United States v. Cannelton Sewer Pipe Company

PETITIONER:United States
RESPONDENT:Cannelton Sewer Pipe Company
LOCATION:Bonneville Dam

DECIDED BY: Warren Court (1958-1962)
LOWER COURT: United States Court of Appeals for the Seventh Circuit

CITATION: 364 US 76 (1960)
ARGUED: May 19, 1960
DECIDED: Jun 27, 1960

Facts of the case


Audio Transcription for Oral Argument – May 19, 1960 in United States v. Cannelton Sewer Pipe Company

Earl Warren:

Number 513, United States, Petitioner, versus Cannelton Sewer Pipe Company.

Mr. Spritzer.

Ralph S. Spritzer:

Mr. Chief Justice, Your Honors.

This is a tax case, one which we believe to be of broad, economic and legal implications.

In relation to this taxpayer, it raises the question whether a company which mines fire clay and shale to whether cheap and common minerals which characteristically sell at something around $2 or less a ton.

A company which mines those minerals and thereafter, manufactures them into sewer pipes, which sell at $35 or $40 a ton may take percentage depletion on the theory that its total receipts from the sale of sewer pipe represent its gross income from mining.

Now, taxpayer’s contention that it may do precisely that may strike the Court as rather startling, because though it has long been recognized that mineral depletion provides a very liberal allowance for mining, it is not generally been thought, at least until very recently, that percentage depletion affords a gigantic subsidy for manufacturing operations as well.

Now, what we challenge here is not the concept of percentage depletion, but the attempt to incorporate into the base upon which percentage depletion is taken, values created by operations which are far removed from the concept of mining.

Of the 12 principal processes used in making sewer pipe as explained, as outlined in taxpayers’ complaint in this case, at Record 252, the first one of the 12 takes in the mining of the clay, the loading and the unloading of it and the delivery to the factory gates, and the other 11 are processes which are performed inside the Cannelton factory, and which involve, as the testimony of taxpayers, officer would show the use, among other things, of automatic presses and of extrusion machinery.

In our view, this is a complete perversion of the depletion statute and of the implementing regulations, and we think it is in the teeth of some 40 years or more of history, the whole history of mineral depletion.

In the course of which, I may say, no representative of the mining industry ever contended that the branch of the industry which he represented would be entitled to take depletion on finished products of the kind which taxpayer says may constitute the basis of depletion in this case.

First, let me state a little more of the facts before getting to the statute.

The tax years here are 1950 and in 1951.

In both those years, taxpayer, which is an Indiana corporation mined this fire clay and shale from pits which were very close to its factory.

It didn’t sell this fire clay or shale, being an integrated operator it used it all in the manufacture of sewer pipe and certain related products.

Its cost in extracting mineral was something in the neighborhood of $2 per ton.

As I indicated, its sales price on the finished sewer pipe averages close to $40 a ton.

Its complaint claims depletion on the express and explicit basis that its gross income from mining embraces the total receipts from its — from the sale of its finished products.

The depletion rate, incidentally, on fire clay is 15% on the statute.

The depletion rate on shale is 5%.

And since it appears the taxpayer uses fire clay and shale, which come out of the same mining operation, incidentally.

In 60 to 40 proportions, it gets what I might call a mixed rate, which works out to 11%.

And this rate as applied to a depletion base computed by reference to the sales receipts from the sale of sewer pipe yield —

William O. Douglas:

Gross — gross —

Ralph S. Spritzer:

Gross receipt.

William O. Douglas:

Gross receipt.

Ralph S. Spritzer:

Yes, Your Honor, yield an allowance of a little over $4 per ton.

Now, this record shows that miners of fire clay in Indiana who are nonintegrated sold fire clay and shale for less than $2 a ton.

It was sold in substantial quantities for prices ranging from $1.60 to $1.90.

William O. Douglas:

That was just raw material.

Ralph S. Spritzer:

The raw clay and shale.

And the depletion on clay and shale, which this taxpayer gets by its computation, yield with over $4 a ton, and my — the point I am bringing out is that its depletion allowance actually comes to double what it could have gone out and bought fire clay and shale for.

Another way of putting it would be that the United States Treasury would be better off if Cannelton’s theory of depletion is correct, to go out and buy fire clay and shale, and give it to Cannelton free of charge.[Laughter]

Felix Frankfurter:

You mean under the free enterprise system?

Ralph S. Spritzer:

Yes, sir.[Laughs]

Because if depletion is a ticket to taking depletion — if the statute is a ticket to taking depletion on the finished product, Cannelton is better off rejecting such an offer than it would be accepting it.

There was a miner across the river from the Cannelton Company who mined clay, the $1.40 a ton and sold it to a competing sewer pipe manufacture.

Cannelton’s depletion allowance is over $4 a ton.


Ralph S. Spritzer:

Cannelton’s is over $2.

They have a deep mine and their costs are higher than most of these miners.

So they, more recently, buy it instead of mining it.

Well, “buy it” is the wrong word.

More recently, they’re obtaining it from this same miner across the river.

They’d given him a dollar in return for which they have taken the lease, and they’ve given him a contract to mine the fire clay and shale.

They claim the economic interest on the basis of this lease.

And now, they take depletion on his fire clay and shale which he can mine and apparently, make a profit on delivering it at a $1.40 a ton.

They’re getting the depletion on that apparently today, yielding upwards of $4 a ton.

The nonintegrated miners of fire clay, the Court of Appeals pointed out, would necessarily take depletion on the basis of the value of the raw clay and shale.

That would mean for someone selling fire clay at $2, he’d get 30 cents.

If he sold shale, and shale was sold for $1 a ton, he would get 5 cents a ton.

I won’t labor the figures further.

I would like to point out that the Court of Appeals noted that the Government had proved that there were miners of fire clay and shale in Indiana who were nonintegrated and who were selling it.

It noted that out of 500,000 tons of fire clay sold in Indiana, in the tax year involved, taxpayer’s own expert conceded that something like 300,000 tons had been sold by nonintegrated producers.

And the basis of the Court’s holding that Cannelton, unlike miners of the same clients who are nonintegrated, may take depletion on the basis of finished product.

The basis of its holding was that Cannelton, because of its high mining cost and the high transportation cost, which it would have had in bringing raw clay and shale to the markets where it is sold in quantity, could not have sold it profitably.

Now we don’t contest that finding.

We agree that it could not have sold it profitably, its costs being what they were.

We don’t think that that has — that that is the test under the statute.

And that, of course, brings me without further delay to the statute.

Ralph S. Spritzer:

The statute is set out in our brief on page 93, in relevant provision as — I would like to identify the language for the Court.

I seem to lose my place at the moment.

Oh, yes.

It starts about four or five lines from the bottom on page 93.

Our question, of course, here is what is embraced in the concept of mining.

The statute first says that depletion may be taken on the basis of the gross income from the property.

It defines gross income from the property as gross income from mining, and then it goes on to say the term mining, as used herein, shall be considered to include not merely the extraction of the ores or minerals 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.

Now, that is the crucial language, though there is some further language to which I’ll refer in a few minutes, which sheds further light.

Now, the Court of Appeals, here, concentrated on the words, “commercially marketable product” and it said, “Yes, raw fire clay and shale have commercial value and the Government’s proof in this case has shown that there is a regular commerce in those minerals.

Nonetheless, it goes on to hold that taxpayer did not have a commercially marketable product.

It individually, it did not have a commercially marketable product because the Court says it could not sell its fire clay and shale at a profit.

As to the antecedent words, you will note that the statute speaks of a miner being unable to take depletion on the basis to include in depletion the ordinary treatment processes normally applied by mine owners and operators to obtain that product.

As to those antecedent words, ordinary treatment processes, the District Court made the finding, which you will find at Record 5, that the — this is Finding 10, that the processes used by plaintiff, and I’ll skip on, where processes normally applied by mine owners or operators who are engaged in the manufacture of vitrified clay sewer pipe and related products.

And the Court of Appeals apparently agreed with that finding.

Now, the result here is that the court below has held, one, that the individual miner manufacturer, the miner who’s integrated, can take his depletion on the basis of the product which he finds it profitable in his operation to make and sell, the finished product, if that’s the first thing he finds it profitable to make and sell.

And it has held, second, that there’s no objection to his including in the depletion base whatever processes, whatever their nature, are acquired in order to obtain that finished product.

Now, we differ on both those propositions.

Now, Cannelton’s main reliance, as I’ve said, is upon the words, “commercially marketable mineral product”.

Could I ask you a question?

Did the — as you read the Court of Appeals’ opinion, did it hold that as a matter of law, the end product was the determinative thing in all instances?

Ralph S. Spritzer:

Only — no.

He can — the taxpayer, the Court of Appeals said can go to that point where he obtains a product which he can market at a profit.

Even though he’s not making it.

Ralph S. Spritzer:


They allow him to go as far as — oh, yes, yes.

They say —

In other words —

Ralph S. Spritzer:

— that his depletion base in this case is not raw fire clay and shale even though there is a regular commerce in those products because he could not sell it at a profit.

Does that mean that if the proof had showed that this manufacture could have sold that anterior product at a profit, that the —

Ralph S. Spritzer:


— then that would have been the base.

Ralph S. Spritzer:

That’s right.

The Court of Appeals says in its opinion, necessarily the nonintegrated miner would take it on raw fire clay and shale, and it would also say, presumably, that if a manufacturer had a lower cost to mine than Cannelton, but otherwise, did the same thing, so that it could have sold the raw fire clay and shale at a profit at the going price that he would take it only on the fire clay and shale and not on the sewer pipe, which gives it 20 times greater yield.

William J. Brennan, Jr.:

But if it had ended up with bricks, instead of sewer pipe, bricks would sold at $3 a ton and make a profit.

Ralph S. Spritzer:


William J. Brennan, Jr.:

That that would have been the measure?

Ralph S. Spritzer:

The Court does not deal with that.

I would rather doubt that the Court of Appeals would say that the — that it was going to attempt to determine what the manufacturer could make if he had a different type of factory.

William J. Brennan, Jr.:

Well, then I don’t understand your answer to Justice Harlan.

Ralph S. Spritzer:

My answer to Justice Harlan was that if the Court of Appeals had concluded in this case that Cannelton with its mining costs could have sold raw fire clay and shale at a profit, it would have held that that was the depletion base.

On the other hand, finding the contrary, it held the taxpayer could go on to the product which it did make, which yielded at a profit, which is sewer pipe.

William J. Brennan, Jr.:

Well, that’s the only product it is making.

Ralph S. Spritzer:

That’s the only product it makes other than the fire clay and the shale, and that is our contention that the raw fire clay and shale is a commercially valuable product and that all miners of fire clay and shale must take depletion on the same basis.

It is the industry-wide, commercially marketable product for miners of the same client, and if one takes the — the view which Cannelton suggests, the consequence would be that a high cost mine, badly located, which is by hypothesis, less valuable as a mine, would qualify for far greater depletion than a low-cost, well located mine, which is by hypothesis, more valuable, because it can compete effectively at the going price for the mineral product.

This stands depletion on its head.

Charles E. Whittaker:

Where, Mr. Spritzer, if I may ask if you understand, does the Court of Appeals get this basis or this concept in profit?

Ralph S. Spritzer:

I was about to reach that, Your Honor.

Charles E. Whittaker:

Go on.

Ralph S. Spritzer:

It says that the word “marketable” implies that there must be an opportunity to market it profitably.

It says in this case, to indicate how we’ve viewed the question that was before it.

It summed up the issue in one sentence that it saw the issue speaks the question squarely presented at the beginning of the opinion.

That’s on 267.

The question squarely presented is whether that statutory language which defines as a part of mining, all ordinary treatment processes normally applied by mine owners to produce the commercially marketable mineral products or product, includes all processes necessary by a taxpayer to obtain a product which can be sold at a profit.

Now, it gets to — and the word profit isn’t in the statute.

The Court of Appeals has taken the term “marketable” to imply that —

Could be using this?

Ralph S. Spritzer:

To imply marketable at a profit.

Now, we would say initially to that that a product is marketable if there’s a regular commerce in it, and the market, as every entrepreneur knows, frequently imposes a loss, as well as a profit, and this statute does not import any notion of profitability.

