nonrecoverable expenses for most OMT taxpayers.          For those years,

total processing allowances claimed by OMT taxpayers were more

than three times greater than nonrecoverable expenses.           Total
                                - 14 -


processing allowances exceeded nonrecoverable expenses each year

from 1968 to 1980 except 1971 and 1977.

G.   Respondent’s Determination and Petitioner’s Election

     On March 29, 1989, respondent issued a notice of deficiency

to petitioner for 1979, 1980, and 1981.   Respondent did not

determine a deficiency for 1978, but adjusted petitioner’s net

operating loss to be carried forward from 1978 to 1979.

Petitioner timely elected for section 1.901-2, Income Tax Regs.,

to apply in deciding whether its OMT and other Canadian taxes are

creditable under section 901.

                                OPINION

A.   Background and Contentions of the Parties

     The parties dispute whether the OMT is creditable under

section 901.   Our decision on this issue depends on whether the

OMT is an income tax under section 1.901-2, Income Tax Regs.

     A taxpayer may deduct foreign taxes unless the taxpayer

elects and is entitled to use the foreign tax credit.   Sec.

901(a).   If a taxpayer is a citizen or a domestic corporation,

the taxpayer may be entitled to a credit for any income, war

profits, and excess profits tax paid or accrued during the

taxable year to a foreign country or possession of the United

States.   Sec. 901(b)(1).2

     2
           SEC. 901(b) provides in pertinent part:

                                                     (continued...)
                               - 15 -


     The purpose of the foreign tax credit is to "mitigate the

evil of double taxation" of domestic corporations on income from

foreign sources.    Burnet v. Chicago Portrait Co., 

, 7

(1932); New York & Honduras Rosario Mining Co. v. Commissioner,

, 747 (2d Cir. 1948), revg. and remanding 

(1947).   A credit against U.S. income tax is, in effect, an

exemption from taxation, and is dependent upon legislative grace.

Keasbey & Mattison Co. v. Rothensies, 

, 898 (3d Cir.

1943).    A taxpayer who claims a foreign tax credit must show that

it clearly comes within the statute that allows the credit.    

the burden of proof.   Rule 142(a).   The “reaches

of the word ‘income’ in section 901(b)(1) have been the subject

of a long and tortuous history” in terms of legislative

background, the decided cases, and respondent's rulings, which

history is “permeated” with “vagaries, confusion, and * * *

contradictions”.    Bank of America Natl. Trust & Sav. Association

v. Commissioner, 

, 759 (1974), affd. without published


     2
      (...continued)
          Sec. 901(b). Amount Allowed.--Subject to the
     limitation of section 904, the following amounts shall
     be allowed as the credit under subsection (a):

           (1) Citizens and domestic corporations.--In the
           case of a citizen of the United States and of a
           domestic corporation, the amount of any income,
           war profits, and excess profits taxes paid or
           accrued during the taxable year to any foreign
           country or to any possession of the United States
           * * *
                               - 16 -


opinion 

(9th Cir. 1976).      In Bank of America Natl.

Trust & Sav. Association v. United States, 

, 

, 523 (1972), the U.S. Court of Claims concluded that an

income tax for purposes of section 901(b):

       covers all foreign income taxes designed to fall on
       some net gain or profit, and includes a gross income
       tax if, but only if, that impost is almost sure, or
       very likely, to reach some net gain because costs or
       expenses will not be so high as to offset the net
       profit. [Fn. ref. and citation omitted.]

B.     Section 1.901-2, Income Tax Regs.

       Respondent proposed regulations under section 901 in 1979,

sec. 1.901-2, Proposed Income Tax Regs., 44 Fed. Reg. 36071

(June 20, 1979), and issued temporary regulations in 1980, sec.

4.901-2, Temporary Income Tax Regs., 45 Fed. Reg. 75647 (Nov. 17,

1980); see Phillips Petroleum Co. v. Commissioner, 

,

285 (1995)(construing these temporary regulations).     On April 5,

1983, respondent issued new proposed regulations.     Sec. 1.901-2,

Proposed Income Tax Regs., 48 Fed. Reg. 14640 (Apr. 5, 1983).

