Warner Co. v. U.S., 73-1722
| Decision Date | 27 September 1974 |
| Docket Number | Nos. 73-1722,73-1723,No. 73-1723,No. 73-1722,73-1722,s. 73-1722 |
| Parties | 74-2 USTC P 9728 WARNER COMPANY, Appellant in, v. UNITED STATES of America, Appellant in |
| Court | U.S. Court of Appeals — Third Circuit |
Jules I. Whitman, Peter J. Picotte, II, Philadelphia, Pa., for Warner Co.; Dilworth, Paxon, Kalish, Levy & Coleman, of counsel.
Scott P. Crampton, Asst. Atty. Gen., Meyer Rothwacks, Jonathan S. Cohen, Donald H. Olson, Tax Div. Dept. of Justice, Washington, D.C., for the United States; Robert E. J. Curran, U.S. Atty., of counsel.
Before VAN DUSEN, WEIS and GARTH, Circuit Judges.
Warner Company (Warner) brought this action for a refund of federal income taxes alleged to have been erroneously paid for the taxable years 1956 through 1959 and 1961. 1 From a judgment in favor of the taxpayer, the Government appeals. 2 The issue presented is whether Warner is entitled to employ the 'proportionate profits' method of computing its percentage depletion allowance of limestone. The resolution of that issue depends upon whether a 'representative market or field price' existed for Warner's limestone.
The district court concluded that 3
We disagree with the district court, and reverse. 4
Under 26 U.S.C. 611 and 613, 5 taxpayer claims it is entitled to a percentage depletion allowance of its gross income from mining its limestone. The regulations promulgated thereunder provide, among other things, that if the mined product is processed (as this limestone was processed into calcined lime) before it is sold by the taxpayer, the gross income from the mining of the mineral is to be constructively computed. 6 Under Treasury Regulation 1.613-4, 7 this is to be accomplished by determining the 'representative market or field price' as of the date of the taxpayer's sale of the processed product, of a mineral of like kind and grade, if there is such a representative market or field price. This regulation further provides that if there is no such representative market or field price, the gross income is to be computed by what is commonly called the proportionate profits method. 8 The regulation, however, does not permit the taxpayer to browse freely through these various methods and select the one most favorable to it. The representative market or field price method is the only one available unless the taxpayer establishes that there is no such price. Ames, supra. Only then is the proportionate profits method available to it. If a representative market or field price is established and it is less than the taxpayer's mining costs, no deduction is allowed. United States v. Cannelton Sewer Pipe Co., supra. This is so because 26 U.S.C 613(a) expressly limits the percentage depletion allowance to a maximum of 50% Of the taxpayer's taxable income from mining. If costs are higher than the selling price, there can be no income. Without income, there can be no depletion allowance under this section of the statute.
The district court's findings of fact reveal the following. During the years in question, taxpayer, a Delaware corporation, was an integrated miner-manufacturer of limestone into lime with facilities located at Bellefonte, Pennsylvania. Virtually all of the limestone, the mined product, that taxpayer mined was converted by it to lime. Limestone has two very broad types of uses. One is for the physical functions that the limestone performs and the second is for its chemical properties. The latter limestone, kilnstone or fluxing stone, 9 is used both in the lime producing industry and in the steel industry and is the type of limestone mined by taxpayer. It is a high quality, high calcium grade of limestone having a calcium carbonate content of 97.8%
In extracting limestone from its mine, taxpayer employed the relatively expensive stope method of mining. 10 As a result, it incurred mining costs in excess of $2.00 per ton. Employing this method, during the years in question, taxpayer extracted between 387.794 and 569,914 net tons of limestone each year. Of these, between 293,794 and 439,572 net tons of limestone were consumed in its lime kilns each year. Although taxpayer's business was selling lime, it did sell small amounts of raw limestone. The price at which these sales were made was $2.00 per ton and they were accommodation sales made to obtain the good will of the purchasers.
