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


Media for United States v. Cannelton Sewer Pipe Company

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.