Riddell v. Monolith Portland Cement Co.

• Decision Date: 24 March 1962
• Docket Number: No. 16914.,16914.
• Citation: 301 F.2d 488
• Parties: R. A. RIDDELL, District Director of Internal Revenue, Los Angeles District, Appellant, v. MONOLITH PORTLAND CEMENT CO., Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

301 F.2d 488 (1962)

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

No. 16914.

United States Court of Appeals Ninth Circuit.

March 23 and 24, 1962.

Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson and Melva M. Graney, Attys., Dept. of Justice, Washington, D. C., and Francis C. Whelan, U. S. Atty., Robert H. Wyshak and Eugene N. Sherman, Asst. U. S. Attys., Los Angeles, Cal., for appellant.

Joseph T. Enright, Norman Elliott and Bill B. Betz, Los Angeles, Cal., for appellee.

Before BARNES, HAMLIN and JERTBERG, Circuit Judges.

BARNES, Circuit Judge.

This is another of the "statutory percentage mining depletion allowance" cases, involving taxpayer's 1952 return. We have for consideration the effect on this case, if any, of United States v. Cannelton Sewer Pipe Co., 1960, 364 U.S. 76, 80 S.Ct. 1581, 4 L.Ed.2d 1581, as well as the effect of the previous Monolith decision (Monolith Portland Cement Co. v. United States, 9 Cir. 1959, 269 F.2d 629),¹ determining the same taxpayer's 1951 liability.

An income tax liability of $156,286.65 shown on appellee's² 1952 return was paid by taxpayer in 1953. An additional $25,396.60, plus interest of $5,002.43, was assessed against it and paid in 1956. Taxpayer filed, on or about February 24, 1956, a timely claim for refund of $99,070.81 in taxes paid for 1952, which was disallowed by appellant.³ Taxpayer and appellant executed a timely extension of the period of limitations for the calendar year 1952; within six months thereafter, taxpayer filed two more claims for refund in the amounts of $181,683.24 and $82,612.44 respectively, which were neither allowed nor disallowed. Within the time provided in Section 3772 of the Internal Revenue Code of 1939, 26 U.S.C.A. § 3772,⁴ taxpayer brought this action in the district court for a refund of taxes which included a claim for taxes paid in 1952 in the amount of $186,753.30.⁵ Jurisdiction was conferred upon the district court by Section 1346, Title 28, United States Code. Judgment in favor of the taxpayer in the principal amount of $186,753.40, plus interest, was entered on December 17, 1959. A timely notice of appeal was filed by the government. This court has jurisdiction to review the judgment entered in the district court by virtue of Section 1291 of Title 28, United States Code.

Taxpayer filed a motion for summary judgment below, and pursuant thereto, the district court considered the taxpayer's motion, its affidavits, the statement of undisputed facts and the stipulations between the parties, the government's affidavits, admissions in its answer and its answers to taxpayer's request for admissions and interrogatories, and, in addition, took judicial notice of the first Monolith case (which was between parties in privy involving the year 1951). The district court held that the 1951 proceeding was res judicata as to all issues but, preferring not to rest its decision solely on that ground, also decided the merits in favor of taxpayer, stating that there was no genuine disputed issue of fact and that the case was an appropriate one for summary judgment because the issues were of law rather than of fact and that in any event, since the underlying and evidentiary facts were admitted and undisputed, all that remained was to apply the proper legal principles to undisputed facts. Summary judgment was entered in favor of the taxpayer and the government appealed.

The facts as found by the district court may be summarized as follows:

Taxpayer is a Nevada corporation which has its principal office in Los Angeles, California, and is engaged in the manufacture and sale of finished cement in its plant at Monolith, California. In connection with that plant and immediately adjacent thereto (within less than fifty miles) the taxpayer operates an extensive mineral desposit known as its Monolith quarry. During the year in question taxpayer extracted limestone from its quarry which it used to make cement in its plant. All of the extracted limestone was used by the taxpayer exclusively for that purpose.

In the process of making cement, taxpayer added to the limestone small amounts of certain other materials which it mined, as well as some purchased materials. The processes used by taxpayer in making cement were those normally applied in the cement industry by cement manufacturers having deposits similar to taxpayer's.⁶

During 1952 it was not economically or commercially feasible for the taxpayer to use any of its limestone in the production of dimension stone or crushed stone.

