Smith and Freedman, Circuit Judges, and Miller, District Judge.
WILLIAM F. SMITH, Circuit Judge.
These appeals are from a judgment in favor of the defendant in an action for the refund of federal income taxes for the years 1951 to 1956, inclusive. The opinions of the district court are reported in 237 F. Supp. 838 and 242 F. Supp. 326 and 327. The controversy pertains to the method employed by the court below in the computation of depletion deductions allowable in the years in question. There is no dispute as to the material facts. We find it necessary to consider only the issues raised on the plaintiff's appeal and these will be separately treated.
The plaintiff was an integrated miner-manufacturer engaged in the production of portland cement. It was the owner of a quarry from which it extracted cement rock which was used exclusively in the manufacture of cement; none of its quarried product was sold or saleable in the open market.
After the rock was quarried it was subjected to a treatment process comprised of the following successive steps: (a) the quarried rock was crushed and reduced to pieces having a maximum dimension of 7/8ths of an inch; (b) the crushed rock was mixed with limestone, cinders or iron ore, and sand, which were purchased in the open market; and (c) the mix was pulverized*fn1 and then fed into a kiln in which it was calcined for approximately two hours. The calcination converted the mix into cement clinkers, hard pieces of the size of an ordinary marble. These were blended with gypsum and then ground to a fine powder known as portland cement. the finished product was then stored in silos from which it was ultimately loaded into trucks or freight cars for shipment to consumers.
PERTINENT PROVISIONS OF THE STATUTES AND REGULATIONS
The depletion allowances for the years 1951, 1952 and 1953 are authorized by the pertinent provisions of the Internal Revenue Code of 1939, 26 U.S.C.A. §§ 114(b)(4)(A)(ii) and (B), as amended. Similar allowances for the other years are authorized by the pertinent provisions of the Internal Revenue Code of 1954, 26 U.S.C.A. §§ 611(a) and 613(a) (b)(6) and (c), as amended. For the purposes of this litigation the relevant provisions of the respective codes may be regarded as substantially similar except as to the percentage of gross income from mining allowable as a deduction.
Section 611(a) provides that in "the case of mines, * * *, [and] natural deposits, * * *, there shall be allowed as a deduction in computing taxable income a reasonable allowance for depletion * * *, according to the peculiar conditions in each case; such reasonable allowance * * * to be made under regulations prescribed by the Secretary [of the Treasury] or his delegate." Under §§ 613(a), (b)(6) and (c)(1)(2), the taxpayer may claim as a deductible allowance a specified percentage "of the gross income from the property" which, in the case of property other than an oil or gas well, means "the gross income from mining."
Subdivision (c)(2) of § 613 was amended in 1960 (74 Stat. 291, 292) so as to define with more particularity the stage in integrated operations at which "mining" ended and manufacturing began, the cut-off point for calculating the depletion allowance determined on the basis of "gross income from mining." The amendment defined "mining" as including "not merely the extraction of ores or minerals from the ground but also the treatment processes considered as mining described in paragraph (4) * * *." The said paragraph, as applied in the instant case, describes the treatment processes considered as mining as "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." The obvious purpose of the amendment was to move the cut-off point forward from the crushing to the pre-kiln stage.
The amendment as first enacted was made applicable only with respect to taxable years beginning after December 31, 1960. However, by later enactment (74 Stat. 1017, 1018), the amendment was made retroactive and applicable with respect to earlier years and in specific situations, provided the taxpayer elected to have the amendment apply. Such an election was made by the plaintiff. It follows that for the purpose of this litigation "mining" operations ended when the prepared mix, comprised of cement rock and purchased minerals, was fed into the kiln.
The method of computing "gross income from mining" as defined in § 613(c)(2), as amended, is prescribed by §§ 39.23(m)-1(e)(3) of Treasury Regulation 118. 26 CFR (1939). Since the plaintiff by its election consented to the application of the 1960 amendments, the computation of "gross income from mining" was made under the following formula:
"* * * If there is no * * * representative market or field price (as of the date of sale), then there shall be used in lieu thereof the representative market or field price of the first marketable product resulting from any process or processes (* * *) minus the costs and proportionate profit attributable to the transportation (other than transportation treated, ...