During the period 1956 to 1961, National Gypsum Company and Standard Lime and Cement Company were taxpayer's principal competitors in the production of lime in the Bellefonte area and, like taxpayer, were integrated miner-manufacturers. Both of these companies mined the same kind and grade of limestone as taxpayer and incurred mining costs approximating taxpayer's. National Gypsum sold no raw limestone although a potential market for its limestone did exist at Pittsburgh ( No. 32); Standard Lime made annual sales of stone to various steel companies approximating 10,000 to 15,000 net tons per year at an f.o.b. quarry price of $1.75 per ton. Although these were accommodation sales, the district court specifically found that the 'accommodation nature of these sales had no bearing on the price charged, and Standard Lime priced this flux stone so that it was delivered at a competitive price'. ( No. 41)
In addition to the above two companies, two other companies produced limestone in the Bellefonte area, Whiterock Quarries and Valley View Lime Company (also referred to as Valley View Quarries). Both of these companies produced the same quality limestone as the integrated miner-manufacturers; however, they sold their limestone on the open market, largely to steel companies in Pittsburgh and Youngstown, Ohio, at prices ranging from $1.55 to $1.74 per ton. During the years in question, neither of these companies sold any limestone to the three Bellefonte lime producers. Whiterock and Valley View, during these years, produced a total of about 515,108 tons of limestone as compared to approximately 7,019,485 tons produced by the three integrated miner-manufacturers. Over the six-year period, the total amount of tons of high quality, high calcium stone produced by Whiterock and Valley View was 7.3% Of the total net tonnage of kilnstone produced by taxpayer, National Gypsum and Standard Lime. However, with regard to taxpayer alone, the total production of Whiterock and Valley View averaged 25.7% Of the kilnstone produced by taxpayer. (Findings Nos. 47, 48, 49, 52, 55-57).
Bellefonte is located in the center of a high-calcium limestone producing area stretching from Virginia and West Virginia to the south, to other limestone deposits in Pennsylvania and to deposits near Lake Erie in Michigan. At least five producers of limestone of like kind and grade to that of taxpayer's sold vast quantities of blast and open hearth stone to steel producing and lime-making companies in Pittsburgh, Johnstown and Bethlehem, Pennsylvania. 11 This is the same market in which both Whiterock and Valley View competed. These sales, f.o.b. mine or quarry, ranged from $1.46 to $1.85 per net ton and for sales from Michigan, they varied from $.85 to $.94 per net ton. 12 No sales were found at or above $2.00 per ton. 13
The district court's determination that no representative market or field price existed for Warner's limestone was based on (1) Warner's unwillingness to sell its stone in the limestone market as it could not do so profitably, (2) Warner's status as an integrated miner-manufacturer, and (3) Warner's 'unique' situation geographically. While each of these factors may be important to the manner in which Warner conducts its business, factors (1) and (2) are not to be taken into account in determining whether a representative market or field price exists, and the third factor relied on by the district court, while relevant, cannot standing alone support the determination reached.
The district court concluded that the representative market or field price, if there was one, would have to be determined by looking at Bellefonte only, reasoning that:
Because the direct and indirect mining costs for Warner Mining Company were over $2.00 per ton, Warner Mining Company would not attempt to sell its stone to the Pittsburgh and Eastern Pennsylvania (Bethlehem) market areas assuming it could only obtain a maximum price, f.o.b. Bellefonte, of $1.76 or less per ton, nor would it attempt to sell stone to Warner Manufacturing Company at such price . . ..
This court is of the opinion that the market or field price must exist at Bellefonte if it exists at all and that prices from other markets are not relevant to establish the existence of a price at Bellefonte.
Bellefonte is a distinct limestone field area and market which exists as a lime producing center and not as a limestone-fluxstone producing center . . .. To establish a representative market or field price for Warner's limestone, we must limit the market to one in which the taxpayer would have and could have competed in order to obtain a price which is in fact representative . . .. The 'market' or 'field' concept is an economic concept which necessarily assumes the presence of actual competition.
The district court's reasoning and conclusion are at odds with the Supreme Court's decision in United States v. Cannelton Sewer Pipe Co., supra.
In Cannelton the Supreme Court specifically disapproved of the use of the profitability test in determining depletion allowances stating:
This indicates that fire clay and shale were ...
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