Petition for Writ of Certiorari — American Gilsonite Co. v. Commissioner

FILE COPY. “pe oye

see Dawes.

_ SUPREME COURT OF .THE UNITED STATES

October Term, 1958

Ae ! : arenas - : ]

No. 5 8 :

AMERICAN GILSONITE COMPANY, Petitioner, °—

a 5 . aed -

COMMISSIONER OF INTERNAL REV 2NU | >

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" PETIFION FOR WRIT OF CERTIORARI TO*THE UN ITED | \

STATES COURT OF APPEALS FOR THE TENTH CIRCUIT

. ALLAN E. MECHAM ?

_ Counsel of Record — ie

301 South State St.

” Salt Lake City, Utah.

ELLIOTT LEE PRATT | rar

Counsel and Attorney for. ar

Petitioner

351 South State St.

Salt Lake City, Utah

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Opinions Below ..... RAE. eR ee heMie ate tee oe Nosenstasamutrceectea :* ann

Statement of Jurisdiction. ee Se Eee oueainea ae & oe

~ Questions Presented............ a Sirern C i lulaecundinaodaadanake seeks lade 2

Statutes Involved ................. ui PAL Aaa RAT a oe : ie One 2

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Reasons for Allowance of Writs... ......5..::c:ccccccececeeceeeeseeqeeeeeeeens 5 .

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Appendix B — Opinion of Court of Appeals issdduacks wasdarnnlee at cinslecccvee 18_ ;

Apperidix C — U.S. v. Utco Products, ‘Ine., cae aint Seer 21.

® iad

: CITATIONS ;

. ee

a ico!

Dragon Cement Company v. United States, 1 Cir. 244 F. 2d_

SiS, Cort. denied, S66°U.S. 38.2 ltt 549

“Matagarda Shell Company, 29 T.C. No. 111, Decision 22875 Eblveeas 43

New ldria Quick Silver Mining Company V.. Commissioner,

9 Cir. 144 F. BN RB nn sss cnne tee enseeaneestgepncnael les cigetacniaep a

4 Townsend ‘v. Hitchcock Corporation, 4 Cir. 233 F. 2d Le ware i 32% :

United States v. Cherokee Brick and Tile ‘Company, 5 Cir. 218 .

Se I si icicseiahecocbs nce ineccaeo sae adnan ahaha alae 6, 9

United’ States v. ‘Whey Bros. Brick and Tile Company. 5 Cir.

242 F. 2d 708, Cert. Denied 353 U. a rigane

a4, . a . «

. ch

t 2 .

INDEX— (Continued)

United shites v. Sapulpa Brick and Tile Corporatio

© 289 F. 2d 6942.00 cece aie: Tal -

United States v. Utco Products, Inc., 19 Cir, 257 F. 2d 5,7, 21

; STATUTES ,

I IN aie 3

Sec. 23 (m) Internal Revenue Code of 1939................ a

Sec. 114 (b) (4) as amended, Internal Revenue Code of 1939. 8, 1h

__ See, 3797 (b) Internal Revenue Code of 1939..............0.000000000.. 11,17

tre MISCELLANEOUS :

Treasury Regulation 1.613 (d) (2) 1954 Code.......... Se S|

*

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rr

IN THE ) o

- SUPREME COURT OF THE UNITED STATES

October Term, 1958 f

: No,?... ls

° wae ; 0

AMERICAN ia si eae Petitioner, >

COMMISSIONER | OF INTE RN Al, REVENUE,.

: | — Respondent.

/ ) ve ; 7

PETITION FOR WRIT OF CERTIORARI TO THE UNITED

STATES COURT OF APPEALS FOR THE TENTH CIRCUIT “a

TO THE HONORABLE-THE € HIER JUSTIC ‘AND

THE ASSOCEATE JUSTICES OF THE SU PREME

COURT OF THE UNI TED STA TES:

The Petition of American Gilsonite Company respect->~

filly prays that a Writ of Certiorari issue to review the

— Judgment of the United States Circuit Court of Appeals

for the ‘Tenth Ci ireuit entered in, these cases September aay

1958.

OPINIONS BELOW

‘The opinion of the Tax Court of the United States is

reported in 28 T.C. 194; (1957) and is printed in the Record

at page 39. The opinion of the Court of Appeals i is reported

2S... Fed: 2d..:....; is S printed i in the Cifeuit: Court Record’

!The Circuit Court Record is designated as ; CR and the Record on Appeal

is designated as R.

+

‘of said J udgment.

‘ ws rd pe . ‘

at page 3, and inthe Appendix’B*. The decision ih United

‘States v. Utco Products, lic., is ado included in Appendix

. ?—. : P ss a . .

Y

a STATEMENT OF JURISDICTION

aye jurisdiction of this court is invoked under Ke

x S.C. 1254, (1). The Judgment of the Court of Appei als]

-

was ay on September 25, 1958 and this Petition for

Writ of. Certiorari“is filed within 90 days from the entry

‘

35 : QUESTIONS. PRESENTED

_ L. Whether under Sectians 23 (m), and 114 (b) (+) (A)

(B) Internal Revenue Code of 1939, the term, “ordinary

treatment processes” in its application to the gilsonite in-

‘dustry is limited only to those processes which effect a

physical or chemical change in the gilsonite qnineral or

effect a separation from other minerals in-which gilsonite

is found, and ‘w ‘hether sacking of gilsonite is such a process.

ote 2. If sacking gilsonite i is an ordinary treatment proc-

ess, then uhder Section 114 (b) (4) (b) Internal Revenue ©

Code of 1939, as amended by Section 207 Revenue Act of

1950 (c) 994, 64 Stat. 906, what portion of the M3 miles

transportation of gilsonite from the mine to the: sackinz

plant \s includible’ under, the definition of mining in the

determination of. gross income. .