The regulations under section 901, section 1.901-2, Income Tax

Regs., were adopted on October 12, 1983.     T.D. 7918, 1983-2 C.B.

113.    The parties do not dispute that the regulations apply to

petitioner for the years in issue.

       To understand how the regulations apply here, we must

consider a series of defined terms and phrases in the

regulations.    We begin with the definition of income tax.    The

regulations define income tax as follows:
                              - 17 -


     § 1.901-2. Income, war profits, or excess profits tax
     paid or accrued.--(a) Definition of income, war
     profits, or excess profits tax--(1) In general. * * *
     Whether a foreign levy is an income tax is determined
     independently for each separate foreign levy. A
     foreign levy is an income tax if and only if--

               (i)   It is a tax; and

               (ii) the predominant character of that tax is
               that of an income tax in the U.S. sense.

          Except to the extent otherwise provided in
          paragraphs (a)(3)(ii) and (c) of this section, a
          tax either is or is not an income tax, in its
          entirety, for all persons subject to the tax.
          * * *

Sec. 1.901-2(a)(1), Income Tax Regs.

     Respondent concedes that the OMT is a tax under section

1.901-2(a)(2)(i), Income Tax Regs.     However, the parties dispute

whether the "predominant character of the tax is that of an

income tax in the U.S. sense."   The regulations describe that

requirement as follows:

          (3) Predominant character. The predominant
     character of a foreign tax is that of an income tax in
     the U.S. sense--

               (i) If, within the meaning of paragraph
     (b)(1) of this section, the foreign tax is likely to
     reach net gain in the normal circumstances in which it
     applies * * *

Sec. 1.901-2(a)(3), Income Tax Regs.

     Thus, for a tax to be creditable under the regulations, it

must be likely to reach net gain in the normal circumstances in
                               - 18 -


which it applies.3   Under the regulations, that standard is met

"if and only if the tax, judged on the basis of its predominant

character" meets specified realization, gross receipts, and net

income requirements.    Sec. 1.901-2(b)(1), Income Tax Regs.   The

regulations provide in part as follows:

     (b) Net gain--(1) In general. A foreign tax is
     likely to reach net gain in the normal circumstances in
     which it applies if and only if the tax, judged on the
     basis of its predominant character, satisfies each of
     the realization, gross receipts, and net income
     requirements set forth in paragraphs (b)(2), (b)(3) and
     (b)(4), respectively, of this section.

Sec. 1.901-2(b)(1), Income Tax Regs.

     Respondent concedes that the OMT meets the realization and

gross receipts requirements but contends that it does not meet

the net income requirement of section 1.901-2(b)(4), Income Tax

Regs.    Thus, for present purposes the OMT is creditable,

according to section 1.901-2(b)(1), Income Tax Regs., "if and

only if" it meets the net income requirement.

     A foreign tax meets the net income requirement of section

1.901-2(b)(4), Income Tax Regs.,4 if, judged on the basis of its

     3
      This standard was first used in Bank of America Natl. Trust
& Sav. Association v. United States, 

, 

, 517-518 (1972). One commentator said that "Fortunately, the
regulations provide specific tests for determining whether the
general Bank of America standard is satisfied." Dolan, "General
Standards of Creditability Under Sections 901 and 903 Final
Regulations -- New Words, Old Concepts”, 13 Tax Mgt. Intl. J.
(BNA) 167, 169 (1984).
     4
         Sec. 1.901-2(b)(4), Income Tax Regs., provides:
                                                     (continued...)
                             - 19 -


predominant character, the base of the tax is computed by

reducing gross receipts to permit --

     (1) recovery of significant costs and expenses attributable

to gross receipts, sec. 1.901-2(b)(4)(i)(A), Income Tax Regs.; or

     (2) recovery of significant costs and expenses computed

under a method that is likely to produce an amount that

approximates, or is greater than, recovery of such significant

costs and expenses, sec. 1.901-2(b)(4)(i)(B), Income Tax Regs.

