International Talc Co. v. Commissioner

International Talc Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent International Talc Co. v. Commissioner Docket No. 24087 United States Tax Court 15 T.C. 981; 1950 U.S. Tax Ct. LEXIS 3; December 29, 1950, Promulgated *3 Decision will be entered under Rule 50. 1. Held, the word "talc" as used in the percentage depletion statutes refers to the product known commercially and in the industry as talc and not to a theoretically or chemically pure product as ruled by the Commissioner. 2. Held, further, that as used in section 114 (b) (4) (B), the term "mining" includes as "ordinary treatment processes," the crushing and grinding of the crude ore necessary to bring petitioner's product to the condition in which it is customarily sold in the industry, such processes being customarily applied by the industry in order to obtain the commercially marketable mineral product. Wesley E. Disney, Esq., and Lawrence H. Gall, Esq., for the petitioner. Clay C. Holmes, Esq., for the respondent. Note: Judge Richard L. Disney, a member of this Court, took no part in the consideration or disposition of this case. Van Fossan, Judge. VAN FOSSAN *982 Respondent determined deficiencies in petitioner's income tax for the calendar years 1944 and 1945 in the amounts of $ 46,358.28 and $ 28,986.58, respectively, and in declared value excess profits tax for the year 1945 in the amount of $ 2,726.84. *4 The deficiencies arose from respondent's disallowance of part of petitioner's claim for depletion in the mining of the nonmetallic mineral known as talc. Part of the following facts were stipulated, the remainder being developed by oral testimony. FINDINGS OF FACT. Petitioner is a corporation organized under the laws of the State of New York on March 22, 1893, and having its principal office at 41 Park Row, New York, New York. The name of petitioner was changed from "International Pulp Company" to "International Talc Company, Inc." in February 1944. Petitioner kept its books of account and filed its Federal income and declared value excess profits tax returns for the calendar years ended December 31, 1944, and December 31, 1945, with the collector of internal revenue for the second district of New York. Since its incorporation and thereafter throughout the taxable years in question, petitioner owned in fee certain properties and owned leases of certain other properties located in St. Lawrence County, Gouverneur District, New York State. The properties included mines and plants and equipment for the crushing and grinding of the ore removed from the mines. The material mined, milled, *5 and sold by petitioner is talc. As such it has been known, accepted, and classified by producers, consumers, railroads, technologists, engineers, and State and Federal agencies, since first produced. *983 Talc is an alteration material, pseudomorphic after rocks and minerals containing magnesium. It occurs in nature in many forms and types (i. e., fibrous, foliated, massive, granular) varying quite widely in chemical composition. While scientists have assigned a number of possible theoretical formulas for chemically pure talc, the specimens approaching theoretical composition occur so rarely and in such small quantities that they are only of scientific interest as museum specimens. During the taxable years in question, petitioner realized gross proceeds from sales of its products, as follows: Year ended December 31, 1944 $ 963,615.35 Year ended December 31, 1945 925,161.54 There is no market nor representative market value or field price for petitioner's ore in its crude form. The first saleable product from petitioner's operations is the mineral in its ground form. The products were obtained by crushing and grinding the crude ores extracted from the mines owned*6 and leased by petitioner. During the years involved herein none of the crude ore extracted by petitioner from the mines located on its properties was sold in that form. During the years in question the crude ore mined by petitioner was extracted from subterranean workings developed by drifts, cross cuts, and tunneling, by the method known as stope mining. The ore occurs in both vertical and inclined banks or lenses. The average maximum depth reached in mining is about 900 feet. The ore body lies in large strata at approximately 45 o pitch. The ore is wet drilled and blasted with dynamite. The broken ore is sorted as to physical grades and the sorted ore is blended and loaded in mine cars in which it is hauled underground by the use of electric trammers to the mine shaft; at that point it is loaded in the mine skips and hoisted to the surface by air or electric hoists. After reaching the surface the ore is dumped into railroad gondolas for hauling to the mills, the average haul from the mine headframe to the mill being about eight miles. Petitioner operated three mines and three mills, all the mills being located on the river, as they were originally constructed to utilize water*7 power. When the gondola cars arrive at the mills they are put on a trestle, at which point the hoppers are opened and the broken ore released from the cars. The ore passes over a shaking grizzly where the smaller pieces, i. e., those which are minus 4", drop onto a belt which *984 conveys it to a dryer; the plus 4" material passes over the grizzly to a gyratory jaw crusher. The discharge from the jaw crusher combines with the dried ore from the dryer at a common point on the belt conveyor and is conveyed to a double deck Hummer screen. At that point all material minus 1/4" is conveyed to an elevator. The over-size on the screen is conveyed to two gyratory crushers. The discharge from the gyratory crushers is conveyed to the Hummer screen in closed circuit. All material passing through a 1/4" screen is conveyed to the elevator. This 1/4" minus material is elevated to a large storage bin from which it is fed by automatic weight feeders to the pebble mills. The grinding is done in four units