STANDARD LIME AND CEMENT COMPANY (FORMERLY KNOWN AS THE STANDARD LIME AND STONE COMPANY) v. THE UNITED STATES, 165 Ct. Cl. 180

Laramore, Judge, delivered the opinion of the court: This is a suit for refund of Federal income taxes for the taxable period January 1,1954 to November 30,1954. During this period taxpayer owned and operated at Martinsburg, West Virginia, an underground limestone mine and a shale quarry, together with a plant for the processing of these materials into finished cement. The ultimate question for determination in this case is the amount of gross income attributable to the mining of these minerals for the purpose of computing taxpayer’s percentage depletion allowance under

section 613 of the Internal Revenue Code of 1954. Specifically' in issue before this court is whether certain indirect costs incurred apart from the mining (pre-kiln feed) and manufacturing (post-kiln feed) processes should be properly allocated to these two processes for computation of plaintiff’s “gross income from mining” under the proportionate profits method.

On its original Federal income tax return for the taxable period iii issue, plaintiff computed its percentage depletion allowance with respect to the limestone and shale mined by it at its Martinsburg facilities, which, it used in the manufacture of cement, based on a “gross income from the. property” figure equivalent to the representative field or market price of the crushed limestone and shale in the Martinsburg area. On February 13, 1958, taxpayer filed a timely claim for refund of alleged overpayment of Federal income tax for the taxable year in issue.

In this claim for refund, taxpayer computed its percentage depletion allowance on the basis of gross income derived from the sale of finished cement. Having received no notice of any action on this claim for refund from the Commissioner of Internal Revenue, taxpayer instituted suit in this court reiterating its claim that it was entitled to compute its percentage depletion allowance on gross income derived from the sale of finished cement. While the instant suit was pending before this court, the Supreme Court rendered its decision in the now landmark case of United States v.

Cannelton Sewer Pipe Co., 364 U.S. 76 (1960) where the Court held that an integrated miner-manufacturer had to compute its percentage depletion allowance based on “gross income from the property” of its first commercially marketable product and not as claimed by the taxpayer, based on “gross income from the property” at the finished product.

As a result of the Oannelton decision, legislation was enacted by Congress (Public Law 86-564, 74 Stat. 290; Public Law 86-781, 74 Stat. 1017) giving taxpayers engaged in the mining of minerals used in the production of cement the right, pursuant to election, to compute their “gross income from the property,” for purposes of the percentage depletion allowance with respect to such minerals for taxable years beginning prior to January 1, 1961, at the point of introduction of the minerals into the kiln.

A taxpayer so. electing was required to forego its claim for percentage depletion based on “gross income from the property” at the finished product. Taxpayer, by letter addressed to the District Director of Internal Revenue, Baltimore, Maryland, elected to compute its percentage depletion allowance at the kiln cutoff point as provided by Public Law 86-781, supra, for the taxable year in issue.

Accordingly, it filed an amended Federal income tax return, utilizing therein the proportionate profits method of computing its “gross income from the property” at kiln feed, there being no representative field or market price for plaintiff’s minerals at that point. Plaintiff’s amended return for the period in issue was thoroughly audited by a representative of the Office of the District Director of Internal Revenue, Baltimore, Maryland.

As a result of such audit, the Government took issue with the treatment afforded by taxpayer in its amended return to the following items: (1) interplant overhead, (2) cash discounts, (3) packing and loading costs, (4) cost of containers, (5) purchased additives, (6) cost of warehousing, (7) freight costs, (8) inventory adjustments. The controversy between the parties concerns the way in which the proprotionate profits method is to be applied with regard to the items in dispute. Taxpayer concedes the correctness of the Government’s position with respect to item (7), freight costs.

Before we can reach a final decision on the merits of this controversy, we have to dispose of several procedural issues raised by the Government. On June 15, 1962, just three days before this case was set for trial, the Government filed a motion for

summary judgment predicated upon this court’s alleged lack of jurisdiction to hear this controversy. In support of said' motion, the Government contends that the issues raised in the petition had been rendered moot by reason of taxpayer’s election under Public Law 86-781, supra. The Government further urges that this court’s lack of jurisdiction is also due to taxpayer’s failure to comply with the prerequisites for the bringing of a suit for refund of Federal income tax. Specifically the Government asserts that taxpayer has failed to comply with the requirements of

section 6532(a) (1) of the Internal Revenue Code of 1954, which provides:

(1) General. Buie. No suit or proceeding under

section 7422(

a) for the recovery of any internal -revenue tax, penalty, or other sum, shall be begun before the expiration of 6 months from the date of filing' the claim required under such

section unless the Secretary or his delegate renders a decision thereon within that time, * * *. In other words, the Government’s contentions are based on the proposition that since taxpayer’s original claim for refund was predicated on its entitlement to a refund based on its percentage depletion allowance computed from gross income of the end product, a new and distinct' claim for refund has arisen because of taxpayer’s election under Public Law 86-781, supra, wherein gross income is' computed at the kiln cutoff point.

Thus, the Government argues, the original claim has become moot and taxpayer must meet all the procedural requirements for instituting a new claim for refund, i.e., a claim for refund with the Commissioner of Internal Revenue, a 6-month waiting period if no decision on the claim is rendered, and finally the instituting of a suit for refund. We believe that under the circumstances of this case taxpayer’s election to compute its percentage depletion allowance based on “gross income from the property” at the kiln cutoff does not give rise to a new and distinct claim for refund.

Consequently, the issue never became moot and taxpayer need not meet the procedural requirements for instituting a new claim for refund. We say this because “[i]ncome-tax liability for any one year is a single cause of action. Each taxable year constitutes a separate cause of action, and in every suit for refund one of the questions presented is the determination of the amount by which the taxpayer has overpaid his taxes for the year involved.” United States v. C. C. Clark, Inc., 159 F. 2d 489, 490 (5th Cir. 1947).

Taxpayer’s entitlement to a refund is still centered on what is its proper percentage depletion allowance. International Curtis Marine Turbine Co. v. United States, 74 Ct. Cl. 132, 139; 56 F. 2d 708, 711 (1932). What has changed by taxpayer’s election, pursuant to legislation enacted by Congress, is the manner in which the amount is to be computed. Electric Storage Battery Co. v. McCaughin, 54 F. 2d 814 (1931). Buie 8(

b) of this court requires that “[a]ll pleadings shall be so construed as to do substantial justice.” We believe that if we adopt the Government’s narrow construction of the original petition, taxpayer would be deprived of a prompt decision on a matter so vital to the orderly conduct of its business. Cf. Register Publishing Co. v. United States, 189 F. Supp. 626, 631 (Conn. 1960). There is an alternative ground for disposing of the Government’s contention that this court lacks jurisdiction to hear this case, even if we view taxpayer’s election as giving rise to a new and distinct claim for refund.

In Rosengarten v. United States, 149 Ct. Cl. 287, 181 F. Supp. 275, cert. denied 364 U.S. 822 (1960), we said that an informal claim which fairly gives notice of a taxpayer’s intention to press for a refund of taxes is sufficient to satisfy the statutory requirement. See also United States v. Kales, 314 U.S. 186 (1941). We find that taxpayer’s amended return filed in 1960, electing to compute its depletion allowance at kiln feed, sufficiently apprised the Commissioner of its claim. Thus, the requirement, under

section 7422(a), of filing a claim with the Commissioner has been met and the Government so concedes. Furthermore, we believe that taxpayer has substantially complied with the 6-month waiting period before instituting suit on a claim for refund as required by

section 6532(a) (1) of the 1954 Code, supra. We say this because this procedural requirement was enacted by Congress to give the Commissioner of Internal Kevenue a reasonable period of time within which to process the claim and to afford an opportunity for administrative adjustment without suit. Caldwell Sugars, Inc., v. United States, 101 Ct. Cl. 395, 412, 54 F. Supp. 544, 552 (1944); Register Publishing Co. v. United States, supra at 630; Gerrard v. Campbell, 81 F. Supp. 752, 754 (N.D. Ill. 1949).

The Commissioner has had ample opportunity to consider taxpayer’s claim and avoid needless litigation if be felt taxpayer’s claim was meritorious. More tban six months had elapsed before trial was held. The record discloses that the parties on numerous occasions conducted settlement conferences. The Government was fully apprised of what constituted taxpayer’s claim for refund. We note that the Regional Office conducted an extensive audit of taxpayer’s amended return. This court is acting on the merits of the controversy well over six months after the amended returns were filed.

The fact that taxpayer did not bring a new suit on its amended claim for refund is not determinative in view of the fact that we have allowed taxpayer to amend its original petition under Rule 18(

b) of this court. Once the 6-month waiting period is in fact satisfied, the manner in which taxpayer enforces his claim, i.e., either by bringing an independent suit or by amending its original petition, should not be determinative as to whether or not the 6-month requirement has been satisfied and should not give the Commissioner of Internal Revenue fictitious defenses in order to defeat reality. Gerrand v. Campbell, supra, at 754. See also, Register Publishing Co. v. United States, supra.

Having disposed of the Government’s contentions concerning this court’s alleged lack of jurisdiction, we now turn to the merits of the controversy. As stated previously, the ultimate question for determination in this case is the amount of gross income from the property for the purpose of computing the proper depletion allowance under

section 613 of the 1954 Code. We note that the statutory enactment defines “gross income from the property” as “gross income from mining.” It then specifically prescribes what treatment processes are considered mining. In the case of calcium carbonates used in making cement, gross income from mining-must be computed at kiln feed. Since the minerals at this stage of the treatment process are neither sold by the taxpayer nor do they have a representative market or field price, a hypothetical gross income from the property must be constructed in order to compute taxpayer’s percentage depletion allowance.

