Respondent mines cement rock and manufactures it into Portland
cement. Section 611(a) of the Internal Revenue Code of 1954 allows
respondent, as a miner, to deduct from its taxable income a
percentage of its gross income from mining as a recoupment of
capital investment in the depleting mineral. Because respondent, as
an integrated miner-manufacturer, has no actual gross income from
mining, it must base its depletion deduction upon a constructive
gross income from mining. For each of the tax years at issue in
this case, respondent used the proportionate profits method
prescribed by the Treasury Regulations to compute such constructive
gross income. This method uses the costs of and proceeds from the
taxpayer's "first marketable product" to derive the constructive
gross income. The regulations define "first marketable product"
as
"the product (or group of essentially the same products)
produced by the taxpayer as a result of the application of
nonmining processes, in the form or condition in which such product
or products are first marketed in significant quantities by the
taxpayer."
The regulations provide that bulk and packaged products are
considered to be essentially the same product for this purpose. The
method required respondent to derive the portion of total proceeds
that reflects the ratio between its mining costs and its total
costs. Under the regulations, respondent must include in the total
costs figure "all the mining and nonmining costs paid or incurred
to produce, sell, and transport the first marketable product."
Respondent took the position that its "first marketable product"
was cement sold in bulk, rather than all cement sold, whether in
bulk or in bags. The costs of bags and bagging exceeded
respondent's bagging premium (the increase in proceeds for selling
cement in bags). Hence, respondent did not include proceeds from
the sale of cement in bags in the total proceeds figure of the
proportionate profits method. Nor did respondent include in the
total costs figure of the method the costs incurred for bags,
bagging, storage, distribution, and sales. The result was that the
proportionate profits method yielded a greater constructive gross
income from mining, and respondent reported a correspondingly
greater depletion deduction, than
Page 450 U. S. 157
it would have if it had included those proceeds in costs in its
computation by such method. Petitioner Commissioner of Internal
Revenue determined that respondent's reported tax liabilities were
deficient, taking the position that respondent's "first marketable
product" is cement, whether sold in bulk or in bags, and that
respondent should have included proceeds from its sale of bagged
cement in its calculation by the method, and also the costs
incurred for bags, bagging, storage, distribution, and sales.
Respondent then filed suit in the Tax Court for a redetermination.
That court accepted respondent's position, and the Court of Appeals
affirmed.
Held: The Treasury Regulations defining "first
marketable product" and prescribing the treatment of the costs of
bags, bagging, storage, distribution, and sales support the
Commissioner's position. Pp.
450 U. S.
165-174.
(a) This Court customarily defers to Treasury Regulations that
"implement the congressional mandate in some reasonable manner."
United States v. Correll, 389 U.
S. 299,
389 U. S. 307.
P.
450 U. S.
169.
(b) Respondent's contention that the Commissioner's position
will yield a distorted constructive gross income from mining if it
is applied without regard to the particular circumstances in this
case,
i.e., that respondent's bagging costs exceed its
bagging premium, misperceives both the meaning of "gross income
from mining" and the holding in
United States v. Cannelton
Sewer Pipe Co., 364 U. S. 76. Under
the Code and regulations, gross income from mining means income
received, whether actually or constructively, without regard to
value. In
Cannelton, in interpreting an earlier statutory
definition of "mining," the Court said that
"Congress intended integrated mining-manufacturing operations to
be treated as if the operator were selling the mineral mined to
himself for fabrication."
Id. at
364 U. S. 89.
This statement, in the context in which it occurs, does not support
respondent's contention that the method used to determine
constructive gross income must take into account forces that might
cause income to differ from value. Nor does the difference between
bagging costs and the bagging premium warrant a deviation from the
regulation's definition of "first marketable product." Pp.
450 U. S.
170-173.
(c) The statutory definition of "mining" to include all
processes up to the introduction of the kiln feed into the kiln,
"but not . . . any subsequent processes," forecloses respondent's
further contention that the costs it incurred in the storage,
distribution, and sales of its first marketable product, if they
must be included in the proportionate profits method, should be
treated as indirect costs which benefit the entire
mining-manufacturing operation, and hence should be allocated
between mining and manufacturing. The regulations recognizing
that
Page 450 U. S. 158
storage, distribution, and sales are "subsequent processes" are
reasonable. Pp.
450 U. S.
173-174.
614 F.2d 724 reversed.
POWELL, J., delivered the opinion for a unanimous Court.
JUSTICE POWELL delivered the opinion of the Court.
This case concerns the depletion deduction taken under § 611 of
the Internal Revenue Code of 1954, 26 U.S.C. § 611, by a company
that mines and manufactures Portland cement. The question presented
is whether the company's "first marketable product," for the
purpose of determining gross income from mining by the
proportionate profits method, is cement, whether sold in bulk or in
bags, or only cement sold in bulk.
I
Respondent, Portland Cement Co. of Utah, is an integrated
miner-manufacturer. It mines argillaceous limestone rock, known in
the trade as cement rock, and it manufactures the rock into
Portland cement. [
Footnote 1]
As a miner, respondent is allowed
Page 450 U. S. 159
by § 611(a) [
Footnote 2] to
deduct from its taxable income an amount that permits it a
recoupment of capital investment in the depleting mineral. Section
611(a) provides:
"In the case of mines, oil and gas wells, other natural
deposits, and timber, there shall be allowed as a deduction in
computing taxable income a reasonable allowance for depletion and
for depreciation of improvements, according to the peculiar
conditions in each case; such reasonable allowance in all cases to
be made under regulations prescribed by the Secretary. . . ."
The amount which respondent may deduct is a percentage of its
"gross income from the property." 26 U.S.C.
Page 450 U. S. 160
§ 613(a). [
Footnote 3] In
respondent's case, gross income from property means "gross income
from mining." [
Footnote 4]
Thus, respondent may deduct from its taxable income a percentage of
the gross income it receives from mining.
If respondent were only a miner, and therefore sold the product
of its mining, respondent's gross income from mining would be the
receipts from its sales. But as an integrated miner-manufacturer,
respondent itself uses the product of its mining. [
Footnote 5] Respondent therefore has no
actual gross income from mining, and must base its depletion
deduction upon a constructive gross income from mining.
See
United States v. Cannelton Sewer Pipe Co., 364 U. S.
76,
364 U. S. 86
(1960).
The Commissioner of Internal Revenue, petitioner here, has
prescribed in Treasury Regulations two methods of determining
constructive gross income from mining. If other miners in the
industry sell the product of their mining on an open market, then
miners who do not sell their product must use "the representative
market or field price" to compute their constructive gross income
from mining. Treas.Reg. § 1.613(c), 26 CFR § 1.613(c) (1980). If
other miners do not sell their mining product and a representative
market
Page 450 U. S. 161
or field price cannot be determined, as is the case in the
integrated cement industry, then constructive gross income from
mining must be determined by the "proportionate profits method." §
1.613-4(d). In addition to providing these two methods, the
Commissioner also has provided that a taxpayer may compute a
constructive gross income from mining by any other method that,
upon the taxpayer's request, the Commissioner determines to be more
appropriate than the proportionate profits method under the
taxpayer's particular circumstances. § 1.613-4 (d)(1)(ii).
[
Footnote 6] For each of the
tax years at issue in this case, respondent used the proportionate
profits method to compute its constructive gross income from
mining. [
Footnote 7]
The proportionate profits method uses the costs of and proceeds
from the taxpayer's "first marketable product" to derive the
taxpayer's constructive gross income from mining. The principle of
the method is that each dollar of the total costs which the
taxpayer incurs to produce, sell, and transport its first
marketable product earns the same proportionate part of the
proceeds from sales of that product. § 1.613-4(d)(4)(i). The
objective of the method is to identify -- from among the total
proceeds from sales of the first marketable product -- that portion
of the proceeds that has been earned by the costs which the
taxpayer incurred in its mining operations. To identify that
portion of the proceeds, the formula requires the taxpayer to
apportion the total proceeds from its first marketable product
between mining income and total income in the same ratio as its
mining costs bear to its total costs. The amount of proceeds which
bears the same
Page 450 U. S. 162
relationship to total proceeds as mining costs bear to total
costs is the taxpayer's constructive gross income from mining.
[
Footnote 8] On its returns for
the tax years in question, respondent took the position that its
first marketable product was cement sold in bulk. Respondent sells
most of its cement in bulk, by loading finished cement directly
from silos into customers' trucks or railroad tank cars. But
respondent also sells cement in bags to customers who want to buy
relatively
Page 450 U. S. 163
small quantities. [
Footnote
9] Cement is bagged by running it from the storage silo into a
bin above a bagging machine, which then pours the cement into bags
and seals them. The cost that respondent incurs for bags and
bagging exceeds the increase in proceeds, known as the bagging
premium, that respondent receives for selling cement in bags.
