United States v. Ideal Basic Industries, Inc., 9571.

• Decision Date: 20 January 1969
• Docket Number: No. 9571.,9571.
• Citation: 404 F.2d 122
• Parties: UNITED STATES of America, Appellant, v. IDEAL BASIC INDUSTRIES, INC., Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

404 F.2d 122 (1968)

UNITED STATES of America, Appellant, v. IDEAL BASIC INDUSTRIES, INC., Appellee.

No. 9571.

United States Court of Appeals Tenth Circuit.

August 15, 1968.

Rehearing Denied January 20, 1969.

COPYRIGHT MATERIAL OMITTED

Grant W. Wiprud, Atty., Dept. of Justice, Washington, D. C. (Mitchell Rogovin, Asst. Atty. Gen., Lee A. Jackson, Robert Livingston and Thomas L. Stapleton, Attys., Dept. of Justice, Washington, D. C., with him on brief) for appellant.

Claude M. Maer, Jr., Denver, Colo., (Lawrence W. Treece, Denver, Colo., and Pillsbury, Madison & Sutro, San Francisco, Cal., with him on brief), for appellee.

Before MARVIN JONES^*, LEWIS and HICKEY, Circuit Judges.

HICKEY, Circuit Judge.

Appellee, Ideal Basic Industries, Inc., for itself and its merged affiliate, Pacific Portland Cement Co., sues for refund of income and excess profit taxes paid for the years 1951 through 1954. The trial court granted the refund claimed by appellee. The government appeals. Jurisdiction is conferred by 28 U.S.C. § 1291.

The appeal presents two questions: (1) Are taxpayer's claims for the years 1951, 1952, and 1954 with respect to the Ada, Oklahoma, plant barred by failure to present a claim for refund within the period of limitations? (2) Is the determination of "Gross Income from Mining" properly made under the proportionate profits method of computation when certain costs are introduced into the proportionate fraction?

The specific costs to be considered are:

1. Cost of processing additives.

2. Cost of bags and bagging.

3. Cost of bulk loading.

4. Cost of operating storage warehouses, distribution terminals, and the transportation thereto.

5. Costs of advertising, promoting and selling cement.

The facts are not in dispute. Appellee is an integrated miner-manufacturer. The first market price available is for the finished product, bulk cement, therefore, depletion is computed on the hypothetically derived value of "kiln feed." 26 U.S.C. § 613(c) (4) (F). Appellee made timely election to use the proportionate profits formula to compute its "Gross Income from Mining" which would be subject to depletion.

We consider initially the procedural question relative to the period of limitations provisions.

All refund claims were initially filed on time, and all except the Ada, Oklahoma, claims were based upon the depletion percentage for limestone. In its 1951-53 returns, appellee claimed the calcareous material at Ada was calcium carbonate, depletable at 10%. In its 1954 return, appellee claimed the argillaceous material at Ada was shale, depletable at 5%. Later the appellee amended its 1951-53 claims relating to Ada, Oklahoma, to identify the calcareous material as chemical grade limestone, depletable at 15%. The 1954 claim was amended to identify the argillaceous material as clay, depletable at 15%. The commissioner denied the amended claims for 1951, 1952, and 1954 on the ground they were filed out-of-time. The trial court reversed and allowed the amended claims.

The test applied to determine, "whether a new ground of recovery may be introduced after the statute has run by amending a pending claim filed in time depends upon the facts which an investigation of the original claim would disclose. Where the facts upon which the amendment is based would necessarily have been ascertained by the commissioner in determining the merits of the original claim, the amendment is proper." Pink v. United States, 105 F.2d 183, 187 (2d Cir. 1939). (citations omitted). "The test is one which affords the government ample protection against the filing of stale claims * * * while at the same time providing no arbitrary limit on the amendment of claims previously filed." St. Joseph Lead Co. v. United States, 299 F.2d 348, 350 (2d Cir. 1962). (citations omitted).

The trial court found the contested mineral identification issues in favor of the taxpayer. When the initial claim was filed it was incumbent upon the commissioner to identify the minerals upon which depletion was claimed. The findings clearly indicated the identity of the minerals as limestone and clay, entitled to the 15% depletion rate. Therefore, the commissioner could not have been misled nor did the amendment introduce a new ground for recovery.

