IOWA LIMESTONE COMPANY v. United States, 17936.

• Decision Date: 10 August 1966
• Docket Number: No. 17936.,17936.
• Citation: 365 F.2d 63
• Parties: IOWA LIMESTONE COMPANY, Appellant, v. UNITED STATES of America, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

365 F.2d 63 (1966)

IOWA LIMESTONE COMPANY, Appellant, v. UNITED STATES of America, Appellee.

No. 17936.

United States Court of Appeals Eighth Circuit.

August 10, 1966.

James Evans Cooney, Des Moines, Iowa, Darrell D. Wiles, St. Louis, Mo., for appellant.

Melva M. Graney, Attorney, Tax Division, Dept. of Justice, Washington, D. C., for appellee; C. Moxley Featherston, Acting Asst. Atty. Gen., and Lee A. Jackson, Chief Appellate Section, Washington, D. C., Donald M. Statton, U. S. Atty., on the brief.

Before MATTHES, MEHAFFY and GIBSON, Circuit Judges.

MATTHES, Circuit Judge.

This case involves the recurring problem of the amount of percentage depletion allowance to which a miner of chemical and metallurgical grade limestone is entitled for income tax purposes. The question was presented to us in Commissioner of Internal Revenue v. Iowa Limestone Company, (same taxpayer), 269 F.2d 398 (8th Cir. 1959), and in Bookwalter v. Centropolis Crusher Company, 272 F.2d 391 (8th Cir. 1959) (first appeal), 305 F.2d 27 (8th Cir. 1962) (second appeal).¹

Involved in the prior Iowa Limestone Company case were taxable years 1950 and 1951. At issue in this case is the amount of income tax owed by taxpayer for the years 1952 and 1953. The District Director asserted, assessed, and collected income tax in the amount of $29,259.24 and $34,766.74 for the years 1952 and 1953 respectively. Claims for refund were disallowed and taxpayer filed this action for the purpose of recovering the amount in dispute. The issues were tried to the court without a jury. Judgment was duly entered dismissing the complaint and taxpayer has appealed. The court's memorandum opinion, which contains findings of fact and conclusions of law, is reported at 234 F.Supp. 278 (S.D.Iowa 1964).

The taxpayer, Iowa Limestone Company, is an Iowa corporation with principal offices located at 500 New York Avenue, Des Moines, Iowa. Its business consists primarily of the mining and processing of chemical grade limestone from its Alden, Iowa quarry, and the subsequent sale of its finished mineral product throughout Iowa and other contiguous states.

Taxpayer's mining operations consist in general of stripping the dirt overburden from the area of desirable limestone deposits and blasting the face of the quarry with explosives set in drill holes. The broken limestone is then loaded into trucks and hauled to a primary "jaw crusher" which reduces it to chunks of limestone which may vary in size from a tennis ball to a football or basketball. These pieces are carried into its plant by a belt conveyor where a secondary crushing process in hammer mills further reduces the limestone in size. From the hammer mills, the limestone is then conveyed into roller mills which process the material into finely ground limestone — taxpayer's end product. Each roller mill has its own separate heating furnace which produces a steady flow of heated air to remove undesirable moisture inherent in the limestone. A stream of air from cyclone collectors located at the top of the roller mills vacuums the finished product into the bottom of each collector. Part of taxpayer's finely processed limestone is treated with chemicals to meet individual specifications of its customers and packaged in 50 and 100 lb. 3-ply paper bags. Other portions of the end product are either similarly bagged or shipped in bulk without such chemical additives.

In this appeal the government concedes that taxpayer's mineral product is chemical or metallurgical grade limestone and therefore entitled to a depletion allowance of 15 per cent.² A dispute, however, arises as to the "cut-off point" to be used in computing taxpayer's depletion basis. The Internal Revenue Code of 1939, § 114(b) (4) (B), as amended, 65 Stat. 497 (1951) controls disposition of the case at bar. Section 114(b) (4) (B) grants nonintegrated mining operators a depletion allowance based upon their "gross income from mining." The statute then continues:

"* * * The term `mining\' as used herein shall be considered to include not merely the extraction of the ores or minerals from the ground but also the ordinary treatment processes normally applied by mine owners or operators in order to obtain the commercially marketable mineral product or products

* * *." (Emphasis added.)

