United States v. California Portland Cement Company

• Decision Date: 01 July 1969
• Docket Number: 22398,No. 22397,22397
• Citation: 413 F.2d 161
• Parties: UNITED STATES of America, Appellant, v. CALIFORNIA PORTLAND CEMENT COMPANY, a corporation, Successor-in-Interest to Arizona Portland Cement Company, a corporation, Appellee. CALIFORNIA PORTLAND CEMENT COMPANY, a corporation, Successor-in-Interest to Arizona Portland Cement Company, a corporation, Cross-Appellee, v. UNITED STATES of America, Cross-Appellant. UNITED STATES of America, Appellant, v. CALIFORNIA PORTLAND CEMENT COMPANY, Appellee. CALIFORNIA PORTLAND CEMENT COMPANY, Cross-Appellant, v. UNITED STATES of America, Cross-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

413 F.2d 161 (1969)

UNITED STATES of America, Appellant, v. CALIFORNIA PORTLAND CEMENT COMPANY, a corporation, Successor-in-Interest to Arizona Portland Cement Company, a corporation, Appellee.

CALIFORNIA PORTLAND CEMENT COMPANY, a corporation, Successor-in-Interest to Arizona Portland Cement Company, a corporation, Cross-Appellee, v. UNITED STATES of America, Cross-Appellant.

UNITED STATES of America, Appellant, v. CALIFORNIA PORTLAND CEMENT COMPANY, Appellee.

CALIFORNIA PORTLAND CEMENT COMPANY, Cross-Appellant, v. UNITED STATES of America, Cross-Appellee.

Nos. 22397, 22397-A, 22398, 22398-A.

United States Court of Appeals Ninth Circuit.

June 4, 1969.

Rehearing Denied July 1, 1969.

Grant W. Wiprud (argued), Mitchell Rogovin, Asst. Atty. Gen., Lee A. Jackson, Robert Livingston, Attys., Dept. of Justice, Washington, D. C., Wm. Matthew Byrne, Jr., U. S. Atty., Loyal E. Keir, Asst. U. S. Atty., Los Angeles, Cal., for appellant.

Stuart T. Peeler (argued), Joseph D. Peeler, Peter C. Bradford of Musick, Peeler & Garrett, Los Angeles, Cal., for appellee.

Before BARNES, DUNIWAY and ELY, Circuit Judges.

BARNES, Circuit Judge:

This is an appeal from a judgment of the district court awarding taxpayer a refund of income taxes previously paid for the taxable years ending April 30, 1953 to 1959, inclusive. The district court had jurisdiction pursuant to 28 U. S.C. §§ 1346(a) (1) and 1402(a) (1), and we have jurisdiction of the appeal under 28 U.S.C. § 1291.

Initially, the taxpayer maintains that the government is collaterally estopped in the present case from attacking the depletion computation previously determined in litigation involving the taxable years ending April 30, 1951 and 1952. On two prior occasions, this court considered questions arising out of that controversy, and our opinions are reported at Riddell v. California Portland Cement Co., 297 F.2d 345 (1962) and 330 F.2d 16 (1964). The several opinions of the district court are unofficially reported at 3 A.F.T.R.2d 438 (S.D.Cal. 1958), 17 A.F.T.R.2d 782 (S.D.Cal.1962), and 18 A.F.T.R.2d 5424 (S.D.Cal.1965). The last citation sets forth the method of determining the depletion allowance finally adopted in the 1951-1952 litigation, taking into account this court's two prior decisions in the case.

In light of the clear language of the district court in its final disposition of the 1951-1952 litigation, the taxpayer's claim in the instant case of collateral estoppel would appear to be without foundation. Finding of Fact No. 33, entered in the 1965 "stipulated" decision, (p. 5425) stated as follows:

"33. By agreeing to the entry of the foregoing Findings of Fact and the following Conclusions of Law, the defendant has not waived his objections thereto nor does the defendant concede the correctness thereof either for the taxable years in suit or subsequent taxable years. Defendant has stipulated to the entry thereof to avoid another trial for the taxable years involved and so that final Findings of Fact and Conclusions of Law and a final Judgment may be entered without further delay. As to certain of the costs relating to the handling of additives ($21,390.00 for the taxable year ended April 30, 1951 and $14,321.00 for the taxable year ended April 30, 1952) herein treated as mining costs (see Finding of Fact No. 30, supra, Conclusion of Law No. 6, infra, and the computations shown in Exhibit A attached hereto), the defendant has not waived his objection thereto nor conceded the correctness thereof but has stipulated to such computations in order that final Findings of Fact and Conclusions of Law, and a final Judgment may be entered for the taxable years in suit without further delay."

It is well established that a judgment based on the parties' stipulation is only res judicata as to the period covered by the action, and is not entitled to collateral estoppel effect in an action for a later period. United States v. International Bldg. Co., 345 U.S. 502, 73 S.Ct. 807, 97 L.Ed. 1182 (1953); Kennedy v. Mendoza-Martinez, 372 U.S. 144, 157, 83 S.Ct. 554, 9 L.Ed.2d 644 (1963); Erickson v. United States, 309 F.2d 760, 768, 159 Ct.Cl. 202 (1962); Clark v. United States, 281 F.2d 443, 446 (150 Ct.Cl. 470 (1960)); Seaboard Air Line R. R. Co. v. George F. McCourt Trucking, Inc., 277 F.2d 593, 596-597 (5th Cir. 1961); Brawner v. Pearl Assurance Co., 267 F.2d 45, 47 (9th Cir. 1958); Abarr v. United States, 153 F.Supp. 387, 389, 139 Ct.Cl. 748 (1957).

