United States v. Portland Cement Company of Utah

• Decision Date: 27 July 1961
• Docket Number: No. 6591.,6591.
• Citation: 293 F.2d 826
• Parties: UNITED STATES of America, Appellant, v. PORTLAND CEMENT COMPANY OF UTAH, a Utah corporation, Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

293 F.2d 826 (1961)

UNITED STATES of America, Appellant, v. PORTLAND CEMENT COMPANY OF UTAH, a Utah corporation, Appellee.

No. 6591.

United States Court of Appeals Tenth Circuit.

July 27, 1961.

Abbott M. Sellers, Acting Asst. Atty. Gen., Louis F. Oberdorfer, Asst. Atty. Gen., and Lee A. Jackson, Melva M. Graney and James P. Turner, Attys., Dept. of Justice, Washington, D. C., for appellant.

Glen E. Fuller and Jack R. Decker, Salt Lake City, Utah, for appellee.

Before MURRAH, Chief Judge, PICKETT, Circuit Judge, and SAVAGE, District Judge.

SAVAGE, District Judge.

In this income tax refund case the United States appeals from a judgment in favor of the taxpayer for taxes paid under protest for the years 1954 through 1956. The controversy arose over the computation of the statutory depletion allowance to the taxpayer in the mining and processing of cement rock into cement. The Internal Revenue Code of 1954, § 613, 26 U.S.C.A. § 613, which was in effect during the tax years in question, provides that in the case of mines there shall be allowed as a deduction in computing taxable income a reasonable allowance for depletion which shall be a percentage of the gross income from mining. The schedule of percentage depletion rates provides for a 15% depletion allowance for "all other minerals (including but not limited to) * * * calcium carbonates * * * limestone." The term "mining" includes "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 * * *."

The findings were that the taxpayer was engaged in the mining of an argillaceous limestone from its own quarry located in a canyon twelve miles east of its processing plant in Salt Lake City, Utah. It was mining a kind of limestone known in the trade as cement rock, which was desirable for making cement but had value for no other purpose. Cement rock may be processed into finished cement without the necessity of blending and mixing many isolated products, which is required in the manufacture of cement from ordinary limestone. The ingredients found in cement rock are mixed in a solid solution in such a manner as to constitute an ideal mineral in its natural state for producing cement.

In processing its cement rock into finished cement, the taxpayer resorted to procedures normally applied by other similar mine owners and operators. It blasted the rock out of a mountainous quarry face and reduced the size by secondary blasting of large boulders which were obtained. The rock was then crushed in a gyratory crusher to sizes two to four inches rough diameter plus "fines" ranging in size down to splinters. The usable material was then transported to the plant in Salt Lake City where it was further crushed to three-fourths inch rough diameter size. It was then ground in ball mills to a fineness of 90% in volume, passed through a 200 mesh sieve and water was added forming a "slurry," which is a very fine mud. The slurry was placed in tanks where it was mixed and made uniform and then fed into rotary kilns and sintered. The resulting clinkers were cooled and later ground into cement, which was stored in silos for future sale.

The taxpayer has never sold any of the crushed cement rock it produced nor made any use of it other than to make cement. "Fines" produced at the quarry were disposed of as waste material for lack of any market. Cement rock is not suitable for use as road base material. When a highway was cut through the taxpayer's deposit the cement rock was pushed aside and other materials hauled in for the road bed.

The problem presented is whether depletable gross income from mining is that realized from the sale of finished cement, as contended by the taxpayer and decided by the trial court, or whether it is limited to the constructive income from crushed cement rock as contended by the government. The government asserts that the taxpayer is an integrated miner-manufacturer; that its mining operations terminate when the mineral is converted into crushed limestone, and that the subsequent processing into finished cement is a manufacturing operation.

This argument would be unassailable except for the statutory definition of "mining" as including "ordinary treatment processes normally applied by mine owners or operators in order to obtain the commercially marketable mineral product or products." This definition may under the facts of a particular case take us well beyond the ordinary concept of mining operations.

The cement rock mined by the taxpayer unquestionably was not salable at the market at any stage of processing until it became finished cement. But the government points out that only the treatment processes which are normally applied by miners are encompassed within mining and that "mining" is limited to the basic marketable product of each branch of the mining industry; that mining ends when the mineral reaches the point at which it may by industry standards be sold, and that any unusual or abnormal processing resorted to by the taxpayer would not be embraced in the mining operations.

The taxpayer urges that, because the location of the mineral deposit is such a vital factor in determining its value, only the local market may be relied upon to reflect the true value of the mineral. Taxpayer would look only to the availability of a local market for its products in deciding at what stage of processing a commercially marketable product had been obtained. This was the test applied by the trial court, which found that the taxpayer produced no product from its cement rock deposit which was commercially marketable, nor could have, prior to its conversion into finished cement. The court further found that the location of the deposit in a narrow canyon precluded the sale for road and construction purposes.¹ Evidence offered by the government in support of its theory as to the first marketable product of the mining industry of which taxpayer is a part was excluded.

If the statutory provision for including "ordinary treatment processes normally applied by mine owners or operators" left the issue in doubt, it was set at...