KAISER STEEL CORPORATION v. United States

• Decision Date: 23 July 1969
• Docket Number: No. 22272.,22272.
• Parties: KAISER STEEL CORPORATION, Appellant, v. UNITED STATES of America, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

411 F.2d 335 (1969)

KAISER STEEL CORPORATION, Appellant, v. UNITED STATES of America, Appellee.

No. 22272.

United States Court of Appeals Ninth Circuit.

April 29, 1969.

Rehearing Denied July 23, 1969.

Edward J. Ruff (argued), George E. Link, Fielding H. Lane, Thelen, Marrin, Johnson & Bridges, San Francisco, Cal., for appellant.

Grant W. Wiprud (argued), Mitchell Rogovin, Asst. Atty. Gen., Lee A. Jackson, Stephen H. Paley, Attys., Dept. of Justice, Washington, D. C., Cecil F. Poole, U. S. Atty., Richard L. Carico, Asst. U. S. Atty., San Francisco, Cal., for appellee.

Before MERRILL, DUNIWAY, and HUFSTEDLER, Circuit Judges.

HUFSTEDLER, Circuit Judge:

Kaiser Steel Corporation ("Kaiser") sued to recover a refund of federal income taxes for its fiscal years 1949 and 1950. From a judgment for the Government, Kaiser appeals.

The action involves the determination of the appropriate percentage depletion allowance to which Kaiser was entitled by reason of its mining of iron ore and coking coal which it consumed in manufacturing steel at its Fontana, California, plant. Kaiser attacks the findings of the District court, claiming error in the inclusion and exclusion of certain market data in computing Kaiser's constructive gross income from its mining operations.

The federal income tax statutes have long authorized an allowance against gross income for depletion from mining computed as a percentage of the gross income from mining. For the integrated miner-manufacturers, such as Kaiser, gross income from mining must be created constructively. Constructive gross mining income is the amount which would have been earned if the miner-manufacturer were "disintegrated" and the raw minerals were sold by its mining division as a separate entity to its manufacturing division, likewise a separate entity. The Treasury Regulations, as interpreted by the courts, reflect the policy of achieving a parity of tax treatment between integrated miner-manufacturers and nonintegrated miners. (United States v. Cannelton Sewer Pipe Co. (1960) 364 U.S. 76, 80 S.Ct. 1581, 4 L. Ed.2d 1581; United States v. Henderson Clay Products (5th Cir. 1963) 324 F.2d 7, 15.)

For the fiscal years 1949 and 1950, Treasury Regulation 111, § 29.23(m)-1, specifies the methods by which an integrated miner-manufacturer shall compute his constructive gross income from mining as follows: (1) If the mineral product is processed before sale, "`gross income from the property' means the representative market or field price * * of a mineral product of like kind or grade as beneficiated by the ordinary treatment processes actually applied, before transportation of such product", (2) "if there is no such representative or field price, * * * there shall be used in lieu thereof the representative market or field price of the first marketable product resulting from any process or processes * * * minus the costs and proportionate profits attributable to the transportation and the processes beyond the ordinary treatment processes"; (3) "if the taxpayer establishes to the satisfaction of the Commissioner that another method of computation, other than the computation of profits proportionate to costs, clearly reflects the gross income from the property, then such gross income shall be computed by the use of such other method." For convenience we label the methods seriatim, "field price," "proportionate profits," and "taxpayer's alternative."

Section 29.23(m)-1 does not permit the taxpayer to browse freely through these methods and to select the method which most strikes his fancy or to sample pieces of each to formulate a taxpayer's alternative. The field price method is the only available method unless the taxpayer establishes that there is no such price. Only then is the proportionate profits method available to him. He cannot avoid the proportionate profits method in turn unless he can establish that that method does not clearly reflect his gross income and that the taxpayer's alternative does so.

Kaiser's attack upon the District Court's findings is primarily based on its hybridizing these methods and applying the product to the evidence presented to the District Court. Because the market data involved in the iron ore and coking coal operations differ, we take up each separately.

Iron Ore

In Kaiser's returns for fiscal year 1949, it reported mining 276,655 net tons of iron ore at its Eagle Mountain mine in Riverside County, California, and 167,970 net tons at its Vulcan mine in San Bernardino County, California. The following year it mined 835,215 net tons of iron ore at Eagle Mountain and nothing at the Vulcan mine. In its original returns for 1949, depletion was based on field prices of $2.89 for Eagle Mountain ore and $3.13 for Vulcan ore. In 1950 depletion was computed using the field price of $3.5455.