[
Footnote 10] Respondent
still receives a profit on the cement it sells in bags, but less
profit than if it had sold the cement in bulk. [
Footnote 11]
Because respondent considered its first marketable product to be
cement sold in bulk, rather than all cement sold, whether in bulk
or in bags, respondent did not include proceeds from the sale of
cement in bags in the total proceeds figure of the proportionate
profits method. Nor did respondent include in the total costs
figure the costs it incurred for bags, bagging, storage,
distribution, and sales. [
Footnote 12] The result of this position was that the
proportionate profits method yielded a greater constructive gross
income from mining, and respondent reported a correspondingly
greater depletion deduction, than would have been the case if
respondent had included those proceeds and costs in its computation
by the method.
After an audit, the Commissioner determined that
respondent's
Page 450 U. S. 164
reported tax liabilities were deficient. [
Footnote 13] The Commissioner took the position
that respondent's first marketable product is cement, whether sold
in bulk or in bags, that respondent therefore should have included
proceeds from its sales of bagged cement in its total proceeds
figure, and also that respondent should have included in its total
costs figure the costs it incurred for bags, bagging, storage,
distribution, and sales. Respondent then filed this suit in the Tax
Court for a redetermination.
The Tax Court, following its rule of applying the law of the
court of appeals to which an appeal would be taken, [
Footnote 14] relied upon
United States
v. Ideal Basic Industries, Inc., 404 F.2d 122 (CA10 1968),
cert. denied, 395 U.S. 936 (1969), and accepted
respondent's position. 36 TCM 578 (1977), � 77,137 P-H Memo TC.
Ideal Basic Industries had held that cement sold in bulk
is the first marketable product of an integrated
miner-manufacturer, and that revenues from sales of cement in bags,
and the costs of bags, bagging, storage, distribution, and sales,
should not be included in calculations under the proportionate
profits method. 404 F.2d at 125-126. The Court of Appeals for the
Tenth Circuit affirmed, also adhering to
Ideal Basic
Industries. 614 F.2d 724 (1980) (per curiam). It rejected the
Commissioner's argument that Treasury Regulations dictate the
opposite result. We granted the Commissioner's petition for a writ
of certiorari because other Courts of Appeals have accepted the
Commissioner's position in cases with substantially identical
facts. [
Footnote 15] 449
U.S. 818 (1980). We now reverse.
Page 450 U. S. 165
II
Congress requires in § 611 that the allowance of the depletion
deduction is "in all cases to be made under regulations prescribed
by the Secretary." The Commissioner provided the proportionate
profits method pursuant to this delegation of authority. [
Footnote 16] Also pursuant to this
authority, the Commissioner has promulgated regulations which
specifically address the questions before us. We find these
regulations dispositive.
The Treasury Regulations define "first marketable product"
as
"the product (or group of essentially the same products)
produced by the taxpayer as a result of the application of
nonmining processes, in the form or condition in which such product
or products are first marketed in significant quantities by the
taxpayer or by others in the taxpayer's marketing area."
26 CFR § 1.613-4(d)(4)(iv) (1980). This definition
continues:
"For this purpose, bulk and packaged products are considered to
be essentially the same product. . . . The first marketable product
or group of products does not include any product which results
from additional manufacturing or other nonmining processes applied
to the product or products first marketed in significant
quantities
Page 450 U. S. 166
by the taxpayer or others in the taxpayer's marketing area. For
example, if a cement manufacturer sells his own finished cement in
bulk and bags and also sells concrete blocks or dry ready-mix
aggregates containing additives, the finished cement, in bulk and
bags, constitutes the first marketable product or group of products
produced by him."
This regulation supports the Commissioner's position that cement
sold in bulk is the same product as cement sold in bags, and that
the container for the cement -- whether a tank car supplied by the
customer or a bag supplied by respondent -- does not distinguish
cement in bulk from cement in bags for the purpose of determining
respondent's first marketable product. Federal Courts of Appeals
other than the court below have relied on the regulation to uphold
the Commissioner's position.
General Portland Cement Co. v.
United States, 628 F.2d 321, 323 (CA5 1980),
cert.
pending, No. 80-1211;
United States v. California Portland
Cement Co., 413 F.2d 161 (CA9 1969). Indeed, the
Commissioner's position also is supported by respondent's
stipulation in the Tax Court that "[t]hat portion of its cement
sold . . . in bags is the same material as the cement sold in
bulk."
The Treasury Regulations also support the Commissioner's
position that respondent must include in the total costs figure of
the method the costs of bags, bagging, storage, and distribution.
To derive the portion of total proceeds that reflects the ratio
between respondent's mining costs and its total costs, respondent
must include in the total costs figure "all the mining and
nonmining costs paid or incurred to produce, sell, and transport
the first marketable product." 26 CFR § 1.613-4(d)(4)(ii) (1980).
