Commissioner of Internal Revenue v. Portland Cement Company of Utah, 79-1907

• Citation: 101 S.Ct. 1037,450 U.S. 156,67 L.Ed.2d 140
• Decision Date: 03 March 1981
• Docket Number: No. 79-1907,79-1907
• Parties: COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. PORTLAND CEMENT COMPANY OF UTAH
• Court: United States Supreme Court

67 L.Ed.2d 140

101 S.Ct. 1037

450 U.S. 156

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

v PORTLAND CEMENT COMPANY OF UTAH.

No. 79-1907.

Argued Jan. 13, 1981.

Decided March 3, 1981.

Syllabus

Respondent mines cement rock and manufactures it into Portland cement. Section 611(a) of the Internal Revenue Code of 1954 allows respondent, as a miner, to deduct from its taxable income a percentage of its gross income from mining as a recoupment of capital investment in the depleting mineral. Because respondent, as an integrated miner-manufacturer, has no actual gross income from mining, it must base its depletion deduction upon a constructive gross income from mining. For each of the tax years at issue in this case, respondent used the proportionate profits method prescribed by the Treasury Regulations to compute such constructive gross income. This method uses the costs of and proceeds from the taxpayer's "first marketable product" to derive the constructive gross income. The regulations define "first marketable product" as "the product (or group of essentially the same products) produced by the taxpayer as a result of the application of nonmining processes, in the form or condition in which such product or products are first marketed in significant quantities by the taxpayer." The regulations provide that bulk and packaged products are considered to be essentially the same product for this purpose. The method required respondent to derive the portion of total proceeds that reflects the ratio between its mining costs and its total costs. Under the regulations, respondent must include in the total-costs figure "all the mining and nonmining costs paid or incurred to produce, sell and transport the first marketable product." Respondent took the position that its "first marketable product" was cement sold in bulk, rather than all cement sold, whether in bulk or in bags. The costs of bags and bagging exceeded respondent's bagging premium (the increase in proceeds for selling cement in bags). Hence, respondent did not include proceeds from the sale of cement in bags in the total-proceeds figure of the proportionate profits method. Nor did respondent include in the total-costs figure of the method the costs incurred for bags, bagging, storage, distribution, and sales. The result was that the proportionate profits method yielded a greater constructive gross income from mining, and respondent reported a correspondingly greater depletion deduction, than- it would have if it had included those proceeds in costs in its computation by such method. Petitioner Commissioner of Internal Revenue determined that respondent's tax liabilities were deficient, taking the position that respondent's "first marketable product" is cement, whether sold in bulk or in bags, and that respondent should have included proceeds from its sale of bagged cement in its calculation by the method, and also the costs incurred for bags, bagging, storage, distribution, and sales. Respondent then filed suit in the Tax Court for a redetermination. That court accepted respondent's position, and the Court of Appeals affirmed.

Held : The Treasury Regulations defining "first marketable product" and prescribing the treatment of the costs of bags, bagging, storage, distribution, and sales support the Commissioner's position. Pp. 169.

(a) This Court customarily defers to Treasury Regulations that "implement the congressional mandate in some reasonable manner." United States v. Correll, 389 U.S. 299, 307, 88 S.Ct. 445, 450, 19 L.Ed.2d 537. P. 169.

(b) Respondent's contention that the Commissioner's position will yield a distorted constructive gross income from mining if it is applied without regard to the particular circumstances in this case, i. e., that respondent's bagging costs exceed its bagging premium, misperceives both the meaning of "gross income from mining" and the holding in United States v. Cannelton Sewer Pipe Co., 364 U.S. 76, 80 S.Ct. 1581, 4 L.Ed.2d 1581. Under the Code and regulations, gross income from mining means income received, whether actually or constructively, without regard to value. In Cannelton, in interpreting an earlier statutory definition of "mining," the Court said that "Congress intended integrated mining-manufacturing operations to be treated as if the operator were selling the mineral mined to himself for fabrication." Id., at 89, 80 S.Ct., at 1588. This statement, in the context in which it occurs, does not support respondent's contention that the method used to determine constructive gross income must take into account forces that might cause income to differ from value. Nor does the difference between bagging costs and the bagging premium warrant a deviation from the regulation's definition of "first marketable product." Pp. 170-173.