It is at once apparent that this hypothetical “gross income from the property” at kiln feed must include the following items: (1) direct costs incurred up to that point, (2) a percentage of the indirect costs, (3) a percentage of the profits. Both parties agree that the proper method of determining “gross income from the property” at this stage is by the use of the proportionate profits method as provided by Treasury Regulation 118,

section 39.23 (m)-1(e) (3). The controversy between them mainly concerns the way in which the proportionate profits method as proposed by this regulation is to be applied to the items in dispute. Since most of these cost items were incurred apart from the direct processing cost, the question with which we are confronted is whether or not they can be properly allocated, by the use of the proportionate profits method, to both stages of the production process in determining taxpayer’s “gross income from the property” at kiln feed.

Briefly stated, the proportionate profits method of computing “gross income from the property” attributes to each step of taxpayer’s operation the costs (both direct and indirect) attributable to each step plus a proportion of the total profit. United States v. Henderson Clay Products, 324 F. 2d 7, 9 (5th Cir. 1963). The basic assumption of the proportionate profits method is that each dollar of costs expended to produce and sell the end product earns the same percentage of the profit.

In the case of an integrated cement manufacturer, which utilizes its mined minerals in the production of cement, the proportionate profits method allocates these costs and. a proportion of their profits to two distinct stages of operation, i.e., processes up to kiln feed and post-kiln feed processes. The direct costs associated with-each of these parts are first ascertained. Then the total-indirect costs which are incurred for the benefit of the entire operation are determined.

These indirect costs are allocated to the first part of taxpayer’s operation in the proportion as this part’s direct costs 'bear to the aggregate direct costs. Finally, the profit attributable to the first part of taxpayer’s operation must be determined and allocated.

In making this computation, the profits attributable to those indirect costs which are not incurred for the benefit of the entire operation and thus not properly allocable to taxpayer’s mining operation up to kiln feed must be determined and taken from the profit of the entire operation before this “net” profit can be allocated to the pre-kiln feed processes in the proportion as the pre-kiln feed processes direct costs bear to the aggregate direet costs of producing cement. Thus, in simplified form, taxpayer’s gross income from the property at kiln feed point is the sum of the following items (a, b, and c) : (

a) Total direct cost up to kiln feed (

b) Percentage of indirect cost allocable to process up to kiln feed (Direct cost up to kiln_ Indirect costs which \ Total processing direct costs ^ can be allocated J (

c) Percentage of “net” profits allocable to kiln feed • Gross income from end product (sales priceXunits sold) —Total costs in producing end product_ , Profit from entire operation —Profit attributable to indirect costs which cannot be allocated_._ Allocable “net” profit Direct cost up to Min_ Total processing direct costs X Allocable “net” profit The Government contends that Treasury Eegulation 39.23 (m)-l(e) (3), supra, requires that the starting point for the computation should be the representative field or market price of the first marketable product and not the price for which the end product is sold by taxpayer.

We need not decide this issue since the evidence before us fails to show any discrepancy between the sales price and the representative market or field price. Furthermore, we need not determine whether the end product or the first marketable product should be used as the starting point for the computation since in this case the end result would be the same. Taxpayer asserts that the issue before this court is a factual one involving the acceptable accounting treatment to be accorded to the items in dispute in applying the proportionate profits method.

Taxpayers, therefore, called as witnesses, two eminently qualified accounting experts to testify as to their opinion with respect to the acceptable accounting treatment to be accorded such items. We do not disagree with taxpayer’s experts’ opinions as to the proper accounting treatment to be given to the items in dispute. However, the issue before us is not factual but a legal one. We are asked to construct a hypothetical “gross income from the property” at the kiln feed stage for the purpose of computing taxpayer’s proper percentage depletion allowance.

In so doing, we are confronted with the question whether the indirect cost items in dispute can be properly allocated to the pre-kiln stage, thus forming a component of this hypothetical gross income we are asked to compute. In other words, we must determine whether Congress intended to include these cost items in its definition of gross income from mining under

section 613. This clearly calls for a legal determination of Congressional intent and not a factual choice of the proper and acceptable accounting treatment to be accorded such items. The legislative history of the 1960 amendments does not provide us with a solution to our problem. However, the words of the statutory enactment give us a starting point for our analysis. We believe that Congress intended to include in gross income from mining only those cost items (and a percentage of the entire profit attributable to them) which were incurred for the benefit of the mining operations as defined in

section 613(c) (4). This result is inescapable since we must view depletion as “an allowance for the exhaustion of a capital asset.” United States v. Cannelton Sewer Pipe Co., supra, at 86. This capital asset under the statutory definition is measured for depletion purposes in terms of “gross income from mining.” It follows that only those costs incurred for the benefit of the mining operation as particularized by the statutory scheme, can be included. The language of sub-paragraph (

F) of subsection 613(c)(4) demands this conclusion, for it specifically includes all processes up to kiln feed “but not including any subsequent processes.” We interpret this as excluding any subsequent manufacturing or marketing processes. Admittedly, our holding might be contrary to accepted cost accounting principles, but the purpose of depletion allowance is not to recompense for the cost of manufacturing and marketing of the end product but is to allow for the exhaustion of the mineral assets.

