Riddell v. California Portland Cement Company

• Decision Date: 02 January 1962
• Docket Number: No. 16438.,16438.
• Citation: 297 F.2d 345
• Parties: R. A. RIDDELL, District Director of Internal Revenue, Los Angeles District, Appellant, v. CALIFORNIA PORTLAND CEMENT COMPANY, Appellee. CALIFORNIA PORTLAND CEMENT COMPANY, Appellant, v. R. A. RIDDELL, District Director of Internal Revenue, Los Angeles District, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

297 F.2d 345 (1962)

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

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

No. 16438.

United States Court of Appeals Ninth Circuit.

January 2, 1962.

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

Musick, Peeler & Garrett, by Joseph D. Peeler and Stuart T. Peeler, Los Angeles, Cal., for Cal. Portland Cement Co.

Joseph T. Enright, Norman Elliott and Bill B. Betz, Los Angeles, Cal., for Monolith Portland Cement, amici curiae.

Before STEPHENS, BARNES and KOELSCH, Circuit Judges.

BARNES, Circuit Judge.

The District Director of Internal Revenue appeals from a judgment of the district court awarding taxpayer $1,073,612.46 in refund of income taxes previously paid for the taxable years 1951 and 1952. The taxpayer also appeals, as protective procedure, from the court's refusal to classify its product as chemical grade limestone, entitled to a fifteen per cent rate as a depletion allowance. We shall for convenience refer to the District Director of Internal Revenue as "appellant" or "government" and to California Portland Cement Company as "appellee" or "Company."

This is one of several "statutory percentage mining depletion allowance" appeals involving federal income tax payments, heard by this court within the past several years.¹ All of them have involved to a greater or lesser degree, the issue finally passed upon by the Supreme Court in the Cannelton Sewer Pipe Company case (United States v. Cannelton Sewer Pipe Co., 1960, 364 U.S. 76, 80 S. Ct. 1581, 1582, 4 L.Ed.2d 1581), plus others peculiarly their own.

Jurisdiction was conferred below by 28 U.S.C. §§ 1331(a), 1340 and 1346. This court's jurisdiction on appeal rests upon § 1291 of Title 28 U.S.Code, as amended.

Appellee is a California corporation maintaining its principal place of business in Los Angeles, California. During the years in question it was engaged in mining rock from its Colton Quarry and Slover Mountain deposit at Colton, California. It processed such raw material to obtain finished cement, which it sold. There were also marketed small quantities of by-products.

The findings state that the appellee produced during the two years in question: (a) as its principal business, calcium carbonate rock for cement (Finding No. 4); (b) approximately 111,000 tons of crushed and screened calcium carbonate rock, sold for use as fluxstone for the production of steel (Finding No. 5); (c) approximately 119,000 tons of calcium carbonate rock, sold for use as glass sand, poultry grits, roofing grits, and clay pigeon filler (Finding No. 6); (d) approximately 20,600 tons of calcium carbonate rock which it used in its own plant to produce finished lime products (lump lime, ground quicklime, and hydrated lime; Finding No. 7); (e) approximately 1,240 tons of paving dust (Finding No. 8); (f) approximately 523,000 barrels of 376 pounds each of cement clinker, sold to Blue Diamond Corporation (Finding No. 9).

Items (b) to (f) above were found to be by-products, incident to the cement producing operation listed under (a) above. The aforesaid by-products supplied all the commercial market available to appellee, and each was found to be "the first commercially marketable mineral product derived by plaintiff from such portion of its calcium carbonate rock so used."

The trial court found that "mineral materials of shale, iron ore, quartzite, gypsum, Phillip's shale and various purchased nonmineral materials were added by plaintiff" to its calcium carbonate rock in the production of cement clinker and finished cement, and that this "was part of the application of the ordinary treatment processes normally applied by mine owners and operators in the cement industry." In so finding, and in making its conclusion of law based thereon, the trial court, of course, did not have the benefit of the later decision of the Supreme Court in Cannelton, supra.

After the Cannelton decision came down, we asked for additional briefs from each side, and permitted the filing of an amicus curiae brief on behalf of Monolith Portland Cement Company. We have had the benefit of copies of the government's opening and reply briefs (and the five hundred page Appendix) in Cannelton. We have also had the benefit of the following decisions rendered since Cannelton: Bookwalter v. Centropolis Crusher Co., 8 Cir., 1960, 281 F.2d 798, withdrawing its decision at 272 F. 2d 391; Great Bend Brick & Tile Co. v. United States, D.C.Kan.1961, 194 F.Supp. 309; Standard Realization Co. v. United States, 7 Cir., 1961, 289 F.2d 247; Commissioner v. Halquist, 7 Cir., 1961, 291 F.2d 49; United States v. Portland Cement Co. of Utah, 10 Cir., 1961, 293 F.2d 826.