We think that the words “commercially marketable mineral product” refer to the basic product of the mine, whatever the classes of mine.

In a state where the mineral has been sufficiently separated from the waste and impurities in which it is found in its natural form, and sufficiently prepared if preparation is necessary so that it’s ready for shipment or for use.

William J. Brennan, Jr.:

Now, in relation to 252, 253 you —

With reference is to the record, Your Honor?

Yes (Inaudible) your first reference to the steps and the processes involved here, where on your theory as to processing to that end?

Ralph S. Spritzer:

On our theory, this miner had a marketable product when it had the shale and clay removed from the ground and transported into the surface and loaded.

William J. Brennan, Jr.:

Before any of (Voice Overlap) —

Ralph S. Spritzer:

Before any of the processes that begin with paragraph (b).

William J. Brennan, Jr.:


Ralph S. Spritzer:

Now, I’d like to emphasize since taxpayer —

So under that theory, you’ve got no treatments.

Ralph S. Spritzer:

Well this happens to be a mineral, which is saleable, can be sold as it’s dug out of the ground and loaded on trucks.

That in all events, it would exclude any application of the treatment clause of the section, does it not?

I thought you —

Ralph S. Spritzer:

If they’ll — they’re allowed all ordinary treatment processes.

In fact, the only thing they do with fire clay and shale is dig it up.

Well, actually, they have to get it out of the ground, that ends it from your point of view as to —

Ralph S. Spritzer:

For that particular mineral.

It’s unusual that — it’s an unusual mineral in that respect.

In this case — in this case, you will get no effect — give no effect to that treatment process clause of the section.

Charles E. Whittaker:

Because you’ll (Voice Overlap) —

Ralph S. Spritzer:

Because it’s not involved.

Well, I’m not —

Ralph S. Spritzer:


— saying (Voice Overlap) —

Ralph S. Spritzer:

Mineral treatment means simply, in its common usage in the industry, doing what’s necessary to the mineral to eliminate the waste and impurities and get it in — conditionally, you can ship it.

Now with most minerals, there are good many things that have to be done.

A low grade iron ore comes out of the ground and it has such a great amount of waste that it wouldn’t be worth the price of shipping it, unless you eliminated some of the waste matter.

That’s called concentrating.

Well, all the miners do that and they’re allowed to include that in their depletion base.

The point I would make about this ordinary treatment process language is that it obviously imposes a class standard.

It talks about the ordinary processes normally applied by mine owners, and this taxpayer as in effect contended that the depletion base varies from taxpayer to taxpayer within the same class.

Ralph S. Spritzer:

That one miner of fire clay and shale will get depletion on the basis of fire clay.

Another, if he doesn’t sell fire clay and can — so he couldn’t profitably have sold it, will get it on buff bricks, the third one on sewer pipes and so on.

We have other cases since Cannelton in which the same contention is being made in various forms, cases in which a miner of iron ore says he can’t sell the iron ore profitably.

He wants depletion on pig iron.

We have a case in which a salt company mines salt which sells for around $10 a ton as naked salt, says it wouldn’t be profitable to sell it in that form.

It is seeking to take depletion on the basis of the value of small in — salt in small packages as it is ready for sale on the supermarket shelves, and so computed salt has a value close to $2 a ton in the smallest packages.

There are cases in which miners of lignite, a cheap coal, are claiming depletion on the basis of activated carbon, which is worth several hundred times as much.

Now that is economics.

They — what is involved in this case.

Now, I’m talking about the statutory definition, the main part of the definition, but there is something more that goes with it.

Congress has gone on after this language relating to ordinary treatment processes, and this about one-third of the way down on page 94, and it says the term “ordinary treatment processes” as used herein shall include the following.

Hugo L. Black:

Page 94 of what?

Ralph S. Spritzer:

94 of the Government’s opening brief, Your Honor.

Shall include the following, and four subparagraphs follow.

Now before I get into the rather detailed language of those four subparagraphs, I’d like to make one or two observations about them.We agree with taxpayer that this listing does not purport to be all inclusive.

And if I may anticipate for a moment the discussion of the legislative history to which I intend to come later, Congress stated when it wrote the definition of mining with these four subparagraphs included.

It stated in the Senate Committee report that these subparagraphs were designed as a reasonable specification of various processes which might be included for various kinds and classes of mines.

I emphasize the reasonable specification because it is significant when we consider the types of processes which have been authorized and I emphasize further that the senate report referred to various, kinds and classes of mines, which does — which we think is inconsistent with taxpayer’s view that individual integrated miners can get widely varying depletion bases depending on the particular products which they make and sell.

The ordinary treatment processes listed by Congress are one in the case of coal, cleaning, breaking, sizing and loading for shipment.

Now, all of these are obviously preparatory processes, getting it to the point where you’re ready to load it on the — on the coal cars.

The last of them is loading for shipment, and coal is almost invariably broken up and put through screens, broken and sized and cleaned before it’s shipped.

That’s done right after mine or at the mine depot.

The second category in the case of sulphur, pumping to that is cooling, breaking and again, loading for shipment, again, we’re dealing with the necessary extractive or preparatory processes.

These are the — the processes which are necessary to get sulphur out of the ground by the use of a method which sulphur miners all use the Frasch method.

Indeed, you will notice as I go through these four subparagraphs that there are two categories of processes which are allowed.

The one separative or extractive processes, getting the valuable constituent out of the mineral, eliminating the waste and extraneous matter.

The other preparatory processes to get it in shipping grade or form, breaking it up so it’s in manageable size or eliminating excess moisture, crushing it if that’s necessary.

Well, going on that is the third subparagraph.

This relates not to one individual mineral but to a number of specified minerals, and then to a class, other minerals which are customarily sold in the form of a crude mineral product.

And as to those, Congress has said that the miner, if he uses them, may take depletion on assorting, the concentrating, which is simply getting the mineral in more concentrated form and sintering.

Ralph S. Spritzer:

Sintering is heating up the dusty particles which you get from some minerals so they’ll form a porous clinker because obviously, you can’t ship dust, but you can ship clinkers.

All — again, one notes for the purpose of bringing the mineral to shipping grade and form and loading for shipment.

Then we come to the fourth category.

William J. Brennan, Jr.:

Now, may I ask, do you suggest that this mineral comes within that subdivision?

Ralph S. Spritzer:


It’s customarily sold as raw clay and shale.

And all of the processes here are obviously of the type which have nothing to do with anything that might be done in a factory of any kind.

William J. Brennan, Jr.:

Well, as I understood you though, Mr. Spritzer, there’s no sorting or concentrating or sintering involved, is there, as to this (Voice Overlap) —

Ralph S. Spritzer:

This is included in the general category of the minerals sold in the form of the crude mineral product.

In that sense, it comes within this class.

William J. Brennan, Jr.:

But as to this particular — but as to this particular mineral, none of those things.

Ralph S. Spritzer:


Well, there’s great variation from mineral to mineral as to what you have to do to — to get them ready.

As we know that in case of coal, they clean it, oddly enough.

The fourth category relates to minerals not customarily sold in the form of crude mineral product.

There are various metals there and then it says, “And ore is not customarily sold in the form of the crude mineral product.”

And as to those, the taxpayer to miner is allowed to include a variety of processes; crushing, grinding and beneficiation by concentration then various other methods of beneficiating the mineral and dropping down or by substantially equivalent processes or a combination of processes used in the separation or extraction of the product or products from the ore.

So again, we have a group of processes which are separative or extractive which involve getting the valuable constituent out of the mine, but don’t involve in any instance the kind of process which might be used for purposes of taking that valuable constituent and then making it into a new and different product, which is the kind of processes — the kind of process which this taxpayer would include in its depletion base.

Now, there’s a parenthetical clause in subparagraph (4), which is important, and I’d skipped over and I now want to go back to it.

But not including — not including as an ordinary treatment process, electrolytic deposition, roasting, thermal or electric smelting or refining.

Now, this is highly significant, we think.

And the reason is this.

When depletion was first granted, and I’m again anticipating the history for a moment, when depletion was first granted in relation to metals, and that took place in 1932, Congress was informed and informed at length that most of the metal miners were integrated.

In the case of iron ore, it was pointed out that more than 90% of the iron ore was owned or controlled by companies which were integrated, and that was about the same for copper.

It was also pointed out, however, that there were small miners who were not integrated and who did not have their own smelting and refining works.

What they did was simply to come get the mineral in fairly concentrated form and then sell what is called the ore concentrate to a so-called custom smelter who did the smelting and refining.

And Congress was persuaded as early as 1932, though this — this is of the 1943 statute.

But Congress was persuaded as early as 1932.

It indicated in its reports that the small miner who didn’t have these works, the smelting and refining works, should get depletion on the same basis as the big ones and promptly after the 1932 Act, Treasury by Regulations, specifically for forbade the inclusion of smelting and refining.

And then when Congress wrote this detailed definition, which we have in the 1943 statute, it too, following the prior regulations specifically for forbade smelting and refining.

Ralph S. Spritzer:

And this is particularly important, we think, because smelting and refining is obviously a great deal closer to normal mining operations than making sewer pipes or fancy ceramics in a — in a factory.

Yet Congress excluded it because it was convinced that had it allowed smelting and refining, it would have caused a discrimination as between the small miner and the larger miner, and it decided that they should both have depletion on the same basis.

And I’d like to turn now to the legislative history which I’ve anticipated a little, but I’d like to go back and sketch the entire history of depletion.

Obviously, it will be a very brief sketch.

But I think it’s important to get the idea of the development of this, in mind, because each of the statutes has dealt pretty much on the predecessor.

A mineral depletion actually began, though not percentage depletion, of course, with the first Income Tax Act in 1913.

The Act of that year provided that there should be allowed as a deduction, a reasonable allowance for the exhaustion of property not to exceed in the case of mines, 5% of the gross value at the mine of the output for the year.

That point, though, has no provision for any kind of processing and it was cost to depletion and was the value at the mine.

The regulations which were promptly promulgated provided that if the market value of the product of the mine was established at some other place from the mine, then the gross value was to be reduced by the cost of the transportation, the reduction and the smelting charges.

And thus, at the very outset of the history, there is in the regulations an attempt to exclude specified activities which are not closely associated with the extractive process but might be performed by a company in which was integrated.

Of course, depletion by the discovery method was later authorized and under this method, we went from cost depletion to a depletion without reference to cost.

Under discovery depletion, the value of the mine at the time of discovery was estimated and then once its fair value had been fixed and the estimated amount of minerals in place had been determined, the miner was — the miner established a per unit measure of depletion and he applied that measure to the number of units removed that year.

The next change after discovery depletion came in was in 1921 when Congress placed a filling on the annual deduction stating that it might not exceed in the case of any taxpayer his net income from the property.

And this limitation was later changed in 1924 to a so-called 50% net income limitation.

He couldn’t claim depletion in any year more than — above 50% of his net income from the property.

Now once Congress imposed this net income limitation, which has persisted incidentally under percentage depletions, as well, it became immediately necessary, in order to apply that limitation, for taxpayers to distinguish between their gross income from mining or their net income from mining, as the case might be, and their income from other sources in the exact same way as necessary under the present statute to determine what its gross income from mining and what is gross income from some other activity such as sewer pipe making, which the miner may also happen to be engaged in.

Now in 1922, the Treasury Regulations provided, if the mineral products are not sold as raw material but are manufactured or converted into a refined product, then the gross income shall be assumed to be equivalent to the market or field price of the raw material before conversion.

In 1926, Congress went on and established depletion at that time only for oil and gas, and regulations promptly promulgated in 1927 provided in substance the same as the earlier regulations they held that the oil and gas producer who also transported or distributed or engaged in further activities would be held to the field, post-field price.

He couldn’t go beyond that.

Finally, in 1932, after numerous proposals had been made to it, Congress extended percentage depletion to coal, sulphur and to the metal mines.

And up until this point, depletion had been phrased simply in terms — the depletion base had been phrased simply in terms of the gross income from the property, that is gross income from the mining property.

Earl Warren:

What year is this?

Ralph S. Spritzer:

This is 1932, Your Honor, when it was first extended to minerals other than oil and gas.

Now, at these hearings, as I indicated earlier, emphasis was made upon the fact that the producers of many of these minerals were integrated, but there were small producers who were not.

