Commissioner of Internal Rev. v. American Metal Co.

• Decision Date: 15 March 1955
• Docket Number: Docket 22907.,No. 29,29
• Citation: 221 F.2d 134
• Parties: COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. The AMERICAN METAL CO., Limited, Respondent. The AMERICAN METAL CO., Limited, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Second Circuit

221 F.2d 134 (1955)

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. The AMERICAN METAL CO., Limited, Respondent.

The AMERICAN METAL CO., Limited, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 29, Docket 22907.

United States Court of Appeals, Second Circuit.

Argued November 4, 1954.

Decided March 15, 1955.

Sullivan & Cromwell, New York City (Norris Darrell, John F. Dooling, Jr., New York City, Robert MacCrate, Port

Washington, N. Y., of counsel), for The American Metal Company, Limited.

H. Brian Holland, Asst. Atty. Gen., Ellis N. Slack, Lee A. Jackson, Melva M. Graney, Sp. Assts. to Atty. Gen., for the Commissioner of Internal Revenue.

Before CHASE, MEDINA, and HINCKS, Circuit Judges.

HINCKS, Circuit Judge.

The taxpayer whose petition is before us, is a New York corporation which owns over 98% of the voting stock of Compania Minera de Penoles, S.A., a Mexican corporation (hereinafter referred to as "Minera"). Minera, from 1924 through 1947, has been in the business of mining, milling, smelting and refining non-ferrous metals. In 1934, the smelting and refining operations were carried on by a Mexican corporate subsidiary of Minera, called Metalurgica. In 1947, Minera paid a taxable dividend to its shareholders in United States money in the amount of $8,250,000. Of this amount the taxpayer received $8,110,932.50. The taxpayer filed a consolidated income tax for the year 1947 claiming as credit certain Production Taxes paid by Minera to the Mexican government from 1924 through 1947. The Commissioner allowed a credit for taxes paid by Minera under the Mexican Income Tax Law but refused to allow any credit for the payment to Mexico of so-called Production Taxes as imposed by the Mexican Mining Tax Law.

The taxpayer's petition presents this question: Were the Production Taxes paid by Minera under the Mexican Mining Tax Law income taxes or taxes in lieu of income taxes within the meaning of Section 131(a) (1) or (h) of the Internal Revenue Code, 26 U.S.C.A. § 131(a) (1), (h)? Only if the question requires an affirmative answer is the taxpayer entitled to the credit which it seeks by its pending petition to establish.

In a well reasoned opinion, 19 T.C. 879, the Tax Court held that the Production Taxes in question were not income taxes or taxes in lieu of income taxes within the meaning of I.R.C. Section 131(a) (1) or (h).¹ The taxpayer-petitioner now contends that this holding was erroneous in that the court failed to find and give effect to facts claimed to be fully established by the evidence as follows:

"Mining is in Mexico a main source of the national economy. Under Mexican law, the mineral wealth of the nation is the property of the nation and not of the landowner. The landowner in Mexico has no right to the minerals under his land nor to explore for them; only the one who has received a mining concession from the Government can explore for minerals.

"While the miner in Mexico derives his right to mine by Government concession, that concession confers upon him no ownership in metals or minerals in the earth but only the right to explore for them, and when he has discovered them to turn them to his own account or profit by removing them from the sub-soil. This is so far true that if a mining concessionaire forfeits or surrenders his mining concession, ore that he has broken and left inside the mine is not his property but reverts to the Government of Mexico as its property.

"Customarily, the Mexican miner sells his ore to a smelter or foundry and sells it on the basis of the current New York price of the recoverable metal content of the ore less processing, transportation and commission costs and less the Production Taxes (which are also based on the New York price). The New York price is normally determined by world supply and demand and not by the Production Taxes nor by the Mexican miner\'s costs which vary from mine to mine between wide extremes.

"`Commercial ore\' is material, the value of the recoverable and salable metal of which is such as to yield more than the costs necessary to get the metals in available form.

"Hence, whether a mine will be opened up at all, depends upon the estimated value of the salable metals recoverable from the ore weighed against the estimated cost of working the particular metal-bearing body, including the cost of the property, of opening the mine, and of equipping and operating it and taking into account also the grade of the ore body, the uniformity of that grade, the size of the ore body, its location with relation to transportation facilities, treatment plants and natural land barriers and the type of mining possible with that ore body. Existing mines which have been once opened and worked are not continued in operation unless metal prices are such as to make operation profitable, and declines in market prices of metals result in shutting down mines, while increases in metal prices bring mines that have been shut down back into operation.