     A foreign tax also meets the net income requirement of

section 1.901-2(b)(4), Income Tax Regs., if it provides

allowances that "effectively compensate" for nonrecovery of


     4
      (...continued)
          (4) Net income -- (i) In general. A foreign tax
     satisfies the net income requirement if, judged on the
     basis of its predominant character, the base of the tax
     is computed by reducing gross receipts (including gross
     receipts as computed under paragraph (b)(3)(i)(B) of
     this section) to permit--

               (A) Recovery of the significant costs and
     expenses (including significant capital expenditures)
     attributable, under reasonable principles, to such
     gross receipts; or

               (B) Recovery of such significant costs and
     expenses computed under a method that is likely to
     produce an amount that approximates, or is greater
     than, recovery of such significant costs and expenses.

     A foreign tax law that does not permit recovery of one
     or more significant costs or expenses, but that
     provides allowances that effectively compensate for
     nonrecovery of such significant costs or expenses, is
     considered to permit recovery of such costs or
     expenses. * * *
                               - 20 -


significant costs or expenses.   Sec. 1.901-2(b)(4) (flush

language), Income Tax Regs.    Petitioner prevails if the OMT meets

one or more of these net income requirements.

     A recap may be helpful.   The task of deciding whether the

predominant character of the OMT is that of an income tax in the

U.S. sense is simplified because the terms and clauses in the

regulations just described tie the "predominant character"

inquiry to several specific tests.      To summarize, for a tax to be

creditable:

     1.   Its predominant character must be that of an income tax

in the U.S. sense.   Sec. 1.901-2(a)(1)(ii), Income Tax Regs.

     2.   Its predominant character is that of an income tax in

the U.S. sense if it is “likely to reach net gain in the normal

circumstances in which it applies”.     Sec. 1.901-2(a)(3)(i),

Income Tax Regs.

     3.   It is likely to reach net gain in the normal

circumstances in which it applies if and only if the tax, judged

on the basis of its predominant character, meets (among other

requirements) the net income requirement.     Sec. 1.901-2(b)(1),

Income Tax Regs.

     4.   It meets the net income requirement if, judged on the

basis of its predominant character,5 it meets one of three tests.

     5
      To borrow a phrase, the "reader by now has divined that
'predominant character' is the leitmotif of the 1983
                                                   (continued...)
                               - 21 -


Sec. 1.901-2(b)(4), Income Tax Regs.    We next consider whether it

meets one of these tests.

C.   Whether the OMT Meets the Net Income Requirement in Section
     1.901-2(b)(4)(i)(B), Income Tax Regs.

     Under one of the three net income tests, a tax meets the net

income requirement if, judged on the basis of its predominant

character, the base of the tax is computed by reducing gross

receipts to permit recovery of significant costs and expenses

under a method that is likely to produce an amount that

approximates or exceeds recovery of such significant costs or

expenses.    Sec. 1.901-2(b)(4)(i)(B), Income Tax Regs.   Because of

respondent's concessions, the OMT is creditable if it meets that

test.

     1.     Consideration of Representative OMT Data

     Petitioner offered evidence intended to prove that the

processing allowance is likely to approximate or exceed

nonrecoverable expenses.    Petitioner's evidence consisted of a

broadly representative study of OMT tax returns filed from 1968

to 1980.    Petitioner's study showed that the processing allowance

far exceeded the nonrecoverable expenses both in the aggregate

for all returns studied and for a large majority of OMT returns.



     5
      (...continued)
regulations." Isenbergh, "The Foreign Tax Credit: Royalties,
Subsidies, and Creditable Taxes", 39 Tax L. Rev. 227, 272 (1984).
                               - 22 -


     We agree with petitioner that use of broadly representative

data is an appropriate way to show whether the processing

allowance is likely to exceed nonrecoverable expenses.    Two

factors lead us to that conclusion.     First, both the processing

allowance and the amount of nonrecoverable expenses vary from

year to year and from taxpayer to taxpayer.    Whether one is

likely to exceed the other is a factual question.    Accord

Texasgulf, Inc. v. United States, 

(1989), modified

per order (Apr. 16, 1992).   Whether the processing allowance is

likely to approximate or exceed nonrecoverable expenses can be

shown by actual OMT data.    Second, we think it is appropriate to

consider industry data because a foreign tax either is or is not

an income tax, in its entirety, for all persons subject to it.