For example, the representative of the American Smelting and Refining Company was one of the people who came before the Congress at these extensive hearings.

And we’ve collected all of the legislative materials on which we’re relying in the case in this larger volume.

And as he argued, he testified and I’m looking at page 102, immediately after the asterisks about a third of the way down.

He testified that where the taxpayer’s interests are varied as in the case of large mining companies, there is I believe, no doubt that as a rule, its books reflect the result of each operation, which make it possible for the taxpayer to determine to the satisfaction of the bureau the portion of the income applicable to mining.

And as his whole line of testimony shows — I will not go into it further — he insisted that it would be perfectly practicable in the case of the integrated producer to determine the basic mineral product and to put a value upon it so that the small man who didn’t do his own smelting and refining but sold to concentrate would just take it on the same basis as the large operator who would also have to put a value on the mineral concentrate and not compute depletion after the smelting and refining had been completed.

Now, promptly after the 1932 statute was enacted, Treasury promulgated regulations, after extensive conferences with the mining industry, and those regulations appear in this large appendix at 136.

Ralph S. Spritzer:

And what Treasury did was to list in the regulations a number of processes which it would allow.

And this listing and you’ll note the four subparagraphs, is closely similar to the listing which later became in 1943, a part of the statute.

Congress made 13 additions and modifications of this in 1943.

But this listing was largely adopted and codified by Congress, and you’ll note without my taking a time to go through these that these are again —

William O. Douglas:

Is this the first regulation where it appears?

Ralph S. Spritzer:


This was the first set of regulations, Your Honor, following the extension of depletion to the metals.

Prior to that, we only had regulations for oil and gas which didn’t need any treatment as it came out of the ground.

Now, as I have indicated, it was in 1943 that we first got the — the elaborate definition in the statute.

The 1932 statute merely said that depletion would be of such certain percentage computed on the gross income from the property.

In 1943, we got the definition of mining in the statute, which I attempted to analyze at the outset of the argument.

Now, what were the circumstances that led Congress to write a fuller definition?

Well, the mining industry had come to Congress in the early 1940s with two complaints.

One, which Congress concluded was a valid complaint.

And I’ll concentrate on that one.

The complaint was that the Treasury had been unduly restrictive in applying the 1932 regulations and particularly, that was alleged in the case of two types of miners.

You’ll note, reverting to page 136, where we set out this 1932 regulations that the fourth category of the Treasury Regulations allowed for concentrating and other processes to the extent to which they do not beneficiate the product in greater degree than crushing and concentrating.

Well, the controversy was about the coverage of those words, “other processes.”

Two groups of miners came to Congress, primarily gold miners and quicksilver miners, and said that some miners of the — of gold used processes other than the physical concentration process whereby you eliminate the waste specifically.

Some used chemical methods of separating the waste in getting the gold out.

And these miners said that Treasury had originally allowed this treatment process but that in 1940, it began disallowing it.

And the controversy between the miners and the Treasury was as to whether this chemical method called cyanidation of gold was or was not substantially equivalent to the physical concentration methods which other miners mining different types of deposits used.

And the mining industry represented that these processes were substantially equivalent and that Treasury had been applying the regulation in this respect to narrowly.

Similarly, the miners, this quicksilver said that the Treasury had erroneously decided that it would not allow the furnacing of quicksilver, which is simply taking the — the ore in which quicksilver is found and putting it into a simple retort and heating it.

These miners said that the furnacing of quicksilver was equivalent to concentration was necessary to get the quicksilver out of the cinnabar ore and that it should be allowed as coming within these words other processes.

But all of those people who came forward emphasized that they were seeking the allowance of processes which were extractive in nature and which were substantially equivalent to those which were already being allowed.

And they emphasized further that they were not seeking the allowance of any process which was essentially a manufacturing or a refining process.

Indeed, the representative of the quicksilver miners was Mr. David Searls who has represented minimal interest in this Court on numerous occasions.

And he said, at 166 of our appendix, obviously, it was not the intent of Congress that those processes which would take your products and make them into different products, having very different uses, should be considered as the basis of depletion.

Can you tell us (Inaudible)

Ralph S. Spritzer:

Who is he?

He was the — speaking for the quicksilver miners, and he was saying that furnacing of quicksilver should be allowed.

That he was making clear that he was asking it on the basis that furnacing was necessary as an extractive process and he wasn’t claiming that anything in the nature of smelting or refining or manufacturing ought to be allowed.

William O. Douglas:

He was first from the industry?

Ralph S. Spritzer:


William O. Douglas:

He is not a Congressman.

Ralph S. Spritzer:


He was the industry representative for the Congress.

But he is a lawyer, not a miner.

Ralph S. Spritzer:

That’s right.

He’s the lawyer for the mineral representatives.

He also says down at the bottom of the same page speaking of smelting and refining and the like, I see no reason for giving the big fellow that has all those big works any better or any worse field than the little fellow who hasn’t got them.

I say that the refining process has nothing to do with the depletion.

That he was distinguishing, furnacing of quicksilver from refining.

William O. Douglas:

We’ve come along ways in using legislative (Inaudible) used statements of lawyers here and before committees as to expressing the congressional intent, I —

Ralph S. Spritzer:

He was speaking for the representatives of the — he was speaking for the quicksilver miners to —

William O. Douglas:

They were —

Ralph S. Spritzer:

— ask Congress to —

William O. Douglas:

They are not —

Ralph S. Spritzer:

— provide that furnacing —

William O. Douglas:

They were not the law — they’re not the law makers or —

Ralph S. Spritzer:


The Congress agreed as I shall point out the — in a moment with the request for changes made, and I want to point out what it said when it made these changes.

Congress, as I say, made its own listing in 1943 and it added to this subparagraph (4), cyanidation of gold and furnacing of quicksilver and other equivalent processes that accepted the view of the representatives of those industries that these were substantially equivalent processes to those which were already allowed, and it then said, and this is from the report.

William O. Douglas:

What part are you reading now?

Ralph S. Spritzer:

I read from page — it’s quoted in part at page 62 and 63 of the Government’s opening brief.

You’ll notice the bottom at 62 when it’s talking about these processes it has listed.

It says the purpose is to make certain that the ordinary treatment processes which a mine owner would normally apply to obtain a marketable product should be considered as a part of the mining operation and to give reasonable specification of what ought to be considered such processes for various kinds or classes of mines.

Potter Stewart:

Where are you now, Mr. Spritzer?

Ralph S. Spritzer:

On page 62 and 63 of the Government’s opening brief.

Ralph S. Spritzer:

And then it goes on and says that the definition here prescribed expresses the congressional intent of these provisions as first included in the law and is in accord with the — with the original regulations and the bureau practices and procedures thereunder.

So that in sum, Congress in 1943 concluded that it agreed with the Treasury Regulations.

That it was going to make several modifications to make certain that they were not too restrictively applied because it felt that they had been in respect to certain processes which, it’s deemed equivalent to others.

And with that modification is approved by our Treasury practice.

Since 1943, the —

Up to this point, has there been any suggestion that there ought to be a broader base in depletion?

Ralph S. Spritzer:



Ralph S. Spritzer:

Nobody ever suggested depletion on finished products.

The argument frequently and many branches of the mining industry came before Congress because after 1943, it was extended to more and more minerals.

At first, only the metals got it, and coal and sulphur, later on other nonmetallic minerals.

Representatives of every branch in the mining industry came to Congress, and each attempted to show what would be the ordinary processes which it would have to use to put its mineral in marketable conditions, and most of them referred to the mineral product which they would get —

William O. Douglas:

But the Senate —

Ralph S. Spritzer:

But —

William O. Douglas:

— now that report says to obtain a marketable product which —

Ralph S. Spritzer:

— the marketable product that they are talking about is the product of the mine —

William O. Douglas:

That’s — that’s our question, I guess, isn’t it?

Ralph S. Spritzer:

Well, as a matter of fact, from 1916 on, Congress has referred to the mineral as the product of the mine and the regulations that treated mineral as the product as referring to the mineral and the commercially marketable product in our view is the mineral in marketable condition.

For example is, in our Appendix B, you’ll find the 1963 Act on page 3.


Ralph S. Spritzer:


In the case of mines, a reasonable allowance for depletion — this is the top of three, not to exceed the market value in the mine of the product thereof.

I’m just pointing to that — that 1916 language to show that from the earliest, this word product has been used in connection with the mineral.

And indeed in subparagraph (4), of the present statute, that’s on page 94.

You’ll notice that Congress in subparagraph (4) speaks of the processes used in the separation or extraction of the product or products from the ore.

So by product, it means the valuable constituent of the mineral extracted and freed from the waste and impurities and other matter which — with which it is found in nature.

Since 1943, the criterion of the statute has remained unchanged, and the 1943 Act which we have it here controls in this case.

Now, I had told Justice Harlan a moment ago that — that nobody suggested depletion on the basis of finished manufactured products.

And we have attached to the back of this Appendix A — a chart.

It follows the last page of the appendix.

Ralph S. Spritzer:

In this chart, attempts to set out in summary form the various types of minerals and a product on which percentage depletion was sought by the people who were receiving it in Congress.

The processes which they told Congress they ought to be allowed and the product which they said would result from the use of these processes, what they said would be the marketable product and in the right hand column, we have a list of all of the legislative references.

This is what was claimed to — to Congress should be the case.

Ralph S. Spritzer:

The — this is what the industry people thought when they asked for depletion.

It’s not individual taxpayers, is it?

Ralph S. Spritzer:

No.Generally in many instance, it usually would be the people who came were usually the mining associations and the most important spokesman before Congress was the American Mining Congress.

I obviously cannot go through branch by branch what the various representatives told Congress, but we find no instance in which the representatives of any branch contended that depletion should be taken on the basis of finished manufactured products.

Hugo L. Black:

Has there — has there ever been any regulation that provided that?

Ralph S. Spritzer:

Had permitted that?

No, no.

The regulations have — the first regulations were these 1932 Regulations I read, Your Honor —

Hugo L. Black:


Ralph S. Spritzer:

— at page 136, and they are all the processes which they’re allowed or as taxpayer would agree, separation processes or preliminary processes which you use to get a mineral in the — in shipping grade or form.

None of those processes obviously would take in the processes or the activities which might — one might perform in a factory.

Hugo L. Black:

Do you know when the first claim was made, at least as it developed into losses, had finished products — the value of finished products would be used to measure the depletion allowance?

Ralph S. Spritzer:

The first group of cases in which that was allowed were the so-called brick and tile cases in which the courts — lower courts concluded that the miners of brick and tile clay could take depletion on bricks rather than on brick and tile clay.

Hugo L. Black:

When was that?

Ralph S. Spritzer:

The first of those was in about 1955, Your Honor.

And that was the — the Cherokee case in the Fifth Circuit.

William J. Brennan, Jr.:

This was the Court of Appeals opinion?

Ralph S. Spritzer:


Felix Frankfurter:

That would fall under criteria, would it not?

Ralph S. Spritzer:

In — under my view of the statute, that was erroneous because I would say — but let me pause a moment.

Our view of the statute goes so far as to lead us to conclude that that was wrong, but I hasten to point out, that is a very different case from what we have here because in those cases, it was found or assumed on the pleadings that there were no sales by anyone concerned of the brick and tile clay.

That it was too costly for it to be worthwhile for anybody to ship it, and so plentiful that everybody wanted to use it bought a piece of land and mined his own.

And those cases rested on the conclusion that there was — there were no sales and there was no market for brick and tile clay and hence, the first marketable product was brick.

Felix Frankfurter:

But on your assumption, it — on the assumption that you’ve stated, and why do you think it was wrong?


Ralph S. Spritzer:

I think that by ordinary treatment processes normally applied by mine owners to obtain —

Felix Frankfurter:

Although nobody in the industry — although nobody in the industry did it.

Ralph S. Spritzer:

I don’t think that depletion need be or should be suddenly and greatly enhanced.

If all of the members of a particular mining industry overnight become integrated, because I think Congress is referring to the ordinary treatment processes used by miners in their capacity as miners.

However, if the statute should be read as imposing the necessity upon — imposing the necessity that the government show some sales in order to show that the product is commercially valuable or commercially marketable, and for that reason, that the brick and tile clay cases are correct.