Thus the depletion rate must be applied as nearly as possible to the income derived from the mining of the raw materials as defined in the statutory scheme. United States v. Henderson Clay Products, supra, at 12. In so doing, we must view the miner-manufacturer as selling to itself the processed minerals at the kiln feed stage. United States v. Cannelton Sewer Pipe Co., supra, at 87. Thus taxpayer, the miner, does not incur those subsequent costs which its alter ego (the manufacturer and distributor) must incur to sell the end product.

To view this in any other perspective would introduce the tax discrimination between integrated and non-integrated miners against which the whole tenor of the Oannelton decision was directed. With this in mind, we turn to the specific items in dispute. A. Interplant Overhead It is at once apparent that this type of indirect expense is incurred for the benefit of taxpayer’s entire mining-manufacturing operation, consequently it should be apportioned to both stages of production in the manner that we have prescribed above.

By way of illustration, administrative expenses are incurred for the benefit of both the mining operations and the manufacturing processes. Consequently they should be allocated to both stages of production. However, at this stage of the proceedings, we are not determining which costs are to be classified as interplant overhead. This question will have to be determined at the time Buie 38(

c) computations are made. At this point we are merely holding that indirect cost items which are incurred for the benefit of the entire operation can be properly allocated by taxpayer in making his computation of gross income from the property at kiln feed. However, before the proper allocation of overhead can be made to these two stages, we must first determine taxpayer’s Martinsburg plant’s share of the total interplant overhead.

In its: amended return for the period in issue, taxpayer allocated to its' Martinsburg plant a portion of the total- inter-plant' overhead on the ratio which the direct costs of taxpayer’s'-Martinsburg plant bore to the total direct costs of all its nine plants. The Government now agrees with taxpayer’s method of allocation and we accept it as the proper method for purposes of this case. B. Gash Discovjnts Taxpayer sold finished cement on the following terms: Net cash, 30 days or discount of $.10 per barrel (discount on white cement $.20 per barrel) if paid within 15 days of invoice date.

In its amended return, taxpayer included the amount of cash .discounts on sales in gross income and allocated such amount to .the two stages of operations in the proportion which.direct costs of mining bear to total direct costs. The Government does not challenge the character of the discounts and agrees that they should be included in taxpayer’s gross income. Since there is no dispute between the parties that these discounts are cash discounts and not trade discounts, we accept such a characterization.

The Government contends that no part of this expense may be allocated to mining since “[n]o part of this expense was incurred at the end of mining when taxpayer theoretically sold the klin feed to its manufacturing alter ego.” The Government’s contention fails to envision the purpose which these expense items serve. Taxpayer’s experts testified that the function of a cash discount is to stimulate prompt payment in order to insure a quicker flow of working capital.

It is a financial expense which is incurred for the benefit of both-stages of the production process since it is obvious that working capital is needed for both the mining and manufacturing processes. Consequently, we must hold that cash discounts are an indirect expense which are incurred for the benefit of the entire operation and as such can be properly allocated in taxpayer’s computation of gross income from the property at kiln feed. C.

Packing and Loading Costs On its amended return, taxpayer allocated packing and loading costs between pre-kiln feed processes and post-kiln feed processes in the proportion as the direct cost of each bear to their aggregate direct cost. The Government takes the position that these cost items must be broken down into two separate items: First, there are those costs attributable to packing and loading bulk cement; second are the packing and loading costs incurred in selling cement in bags.

The Government contends that the costs incurred in loading bulk cement should be treated as a non-mining expense, no part of which is allocable to mining. It is not clear whether the Government considers this as a direct non-mining expense, thus includible in the total direct cost of processing, or it .'views these cost items as indirect expenses which cannot be properly allocated to those processes up to kiln feed.

As to those costs incurred in packing and loading cement in bags, the Government takes the position that these costs must be removed along with the elimination from the computation of the cost of the bags and the bag premium. We are of the opinion that all of taxpayer’s packing and loading costs are distribution expenses which cannot be allocated by taxpayer in its computation of gross income from the property at kiln feed. We say this because these cost items are not incurred for the benefit of taxpayer’s mining operations. They have no functional relationship to the mining activity.

Taxpayer under the statute is entitled to compute its “gross income from mining” from those costs (both direct and indirect) incurred up to kiln feed. This is all the law permits. It is obvious that these cost items are incurred by taxpayer long after the mining processes, as defined by the statute, have ceased. Cf. Morton Salt Co. v. United States, 161 Ct. Cl. 640, 316 F. 2d 931, cert. denied 375 U.S. 951 (1963).