Sec. 1.901-2(a)(1) (flush language), Income Tax Regs.6    Whether a

tax is creditable for all persons subject to it can be shown by

multiyear data from a broadly representative group of taxpayers

subject to the tax.

     2.   Expert Testimony

     Petitioner's expert was Robert B. Parsons (Parsons).     He

prepared a report entitled “Study of Ontario Mining Tax Returns”

(Parsons OMT Report) and an “Overview of the Ontario Mining




     6
      See Dolan, supra note 3.
                                - 23 -


Industry”.7    The Parsons OMT Report was based on a review of 213

OMT returns that represented about 80 percent of the total OMT

paid from 1968 to 1980.    The mining operators which filed those

returns had about 68 percent of Ontario’s mineral production

during that period.

     William J. Hallett (Hallett) was respondent’s expert.    He

testified about the OMT returns that Parsons analyzed.    Parsons

prepared a memorandum that rebutted parts of Hallett’s testimony.

     We are not bound by the opinion of any expert witness, and

we may accept or reject expert testimony exercising our sound

judgment.     Helvering v. National Grocery Co., 

, 295

(1938); Fitts’ Estate v. Commissioner, 

, 732-733 (8th

Cir. 1956), affg. T.C. Memo. 1955-269; IT & S of Iowa, Inc. v.

Commissioner, 

, 508 (1991).

     3.     Petitioner's Study of OMT Taxpayers

     Respondent concedes that the Parsons OMT Report included a

representative cross-section of OMT taxpayers.    Only one

significant taxpayer did not give its OMT tax returns to Parsons

for the study.    Respondent's expert stated that this taxpayer's

information would not have materially changed the results of the

     7
      Kumara Rachamalla was petitioner’s other expert.
Respondent objected to our consideration of his report and
testimony. Canadian law precluded him from revealing the data
upon which he based his opinion and answering questions about
this data on cross-examination. He agreed with Parsons’
conclusion in every material aspect. However, we have not
considered his report or testimony in deciding this case.
                                - 24 -


Parsons OMT Report.   Parsons analyzed returns as filed; i.e.,

before assessment by the Mine Assessor.       Later, Parsons obtained

records of the Mine Assessor’s adjustments to the filed returns.

He included assessment data in his rebuttal memorandum to the

extent it was available.    The parties stipulated that the data

(but not the opinions and conclusions) in the Parsons OMT Report

was accurate.

     Of the 213 returns that Parsons reviewed, 145 returns (68.1

percent) reported OMT liability.    Nonrecoverable expenses exceed

the processing allowance on only 19 of the OMT returns which

reported OMT liability (15.8 percent).

     The Parsons OMT Report shows that, in the aggregate,

processing allowances claimed by OMT taxpayers dwarfed

nonrecoverable expenses:

                           Millions of Can$


                         Nonrecoverable   Processing
                Year       Expenses       Allowance
                1968          10.6           91.6
                1969           9.7           76.3
                1970          30.2           99.7
                1971          39.6           36.9
                1972          51.7           92.6
                1973          54.1          140.6
                1974          57.6          196.8
                1975          61.6          252.2
                1976          70.0          217.8
                1977          73.3           43.2
                1978          83.4           94.7
                1979          64.1          321.8
                1980          99.3          573.5
                   Total     705.2        2,237.7
                   Average    54.3          172.1
                                  - 25 -


     For the 13-year period, the total amount of processing

allowance claimed on returns in the Parsons OMT Report was

Can$2,237,700,000, which is more than three times the total

amount of nonrecoverable expenses (Can$705,200,000).

     Parsons concluded that the aggregate amount of processing

allowance claimed by OMT taxpayers in his report exceeded their

aggregate amount of nonrecoverable expenses by 3.2 to 1.

Respondent does not dispute that conclusion.   Total processing

allowances claimed on returns exceeded nonrecoverable expenses

for 11 of the 13 years in the Parsons OMT Report.

     The Parsons OMT Report also shows that the processing

allowances claimed by the vast majority of OMT taxpayers in the

study exceeded those taxpayers' nonrecoverable expenses.     The

Parsons OMT Report also shows that nonrecoverable expenses

exceeded processing allowances in 21 of 145 returns from eight

OMT taxpayers.

