Henderson Clay Products, Inc. v. United States
| Decision Date | 16 July 1980 |
| Docket Number | No. 87-75.,87-75. |
| Citation | 633 F.2d 565 |
| Parties | HENDERSON CLAY PRODUCTS, INC. v. The UNITED STATES. |
| Court | U.S. Claims Court |
John G. Heard, Houston, Tex., Atty. of record, for plaintiff. Thomas P. Marinis, Jr., Glen A. Rosenbaum and Vinson & Elkins, Houston, Tex., of counsel.
Allan C. Lewis, Washington, D. C., with whom was Asst. Atty. Gen. M. Carr Ferguson, Washington, D. C., for defendant. Theodore D. Peyser and Robert S. Watkins, Washington, D. C., of counsel.
Before COWEN, Senior Judge, and DAVIS and BENNETT, Judges.
This case comes before the court on the parties' exceptions to the recommended decision of Senior Trial Judge Mastin G. White, filed October 10, 1979, pursuant to Rule 134(h), having been submitted and considered on the briefs and oral argument of counsel. The court is satisfied with the trial judge's findings of fact with respect to, and articulation of the standard for this case of, the representative market or field price for the taxpayer's ore or mineral—the threshold factual issue in the case which is determinative of the case—and therefore deletes from the trial judge's opinion and findings the discussion of unnecessary issues which might otherwise be involved and which need not be reached in this case. Since the court agrees with the trial judge's decision, as modified and as hereinafter set forth,* it hereby affirms and adopts the decision, as modified, and the following Conclusion of Law as the basis for its judgment in the case.
WHITE, Senior Trial Judge: The plaintiff, an integrated miner-manufacturer, mines clay from deposits which it owns in the vicinity of Henderson, Texas, and uses the clay to manufacture brick of such high quality that it is sold throughout the United States for use in architecturally demanding construction projects. The plaintiff (which will sometimes be referred to in the opinion as "Henderson") seeks in the present case to recover a total of $830,295.45 (plus interest), representing income tax deficiencies, and interest thereon, which were assessed against and paid by the plaintiff for its 8 fiscal years during the 1956-63 period. The plaintiff's fiscal year begins on April 1 and extends through the following March 31.
The basic issue in the case is whether it was proper for the plaintiff, in claiming percentage depletion deductions for the years in question under sections 611 and 613 of the Internal Revenue Code of 1954, to use the price of Kentucky-Tennessee ball clay as the representative market or field price for the purpose of determining the plaintiff's gross income from its mining operations.
At the time involved in the present litigation, section 611 of the 1954 Code provided in part as follows:
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 * * *, according to the peculiar conditions in each case; such reasonable allowance in all cases to be made under regulations prescribed by the Secretary of the Treasury or his delegate. * * *
Subsection (a) of section 613 partially provided that in the case of mines, "the allowance for depletion under section 611 shall be the percentage, specified in subsection (b), of the gross income from the property * * *"; subsection (b) prescribed percentage depletion rates for a large number of minerals, including a 15 percent rate for "ball clay" and a 5 percent rate for "bride and tile clay"; and subsection (c) defined the term "gross income from the property" as meaning the gross income from mining.
As an integrated miner-manufacturer (such as the plaintiff) does not market in raw form the mineral that it takes from the mine, there is a problem involved in ascertaining the company's gross income from mining. This matter is dealt with in a Treasury regulation, 26 C.F.R. § 1.613-4, which provides in part as follows:
As indicated previously in the opinion, the plaintiff owns clay mines in the vicinity of Henderson, Texas, and is engaged in the business of mining clay from its mines for use by it in the manufacture of brick. Most of the clay is designated by the plaintiff as ball clay, and the remainder is designated as brick and tile clay. All of the clay is used by the plaintiff for the manufacture of brick. Only the clay designated as ball clay is involved in the present litigation.
In preparing its income tax return for each of the fiscal years previously mentioned, the plaintiff claimed a percentage depletion deduction based on its gross income from mining clay. With respect to most of the clay mined, the plaintiff computed its gross income from mining by using what it regarded as a representative market or field price based on the price of ball clay mined in the Kentucky-Tennessee area of the United States, and claimed a 15 percent depletion deduction. It was the plaintiff's view that Kentucky—Tennessee ball clay was a "mineral of like kind and grade" as the plaintiff clay for which the 15 percent depletion allowance was claimed.
The Internal Revenue Service, upon auditing the plaintiff's income tax returns for the years involved in the present litigation, wholly disallowed the use of any representative market or field price in computing the plaintiff's gross income from mining for percentage depletion purposes, reduced the plaintiff's percentage depletion deductions by redetermining the plaintiff's gross income from mining on the basis of proportionate profits calculations, and assessed against the plaintiff deficiencies in the total amount of $830,295.49 (including interest).
The plaintiff paid the deficiencies, and then filed claims for refund, which the Internal Revenue Service did not allow. The present litigation followed.
On January 24, 1977, the defendant filed a motion for partial summary judgment. This motion was denied by the court in an order dated January 6, 1978, the court having concluded that there were material facts in dispute. Much evidence was subsequently received at a trial that was held in July 1978; and the post-trial proceedings under Rule 134(a)-(g) were concluded on August 16, 1979.
This case represents Henderson's third attempt to gain judicial approval of its position that, in claiming percentage depletion deductions for income tax purposes with respect to most of the clay which it mines, it is entitled to use a representative market or field price, based upon the price of Kentucky—Tennessee ball clay, in computing its gross income from mining. The first case, involving the plaintiff's fiscal years during the 1951-54 period, was United States v. Henderson Clay Products, 324 F.2d 7 (1963), rev'g 199 F.Supp. 304 (E.D.Tex.1961), cert. denied, 377 U.S. 917, 84 S.Ct. 1182, 12 L.Ed.2d 186 (1964). The second case, involving the plaintiff's fiscal year 1955, was Henderson Clay Products v. United States, 377 F.2d 349 (5th Cir. 1967), aff'g 252 F.Supp. 1013 (E.D.Tex.1966).
In the earlier cases, the Government did not dispute Henderson's contention that most of the clay which it mined and used for the manufacture of brick was ball clay; and the appellate court considered each case on the basis of factual determinations by the trial court that Henderson mined ball clay, that the first commercially marketable product obtained by Henderson from the mining of its ball clay was shredded ball clay (i. e., raw clay which has been run through a shredding machine and reduced to walnut-sized or smaller pieces), that the plaintiff's ball clay mined during the pertinent period and Kentucky-Tennessee ball clay were minerals of like kind and grade, and that shredded ball clay produced by Kentucky-Tennessee clay miners had an average market price or value of $10.50 per ton during the 1951-54 period (which was involved in the first case) and $10.00 per ton in 1955 (the year involved in the second case). However, Henderson's attempt to use $10.50 per ton in the first case, and $10 per ton in the second case, as a representative market or field price in computing its gross income from mining for depletion allowance purposes was denied by the appellate court.
The appellate court concluded in the first case (324 F.2d at 15) that the "commercial realities" demonstrated that the price of $10.50 per ton was not a representative market or field price for Henderson's shredded clay, because it did not represent the price which a non-integrated brick manufacturer would pay for clay with which to make brick. During the period involved in that case, Henderson sold its finished brick for only $8.75...
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