° —

STATUTES INVOLVED |

The Federal Statutes involved are Section 23 (nr), See:

tion 11+. (b)(4) (B), as amended, ‘and Section 3797 (b),

Internal Revenue. Code of 1939. Portions of these statutes

ire quoted i in the Appendix AL

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&

STATEMENT

2. The Judgment of the Court of Appeals sought to be

reviewed, reversed the previous . Jndgment of the Tax Court -

of the United States holding that the taxpayer was entitled

to inchyle in its gross income from the property, income at-—

tributable to, the bagging of gilsonite and to the cost of bags

in whic the mineral was sold, and affirmed the Tax Court

_decision, halding that transportation was not includible as

gross incope from mining. * ‘

Petitioner mines and sells 7 10% of the gilsonite used in

_ the United States ( R.55). The processes through whieh the»

gilsonite passes to reacit the commercially marketable

product are as follows:

(a) Gilsonite is mined by blasting it out of the vein

(R. 36) at the mine located at Bonanza, Utah (R. 73) and

Js broken by this blasting into yarious sized chunks.

(b) In this original form,-the gilsonite has inter-

“mingled with it rocks, weeds, wires and other foreign

matter. al conglomerate is cleaned by washing and

blowing (R. 36, 48, 49 and 79). | ‘

~{e) The gilsonite is then crushed, screened and sorted.

- into three different sizes: The fine, the select and the-pul-

ed (R. 36, 49) and is thereafter kept so segregated

AR Of, dt). Pek irae

(d) The gilsonite. is then trucked in- special air-tight .

trucks 113 miles to the sacking plant at Craig, Colorado,

. the nearest railhead to Bonanza (R. 37, ‘52, 53, 73, 77, SI,

83). The gilsonite, if not sacked and kept tightly contained,

disintegrates. upon exposure to the eleménts and: breaks

dows from handling (R. 51). The gilsonite must be kept in.

ail

oO

4

‘8. pure state and uniform size in order to be marketed ik.

2, oO, G8, 70 and i) a

(e) The gilsonite upon arrival at the sacking plant,

is placed in large dirt proof bins-and thereupon descends

into. the sacking machines and is placed in the air- tigeht

sacks for loading and shipping» (R. 37, 52, 53, 81,83)...

The gilsonite must be kept clean and uniform in size

and must be placed in the sacks before it-is commercially

inarketable (R..37, 56, 63, 64). [gis impractical to sell it.

in anything but the sacked form (R. 64, 65), and the gilson-

ite must be kept in sacks to prevent excessive handling re-

sulting in disintegration. The sacking is further necessary

to prevent destruction of the gilsonite becatise of its ex-

plosive nature (R. 65). Customers cannot use or purchase

. the gilsonite unless it is in the sacked form ee 68, 69, 70 |

and - 71). : ‘

The cost of transportation for the taitable: years in

question’ is ‘as follows: ' 1948 — pilpnen 1950 —

$1313634.89; and 1951 —- $152,067.85 (R. 17, 25). The.

cost of the sacking. process for the neni years is ‘as

__-follows: 1948 — $189,395.61; 1950 — $234,118.37; and 1951

—$277,122.42 (R. 17, 21, 23).

. The above amounts were. included by the Petitioner

in computing gross income from mining for depletion pur-

poses, for the reason that the sacking process was an ordi-

nary iin ae under the statute. This. being >

: : ° > te

it Was-necessary, nsport the gilsonite from the mine to

the: sacking plant where this ordinary treatment process *

vecurred, The Commissioner disallowed this computation ~

and Petition was filed Grthe Tax Court of the United States.

R. 28) re :

5)

‘The Tax Court sustained the taxpayer in its contention

that the sacking process was an ordinary treatment process

iR. 40), but denied the taxpayer the transportation cost

ite for the reasons that the t taxpayer should not loeate

the sacking plant beyond the statutory 50 mile: limit and

that the Secretary of the Treasury had not made’ an act

ministrative determination as tothe nec essity of transport-

ing heyond the jO mile | lint CR. a). (See Appendix A.)

Court relating to the sacking problem (CRS) upon gp 204

‘ity of its opinion in the case of U nited States v. Utev

Products, June TO, 1988, on Fed. 2d bo, C.CLA. 10th, and

inion disallowing transporta-

B).

“REASONS FOR ALLOWANCE OF THE WRIT

affirmed the Tax: Court's: ¢

tion costs (CR 9): (Append

1. Each of the questions presented herein wasbediies

ay, settled by this Court. ; .

2. The decision herein is at variance and in conflict

Soa, Wherein the placing of cement .in silos’ from which. if

was loaded and shipped in bags’ or in — to be

ordinary tre: tment processes,

Corporation” 233 F.2d 444, wherein the packaging and

tosts of bags for the tale were held to be ordinary treatinet

: :

" processes, : . ; °

’

° . .

The € ourt of “Appet ils reversed the opinion of the ‘Tax

with the decisions of Fail, Cireuits: * "e

a CA) Tlie Ir inst Cireuit wh Dragon Cement Company

“y. United States, 244 F.2d O15, Cert. Denied tar CK

(B) The Fourth Cireuit:in Townsend vy, Hitchcock =

the cost of the packages for crayons and the hagging and.

questions of Federal law which have not been, but should

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(C). “The: Pith Cireuit in United States v. Cherokee .

’ Brick and. Tile, Companye: 218 F. 2d 424, paid in, United

States v. Merry. Bros. Hrivk and Tile Company, a

2d 708, Cert. Denied, a? a2 824, wherein all processes ]

up to and including: the lofiding of the. finished. brick were

held fo be ordinary : treatment processes. : ’,

(D) The Ninth Cirewit in New ‘tévéa Quick Silver

Nisiag Company y. Commissioner, 144 F.2d 918, wherein

the cost of the containers for the finished mercury was in-

eguded 3 in gross income from mining.

e

v

ine _ ARGUMENT

te, : QUESTION I°

- The Court of Appeais érred in holding*that an.ordinary

treatment, process for filsonite must effect a chemical or

physical change: i in the gilsonite or must effect a separation

of the mineral from thé material in which it is found. The,

court concluded that gilsonite .“is.not ‘customarily sold in

‘ the form of ‘a crude mineral product’” (CR 8), that this”

case is not distinguishable from United States vy. (teo

oH Products, Inc.; supra, and that, therefare, the sacking pfoc-

ess is not an ordinary treatment process applied to obtain

the commercially marketable mineral product (CR 8). This

position h has no support eithe a aa or in the statutes.

As THE CASES ;

’ The Court of, Appeals cites the Utco Products ease as

the authority for its decision herein, although the prodact |

there involved, perlite, is of a different nature and sub jept

to different processes than is ‘Bilsonite, although the [te ,

case only passed upon the cost of bay (not bagging), and

7

‘notwithstanding the Court’s recognition that its deeisioa

was:at variance with other Circuit Court decisions. ‘

6

The Court said.in Utco Products:

. “So far as. Townse icock, + Cir., 232

F. 2d 444, and New Idria Q silver Mining Com-

pany, v. Commissioner, 9.Cir., 144 F. 2d 918, may be

té the contrary, we are not in accord witli the con-

clusions there reeled. * 257-F. 2d 65, 68. ( a

)

; T he Townsend and the New jivie cases, along with the

other cases relaiing to this preblém, are very cléarly con- ‘

trary to the. Court/ of Appeals’ decision herein. ‘The # 3

. Townsend case involved the sagging of tale and the cutting

and packaging of crayons. In this case, ‘the Court in holding

z that such steps were ordinary treatment pro¢esses, relied J

upon the F indings of F act-of the District-Court and stated: ;

“The District Court made the. following Fd.

.ings, of Fact: ‘There is no commercial market for

the tale ‘mined by plaintiff before the tale is put ine

the form of tale crayon or pulverized tale and ‘be-

fore such products are packaged or bagged for ™ p-

_ment.”””

: Likewise’ ethere i is no market fer gilsonite until ara] unless

“it is “sacked we 34,8 32, 56, 63, 64%

ie

The Court then went on to approve the language of the, | e

District Court relating to the legislative history of the par-

tie ular: ‘portion. of the Act involved, stating: ce

= * Phe District C ourt stated ‘Congress clearly

provided that the cost of obtaining a..market abil.

produtt should come within the definition of mining

and the sanie basis should be applied to gross sales.

The only limitation by Corigréss is that the process _ “

must be that normally applied by: the miner to ob-

‘

-

f°

er

a

tain a .marketable product. It seems ‘immaterial

whether that process be one of manufacture, as ip

the brick and tile case (U.S. v. Cherokee Brick &

Tile Company, 5 Cir. 218 P. 2d 424), or some othe:

step; that which was essential to obtain the first

marketable prodiacts is an expense of mining .and

the gross sales of the products so mined ‘is the gross

income from which the 15 percent depletion is to he

taken.’ ” ae ee ie enn

The Court-further.states with reference to Sec. 114 (hy)

(+) (B):

“This statutory language is clear and, unan-

biguous: Its obvious meaning is that gross income

from mining must inélude the income from treat

ment processes which must normally be applied to

-the ore or mineral to obtain ‘the commercially mar.

ketable mineral product or products,’ that is the

‘ products obtained by the mine owner or operator

for which a commercial market exists, the product:

which are marketable in commerce.”’

It sepyis clear in the Townsend case that an ordinary.

treatment process does not’ necessarily ‘involve a change

in the nattire of the mineral or a separation from. other

minerals. Thus tlie holding of the Court of Appeals in

placing such a restriction upon the gilsonite sacking process .

is in direct conflict with the halding of the Townsend case.

The New Idria case holds that the sale of mereury

in-flasks is the first marketable product and that the costs

up to and including .that point are included as ordinary

treatment processes under the definition of “mining.” -

A brief examination of the so-called “brick cases” indi-

cates the trend of the various,Cireuit Court decisions in’

defining ordinary treatment processes. The end result

sought in each of the cases is the commercially, marketable

|

9

product, and°all steps taken to achieve that product are

defined as ordinary treatment processes. In United States

Merry Bros, Brick & File Company, supra, the Court

ead its prior position in the case of United States

v. Cherokee Brick & Tile Company, supra. In these eases,

the question was: W hether or not the various steps leading

up to the final sale of the brick and tile, including the load-

‘ing for shipment thereof, should be ordinary treatment

processes, The Court, in holding, that these are prope r

ordinary treatinent processes, states:

“There is no provision in the statute for exclud-

ing any* process berore such a marketable product

is reached, The only réstriction is that the process

must be the ordinary treatment process normally

—— by mine owners or operators.” —

‘Again in the ¢ ise of Dragon Cement Company v.

United States, 244 FY 2d 513, theC ourt, in holding that all

of the steps up to and ine ‘luding the loading of the cement

efor shipment. are ordinary treatment processes, states:

fai “The purpose of the provision (relating to the

+ _definition of ordinary treatment process) is to make

certain that’ the ordinary treatinent process-ehich

amine operator would normally apply ‘to obtain a

marketable product should he considered as a, part

of the inining. operation, and to give reasonable

specification fot What are to be considered such

processes for various kinds or classes of mines.’

ty

The Court then w ent on to indicate that the Congress

had int¥oduced new language which had never previously

appeared in the history of the depletion allowance and that

rather than - being restricted fo certain processes, me pur-

Pose of the new provision was:

-

1)

s i .

“Po make certain that.the ordinary treatmen'

process which a mine operator would nofmally ap

ply, to obtain a marketable ‘produet should be con.”

sidered as a part of the minirig operation.”

All of: these cases indicate a trend of decisions pro.”

viding for depletion: on the various processes resulting in

‘the marketable product, including sacking and packaging

processes. There are no exceptions to these leading cases,

except the decisions here’ of our Court of Appeals dealing

with gilsonite and perlite. ?

B. THE STATUTES

Section 114 (b) (4, (B) under subdivisions (i), (ii), (ili)

and (iv) lists four groups of ores and minerals, together

with the specific processes applicable, to each group, which

processgf are stated to be ordinary treatment: processes

(Appendix A). The Court of Appeals concluded that gril =

sonite “is not ‘customarily sold in the form of a crude

mineral product’” and, therefore, falls under subdivision

(iv). Subdivision (iv), however, refers to ores and not to

minerals such as gilsonite. Gilsonite is not an ore within

the meaning of Subsection (iv). The, Court of Appeals,

by its own definition of ore, excludes gilsonite. The Court

stated in United States Sannin Brick & Tile Cor pord-

tion, 239 F. 2d 694 C.C.A. 10th: + =

~*Ore is a material containing valuable metallic

constituents which are extractable therefrom: Brick

and tile clay such as is involved in the instant case

contains no valuable metallic constituents whic ‘h-ean

be extracted theref Nga

wv

It is apparent that gilsonite contains no valuable mefal-

‘lie constituents which can be extracted from it, since it is

7

11:

sold in the form in which it is found exéept for having been

cleaned, crushed, sorted, sized and sacked.

_ This definition of ore and its application to this statute—.——+ ~~

is further upheld in the Townsend case, supra, where the -

Court determined that tale was not an ore and was not

specifically mentioned in the said four subparagraphs: The

. Court there stated that the lists of processes were not ex- -

clusive in view of the language employed in said subdivi-

sions and also in view of Section 3797 (b) Internal Revenue

Code (1939) (see. Appendix A)»

Gilsonite, therefore, bats being mineral, might more

properly, if at all, be included. under subparagrgph (iii) in

which ordinary treatment processes include “loading for

shipment.’’ This very ‘provision as well as provisions in

the: other’ two subparagraphs negative any possible inter-

pretation of the;statute to the. effect. that ordinary treat-

ment processes: hai involve a physical change or a PeFical

separation from other materials such as_oceurs in the refin-

ing of ores. x

_It is apparent that there are various ‘minerals such as

tale’ (Townsgnd), perlite (Uteo Products) and gilsonite

which do not specifically fit-under any of the listed minerals

or ores and the specifie processes set forth in said sub-

divisions. The disposition of such minerals and the de fini-

tion of the ordinary treatment processes as applied to these

minerals is the problem before the Court. The T reasury

Department recently has recognized that the aforesaid

four subdivisions are not the exclusive lists-ef—ordinary

treatment processes affee ‘ting the various’ minerals supon .

Which depletion is allowed, and. has provided for additional

ordinary treatment processes as follows:

ee a ae

“Regulation 1.613-3 ae ) 1954 es Iu ti

case of minerals to whieh subdivision He

subparagraph is_not-applicable — (x any pre “Was

applied for the purpose of separating the miners

: -or-ore from waste or from other minerals or ores

and. (b) any process HOCESSATY on pul the Ar:

+ Snineral in condition for shipment.’ " (Eimphasis add.

“ed. )

This reguiation would very clearly ine ‘ude as an ord

nary Semaeery process the sac king of gilsonite. AS a process

to put the mineral in condition for shiprae NW

is c there | is this additional inte rpretation: of the statutes

contrary to the holding of the ourt of Appeals.

Even recognizing the Court-of Appeals’ position that

-gilsonite is a refined mineral and as such must be subject te.

the restriction that its ordinary treatment’ pron Wsser must

effect a vhysical or chemical change or nitist “effect ta sepa:

ration, an unde ‘rstanding of the nature of gilsonite and of

the processes involved would résult ina determination that

- the sacking process isan essential separation process. Aa.

is pointed out above under the Statement of Facts, the

: sacking process ix not only required by the, CONSUINET As“

condition precedent. to purchase of the gilxonite, but is re.

quired by the taxpayer to preserve the mineral in the Form

in which it arryes after it is cheaned, crushed and sorted.