Consequently, we must hold that those packing and loading costs are indirect costs which are not incurred for the benefit of the entire operation and as such cannot be included in taxpayer’s computation of gross income from the property at kiln feed. D. Oost of Containers Taxpayer, in its amended return, excluded from its gross income the additional price charged to customers for shipment of finished cement in bags by way of netting it against the cost of such bags.

Tire Government contends that taxpayer’s method of netting the cost of containers against the bag premium erroneously assumes that the premium charged is no greater than cost, and thus has the effect of leaving in income that portion of bag premiums which exceeds the cost of the containers. We agree with the Government’s position and are of the opinion that the cost of the entire packing operation, including both the packing and loading into bags and the cost of containers, is the expense incurred in order to obtain the bag premium.

Thus the entire amount of this expense must be eliminated from the computation for the same reason that packing and loading costs of bulk cement (and a percentage of the total profits attributable to them) must be excluded from the computation as an indirect cost which is not incurred for the benefit of the entire mining-manufacturing operation. E.

Purchased Additives Taxpayer has taken the position with respect to this cost item that their cost, as well as the profits attributable thereto (the profits being that portion of total profits which the tons of purchased additives bear to the total tons of processed materials) should be removed from gross income. On the other hand, the Government contends that the cost of purchased additives should be treated as a direct non-mining expense, no matter whether these purchased minerals are added prior to or subsequent to the kiln feed point, and as such should not be eliminated from the computation.

We believe that these cost items should be segregated into two categories: (1) the cost of purchased additives added prior to kiln feed, (2) the cost of purchased additives introduced -subsequent to kiln feed. The latter should be considered as a direct non-mining expense and should not be removed from the computation. We say this because these cost items are directly incurred for the benefit of the taxpayer’s non-mining processes and as such should be a component part of taxpayer’s total processing direct cost. As to the former, we believe that they should be eliminated from taxpayer’s gross income.

Admittedly these costs are incurred prior to the cutoff point; however, we are here concerned with taxpayer’s gross income from mining of limestone and shale in order to compute its proper depletion allowance, thus it should not be entitled to an allowance with respect to minerals which it does not mine. However, we cannot, as the Government contends, consider these items as direct costs incurred for the benefit of post-kiln feed processes since they are incurred in fact for the benefit of pre-kiln feed processes. Thus, the only solution available is to eliminate them from the entire computation.

Taxpayer, in its computation, has eliminated these items and the profits attributable thereto on a tonnage basis. We cannot accept taxpayer’s method since the adoption of this method would possibly result in a distortion of taxpayer’s true gross income at kiln feed. The proportionate profits method is a cost oriented method and as such requires that all expenses and profits attributable thereto be expressed. in terms of dollars and not in terms of weights.

Thus in eliminating these cost items, the profits attributable thereto should also be eliminated from the total profit on the ratio which the cost of the purchased additives bears to the total cost of producing cement. F. dost of Warehousing Taxpayer contends that the cost of warehousing finished cement should be allocated to the pre-kiln feed processes in its computation of gross income from mining on the grounds that they are distribution expenses.

We hold that these warehousing expenses are indirect costs (distribution) which cannot be allocated to the pre-kiln feed processes and as such should be eliminated (and the profits attributable thereto) from taxpayer’s gross income, because these cost items are incurred long after the kiln feed cutoff point. Furthermore, these expenses were not incurred for the benefit of taxpayer’s pre-kiln feed processes. Taxpayer has already included as a mining expense the cost of storage incurred prior to the cutoff point. Gr.

Inventory Adjustments Taxpayer, in its amended return, took into account all postive and negative inventory adjustments with respect to the materials utilized by it in the production of cement. The Government now agrees with this contention and has no objections to the making of inventory adjustments to these items as long as such adjustments are done in a manner consistent with prior accounting practices and are followed in future years.

Since at this stage of the proceedings we do not know whether taxpayer’s depletion allowance based on “gross income from the property” at kiln feed computed in accordance with our opinion'is greater than that which it took in its original return, entry of judgment is suspended and the case is remanded to the Commissioner for a computation of plaintiff’s taxes for the period in issue in conformity with the above opinion. FINDINGS OF FACT The court, having considered the evidence, the report of Trial Commissioner William E.

Day, and the briefs and argument of counsel, makes findings of fact as follows: Introductory Statement This case was filed on June 25, 1959. The defendant’s answer was filed on October 21,1959. On January 20, 1960, the court, upon motion of the defendant, suspended proceedings because of the case entitled United States v. Cannelton Sewer Pipe Company, then under review by the Supreme Court of the United States, involving the question of the proper base upon which to apply the appropriate mineral-depletion allowance.

After that case was decided by that Court, favorably to the defendant, new legislation was enacted (Public Law 86-781, 74 Stat. 1017), which .gave taxpayers engaged in the mining of minerals used in the production of cement the right, pursuant to election, to compute their “gross income from the property,” for the purposes of the percentage-depletion allowance with respect to such minerals for taxable years beginning prior to January 1, 1961, at the point of introduction of the materials into the kiln.