The exclusion of nonmining costs from the total costs figure has
the effect of including the proportionate profits earned by such
costs within respondent's depletion base. Such inclusion
enhances
Page 450 U. S. 167
respondent's depletion base by proceeds that were not earned by
respondent's mining operation, and accordingly respondent's
depletion deduction becomes a recoupment for more than the
exhaustion of respondent's mine. It is undisputed, however, that
Congress allows the depletion deduction to permit recoupment for
the exhaustion of the mineral only.
See United States v.
Cannelton Sewer Pipe Co., 364 U.S. at
364 U. S. 81,
364 U. S. 85-86;
Commissioner v. Southwest Exploration Co., 350 U.
S. 308,
350 U. S. 312
(1956);
General Portland Cement Co. v. United States,
supra, at 322. It also is undisputed that the Treasury
Regulations classify the costs of bags, bagging, storage, and
distribution as nonmining costs. 26 CFR 1.613-4(d)(3) (iii) (1980).
[
Footnote 17] Courts of
Appeals have accepted the Commissioner's position on this question
also.
General Portland Cement Co. v. United States, supra,
at 326;
Southwestern Portland Cement Co. v. United States,
435 F.2d 504, 508, 510
Page 450 U. S. 168
(CA9 1970);
United States v. California Portland Cement Co.,
supra at 168-169;
Whitehall Cement Manufacturing Co. v.
United States, 369 F.2d 468, 473-474 (CA3, 1966).
Finally, the Treasury Regulations support the Commissioner's
position that respondent must include as nonmining costs the costs
incurred in selling the first marketable product. The regulations
provide that integrated miner-manufacturers must treat sales
expenses as nonmining costs absent evidence that unintegrated
miners typically incur such expenses in selling their mineral
product. §§ 1.613-4(d)(3)(iv), 1.613-5(c)(4)(ii). [
Footnote 18] These regulations simply
recognize that sales of finished cement occur after the point at
which an integrated miner-manufacturer's mining phase ends and its
manufacturing phase begins.
See 26 U.S.C. § 613(c)(4)(F);
cf. General Portland Cement Co. v. United States, supra at
333. Integrated miner-manufacturers may allocate selling costs
between their mining and manufacturing phases
Page 450 U. S. 169
if they can show that unintegrated miners typically incur
selling expenses, for that maintains a parity of tax treatment
between integrated miner-manufacturers and unintegrated miners. But
respondent has not put forth such evidence in this case, there
being no unintegrated miners in the cement industry.
These regulations command our respect, for Congress has
delegated to the Secretary of the Treasury, not to this Court, the
task "of administering the tax laws of the Nation."
United
States v. Cartwright, 411 U. S. 546,
411 U. S. 550
(1973);
accord, United States v. Correll, 389 U.
S. 299,
389 U. S. 307
(1967);
see 26 U.S.C. § 7805(a). We therefore must defer
to Treasury Regulations that "implement the congressional mandate
in some reasonable manner."
United States v. Correll,
supra at
389 U. S. 307;
accord, National Muffler Dealers Assn. v. United States,
440 U. S. 472,
440 U. S.
476-477 (1979). To put the same principle conversely,
Treasury Regulations "must be sustained unless unreasonable and
plainly inconsistent with the revenue statutes."
Commissioner
v. South Texas Lumber Co., 333 U. S. 496,
333 U. S. 501
(1948);
accord, Fulman v. United States, 434 U.
S. 528,
434 U. S. 533
(1978);
Bingler v. Johnson, 394 U.
S. 741,
394 U. S.
749-751 (1969). Indeed, our customary deference to
Treasury Regulations is particularly appropriate in this case, for
the Court previously has recognized the necessity of a "broad
rulemaking delegation" of authority in the area of depletion:
"As Congress obviously could not foresee the multifarious
circumstances which would involve questions of depletion, it
delegated to the Commissioner the duty of making the
regulations."
Douglas v. Commissioner, 322 U.
S. 275,
322 U. S. 280,
281 (1944); [
Footnote 19]
accord, Helvering v. Wilshire Oil Co., Inc., 308 U. S.
90,
308 U. S.
102-103 (1939).
Page 450 U. S. 170
III
Respondent does not contend that these Treasury Regulations are
either unreasonable on their face or inconsistent with the Code. To
the contrary, respondent acknowledges that several courts have
found the regulations to prescribe a reasonable formula for
determining gross income from mining in cases where no actual
income is realized and no representative market price is available.
Respondent's contention is that the Commissioner's position will
yield a distorted constructive gross income from mining if it is
applied without regard to the particular circumstances in this
case.