If that should be held, it would not avail the taxpayer in this case because it is committed to the position that even though fire clay is widely sold and the nonintegrated miners of it are taking depletion on the raw mineral, it nonetheless, because it has a high cost mine and is badly located from the standpoint of selling fire clay and shale if it wished to do so, that it can go on and take depletion on a basis 20 times greater than all the members of the same class, all the other miners of the same class who are nonintegrated.

That is the factual and legal difference between the earlier line of cases represented by Merry Brothers in which this Court — in which government petition in this Court denied certiorari in that group of cases.

Felix Frankfurter:

Assume that you agree that if nobody does it as ordinary, do we have to face in this — on your theory, do we have to face in this case what constitutes — what participation in the both in the early sale, the earliest sale as a mining product, what percentage of the industry is in your point of view would be the industry?

Ralph S. Spritzer:

Well, in this case, the Court of Appeals —

Felix Frankfurter:

(Voice Overlap)

Ralph S. Spritzer:

— has found —

Felix Frankfurter:

(Voice Overlap) geographically and quantitatively, what (Inaudible)

Ralph S. Spritzer:

I think you have no problem in this case because the Court of Appeals has found that there are substantial sales and the Government proved marketability in the sense that there was a regular traffic.

It found that in it’s — and there’s —

Felix Frankfurter:

In — in Indiana or in the United States?

Ralph S. Spritzer:

It found in relation to Indiana that 300,000 tons, out of 500,000 tons of fire clay and shale were — were sold rather than used by integrated producers.

Let me refer, Your Honor, a moment to the opinion —

William J. Brennan, Jr.:

Is that industry-wide, Mr. Spritzer, or was that just in Indiana?

Ralph S. Spritzer:

The Court’s findings are in relation to Indiana and they appear on page 270.

The Court says about halfway down, the Government did not admit in this case the non-marketability of fire clay and shale.

It’s distinguishing this case from the brick and tile clay cases.

Indeed, it says, “The Government’s evidence indicates that large quantities of fire clay and shale were sold during the tax year 1951.”

And then it goes on that in Indiana, the 82 companies engaged in production of fire clay and shale, 32 of them purchased for use in their manufacturing operations.

So, that would mean that 32 were mining it in order to sell it.

And then it goes on at the top of 271 and it points to those figures 300,000 and 500,000 to which I earlier referred.

Felix Frankfurter:

Maybe not in this case, but on your — even on your theory, some individualization — some problems of individualization would be raised as indicated by my question, statewide industry, nationwide industry, what percentage constitute the industry?

Those questions would still be, or wouldn’t it?

Ralph S. Spritzer:

In the case of most of the minerals, the representatives of the mining industry themselves made very clear what the basic mineral product was.

What the object of mining was.

In the case of coal mines, it’s obviously coal.

And if the — the clay people came to Congress, and I’d like to refer the Court to 340 of our appendix.

They told Congress what they were seeking depletion on.

Ralph S. Spritzer:

You’ll see a little chart at the top of that page.

This is an exhibit that was submitted by the Refractories Institute when it was speaking depletion on refractory clay.

Most fire clay is refractory.

Now, you’ll notice that they told the Congress in this exhibit how many manufacturing establishments were using this clay and then they lift the value of the clay, then they lift the raw — the raw materials used, we have then in italics Value, $29 million.

I’m looking under the heading 1947.

Then they say, “Estimated depletion allowance 15% of value, 15% of the value of the raw material, that’s what was sought.

What we have here is the case where the raw materials are worth about $2 a ton, but the depletion is sought on something that has suddenly multiplied and become worth $40 a ton.

Earl Warren:

Mr. Griswold.

Erwin N. Griswold:

May it please the Court.

The question on the merits in this case is solely one of statutory construction.

There’s no constitutional question.

By call of presence of interpretation that has many facets, but the touchstone I think is to be found in the way the statute is actually written.

If the words which Congress used are carefully examined and then applied, the result to which they point may be tolerably clear.

Before going to the statute in detail, it’s helpful, I think, to clear away some possible basis from misunderstanding.

In the first place, although the statute is one which deals with depletion of minerals, the allowance made by Congress has nothing to do with the actual cost or the loss or expenditure sustained by the owner from the use of his materials.

One would expect that the depletion allowance would have something to do with depletion sustained, and that was true to a considerable extent in the very first income tax statute in 1913.

But in 1918, only five years later, Congress had produced a new concept, discovery value, applicable to all minerals.

At this point, cost ceased to be relevant and the aggregate allowance was based on the value of the property — the value of the property, not the cost, within 30 days after discovery when you know what you’ve got, not when you’re speculating.

In 1927, Congress went still further and introduced percentage depletion for oil and gas wells.

This was an outgrowth of the experience with discovery value, but it has one very important difference from discovery depletion.

Under percentage depletion, the amount of the allowance not only has no relation to cost, but it is also entirely unlimited in amount, not even being limited to the amount of discovery value.

It goes on at the rate of 27.5% in the case of oil and gas wells as long as oil and gas are produced, regardless of the taxpayer’s cost, regardless of any other fixed amount, either cost or discovery value.

In 1932, Congress extended percentage depletion to sulphur and the metals.

In later years, it extended percentage depletion to many other commodities.

In 1951, it extended percentage depletion to clay and shale, the two commodities involved here.

And finally, in 1954, it extended percentage depletion to all minerals, except in only soil and sod, and things taken out of the sea in the area.

In this process, percentage depletion has become simply an allowance for the producers of minerals having nothing to do with their cost.

It’s not measured or limited in any way by the amount invested by the taxpayer in the mineral deposit or by any other factor relating to the cost or value of the mineral deposit.

It is simply an allowance for the producers of minerals, probably misnamed when it’s called a depletion allowance.

It is more accurately an incentive allowance.

Erwin N. Griswold:

If it is thought out as to depletion, then there may be some tendency to try to restrict it narrowly so as to limit it to the amount invested by the taxpayer in the deposit.

But Congress has not so restricted it.

Congress has indeed been very generous in the granting of depletion allowances.

Congress loves percentage depletion, just as it loves farms and rivers and harbors, and many other things.

And Congress may well be right.

At any rate, it’s Congress’ decision.

And if Congress chooses to provide a generous depletion allowance, there’s no reason why its judgment should not be respected and carried out.

If the allowance as written by Congress is indeed — is indeed too generous, then the place where that should be rectified is in Congress and not here.

There’s one more point of general background.

The taxpayer mines clay and shale from an underground mine in Cannelton, Indiana.

It is superior clay and shale.

The record shows that it sold no clay or shale except for a negligible amount of ground fire clay and it also shows that there was no market for fire clay and shale in Cannelton.

The Government expressly concedes that the taxpayer could not profitably sell fire clay and shale in their raw form.

Fire clay and shale were sold in Brazil, Indiana, 140 miles away, but all of this was produced by strip miners of coal.

In most places, the clay and shale is a byproduct or a waste from the strip mining operation.

It’s something that the coal miner has to get rid of.

So, of course, he’s glad to get rid of it cheap.

But our people had superior shale and clay, which the record shows “made the best sewer pipe in Indiana.”

Now, with this background, we may turn to the statute as it was written by Congress.

It is set forth in the appendix to our principal brief on page 121.

In the first place, Congress generally allowed a reasonable allowance for depletion according to the peculiar conditions in each case.

And then turning over to page 122, we find in the first paragraph of 114 (a) (1).

In the third line of the embedded material, we find shale, 5%.

And then in the third paragraph, we’ll find refractory and fire clay, 15%.

In this case, the taxpayer’s mineral is 60% fire clay and 40% shale.

And then Congress provides that the depletion allowance shall be those percentages, the fourth line from the bottom of page 122, of the gross income from the property, not somebody else’s property, not some idealized property, not what it might have been that all miners together had been averaged out, but the gross income from the property during the taxable year.

There is, however, another limitation to which Mr. Spritzer has made no reference that such allowance shall not exceed 50 per centum of the net income of the taxpayer from the property.

And when Mr. Spritzer holds this $40 a ton sewer pipe up before you, he’s made no reference whatever to the 50% limitation which sharply qualifies that.

Incidentally, Mr. Justice Brennan, if you can produce brick for $3 a ton, I’m sure you can sell a large quantity.

I understand that the price is about $15 a ton for — for a brick.

William J. Brennan, Jr.:

That just shows my ignorance.

Erwin N. Griswold:

Then we come to Section 114 (b).

As used in this paragraph, the term gross income from the property means the gross income from mining.

Well, if they’d stop there, you might think it was limited to mining.

But they won’t ride along.

The term “mining” as used herein shall be considered to include — shall be considered to include not merely the extraction of the ores or minerals from the ground, which is the only thing Mr. Spritzer will allow us.

He has said that expressly here that in this case, there is nothing but the extraction of the ores and minerals from the ground, but Congress has said, “shall be considered to include not merely the extraction but also the ordinary treatment processes normally applied by mine owners or operators in order to obtain the commercially marketable mineral product or products.”

The ordinary treatment processes normally applied by mine owners or operators in order to obtain the commercially marketable mineral product or products.

Now, the figures referred by the Government to this Court show that 90% of the producers of fire clay using more than 73% of the total production of fire clay and 96% of the producers of shale using virtually all of the shale normally apply the same processes as this taxpayer did; grinding, tempering, shaping, firing to make either brick or tile or sewer pipe.

And what 90% of the producers do to 96% of the material would seem to be what is normally applied by mine owners or operators in order to obtain the commercially marketable mineral product.

William O. Douglas:

Where is it?

Where are those findings?

Erwin N. Griswold:

There is no finding on that.

That is contained in — in a government document, which the taxpayer relied on in the — in its brief in this case, but has seemed to sort of shy from in its reply brief and this is summarized on page — it’s on — I don’t think it was page 83 and 84, but I don’t — Mr. Travis, can you find it and give me a reference to it?

And I will mention it in a moment.

William J. Brennan, Jr.:

May I ask in the — are the integrated brick manufacturers using this process?

Erwin N. Griswold:

Yes, this is — these are the same processes.

Exactly that they use in making brick.

William J. Brennan, Jr.:

And it’s something the integrated fellow who, I take this on the end product basis.

Erwin N. Griswold:

The — all the cases have decided so far that everyone who makes brick may take depletion based on the value of the brick produced.

William J. Brennan, Jr.:

Even the fellow who buys the raw material (Voice Overlap) —

Erwin N. Griswold:

There seem to be few or none who buy the raw material in the case of brick.

There are very few who do here.

William J. Brennan, Jr.:

But even — are they — permitted it on the — a depletion based on brick if they buy the minerals —

Erwin N. Griswold:

As far as I know, there — I know of none who buy raw materials to make brick.

Howard P. Travis:

72 and 73.

Erwin N. Griswold:

Yes, this is on page 72 and 73.

I’m sorry that I was —

Howard P. Travis:


Erwin N. Griswold:

— so clumsy in finding it.

Erwin N. Griswold:

It’s on pages 72 through 74, and these are materials from the Minerals Yearbook of the Bureau of Mines on which is, I say the Government was relying in its main brief in this case, but — which it shied away from in its reply brief.

Now, these are the words of the statute.

“Mining shall be considered as not merely the extraction of the ores 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.

It seems to me that that makes it plain that Congress means to include in mining more than the extraction of the mineral from the ground.

The Government has been greatly troubled by these words and has long sought to exorcize them from the statute.

It’s developed many theories in many different cases.

But before going into that, I would like to call attention to the language which Congress did once use nearly 50 years ago.

In the very first income tax, the one for 1913 which is set out on page 1 of the Government’s large appendix, we find that there was a sort of percentage depletion in the very beginning.

At that time though, the percentage was used to restrict the amount of the deduction below cost, not to expand it above cost as in the present statute.

But what Congress said in 1913 was that depletion should not exceed 5 per centum of the gross value at the mine.

Now, let’s look at that phrase, “gross value at the mine.”

This is essentially what the Government argues for in this case.

Yet, it is obvious that the statutory provision here is very different.

What the Government’s position amounts to either, is either an elimination of the words, which Congress has written specifically with respect to the commercially marketable mineral product or products or at the very least, a substitution for these words of other words which have a much more restrictive meaning.

In various cases at various times, the Government has come up with different formulae which it liked to have read into the statute.

In some of the earlier cases, it sought to draw a distinction between manufacturing and mining, and it has finally in its reply brief in this case come back to launch that same argument.

This was done in the Cherokee Brick case in the Fifth Circuit, in the Merry Brothers case where this Court denied the petition for certiorari.

Then in the Dragon Cement case in the First Circuit, the Government sought to lay stress on the words “mineral product” and sought to confine them to the product as it comes out of the mine or very shortly thereafter.

That argument was rejected in an opinion by Judge Magruder for the First Circuit and since this gives a careful discussion of the problem and for the convenience of the Court, we have printed it in full in Appendix 2 to our brief which is the — the white supplement, somewhat smaller than the Government’s but the total volume of words in this case is already considerable.

Then in the Richland shale case and in the Court below in this case, note I said the Court below, the Government’s argument was based on the concept of least processed.

Of course there’s nothing like this in the statute as Congress has written it.

Congress didn’t say least processed.

It said commercially marketable mineral product or products.Congress might have said many other things, but it’s what Congress did say that ought to be controlling.

When the Treasury went to Congress last year to try to get the law changed, it developed still a different phrase.

And this appears at page 131 of our Appendix 2 where there is set forth the text of the statute, which the Treasury submitted to Congress last year to deal with this problem.

And the idea is there expressed as “capable of being transported,” as distinguished from those processes “which make the mineral or ore saleable.”

This would be getting completely away from the words, commercially marketable.

Commercially marketable surely means saleable and no formula can be a sound construction of this statute which does not give effect to that construction and yet I suggest that what the Government is arguing here is in essence what they sought to get, unsuccessfully sought to get Congress to put into the statute.

Finally in its main brief in this case, in this Court for the first time, the Government came up with still another formulation and its effort to escape from the effect of the commercially marketable mineral product or products, words.

In its main brief in this Court, the Government repeatedly based its argument on a new phrase “fit for commercial or industrial use”.

Erwin N. Griswold:

That is no doubt an interesting conception, but it is not the test enacted by Congress and there’s no reason why the words of Congress did use should not be given the statute’s.

Apparently, the Government now agrees, for in its reply brief, it has abandoned that phrase entirely and now comes up with still another set of phrases, all of course, in an effort to get away from the words which Congress used.

Now, there’s another part of the Government’s case as to which I’m a little baffled.

At page —

Could I interrupt you just a second to see if I’m off —

Erwin N. Griswold:

Yes, Mr. Justice.

(Inaudible) on this?

You emphasize commercially marketable.

Now, of course, that phrase can be given effect under your theory, under the Government’s theory, as well as yours.You say commercially marketable means commercially marketable by the individual taxpayer, as I understand it.

And the Government says commercially marketable means marketable in general, irrespective of whether the taxpayers involved in that operation or not.

Erwin N. Griswold:

But, Mr. Justice, if it could — if it could be in general, I’d like to think about it.

Actually, the — the indication here is, it’s more or less pure chance that the one place where there are substantial sales of fire clay and shale is Brazil, Indiana.

There is indeed more there than can be sold as the record shows, which of course, accounts for it’s — it’s low price.

Suppose those sales had been in Hawaii or in Maine or in California or in Texas, would they be regarded as relevant with respect to this taxpayer?

Now it’s true this taxpayer is much closer, but economically, it is just as far away as if the sales were in Maine or California.

If this taxpayer’s costs are $2.41 a ton to get its superior clay out of an underground mine, its cost to transportation from Cannelton to Brazil, the record shows, varies from $5 to $6 a ton.

And the price for strip mining waste in — in Brazil is a $1 to $1.5 a ton.

Now, Brazil might just as well be in Maine or in California as far as this taxpayer is concerned.

It is an irrelevant market with respect to this taxpayer, the finding of the District Court, unchallenged is, that there was no market for the taxpayer’s fire clay and shale.

There is no — there was never any issue in the District Court with respect to salability generally throughout the United States of fire clay and shale, and the record is very sparse on that.

The Government finally in this Court for the first time referred to this Bureau of Mines pamphlet that I have mentioned, but which is not in the record and was never called to the attention of the District Court.

The sole contest in the District Court in this case was with respect to whether the taxpayer could sell its fire clay and shale.

And incidentally, there is much reason to — to think that the whole case is a kind of a mistake.

In the opening of the taxpayer’s counsel in the District Court, page 17 of the record, and I’d like to have the Court look at this.

Right at the middle of the page, Mr. (Inaudible), counsel for the Government in the District Court said, “The economics of the situation will also be a matter of proof, and the Government will offer evidence to show the average cost including a profit of transporting clay is 1.80 cents per ton-mile.

And this was in an effort to show that the taxpayer couldn’t get its clay to Brazil and sell it.

And then they produced their witness, Mr. Smith, and his testimony appears on page — begins on page 84 of the record.

And if you will look at the very bottom of the page, you will find that Mr. Smith testified that it cost 1.80 cents a ton-mile to haul the clay.

And that’s the bottom of page 84.And then Mr. Smith was cross-examined and he clung to the 1.80 cents a ton-mile.

He weakened a little, but he never would give up even when it was pointed out.

Erwin N. Griswold:

And then the next day, page 161 of the record, Mr. Smith came back to Court and Mr. (Inaudible), counsel for the Government stood up in Court interrupting another witness.

“Your Honor, may I interrupt.

Mr. Smith who testified yesterday — this is page 161 near the bottom of the page — has examined the computations which he made and states to me that he made a misplacement of the decimal point, and it should be 18 cents per ton-mile rather than one and eight tenths on the short-haul distances.

The Court, “Now, do you want to call him as witness?”

Mr. Travis, for the plaintiff, “We will stipulate the 18 cents is correct, the correct figure.”

Mr. (Inaudible), for the defendant.

Mr. Smith came back to make the record clear.

And thus, the Government’s proof with respect to the possibility of getting the taxpayer’s clay to Brazil evaporated.

Now, I come to this point which baffles me.

Until this afternoon, the Government has expressly conceded that the clay and shale involved here were not covered by those four Roman numbered paragraphs to which Mr. Spritzer referred in his argument.

I’d like to call attention to the Government’s brief, the top of page 21.

The minerals involved in this case, fire clay and shale are not specifically designated.

Now, on the basis of that concession, Mr. Spritzer said the opposite this afternoon but in his brief he says they are not specifically designated.

On that concession, this is in the language of the statute, an agreement that shale and clay are not customarily sold in the form of a crude mineral product, and I can only surmise that the Government has seen the consequences of its concession that shale and clay are not covered by the statute by the specifically numbered places.

They have never before in any court, in this case, made a suggestion that those four numbered paragraphs specifically applied to this case.

William J. Brennan, Jr.:

Well, I must say, Dean, I didn’t understand Mr. Spritzer to say that.

I thought —

Erwin N. Griswold:


William J. Brennan, Jr.:

— all that he said was that under subdivision (3) at page 94 of this brief, they — these minerals might be embraced within those –the language (Voice Overlap) —

Erwin N. Griswold:

He said specifically that these minerals — these minerals are covered by (3) —

William J. Brennan, Jr.:

I thought (Voice Overlap) —

Erwin N. Griswold:

— because he said —

William J. Brennan, Jr.:

— within the language which are customarily sold in the form of a (Voice Overlap) —

Erwin N. Griswold:

— because he said that they are customarily sold —

William J. Brennan, Jr.:


Well, I —

Erwin N. Griswold:

— in the form of a crude mineral product.

I interpret the brief to say that they are not covered, which must rest on — on my understanding —

William J. Brennan, Jr.:

(Voice Overlap) does not specifically designate it.

Maybe there is an inconsistency but I wasn’t quite clear if that was so.

Erwin N. Griswold:

Well, with this background, we can come to the first point which it presented in their respondent’s brief.

It’s our contention that the arguments which the Government is now making in this Court are not available to it on this record.

And should not be considered or decided by this Court in this case.

We submit that on this record, in terms of the issues actually presented by the Government in the District Court through the things that are irrelevant with respect to a trial on a District Court, the pretrial order, the opening statement of counsel, the trial and the briefs of counsel in that Court that the decision of the District Court was correct.

This Court and the Court below have appellate jurisdiction in this case, not original jurisdiction.

And the government is not entitled to a reversal of the District Court’s decision unless that Court made an error on an issue which was presented to it by the Government and unless the record contains the material which supports the Government’s present position.

The Government has had its day in court.

It’s not entitled to a new trial even though the District Court may be wrong in an abstract sense, unless the District Court’s decision is erroneous on an issue, which was presented to it by the Government at the trial.

Never in the District Court did the Government make any argument about least processed, which was the basis for its argument in the Court below.

Never in the District Court did the Government make any argument about fit for commercial or industrial use, which was the basis of its argument here when its main brief was filed.

On the contrary, the only point raised in the District Court was whether there was a market for this taxpayer’s clay and shale.

It was overwhelmingly proved that there was no such market.

The Government is not entitled to a reversal of that decision except on a ground, which was presented to the District Court.

Charles E. Whittaker:

Do you mean by that (Inaudible) it has to specify with particularity the various arguments to sustain a particular point or is foreclosed?

Erwin N. Griswold:

Mr. Justice, I would like to call attention to the pretrial order in this case because I think in part, that is true.

The function of a pretrial is to narrow the issues.

And as a result of the pretrial order in this case, of which appears on — begins on page 263, continues to page 265 and was approved by counsel for both parties.

Paragraph 2 on page 264, counsel for the defendant represented to the Court that the defendant through its internal revenue service had initiated as of this date a survey regarding the sales of shale and clay, fire clay, in a certain marketing area which it’d — would include the location of the plaintiff’s mine and factory to determine whether or not the defendant will claim in this cause of action that plaintiff has a market for the clay which it mines, no talk about whether there is a market in general for clay somewhere in the country.

Whether the plaintiff has the market for the clay which it mines prior to be being put in the form of finished vitrified sewer pipe and other related products which are made and sold — sold by the plaintiff, and further that, if the defendant determined that there was such a market, then an additional survey would be made to determine the market value of the clay mined by plaintiff at the point where the defendant claims that there was a market for the clay.

Counsel for the defendant further represented that if it were determined as a result of the survey that there was no market for the clay and shale of the type mined or used by the plaintiff, prior to as being put in finished form ready for sale, then plaintiff’s claim as alleged in plaintiff’s complaint would be recommended for administrative refund by the internal revenue service of defendant.

And then turn to paragraph 4 of the pretrial order.

If this cause of action is to be tried by the Court, it was agreed between the parties that the only issues of fact which would have to be presented to the Court would be first, whether the plaintiff has any commercially marketable product or products from the shale and clay, which it mines prior to the finished vitrified sewer pipe and other products which plaintiff produces and sells and it’s overwhelmingly clear that the plaintiff cannot sell anything prior to that.

And second, what is the value of such commercially marketable product or products if it is determined that plaintiff has such a product or products prior to the completed vitrified sewer pipe and other products which plaintiff makes and sells.

Felix Frankfurter:

Doesn’t — doesn’t paragraph 4 conceal the very conflict which is now before us, namely, as to what the content of the scope of “commercially marketable product or products” is?

Erwin N. Griswold:

It — it can be so read, I believe.

I do not believe it was so understood by counsel or by the District Court as it evidenced by the briefs which were filed in the District Court, the issues which the District Court conceived to be — conceived to be before it and its findings and determination on that issue.

The whole focus of this case was as to whether this taxpayer held something which it can sell prior to the vitrified sewer pipe.

Charles E. Whittaker:

Might I ask you there sir?

Do you conceive that the phrase on the one hand, marketable product, and on the other hand, the phrase products for which there is a market are different concepts?

Erwin N. Griswold:

In the first place, Mr. Justice, the phrase and the statute is commercially marketable.

Charles E. Whittaker:

All right, commercially marketable product.

Erwin N. Griswold:

And where does the phrase products for which there is in the — in the pretrial order.

Charles E. Whittaker:

There was some mention of it, but in any case, are — is it the same concept to think of a commercially marketable product on the one hand and on the other hand, a product for which there is a market.

Erwin N. Griswold:

Well, I find it hard to — I — I would hesitate without thinking more to say that I think the two are identical.