A taxpayer so electing was required to forego its claim for percentage depletion based on “gross income from the property” at the finished product. In early March 1962, counsel for both parties were requested to advise concerning the location of their witnesses so that a trial date might be arranged. Upon suggestion from counsel that a trial might be avoided by administrative settlement, no order setting the case for trial was made until May 8, 1962, when the parties were notified that the trial would begin on Monday, June 18,1962, at Washington, D.C., with both parties expected to close proof.

No further pleadings were filed by either party. On June 13, 1962, at an informal conference between counsel for the parties and the commissioner, it was suggested by the defendant that the issues made by the pleadings became moot by reason of the new legislation referred to above, and the election thereunder made by the plaintiff. Counsel for the defendant requested a continuance of the trial setting. Upon objection by counsel for the plaintiff, the parties were directed to comply with the notice setting the case for trial on June 18th, and both parties were therein expected to close proof.

The trial proceeded as scheduled. There is practically no dispute as to the facts because no testimony ivas given on behalf of the defendant. In addition, no documentary evidence was offered on behalf of the defendant. 1. Art all times material hereto, plaintiff, a Maryland corporation, maintained its principal office at 2000 First National Bank Building, Baltimore 3, Maryland. Until April 1955, plaintiff was known as The Standard Lime and Stone Company, at which time its name was changed to Standard Lime and Cement Company. 2.

For the taxable period January 1, 1954, to November 30, 1954, plaintiff kept its books and filed its federal income tax return on an accrual basis. Prior to January 1,1954, it had filed its tax returns on the calendar year basis. On November 30, 1954, it was authorized by a proper official of the Internal Revenue Service to change its taxable year to a fiscal year ending November 30th. 3.

On February 14, 1955, plaintiff timely filed its federal income tax return for the taxable period January 1, 1954, to November 30,1954, with the Director of Internal Revenue for the District of Maryland, at Baltimore, Maryland. 4.

As filed, such return reflected a federal income tax liability of $1,028,011.39, all of which was paid by the plaintiff on the dates and in the amounts set forth below: February 14, 1955_$462,605.13 May 13, 1955_ 462, 605.13 August 11, 1955_ 51,400. 57 November 14, 1955_ 51,400. 56 5.On its return for the taxable period ending November 30, 1954, plaintiff deducted estimated expenses of $115,665, pursuant to Sections 452 and 462 of the Internal Revenue Code of 1954.

Upon repeal of those sections, it increased its taxable income by the amount so deducted, and paid the resulting deficiency in tax of $55,806.40 on or about December 16, 1955. fi. On May 28, 1956, plaintiff paid an additional assessment of tax in the amount of $16,001.16, plus interest of $1,234.28, all of which arose as a result of adjustments made in a revenue agent’s report dated August 14, 1956. 7.

On February 13,1958, plaintiff filed a timely claim for refund for overpayment of income tax for the taxable period January 1, 1954, to November 30, 1954, in the amount of $640,538.48, or such greater amount as legally refundable, together with statutory interest thereon. 8. During the taxable period January 1, 1954, to November 30, 1954, plaintiff owned and operated, at Martinsburg, West Virginia, an underground limestone mine and a shale quarry, together with a plant for the processing of these materials into finished cement.

In its original return for the taxable period January 1, 1954, to November 30, 1954, plaintiff computed its percentage-depletion allowance on the limestone and shale quarried at its Martinsburg facilities, which were processed into finished cement, on the basis of their representative field price in the Martinsburg, West Virginia, area. 10.

In its claim for refund for the taxable period January 1, 1954, to November 30, 1954, plaintiff computed its percentage-depletion allowance on the limestone and shale quarried at Martinsburg, which were processed into finished cement, on the basis of gross income derived from the sale of finished cement. 11. Having received no notice of any action by defendant, either allowing or disallowing its claim for refund, within 6 months subsequent to the date of filing thereof, plaintiff filed suit in this court on June 25, 1959, for the recovery of the overpayment of tax claimed in such refund claim.

The statutory notice of disallowance of plaintiff’s claim for refund was mailed to the plaintiff on August 20, 1959, after this action was filed herein. 12. As enacted, Public Law 86-781 (1960) (74 Stat. 1017) provided that taxpayers engaged in the mining of minerals used in the production of cement might, pursuant to election, compute their “gross income from the property” for the purpose of the percentage-depletion allowance at the point of introduction of the materials into the kiln (hereinafter referred to as “kiln feed” or “kiln feed cut-off point”).

A taxpayer electing under Public Law 86-781 was required to forego its claim for percentage depletion based on “gross income from the property” at the finished product. 13. On November 14,1960, the plaintiff sent the following letter to the District Director of Internal Eevenue at Baltimore, Maryland: In accordance with the provisions of Regulations

Section 1.9003-4 and the provisions of

Section 302(c) (2) of the Public Debt and Tax Rate Extension Act of 1960 (Public Law 86-564), as amended by

Section 4 of Public Law 86-781, the taxpayer elects to apply the provisions of

Section 302(

b) of the Public Debt and Tax Rate Extension Act of 1960 to its corporate federal income tax returns for all open years.