The taxpayer's modes of production as they are relevant to the issues raised on this appeal are fully set out in our opinion in Riddell v. California Portland Cement Co., 297 F.2d 345 (9th Cir. 1962), and need not be repeated here.¹ On the present appeal, the government contends that the court below erred with regard to the tax treatment of the following items: (1) costs of handling additives — whether these are mining or nonmining costs; (2) costs of bags and bagging — whether these are to be included when computing the cost of the first commercially marketable product; (3) selling expenses — whether these are to be excluded in computing the depletion allowance and, if not, whether they are both mining and nonmining expenses, or only nonmining; and (4) discounts given by taxpayer on the sale of its cement — whether these are trade or cash discounts. We will consider each of these items separately, in the context of the applicable code provisions, regulations and case law.

Initially, we note that taxpayer made a timely election pursuant to Pub.L. 86-781 § 4, 74 Stat. 1017, 1018, 26 U.S.C. § 613 note to have all the taxable periods here in question governed by section 613 of the Internal Revenue Code of 1954, as amended by section 302(b) of the Public Debt and Tax Rate Extension Act of 1960, Pub.L. 86-564, 74 Stat. 293. Thus, taxpayer's depletion allowance is to be determined by reference to the pre-kilnfeed cutoff point referred to in 26 U.S.C. § 613(c) (4) (F).

Under 26 U.S.C. § 611(a), the taxpayer is entitled to a reasonable allowance for depletion "in all cases to be made under regulations prescribed by the Secretary of the Treasury or his delegate." Pursuant to this authority, the Treasury Department on July 26, 1968, promulgated Treasury Regulations § 1.613, and more particularly § 1.613-3, relating to percentage depletion, applicable to taxable years beginning after December 31, 1953. See 33 Fed.Reg. 10692-10699 (1968). Such regulations may be given retroactive application. 26 U.S.C. § 7805(b). Dixon v. United States, 381 U.S. 68, 71-74, 85 S.Ct. 1301, 14 L.Ed.2d 223 (1965); Pollack v. Commissioner of Internal Revenue, 392 F.2d 409 (5th Cir. 1968); United States v. Fenix & Scisson, Inc., 360 F.2d 260, 267 (10th Cir. 1966). Further, when treasury regulations are reasonable interpretations of the statute in question, and are issued pursuant to statutory authority and are necessary to make the statute effective, they have the force and effect of law. Commissioner of Internal Revenue v. South Tex. Lumber Co., 333 U.S. 496, 501, 68 S.Ct. 695, 92 L.Ed. 831 (1948); Redwing Carriers, Inc. v. Tomlinson, 399 F.2d 652, 656 (5th Cir. 1968); Weyerhaeuser Co. v. United States, 395 F.2d 1005, 1008 (Ct.Cl.1968); Estate of Willett v. Commissioner of Internal Revenue, 365 F.2d 760, 761 (5th Cir. 1966); United States v. D. I. Operating Co., 362 F.2d 305, 308 (9th Cir. 1966), cert. denied, 385 U.S. 1024, 87 S. Ct. 742, 17 L.Ed.2d 673 (1967); United States v. Fisher, 353 F.2d 396, 398-399 (5th Cir. 1965); Whirlwind Mfg. Co. v. United States, 344 F.2d 153, 156 (5th Cir. 1965). See also Nutt v. Commissioner of Internal Revenue, 351 F.2d 452, 454 (9th Cir. 1965).

In the instant case, we conclude that the new regulations promulgated pursuant to 26 U.S.C. §§ 611 and 613 constitute a valid exercise of the Secretary's power. Therefore, taxpayer's liability for the last five of the tax years now in question — those ending April 30, 1955 to 1959, inclusive — is to be determined with reference to the new regulations (which were not considered in the prior litigation, or in the court below in the present proceedings, or in the parties' briefs on this appeal). Taxpayer's liability for the years ending April 30, 1953 and 1954, respectively, is to be determined with reference to Treasury Regulations 118, § 39.23(m)-1(e) (2) and (3), promulgated under the Internal Revenue Code of 1939. Both the old and the new regulations provide for the use of the proportionate profits method as an alternative method of computing gross income from mining, when there is no representative market price for the mineral product at the mining cutoff point, as in the instant case. The new regulations do not change the method, but set forth more specific applications of the method, as it relates to particular items in the cost computation, than are contained in the earlier regulations. This we will discuss in relation to the several issues raised on this appeal.

The government and the taxpayer are here agreed that the mineral with which we are concerned for depletion allowance purposes in calcium carbonate. Thus, the district court correctly held in Conclusion of Law No. 4 (C.T. 188) that the appropriate allowance for the taxable year ended April 30, 1953 and for the first 245/365ths of the year ended April 30, 1954 is 10 per cent of the taxpayer's gross income from mining. Internal Revenue Code of 1939, section 114(b) (4) (A) (ii), as amended. That court correctly held also that the applicable allowance for the remainder of the taxable year ended April 30, 1954 and for the years ended April 30, 1955 through 1959, inclusive, is 15 percent of the taxpayer's gross income from mining. 26 U.S.C. § 613(b) (7), and (d).

I. COSTS OF HANDLING ADDITIVES

The first question we must decide is whether the taxpayer's costs of handling the materials it added to its mined calcium carbonate rock are mining or nonmining costs, for purposes of computing the depletion allowance. The...