Amrican Metal Climax, Inc. v. Comm'r of Internal Revenue
| Decision Date | 26 November 1963 |
| Docket Number | Docket No. 58218. |
| Citation | 41 T.C. 292 |
| Parties | AMERICAN METAL CLIMAX, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
John P. Lipscomb, Jr., for the petitioner.
Arthur N. Mindling and S. A. Winborne, for the respondent.
Petitioner, a company involved in the mining and sale of molybdenum, engaged in a program of exploration and development. Held, a portion of the petitioner's 1942 income arising from the sale of molybdenum constitutes net abnormal income resulting from such exploration and development within the meaning of sections 721(a)(2)(C) and 721(a)(3), I.R.C. 1939, and is allocable to those years prior to 1942, during which the exploration and development work was done, pursuant to section 721(b), I.R.C. 1939.
The issue in this case is excess profits taxes under section 721 of the Internal Revenue Code of 1939, as amended,1 for the calendar year 1942. The principal questions are the existence of ‘net abnormal income’ in such year, and the portion thereof attributable to other taxable years under section 721(b).
On November 21, 1961, we filed our Findings of Fact and Opinion herein, 37 T.C.No. 30. We decided in such report that petitioner had realized ‘Abnormal Income’ within the meaning of section 721(a)(2)(C); assumed the existence of ‘Net Abnormal Income’ under section 721(a)(3) for such year; but concluded that none of it could be attributed to any other year under section 721(b) and section 35.721-3, Regs. 112, because we had been afforded no reliable or acceptable basis or method for screening out World War II induced increased demand for petitioner's product.
On further consideration we concluded that the substantial sums which had been expended by petitioner in exploration and development work in prior years had resulted (in and of themselves, and apart from war-induced increased demand and improvement in business conditions) in increased abnormal income for petitioner in 1942, and that the method we now employ would effectively eliminate that portion of such abnormal income which is attributable to war-induced increased demand; consequently we withdrew the said report of November 21, 1961, and have by appropriate orders admitted further evidence into the record and received further briefs from the parties.
Some of the facts are stipulated and are so found.
At all times material, Climax Molybdenum Co., hereinafter called Climax, was a Delaware corporation. From about 1933, its principal office was located in New York, N.Y. Its corporate existence continued until December 30, 1957.
Petitioner is a New York corporation organized on June 17, 1887, with its principal office in New York, N.Y. Prior to December 30, 1957, petitioner's name was The American Metal Co. (Ltd.). As of such date, petitioner and Climax were consolidated and merged, with the petitioner continuing as the surviving corporation. Thereupon, petitioner changed its name to American Metal Climax, Inc.
By order, dated February 13, 1959, petitioner was substituted for Climax, which filed the original petition herein.
Climax was organized on January 17, 1918, to acquire certain mining claims held by E. C. Heckendorf and others on the molybdenite property located on Bartlett Mountain near Climax, Colo.
At all times material, Climax employed an accrual method of accounting and filed its tax returns thereunder and on a calendar year basis. Its tax returns were filed with the collector of internal revenue for the third district of New York.
Climax filed its excess profits tax return for 1942 on March 15, 1943. The total net assessment of excess profits tax against Climax for 1942 was $4,409,066.94. The entire amount of such net assessment was discharged prior to February 6, 1946, by payment or by credit of other amounts due Climax.
On February 6, 1946, Climax filed a claim for refund of excess profits tax (Form 843) with respect to the calendar year 1942 in which it claimed the benefit of section 721 of the 1939 Code and asserted that the net amount of tax to be refunded was $2,391,636.93. Thereafter, Climax filed two supplemental documents in support of its claim for refund. The first document, designated a protest, was filed on May 19, 1950. The second document, filed on September 14, 1954, took the form of a letter purporting to amend the original claim for refund in certain respects, including the submission of revised and additional data. Climax's claim was disallowed in full on March 8, 1955.
Climax's mine is located on Bartlett Mountain approximately 100 miles west of Denver, Colo., and is about 1 mile east of the Continental Divide. Outcroppings of molybdenite, the ore mineral of molybdenum, occurred on the southwestern slope of the mountain. The existence of these outcroppings had been known for some time before Climax was organized. Climax, after taking over the claims in 1918, operated the mine until 1919, at which time the mine was shut down because of the lack of demand for molybdenum. Operations were resumed in August of 1924 and have continued to the date of trial.