The general issue presented by the appeals herein is the determination of a proper basis for computing mineral depletion allowances to be deducted from taxpayer's income because of the alleged exhaustion of capital assets arising from appellee's business. It becomes necessary to determine: (1) What is the product appellee is mining? (2) What percentage of depletion is applicable to that which is mined? (3) What is the proper "cut-off point" at which the percentage of depletion applies? (4) Whether either the cost of minerals added to any product during production, or the cost of sacking any product, can be added to the production costs incurred in producing the taxable product.

The first question as to what is being mined was answered by the court below as "calcium carbonate," (depleted at ten per cent) rather than "marble," (depletable at five per cent) within the meaning of § 114(b) (4) (A) of the 1939 Internal Revenue Code, 26 U.S.C. § 114(b) (4) (A). The taxpayer urges that it is "chemical grade limestone" (with a fifteen per cent depletion rate).

The Internal Revenue Code of 1939 provides in § 23 that certain deductions may be made from gross income. One of them is depletion. Subsection (m) of § 23 reads, in pertinent part:

"(m) Depletion. In the case of mines, oil and gas wells, other natural deposits, and timber, a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each case; such reasonable allowance in all cases to be made under rules and regulations to be prescribed by the Commissioner, with the approval of the Secretary. * *" (26 U.S.C. § 23, 1952 ed.)

The same Code, § 114, "Basis for depreciation and depletion," under subsection (b), "Basis for depletion," and subparagraphs (4) (A) and (B), provides, in pertinent part:

"(4) As amended by § 145 of the Revenue Act of 1942, c. 619, 56 Stat. 798, and § 319(a) of the Revenue Act of 1951, c. 521, 65 Stat. 452 Percentage depletion for coal and metal mines and for certain other mines and natural mineral deposits

"(A) In general. The allowance for depletion under section 23(m) in the case of the following mines and other natural deposits shall be —

"(i) in the case of sand, gravel, slate, stone (including pumice and scoria), brick and tile clay, shale, oyster shell, clam shell, granite, marble emphasis added, sodium chloride, and, if from brine wells, calcium chloride, magnesium chloride, and bromine, 5 per centum, (ii) in the case of coal, asbestos, brucite, dolomite, magnesite, perlite, wollastonite, calcium carbonates, emphasis added 10 per centum, (iii) in the case of metal mines, aplite, bauxite, fluorspar, flake graphite, vermiculite, beryl, garnet, feldspar, mica, talc (including pyrophyllite), lepidolite, spodumene, barite, ball clay, saggar clay, china clay, phosphate rock, rock asphalt, trona, bentonite, gilsonite, thenardite, borax, fuller\'s earth, tripoli, refractory and fire clay, quartzite, diatomaceous earth, metallurgical grade limestone, chemical grade limestone emphasis added, and potash, 15 per centum * *

* * * * * *

"of the gross income from the property during the taxable year, excluding from such gross income an amount equal to any rents or royalties paid or incurred by the taxpayer in respect of the property. Such allowance shall not exceed 50 per centum of the net income of the taxpayer (computed without allowance for depletion) from the property, except that in no case shall the depletion allowance under section 23(m) be less than it would be if computed without reference to this paragraph.

"(B) As added by § 124(c) of the Revenue Act of 1943, c. 63, 58 Stat. 21, and amended by § 207(a) of the Revenue Act of 1950, c. 994, 64 Stat. 906, and § 304(d) of the Excess Profits Tax Act of 1950, c. 1199, 64 Stat. 1137. Definition of Gross Income from Property. As used in this paragraph the term `gross income from the property\' means the gross income from mining. 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, and so much of the transportation of ores or minerals (whether or not by common carrier) from the point of extraction from the ground to the plants or mills in which the ordinary treatment processes are applied thereto as is not in excess of 50 miles unless the Secretary finds that the physical and other requirements are such that the ore or mineral must be transported a greater distance to such plants or mills. The term `ordinary treatment processes\', as used herein, shall include the following: (i) In the case of coal — cleaning, breaking, sizing, and loading for shipment; (ii) in the case of sulphur — pumping to

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