The opinion of the court was delivered by: MCGRANERY
This is an action brought against the United States to recover income taxes paid by E. J. Lavino and Company for the years 1939, 1940 and 1941. On the basis of the pleadings and the evidence adduced at trial, I make the following special findings of fact:
1. This action arises under 28 U.S.C.A. § 41(1), (5) and (20). The matter in controversy exceeds, exclusive of interest and costs, the sum of $ 3000. The plaintiff is a Delaware corporation having its principal business office in Philadelphia. The United States is made the party defendant to this suit because Walter J. Rothensies, the Collector of Internal Revenue for the First District of Pennsylvania, to whom the allegedly overpaid taxes were paid, was not in office at the time of the commencement of this suit.
2. During the years 1939, 1940, taxpayer owned chromite properties in the Province of Camaguey in the Republic of Cuba.
3. For each of these years, the taxpayer duly filed Federal income tax returns in which there was reflected income received from the operation of the mines, and in each instance it calculated its allowance for depletion by taking 15 per cent of its gross income from the mines (hereafter designated percentage depletion) as permitted for metal mines by Section 114(b)(4) of the Internal Revenue Code, 26 U.S.C.A.Int.Rev.Code, § 114(b)(4). Later, the Commissioner of Internal Revenue disallowed the depletion as computed by the percentage depletion method and substituted a depletion deduction arrived at by making an allowance for each unit of mineral actually taken from the mines (unit depletion). This method resulted in smaller deductions and the taxpayer became liable for additional taxes. After appropriate satisfaction of the tax deficiencies, the taxpayer filed claims for refunds which were rejected by the Commissioner of Internal Revenue. This action was then brought on May 19, 1945.
4. The taxpayer seeks the benefit of the percentage depletion provisions of Section 23(m) and Section 114(b)(4) of the Internal Revenue Code. Section 23(m), during the years at issue, provided that in computing net income there should be allowed as a deduction 'In the case of mines, * * * a reasonable allowance for depletion * * * , such reasonable allowance in all cases to be made under rules and regulations to be prescribed by the Commissioner, with the approval of the Secretary.'
5. The industrial uses of chromite minerals fall into three groups: metallurgical, refractory, and chemical uses, with the latter relatively less important than the first two. The use of chromite ore for refractory purposes does not involve the making of or reduction to a metal. The mineral, in the form in which it is obtained from the earth, is crushed or ground into bricks or other shapes and these are then used in the linings of high temperature metallurgical furnaces. Substantially all of the materials produced by the taxpayer's mines in 1939, 1940 and 1941 were used by the taxpayer in the production of these refractories for high temperature metallurgical furnaces.
Although the metal chromium might have been extracted from the ore product of taxpayer's mines in the years at issue, by and large, it was not. The appropriateness of the Commissioner's disallowance, therefore, depends upon the definition of 'metal mines.' The taxpayer's contention is that Congress intended to define a metal mine as one from which metals can be extracted at a profit or commercially. The government necessarily contends that the category 'metal mines' did not embrace petitioner's mines in the years at issue; its theory is that metal mines are those mines from which metal actually is obtained. The government contends, as well, that the taxpayer has not proved, even under its own definition, that the Commissioner's disallowance was improper; i.e., that metal could have been extracted from the mines at a profit, but this Court's final view of the case makes it unnecessary to deal with this argument.
The government has marshaled an array of arguments to support its interpretation of the statute. It points to the legislative history of the percentage depletion provision, the prior, the contemporaneous, and the subsequent administrative interpretations, and the enactment of later statutes, as all evincing a Congressional intent to define 'metal mines' according to the use of the mine's product. It further contends that practical considerations recommend its definition and that the Commissioner's interpretation of the phrase, if reasonable, should not be set aside merely because another interpretation is possible.