     4.     Respondent’s Expert

     Hallett concluded that nonrecoverable expenses exceeded the

processing allowance in only 60 of 213 OMT returns in the Parsons

OMT Report if all OMT returns are considered, whether or not tax

was due.    Nineteen of those 60 returns were from taxpayers that

owed OMT.

     Hallett stated his opinion that the nonrecoverable expenses

were significant.    His opinion, even if correct, does not affect
                                - 26 -


the result here.   We need not decide whether nonrecoverable costs

are significant because we decide the case by considering whether

the processing allowance is likely to exceed nonrecoverable

expenses under section 1.901-2(b)(4)(i)(B), Income Tax Regs.    The

question under section 1.901-2(b)(4)(i)(B), Income Tax Regs, is

not whether the nonrecoverable expenses are significant; it is

whether the processing allowance is likely to approximate or

exceed them.8

     5.   Conclusion

     Petitioner has shown that the processing allowance exceeded

nonrecoverable expenses both in the aggregate and for the vast

majority of OMT taxpayers.   We conclude that the OMT processing

allowance was likely to approximate or exceed the nonrecoverable

expenses for the years in issue.

D.   Respondent’s Contentions

     Respondent contends that petitioner has not proven that the

OMT meets the requirements of section 1.901-2(b)(4)(i)(B), Income

Tax Regs., because, according to respondent, (1) this case is

governed by cases decided before the 1983 regulations applied,


     8
      Similarly, we need not decide the parties’ dispute about
the concept of pit’s mouth value. Respondent contends that the
OMT’s use of pit’s mouth value shows that no nexus exists between
the amount of the processing allowance and nonrecoverable
expenses. Sec. 1.901-2((b)(4)(i)(B), Income Tax Regs., requires
us to consider whether the processing allowance approximates or
exceeds nonrecoverable expenses, not whether there is a nexus
between the two. See par. D-3, infra p. 33.
                              - 27 -


such as Inland Steel Co. v. United States, 

, 

(1982); and also by Texasgulf, Inc. v. United States, 

(1989); (2) the OMT is not creditable unless its

predominant character is that of an income tax for each OMT

taxpayer; and (3) for the OMT to be creditable, the processing

allowance must have been intended to compensate for

nonrecoverable expenses.   We address each of these contentions

next.

     1.   Extent To Which This Case Is Governed by Cases Decided
          Before the Regulations Were Issued and by Texasgulf,
          Inc. v. United States

          a.   Preamble to the 1983 Regulations

     Respondent contends that the OMT is not creditable because

it fails to meet standards of creditability applied in cases

decided before the regulations were issued.    Respondent contends

that the Preamble to section 1.901-2, Income Tax Regs., shows

that the regulations adopted prior case law.   We disagree; the

preamble does not support respondent’s broad use of the

preregulation cases.

     The preamble to the final regulations under section 901,

T.D. 7918, 1983-2 C.B., 113, 114, states in part:

          Under these final regulations, the predominant
     character of a foreign tax is that of an income tax in
     the U.S. sense if the foreign tax is likely to reach
     net gain in the normal circumstances in which it
     applies. This standard, found in §1.901-2(a)(3)(i),
     adopts the criterion for creditability set forth in
     Inland Steel Company v. U.S., 

(Ct. Cl.
     1982), Bank of America National Trust and Savings
                               - 28 -


     Association v. U.S., 

(Ct. Cl. 1972), and
     Bank of America National Trust and Savings Association
     v. Commissioner, 

(1974). The regulations
     set forth three tests for determining if a foreign tax
     is likely to reach net gain: the realization test, the
     gross receipts test, and the net income test. All of
     these tests must be met in order for the predominant
     character of the foreign tax to be that of an income
     tax in the U.S. sense.

     The preamble states that the regulations adopt the

creditability criterion from certain cases to use in deciding

whether the predominant character of a foreign tax is likely to

reach net gain for purposes of section 1.901-2(a)(3)(i), Income

Tax Regs.    The preamble states that a tax is likely to reach net

gain if it meets three tests provided in the regulations.   The

regulations provide objective and quantitative standards that

were not used in cases which decided creditability of foreign

taxes before the regulations became final.   Regulations can

supersede prior case law to the extent that they provide

requirements and definitions not found in prior case law.   See

Bowater Inc. v. Commissioner, 

, 212 (1993); Nissho

Iwai American Corp. v. Commissioner, 

, 776-777 (1987).

            b.   Inland Steel Co. v. United States and
                 Texasgulf, Inc. v. United States

     Respondent contends that Inland Steel Co. v. United 

, and Texasgulf, Inc. v. United 

, establish as

a matter of law that the OMT is not creditable.   We disagree with

respondent’s contention that either of those cases decided the

issue before us here.
                                - 29 -


     The U.S. Court of Claims held in Inland Steel Co. v. United

, that the OMT was not creditable and that, for 1964

and 1965, the OMT paid by Caland Ore Co. did not fit the U.S.

concept of an income tax primarily because there were significant

nonrecoverable expenses (i.e., land expenses, rent, and private

royalties).   

87.    In Inland Steel, the U.S. Court of

Claims evaluated Caland data for 1964 and 1965.     In 1964, Caland

could not claim a processing allowance because it sold only

unprocessed ore.   

81.    In 1965, Caland could claim a

processing allowance equal to not less than 15 percent or more

than 65 percent of the profits of the combined mining and

processing operations because it sold both unprocessed ore and

processed iron pellets.     

  Caland reported the minimum

15 percent of combined profits processing allowance on its OMT

return for 1965.   

in that case did not include

OMT returns for any other OMT taxpayers or any other years.

     The U.S. Court of Claims decided Inland Steel before the

1983 regulations were issued.    In Inland Steel, the U.S. Court of

Claims analyzed the history and purpose of the OMT and held that

a foreign tax was creditable only if it was the “substantial

equivalent” of an income tax in the United States.      

see also New York & Honduras Rosario Mining Co. v. 

.   The 1979 proposed regulations included a form

of the substantial equivalence test.     Sec. 1.901-2(c), Proposed
                               - 30 -


Income Tax Regs., 44 Fed. Reg. 36074 (June 20, 1979).    However,

this standard was dropped by the final regulations issued in 1983

and replaced with a “predominant character” test.   The use of the

“predominant character” and “effectively compensates” tests in

section 1.901-2(b)(4), Income Tax Regs., is a change from the

history and purpose approach used in the cases decided before the

1983 regulations applied a factual, quantitative approach.    This

change to a quantitative approach is also made by the provision

of the 1983 regulations which provides that the predominant

character of a foreign tax is that of an income tax in the U.S.

sense, if, among other things, the foreign tax “is likely to

reach net gain in the normal circumstances in which it applies”.

Sec. 1.901-2(a)(3)(i), Income Tax Regs.

     We have considered the parties’ use of industry data in this

case.   See par. C-1, supra p. 21.   The record contains broadly

representative data which shows that the OMT processing allowance

effectively compensates for the disallowed deductions.   See par.

C-3 and 4, supra pp. 22, 24.   The U.S. Court of Claims in Inland

Steel Co. v. United States, 

, 

(1982),

did not have industry-wide data to consider, and the Secretary

had not yet promulgated regulations using a quantitative

approach.   The court in Inland Steel did not discuss the

relationship between nonrecoverable expenses and the OMT

processing allowance.   Based on the Parsons OMT Report, Caland's
                                - 31 -


situation was unusual because most OMT taxpayers could and did

claim a processing allowance equal to 65 percent of the maximum

combined profits.   Thus, the use of the processing allowance by

Caland was not typical.   For the foregoing reasons, we conclude

that we are not bound by Inland Steel in deciding this case.9

     Respondent points out that Inland Steel Co. v. United

, focused on the significance of expenses that are

nonrecoverable under the OMT.    As discussed in paragraph C-4,

supra p. 25, we need not decide whether the nonrecoverable

expenses are significant under section 1.901-2(b)(4)(i)(A),

Income Tax Regs., because we hold that petitioner meets the

requirements under section 1.901-2(b)(4)(i)(B), Income Tax Regs.