The sacking, process ix ax important to the preservation

of the form and of the Separatipn into-variows catagories.

in finally arriving at a commercially imarketable product.

ax is auy-of the other processes leading up to the sacking

process, Were the gilxonite not protected from the vle-

ments, froys dirt and foreign matter, and from excessive

° * . : > ’

handing, the gilsonite: would become a mass of broken

Ss particles unsellable on the BO: § ae market. Furthier-

Is

—

more by reas@ of: the caged baton of the mineral, the

gilsonite might be destroyed entirely through shipping

and confinement in large-magses. Hf the term “ordinaty

- trentment process *-hasvany relationship to the necessity

al preserying the product-or putting it in condition for sale

and shipping, then certainly sacking ix et ordinary treat-

nent process, eel ,

Dane ae ~

‘QUESTION II |

Under the second question presented, by Mix Petition

fora Writ of Certiorari, there minkist be a determination of

“the proportionate amognt of the transportation from the

ming to ‘the sacking plant, in the event that sacking is ain

ordinary treatment process:

Under the statute, 50 miles is autoniatically allowed the

taxpayer. The Tas ‘Court originally denied even the 50

Gile portion, but. later in fe case of Matagorda Shell Com-

pany, 29-T.CONo. TL, Decision $22875, recognized the error

-in the gilsonite decision, and stated :

“We reached our conclusion, because we thought

that the intent of the statute was that if a taxpayer

hauled his mineral product a distance of more than

OW niles, he had to apply to the Commissioner for

all of such distance or he allowed nothing.

“We Have re-examined the legislative. history

of the 1950°Amendment and now conelude that Con-

‘gress meant to allow transportation up-to the first

WW miles regardless of how far-away the processing

plant might be.” - |

Thus irrespective of any determination by the Coi-

missioner petitioner is entitled to the first 50 miles,

re

| 14

Petitioner contends that althougle the Commissioner

did not make an administrative determination, the Tay.

Court could make such a determination and if the full 112

miles transportation was necessary to take the mineral to

the seheomniiass plant, the full, 113 miles should be allowed in

computing depletion. Suet ‘a finding should be made |»

the trial court in the event that sae king i is found to bean

c

ordinary am process.

_/’

Ce ‘¢-

(oNcLUsION

The de¢ision of the ¢ Court of Appeals is a complete te

. versal of the trend of the prior decisions of other Circuit

in defining “ordinary ‘treatihent process.” The decision is.

contrary. to the other Cireuit-C urt decisions and is con |

trary to the provisions of the statutes: involved. For thes:

reasons, the Writ+of Certiorari. should be granted.

erat . : Meares

Respectfully submitted, - | “-™.

“ALLAN FE: MECHAM

Counsel of Record |

A ees vy +304 South State St

Salt Lake City, Utah °

; ELLIOTT LEE PRATT

. ; Counsel and Attorney for

Petitioner

301 South State St.

: Salt ‘ake City, Utah

a el e » . = oma

e = *

acne. 15

APPENDIX A ght Ss

ie “Internal Revenue Code of 1% 39:

“SEC. 23. DEDUCTIONS FROM. GROSS. INCOME.

. In- computing net income there shall be allowed” as’

deductions : . i

7

; ~*~ ‘ °

(mn) Depletion. — In the case-of mines, oil and

gas, wells, Other natural deposits, and’ timber, a

reasonable allowance fag depletion and for deprecia-_

> tion of improvements, re to the peculiar con-

ditions in each case; sith réasonable allowance in

all cases to be made under rules aad aelden to

be prescribed by the Commissioner, with ‘the ap-

A *. proval of the Secretary. °**

For percentage depletion allowable under this,

subsection, see section: 114 (b), (3) and (4).

, * = 8

ff (26 U.S.C. 1952 ed., See. 23.)

SEC. 114.. BASIS. FOR DEPRECIATION AND

~~

_ (b) Basis for pene. —_

(4) [As amended by Sec. 145(a), Revenue Act

_ Of 1942, ¢. 619, 56 Stat. 798, ‘and See. 15 (b), Act of

{ August 8, 1947, ¢. 515, 61 Stat. 917] on de-

pletion for®** gilsonite***,— _ .

(A) In general. — The siteniaiioets for ‘de-

pletion under section 23 (m) shall be, in the ease

of °° ® gilsonite, * °° 15 per centum, and in the

case of sulfur mines or deposits, 23 per centum,

of the gross income from the property during

the taxable vear, excluding from such gross in-

come an amount equal’ to any rents or royalties

paid or incurred by.the taxpayer in respect of

the property. Such allowance shall not exceed

Sve

16s

. 50 per centum of the net: income of the taxpayve:

(computed without allowance for depletion)

from the property, except that in no case shai!

the depletiomgllowance under section 28(1m) bi

less than it woMd be iftcomputed without refer

ence to this paragraph.

(B) [As added by See. 124(¢), Revemi

" Act af 1943,. ¢. 63, 58 Stat. 21] Definition o:

gross income from property, — As used in t!:i-

paragraph the te€wWt “gross income from the -

property” means th&gross income from mining. ’,

The term “mining,” as used herein, shall be

considered to include nos merely the extraction

of the ores or‘minerals from the ground but

alsothe ordinary treatment processes norma!|y

ied by mine owners or operators in order to

in the commercially marketable minerai

luct or products. The term “ordinary treat

ment \)processes,” as used herein, shall include

the follywing:-(i) in the case of coal — clean

ingghreaking, sizing, and loading for shipment:

(it) m the case of sulphur — pumping to vats.

coogng, breaking, and loading for. shipment:

(iii) inthe asd of iron ore, bauxite, ball an!

sagger clay, rock asphalt, and minerals whic,

are customarily sold in the formr of a ernude

mineral product -= sorting, concentrating, ay |

sintering to bring to-shipping grade and fair,

and loading for shipment: and (iv) in the ens:

of lead, zine, copper, Bolt silver, or fluorspa:

ores, potash, and ores which are not customary,

sold in the form of the erudé@mineral prodact

crushing, grinding, and beneficiation by concen.

tration (gravity, flotation, amalgamation, ele

trostatic, or magnetic), evanidation, leachine.

erystadlization, precipitation (but not ineludine

as an ordinary treatment process electrolytic —

‘deposition, roasting, thermal or electrie smy!t

ing, or refining), or by substantially equivalent

17

_ processes or combination of processes used in

the separation or extraction of the product or

products from the ore, ine luding the furnacing

of quicksilver ores. The prince iples af this sub-

‘paragraph ‘shall be applicable in determining

gross income attributable to mining for theepur-

pose of sections: 731 and 735.

