The opinion of the court was delivered by: SNYDER
This action is a civil refund suit for the recovery of corporate income taxes for the taxable year 1960 in the amount of $111,504.12, attributable to an adjustment made by the District Director of Internal Revenue by which the Plaintiff's iron ore depletion deduction was reduced in the amount of $214,431.00. The case was fully stipulated to the Court and expertly briefed by counsel. We are asked by the Government to find in its behalf because the question is controlled by the decision of the Supreme Court of the United States in United States v. Cannelton Sewer Pipe Company, 364 U.S. 76, 80 S. Ct. 1581, 4 L. Ed. 2d 1581 (1960). We find that the Government's position is not well taken and judgment must be entered for the Plaintiff.
The Plaintiff filed its federal corporate income tax return for the year 1960 with the District Director at Pittsburgh, Pennsylvania, and paid the taxes shown to be due thereon. Upon audit of the Plaintiff's return, the District Director made the adjustment which resulted in tax deficiencies asserted in the principal amount of $2,041,456.04, which the Plaintiff paid. On March 19, 1968, the Plaintiff filed with the District Director a claim for tax refund in the principal amount of $114,504.12.
Plaintiff is a major manufacturer of steel, mining its own iron ore for use in its steel mills. As a miner, Jones & Laughlin Steel Corporation (J&L) is entitled to a depletion deduction designed as an allowance for the exhaustion of the mineral assets used up in the mining process and not as a subsidy to miners who are also manufacturers of products. It compensates for the exhaustion of a wasting asset and encourages exploration and discovery of mineral deposits. See Parsons v. Smith, 359 U.S. 215, 79 S. Ct. 656, 3 L. Ed. 2d 747 (1959).
As stated in the Government's Brief (p.12):
"There is no dispute in this case, . .. that the Plaintiff is entitled to a depletion deduction with respect to its iron ore mining activities."
The dispute between the parties here is as to the depletion base, that is, the gross income from mining against which the percentage depletion is to be applied.
We must therefore determine the proper amount of "gross income from mining" by deciding whether or not that "gross income from mining" should include the value added to the iron ore by the process carried on at the mills, known as "sintering". If, on the one hand, the sintering of the Plaintiff's iron ore at its mills is a non-mining process, that is a manufacturing process, then the value added to the iron ore by such processing should not be included in determination of "gross income from mining" for percentage depletion purposes.
Under Section 613 of the Code, the depletion deduction is allowed as a percentage of the "gross income from property" which is defined in the same Section as "gross income from mining."
And "mining" is defined in Section 613(c)(2) as including not just the extraction of the mineral 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, and so much of the transportation or ores or minerals (whether or not by common 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 50 miles unless the Secretary or his delegate finds that the physical and other requirements are such that the ore or mineral must be transported a greater distance to such plants or mills."
Section 613(c)(4) of the Code designates the minerals and processes which are included in the "ordinary treatment processes". The ore involved in this case, iron ore, is specifically designated and the process of "sintering" is named as an ordinary treatment process in Section 613(c)(4)(C).
As a possible aid in interpretation, we turn to the Treasury Department's submission to the Committee on Ways and Means in February of 1959, a proposed draft of legislation to amend, among other things, the provisions of Section 613(c)(4) of the Code (106 Cong. Rec. Part 10, p. 13216 (1960)). In addition to "sorting" and "concentrating" as treatment processes, the Treasury proposal would have allowed additional processes only if necessary "to bring the mineral or ore to form and condition suitable for shipment." Such additional processes were defined as "those processes which are necessary to bring the mineral or ore to the fiscal form and condition in which it is capable of being transported as distinguished from those processes applied to make the mineral or ore salable." The Treasury's proposed amendment was introduced by Senator Gore on the floor of the Senate as an amendment to H.R. 12381, which was subsequently enacted but not in the form in which it was introduced. Rather the Senate-House Conferees receded from the amendment as proposed and adopted by the Senate, and, instead, adopted an amendment substantially restating existing law and effective beginning after December 31, 1960, as follows:
"in the case of iron ore, bauxite, ball and sagger clay, rock asphalt, and [ores or] minerals which are customarily sold in the form of crude mineral product -- sorting, concentrating, sintering, [and substantially equivalent processes] to bring to shipping grade and form, and loading for shipment; . . ." [Words in brackets added in 1960].
Thus, after the 1960 Amendment, Section 613(c)(4)(C) of the Code reads substantially the same as it did for the tax year involved (1960).
We now turn to United States v. Cannelton Sewer Pipe Co., 364 U.S. 76, 80 S. Ct. 1581, 4 L. Ed. 2d 1581 (1960), where the Court held (4 L. Ed. 2d at 1587):
". . . [The] Section contains four categories of 'ordinary treatment processes': the first enumerating those permissible as to the mining of coal; the second, as to sulphur; the third, as to minerals customarily sold in the form of the crude mineral product; and the fourth, as to those ores not customarily so sold. We note that Congress even states the steps in each permissible process, and in addition specifically declares some processes not to be 'ordinary treatment' ones, viz., 'electrolitic deposition, roasting, thermal or electric smelting, or refining.' ...