UNITED STATES v. CANNELTON SEWER PIPE CO.
No. 513
Supreme Court of the United States
Argued May 19, 1960.—Decided June 27, 1960.
364 U.S. 76
Erwin N. Griswold argued the cause for respondent. With him on the brief was Howard P. Travis.
Robert E. Lee Hall and Richard L. Hirshberg filed a brief for the National Coal Association, as amicus curiae.
MR. JUSTICE CLARK delivered the opinion of the Court.
This income tax refund suit involves the statutory percentage depletion allowance to which respondent, an integrated miner-manufacturer of burnt clay products from fire clay and shale, is entitled under the Internal Revenuе Code of 1939.1
The percentage granted by the statute is on respondent‘s “gross income from mining.” It defines “mining” to include the “ordinary treatment processes normally applied by mine owners ... to obtain the commercially marketable mineral product or products.” Respondent claimed that its first “commercially marketable mineral product” is sewer pipe and other vitrified articles. Alternatively, it contended that depletion should be based on the price of 80 tons of ground fire clay and shale actually sold during the tax year in question. The District Court agreed with respondent‘s first claim. The Court of Appeals affirmed, holding that respondent could not profitably sell its raw fire clay and shale without processing it into finished products, and that its statutory percentage depletion was therefore properly based on its gross sales
I.
During the tax year ending November 30, 1951, the respondent owned and operated an underground mine from which it produced fire clay and shale in proportions of 60% fire clay and 40% shale. It transported the raw mineral product by truck to its plant at Cannelton, Indiana, about one and one-half miles distant. There it processed and fabricated the fire clay and shale into vitrified sewer pipe, flue lining and related products. In this process, the clay and shale is first ground into a pulverized form about as fine as talcum powder. The
Not all clays and shales are suitable for respondent‘s operations. They must have plasticity, special drying qualities and be able to withstand high temperatures. Respondent‘s clay, known as Cannelton clay, is the deepest clay mined in Indiana and, respondent says, yields the best sewer pipe. Its cost of removing and delivering the same to its plant was $2.418 per ton in 1951. Respondent used some 38,473 tons of clay and shale in its operations that year and sold approximately 80 tons of ground fire clay and shale in bаgs at a price of $22.88 per ton. Net sales of its finished wares amounted to approximately one and a half million dollars.
In connection with its tax assessment for the year in question, respondent filed a document in which it stated that “we used as a basis for calculating the gross income from our mining operations of shale and fire clay the point in our manufacturing operations at which we first arrive with a commercially marketable product, which is ground fire clay. This product arrives after the raw mineral is crushed and granulated to such extent that by the addition of water it can be made into a mortar for use in laying or setting fire or refractory brick. This ground fire clay has a definite market and an ascertainable market value at any particular time and is the same product from which our end product, sewer tile, is made simply by the addition of water and the necessary baking process.” In this return it based the value of the ground
The record shows and the District Court found that in 1951 there were substantial sales of raw fire clay and shale in Indiana, mostly in the vicinity of Brazil, about 140 miles from Cannelton. The average price there was $1.60 to $1.90 per ton for fire clay and $1 per ton for shale. Transportation costs from Brazil to Cannelton ran from $4.58 to $5.50 per ton. In Kentucky, across the river from respondent‘s plant, it appears that fire clay and shale of the same grade were mined and sold3 before, dur-
II.
We have carefully studied the legislative history of the depletion allowance, including the voluminous materials furnished by the parties, not only in their briefs but in the exhaustive appendices and the record.4 We shall not burden this opinion with its repetition.
In summary, mineral depletion for tax purposes is an allowance from income for the exhaustion of capital assets. Anderson v. Helvering, 310 U. S. 404 (1940). In addition, it is based on the beliеf that its allowance encourages extensive exploration and increasing discoveries of additional minerals to the benefit of the economy and strength of the Nation. We are not concerned with the validity of this theory or with the statutory policy. Our sole function is application of the congressional mandate. A study of the materials indicates that percentage depletion first came into the tax structure in 1926, when the Congress granted it to oil and gas producers. The percentage allowed was based on “gross income from the property,” which was described as “the gross receipts from the sale of oil and gas as it is delivered from the property.” Preliminary Report, Joint Committee on Internal Revenue Taxation, Vol. I, Part 2 (1927). The report continued that, as to the integrated
Thereafter, in 1932, percentage depletion was extended to metal mines, coal, and sulphur. The mining engineer of the Joint Committee, Alex. R. Shepherd, urged in a report to the Congress5 that depletion for metal mines be computed, as in the oil and gas industry, on a percentage-of-income basis, and the Revenue Act of 1932 was so drawn. The Shepherd Report pointed out that the percentage basis for oil and gas depletion had been in force for over a year and had “functioned satisfactorily both from econоmical and administrative viewpoints and without loss of revenue.” It added that “careful study of this method as applied to metal mines indicates that the same results will be attained in practice as in the case of oil and gas,” but that, because of varied practices in the mining industry, it would be necessary to determine “the point in accounting at which” gross income from the property mined could be calculated. It recommended that “it is logical to peg ‘gross income from the property’ f. o. b. cars at mine,” i. e., net smelter returns, recognizing that processing beyоnd this point should not be included in calculating “gross income from the property.” While as to certain metals, viz., gold, silver, or copper, the report suggested that gross income should be based on receipts from “the sale of the crude, partially beneficiated or refined” product, this was but to make
The Congress in fashioning the 1932 Act took into account these recommendations. It incorporated a provision in the Act allowing percentage depletion for coal and metal mines and sulphur, based on the “gross income from the property.”