(26 U.S.C. 1952 ed, See. 14.)

Reve mue Act. of 1950, ¢. 994, 64 Stat. 906:

a

SEC. 207 PERCENT AGE DEPLETION.

- (a) Transportation from mine. — The second

sentence of section 114 (b) (4) (B). (relating t@# the

definition of grossAncome from property) -s héreby

amended to read fis follows: “The term ‘mining’ as

used herein shall pe.considered to include not me rely

the extraction of the eres or minerals. from: the

ground but.alsfg the ordinary treatment processes

- normally appYed by mine owners or. operators in

order to cbtzin the commercially marketable mineral

product or/produets, and so much of the transporta- |

tion of ores or minerals (whether or not by common

carrier) froin the point.of.extraction from the ground

to the plants or mills in which the ordinary‘ treat-

inent/ processes are applied thereto as is not in ex-

cess: 6f 50 miles unless the Secretary ‘finds that the

physical and other requirements are such that the,

ore or mineral-must be transported a greater dis-

tance to such.plants or mills.”’

; s

(b) Effective date. — The amendment made

bv subsection (a) shall be applicable with respect to

taxahle years beginning after December 51, 1949. 4

SEC. 3797 (b) INCLUDES AND INCLUDING

,

The terms “Includes’ land: “including” when

used in-a definition contained in this tithe shall not

Se oe

™,

€ : d

. i ‘ o ‘

iy . * 9 ; ‘

Cte ree

oo 18 ‘

: oe ’ —2_

be deemed: to salads other things otherwise: within

the meaning of the termdefined. =.

, |. + APPENDIX B

Before BR ATTON, Chief Judge, and PHILL IPS and

LEWIS; Cireuit Judges. - . | te

a

“

‘PHIBLIPS, Cireuit Judge.

This matter is before us on a petition of the Com.

missioner of Internal Revenue and the cross:petition of

‘American Gilsonite Company’ to review a decision of the

. Tax Court. Income tax deficiencies for the years 1948, Ia WW .

and 1951 are involved. .

i

During such tax years. the taxpayer was principatly*

engaged in the mining of gilsonite, a hydrocarbon sub-

stance, from vertical veins averaging 20 feet in width and

up to 1,000 feet in depth. The taxpayer's mines are located -

near Bonanza, Utah, approximately 50 miles southwest o!

- Vernal, Utah. |

—Qionite is mined by a blasting ‘operation at the face

_of the Ore as it lies in the vein. The blasting breaks the ore

into chunks of various sizes. With it there is intermingled

rock and other foreign matter. The ore is taken from the:

-mine to a.cleanjng plant, where the rock and other foreign

inatter is removed by a washing and air blowing process. .

The cleaned ore is put through a crusher and is then passed

through sereens*which separate it into.three sizes: (1) fine.

2) select, and (3) pulverized. Approximately 10 per-cent

of it is pulverized. Each size ‘of ‘gilsonite is stored in sepa-

rate tight bins. From the processing plant at Bonanza the .

gilsonite is transported to Craig, Colorado, by trucks espe-

. ‘Hereinafter called the taxpayer.

19

%

cially designed to keep it dry and dirt free. Craig is the

nearest railhead to Bonanza which is available as a shipping

point. At Craig the ore is hoisted. from the truck into‘a’

closed hoist and is placed into closed hoppers. From the

hoppers it descends into the packing machines, whereby it

_ is packed in bags of 100 pound capacity. The filled bags are

closed and placed ppon a conveyor, which transports them .

directly into the rajlroad car and they are then transported

by rail to the wi hasing customer.

“Gilsonite is ‘used in the ‘manufacture | of paints,: var-

nizhes, inks, asphalt tile, storage hatteries pipe insulation

and ‘other similar products. To meet the deniands, ¢ gf « ‘Gasto-

mers, gilsonite must be made available ir. different sizes’

-and each size must be approxiinately ‘unifoéin. Handling,

especially of the larger sizes, tends to break them down

into smaller particles. Bagging tends to prevent gilsonite

from thus breaking down. Commercial gilsonite must be

kept in a pure state, free from ‘dust, dirt, or other foreign

matter. Bagging gilsonite protects it from impurities. Pul-

' yerized gilsonite, or gilsonite dust, is highly Nolatile and it

is safer to handle when contained i in bags. Purchasers of

gilsonite desire it to be packed in 100 pound bags. Bag-

ging of gilsonite is Speen order to preserve its free-

“

2

dom from impurities, to preseFve its uniform Size, pel 64

it safer to iiandle, and to satisfy ‘customers’ deman .