Molybdenum is an alloying metal and is element No. 42 of the Chemical Periodic Table. There are two major types of molybdenum deposits in the world. In the first, molybdenum occurs as the main product, while in the second molybdenum occurs as a recoverable byproduct from copper operations. The Climax mine is of the first type and is the world's largest single primary source of molybdenum.
In the Climax mine, numerous siliceous veinlets impregnated with molybdenite had penetrated the granite rock. This molybdenite, a compound of molybdenum and sulfur, contained approximately 60 percent molybdenum. The ore that outcropped on the surface also extended a considerable depth below the surface. In the upper 700 feet, the ore body was quite symmetrical and surrounded a dome-shaped cone of high silica rock that gradually enlarged below the surface. At deeper levels, the symmetry of the ore body was destroyed by another intrusion of mineralization. The ore body was low in its content of molybdenite varying from zero to slightly more than 1 percent. The overburden or waste that covered the ore body was of two types, glacial debris and low-grade material of uneconomic mineralization. Climax recovered about 18 pounds of molybdenite from a ton of ore assaying 1 percent. This amounted to about 11 pounds of molybdenum.
The first mining by Climax occurred on the Leal Level at an altitude of 12,145 feet on Bartlett Mountain. In 1927, the last tonnage was hauled from Leal Level as the higher grade ores had been extracted. Operations were then shifted to the White Level which was 205 feet below the Leal Level and more productive. In 1929, Climax began development work at the Phillipson Level of its mine which was about 470 feet below the White Level. The first production from the Phillipson Level, other than that produced during the course of development work, referred to as ‘development tonnage,‘ was during May 1933. Production from the White Level ceased in September of 1937. From the latter date through 1942, production was from the Phillipson Level, except for small stipulated amounts of development tonnage in 1941 and 1942 from levels below the Phillipson. Through the year 1942, Climax carried on no other mining operations and the only metal recovered from its mine was molybdenum.
The grade of the ore body that Climax considered economical to mine varied over the years. In the late 1920's and the early 1930's the grade limit was ore containing six-tenths of 1 percent molybdenite. In the middle 1930's, the cutoff grade was reduced to 0.45 percent. Later in the 1930's, it was further reduced to 0.4 percent, where it remained substantially throughout the 1940's.
Climax employed two types of mining. On the Leal Level and to a lesser extent on the White Level, it used a gloryhole type of mining, and it also used shrinkage stopes and open-room and pillar methods. As its mining progressed to deeper levels, Climax needed a more economical method of mining that would permit the extraction of low-grade ores in large volume. Accordingly, it adopted the block or progressive caving method of mining, which was the most economical method of mining this particular ore body. The progressive caving method utilized gravity to break up the ore as contrasted with drilling and blasting. Numerous joints and fractures in the rock assisted in breaking up the mass when it subsided. Essentially, the progressive caving method contemplated driving in from the surface beneath the ore body to be mined, removing the supports from underneath the column of ore to be recovered by an intricate system of undercutting on a level that would cause subsidence, and thereafter extracting the ore from underneath. The ore was removed from the mine in ore trains through haulage drifts. The overburden or waste followed the ore down after caving diluting it from 10 to 20 percent.
Climax employed two methods of caving, the ‘grizzly’ system and the ‘slusher’ system. The grizzly system was used on the White Level and on the Phillipson Level prior to November 1936. Thereafter, a combination of the grizzly and slusher systems was used on the Phillipson Level. On levels below the Phillipson Level, the slusher system was used. The slusher system had several advantages over the grizzly system, including safety, better ventilation, cheaper development costs, and greater productivity. The main hazards of both systems were dust and falls. Also there were hangups at points which required blasting.
In the grizzly system of progressive caving, a vertical chute for control of the ore was raised from the haulage level. Branch raises led off from this chute to a sublevel, known as the ‘grizzly level,‘ which was about 60 feet above the haulage level, and on which rooms were located called ‘grizzly chambers.’ From the grizzly...
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