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U.S. Supreme Court

Commissioner v. Portland Cement Co. of Utah, 450 U.S. 156 (1981)

Commissioner of Internal Revenue v.

Portland Cement Company of Utah

No. 79-1907

Argued January 13, 1981

Decided March 3, 1981

450 U.S. 156


Respondent mines cement rock and manufactures it into Portland cement. Section 611(a) of the Internal Revenue Code of 1954 allows respondent, as a miner, to deduct from its taxable income a percentage of its gross income from mining as a recoupment of capital investment in the depleting mineral. Because respondent, as an integrated miner-manufacturer, has no actual gross income from mining, it must base its depletion deduction upon a constructive gross income from mining. For each of the tax years at issue in this case, respondent used the proportionate profits method prescribed by the Treasury Regulations to compute such constructive gross income. This method uses the costs of and proceeds from the taxpayer's "first marketable product" to derive the constructive gross income. The regulations define "first marketable product" as

"the product (or group of essentially the same products) produced by the taxpayer as a result of the application of nonmining processes, in the form or condition in which such product or products are first marketed in significant quantities by the taxpayer."

The regulations provide that bulk and packaged products are considered to be essentially the same product for this purpose. The method required respondent to derive the portion of total proceeds that reflects the ratio between its mining costs and its total costs. Under the regulations, respondent must include in the total costs figure "all the mining and nonmining costs paid or incurred to produce, sell, and transport the first marketable product." Respondent took the position that its "first marketable product" was cement sold in bulk, rather than all cement sold, whether in bulk or in bags. The costs of bags and bagging exceeded respondent's bagging premium (the increase in proceeds for selling cement in bags). Hence, respondent did not include proceeds from the sale of cement in bags in the total proceeds figure of the proportionate profits method. Nor did respondent include in the total costs figure of the method the costs incurred for bags, bagging, storage, distribution, and sales. The result was that the proportionate profits method yielded a greater constructive gross income from mining, and respondent reported a correspondingly greater depletion deduction, than

Page 450 U. S. 157

it would have if it had included those proceeds in costs in its computation by such method. Petitioner Commissioner of Internal Revenue determined that respondent's reported tax liabilities were deficient, taking the position that respondent's "first marketable product" is cement, whether sold in bulk or in bags, and that respondent should have included proceeds from its sale of bagged cement in its calculation by the method, and also the costs incurred for bags, bagging, storage, distribution, and sales. Respondent then filed suit in the Tax Court for a redetermination. That court accepted respondent's position, and the Court of Appeals affirmed.

Held: The Treasury Regulations defining "first marketable product" and prescribing the treatment of the costs of bags, bagging, storage, distribution, and sales support the Commissioner's position. Pp. 450 U. S. 165-174.

(a) This Court customarily defers to Treasury Regulations that "implement the congressional mandate in some reasonable manner." United States v. Correll, 389 U. S. 299, 389 U. S. 307. P. 450 U. S. 169.

(b) Respondent's contention that the Commissioner's position will yield a distorted constructive gross income from mining if it is applied without regard to the particular circumstances in this case, i.e., that respondent's bagging costs exceed its bagging premium, misperceives both the meaning of "gross income from mining" and the holding in United States v. Cannelton Sewer Pipe Co., 364 U. S. 76. Under the Code and regulations, gross income from mining means income received, whether actually or constructively, without regard to value. In Cannelton, in interpreting an earlier statutory definition of "mining," the Court said that

"Congress intended integrated mining-manufacturing operations to be treated as if the operator were selling the mineral mined to himself for fabrication."

Id. at 364 U. S. 89. This statement, in the context in which it occurs, does not support respondent's contention that the method used to determine constructive gross income must take into account forces that might cause income to differ from value. Nor does the difference between bagging costs and the bagging premium warrant a deviation from the regulation's definition of "first marketable product." Pp. 450 U. S. 170-173.

(c) The statutory definition of "mining" to include all processes up to the introduction of the kiln feed into the kiln, "but not . . . any subsequent processes," forecloses respondent's further contention that the costs it incurred in the storage, distribution, and sales of its first marketable product, if they must be included in the proportionate profits method, should be treated as indirect costs which benefit the entire mining-manufacturing operation, and hence should be allocated between mining and manufacturing. The regulations recognizing that

Page 450 U. S. 158

storage, distribution, and sales are "subsequent processes" are reasonable. Pp. 450 U. S. 173-174.

614 F.2d 724 reversed.

POWELL, J., delivered the opinion for a unanimous Court.

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