The taxable years to which this election applies, for which returns have previously been filed, are: Taxable period ended November 30, 1954 Taxable year ended November 30, 1955 Taxable year ended November 30, 1956 Taxable year ended November 30, 1957 Taxable year ended November 30, 1958 Taxable year ended November 30, 1959 In accordance with the provisions of the Regulations, amended returns will be filed with your office not later than February 28, 1961, covering the period ended November 30,1954 and the years ended November 30,1955, 1956, 1957,1958 and 1959, computed in accordance with the

section of the law referred to above, together with the payment of any additional tax due with interest thereon. 14. In addition to the dispatch of the aforementioned letter, plaintiff duly made and timely filed with the District Director of Internal Revenue at Baltimore, Maryland, an amended federal income tax return for the taxable period January 1, 1954, to November 30, 1954. Such amended return was filed on December 1, 1960.

Therein, plaintiff computed its “gross income from the property” with respect to the limestone and shale quarried at its Martinsburg facilities, which were processed into cement, at the kiln feed cutoff point as provided by Public Law 86-781. 15. Plaintiff utilized the proportionate-profits method in computing its “gross income from the property” at the kiln feed cut-off point on its amended return.

By this method, the manufacturing process is divided into two parts, one of which includes all direct costs up to the kiln feed cut-off point, and the other, all direct costs incurred after the kiln feed cut-off point. The indirect costs (the distribution and general and administrative expenses) and the profit are allocated to the two parts in proportion to their direct costs. 16. Plaintiff’s amended federal income tax return for the taxable period January 1, 1954, through November 30,1954, was audited by a representative of the District Director of Internal Revenue at Baltimore, Maryland.

Thereafter, conferences were held between counsel for the parties in an effort to dispose of this case by stipulation or by settlement. Such conferences were unavailing. 17. At all times pertinent hereto, plaintiff mined limestone and • shale from its Martinsburg facilities which it processed into finished cement. The various steps of plaintiff’s method of operation were as follows: (

a) The high-calcium limestone was removed from the working of the underground mine by drilling and blasting. (

b) The working face and mine roof were then scaled to remove fractured or loose and dangerous material. (

c) The limestone recovered was loaded by shovels into dump trucks and hauled to the surface. (

d) The limestone was then dumped into a gyratory crusher for prime crushing, which reduced it to a maximum size of 8 inches. (

e) The limestone was taken from the crusher by a conveyor belt to a surge bin from which it was removed to a scalping screen where material less than 5 inches in diameter was removed. (

f) The 5-inch material was then further reduced in size by secondary crushing to a maximum of 2 inches. (

g) The limestone was then introduced into a hammer mill where it was reduced in size to one-half inch. (

h) The %-inch limestone was then discharged into a feed bin from which it was withdrawn by proportionary scales and fed to a preliminator mill. At this point, shale, very small quantities of sand, and, where required, minute quantities of iron ore were also proportioned and added to the limestone. The shale introduced at this point was quarried by plaintiff from an open pit and trucked by it to its processing plant. (

i) Water was also added at the preliminator mill, and the resulting slurry was pumped to ball mills where it was further reduced to a size suitable for burning in the kiln. (

j) From the ball mills, the slurry was pumped to mixing and blending tanks from which it was withdrawn and pumped to a slurry storage basin. (

k) From the slurry storage basin, the slurry was pumped to ferris wheel feeders and fed into a rotary kiln. During the taxable period in issue, there were four rotary cement kilns in operation at Martinsburg. (

l) In the rotary kiln the slurry was burned to cement clinker at temperatures between 2,100 and 2,800 degrees Fahrenheit. (

m) The cement clinker was then discharged to a rotary clinker cooler. After cooling, the clinker was stockpiled. (

n) From the stockpile, the clinker was fed by a drag conveyor over a scalping screen where clinker in excess of three-eighths of an inch was removed to be reduced to %- inch size. (

o) The clinker was then stored in steel storage bins, from which it was withdrawn by proportionary feeders and gypsum added to control the speed of its set. (

p) The cement clinker, mixed with gypsum, was ground in a compeb mill to finished cement. (

q) The finished cement was then stored in storage silos. (

r) The cement was withdrawn from the storage silos and either packed in bags or loaded in bulk cars or containers for shipment. The method of shipment was determined by the customer’s instruction at the time of purchase. (

s) Certain quantities of the finished cement were shipped in bulk by plaintiff to a warehouse in Washington, D.C., where it was stored awaiting ultimate sale. 18. Set forth below are the costs incurred by plaintiff in the operation of the Washington, D.C., warehouse during the period in issue.