Thereafter Kaiser decided that its field prices were too modest, and it filed amended returns for both years, claiming the following prices: for 1949, $3.584 for Eagle Mountain ore and $4.263 for Vulcan ore (July through December), $4.371 for Eagle Mountain ore and $4.912 for Vulcan ore (January through June); for 1950, $4.903 (July through December) and $5.376 (January through June) for Eagle Mountain ore. The Commissioner denied Kaiser's claims for refund based on the revised price schedules, and this action followed.

The District Court assembled the iron ore transactions in Kaiser's marketing area and used the weighted average f.o.b. mine price of those transactions as the field price. The court found that the applicable prices were $2.29 for 1949 and $2.03 for 1950. These prices yield depletion allowances which are less than those permitted Kaiser on its original returns.

Kaiser argues that the District Court's prices were wrong because (1) iron ore sales by Utah Construction and Mining Company ("Utah Construction"), upon which the District Court primarily relied, did not establish a "representative" field price for Kaiser's ore, (2) the court improperly rejected prices prevailing in the lower Great Lakes ports, and (3) even if the court properly accepted Utah Construction's transactions, the court erred in including certain of those transactions in setting prices and in excluding for freight differentials.

In 1949 and 1950 there were only four producers and three consumers of significant quantities of iron ore in California, Oregon, Nevada, Arizona, Utah, Washington, and Idaho. Three of the producers either consumed all of their ore or sold it to related entities. Utah Construction was the only independent producer. Utah Construction operated a mine in Iron Springs, Utah. It made substantial ore sales to Kaiser and to Geneva Steel Company for domestic use and to Japan for foreign consumption. It also sold smaller quantities to other western customers.

The only area in the United States in which there is a large volume of iron ore transactions between independent buyers and sellers is the Great Lakes region. During the years in question, there were no iron ore transactions between producers or consumers in the Great Lakes region and those in the western states. The two marketing areas are separated by a gulf of prohibitive freight rates.

The District Court rejected Kaiser's contention that there is a national market for iron ore and found that the Great Lakes and western markets are separate. Recognizing the futility of making a frontal assault on that finding, Kaiser tries an end play. It is a complicated call because Kaiser seeks to avoid Utah Construction's prices while simultaneously avoiding a determination of "no field price," which would have compelled it to carry the burden of the proportionate profits method, or the potentially greater burden of proving the taxpayer's alternative. Kaiser's argument is that, once relieved of the overburden of vulnerable Utah Construction transactions, the residue of Utah Construction's sales is too thin to make a "representative" market. By adding economically relevant Great Lakes pricing data to the Utah Construction residue, representative pricing in the western market is created.

The District Court's finding that Utah Construction's transactions created a field price in Kaiser's marketing area is not clearly erroneous. Utah Construction sold substantial quantities of iron ore at negotiated prices. Kaiser itself purchased 20 percent of the iron ore for its production facilities from Utah Construction: During the fiscal year ended June 30, 1949, Kaiser bought 146,501 net tons at $1.869 per ton f.o.b. Iron Springs, Utah; in the following fiscal year, Kaiser bought 228,924 net tons at $1.901 per ton on the same terms. During the same general period Utah Construction sold 309,475.25 net tons of its ore to Japan for an average of $2.54 per ton f.o.b. mine. These transactions are enough to render invulnerable on appeal the District Court's finding that there was a field price based on Utah Construction's sales.

Because there was a field price in Kaiser's marketing area, the District Court did not err in refusing to resort to Great Lakes prices to create representative prices for Kaiser's ore.

Kaiser argues that Great Lakes prices should nevertheless be taken into account with Utah Construction's prices, because the Great Lakes market exerts economic influence upon western prices and because Great Lakes prices are used for other purposes in pricing western transactions. Unquestionably the prices of ore, pig iron, and finished steel in the Great Lakes market have some influence on western steel and ore prices. But from that given it does not follow that there was error in rejecting Great Lakes transactions as directly relevant criteria in constructing Kaiser's gross income. The District Court was entitled to conclude that whatever had been the economic effect of Great Lakes transactions upon western prices was reflected in the prices that Japan and Kaiser actually paid Utah Construction for ore in 1949 and 1950....