Monolith Portland Cement Company v. United States, 16063.

• Decision Date: 02 July 1959
• Docket Number: No. 16063.,16063.
• Citation: 269 F.2d 629
• Parties: MONOLITH PORTLAND CEMENT COMPANY, a corporation, Appellant, v. UNITED STATES of America, Appellee. UNITED STATES of America, Appellant, v. MONOLITH PORTLAND CEMENT COMPANY, a corporation, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

269 F.2d 629 (1959)

MONOLITH PORTLAND CEMENT COMPANY, a corporation, Appellant, v. UNITED STATES of America, Appellee.

UNITED STATES of America, Appellant, v. MONOLITH PORTLAND CEMENT COMPANY, a corporation, Appellee.

No. 16063.

United States Court of Appeals Ninth Circuit.

July 2, 1959.

Enright, Elliott & Betz, Joseph T. Enright, Norman Elliott, Bill B. Betz, Los Angeles, Cal., for appellant.

Howard A. Heffron, Acting Asst. Atty. Gen., James P. Turner, Melva M. Graney, Lee A. Jackson, Attys., Dept. of Justice, Washington, D. C., Laughlin E. Waters, U. S. Atty., Edward R. McHale, Asst. U. S. Atty., Los Angeles, Cal., for appellee.

Before CHAMBERS, HAMLEY and JERTBERG, Circuit Judges.

HAMLEY, Circuit Judge.

Monolith Portland Cement Company brought this action against the United States seeking a refund of a portion of its federal income taxes paid for 1951. The theory of the action is that the company in preparing its 1951 return understated the depletion allowance which it was entitled to deduct from the gross income derived from a limestone quarry. Recovery in the sum of $264,435.41 was sought. After a trial a judgment in that amount was entered.

Although it obtained judgment in the amount prayed for, Monolith appeals because of its dissatisfaction with certain findings of fact and conclusions of law. The company asserts that it is aggrieved because of the findings and conclusions to the effect that its limestone is "calcium carbonate" rather than "chemical grade limestone," as those terms are used in § 114(b) (4) (A) of the Internal Revenue Code of 1939, as amended, 26 U.S. C.A. § 114(b) (4) (A).

The Government has cross-appealed. It contends that the district court erred in holding that the gross income attributable to the mineral materials which Monolith adds to its limestone in producing cement should be included in computing the depletion allowance.

During the year 1951, Monolith operated a limestone quarry and cement plant at Monolith, California. In addition to mining limestone it also mined other raw materials which it used in making cement. These additional materials were clay No. 1, clay No. 2, tufa, and gypsum. In addition the company purchased for use in its operations stipulated quantities of iron cinders and fluorspar. Applying customary methods used in the cement industry, these raw materials were blended and processed into Portland cement.

The process employed by the taxpayer in arriving at the finished product of Portland cement may be summarized as follows: The calcium carbonate rock was obtained from the face of the quarry by the open pit method, and further broken into manageable size by secondary or squib blasting. The rock was then taken by rail to a large primary crusher which reduced the size of the rock to pieces with a maximum diameter of about six inches. After secondary crushing the rock was transported to the cement plant and placed either in a limestone hopper or in a pile used to replenish the hopper.

The limestone was then blended with clay No. 1, clay No. 2, and iron cinders. Measuring and conveying equipment was used to accomplish this blending. The blended materials were then gravity-fed into a ball mill where, with the addition of water, they were ground to a proper fineness known as "slurry." The slurry, after further grinding in tube mills, was conveyed to a wet slurry tank where it was kept in suspension and blended by a revolving paddle mechanism and, after blending, fed into a kiln.

The kiln-fed slurry was run into the upper end of rotary kilns, which were in the form of long rotating cylinders set at a slight inclination. The slurry traveled gradually toward the lower end. Hot gases from a flame at the lower end evaporated the water from the slurry, and the application of heat at a proper temperature chemically combined the remaining material into a dense "clinker." The clinker was conveyed to a grinding mill where gypsum was added. This mixture was then ground to a great fineness to become one of the various types of Portland cement. It does not appear in the record at what point the tufa and fluorspar were added.

Section 23(m) of the Internal Revenue Code of 1939, 26 U.S.C.A. § 23(m), allows a deduction for depletion in the computation of net income. Section 23(n) provides that the basis for such depletion "shall be as provided in section 114." Section 114(b) (4) (A) (ii) provides that in the case of "calcium carbonates" the allowance shall be ten per cent of the gross income from the property during the taxable year. Section 114(b) (4) (A) (iii) provides that in the case of "chemical grade limestone" the allowance shall be fifteen per cent of the gross income from the property during the taxable year. Section 114(b) (4) (A) provides that such allowances shall not exceed fifty per cent of the net income of the taxpayer (computed without allowance for depletion) from the property, with an exception not here applicable.

Subparagraph (b) (4) (B) of the same section defines "gross income from the property" to mean "gross income from mining" and then defines "mining" as follows:

"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. * * *"

In its tax return for 1951, Monolith considered its commercially marketable product from the mining of limestone to be limestone in the form of slurry. It considered the limestone to be "calcium carbonates," entitled to a ten per cent depletion allowance, rather than "chemical grade limestone," entitled to a fifteen per cent allowance.

Premised on these determinations, the depletion allowance would have been $271,045.01, or ten per cent of the gross sales of limestone less royalty. But because of the provision limiting the allowance to fifty per cent of the net income from the property, the actual depletion allowance on limestone claimed in the 1951 return was $107,929.01 or fifty per cent of a net income of $215,858.03 on assumed limestone sales.

In its complaint in the instant case the company asserted that both of its determinations referred to above were in error. It alleged that the "commercially marketable product" was not limestone in slurry, but Portland cement produced in bulk or in sacks. It averred that the limestone utilized in the process of manufacturing Portland cement was "chemical grade limestone" rather than "calcium carbonate." Applying the higher gross income and higher depletion allowance rate derived from these new determinations, as limited by the fifty per cent provision of § 114(b) (4) (A), Monolith sought a refund in the amount of $166,811.04. This was later raised to $264,435.41.

In granting judgment in this amount the court found that the "commercially marketable product" within the meaning of § 114(b) (4) (B) was bulk Portland cement. The Government does not now contest that finding.

The court further found and concluded, however, that the limestone was not "chemical grade limestone" within the meaning of § 114(b) (4) (A) (iii). It therefore applied the ten per cent depletion rate for "calcium carbonates." But by reason of the provision of § 114(b) (4) (A) limiting the allowance to fifty per cent of the net income from the property, the depletion allowance which could be claimed, however the...