of two cylinders, each in closed circuit with a double whizzer Raymond Air Centrifugal Separator. These separators can be adjusted to produce various degrees of fineness, as required*8 by the various industries. The finished product is conveyed to packing bins and from the bins to a packer automatically weighed and packed into valve paper bags so that 50 pounds net weight is packed into each bag. These bags are then conveyed on a conveyor line either into railroad box cars or trucks for shipment to the trade. The entire output from the mines is put through the mills and ground to a fineness required by the consumers. The steps required to prepare the products for commercial use involve a grinding process which results in a product 95 per cent to 99 per cent of which will pass a screen of 325 mesh. Petitioner sells directly to the consumer in nearly all instances, there being but four jobbers who purchase and distribute petitioner's product to the smaller consumers. Petitioner's annual sales average about 50,000 tons divided among consuming industries approximately as follows for the years 1944 and 1945, although these percentages vary each year: Industry [1945] Paint .82 .72 Ceramic .08 .15 Rubber .01 .01 Plaster .01 .01 Textiles .01 .01 Castings .025 .025 Paper .030 .055 Miscellaneous .015 .02 Total 100.0% 100.0% *9 During the taxable years in question the gross sales realized by petitioner from the sale of its products from all its properties and the costs of removing, crushing, grinding and bagging the ores above described, and the amounts claimed as deductions for percentage depletion, are as follows: *985 Year Ended December 31, 1944 I. Gross Sale at average sale price of 57,597 tons of ore as mined and milled $ 961,815.87 Less Royalty paid on ore mined 18,251.56 Gross Income as computed by taxpayer 943,564.31 II. Cost 1. Mining $ 247,878.73 Less Royalty Paid $ 18,251.56 Depletion on Ore 1,812.70 20,064.26 227,814.47 2. Milling (crushing, grinding and packing) 374,916.09 3. Administration Expense allocated to talc operations 96,577.65 Total Cost 699,308.21 Profit on Product as Mined and Milled 244,256.10 15 per cent of net sale price as computed by taxpayer 141,534.65 50 per cent of net profits as computed by taxpayer 122,128.05 Year Ended December 31, 1945 I. Gross Sales at average sale price of 55,050 tons of ore as mined and milled $ 932,291.29 Less Royalty paid on ore mined 15,656.09 Gross Income as computed by taxpayer 916,635.20 II. Costs 1. Mining $ 253,226.58 2. Milling (crushing, grinding and packing) 396,916.66 3. Administration expense allocated to talc operations 86,618.71 Total Costs 736,761.95 Profit on Product as mined and milled 179,873.25 15 per cent of sale price as computed by taxpayer 137,495.28 50 per cent of net profits as computed by taxpayer $ 89,936.62 *10 In computing the depletion deduction petitioner used as the gross income from the property, the gross proceeds from the sale of its ground product, less loyalty paid to land owners. In arriving at the deficiency involved in this proceeding, respondent disallowed depletion for the calendar years 1944 and 1945 in the respective amounts of $ 107,224.49 and $ 75,831.92. Respondent allowed depletion for the years 1944 and 1945 in the respective amounts of $ 14,903.56 and $ 14,104.70. In the United States Department of Interior, Bureau of Mines Yearbook, there appears each year a chapter entitled "Talc, Pyrophyllite and Ground Soapstone." The material reported as talc in this chapter and the table of salient statistics therein, includes products known commercially as talc, in which the mineral talc is an important constituent, but which have a wide variety of mineralogical composition. Of the commercial talc reported as sold in the crude form, less than five per cent was produced or sold in the eastern *986 part of the United States. There are no reported sales of crude commercial talc produced in New York State. OPINION. The difference in this case is largely a matter of definition. *11 Petitioner rests its case on two contentions, (1) that Congress intended and used the word "talc" in the percentage depletion statutes in its usual significance as known and accepted by commerce and industry, and (2) that the processes of crushing and grinding applied by petitioner were the "ordinary treatment processes" necessary to produce its "commercially marketable mineral product" and are included in the term "mining" as provided and defined in section 114 (b) (4) (B) of the Internal Revenue Code. Respondent, holding the contrary, urges that petitioner's allowance for percentage depletion should be limited to the talc content appearing in its product, and that the "gross income from the property" should be based only on the actual mining operation, thus excluding the cost of milling or grinding the crude ore. In order to arrive at the result indicated by respondent in the notice of deficiencies he calculated an artificial or theoretical sale price for crude talc ore at the head of the mine shaft. He then assumed that 40 per cent of such assumed sales price represented the sales price of the chemically pure talc content of the crude ore. At the inception of this consideration*12 it is well to have clearly in mind certain facts as proved by the record, among which are the following: Talc is not a basic element. It is essentially a hydrous magnesium silicate with varying contents of associated and constituent minerals or impurities. It is a nonmetallic mineral which occurs in nature as a soft rock in veins, pits, pockets, and lenses in a wide variety of forms and types. Petitioner removes the crude ore from the underground mine workings by means of a deep shaft, transports the ore to its mills (8 miles distant) and there grinds the ore to a powdered form, sacks it in 50-pound sacks and ships it to its customers. In the grinding process nothing is added and nothing is removed. There is no waste in grinding nor is there any beneficiation. Except for the change