The allowance for depletion is permitted in recognition of the fact that mineral deposits are wasting assets and is intended as compensation to the owner for the exhaustion of his capital assets in natural resources. But 'The deduction is permitted as an act of grace.' See Helvering v. Bankline Oil Co., 303 U.S. 362, 366, 58 S. Ct. 616, 618, 82 L. Ed. 897. The granting of an arbitrary deduction of a percentage of the gross income derived from the severance of the minerals from the earth is in the interests of convenience and does not change the basic character of the allowance. See Anderson v. Helvering, 310 U.S. 404, 408, 60 S. Ct. 952, 84 L. Ed. 1277. The language of Section 114(b)(4) first appeared in the Revenue Act of 1932, 26 U.S.C.A.Int.Rev.Acts page 520. The allowance of a flat 15 per cent deduction for depletion of a metal mine as a substitute for the computations hitherto used was adopted by Congress after a study of the problem by the Joint Committee on Internal Revenue Taxation. A Preliminary Committee on September 19, 1929, by L. H. Parker, its Chief of Staff . See Reports to Taxation, 69th Cong. Vol. 1, Part 8. Copies of the Parker report were distributed to the Treasury Department, the mining industry, and others, and hearings were held on the data contained in the report and its recommendations. The recommendations made by the Parker report were urged on the House Ways and Means Committee and the Senate Finance Committee and finally the Senate Finance Committee introduced Section 114(b)(4) as an S.Rep. No. 665, 72d Cong., 1st Sess., p. 30, 1939-1 Cum.Bull. (Part 2) 496. It is apparent from the Parker Report that the 15 per cent short cut allowance was based on a study of the problems and experiences of mines actually producing ores from which metals were extracted. The discussion of the previous method for arriving at depletion allowances, the examples of mines used, the analysis of how the new method of computing depletion would work with its references to smelting and refining, all indicate that the recommendation of a 15 per cent percentage depletion for metal mines contemplated mines from which metal is actually extracted.
The Government points out that the Treasury Department, both before and after adoption of the percentage depletion provision, had used the test of whether or not minerals were used for the purpose of obtaining the metals from them in describing the minerals as metallic or nonmetallic. Thus, at the time of enactment of Section 114(b)(4), in defining mineral properties, Treasury Regulation 74, under the Revenue Act of 1928, Art. 221(e), provided: "Minerals' include ores of the metals, coal, oil, gas, and such nonmetallic substances as abrasives, * * * barytes, borax, building stone, * * * fluor spar, * * * refractories * * * and talc.' (Emphasis supplied.)
The Government contends that 'ores of the metals' and 'nonmetallic substances,' obviously described mineral substances which may or may not contain metals, but which were not mined for the purpose of recovering the metals they contained. Furthermore, the Government points out, within the classification of nonmetallic substances were several which had meaning solely as classifications of the nonmetallic use to which minerals were put, including abrasives and refractories. Therefore, in view of the close cooperation of the Treasury and the Joint Committee in the enactment of Section 114(b)(4), 'Its substantially contemporaneous expressions of opinion are highly relevant and material evidence of the probable general understanding of the times and of the opinions of the men who probably were active in the drafting of the statute.' See White v. Winchester Club, 315 U.S. 32, 41, 62 S. Ct. 425, 430, 86 L. Ed. 619. Furthermore, the substance of Regulation 74 has been promulgated under later Revenue Acts and the Government argues that re-enactment of the Revenue Acts illustrates specific Congressional approval of this interpretation, as embodied in the Regulation. With this argument the court is less impressed. Cf. Griswold, A Summary of the Regulations Problem, 54 Harv. 398.
The evidence at trial indicated that administrative interpretation has continued further. Mr. L. R. Anderson, chief of the natural resources section of the Bureau of Internal Revenue, testified at trial that the 'end use' rule has been the Bureau's policy throughout the years, but was modified slightly in 1938 to meet the 'unusual situation of a mine which produced both substances susceptible of a metallic and nonmetallic use from the same property in the same year,' by a ruling classifying the mine according to the use for which the product had the greater value. In the war period, when taxpayers producing and using substances for nonmetallic uses were asked by the Government to divert all or a part of their production to the production of metals, there was issued General Counsel's Memorandum 24185 which stated that: 'Where a mine produces an ore containing substances which are susceptible to both metallic and nonmetallic uses, or where a man produces both metallic and nonmetallic substances from the same ore ...