A
Respondent's position rests upon (i) an assumption about gross
income from mining and (ii) an interpretation of this Court's
decision in
United States v. Cannelton Sewer Pipe Co.,
364 U. S. 76
(1960). Respondent deems "gross income from mining," for the
purpose of the percentage depletion deduction, to be the same thing
as "the market value of the extracted minerals" at the end of the
mining phase, Brief for Respondent 14; and respondent reads
Cannelton to hold that, for the purpose of determining
gross income from mining, the mining phase of an integrated
mining-manufacturing operation should be considered one independent
business selling its product to another independent business, the
manufacturing phase. On the basis of these notions, respondent
perceives a potential for distortion of constructive gross income
inhering in the premise of the proportionate profits method. The
premise of that method is that each dollar of costs, mining and
nonmining alike, earns the same proportionate part of the proceeds
from the first marketable product. In respondent's view, however,
it simply will not be true in some cases that each dollar of costs
earns the same share of proceeds. For example, respondent contends,
market forces and arm's length negotiations may so affect market
value when an independent
Page 450 U. S. 171
miner sells to an independent manufacturer that it will not be
true that each dollar of cost earns the same share of proceeds; and
respondent contends that it certainly is not true in this case that
each of its dollars of cost earned the same share of proceeds, for
the cost of bags and bagging exceeds the bagging premium.
Respondent does not conclude from this reasoning that the
proportionate profits method is unreasonable in itself. Rather, it
argues that the method will distort constructive gross income from
mining to the extent that the particular facts of a case deviate
from the method's premise, and that the possibility of distortion
increases as costs and proceeds attending post-mining processes are
included. To remedy this, respondent asks that the Commissioner
take into account the "peculiar" circumstance that respondent's
bagging costs exceed its bagging premium. [
Footnote 20] If this were done, respondent says,
the distortion that it perceives could be obviated by considering
its first marketable product to be only cement sold in bulk, not
cement sold both in bulk and in bags. If only bulk sales are
considered to be the first marketable product, then the proceeds
from cement sold in bags, and the costs of bags, bagging, storage,
and distribution, will
Page 450 U. S. 172
be excluded from the proportionate profits method. This was
essentially the reasoning and holding of
Ideal Basic
Industries, 404 F.2d at 125-127.
We cannot accept respondent's contention, for it misperceives
both the meaning of "gross income from mining" and the holding in
Cannelton. Respondent cites nothing to support the
assumption that gross income from mining means market value of the
mining product. The language of §§ 613(a) and(c) does not support
this assumption; and
Helvering v. Mountain Producers
Corp., 303 U. S. 376,
303 U. S.
381-382 (1938), rejected it. [
Footnote 21]
See also Commissioner v. Southwest
Exploration Co., 350 U.S. at
350 U. S. 312.
Under the Code and regulations, gross income from mining means
income received, whether actually or constructively, without regard
to value. Nor does
Cannelton support respondent's
argument. That case did not involve the proportionate profits
method of determining constructive gross income from mining. The
question there, under an earlier statutory definition of "mining,"
was when the mining phase ended in the operation of an integrated
miner-manufacturer of burnt clay products.
See 364 U.S. at
364 U. S. 84,
and n. 8. In interpreting the definition of "mining," the Court
observed that
"the Congress intended integrated
Page 450 U. S. 173
mining-manufacturing operations to be treated as if the operator
were selling the mineral mined to himself for fabrication."
Id. at
364 U. S. 89.
This statement, in the context in which it occurs, does not support
respondent's contention that the method used to determine
constructive gross income must take into account forces that might
cause income to differ from value.
Nor does the difference between bagging costs and the bagging
premium warrant a deviation from the Treasury Regulation's
definition of "first marketable product." Respondent receives a net
profit on every bag of cement that it sells, despite the fact that
bagging costs exceed markup on the product. It is reasonable to
infer, therefore, that the costs of bagging the cement contribute
to respondent's profits from sales of cement in bags. Courts of
Appeals other than the court below have found this inference
reasonable.
General Portland Cement Co. v. United States,
628 F.2d at 330-331;
Whitehall Cement Manufacturing Co. v.
United States, 369 F.2d at 474;
see also United States v.
California Portland Cement, 413 F.2d at 169.
B
There remains only respondent's contention that the costs it
incurred in the storage, distribution, and sales of its first
marketable product, if they must be included in the proportionate
profits method, should be treated as indirect costs which benefit
the entire mining-manufacturing operation. For that reason,
respondent urges that these costs should be allocated between
mining and manufacturing.
The statutory definition of "mining" forecloses this contention.
