Henderson Clay Products v. United States

• Decision Date: 11 April 1967
• Docket Number: No. 23771.,23771.
• Parties: HENDERSON CLAY PRODUCTS, Appellant, v. UNITED STATES of America, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

377 F.2d 349 (1967)

HENDERSON CLAY PRODUCTS, Appellant, v. UNITED STATES of America, Appellee.

No. 23771.

United States Court of Appeals Fifth Circuit.

April 11, 1967.

Chas. W. Shaw, Henderson, Tex., R. Gordon Appleman, B. L. Bird, Fort Worth, Tex., Waldrop, Shaw & Colley, Henderson, Tex., Weeks, Bird, Cannon & Appleman, Fort Worth, Tex., of counsel, for appellant.

Mitchell Rogovin, Asst. Atty. Gen., Tax Div., Lee A. Jackson, Atty. Dept. of Justice, Washington, D. C., W. Wayne Justice, U. S. Atty., Tyler, Tex., Melva M. Graney, Thomas L. Stapleton, Attys., Dept. of Justice, Washington, D. C., Richard B. Hardee, Asst. U. S. Atty., of counsel, for appellee.

Before TUTTLE, Chief Judge, and JONES and GEWIN, Circuit Judges.

TUTTLE, Chief Judge:

This is the second appeal to this court which raises the problem of ascertaining the proper base on which to determine the depletion allowance for an integrated miner-manufacturer of bricks processed from ball clay and from ordinary brick and tile clay.

The rates of depletion allowed by statute differ with respect to ball clay and brick and tile clay. The rate is 15% for the ball clay, whereas it is only 5% for brick and tile clay.

The legal issues respecting the two different types of clay differ also in the fact that it is undisputed in the record before us, and it has been earlier decided by us in United States of America v. Henderson Clay Products Company, 5 Cir., 324 F.2d 7, that there is a commercially marketable product, known as "shredded ball clay," in which market the taxpayer could have disposed of his mined ball clay, thus giving rise to the application of the statutory provision that the base for depletion is a figure that would represent either the "representative market or field price" of shredded ball clay, or, if none could be established, then the figure would be arrived at by taking the "representative market or field price" of the finished brick, minus the cost and proportionate profits attributable to the processes beyond those necessary to produce the shredded ball clay. The applicable statutes are found under the Internal Revenue Code of 1954.¹

The question relating to the figuring of depletion with respect to the ordinary brick and tile clay is of a different kind. It is undisputed in this record that there is no marketable product following the extraction of the clay from the ground until the final completion of the manufacture of the clay into bricks. Until the passage of a new statute by the Congress of the United States in 1961, brick manufacturers dealing with ordinary brick clay were permitted to base their depletion on the gross income upon the sale of the finished product. See United States v. Cherokee Brick and Tile Co., 5 Cir., 1955, 218 F.2d 424, United States v. Merry Brothers Brick and Tile Company, 5 Cir. 1957, 247 F.2d 708, cert. denied 1957, 355 U.S. 824, 78 S.Ct. 31, 2 L.Ed.2d 38.

On September 26, 1961, Congress passed a statute which offered to brick and tile manufacturers an option to compute their taxes in a different manner. The taxpayer contends that it exercised the option with respect to the tax year in question. The government contends to the contrary. This is the only issue respecting the right of recovery by the taxpayer of the amount paid on the deficiency notice resulting from the depletion allowance on the brick and tile clay.

The tax year in question before the court here is the fiscal year ended March 31, 1955. This court had before it, on an earlier appeal, a similar question with respect to the proper basis for computing the depletion on the ball clay for the fiscal years 1951, 1952, 1953 and 1954. In that case the record disclosed that the appellant used ball clay, as it still does, solely for the purpose of manufacturing bricks; that nevertheless during the life history of the clay products from the time the clay was taken from the ground until it was ready for the builder, it passed through a stage known as "shredded ball clay"; that there were clay miners, principally in a Kentucky and Tennessee mining area, who mined and sold shredded ball clay all over the United States, including the area in which Henderson had its clay mines; that the market price for such clay was $10.50 per ton; that, although Henderson sold its finished brick at $8.75 per ton, it claimed that under the teaching of United States v. Cannelton Sewer Pipe Company, 1963, 364 U.S. 76, 80 S.Ct. 1581, 4 L.Ed.2d 1581, it was entitled to take depletion on the $10.50 figure, or $1.75 per ton more than it received for finished brick.

This court determined that a price of $10.50 per ton for the admittedly marketable product, shredded ball clay, was not a "representative field price," as to a manufacturer of bricks who used a like grade and quality of clay for the manufacture of bricks which it sold for $8.75 per ton.

This second case comes to us following the filing of a refund suit by Henderson seeking a refund of the taxes paid for fiscal 1955 as distinguished from the prior cases which covered the years through fiscal 1954. The complaint in this case also alleged that there was a market for shredded ball clay at $10.50 a ton, as had the earlier complaints. Nevertheless, the case coming to trial after the court decided the earlier case, the parties stipulated that the market price that was being obtained for shredded ball clay was $10.00 per ton, as contrasted with the $10.50 that had been proved as to the earlier years. The stipulation also established the fact that during fiscal 1955, Henderson sold its finished brick for $12.38 per ton, as contrasted to $8.75 per ton during the prior four years. Thus, Henderson sought to distinguish the facts of this case from the earlier case by reason of the fact that the final product, the finished brick, was sold by Henderson for $2.38 more per ton than the available market price for shredded ball clay.

However, while most of the facts were stipulated in the trial court, there were two circumstances testified to which have a significant bearing on the finding of the trial court that the 1955 case did not so far differ from the earlier cases as to warrant a finding by the trial court that depletion could be computed by Henderson on the $10.00 market price for shredded ball clay. These two circumstances are: (1) testimony by the president of the taxpayer that if Henderson had bought shredded ball clay at $10.00 per ton, delivered at its pug mill in Texas, instead of mining its own clay, it would just about have "broken even" on its operation.² (2) The record discloses that the sales by the Kentucky-Tennessee clay miners were of shredded ball clay and a further processed product, air-floated clay, and in his testimony, following evidence that Henderson could have sold shredded ball clay at $10.00, Mr. Bryce stated that he could not have competed with the Kentucky-Tennessee miners unless he had gone into the processing of shredded ball clay into air-floated clay, and that this would have taken additional equipment which his company did not have.³

The problem for the court here, as in the last case, was, first, to determine whether a marketable product resulted at a stage following the removal of the clay from the pits and before the final finishing of the bricks, and, second, if it was determined that there was such a marketable product, to ascertain whether there was a "representative field price" that prevailed for such market, and, if there was no such representative field price, then to determine the gross income from mining by the proportionate profits method, as provided in the regulations.⁴

The Cannelton decision determined that the question whether a marketable product existed must be viewed industry-wide rather than from the view-point of the particular miner-manufacturer. The fact that a manufacturer of bricks or a clay pipe manufacturer did not himself sell the raw clay or the limestone or other unfinished products, did not preclude a finding that there existed a marketable product short of the final manufacturing process. It is clear here, as we held in our earlier decision, that in ball clay mining there is a commercially marketable product in the nature of shredded ball clay produced before the final manufacturing into brick commences. The first part of the problem is thus answered in the affirmative — that is, there is a commercially marketable mineral product which Henderson later processes additionally to produce its brick. We thus apply clause 3 of the Regulations to ascertain whether the term "gross income from the property" is to be found by using a representative market or field price or by using a proportion of profits computation. The Cannelton case does not aid us in this regard.

As we stated earlier, "We observe that in Cannelton the question was one of identifying the first commercially marketable product so as to mark the end of the mining process for the purposes of Section 114(b) (4). The court held that commercial profitability was not relevant in defining the product which had passed sufficiently from its natural state so as to become marketable. The case was remanded to be treated according to Regulation 39.23(m)-1(e) (3); there is no indication that the proceedings in the Supreme Court have any bearing on this determination over and above the establishment of the `product' on which the depreciation allowance is to be granted." (Emphasis added) 324 F.2d 7, 15.

We also said in our earlier case:

"The competitive market approach is to be used only if there is a `representative market or field price\' of an essentially similar product. The Regulation does not allow the indiscriminate use of any price of a product of like kind and grade, but requires the price to be representative; `representative\' should be interpreted to qualify the entire phrase `market or field price\'".

We conclude that on any one of three different approaches we must affirm the...