"`If the Commissioner is not deceived or misled by the failure to describe accurately the claim, as obviously he was not here, it may be more convenient for the government and decidedly in the interest of an orderly administrative procedure that the claim should be disposed of upon its merits.'" Reynolds v. McMurray, 77 F.2d 740, 744 (10th Cir. 1935), quoting Tucker v. Alexander, 275 U.S. 228, 231, 48 S.Ct. 45, 72 L.Ed. 253 (1927).

We now turn to the question which involves the merits of the controversy.

This circuit has adopted the proportionate profits method for determining the "Gross Income from Mining" for the purpose of depletion in the miner-manufacturer product, cement. United States v. Portland Cement Co. of Utah, 378 F.2d 91, 93 (10th Cir. 1967).

                      Gross Income from Mining — Mining Cost   X Sales price of first
                                                      Total cost of   marketable product, i
                                                      bulk cement   e., bulk cement.1
                

"This method works back to the end result by reducing the representative market or field price of the taxpayer's first marketable product by his non-mining costs plus the proportionate profits allocable to his non-mining activity. For this purpose profits are allocated between mining and non-mining activities in the proportion that the taxpayer's non-mining costs bear to his total costs." Hamovit, Depletion for the Integrated Miner-Manufacturer, 13 Rocky Mtn. Mineral L. Inst. 411, 422 (1967).

The trial court found: "The grinding and blending of pre-kiln additives was incidental to the grinding and blending of plaintiff's own materials." Ideal Cement Co. v. United States, 263 F.Supp. 594, 601 (D. Colo. 1966). We agree, therefore, we would not deduct the costs from the numerator (mining costs) in the proportionate formula. Other courts have so held. Whitehall Cement Mfg. Co. v. United States, 237 F.Supp. 838 (E. D. Pa.), modified, 242 F.Supp. 326 (E. D. Pa. 1965), aff'd without discussion of this issue, 369 F. 2d 468 (3d Cir. 1966); Riddell v. California Portland Cement Co., 330 F.2d 16 (9th Cir. 1964).

We conclude that "first marketable product" is the proper sales price to which the application of the formula was intended, therefore, the cost of bags, bagging, and bulk loading should be eliminated from all parts in the formula. "Consequently we must hold that those packing and loading costs are indirect costs which are not incurred for the benefit of the entire operation and as such cannot be included in taxpayer's computation of gross income from the property at kiln feed." Standard Lime & Cement Co. v. United States, 329 F.2d 939, 948, 165 Ct.Cl. 180 (1964) (emphasis added); accord, United Salt Corp., 40 T.C. 359 (1963). Equally compelling is the simple logic that bulk cement is the first marketable product,² bagged cement is the second marketable product, as for example "sakrete"³ would be a third marketable product.

The cost of operating storage warehouses, distribution terminals, and the transportation thereto are, on their face, non-mining and non-processing costs. The basic principle concerned is to allow a deduction to compensate for the depleting resource and, therefore, the formula is oriented to the value of the resource at the time of its extraction rather than to the ultimate sale price of the manufactured product. Transportation, governed by regulated rates, does not add to or detract from the appellant's profit as computed for bulk cement and is not a proper part of the "Gross Income from Mining" computation. The operation of warehouses and of distribution terminals are marketing facilities for the manufactured product and are, therefore, cost oriented to the value of the manufactured product rather than the value of the depleted resource. Both should be eliminated from the formula to arrive at the gross resource income. Standard Lime & Cement Co. v. United States, 329 F.2d 939, 165 Ct.Cl. 180 (1964). See Commissioner of Internal Revenue v. American Gilsonite Co., 259 F.2d 654, 657 (10th Cir. 1958).

The advertising, promotional, and selling costs are not a proper part of the computation. These costs, like bagging (packing) and loading costs are overhead charges properly applicable to finished cement after it has become "first marketable product." The selling, advertising, promotional, loading, bagging, and transportation costs are all distribution costs to get the finished cement from the point of completed manufacture to the next user. A hypothetical model to test this point would be the case of a cement block manufacturer with facilities adjacent to the cement plant. If the block manufacturer utilized all of the output of the cement plant, then there would not be any necessity for the cement manufacturer to incur costs of distribution. The cement manufacturer would not incur...