Riddell v. California Portland Cement Company

• Decision Date: 02 April 1964
• Docket Number: No. 18506.,18506.
• Citation: 330 F.2d 16
• Parties: R. A. RIDDELL, District Director, Internal Revenue, Los Angeles District, Appellant, v. CALIFORNIA PORTLAND CEMENT COMPANY, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

330 F.2d 16 (1964)

R. A. RIDDELL, District Director, Internal Revenue, Los Angeles District, Appellant, v. CALIFORNIA PORTLAND CEMENT COMPANY, Appellee.

No. 18506.

United States Court of Appeals Ninth Circuit.

April 2, 1964.

John B. Jones, Jr., Acting Asst. Atty. Gen., Lee A. Jackson, Melva M. Graney and Michael Mulroney, Attys., Dept. of Justice, Washington, D. C., Francis C. Whelan, U. S. Atty. and Loyal E. Keir, Asst. U. S. Atty., Chief Tax Section, Los Angeles, Cal., for appellant.

Musick, Peeler & Garrett, Joseph D. Peeler and Stuart T. Peeler, Los Angeles, Cal., for appellee.

Before BARNES, JERTBERG and KOELSCH, Circuit Judges.

JERTBERG, Circuit Judge:

The prior history of this controversy is fully set out in our opinion in Riddell v. California Portland Cement Company, 297 F.2d 345 (9th Cir. 1962), and need not be repeated here. In that case we noted that the taxpayer had elected to take the pre-kiln seed cutoff point as to all taxable years here involved, pursuant to Public Law 86-781 § 4, 74 Stat. 1017, 1018, 26 U.S.C. § 613 note. We remanded the cause to the district court "for the making of new findings and conclusions, and the entry of a judgment consistent with the teachings of United States v. Cannelton Sewer Pipe Co., 364 U.S. 76 80 S.Ct. 1581, 4 L.Ed.2d 1581 (1960) and with this opinion * * * and with the election made by California Portland Cement Company." Upon remand the district court held that, in computing the taxpayer's gross income from mining (its percentage depletion base) by the proportionate profits method prescribed in the pertinent Treasury Regulations, for the limestone mined by the taxpayer and used to make cement and cement clinker, the costs of iron ore and quartzite added to the limestone are to be treated as mining costs. This appeal is from that holding.

The undisputed facts, so far as pertinent here, are as follows. In the taxable years in question, the taxpayer extracted limestone from its Colton Quarry and used it to make cement clinker and finished cement. The taxpayer took the following steps in producing cement from its limestone and preparing the cement for marketing: (1) quarrying and primary crushing of the limestone; (2) secondary crushing, grinding and blending of the crushed limestone with varying amounts of iron ore and quartzite to obtain a properly proportioned raw mixture which is stored in silos pending further processing; (3) dead burning the raw mixture in rotary kilns to produce cement clinker which is stored in piles pending further processing or sale; (4) grinding the clinker with the addition of other materials; and (5) storing the resultant finished cement in silos, and preparing the cement for shipment in bulk or sack to customers.

The addition of iron ore and quartzite to the limestone (step 2) was an essential step in the production of cement clinker and finished cement from the taxpayer's limestone. All of the quartzite was purchased by the taxpayer; all of the iron ore was extracted by the taxpayer from its own iron ore deposit. For all of this iron ore, the taxpayer received a depletion allowance separate and apart from its depletion allowance on limestone.

The taxpayer's limestone is subject to percentage depletion at the rate of 10 percent of its "gross income from mining." The district court used the method for constructively computing the "gross income from mining" which is commonly called the proportionate profits method, reflected in the following formula:

                        "mining" costs              sale price of     gross income
                  ---------------------------  ×                   =
                  total costs of product sold       product sold       from mining
                

By virtue of taxpayer's election, the prekiln feed stage is to be used as the cutoff point to "mining" in determining the "mining costs" factor of that formula, as now provided in 26 U.S.C. § 613, the pertinent parts of which are reproduced in the footnote.¹ The question presented concerns the scope of "Treatment processes considered as mining" within the meaning of that provision. The addition of quartzite and iron ore to limestone encompasses two costs: (1) the cost of the additives themselves, which covers the purchase price of the quartzite and the cost of mining the iron ore; and (2) the cost, or expense of physically adding those minerals to the limestone. The appellant concedes that the second — the act of physically adding the quartzite and iron ore to the limestone — is a pre-kiln "process" and that the expense thereof is a "mining" cost.

In our view the costs of the additives themselves are not includable as a "mining" cost. The district court was of the erroneous view that of the total cost of bulk cement production, so much as relates to the pre-kiln stage represents "mining" within the formula, and that the cost of these additives were includable simply because they were added to the limestone prior to the kiln stage. The legislative history of the provision in question reveals the error.

S.Rep.No.1910, 86th Cong., 2d Sess., pp. 7-10, explains that the cutoff point for cement-producing minerals is derived from Rev.Rul. 290, 1953-2 Cum.Bull. 41, which provides:

"Blending with other materal after crushing and grinding such as that occurring at the kiln feed bins, is excluded from `ordinary treatment processes\' * * *.

"The gross income for percentage depletion purposes must of course be computed separately with respect to each component mineral, notwithstanding any such mixing."

We believe that by the enactment of the amendment in question Congress intended only to move the cutoff point from the crushing and grinding stage to the pre-kiln stage, but not to alter the revenue ruling with respect to separate computations of depletion of component minerals. To hold otherwise would be to allow a double depletion on the iron ore extracted by the taxpayer. This will not do.²

With respect to the quartzite, H.Conference Rep.No.2005, 86th Congress, 2d Sess., pp. 8-9 (1960-2 Cum.Bull. 741, 746), U.S.Code Congressional and Administrative News 1960, p. 2581 contains the following:

"As under existing law, a described process is to be treated as mining where performed by another person for the mine owner or operator if the mine owner or operator has not disposed of his depletable interest in the ore or mineral to which such process is applied. Under the language of this provision, a described process is not treated as mining where applied to a purchased ore or mineral."

If inclusion of iron ore extracted by taxpayer is...