The taxpayer's gross sales of finished cement for the year 1952 amounted to $8,393,507.11. The elimination therefrom of amounts attributable to certain operations or practices which the district court found were not ordinary treatment processes, such as bagging,⁷ leaves a figure of $6,565,070.44 which the district court called taxpayer's "gross income from mining."

The limestone mined by taxpayer in 1952 and used by it to make finished cement came from the same quarry from which the taxpayer obtained the limestone it used in 1951 and was substantially identical in chemical content to such 1951 limestone. It is stipulated that taxpayer's limestone deposit "is a metamorphosed recrystallized limestone."

During the year 1952 the limestone in taxpayer's deposit was commonly regarded as and understood to be either "calcium carbonates" or "chemical grade limestone" and was not commonly regarded as or understood to be "marble" or "stone." During the year 1952 the limestone was either "calcium carbonates" or "chemical grade limestone" within the commonly understood commercial meaning of those terms.

The district court held that the taxpayer's limestone was "calcium carbonates" or "chemical grade limestone;" that it was unnecessary to determine which in view of the fact that the percentage depletion allowance is limited to fifty per cent of the net income from mining (which here means taxpayer could not take the higher depletion allowance for "chemical grade limestone" even if its stone were to be found to be so classified); that taxpayer's 1952 "gross income from mining" (its depletion base) was $6,565,070.44; that its percentage depletion allowance, as limited to fifty per cent of its net income from mining, was $463,739.44; and that it therefore should have paid no income tax in the year 1952. Judgment was accordingly entered in favor of taxpayer for a refund of taxes in the amount of $186,753.40, plus interest.

Appellant urges that the district court erred in the following respects:

"1. In holding that the taxpayer\'s limestone is either `calcium carbonates\' or `chemical grade limestone\' rather than `marble\' within the meaning of Section 114(b) (4) (A) of the Internal Revenue Code of 1939 and that the taxpayer\'s percentage depletion allowance therefore need not be computed by using the lesser 5 per cent rate.

"2. In holding that, within the meaning of Code Section 114(b) (4) (B), `mining\' includes all of the processes which the taxpayer used in making cement and that the taxpayer\'s finished cement in bulk is the `commercially marketable mineral product\' to which mining extends and on which the taxpayer is entitled to depletion. In this connection, the court also erred in failing to hold that `mining\' only extends to crushing the limestone (properly classified as marble), that the other minerals added to the limestone in making cement were not shown to be depletable, and that crushed limestone (properly classified as marble), is the `commercially marketable mineral product\' to which mining extends and on which the taxpayer is entitled to depletion.

"3. In holding that the doctrines of res judicata and collateral estoppel bar consideration of issues 1 and 2 on their merits.

"4. In awarding summary judgment on issues 1 and 2."

As Judge Magruder points out so clearly in his Dragon Cement Company v. United States opinion (1 Cir. 1957, 244 F.2d 513, cert. denied, 355 U.S. 833, 78 S.Ct. 50, 2 L.Ed.2d 45):

"The allowance for depletion has been a controversial subject for years, and officials of the executive branch have sought from time to time, with conspicuous lack of success, to persuade the Congress to eliminate some of its alleged over-generous features. See Mertens, Law of Federal Income Taxation § 24.04 (1954). We are not concerned with the wisdom or policy of the statutory allowance, once we are sure what the allowance is, for it is plainly our judicial function merely to apply the allowance as Congress wrote it and meant it." (Id. 244 F. 2d at 514.)

The Dragon Cement opinion then states the background that must be kept in mind before we meet the peculiar problem inherent in the mining of raw material from which cement is made, as distinguished from other "ores" or "minerals."⁸

We next note that the Dragon Cement case, supra, like our instant case, and unlike Cannelton, supra, involves the raw material from which cement is "manufactured."

Turning to Cannelton, we first note that it differs in its facts from our instant case in that in Cannelton (a) there was a local market in "ground fine clay," the first "commercially marketable product" originally claimed by taxpayer (although subsequently taxpayer claimed the first commercially marketable product was the finished product, i. e., sewer pipe); (b) there was "a substantial market for the raw mineral" in Indiana and Kentucky, even though not marketable at a profit.

Next, we know that (1) Cannelton holds that "marketability of the raw material" at a profit is of no significance; (2) the "ordinary treatment processes" to be included in the depreciable value are not those of the fully or partially integrated miner, but they are "the `ordinary' normal ones applied by the non-integrated miner." (3) "The Congress," says Cannelton, "intended the integrated mining-manufacturing operations to be treated as if the operator...