As now enacted, the section provides that “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,” plus transportation from the place of extraction to the “plants or mills in which the ordinary treatment processes are applied thereto,” not exceeding 50 miles.8 It then defines “ordinary treatment processes”
From this legislative history, we conclude that Congress intended to grant miners a depletion allowance based on the constructive income from the raw mineral product, if marketable in that form, and not on the value of the finished articles.
III.
The findings are that three-fifths of the fire clay produced in Indiana in 1951 was sold in its raw state. This indicates a substantial market for the raw mineral. In addition, large sales of raw fire clay and shale were mаde across the river in Kentucky. This indicates that fire clay and shale were “commercially marketable” in their raw state unless that phrase also implies marketability at a profit. We believe it does not. Proof of these sales is significant not because it reveals an ability to sell profitably—which the respondent could not do—but because the substantial tonnage being sold in a raw state provides conclusive proof that, when extracted from the mine, the fire clay and shale are in such a state that they are ready for industrial use or consumption—in shоrt, they have passed the “mining” state on which the depletion principle operates. It would be strange, indeed, to ascribe to the Congress an intent to permit each miner to adopt processes peculiar to his individual operation. Depletion, as we have said, is an allowance for the exhaustion of capital assets. It is not a subsidy to manufacturers or the high-cost mine operator. The value of respondent‘s vitrified clay products, obtained by expensive manufacturing processes, bears little relation to the value of its minеrals. The question in depletion is what allowance is necessary to permit tax-free recovery of the capital value of the minerals.
Respondent insists that its miner-manufacturer status makes some difference. We think not. It is true that the
IV.
We now reach what “ordinary treatment processes” are available to respondent under the statute. As the principal industry witness put it at hearings before the Congress: “Obviously it was not the intent of Congress that those processes which would take your products and make them into different products having very different uses should be considered, as the basis of depletion.”9 But respondent says that the processes it uses
Respondent further contends, however, that it must utilize these processes in order to obtain a “commercially marketable mineral product or products.” It points out that its underground method of mining prevents it from selling its raw fire clay and shale. This position leads to the conclusion that respondent‘s mineral product has no value to it in the ground. If this be true, then there could be no depletion. One cannot deplete nothing. On the other hand, respondent alleges that its minerals yield “the best sewer pipe which is madе in Indiana.” If this be true, then respondent‘s problem is one purely of cost of recovery, an item which, as we have said, has nothing to do with value in the depletion formulae. Depletion, as we read the legislative history, was designed not to recompense for costs of recovery but for exhaustion of mineral assets alone. If it were extended as respondent asks, the miner-manufacturer would enjoy, in addition to a depletion allowance on his minerals, a similar allowance on his manufacturing costs, including depreciation on his manufacturing plant, mаchinery and facilities. Nor do we read the use by the Congress of the plural word “products” in the “commercially marketable” phrase as indicating that normal processing techniques might include the fabrication of different products from the same mineral. We believe that the Congress was only recognizing that in mining operations often more than one mineral product was recovered in its raw state.
Nor do we believe that the District Court and Court of Appeals cases involving percentage depletion and cited by respondent are apposite here.10 We do not, however, indicate any approval of their holdings. It is sufficient to say that on their facts they are all distinguishable.
It is so ordered.
MR. JUSTICE HARLAN, concurring in the result.
In joining the judgment in this case I shall refer only to one matter which, among the voluminous data presented by the parties, is for me by far the most telling in favor of the Government‘s position.
Treasury Regulation 77, promulgated in 1933 under the
This history, in my view, provides an authoritative and controlling gloss upon the term “commercially marketable mineral product or products” in the statutory definition of “mining,” which in turn constitutes the “property” with which the statute deals. See Helvering v. Wilshire Oil Co., supra. It rеsults, on this record, in limiting respondent‘s basis for depletion to its constructive income from raw fire clay and shale.