I would find it hard to see how there could be a commercially marketable mineral product unless it was a product for which there was a market.

Charles E. Whittaker:

Well it might — obviously.

It might be — that it might be the type of article which in one place would be readily — would meet a ready market, but in some other place, there would be no market for it, but the article itself is the same in either place.

Now then, would it —

Erwin N. Griswold:

It can be argued that the article is not marketable in a place where there is no market if the place where there is a market is so far away that the cost of getting there, make it prohibitive to get your product to that market.

Hugo L. Black:

Is it your idea that commercially marketable has to mean marketable at a profit to the owners?

Erwin N. Griswold:

Not necessarily to the particular owner, but marketable generally at a profit.


I think I recognize what Mr. Spritzer said that the market sometimes involves losses for some people, but if the — if the product is — is one which ordinarily cannot be sold with a reasonable prospects in pursuit of success of a profit, then it is not commercially marketable, and I believe that that is true of fire clay and shale.

It is not true in — it is not true in Brazil where it’s sold as a byproduct of — and a waste from strip mining of coal, but I believe it is generally true of fire clay and shale in the United States.

Hugo L. Black:

During the depression there was considerable — as I recall it, many complaints made of the oil industry that the price was so low that it’s impossible to sell it at a profit.

Would you say that the oil then was not commercially marketable?

Erwin N. Griswold:

No, I wouldn’t say that it was not — not commercially marketable.

Obviously, there’s — is a market all over the United States for oil at all times.

I don’t think that’s true for fire clay and shale or brick and tile clay or of cement rock or of a good many other things that are involved in this controversy.

Charles E. Whittaker:

What’s the difference between tons of this clay at one point in Indiana, or how did you (Inaudible) as the product.

Erwin N. Griswold:

Mr. Justice, when I took elementary economics, I — I learned things about time utility and place utility among other things.

And a ton of clay in Cannelton is something out of which the Cannelton Sewer Pipe Company can make the best sewer pipe made in Indiana and sell and keep in business.

A ton of clay in Brazil is something which they cannot utilize or to put in other way around, a ton of clay in Cannelton is something which they cannot effectively market, cannot commercially market in Brazil because they simply can’t afford to get it there.

I do think that place utility is an important factor here.

I think our case is made a little harder because it’s Brazil, Indiana.

I think that if the place where it was widely sold was Montara, California that one wouldn’t have any difficulty in seeing that the fact that it is salable there simply isn’t relevant to this taxpayer.

And I submit that economically, it’s exactly the same.

This taxpayer was just as far out of the Brazil, Indiana market as if it had been any place else.

Indeed, this particular taxpayer has a wholly owned subsidiary in Texas.

I don’t suppose anyone would think that the fact that — but that shale and clay are sold in Brazil, Indiana is there any particular relevance with respect to the depletion of these subsidiaries, tile, or even shale and clay in Texas.

Hugo L. Black:

Your argument requires, does it not, that one accepts your distinction between an incentive allowance and a depletion allowance?

Otherwise, I’d suppose that you can’t be depleted of any more than what it’s worth and if it’s not — has no market, you can’t sell it —

Erwin N. Griswold:

I think that if —

Hugo L. Black:

— it wouldn’t be right.

Erwin N. Griswold:

— Court — depletion would be presumably based on cost, not on what you could sell it for.

But, actually, since this stuff can’t be sold very much on the spot until you do something with it, the cost of it isn’t very much.

Its discovery value isn’t very much.

And it’s quite plain that if this taxpayer’s depletion allowance is to be restricted to its cost or to its value, that it has no case.

It seems to us equally plain that Congress rightly or wrongly but in its wisdom has specifically granted a substantial depletion allowance to the miners of clay and shale.

I quite agree that if — if we’re restricted to cost, then an awful lot of work that Congress has done over a period of a good many years has been —

Hugo L. Black:

Well, if you’re restricted in other ways of what you were actually will be depleted of, so you will not deplete it of any sulfide.

Erwin N. Griswold:

Well, that’s clear.

We’re depleted of clay and if we’re restricted — if we’re restricted to cost or the value of the clay, we get a very small allowance.

This may be the case which demonstrates the truth of the old quip that when the legislative history is ambiguous, we should look to the language of the statute, where there are large amounts of legislative history.

Both parties who worked hard to put it before the Court, the Government’s appendix has 466 pages running from 1913 to 1954 and we’re all much indebted to them for putting that together.

I — my only objection to it is the way they used italics, and I hope the Court will read all that’s there, not just what they have italicized.

In the appendix to our brief, in order to complete the picture, we’ve added 57 pages more running from 1930 to 1959.

We’ve also filed with the Court copies of the hearings held on this subject by the Ways and Means Committee in 1959 when the Treasury presented to Congress essentially the same arguments which the Government counsel is presenting here today.

Indeed, the table attached to the Government’s petition for certiorari showing in greatly exaggerated form, I believe, the amount the Government says is involved in this general problem is precisely the same as the table which the Treasury represented to Congress.

It’s too bad to have to look at all these legislative history, when as it seems to me that the question is reasonably clear, that words of the statute are allowed to have their natural meaning and effect.

But if one does look to the legislative history, it’s our view that it supports the conclusion for which we contend.

Before percentage depletion was extended to metals and to sulphur in 1932, there were extensive investigations and reports, reports which lie at the very foundation of the legislative history, the Parker Report and the Shepherd Report included in large part in the Government’s appendix.

These reports pointed out to Congress the difficulties arising out of discovery value.

Essentially, the problem evaluation, no two experts could agree on the discovery value of any mine.

No taxpayer could make out his tax return and no taxpayer could ascertain his tax liability without litigation.

The crying need was for certain and this, I believe, is the key to all that Congress has done in this area.

Congress has tried to provide a method for determining depletion which would be automatic, which the taxpayer could follow and apply himself and which he could use in making out his own tax return.

Our whole system of income taxation depends upon self-assessment and the key to percentage depletion, I think, is that Congress has at all times undertaken to set up a system which would be susceptible to self-assessment and is constantly amended and modified the statute to offset efforts by the Treasury to cut down percentage depletion in ways which would make self-assessment difficult or impossible.

In the Tax magazine a year ago, there was a cartoon which illustrates the point I have in mind.

The picture showed a meeting of the Ways and Means Committee in the session and a congressman standing who says, “Before I vote, I want to call my taxman and find out if he could prepare my tax return under this proposed amendment.”

Erwin N. Griswold:

In the present case, the taxpayer can readily prepare his tax return if the taxpayer’s position is sustained.

On the other hand, if the Government prevails, there will be no ascertainable figure which the taxpayer can use to determine the amount of his depletion deduction.

That will depend on a theoretical or hypothetical figure representing no operation of the taxpayer, not appearing on the taxpayer’s books, not ascertainable by the taxpayer by any means to which the Government has yet pointed in this case.

Prior to 1932, Congress was told several ways in which percentage depletion might be ascertained.

One was the fixed rate per unit method, so much per pound or per ton.

And you could apply that here and you could tell the answers.

Congress didn’t adopt this for the very reason that it would not recognize differences among taxpayers and the value of various grades of ores.

Congress was told that percentage depletion could be based on gross income or on net income and Congress in fact adopted both of these measures.

Basically, percentage depletion is based on gross income from the property.

But it is limited to 50% of the net income of the property.

But the important thing to note is that in each case, the percentage is applied to an ascertainable figure derived from the taxpayer’s own operations and experience, not by going out and surveying the country as a whole.

The Treasury soon put out some rather restrictive regulations but interestingly enough, we now know that from the beginning, the Treasury agreed that it would not apply these regulations and this is an — an interesting event which is set out on page 85 of our brief.

Mr. Parker, as Chief of Staff of the Joint Committee on Internal Revenue Taxation had been responsible.

Mr. L.H. Parker, a well-known figure here in Washington, for the preparation of the Parker Report upon which percentage depletion was based in 1932.

Hugo L. Black:

What page you said (Voice Overlap) —

Erwin N. Griswold:

This is on page 85 of my —

Hugo L. Black:

Your brief.

Erwin N. Griswold:


In 1947, Mr. Parker, no longer with the Government, appearing before the Ways and Means committee, recounted what happened in 1932.

The mine operators protested the definitions grafted by the Commissioner and then skipped a couple of sentences.

In this conference, it was agreed the definitions grafted by the Commissioner did not express the intent of Congress.

But then they found the awkward situation that the regulations were all printed, March 15th was coming.

If they were going to change it, they wouldn’t be able to get the regulations out into the hands of taxpayers and there would be chaos for everybody else.

And so below the middle of page 85, to meet this situation, it was proposed that the regulations be issued as printed with the understanding the definitions would be interpreted and applied according to the meaning of the Act as agreed to in that conference.

Hugo L. Black:

Do the italics apply to them?

Erwin N. Griswold:

The italics apply — my italics apply, not the — not the Government’s.[Laughter]

Now actually, for the next eight years, 1932 to 1940, the Treasury allowed all the treatment processes which were customarily used to obtain the commercially marketable mineral product.

Those words weren’t in the statute, but they did represent both the intention of Congress and the practice of the Treasury Department.

But beginning in 1940s, the Treasury began to squeeze down.

It’s — that’s understandable enough.

Erwin N. Griswold:

I — I know their point of view, but the Treasury doesn’t like percentage depletion, Congress does.

If Treasury tries to cut it down, Congress puts it back.

In 1942, the Treasury promised to mend its ways, restore the old practice, but it didn’t do so and in 1943, Congress stepped in and enacted the statutory provision which is involved here, the commercially marketable mineral products rule.

Commercially marketable, it seems to me must mean salable in Congress, and what is more, it gives a definite ascertainable figure to which the percentage can be automatically applied, ascertainable in most cases directly from the taxpayer’s books and capable of being applied as a matter of course without uncertainty, delay or controversy.

This was no inadvertent amendment.

The Senate Finance Committee specifically said that it was intended to mean what it said.

That is, now, the Treasury didn’t like it.

And this particular provision, extending percentage depletion was one of the provisions in the statute to which President Roosevelt specifically referred when he vetoed the Revenue Bill of 1943.

But Congress did like it and passed the bill on to law despite the President’s objections.

Hugo L. Black:

Where did you say the reports — did you cite the place where the reports said that it was the intent of the Committee?

Erwin N. Griswold:

Yes, that is on page 89 of our brief, Mr. Justice.

Hugo L. Black:


Erwin N. Griswold:


The purpose of the provision is to make certain that the ordinary treatment processes which any mine operator would normally apply to obtain any marketable product should be considered as a part of the mining operation.

Hugo L. Black:

Is there any place where they define marketable — commercially marketable product?

Erwin N. Griswold:

I don’t believe so Mr. Justice.

Since 1943, Congress has continued to extend percentage depletion to additional minerals always following the commercially marketable products rule.

For example, when the Treasury sought to eliminate transportation from the mine to mill, the Treasury says, “Well, transportation isn’t mining.”

It’s transportation, and they’d cut it out.

Congress specifically provided that transportation should be included in order to maintain the commercially marketable products rule.

In 1951, Congress extended percentage depletion to fire clay and shale along with many other products.

Again, the legislative history along with the statutory language shows that the commercially marketable product rule was intended, something readily ascertainable and capable of self-assessment by the taxpayer.

It should be noted that the Government’s position here amount as Mr. Spritzer conceded in saying that in the case of fire clay and shale as mined by this taxpayer, there are no ordinary treatment processes.

Thus, rendering nugatory a clear and carefully worked out provision of the statute which Congress has maintained now for 17 years and which because it was made retroactive in 1932, when it was is first enacted, has been applicable to percentage depletion for 28 years.

What is the basis for writing these words out of the statute, which is the general effect of the Government’s position?

Congress can, of course, do that if it chooses, but has shown no signs of wanting to do so.

It should also be pointed out that the Government’s position here would mean that no underground miner of shale or fire clay, no underground miner of shale or fire clay, any place in the country, would ever get any percentage depletion at all.

This is because of the limitation of the allowance to 50% of the net income from mines.

If the underground miner’s operations often is here yielding a superior grade of clay and shale are to be limited by sales, far away in an unattainable market, made by strip miners of coal who obtain clay and shale as a waste or byproduct, then the underground miner will have no net income from his property and thus, no percentage depletion.

It seems obvious that this was not the result intended by Congress.

Earl Warren:

Do you think Congress intended that you should get a — greater depletion value than you could — than you could go up and buy the product in the market —

Erwin N. Griswold:

I think Congress may — will have intended that Mr. Justice.

I feel there is the large element of incentive here.

Congress — they didn’t test this Congress to — for a hundred years, Congress has done things for miners in great and generous ways.

And I think that here, it is plainly intended as an incentive for miners.

This leads to the next point I wanted to make, which is that percentage depletion is determined not only by the base, but also by the rate.

In the case of clay, the rate is — in the case of — of shale, the rate is lower, 5% as compared with 27.5% for oil and gas and 23% for sulphur and 15% for metals.

It’s also 15% for fire clay but that’s a fairly rare commodity.

If the result of this based on rate is too much then the easy way to change that is to change the rate.

But the rate is surely a matter for the judgment of Congress.

Of course, this Court would not say that when Congress said the depletion allowance should be 15% or 5%, it really meant that this rate should be 8% and 3%, no more should the Court fail to give effect to the commercially marketable mineral product or products test which Congress has persistently and consistently maintained in this important area of which it has been fully and constantly aware.

Incidentally, nobody knows where these percentages came from.

There was apparently some slight basis for the original 27.5% for oil and gas though the exact figure was a compromised — committee-compromised between 25% recommended by the Senate Finance Committee and 30% adopted on the floor of the Senate and the Conference Committee split the difference and made it 27.5% and we’ve had that now for 34 years.

The 15% for metal mines introduced in 1932 was apparently based on a survey showing that discovery value depletion had averaged about 17% of gross sales, now note that, the — the Parker and Shepherd Report to which the Government refers, based the 15% on the fact that discovery value taking the taxpayer’s return, they found their sales, whatever they sold, whether it was concentrate or refined metal, they found that that came out to about 17%.

So they said, “Well, let’s make it 15% of gross sales.”

But beyond this, there’s no basis for the percentages beyond legislative judgment or choice.

Fire clay is 15%, perhaps because it’s probably scarce.

Shale is 5%, not inconceivably because Congress recognized that it is applied to a fairly large base under the commercially marketable mineral product or products rule which Congress has long maintained in the statute.

Coal is 5% to begin with, but in 1951, Congress raised it to 10%.

The whole matter is neither precise nor scientific.

It should not be approached, I think, in a niggardly or parsimonious way.

Congress may well know just what it is doing in this area as the legislative history, I think, shows.

The President of the American Institute of certified public accountants in a recent address said, “What are called loopholes are often Congress’ way of apologizing for the high tax rates.

These are special provisions to afford some taxpayer’s relief.

For example, the average taxpayer gets sick pay tax-free.

Married people are taxed more lightly to split income.

The executives get to break through stock options and investors have the cushion of capital gains.

And in fact, Congress sets higher rates and then tears them down — tears down some of the rate structure by allowing special benefits for some taxpayers.”

That’s the end of the quotation.

The economic effects from such an allowance as percentage depletion are far from clear.

Erwin N. Griswold:

It’s perhaps easy to assume that what is involved here is some sort of bonanza for taxpayers.

But an actual operation, percentage depletion may mean such things as lower prices for consumers, more employment and higher wages for the workers.

It may mean that this business is kept operating and paying taxes or that the use for national resources effectively utilized.

All of these things may be the consequences of percentage depletion and Congress may well have had such consequences in mind in extending percentage depletion to mineral resources as widely as it does.

The Treasury’s argument goes far to read percentage depletion out of the statute.

This is shown when the Government says in its reply brief that cost depletion is available, what cost depletion to the mill here.

But Congress granted percentage depletion to fire clay and shale, and it is hardly consistent with the legislative purpose to adopt the construction of its word which would eliminate percentage depletion for a large segment of the clay and shale industry.

Besides, this eliminates the whole discovery value concept which for more than 40 years has been the background of percentage depletion.

The approach of Congress is illustrated by the events of the past seven years.

Three times, beginning in 1954, the Treasury has tried to get Congress to change the commercially marketable mineral product or products rule and Congress has never done so.

In 1954, the Treasury sought to get Congress to eliminate molding, shaping, extruding, firing or burning in the case of the brick and tile clay.

Well, obviously, those are the same processes that are involved here.

At first, the Ways and Means Committee announced that it was going to make this change, but six days later, on February 24, 1954 did announce that it had reconsidered leaving the question as it was under existing law.

The new Internal Revenue Code of 1954 was enacted in the same language as the 1939 Code.

Congress has never made this change.

In 1958, they brought our figures on.

The Secretary of the Treasury formally asked Congress to abolish the commercially marketable products rule as to clay and as to minerals used in making cement.

Later, the Treasury submitted a specific legislation showing in its submission, however, that it understood that law to be in accordance with our position here.

Once again, Congress took no action, no hearings were held, no bill was introduced.

Finally, in 1959, the President included this question in his budget message.

The Secretary of the Treasury wrote to the Speaker of the House and to the Vice-President, recommending the elimination of “raise the commercially marketable mineral product or products from the statute” and the substitution of a new definition of mining.

A few days later, a specific legislative proposal was submitted.

The Ways and Means Committee held five days of hearings on this proposal and this is the volume of those hearings which we have filed with the Court.

Once again, the Treasury made no progress with the Ways and Means Committee.

The Committee has not reported the bill and Congress has taken no action.

Could I ask you a question about your self-assessment argument?

I’m not quite clear on it.

Do you take the position that the base is the — involves the product, mining product, that is actually being made by a particular taxpayer or that one that could have been made by him profitable?

Erwin N. Griswold:

As long as the taxpayer is using the ordinary treatment processes which are normally applied by mine owners or operators with respect to the particular mineral that he is using, then I would say that it is the product made by this taxpayer.

If he used the different processes, if he makes something above and beyond the ordinary treatment processes, then of course, you can’t include that.

Erwin N. Griswold:

Now, this is illustrated by several cases and I’m not going to have time enough to deal with that are in our brief, for example, the Iowa Limestone case is a case involving chemical grade limestone, which is pretty good stuff.

It sells for a pretty good price.

The Commissioner says in that Court that the basic mineral product with respect to limestone is crushed stone that’s used for roads.

And you can get depletion on road stone with respect to this.

The taxpayer in that case doesn’t make road stone.

It isn’t sensible to use.

It’s high grade stuff to make road stone.

It grinds it, sells it for chemical grade limestone at several times the price that road stone sells for, and the Eighth Circuit has held it’s entitled to take its depletion on chemical grade limestone.

Now, in the — in the Thompson against the Hitchcock Company which involves talc, some of the talc is taken out and cut into crayons which sell at a high price.

Some of the rest of the talc which isn’t quite as good is ground and is used to make face powder and a lot of other things that are sold at a much lower price.

Each of the processes is distinct.

That is if the — the poor talc, you run, sew and grind and make face powder out of.

You don’t sell it for face powder, you sell it for ground talc.

The good talc, you cut into crayons, and the Fourth Circuit held that in that case, the taxpayer got depletion with respect to its particular price on that — that which it used for talc.

For ground talc, it got depletion on that.

That what it’d used for crayon, it got depletion on that.

And then there is the (Inaudible) case recently cited in the Tax Court involving dolomite or building stone, a kind of building stone.

Some of that is used for what’s called dimension stone.

That is these big slabs that in this particular case it’s used for a veneer, not for the huge building stones that people used to use.

In making the dimension stone, there is waste.

Also some of the stone in the taxpayer’s quarry isn’t good enough to make dimension stone because it has cracks and other things in it.

The poor stone and the waste are ground and sold for fill and road stone.

The dimension stone is sold for a much higher price for building and the decision of the Tax Court is that the taxpayer is entitled to compute his depletion on the particular product which it sold that product being the product which is obtained by the ordinary treatment processes normally applied by mine owners or operators to obtain —

But supposing these taxpayers, supposing it was showing in this record that this — that there was an active market for the clay and shale in this very town, this — your clients’ operating from.

What would have been the base in those circumstances?

Erwin N. Griswold:

I thought about this a great deal.

The suppose my taxpayer had been Brazil which would be the — which would be the —

Yes, and turn it around.

Erwin N. Griswold:

— which would be the problem.

I would say what every lawyer takes refuge.

Erwin N. Griswold:

In the first place that isn’t this case.

Well, that’s —

Erwin N. Griswold:

— and —


Erwin N. Griswold:

— though I thought about it a great deal, someone else will think more about it when that case does come up.

I think that I would say that the statute says the ordinary treatment processes normally applied by mine owners and mine operators to obtain the commercially marketable mineral product.

And I think such indication as there is in this record, and I repeat, this record is imperfect because issues like this were not raised by the — was imperfect on this points, not raised in the District Court by the Government.

That it is clear that mine owners and operators in the United States in the case of clay and shale normally apply the same treatment processes, as here, to obtain the commercially marketable mineral product.

So that I think I would say that if this taxpayer was in Brazil that to the extent that it used the clay or shale to make sewer pipe that it was entitled to depletion on the sewer pipe because that is the — the result of the ordinary treatment processes normally applied to obtain the commercially marketable product.

If it’s sold anything short of that, of course, its depletion would be limited by what it sold.

Well, self-assessment, if it has any virtue at all must mean that it’s a product that is made by the tax party.

Erwin N. Griswold:


That’s —

Erwin N. Griswold:

So that I would say that — that if this taxpayer was in Brazil, its depletion would be entitled — it would be entitled to take depletion on what appeared on its book as a result of its sale.


Felix Frankfurter:

But you say that because you indicate that that would be the statute.You accept Mr. Spritzer’s starting off point, his standard, namely, that is the ordinary conduct of the industry in your case industry predominantly percentage-wise throughout the United States —

Erwin N. Griswold:


Felix Frankfurter:

— so that —

Erwin N. Griswold:

These are the process that normally —

Felix Frankfurter:

— so that in those assessment, there is also a function of the — of the ordinary practice which means industry practice, whatever that means, isn’t that right?

And not merely the individualized idiosyncratic —

Erwin N. Griswold:

Oh, we quite agree that this taxpayer is not entitled to utilize any processes which are not those normally applied by mine owners or operators to obtain the commercially marketable product.

Felix Frankfurter:

So that the general — the general — that utilization of the general behavior in the industry becomes part of what he’s entitled to do in his individual case.

Erwin N. Griswold:

That is — that — that is — that is right.

And there’s a lot of talk here about manufacturing and — and things like — like that but — I’ve been to a gold mine.

The machinery and the operations and whatnot on top of a gold mine are far greater than is involved in the priming and cooking and whatnot that’s involved here in — with respect to clay and shale.

These are the things that you do.

If you have a deposit of clay and shale, you bring up your stuff and build some kilns and grinders and make sewer pipe.

I wonder where the market is.

Charles E. Whittaker:

I wonder what your view might be of this.

Charles E. Whittaker:

If a — such a minor manufacturer may go on with these processes until he reaches something that is salable at a profit.

Suppose he never reaches a profit then is he denied any deduction at all?

Erwin N. Griswold:

Of course, if he never reaches a profit, Mr. Justice, he has no net income and —

Charles E. Whittaker:


He may have some other things.

Erwin N. Griswold:

He just bounded off —

But it’s net income from the property.

It isn’t his general net income.

It’s his net income from the property.

And if he can’t sell anything of the property, he gets no percentage depletion.

He’s depleted himself.

Erwin N. Griswold:

He’s depleted — he’s eliminated.

[Laughter] He’s eliminated himself.

Earl Warren:

So, Dean, I — I understood Mr. Spritzer to say that 300,000 out of 500,000 tons of shale and — and clay that are mined in Indiana are — are sold by the — the miners and — and that the average was about $1.60 a ton and that on the average, they would get about 11 cents — 11 cents a ton, now depletion.

Now, does that and do you mean that according to your theory, that’s all those miners would get —

Erwin N. Griswold:


Earl Warren:

— but that you — you because you have a plant alongside of — of your mine would get a depletion based upon $40 because — a ton, because that’s the — the value of your completed —

Erwin N. Griswold:

That — that’s my position and I’m also tried to say, in answer to Mr. Justice Harlan, that even if we were in Berlin — in — in Brazil, and made sewer pipe there, that we would be entitled to depletion on sewer pipe because that is our profit.

