Kennecott Copper Corporation v. United States
| Decision Date | 11 June 1965 |
| Docket Number | No. 493-59.,493-59. |
| Citation | 347 F.2d 275 |
| Parties | KENNECOTT COPPER CORPORATION v. The UNITED STATES. |
| Court | U.S. Claims Court |
Norris Darrell, New York City, for plaintiff, M. Bernard Aidinoff, Jerome K. Walsh, Jr., and Sullivan & Cromwell, New York City, of counsel.
Gilbert W. Rubloff, Washington, D. C., with whom was Asst. Atty. Gen., Louis F. Oberdorfer, for defendant, Lyle M. Turner, Philip R. Miller, Washington, D. C., of counsel.
Before COWEN, Chief Judge, and LARAMORE, DURFEE, DAVIS and COLLINS, Judges.
This case was referred pursuant to Rule 45(a), now Rule 57(a), to Trial Commissioner W. Ney Evans, with directions to make findings of fact and recommendation for a conclusion of law. The commissioner has done so in an opinion and report filed on August 2, 1963. Plaintiff requested the court to adopt the commissioner's report in its entirety, the defendant requested the court to adopt the findings of fact with one exception and excepted to the recommended conclusion of law and opinion of the report. Briefs were filed by the parties and the case was submitted to the court on oral argument of counsel. Since the court is in agreement with the commissioner's opinion and his recommended conclusion of law, as hereinafter set forth, it hereby adopts the same as the basis for its judgment in this case. Plaintiff is therefore entitled to recover and judgment is entered for plaintiff in an amount to be determined pursuant to further proceedings under Rule 47(c).
During the 7-year period of 1949-1955, plaintiff expended a total of $14,474,701.13 (hereinafter rounded off to $14.5 million) constructing substitute facilities for the United States Smelting Refining and Mining Company (hereinafter abbreviated as USSRMCO) to replace facilities destroyed by plaintiff in the course of stripping operations at its Utah Copper Mine in an area which, prior to the 1948 agreements between plaintiff and USSRMCO, had been exclusively owned by USSRMCO.
Plaintiff amortized the $14.5 million over the 9-year period of 1949-1957 against the tonnage estimated to be benefited, and claimed deductions for those taxable years as ordinary and necessary expenses of mining. The deductions so claimed for the taxable years 1949, 1950, and 1951 were disallowed by the Commissioner of Internal Revenue. The resulting additional amounts of tax claimed to be due, and interest, were paid by plaintiff. Claims for refund, timely filed, were formally disallowed, and this action was instituted by plaintiff to recover its alleged overpayments of tax and interest, together with interest from the dates of payment.1
The parties agree that the sums so expended by plaintiff were reasonable in amount and were required in the discharge of plaintiff's obligations under the 1948 agreements.
The principal controversy in the case is whether the Commissioner of Internal Revenue was in error in disallowing the claimed deductions on the ground that "the expenditures made by plaintiff to acquire the various surface rights from USSRMCO2 should have been capitalized and returned to plaintiff through annual depletion charges, rather than being deducted as an ordinary expense."3
Both the method (open pit mining) and the scope of operations at the Utah Copper Mine differ from the method and scope involved in most of the cases cited as precedents. The difference in method is a difference in kind. The difference in scope is one of degree.
The story had its beginning in geological time, when the convulsion of nature, which raised the Oquirrh Mountains in Utah, created in the process two types of mineral deposits: lode deposits (or veins), primarily of lead and zinc; and disseminated deposits, primarily of copper. Both types of deposits occur in the immediate area of the Utah Copper Mine, in what is known as the Bingham Mining District (named for Bingham Canyon). While the two types of deposits lie side by side, they are not appreciably intermingled.
Prospectors were in the area staking claims during the early years of the second half of the nineteenth century. By the end of the century hundreds of claims had been staked, and the process of consolidation of claims was well under way. All exploitation during this early period was by conventional methods of underground mining, through tunnels and shafts.
Some veins of copper were found and worked, but the extent of the veins usually proved to be limited. Continuing exploration revealed in outline a very large deposit of low grade copper ore disseminated among the porphyry. The copper content of this disseminated ore was below the tailings of copper then being mined in the Butte District. It would therefore not warrant mining by usual underground methods.