Section 613(c)(4)(F) of the Code defines "mining" to include all
processes up to the introduction of the kiln feed into the kiln,
"but not . . . any subsequent process." The regulations recognize
that storage, distribution, and sales are "subsequent process[es],"
and we find the regulations reasonable. 26 CFR § 1.613(d)(3)(iii)
(1980) (storage and
Page 450 U. S. 174
distribution); §§ 1.614(d)(3)(iv) and 1.613-5(c)(4)(ii) (sales).
These regulations allow a different treatment only for sales
expenses.
See supra at
450 U. S.
168-160. Respondent, who bore the burden of proof in the
Tax Court, made no showing to warrant treating sales expenses as
anything but nonmining costs. [
Footnote 22]
IV
In sum, the Treasury Regulations defining first marketable
product, and those prescribing the treatment of the costs of bags,
bagging, storage, distribution, and sales, dictate the result in
this case. To be sure, the proportionate profits method can only
approximate gross income from mining. The Commissioner does not
contend that the method does more than approximate. But an
approximation must suffice absent an actual gross income from
mining, and respondent concedes that the proportionate profits
method is a reasonable means of approximating. The method also is a
means that respondent accepted, as it did not seek the
Commissioner's approval of any other method. [
Footnote 23] Accordingly, respondent must apply
the method as prescribed by the Commissioner.
The judgment of the Court of Appeals is reversed.
It is so ordered.
[
Footnote 1]
As suggested by the term "integrated miner-manufacturer,"
respondent's operation has two phases: mining and manufacturing.
The mining phase begins with the blasting of cement rock from the
face of respondent's quarry. After crushing the rock into pieces
about one cubic inch in size, respondent transports the rock to its
processing plant, which is about 12 miles from its quarry in Utah.
Respondent then grinds the rock finely and adds water, producing a
mud known as "slurry." Respondent feeds the slurry from tanks into
fired kilns that heat it into a hard, glass-like substance known as
a "clinker." Once the clinker is cooled, respondent grinds it with
gypsum to produce finished Portland cement. The finished cement is
placed in storage silos to await sales to customers.
There is no dispute as to when respondent's mining phase ends
and its manufacturing phase begins. Section 613(c)(2) of the Code,
26 U.S.C. § 613(c)(2), defines "mining" to include
"not merely the extraction of the ores or minerals from the
ground but also the treatment process considered as mining
described in paragraph (4) (and the treatment processes necessary
or incidental thereto), and so much of the transportation of ores
or minerals (whether or not by common carrier) from the point of
extraction from the ground to the plants or mills in which such
treatment processes are applied thereto as is not in excess of 50
miles. . . ."
Paragraph (4)(F) of § 613(c) describes the treatment processes
considered as mining to be --
"in the case of calcium carbonates and other minerals when used
in making cement -- all processes (other than preheating of the
kiln feed) applied prior to the introduction of the kiln feed into
the kiln, but not including any subsequent process."
When these definitions are applied, respondent's mining phase
ends when the slurry has been produced and is stored in tanks to
await introduction into the kilns. The Tax Court so found, 36 TCM
578, 579 (1977), 77.137, p. 582, P-H Memo TC, and the parties
agree.
[
Footnote 2]
All citations to the Internal Revenue Code are to the Code of
1954, unless stated otherwise.
[
Footnote 3]
Section 613(a) reads in pertinent part:
"In the case of the mines, wells, and other natural deposits
listed in subsection (b), the allowance for depletion under section
611 shall be the percentage, specified in subsection (b), of the
gross income from the property. . . . "
For tax years beginning on or prior to October 9, 1969, the
percentage specified by subsection (b) of § 613 for the depletion
of calcium carbonates, the chemical name for cement rock, was 15%.
26 U.S.C. § 613(b)(7) (1964 ed.). For tax years beginning after
October 9, 1969, the percentage was 14%. 26 U.S.C. § 613(b)(7).
[
Footnote 4]
Title 26 U.S.C. § 613(c)(1) (1976 ed., Supp. III) provides:
"The term 'gross income from the property' means, in the case of
a property other than an oil or gas well and other than a
geothermal deposit, the gross income from mining."
[
Footnote 5]
See n 1,
supra.
[
Footnote 6]
The Commissioner himself has suggested two other methods that a
taxpayer may propose as more appropriate than the proportionate
profits method.
See 26 CFR §§ 1.613(d)(1)(ii)(e), (5),
(6), (1980).
[
Footnote 7]
The three tax years at issue in this case are those ending on
March 31, 1970, 1971, and 1972.
[
Footnote 8]
The Treasury Regulations explain the proportionate profits
method this way:
"(i) The objective of the 'proportionate profits method' of
computation is to ascertain gross income from mining by applying
the principle that each dollar of the total costs paid or incurred
to produce, sell, and transport the first marketable product or
group of products (as defined in subdivision (iv) of this
subparagraph) earns the same percentage of profit. Accordingly, in
the proportionate profits method, no ranking of costs is
permissible which results in excluding or minimizing the effect of
any costs incurred to produce, sell, and transport the first
marketable product or group of products. . . ."