"Broadly, price determines whether there is commercial ore in a mine and whether and how long and when the mine will operate. The market prices of the metals occurring in Minera ores varied widely over the years 1924 to 1947; lead ranged from 3¢ a pound to 15¢ a pound, zinc from 2.55¢ a pound to 10½¢ a pound, silver from 25.01¢ an ounce to 90.12¢ an ounce, and copper from 4.91¢ a pound to 22.19¢ a pound. Mining costs, on the other hand, at any point of time, vary widely from mine to mine and in particular vary widely as among the metal mines in Mexico, the variation depending on the type of ore body and the feasible rate of mining, among many other factors.

"Within a single mine where ore of varying grades is found, the richest ore will always be mined first even in an era of abnormally high prices which would enable the miners to extract at a profit those leaner ores in the same mine that could not be mined at a profit when normal metal prices prevail. It is a principle in mining, and a prevalent practice in the industry, that the miners extract the high grade ores first and as quickly as they can up to the limit of their milling capacity and do not in a period of high prices divert to low grade ores.

"Miners do not, in principle, extract ore at all when it cannot be disposed of at a profit, unless some special physical condition makes that imperative and unless they can afford to store the extracted ore pending an expected rise in the market price. Nor are mines generally operated when prices are believed to be temporarily depressed merely because a narrow profit margin appears to be possible at those prices, particularly if the mine is a new one. In such circumstances, the mine would be shut down until prices increased. And so, too, as to opening a new mine, a mine will not be opened up on the basis of a price level believed to be only temporary, for it takes three to five years to open a mine. On the other hand, metallurgical advances, alone or coupled with price advances, can give minable character to ore once passed over as waste.

"Since a mine is a wasting asset, the life of which is exhausted by extraction of the ore, it is basic in mining that ore will not be removed from the mine at a loss when prices are low."

As to so much of this material not incorporated in the express findings of the Tax Court, we think it fairly apparent from its opinion that it treated all the facts just recited as proved and gave due consideration thereto. However that may be, we will assume for present purposes that the facts above stated were indeed proved. But even on that assumption we hold that the decision of the Tax Court was correct.

The primary objective of Section 131 is to prevent double taxation and a secondary objective is to encourage American foreign trade. See Burnet v. Chicago Portrait Co., 285 U.S. 1, 52 S.Ct. 275, 76 L.Ed. 587. Whether the special and peculiar facts of a given case comes within the meaning of 131(a) (1) or (h) is a question to be determined in the light of the established and settled policy against double income taxation. The pertinent cases hold that the determinative question is "whether the foreign tax is the substantial equivalent of an `income tax' as that term is understood in the United States." See New York & Honduras Rosario Min. Co. v. Commissioner, 2 Cir., 168 F.2d 745, 747, 12 A.L.R.2d 355; Biddle v. Commissioner, 302 U.S. 573, 58 S.Ct. 379, 82 L.Ed. 431; Keasbey & Mattison Co. v. Rothensies, 3 Cir., 133 F.2d 894.

The Mexican Production Tax is stated in the Mexican Mining Law of 1934 to be one laid "on the production of metals" and "on metal production." It attaches when the ore is extracted from the subsoil, irrespective of its sale or its transportation to a smelter or its further processing. The ores in the earth under Mexican law were part of the patrimony of the sovereign and, as taxpayer's expert testified, "The miner takes them out of that deposit and puts them into the economic current of things, and thereby, to me, he creates wealth. His creation of wealth is what, in my opinion, is subject to the tax." To us that means no more than that the Production Tax is one levied on the privilege of extracting from the sub-soil ore belonging to the nation.

The taxpayer points, on the one hand, to the Mexican Mining Law of 1926 which "restored the ancient work requirement and made it a condition to the continuance of the concession * * * while continuing the Surface Tax in effect," and to the Mining Law of 1934 which from that time forward conditioned the continuance of the miner's "concession on the dual requirement of paying the Surface Tax and working the mine." And, on the other hand, the taxpayer points to the fact, which we accept as proved, that the payment of an accrued Production Tax is not a condition to the continuance of the miner's concession. From this it is argued that the Production Tax is not a privilege tax because the Mexican Mining Law imposes as the...