     In Texasgulf, Inc. v. United States, 

(1989),

the U.S. Claims Court granted the Government's motion for partial

summary judgment.   The U.S. Claims Court later modified that

ruling in an unpublished order.    Texasgulf, Inc. v. United

States, No. 532-83T (Cl. Ct., Apr. 16, 1992) (order partially

denying summary judgment).   In that order, the U.S. Claims Court

reaffirmed its opinion in Texasgulf, Inc. v. United 

, that nonrecoverable expenses under the OMT were

significant as a matter of law under Inland Steel Co. v. United

.   However, in that order, the U.S. Claims

     9
      We note also that exploration expenses were not recoverable
in Inland Steel Co. v. United States, 

, 

(1982), but are fully recoverable in the years in issue.
                               - 32 -


Court reversed its holding that the OMT processing allowance does

not effectively compensate for expenses that may not be recovered

under the OMT as a matter of law.    Texasgulf, Inc. v. United

States, No. 532-83T (Cl. Ct. Apr. 16, 1992) (order partially

denying summary judgment).    Thus, the U.S. Claims Court treats

that issue as a question of fact.    The U.S. Claims Court left for

decision based on an appropriate record the question whether the

OMT processing allowance effectively compensates for the

disallowed deductions.   Texasgulf, Inc. v. United States, No.

532-83T (Cl. Ct. Apr. 16, 1992) (order partially denying summary

judgment).   Our record enables us to make a factual finding on

this point; as discussed above, we have found that, judged on the

predominant character of the OMT, the processing allowance is

likely to exceed nonrecoverable expenses.

     2.   Whether the Predominant Character of the OMT Must Be An
          Income Tax in the U.S. Sense for Each Taxpayer

     Respondent contends that, for a tax to be creditable, its

predominant character must be that of an income tax in the U.S.

sense for each taxpayer subject to it.    Respondent bases this

argument on the following language from the regulations:    "a tax

either is or is not an income tax, in its entirety, for all

persons subject to the tax."    Sec. 1.901-2(a)(1) (flush

language), Income Tax Regs.    We disagree.   This phrase does not

mean that, to be creditable, a tax must be an income tax for each

taxpayer subject to it; it means that a tax is creditable by
                               - 33 -


either all, or none, of the taxpayers subject to it, regardless

of variations in how the tax applies to each taxpayer subject to

it.

      Respondent contends that petitioner may not use aggregate

data to show that the OMT is creditable.   Respondent also

contends that if we adopt petitioner’s position, the Commissioner

would be required to evaluate each OMT taxpayer every year to

determine whether its OMT payment was creditable.   We disagree.

Use of aggregate data is appropriate because a tax is or is not

creditable for all taxpayers subject to it.   This conclusion does

not require the Commissioner to evaluate each OMT taxpayer every

year to determine whether its OMT payment is creditable.

      3.   Whether the Processing Allowance Must Be Intended To
           Compensate for Nonrecoverable Expenses

      Respondent contends that, for the OMT to be creditable, the

processing allowance must be intended to compensate for

nonrecoverable expenses.   Respondent points out that the

processing allowance is computed without considering the amount

of nonrecoverable expenses and contends that the amount of one

bears no predictable relationship to the amount of the other.

Respondent contends that the fact that the processing allowance

exceeds nonrecoverable expenses for most OMT taxpayers does not

make the OMT creditable because that relationship is

coincidental.   We disagree.
                                - 34 -


     The regulations do not provide that the processing allowance

must bear a predictable relationship to nonrecoverable expenses.

The regulations do provide that a foreign tax meets the net

income requirement if (among other requirements), judged by its

predominant character, the tax permits the recovery of

nonrecoverable expenses under a method that is likely to produce

an amount that approximates or is greater than the amount of the

nonrecoverable expenses.     Sec. 1.901-2(b)(4)(i)(B), Income Tax

Regs.     The effect of respondent’s position would be to exclude

from section 1.901-2(b)(4)(i)(B), Income Tax Regs., the words “or

is greater than”.

E.   Conclusion

        We conclude that the OMT processing allowance meets the

requirements of section 1.901-2(b)(4)(i)(B), Income Tax Regs.,

and that the OMT is creditable under section 901 for the years in

issue.

        To reflect the foregoing and concessions,


                                              Decision will be entered

                                         under Rule 155.