"(ii) The proportionate profits method of computation is applied
by multiplying the taxpayer's gross sales (actual or constructive)
of his first marketable product or group of products . . . by a
fraction whose numerator is the sum of all the costs allocable to
those mining processes which are applied to produce, sell, and
transport the first marketable product or group of products, and
whose denominator is the total of all the mining and nonmining
costs paid or incurred to produce, sell, and transport the first
marketable product or group of products. . . . The method as
described herein is merely a restatement of the method formerly set
forth in the second sentence of Regulations 118, section
39.23(m)-1(e)(3) (1939 Code). The proportionate profits method of
computation may be illustrated by the following equation:"
Mining Costs
------------ x Gross Sales = Gross Income
Total Costs from Mining
26 CFR §§ 1.613-4(d)(4)(i), (ii) (1980).
The Tax Court has captured the gist of the method in fewer
words:
"The purpose of the proportionate profits formula is to separate
the sales price of a product into its mining and nonmining
components."
North Carolina Granite Corp. v. Commissioner, 56 T.C.
1281, 1291 (1971).
[
Footnote 9]
During the tax years in question, respondent sold approximately
92-94% of its finished cement in bulk. Respondent sold the other
6-8% in bags.
[
Footnote 10]
The parties stipulated in the Tax Court that respondent's
bagging costs exceeded the bagging premium by $55,410.88 for tax
year 1970, by $66,667.45 for tax year 1971, and by $64,590.41 for
tax year 1972.
[
Footnote 11]
The parties stipulated in the Tax Court
"that, although for each year there was an excess of costs over
bag premium, . . . [respondent] nevertheless realized a net profit
on the sale of each bag of cement."
[
Footnote 12]
To state respondent's position in the formulaic terms used in
Treas.Reg. § 1.613-4(d)(4)(ii), 26 CFR § 1.613-4 (d)(4)(ii) (1980),
respondent did not include proceeds from the sale of cement in bags
in the multiplier of the proportionate profits method; and
respondent did not include the costs of bags, bagging, storage,
distribution, and sales in the denominator of the method's
fraction.
[
Footnote 13]
The asserted deficiencies were $44,200, $41,509, and $7,175 for
tax years 1970, 1971, and 1972, respectively.
See 36 TCM
at 578, � 77, 137, p. 582, P-H Memo TC.
[
Footnote 14]
See Golsen v. Commissioner, 54 T.C. 742 (1970),
aff'd on other grounds, 445 F.2d 985 (CA10),
cert.
denied, 404 U.S. 940 (1971).
[
Footnote 15]
See General Portland Cement Co. v. United States, 628
F.2d 321 (CA5 1980),
cert. pending, No. 80-1211;
Arvonia-Buckingham Slate Co. v. United States, 426 F.2d
484 (CA4 1970);
United States v. California Portland Cement
Co., 413 F.2d 161 (CA9 1969);
Whitehall Cement
Manufacturing Co. v. United States, 369 F.2d 468 (CA3
1966).
[
Footnote 16]
The Commissioner has prescribed the computation of gross income
from mining by reference to proportionate profits in successive
regulations since 1940. The principle now set forth in Treas.Reg. §
1.613-4(d)(4) first appeared in Treas. Regs. 103, § 19.23 (m)-1(f)
(1940), and it continued in successive regulations to the 1939
Code. Treas. Regs. 111, § 29.23(m)-1(f) (1943); Treas. Regs. 118, §
39.23(m)-(e)(3) (1953). Treasury Regulations 118 continued in force
under the 1954 Code until superseded by Treas.Reg. §§
1.613-3(d)(1)(i), (ii).
See T. D. 6965, 1968-2 Cum.Bull.
265. These regulations were superseded by the present Treas.Reg. §§
1.613-4(d)(1) and (4)(i), (ii), 26 CFR §§ 1.613-4(d)(1) and (4)(i),
(ii) (1980).
See T. D. 7170, 1972-1 Cum.Bull. 178.
[
Footnote 17]
Title 26 CFR § 1.613(d)(3)(iii) (1980) provides in pertinent
part:
"In determining gross income from mining by use of methods based
on the taxpayer's costs -- "
"(a) The costs attributable to containers, bags, packages,
pallets, and similar items as well as the costs of materials and
labor attributable to bagging, packaging, palletizing, or similar
operations shall be considered as nonmining costs."
