United States v. Cannelton Sewer Pipe Co.Annotate this Case
364 U.S. 76
U.S. Supreme Court
United States v. Cannelton Sewer Pipe Co., 364 U.S. 76 (1960)
United States v. Cannelton Sewer Pipe Co.
Argued May 19, 1960
Decided June 27,1960
364 U.S. 76
CERTIORARI TO THE UNITED STATES COURT OF APPEALS
FOR THE SEVENTH CIRCUIT
The Internal Revenue Code of 1939 permitted taxpayers to deduct as a depletion allowance a percentage of "gross income from mining," and defined "mining" as including the
"ordinary treatment processes normally applied by mine owners . . . to obtain the commercially marketable mineral product or products."
Respondent mines fire clay and shale for which there is a market, but which it utilizes to manufacture sewer pipe and other vitrified articles. It claims that it could not profitably market its raw fire clay and shale without processing them into finished products.
Held: Respondent's depletion allowance must be based, not upon the value of the sewer pipe and other vitrified products which it manufactures, but upon the value of its raw fire clay and shale after application of ordinary treatment processes normally applied in the recovery of those materials by miners not engaged in the manufacture of finished products. Pp. 364 U. S. 77-90.
(a) 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 finished articles. Pp. 364 U. S. 81-86.
(b) A depletion allowance is an allowance for the exhaustion of capital assets -- not a subsidy to manufacturers or to high-cost mine operators. P. 364 U. S. 86.
(c) That respondent is both a miner and a manufacturer does not entitle it to treatment different from that accorded miners of the same raw materials who are not manufacturers. Pp. 364 U. S. 86-88.
(d) That respondent's underground method of mining prevents it from selling its raw fire clay and shale does not entitle it to treatment different from that accorded to the other miners of the same raw materials. Pp. 364 U. S. 88-89.
268 F.2d 334 reversed.
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 Revenue Code of 1939. [Footnote 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
of the latter. 268 F.2d 334. The Government contends that the product from which "gross income from mining" is computed is an industry-wide test, and cannot be reduced to a particular operation that a taxpayer might find profitable. The Government further argues that, while the statute permits ordinary treatment processes normally applied by miners to the raw product of their mines to produce a commercially marketable mineral product, it does not embrace the fabrication of the mineral product into finished articles. In view of the importance of the question to taxpayers as well as to the Government, we granted certiorari. 361 U.S. 923. We disagree with respondent's contention that the issue is not presented by this record, and we therefore reach the merits. We have concluded that, under the mandate of the statute, respondent's "gross income from mining" under the findings here is the value of its raw fire clay and shale, after the application of the ordinary treatment processes normally applied by nonintegrated miners engaged in the recovery of those minerals. [Footnote 2]
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 at talcum powder. The
powder is then mixed with water in a pug mill and becomes a plastic mass, which is formed by machines into the shape of the finished ware desired. The ware is then placed in dryers, where heat of less than 212
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