At the turn of the century two mining engineers devised a plan for exploiting this disseminated deposit of low grade copper ore by open pit mining. The surface area overlying most of the ore body was acquired by the Utah Copper Company,4 and open pit mining was begun in 1906.
Open pit mining is surface, or strip mining, with the stripping done in concentric circles. In order for the pit to go deeper, the surrounding circles have to be made larger. Banks are formed of steps or benches around the perimeter. All material cut from the pit or the benches is removed. At the Utah Copper Mine, material containing ore of cutoff grade or better is sent to the concentrating mills, while material in which the copper content is below cutoff grade is sent to waste dumps.
From the outset, the amount of material removed from the mine was substantial. For example, during the first 4½ years of open pit mining,5 some 10.8 million cubic yards of material were removed, of which at least 6 million cubic yards were deposited on the waste dumps, while 4.8 million cubic yards were sent to the concentrating mills for the extraction of copper. During the next three decades the average annual volume of production was:
------------------------------------------------------
| Millions of cubic yards
| removed
Years |----------------------------
| Waste | Ore | Total
-------------------------|---------|--------|---------
1911-1920 .............. | 4.58 | 3.80 | 8.38
1921-1930 .............. | 5.75 | 5.44 | 11.19
1931-1940 .............. | 7.00 | 5.70 | 12.70
------------------------------------------------------
As the open pit mine has grown, over the years, into the largest manmade excavation in the world, the volume of production has increased proportionately. During the 9-year period involved in this case (1949-1957), the average amount of material removed annually was 36.4 million cubic yards, consisting of 22.5 million cubic yards of waste and 13.9 million cubic yards of ore. At the time of trial (in October 1961) the mining goal called for the removal, daily, of 118,098 cubic yards of material, being 43,206 cubic yards of ore and 74,892 cubic yards of waste.6
The foregoing summary of the volume of production at the Utah Copper Mine indicates the demand of the operation for space. Within the surface area owned by plaintiff (or its predecessors), facilities had to be maintained at economic distances from the perimeter of operations, which meant that such facilities had to be moved outward from time to time. Since other mine owners held title to the land immediately adjacent to the ore body, the owners of the Utah Copper Mine had to acquire from these owners all necessary rights of ingress and egress and, as operations at the mine were expanded, additional rights for stripping had to be obtained as well as dumping rights for the disposition of wastes from the mine and from the concentrating mills.7
By 1947, open pit operations at the Utah Copper Mine were approaching the line dividing the properties of plaintiff and USSRMCO on the southern segment of the perimeter of the mine. If plaintiff had been unable to obtain additional stripping rights from USSRMCO, expansion of the concentric circles would have had to be halted in that segment. Such an interruption would have required plaintiff to move the center of the pit northward, in order to continue open pit mining without further disturbance of the southern segment.
Plaintiff had theretofore acquired rights from USSRMCO, for stripping and dumping and transport (railroad rights-of-way). Some stripping rights had been previously acquired over the very segment (Tract A) which now loomed as a barrier unless additional rights could be acquired. When plaintiff approached USSRMCO to acquire the needed, additional rights, USSRMCO asked plaintiff to anticipate as far as possible all the rights it would need in the future: dumping, leaching, and transport rights, as well as stripping rights. Plaintiff complied with this request.
The transaction between plaintiff and USSRMCO was consummated, after extended negotiations, on July 26, 1948, by the execution of a series of grants from USSRMCO to plaintiff and the exchange between them of various agreements.
The grants conveyed to plaintiff a number of perpetual easements, rights, and privileges over, on, and under various surface tracts, for use in stripping, dumping, and leaching. There was no conveyance of land, in fee simple. All rights to minerals in lode deposits were reserved by USSRMCO.
The agreements included (1) a boundary line agreement defining the separation of their respective properties, sub-surface as well as surface; (2) a royalty agreement covering any disseminated copper or copper-molybdenum ores which might be recovered from Tract A; (3) extensions of options theretofore granted for the acquisition of transport (rights-of-way), dumping, and leaching rights; and (4) an agreement whereby plaintiff undertook to provide USSRMCO with substitute facilities to replace those...
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