‘ . : * ¢ ‘ ‘

ia | 7 ; ? Edong

The Tax Court decided that in computing’ the fper-

centage depletion allowed by the provisions of the Intarnal

Revenue Code’ of 1939, as amendel, 25 S.C. A., 1952

Sections : 23(mi) and 114(b) (4); the taxpayer was entitle

to include in its gross income aa idttis 3

‘Tax Court erred in ine ‘luding the ineome attributable tlie

attributable to the heasil: of: the gilsonite and to the hags

in whielr it was sold, The Commnissioner challenges that

ghienisy of the decision. -

°

The Tax Court b decided that the t taxpayer Was ws gig

titled to inélude in its income from the property .f¢

-purpose of computing depletion for the year 1950 the cos’

of trafisporting the refined gilsonite for 50 miles of the dis

tance between the point of extraction and the bagging ani

loading plant at Craig, Colorado,

ee e * * ,

3 = — ‘ : ; a %

“Refine’’ is defined as follows in Webster's New [nter

national Dictionary, Second Edition: “To reduce to a fine,

unmixed, or pure state} to separate from extraneous iat.

ter; * *.* to free or cleanse from impurities, # * *.”"

BF rom the undisputed facts # seems clear to us tha

gilsonite, when it has been cleaned, separ ated from mate vial

‘Associated witli it’iy its envirownent % and freed of impuri-

ties cand. when it has been erushed and separated into th

three SIZES | fine, select and pulverized, i ix a refined miners

product. In that state it is combined with other products in

the manufacturing process in which it is utilized. Ht is no:

“customarily sold in the-form of a er ude mineral produck

With respect to the “qu ation whether the mcome nt

tributable to the bags and the bagging was. gross inde”

trom the property, we are of the opinion that. the instan’

‘axe Is indistinguishahle from niled States v. Flea pP rod

nets Tne, decided June 10; 1958, 10 Cir. ‘...... i eee Wi

actordingly conchaide, on authority of that ease, that the

bagging and the haces. i in the gross income from the property

in; computing depletion allow anee: og i *

me el ieee

— eT Se ee ee

| inigisiant _—

Ga

24

Section Ll4(b) (4) (B): of the Internal Revenue Code

of 1939, as amended by Section 207 of the Revenue Act of

1950, effective December 31, 1949, provides that “The term

‘mining’ as used herein shall be considered to include ***

soanucht of the transportation of ores or. minerals (w hether

‘or not by commion carrier) from the point of extraction

from the ground to the plants or mills in which the ordinary

treatment processes are applied thereto as is, not in excess

of 00 miles unless the Seeretary finds that the physical anid

other requirements are such that the oré or mineral must

be transported a ‘greater distance to such plants or mills.”

Since there were no ordinary treatment processes ap-:

plied at the bagging plant at Craig; the Tax Court did

not err in holding ‘the transporiation was not includile

in gross income from mining, even though it sais another

reason for its holding. ., :

Since the taxpayer, by ordinary treatment processes,

reduces’ the gilsonite to a refined _ mineral product and

since gilsonite is not customarily sold i in the form of a crude

mineral product, “loading for sip i is not an ordinary

- treatment process. See United States v. Uteo Products,

Inc., supra... fa lee Therefore, income attributable

to loading the bagged gilsonite should not be’ ‘included in

gross income from the property for the purpose of com-

puting depletion allowance.

The order of the Tax Court is reversed’ and the cause

remanded for further sie cal in accordance with this

"sales Cc

Before nelaton Chief Judge, and PHILLIPS: and:

BREITENSTELN, Circuit Judges.

©

. PRILL IPS, ‘Cireuit Judge.

22

Uteo'Products, Ine.) a Utah corporation, brought an

action in the United States District Court for the District >

of Utah, under 28 USCA $1346, against the United States.

‘seeking a refund of income taxes paid for the years 1951,

1952 and 1953, with interest.

During those vears the ae was engaged in the

mining and processing of perlite. It mined perlite from its.

deposit located near Milford, Utah, and shipped it: to its

plant at Salt Tgike City, Utah, for proc essing. At the proe-

essing plant. the raw perlite was run through, preliminary

and secondary: crushers. which reduced the raw perlite to

the size of sand.. The crushed perlite was introduced int»

‘a rotary kiln where it was expanded, by.eating, approxi-.

mately 10 times its crushed size. The expanded perlite was

distributed through lumber

placed” in bins, hagged

yards and other retailers of buNding equipment. Expanded

perlite is used as an aggregate to be mixed with plaster

or.cement. It ean also be usedas a soil aerator and a filter

aid... is ;

* Because of its softness gnd lack of cohesiveness: tlie

he

taxpayer's expanded raw perlite, is not commercially mar

ketable in bulk. It is only commercially matketable whet

it has been bagged. The trialcourt concluded that hageing

“The perlite was an- ordinary treatmerit _ process applied ph

obtain the commercially. marketable minovt ‘and held that

the taxpayer was entitled to a refund of taxes for 1951 in

the .nount, of $1,134.62, for 1952 in the amount of $1,340.20,

and for 1953 in the amount of $162.39, ~~ interest on‘suci

amounts. The amount of the taxpayer's tefund was cou

‘puted by. including in the gross income from the perlite

‘Hereinafter called the. taxpay?y. es a .

' 23 a

the full amount received on the taxpayer's sales of bagged

perlite, including income attributable to the’ bagging and

oe

to the bags in ‘which the perlite was sold.

