Great Bend Brick & Tile Company v. United States

• Decision Date: 07 April 1961
• Docket Number: Civ. A. No. W-1914.
• Court: U.S. District Court — District of Kansas
• Parties: GREAT BEND BRICK & TILE COMPANY, Inc., Plaintiff, v. UNITED STATES of America, Defendant.

194 F. Supp. 309

GREAT BEND BRICK & TILE COMPANY, Inc., Plaintiff, v. UNITED STATES of America, Defendant.

Civ. A. No. W-1914.

United States District Court D. Kansas.

April 7, 1961.

Joe F. Balch, Balch & Briley, Chanute, Kan., Joseph B. Brennan, Sutherland, Asbill & Brennan, Atlanta, Ga., Willis B. Snell, Sutherland, Asbill & Brennan, Washington, D. C., for plaintiff.

George E. Peabody, Asst. U. S. Atty., Wichita, Kan., and Harvey Schneider, Department of Justice, Washington, D. C., for defendant.

HILL, Chief Judge.

This is a tax refund case, in which plaintiff seeks to recover the amount of $45,202.13, paid as income taxes for the years 1952 through 1955.¹

The question presented is whether plaintiff's "gross income from the property" for purposes of computing its percentage depletion deduction for its clay is the selling price of its burnt brick and tile (as contended by plaintiff) or whether it must constructively compute its depletion allowance (in accordance with the applicable Treasury Regulations) by applying the percentage rates to that portion of its gross income which is attributable to the basic marketable products of the fire clay and brick and tile mining industries, i. e., raw (crude) fire clay and raw (crude) brick and tile clay.

All of the relevant facts have been admitted by the answer or stipulated. The parties are submitting the case on the pleadings and the three stipulations on file with the Court. Therefore, it is only necessary to state that the stipulations show in general that during the years 1952 to 1955, plaintiff was engaged in the business of mining clay from pits which it owned and making brick and tile from such clay in a plant located near such pits. Thus the taxpayer is a so-called integrated miner-manufacturer. During these years, 77 per cent of the clay mined and used by plaintiff was "refractory and fire clay" and the other 23 per cent was "brick and tile clay". Like the plaintiff, all Kansas producers are integrated miner-manufacturers. There is, therefore, an opportunity to sell only a negligible amount of either type of clay in Kansas. The stipulation does reflect the sale of raw clay in substantial quantities in other parts of the United States by producers. The plaintiff here used virtually all of the clay it mined in its own plant.

A taxpayer is entitled to a deduction for depletion of its capital assets. The depletion deduction is authorized by the Internal Revenue Code of 1939, and 1954, and computation of the percentage depletion method is the same under both 1939 and 1954 code provisions.

The percentage granted by the statute is on taxpayer's "gross income from mining". We are not concerned with rates; it has been stipulated that both types of clay are depletable—fire clay at 15 per cent and brick and tile clay at 5 per cent. If mining includes all processes applied in manufacturing its finished product, gross income from mining is the sales price of those finished products. If, on the other hand, "mining" is limited to the treatment processes which non-integrated miners normally apply to the same minerals, the taxpayer's gross income is limited to that portion of its gross income which is attributable to the product and any normal processes applied by ordinary miners. The statutes provide methods for such computation but they need not be made because it is agreed if the Government's position is upheld gross income would not be greater than that already allowed and plaintiff would be entitled to no recovery.

As now enacted Section 613 of the 1954 Code, which is the same as Section 114(b) (4) (B) of the 1939 Code, 26 U.S.C.A. § 114(b) (4) (B), defines mining as including not merely the extraction of the ores or minerals but also the ordinary treatment processes normally applied by mine owners or operators in order to obtain the commercially marketable mineral product or products.

Essentially, the inquiry here is whether or not a cutoff point to mining is prescribed for integrated miner-manufacturers, and where that point lies.

The Government relies upon the recent case of United States v. Cannelton Sewer Pipe Company, 364 U.S. 76, 80 S.Ct. 1581, 4 L.Ed.2d 1581, in fact, places its sole reliance upon that decision and asserts the taxpayer's case depends upon whether they can avoid the effect of it. Prior to Cannelton the question presented here seemed well settled by a long line of decisions on the trial level and in various circuits.² The suit was brought by Cannelton for an income tax refund based on the statutory percentage depletion allowance.

The Cannelton case discloses the following facts. During the year in suit the taxpayer extracted large quantities of fire clay and shale from its mine located at Cannelton, Indiana. 80 tons of such fire clay was sold for $22.88 per ton but the greater portion of the mined clay was used to manufacture sewer pipe, a finished product. At the same time, in the State of Indiana and immediately across the Ohio River in Kentucky there were substantial sales of raw fire clay without processing. Subsequently Cannelton began securing its fire clay from these sources. In that locality there was a ready market for fire clay and shale as they came from the ground without processing, but, because of Cannelton's cost of production, it could not sell its raw clay at a profit.

The taxpayer contended that its first "commercially marketable miner product" was sewer pipe and vitrified articles. The plaintiff prevailed in the district court on this theory. The Court of Appeals affirmed, holding that plaintiff could not profitably sell its raw clay and shale without processing it into finished products, and that its statutory percentage depletion allowance was therefore properly based on its gross sales of the latter.³ The Government contended, as here, that the product from which "gross income from mining" is computed is an industry-wide test and cannot be reduced to a particular operation that a taxpayer might find profitable. The Government also argued that while the statute permits ordinary treatment processes normally applied by miners to the raw product of their mines to produce a commercially marketable mineral product, it does not embrace the fabrication of the mineral product into finished articles.

The Court, after setting out the above factual situation, carefully detailed the legislative history of depletion allowance, and from that history, made this conclusion on page 86 of the opinion in 364 U.S., on page 1586 of 80 S.Ct.:

"From this legislative history, we conclude that Congress intended to grant miners a depletion allowance based on the constructive income from the raw mineral product, if marketable in that form, and not on the value of the finished articles."

On the same page of that opinion, and on page 1587...