(c) The statutory definition of "mining" to include all processes up to the introduction of the kiln feed into the kiln, "but not . . . any subsequent processes," forecloses respondent's further contention that the costs it incurred in the storage, distribution, and sales of its first marketable product, if they must be included in the proportionate profits method, should be treated as indirect costs which benefit the entire mining-manufacturing operation, and hence should be allocated between mining and manufacturing. The regulations recognizing that- storage, distribution, and sales are "subsequent processes" are reasonable. Pp. 173-174.

10th Cir., 614 F.2d 724, reversed.

Stuart A. Smith, Washington, D. C., for petitioner.

Dennis P. Bedell, Washington, D. C., for respondent.

Justice POWELL delivered the opinion of the Court.

This case concerns the depletion deduction taken under § 611 of the Internal Revenue Code of 1954, 26 U.S.C. § 611, by a company that mines and manufactures Portland cement. The question presented is whether the company's "first marketable product," for the purpose of determining gross income from mining by the proportionate profits method, is cement, whether sold in bulk or in bags, or only cement sold in bulk.

I

Respondent, Portland Cement Co. of Utah, is an integrated miner-manufacturer. It mines argillaceous limestone rock, known in the trade as cement rock, and it manufactures the rock into Portland cement.¹ As a miner respondent is al- lowed by § 611(a) ² to deduct from its taxable income an amount that permits it a recoupment of capital investment in the depleting mineral. Section 611(a) provides:

"In the case of mines, oil and gas wells, other natural deposits, and timber, there shall be allowed as a deduction in computing taxable income a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each case; such reasonable allowance in all cases to be made under regulations prescribed by the Secretary . . . ."

The amount which respondent may deduct is a percentage of its "gross income from the property." 26 U.S.C § 613(a).³ In respondent's case, gross income from property means "gross income from mining." ⁴ Thus, respondent may deduct from its taxable income a percentage of the gross income it receives from mining.

If respondent were only a miner and therefore sold the product of its mining, respondent's gross income from mining would be the receipts from its sales. But as an integrated miner-manufacturer, respondent itself uses the product of its mining.⁵ Respondent therefore has no actual gross income from mining and must base its depletion deduction upon a constructive gross income from mining. See United States v. Cannelton Sewer Pipe Co., 364 U.S. 76, 86, 80 S.Ct. 1581, 1587, 4 L.Ed.2d 1581 (1960).

The Commissioner of Internal Revenue, petitioner here, has prescribed in Treasury Regulations two methods of determining constructive gross income from mining. If other miners in the industry sell the product of their mining on an open market, then miners who do not sell their product must use "the representative market or field price" to compute their constructive gross income from mining. Treas.Reg. § 1.613-4(c), 26 CFR § 1.613-4(c) (1980). If other miners do not sell their mining product and a representative market- or field price cannot be determined, as is the case in the integrated cement industry, then constructive gross income from mining must be determined by the "proportionate profits method." § 1.613-4(d). In addition to providing these two methods, the Commissioner also has provided that a taxpayer may compute a constructive gross income from mining by any other method that, upon the taxpayer's request, the Commissioner determines to be more appropriate than the proportionate profits method under the taxpayer's particular circumstances. § 1.613-4(d)(1)(ii).⁶ For each of the tax years at issue in this case, respondent used the proportionate profits method to compute its constructive gross income from mining.⁷

The proportionate profits method uses the costs of and proceeds from the taxpayer's "first marketable product" to derive the taxpayer's constructive gross income from mining. The principle of the method is that each dollar of the total costs which the taxpayer incurs to produce, sell, and transport its first marketable product earns the same proportionate part of the proceeds from sales of that product. § 1.613-4(d)(4)(i). The objective of the method is to identify—from among the total proceeds from sales of the first marketable product—that portion of the proceeds that has been earned by the costs which the taxpayer incurred in its mining operations. To identify that portion of the proceeds, the formula requires the taxpayer to apportion the total proceeds from its first marketable product between mining income and total income in the same ratio as its mining costs bear to its total costs. The amount of proceeds which bears the same- relationship to total proceeds as mining costs bear to total costs is the taxpayer's constructive gross income from mining.⁸

On its returns for...