in form from the rock or crude ore state to the powdered form, the product sold is the same as when brought to the mouth of the shaft. Expert witnesses of notable qualifications and long experience testified and established that the product so mined and ground is and has been known for many years as talc throughout the producing and consuming industry; that as such it has been accepted and classified*13 *987 not only in the producing and consuming industry but by railroads in freight tariffs, by technologists and geologists, as well as in popular parlance. It was classified as talc by the late Office of Price Administration, the late War Production Board and the Department of Justice in actions against its producers. It was also established that, with the exception of museum specimens, no marketable mineral is found in nature or sold in the trade as theoretically or chemically pure talc. The evidence further establishes that, with the exception of certain producers in the far West, whose production constitutes a small part of the total output, petitioner's procedure in mining and milling talc is typical throughout the industry. With the noted exception, no crude talc ore is sold in the country and what is so sold in the West must thereafter be milled before it becomes marketable. Starting with the readily to be accepted premises that Congress, in legislating, deals with realities and uses words and terms in their ordinary, obvious, and generally accepted meanings, we find no evidence in the legislative history of the depletion statutes that, in granting the right of depletion*14 to producers of talc, Congress meant "theoretically or chemically pure talc" or talc ore nor anything other than talc as the product was known in industry and commerce, specifically the product sold by petitioner and other producers. During the years in issue section 23 (m) provided "In the case of mines * * * a reasonable allowance for depletion * * *." Section 114 (b) (4) (A) provided that "The allowance for depletion under section 23 (m) shall be * * * in the case of metal mines * * * talc * * * mines * * * or deposits, 15 per centum * * * of the gross income from the property * * *." This allowance for talc was first specifically granted in the Revenue Act of 1943. In testimony before the Ways and Means Committee various witnesses testified as to the production of talc, in all cases referring to the article of commerce such as was produced and sold by petitioner. No one suggested that in granting the right to depletion they were referring to the chemically pure product. The proponents of the legislation were practical businessmen, not scientists. All reasonable inferences from an extensive examination of the legislative history point the same conclusion -- that the word "talc" *15 was used in its generally accepted commercial and industrial interpretation. Conclusive evidence of the Congressional intent and what would seem even to the casual reader to be a complete answer to any doubts appears in section 114 (b) (4) (B), I. R. C., as amended, which reads, in part, as follows: (B) Definition of Gross Income From Property. -- As used in this paragraph the term "gross income from the property" means the gross income from mining. *988 The term "mining", as used herein, shall be considered to include 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. The term "ordinary treatment processes", as used herein, shall include the following: (i) In the case of coal * * * (ii) in the case of sulphur * * * (iii) in the case of iron ore, bauxite, ball and sagger clay, rock asphalt and minerals which are customarily sold in the form of a crude mineral product * * * (iv) in the case of lead, zinc, copper, gold, silver, or fluorspar ores, potash, and ores which are not*16 customarily sold in the form of the crude mineral product -- crushing, grinding, and beneficiation by concentration (gravity, flotation, amalgamation, electrostatic, or magnetic), cyanidation, leaching, crystallization, precipitation * * * or by substantially equivalent processes or combination of processes * * *. [Emphasis added.] The above definition, in our judgment, stands as an insuperable barrier to respondent's interpretation. It is in effect a positive prohibition against the doing of the very thing here done by respondent in determining the proposed deficiencies. The evidence shows that milling of the ore at their own mills prior to sale, was the normal treatment; that the processes of grinding, grading, and sacking of the product were the "ordinary treatment processes usually applied by mine owners or operators in order to obtain the commercially marketable mineral product." As above observed, there was no recognized market for crude talc and it was not customarily sold in the form of a crude mineral product. The first commercially marketable form of talc was and is in the powdered form in which it comes from mills such as petitioner's. Congress clinched the matter*17 by providing by way of definition that "mining" includes, in the case of ores not customarily sold as a crude mineral product, crushing and grinding. It went even further and included as a part of mining the beneficiation of such product and various other processes. Thus it is that we find in the law as enacted by Congress complete authority for and justification of petitioner's action in computing its tax deduction for depletion. The conclusion is so clear that we deem it unnecessary to enter into a discussion of the several cases cited by the parties. We are of the opinion that petitioner's position is well buttressed in the law and by industrial and commercial usage; that in the case of talc, the cost of milling is a part of the cost of "mining", which should be included in determining petitioner's "gross income from the property." Respondent's approach to the problem is predicated on a purely hypothetical concept and ignores entirely the realities of the talc industry. Decision will be entered under Rule 50.