The question presented on this appeal is whether in

computing its percentage depletion allowance under §23

(m) and §114(¢b) (4) of the Internal Revenue Code of 1939,

. as amended, the taxpat r was entitled to include~in its

gross income from the property, income ‘attributable to the

hagging of the expanded perlite and to the bags in which it

was sold. “<

Section 283 of the Internal Revenue Code of 19: 9, as

. amended, in part provides:

r] >

Aanpaaprciem. o

“Deductions from gross income. comnputing

> :

net income

“we a *

rere shalk be allowed as deductions:

“(m) Sustetion, In*the case of mines, oil

and gas wells, other natural deposits, and timber,

a reasonable allowance for depletion. and for de-

preciation of improvements, according to the pecu-

diar conditions in each ease; * * *”

Section 114 of the Internal Revenue Code of 1939, as

amended, in part provides:

o “Basis for-depreciation and depletion

“<e * * : ,

“(b) Basis for depletion

‘e as * e ; /

. eee

“(4) Percentage depletion for coal and metal .

mines and for certain other mines and natural min-

eral deposits:

7" A) Jn general. The allowance for depletion

under section 23(m) in the case of the following

on

ae

mines and other natural deposit shall be —

oe _ 6oe * ® :

~“(ii) in the case of *** perlite, *** 10 per

centum, as : ie

“se * @ eae

“of the gross income from the property during

the taxable i dail

“(B) Definition of gross income from prop-,

erty. As used in this paragraph the term ‘gross in-

come from the property’ means the gross incon

from mining. The term ‘mining’ as used herein a

be considered to include not merely the extract’

of thé ores or minerals from the ground. but als

the ordinary treatment processes ®normally applied

by mine owners or gperators in order to. obtain the

commercially marketable mineral product or prod.

_ucts, ***. The term ‘ordinary treatment processes,’

as used. herein, shall include the following: *** (iv)

in the case of *** ores which are not customarily

sold in the form of ‘the erude mineral produet--

- crushing, grinding, and beneficiation by coneentra-’

‘tion (gravity, flotation, amalgamation, electrostatic.

or magnetic), ¢y vanidation, leaching, erystalization..

precipitation, eee, (Emphasis added. -

Depletion allowance is granted. as a matter of legisla.

tive grace to compensate for exhaustion of a mineral asset

resulting from production.?

td

-

— .

Ptateters provisiohs for deductions from ineome are

strictly construed and. the taxpayer iust bring himnself

clearly within the statutory provisions.’ | oy

2Helvering v. Bankline Co., 303 |S. 362, 366; Ryan v. Ales:

ander 10 Cir., 118 F. 2d 744, 749.

iP. A. Gillespie & Sons Co. v. Comm’r., 10 Cir., 154 F. 2d 915.

917; Equitable Life Assurance Society v. ‘Comm’ r., 321 US. 560.

564; Okemah National Bank v.. Wisemany 10 Cir., 253 F, 2d 225.

. 225; Deputy-v. duPont, 308 U.S. 488, 493: White v. United States

305 U.S. 281, 292. ae

.

a

“4

a

1 é

25

This Court has. recently construed the above statute,

“nited ‘States, v. Sdpulpa Brick and Tile Corp., 239 F.2d

~ 694, 697, wherein we said: “The applicable statutory lan-.

guage 1S clearsand unambiguous. It clearly ineans that gross

income from mining includes the ineome from treatment

“processes, which must normally be.applied to the mineral

to obtain ‘the ‘commercially marketable mineral q product

_or products,’ that is, to obtain the first product’ which is

commercially marketable. ***” (Emphasis added.)

It must be conceded that the expanded raw perlite.is

not commercially marketable until it has been bagged. But

the precise questiqn presented is whether placing the mate-

rial in bags is an ordinary treatment process normally ap-

plied by mine owners or operators. —

We are Of the opinion that the phrase “ordinary treat-

. ment process,” except where the statute otherwise provides,

‘means a process of treating which separates the: mineral

from other minerals in which it is found or with which it is |

associated, or which effects a chemical or physical: change

_in the mineral itself, such as crushing, separating, remov-

ing impurities, pulverizing, hardening and the like.

When the pezlite has been expanded it requires no fur-.

ther change, either physical or chemical in the mineral

itself ‘or any separation from other matter to render it

marketable. Clearly, placing the material in bags effects

no ) change i in the mineral: itself gnd i is not an st a sepa-

ration process.

It is signidttant that the statute, in dealing with certain

minerals : Coal, sulphur, iron ore, bauxite, ball and sagger

lay, rock asphalt and Minerals’ whieh are customarily sold .

Je aa

26

in the form of the crude mineral product, includes in the

term “mining” loading for shipment, but makes no such

provision with respect to perlite or for the placing of the

perlite in containers for shipment or marketing.

Expanded perlite is not a crude mineral. Rather,

_is a refined product.

We are of the opinion that ordinary treatment, process-

_es of the perlite to obtain a commercially marketable prod-:

uct were completed when the perlite reached an expanded

form. =o, q :

; %

Accordingly, we conclude that the bagging of the mate.

rial is not an all treatinent process normally applied ,

by mine owners or operators and not included in the term

“niining,” and that come attributable to the bagging and

the cost of: the bags is n6€ gross ‘income from the prop-.

erty.

‘So far as Tow “—_ v. Witchoods Corp., 4 Cir.,.232 F.2d

444 and New Idria Quicksilver Mining Co. v. Comm’r., 9

Cir., 144 F. 2d 918 may be to the contrary, we are not in

accord with the conclusions there reached. ; |

Counsel for the Government in their brief and in oral

argument indicated they would not insist on exclusion from

gross income that part of the income received attributable:

to the bagging, but enly that portion attributable to the

cost of the bags. Accordingly, the judgment i is reversed and

the cause remanded, with instructions to exclude from

gross.income in the years in question the cost of the bags .

and to compute the refunds accordingly. . ,