Earl Warren:

But if you weren’t big enough to — to have an integrated plant, then Congress intended that you should only get about a — 15 or 16 cents where —

Erwin N. Griswold:

I —

Earl Warren:

— the other in your situation, you get about $4.

Erwin N. Griswold:

I don’t think, Mr. Justice, it’s a case of being big enough to have an integrated plant.

These people that sell clay and shale in Brazil are coal miners.

They’re trying to get rid of the clay.

They have to dig it out to get down to the coal.

Earl Warren:

But I thought — well, we can suppose, we can suppose, I guess, a man who does have — does mine shale and — and clay and who doesn’t have the means to — to build an integrated plant and he has to — he has to sell it.

It’s the only way he can transact his business.

He would get about 11 cents a ton and you’ll get —

Erwin N. Griswold:

He will get —

Earl Warren:

— you get $4.

Erwin N. Griswold:

On our position, the taxpayer gets depletion on what he sells as long as that is the result of the ordinary treatment processes normally applied and this foreman who doesn’t exist in this record will be limited to depletion based on what he sells.

Just as — just as Cannelton is surely limited to depletion on what it sells in case it sells and import short of the — of the sewer pipe.

Incidentally, there’s one aspect to the problem to which reference hasn’t been made.

We talked about brick and tile.

All the cases agree that in the case of brick and tile, the depletion is obtained on the basis of the finished product brick and tile because there is very little evidence of any commerce anywhere with respect to them and I find it hard to see why people who use clay and shale to make brick and tile should get it on the brick, but people who use clay and shale to make sewer pipes should be limited to the virtually nonexistent value of the clay and shale in place.

The Government has developed many theories, none of which can be reconciled with the words used in the statute.

It’s argued for distinction between mining and manufacturing.

It’s talked about fit for industrial or commercial use.

All of these things go back to the words first used by Congress, gross value of the mine.

But Congress long ago moved away from any such pit mouth concept.

None of the theories which the Government has advanced here or elsewhere can be reconciled with the words used by Congress in the commercially marketable products rule.

Indeed, the Government’s difficulty in vacillation in attempting to square its basic position which amounts to distinguishing mining for manufacturing with the statute shows that it is trying to read into the statute something which is not there.

Even here, the Government has not taken a decision as to how this taxpayer’s depletion deduction should be computed under its interpretation.

If it liked this Court to work that out itself, the Government nowhere states how the statute should be applied.

Instead, it asked this Court to reverse and remand so that the taxpayer’s gross income from mining may be determined in the lower court.

The most that the Government says is that the taxpayers’ depletion allowance should be computed with reference to the raw fire clay and shale.

But this leaves many questions unsolved, some of which are apparently unsolvable.

If a local basis is used, what is the critical local market area?

There is no area in which this taxpayer can be competitive in a practical business sense, as far as raw fire clay and shale are concerned.

If some other area is to be used, there is no logical basis why it should be anything short of the whole country, which turns the local basis into a national basis.

Or even the whole world because there are taxpayers subject to this law who mine outside the United States.

We submit that the judgment below should be affirmed.

Earl Warren:

Mr. Spritzer.

Ralph S. Spritzer:

Mr. Chief Justice.

Taxpayers’ argument assumes throughout that Congress, in using the words “commercially marketable mineral product”, was undertaken to guarantee, everybody who engaged in mining, a profit on his end product.

And I think —

William J. Brennan, Jr.:

Well, tell me, Mr. Spritzer, is it the fact that the brick manufacturer gets his allowance based on —

Ralph S. Spritzer:

The brick and tile manufacturers has been held in cases in which the Government sought certiorari, that they may take depletion on brick on an expressed determination that the Government could not show and had not shown that brick and tile clay was —

William J. Brennan, Jr.:

This is Merry Brother.

Ralph S. Spritzer:

— sufficiently valuable to be sold.

William J. Brennan, Jr.:

Is that the Merry Brothers?

Ralph S. Spritzer:

That is the Merry Brothers line of case.

William J. Brennan, Jr.:

Has the Commissioner acquiesced in those?

Ralph S. Spritzer:

We petitioned for certiorari after we lost them.

Since certiorari has denied, the Commissioner has not further litigated brick and tile cases.

Felix Frankfurter:

Did you mean that —

Hugo L. Black:

Did you — did you — excuse me.

Felix Frankfurter:

All right.

Hugo L. Black:

Did you assume that denial of a certiorari meant nothing or not?[Laughter]

Ralph S. Spritzer:

That misfortune had been compounded by the fact that we’d lost it in several Circuits, Your Honor, and the — the Commissioner did not feel that he would continue to attempt to apply it in some of the Circuits whereas the way was already barred in others.

Felix Frankfurter:

What I want to know if whether it was assumed that it was determined, you said it was determined.

Was it determined that you couldn’t make who, that it was commercially marketable or that in the particular cases you did?

Ralph S. Spritzer:

It was assumed on the pleadings.

Felix Frankfurter:

No, but — but — well —

Ralph S. Spritzer:

That it was not —

Felix Frankfurter:

Therefore, you —

Ralph S. Spritzer:

— marketable in the sense that there was any proof of actual sale.

Felix Frankfurter:

But you weren’t foreclosed by the pleadings to start a case in which you could prove the fact for you in some other case.

Ralph S. Spritzer:

We were — we concluded in that the lawyers who handled that litigation concluded that they could not show sales of brick clay.

Brick clay is so plentiful that if anybody wants to make brick, he simply locates his kiln next to some clay and digs it out himself, and there’s no commerce in it and — or at most, an extremely negligible commerce.

The courts concluded in those cases that all members of the class would be treated alike and that all of them would get depletion on brick.

None of those cases implied that if there were proof of a commercially valuable product, proof in the form of sales at a stage, in advance, of the manufactured product that some would be able to go on to the advanced product and some would be restricted to the less advanced product.

In the Fifth Circuit, indeed, as recently indicated in the Alabama Byproduct case which we cite in our reply brief, that it conceives of this as an industry-wide text and it went in the brick and tile cases on the premise that in that industry, there was no commercially valuable material until you got brick.

I think that analysis may be wrong, but it’s quite different from the case in which you have proof, that you have a commercially valuable product —

William J. Brennan, Jr.:

Well, what’s —

Ralph S. Spritzer:

— in that —

Felix Frankfurter:

— in Brazil?

Ralph S. Spritzer:

— is already sold.

Felix Frankfurter:

You have it in Brazil but are the Bureau of Mines’ figures in this case as to this product, as to this mine, as to this mineral too, were dependable?

Ralph S. Spritzer:

The Bureau of Mines’ figures show that it’s sold in substantial quantities on a national scale.

Felix Frankfurter:

But was it substantial in volume or in percentage of the industry, what is the prevailing things?

Ralph S. Spritzer:

We have the figures fully set out and it is —

Felix Frankfurter:

(Voice Overlap) —

Ralph S. Spritzer:

— certainly substantial, very substantial in volume though it would be less than half as I recall the figures for the — of the total production.

That there is more than half is mined by integrated producers.

William J. Brennan, Jr.:

But what’s the dollar price to which you would apply the allowance in this case?

Ralph S. Spritzer:

This has always been taken care of in regulations, Your Honor, and I have to go through several steps.

From the beginning, from 1940, there have been complete regulations —

William J. Brennan, Jr.:

I’m thinking of this case.

Ralph S. Spritzer:

— as to the integrated producer.

William J. Brennan, Jr.:

Of this case?

Ralph S. Spritzer:


In this case, if the taxpayer had sold any clay, that would determine and if it were a superior grade, presumably the price would (Voice Overlap) —

William J. Brennan, Jr.:

Well, I gather, the record is (Voice Overlap) —

Ralph S. Spritzer:

But they don’t sell.

The regulations provide that in the case of an integrated producer who does not sell that you then apply the representative market price for the mineral of like kind and grade.

Now, if the Court found — this was litigated but not decided because the Court concluded that the depletable product was sewer pipe.

If the Court had found, as Dean Griswold suggests that the Cannelton clay was a very superior clay, then — and if there was no representative market price for clay of that kind, then a further provision of the regulation would come into play.

And that provision provides a so-called proportionate profits test.

And that test is as follows.

If it be we take some figures to make this simpler to follow, let’s assume that Cannelton’s mining costs are $2.

Let’s assume, further that, its other cost, its factory costs are $18, nine times as much, so that one-tenth represents the mining cost and nine tenths, the non-mining cost.

The regulations provide as they have for many, many years that in that instance, you take one-tenth which represents the mining cost of the price of the ultimate product sold which would be one-tenth of $40.

And you would get then a depletion base of $4.

And you would apply to that $4.

That’s not the allowance.

That’s the (Inaudible)

William J. Brennan, Jr.:


Ralph S. Spritzer:

— then you’d apply the statutory percentage and you’d get 44 cents.

That would be — to get to the real heart of this case, the thing that I would like to leave with the Court is this.

Ralph S. Spritzer:

That Congress was not interested in defining mining, in providing an avenue for producers to go on to manufacturing.

It didn’t use the words “commercially marketable mineral product” for that purpose or in that sense.

Congress recognized that because of the nature of most mineral deposits, you’ve got to do some mineral treatment, treatment which the mining industry does, in order to get realizable value.

Some of the ore, some of the rocks, which may they picked up are waste, are worthless unless they’re deficient — unless they’re treated, they’re not worth shipping.

The miner of a low grade iron ore has to break it up and concentrate it to be worth the freight.

Now, Congress decided that it should allow all miners to include those processes which they would use as miners in order to get the valuable constituent out and to put it in — in a form where it would be of shipping grade and quality.

Now, this isn’t a mystery.

This statute has four subparagraphs which tell you what Congress had in mind when it was talking about treatment processes.

And every one of them involves getting the valuable constituent out of the ore or in some cases, doing some preliminary preparation such as breaking it up into pieces where you can load it on the coal car.

And the marketable mineral product that Congress is talking about is the valuable constituent of the mine and it proposed to treat each class of mine in accordance with what that class of mine was after, what it was engaged in getting out of the deposit and to allow depletion on that basis.

I suggest that it is baseless to the tribute to the Government, a purpose of wiping out all ordinary treatment processes.

The chart which appears at the back of our appendix shows the processes which different miners use.

As it happens, we have here a clay which comes unmixed with dirt and is salable and is sold as you dig it out of the ground, but the miner of metal has to use the various concentration processes to get his mineral concentrate.

Now, the consistent purpose of Congress to avoid discrimination as between members of the same class, miners of the same kind is evident throughout this whole history and this is indeed not the view of the Government alone.

We have here a brief from the National Coal Association, as — as amicus in this case to which I hope to refer if I can locate it among all of my papers.

Well, I won’t —

What are you — you go ahead.

I don’t want to interrupt you.

Ralph S. Spritzer:

I wanted to point out what the National Coal Association says about what this legislative history and this specification of processes show.

And I’m reading from page 15 of the Coal Association’s brief.

The processes enumerated which were allowed to be applied to increase the value of the capital which was allowed tax-free recoupment were clearly of the type which were regarded as processes which resulted in a product of a mine, i.e. mineral concentrate, as distinguished from a manufactured or refined product.

Your Honor, what’s that?

(Voice Overlap)

The question I was going to ask you.

I understood Dean Griswold would argue that the Government had attempted, at least very recently, to get Congress to do what you’re trying to — to get the Court do in this case.

Ralph S. Spritzer:

Yes, we did.

Well, now, what significance do you — did you get it?

Ralph S. Spritzer:

Congress held hearings.

It heard various views.

The American Mining Congress, at those hearings, acknowledged and quoted the statement in our reply brief from the Chairman of their Tax Committee that recent cases had gone far beyond the original concept of depletion, so this view of the statute isn’t ours alone.

Ralph S. Spritzer:

We didn’t get legislation but Dean Griswold has neglected to mention the reason.

After the hearings were concluded, the Chairman of the Ways and Means Committee told the Congress that though the hearings had been held, the Committee did not intend to take any further action because the matter of the interpretation of the statute, as it stood, was before this Court in this case.

Thank you.