The basic question for decision is whether the district court erred in holding that "mining" of chemical and metallurgical grade limestone, for percentage depletion purposes under Sec. 114(b) (4) of the Internal Revenue Code of 1939, terminates after the hammer mill process but before the roller mill process applied by the taxpayer. In the former Iowa Limestone Company case, supra, substantially the same issue was involved. Taxpayer contends, as it did before,³ that it is entitled to percentage depletion from all income from the production of its finely ground chemical grade limestone because its processes are those normally applied by processors to obtain the commercially marketable product. The Government's position, on the other hand, is that the district court properly found on the facts and applicable law that the "cut-off point," for chemical and metallurgical limestone, was after the hammer mill process and before taxpayer's roller mill process.

Resolution of these conflicting contentions requires a determination of what constitutes taxpayer's "commercially marketable product" and the "ordinary treatment processes" applied in the chemical limestone industry to attain that product. We note that these are essentially factual issues in any given situation. Due weight therefore must be given to the findings of fact of the district judge and his first-hand opportunity to observe and evaluate the credibility of the witnesses. We shall not be prone to set aside the district court's findings as clearly erroneous, unless reading the record as a whole, we are left with a firm and abiding conviction that a mistake has been made.

Upon the evidence presented, the district court made findings of fact to the effect that taxpayer's predominant use of its finely processed limestone as a feed additive is not one of the major uses of chemical or metallurgical grade limestone. The court found further that the three major uses of chemical and metallurgical limestone (calcined lime, metallurgical fluxing stone, and chemically grade stone for making glass) do not at all require a finely processed mineral in their production. From the foregoing factors, the district court concluded that taxpayer's method of finely processing its stone was not an "ordinary treatment process" within the ambit of § 114(b) (4) (B) and therefore disallowed taxpayer's fine grinding as a permissible "mining" process.

We do not arbitrarily attempt to determine the permissible limits of § 114(b) (4) (B), as applied to the chemical or metallurgical limestone industry. The Supreme Court in recent years has provided broad guidelines in this area of the law. We shall briefly review the teachings of its decisions.

In its landmark case, United States v. Cannelton Sewer Pipe Co., 364 U.S. 76, 80 S.Ct. 1581 (1960), the Supreme Court held that taxpayer's "gross income from mining" under § 114(b) (4) (B) included the value of income derivable from its raw clay and shale as opposed to income from its end product vitrified sewer tile. From an analysis of the legislative history behind § 114, the Court concluded that:

"Congress intended to grant miners a depletion allowance based on the constructive income from the raw mineral product, if marketable in that form, and not on the value of the finished articles.

* * * * * *

"* * * When extracted from the mine, the fire clay and shale are in such a state that they are ready for industrial use or consumption — in short, they have passed the `mining\' state on which the depletion principle operates. It would be strange, indeed, to ascribe to Congress an intent to permit each miner to adopt processes peculiar to his individual operation. Depletion, as we have said, is an allowance for the exhaustion of capital assets. It is not a subsidy to the manufacturer or the high-cost mine operator * * *" Ibid. at 86, 80 S.Ct. at 1586.

Similarly in Riddell v. Monolith Cement Co., 371 U.S. 537, 83 S.Ct. 378, 9 L.Ed.2d 492 (1963), the Supreme Court reaffirmed the guiding principles set forth in Cannelton. At issue in Monolith was the depletion "cut-off point" of an integrated miner-manufacturer of limestone who processed crushed limestone into a finished cement product. The Court found Cannelton directly applicable and held that the depletion allowance due an integrated mining operator should be initially cut off at the point where the mineral first becomes suitable for industrial use or consumption. The Court concluded that this point was reached at the crushed limestone stage. Taxpayer's depletion basis thus represented its constructive income from crushed limestone, rather than from its finished cement product.

Of particular significance in each of these cases was the fact that there existed a substantial market for the raw mineral product involved. In Cannelton three-fifths of the fire clay mined in Indiana in 1951 was sold in its raw state, even though taxpayer could not profitably market it in that form. 364 U.S. at 86, 80 S.Ct. 1581. Similarly in Monolith, approximately 216,000,000 out of 300,000,000 tons of limestone sold in 1952 were marketable in crushed form, though taxpayer chose not to market its crushed limestone until a later more profitable processing stage. See 371 U.S. note 2, at 539, 83 S.Ct. 378. In each of these cases, the Supreme Court concluded that the raw mineral product was the first "commercially marketable product" fit for industrial consumption within the meaning of § 114, and consequently, the income derivable therefrom formed the basis of taxpayer's percentage depletion allowance.

We construe these and other post-Cannelton decisions⁴ as evincing a tendency to limit...