"
* * * *"
"(c) The costs attributable to the operation of warehouses or
distribution terminals for manufactured products shall be
considered as nonmining costs."
"Accordingly, all profits attributable thereto are treated as
nonmining profits."
The court below did not dispute the regulations'
characterization of these costs. 614 F.2d 724, 725 (1980). To the
contrary,
United States v. Ideal Basic Industries, Inc.,
404 F.2d 122 (CA10 1968),
cert. denied, 395 U.S. 936
(1969), concluded before these regulations were promulgated that
such costs are nonmining costs. 404 F.2d at 125-126. But the court,
following
Ideal Basic Industries, excluded these costs
from the proportionate profits method on the ground that they were
not incurred in producing and transporting cement sold in bulk.
See 614 F.2d at 726.
[
Footnote 18]
Title 26 CFR § 1.613-4(d)(3)(iv) (1980) provides:
"In computing gross income from mining by the use of methods
based on the taxpayer's costs, the principles set forth in
paragraph (c) of § 1.613-5 shall apply when determining whether
selling expenses . . . are to be treated, in whole or in part, as
mining costs or as nonmining costs. To the extent that selling
expenses . . . are treated as nonmining costs, all profits
attributable thereto are treated as nonmining profits."
Title 26 CFR § 1.613-5(c)(4)(ii) (1980) provides:
"A reasonable portion of the expenses of selling a refined,
manufactured, or fabricated product shall be subtracted from gross
income from the property. Such reasonable portion shall be
equivalent to the typical selling expenses which are incurred by
unintegrated miners or producers in the same mineral industry so as
to maintain equality in the tax treatment of unintegrated miners or
producers in comparison with integrated miner-manufacturers or
producer-manufacturers. If unintegrated miners or producers in the
same mineral industry do not typically incur any selling expenses,
then no portion of the expenses of selling a refined, manufactured,
or fabricated product shall be subtracted from gross income from
the property when determining the taxpayer's taxable income from
the property."
[
Footnote 19]
Douglas v. Commissioner involved § 23, Revenue Act of
1936, which was identical to the present § 611 in all ways
significant to this case.
See 322 U.S. at
322 U. S.
278.
[
Footnote 20]
In support of its argument, respondent relies in part upon the
language of § 611(a), which provides that the depletion deduction
is to be allowed "according to the peculiar conditions in each
case." Respondent has read this phrase out of context. In fuller
reading, § 611(a) provides:
"
In the case of mines, oil and gas wells, other natural
deposits, and timber, there shall be allowed as a deduction in
computing taxable income a reasonable allowance for depletion and
for depreciation of improvements, according to the peculiar
conditions
in each case; such reasonable allowance
in
all cases to be made under regulations prescribed by the
Secretary. . . ."
(Emphasis added.) Read in context, "in each case" refers to the
different types of depletable resource, not to individual
taxpayers. Accordingly, this language does not support respondent's
argument that the Treasury Regulations providing the proportionate
profits method must be modified with regard to the circumstances in
each case.
[
Footnote 21]
Helvering v. Mountain Producers Corp. involved a
depletion deduction in the case of oil and gas wells. By contract,
the owner of oil-field leases agreed to sell oil to an oil refiner
at a set price. In return, the refiner agreed, as part of the price
of the oil, to conduct all operations to develop and produce the
oil. The owner then claimed that its "gross income from the
property," for the purpose of percentage depletion deduction,
consisted of the total cash payments received from the refiner,
plus the cost of production defrayed by the refiner under the
contract. 303 U.S. at
303 U. S.
378-379. The Court rejected this claim. It held that the
deductible percentage of gross income "is a fixed factor, not to be
increased or lessened by asserted equities," such as the fact that
"gross income from time to time may be more or less than market
value according to the bearing of particular contracts."
Id. at
303 U. S. 382.
The Court added: "With the motives which lead the taxpayer to be
satisfied with the proceeds he receives we are not concerned."
Ibid.
[
Footnote 22]
Respondent relies upon decisions which hold that an integrated
miner-manufacturer may allocate sales expenses between mining and
nonmining costs.
E.g., United States v. California Portland
Cement Co., 413 F.2d at 170-172. These cases were decided
before the issuance in 1972 of Treas. Regs. §§ 1.613-4(d)(3)(iv)
and 1.613-5(c)(4)(ii). Prior to 1972, no regulations answered the
question whether selling expenses were nonmining costs or allocable
between mining and nonmining costs. The 1972 regulations assume, on
the basis of the statutory definition of "mining," that they are
nonmining costs. Nonetheless, the integrated miner-manufacturer may
show otherwise.
[
Footnote 23]
See supra at
450 U. S. 161,
and n. 6.