The opinion of the court was delivered by: ZIEGLER
This is a civil action for the recovery of corporate income taxes for the taxable years 1961 through 1967 and for the period January 1 through May 15, 1967 in the amount of $1,849,868.12, plus interest from the dates of payment. Plaintiff, Jones and Laughlin Steel Incorporated, seeks to recover corporate income taxes which were assessed and collected following an adjustment by the Commissioner of Internal Revenue that reduced plaintiff's iron ore depletion deductions for the years at issue. Relying on a regulation of the Department of Treasury, the Commissioner determined that the sintering of iron ore fines and concentrates at the mill sites was a non-mining process so that the increase in the value of the fine concentrates could not be included in plaintiff's gross income from mining for the purpose of computing a percentage depletion deduction.
The issue presented is whether Treasury Regulation 1.613-4(f)(3)(ii) is consistent with the language of Section 613(c)(4) of the Internal Revenue Code of 1954.
We hold that the regulation at issue is invalid since it conflicts with the Congressional mandate and fails to "harmonize with the plain language of the statute, its origin, and its purpose." National Muffler Dealers Association, Inc. v. United States, 440 U.S. 472, 477, 59 L. Ed. 2d 519, 99 S. Ct. 1304 (1979). Specifically, Congress has provided that sintering is a mining process which includes the treatment normally applied by mine owners to obtain a commercially marketable mineral product, whether the treatment occurs at the extraction site or not, and therefore an agency regulation to the contrary cannot be enforced. Plaintiff's motion for summary judgment will be granted.
The facts are not in dispute. Jones & Laughlin Steel Incorporated is the successor to Jones and Laughlin Steel Corporation, and is organized and existing under the laws of the state of Delaware, with its principal office located at Pittsburgh, Pennsylvania. Plaintiff is a major manufacturer of iron and steel and operates mills at Pittsburgh and Aliquippa, Pennsylvania, and Cleveland, Ohio. The company operates iron ore mines known as the Benson Mine located at Starlake, New York, and five open pit mines on the Mesabi Range in Minnesota. These mines provide a substantial portion of the raw materials required to make iron and steel at plaintiff's mills.
Plaintiff also operates sintering facilities at the Benson Mine and at the steel mills in Cleveland, Pittsburgh and Aliquippa. Sintering is a process or treatment applied to iron ore fines and concentrates to improve their physical structure and make them suitable as a blast furnace feed (Stip. at 17, 21-24). A major portion of the Benson Mine concentrates were sintered at that mine (Stip. at 15) while the remaining concentrates were shipped to plaintiff's steel mills for treatment. The ore fines sintered at the Benson Mine were shipped to the taxpayer's steel mills and were fed directly into the blast furnaces (Stip. at 15).
In determining its depletion base for computing the percentage depletion deduction on iron ore mined at the Benson and Minnesota mines, Jones and Laughlin included as part of gross income from mining the value attributable to the sintering of ore at both the Benson Mine and at plaintiff's mills (Stip. at 18).
After examining the taxpayer's federal income tax returns for the years at issue, the Commissioner denied that portion of plaintiff's percentage depletion deduction to the extent the depletion base (gross income from mining) included the value attributable to the sintering performed at the Aliquippa, Pittsburgh, and Cleveland mills. The Commissioner assessed and collected deficiencies in taxes and interest, and the taxpayer responded with this civil action claiming an overpayment of taxes for the relevant years. The Commissioner allowed a depletion deduction in an amount attributable to the value of the iron ore sintered at the Benson Mine (Stip. at 19), and that amount is not at issue.
B. Validity of Treasury Regulation
The United States contends that Regulation 1.613-4(f)(3) (ii) permits sintering as a mining process only to the extent that the treatment is needed to ship the iron ore fine. At issue is the validity of the regulation, since Treasury regulations properly enacted carry the force of law.
Treasury regulations are valid if they "implement the Congressional mandate in some reasonable manner." United States v. Correll, 389 U.S. 299, 307, 19 L. Ed. 2d 537, 88 S. Ct. 445 (1967); Commissioner v. Portland Cement Company of Utah, 450 U.S. 156, 169, 67 L. Ed. 2d 140, 101 S. Ct. 1037 (1981). A particular regulation properly implements the Congressional mandate if the regulation "harmonizes with the plain language of the statute, its origin, and its purpose." National Muffler Dealers Association v. United States, 440 U.S. 472, 477, 59 L. Ed. 2d 519, 99 S. Ct. 1304 (1979). When Congress defines the statutory language, the Commissioner may promulgate regulations under 26 U.S.C. § 7805(a) to "prescribe all needful rules." Less deference is accorded, however, when the Commissioner interprets a specific Code provision. Rowan Cos., Inc. v. United States, 452 U.S. 247, 253, 68 L. Ed. 2d 814, 101 S. Ct. 2288 (1981).
In Rowan, the Supreme Court articulated the following test: