COMMISSIONER OF INTERNAL REVENUE v. Gifford-Hill & Co., 12856.

• Decision Date: 16 March 1950
• Docket Number: No. 12856.,12856.
• Citation: 180 F.2d 655
• Parties: COMMISSIONER OF INTERNAL REVENUE v. GIFFORD-HILL & CO., Inc.
• Court: U.S. Court of Appeals — Fifth Circuit

180 F.2d 655 (1950)

COMMISSIONER OF INTERNAL REVENUE v. GIFFORD-HILL & CO., Inc.

No. 12856.

United States Court of Appeals Fifth Circuit.

March 16, 1950.

Hilbert P. Zarky, Ellis N. Slack, and Lee A. Jackson, Sp. Assts. to Atty. Gen., Theron Lamar Caudle, Asst. Atty. Gen., Charles Oliphant, Chief Counsel, Bureau of Internal Revenue, Washington, D. C., John M. Morawski, Special Atty., Washington, D. C., for petitioner.

Robert Ash, Washington, D. C., Carl B. Callaway, Dallas, Tex., for respondent.

Before HUTCHESON, Chief Judge, and WALLER and BORAH, Circuit Judges.

WALLER, Circuit Judge.

Respondent, a corporation, has, since its organization in 1926, been engaged in the business of mining and selling sand and gravel. The question in the case here involves assessed deficiencies in excess profits taxes for the years 1942 and 1943, the solution to which must be found in the interpretation to be given subsection 735(a) (6) of the Internal Revenue Code, 26 U.S. C.A. § 735(a) (6), as applied to section 711(a) (1) (I) and section 711(a) (2) (K), and whether or not subsection 35.735-2 (f) of the Treasury Regulations, in undertaking to define the term "mineral property" was in conformity to section 735(a) (6) and, therefore, applicable, or whether out of conformity and, therefore, void.

The Tax Court, in an opinion reported at 11 T.C. 802 reviewed by the whole Court, held that the regulation defining a mineral deposit did not follow, and correctly interpret, the language of the statute and was, therefore, invalid.

Section 735, subsections (a) (6) and (a) (7), are as follows:

"(6) Mineral Property. The term `mineral property' means a mineral deposit, the development and plant necessary for the extraction of the deposit, and so much of the surface of the land as is necessary for purposes of * * * extraction.

"(7) Minerals. The term `minerals' means * * * such nonmetallic substances as * * * gravel, * * * sand, * * *."

The regulation in question is as follows: "(f) Mineral property. — The term `mineral property' means a mineral deposit, the development and plant necessary for the extraction of the deposit, and so much of the surface of the land as is necessary for the purposes of such extraction. The term `mineral deposit' refers to the minerals in place. The taxpayer's interest in each separate mineral property is a separate `property.' If the mineral deposit in which a taxpayer owns an economic interest extends beyond the boundaries of a single tract or parcel of land a separate mineral property exists with respect to each tract or parcel of land into which the mineral deposit extends. Where two or more mineral properties are included in a single tract or parcel of land, the taxpayer's interest in such mineral properties may be considered to be a single `property,' provided such treatment is consistently followed."

In final analysis the issue for our decision is whether or not the Tax Court erred in holding void, as applied to the taxpayer, the aforementioned regulation which undertook to define "a mineral property" as "each tract or parcel of land into which the mineral deposit extends."

During the tax years the taxpayer conducted sand and gravel mining operations in three areas in Texas and Louisiana, herein designated as the Texarkana, Turkey Creek, and Hearne operations, as well as at ten or eleven other places not involved in this controversy. The lands, or the minerals, embraced in the operations at the three named places were acquired by the taxpayer in some instances by purchase of the fee, and in other instances by acquisition of leases and the payment of a stipulated price per yard for gravel and sand taken therefrom.

Sand and gravel were created by great glacial movements and deposited in low topographical areas but in the coastal plains of Texas and Louisiana sand and gravel of the type utilized in the respondent's operation were deposited by the action of the currents in the angle formed by the confluence of two streams. Such latter deposits are generally not uniformly distributed and in the deposits furthest away from the confluence of the stream there is more foreign matter than in the deposits nearer the current of the streams.

In the effective processing of sand and gravel considerable machinery and much water is required. Accessibility to water and also to railroad transportation also are quite essential. The over-burden must be removed by draglines from above the gravel deposit, and the gravel and sand, whether taken out by dragline or by dredging,...