Standard Realization Company v. United States, 13169.
| Decision Date | 11 April 1961 |
| Docket Number | No. 13169.,13169. |
| Parties | STANDARD REALIZATION COMPANY, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Lee A. Jackson, Chief, Appellate Section, James P. Turner, Atty., U. S. Dept. of Justice, Washington, D. C., Robert Tieken, U. S. Atty., Chicago, Ill., Abbott M. Sellers, Acting Asst. Atty. Gen., Melva M. Graney, Atty., Dept. of Justice, Washington, D. C., Harvey M. Silets, Asst. U. S. Atty., Chicago, Ill., for appellant.
Edward R. Johnston, Herbert B. Olfson, Chicago, Ill., Thompson, Raymond, Mayer, Jenner & Bloomstein, Chicago, Ill., of counsel, for appellee.
Before DUFFY, KNOCH and MAJOR, Circuit Judges.
The Commissioner of Internal Revenue determined deficiencies in plaintiff's (taxpayer's) income and excess profits taxes for the calendar year 1952, for the taxable period January 1, 1953 through November 8, 1953, and for the taxable period November 9, 1953 through December 31, 1953. Such deficiencies were paid by the taxpayer under protest that they were illegally assessed, and this action was commenced to obtain a refund. The amount alleged to have been illegally collected is not in dispute and need not be stated.
Plaintiff is engaged in a mining operation and the primary question for consideration relates to the depletion allowance provided by statute. Its contention is aptly set forth in its complaint which alleged:
The section of the Revenue Code relied upon in the complaint provides for a percentage depletion rate for certain described minerals and other natural deposits as follows:
"(iii) in the case of * * * quartzite * * * 15 per centum."
The Commissioner in assessing deficiencies determined that the product mined by plaintiff was not quartzite within the meaning of the Revenue Code and plaintiff, therefore, was entitled to a depletion rate of only 5%. Furthermore, the Commissioner disagreed with plaintiff as to the "gross income from the property" as a base for calculating the depletion allowance. The government in defense of the instant suit sought to maintain the same position taken by the Commissioner.
Thus, two issues were presented to the District Court for its decision: (1) whether the taxpayer was entitled to compute its depletion allowance under Section 114(b) (4) (A) of the Internal Revenue Code of 1939 at the 15% rate for quartzite, and (2) whether the taxpayer's percentage depletion base under Section 114(b) (4) (B) of the Internal Revenue Code of 1939 and Section 613(c) of the Code of 1954, 26 U.S.C.A. § 613(c), was its receipts from the sale of silica sand and flour in bulk and in bags or limited to the portion of its gross income which was attributable to crude (unwashed) silica sand.
After trial without a jury, the Court decided both questions in favor of the taxpayer. Consistent therewith, the Court entered its findings of fact, conclusions of law and the judgment from which the government appeals.
There is little if any dispute as to the nature of plaintiff's mining operation and the processes employed in converting its raw into its finished products. Its mineral exists in a deposit of rock formation near Ottawa, Illinois. The rock is composed of quartz grains cemented together with pure quartz cement. The rock is so firm that sheer walls have stood for years bearing the weight of railroad tracks, and large tunnels run through the deposit without other support. In its raw state in the ground the mineral has a pure quartz content of approximately 98.40%. The mineral must first be uncovered by the removal of overburden and the surface cleansed in preparation for its extraction. This requires that the exposed rock formation be blasted by high explosives. Dynamite charges of 250 to 300 pounds are placed in drilled holes approximately 30 feet apart and some 12 feet from the face of the quarry. Secondary blasting is necessary to break up the remaining chunks and slabs. Substantial quantities of high explosives are regularly employed in the extraction processes, both in the primary and secondary blasting, the latter employed to reduce the large rock fragments dislodged by the former.
After the secondary blasting, the disintegrating process is continued by means of high pressure water jets directed against the exposed surface of the partially disintegrated rock and by the use of sledge hammers. The pieces and particles are carried by water to the base of the quarry where the mixture is pumped through rubber-lined pipes for treatment processing. The granular quartz is then subjected to primary and secondary washing operations which consist of agitating the grains and subjecting them to high-pressure jets, further disintegrating the quartz particles and removing the quartz cement binding material.
Following the washing, the granular quartz is placed in bins to drain and dried in steam driers. It is graded into nine sizes by the use of multiple vibrating screens and sold by plaintiff under the trade name, "Blackhawk Silica Sand." A portion of the grain-sized quartz particles are processed into similar sizes by grinding and sold in various degrees of fineness under the trade name, "Microsil Ground Silica."
A part of the product is then loaded in bulk in freight cars. This requires the sealing of each car prior to loading, by lining it with paper so as to prevent seepage and the possible intrusion of impurities. The remainder of the product is packaged in bags which are sealed and loaded in freight cars for shipment.
The silica sand and flour as shipped for various commercial uses have a pure quartz content of approximately 99.82% and a melting point of approximately 3200° F. All of the product is sold and purchased solely on the basis of its chemical, physical or refractory properties. None of the product is used or sold for use as rip rap, ballast, road material, rubble, concrete aggregates or for similar purposes.
Plaintiff's silica sand and flour are sold for a wide variety of industrial uses, such as improving the flow in oil wells, the manufacture of glass, building materials, soaps and detergents, paints and pigments, ceramics, and for use in steel, aluminum and magnesium foundaries. It is not used in the construction or building industries for any of the same purposes as common sand. Its product is sold at a price averaging many times that of sand and does not compete or attempt to do so with common sand in any market.
The Trial Court, after hearing the testimony of numerous witnesses, found 184 F.Supp. 719:
Plaintiff offered the testimony of four witnesses experienced and familiar with the silica industry who testified that the commonly understood commercial meaning of quartzite in that industry was a rock of very high silica content which could be processed into silica sand and flour. The plaintiff and the government each offered the testimony of two experts, scientists and geologists, who freely expressed their opinions as to what constituted quartzite. As might be expected, they did not agree. The essential conflict in their testimony, as we understand, is that the government experts insisted that quartzite refers to a hard, compact rock made up of sand grains so firmly cemented with silica that it will fracture through rather than around the grains. Plaintiff's witnesses considered this distinction of no importance. The Court found:
"Whether the ultimate product, silica sand and flour, was derived from quartzite so firmly cemented that it would generally break across the grains rather than around the grains was of virtually no significance to the industries purchasing silica sand and flour."
A detailed recitation of the testimony would unduly burden our opinion and in the end serve no useful purpose. It is sufficient, we think, that we have carefully considered it, particularly on the point under consideration, and are not in doubt but that it amply supports the findings. The government's argument to the contrary is not impressive. While it has consistently contended that plaintiff's deposit is not quartzite, it has evidenced considerable confusion as to its proper classification under the Internal Revenue Code.
Counsel for the government in his...
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