Operating expenses- $43,086. 00 Freight from Martinsburg_ 276, 088. 09 Inventory adjustment — increase_ (9, 896.46) Total costs_$309, 277.63 19. -Plaintiff’s net sales for the 11-month period ending November 80,1954, from its plant at Martinsburg, West Virginia, were as set forth below: 'Capital Cement_ $5,246,205. 56 Capital “X” Cement. 9,411.86 Masonry Mortar_ 360,009.47 Lime_ 447, 536. 07 Furnace Stone_ 269, 888. 24 Commercial Stone_ 157, 997.42 Total net sales_$6,491, 048. 62 20.

Of the $360,009.47 net sales of masonry mortar set forth above, $145,265.12 represented the value of Portland cement used in the production of such mortar. 21.

As reflected by its books and records, the costs and expenses incurred by plaintiff during the taxable period here in issue at its Martinsburg, West Virginia, facilities were as set forth below: Commercial stone quarry_ $98, 248. 59 South and North mines_ 907, 757. 96 Shale quarry- 47, 328.90 Raw material mixing and grinding_ 403,915.76 Kiln feeding costs of lime_ 68, 681.19 Clinker burning- 1,340, 465. 00 Cement finishing- 475,181.40 Rotary lime burning- 201,113. 31 Hydrate lime- 19, 574. 87 Masonry mortar- 50,464.38 Stone from Bakerton (transferred)_ 7,123.73 Purchased additives: Sand- 44, 763.30 Pyrites- 1,926.91 Gypsum- 107,232.91 Packing and loading_ 164,369.27 Cost of containers: Cement_ 146,180. 55 Masonry mortar- 41, 838.35 Cash discounts: Cement_ 173,406.32 Masonry mortar- 12, 952.47 Lime_ 4,762.46 Georgetown and South Capitol Warehouse: Operational costs_ 43, 086. 00 Inventory adjustments: Clinker_ $ (9, 666. 69) Cement_ 31, 726.41 Masonry mortar- 1, 832.76 Lime_ (1,157.24) Hydrate- (765. 00) - $21, 970.24 Overhead allocation: Cement: Limestone $247,402.40 Shale_ 50, 600.97 Additives 20,206.32 - 318, 209. 69 Commercial stone_ 8, 987.77 Furnace stone and lime_ 53,467.56 Masonry mortar- 7,690.38 - 388, 355.40 Total Martinsburg costs and expenses- $4, 760,699.27 22. (

a) During the taxable period in issue, plaintiff mined 688,412 net tons of limestone, and 111,081 net tons of shale from its Martinsburg facilities. The tonnages so mined were used by the plaintiff in the following manner : Limestone: 444,941 net tons used in cement (64.63 percent of total mined) 243,471 net tons used in lime and furnace stone (35.37 percent of total mined) Shale: 111,081 net tons used in cement (100 percent of total mined) (

b) During this same period, plaintiff purchased 25,009 net tons of additives comprised of: Sand_ 12,645 net tons Pyrites_ 205 net tons Gypsum _12,159 net tons (c)The total net tons of materials used by plaintiff in the production of cement during this period was 581,031, broken down on a percentage basis between materials, as follows: Limestone _76.58 percent Shale _19.12 percent Additives_ 4.30 percent 23. (

a) A “barrel” constitutes a unit of measure equal to 376 pounds of cement. In practice, plaintiff’s sales were either in bulk or in bags. Each bag of cement measured 94 pounds, or 4 bags to a barrel. (

b) During the period in issue, plaintiff sold 1,784,144 barrels of Portland cement from its Martinsburg facilities. On account of these sales, it allowed cash discounts in an aggregate amount of $173,406.32. (

c) It was plaintiff’s practice, during the period in issue, to extend a discount of 10 cents per barrel to purchasers of its Portland cement who paid their bills within 15 days of the invoice date. The terms were brought to the purchaser’s attention on plaintiff’s standard form of invoice, which provided: Terms : Net cash 30 days or discount of 10c per barrel (discount on White cement 20c per barrel) if paid within 15 days of invoice date. (

d) White cement was a product purchased by plaintiff for resale to its customers. (

e) The 10 cents per barrel discount was granted only to those customers making payment within 15 days of the invoice date, and was intended solely to encourage prompt payment of the invoices. (

f) During the period in issue, the average gross invoice price per barrel of plaintiff’s cement was $3.56. Conversion of plaintiff’s 10 cents per barrel discount to a percentage basis results in a discount of 2.8 percent on each barrel sold. 24. (

a) During the period extending from the calendar year 1951 through the 11-month period ended November 30, 1954, and including the year 1955, plaintiff sold the following gross tons of furnace stone at its Martinsburg, West Virginia, plant: Year Gross tons 1951_ 586, 364 1952 _ 477, 792 1953 _ 457, 937 Eleven months ending 11/30/54- 133, 793 1955 _ 130, 906 (

b) Furnace stone is a large, high-calcium limestone, approximately 5 by 10 inches in size, and is used by steel mills as fluxing stone. (

c) During the taxable period here in issue, plaintiff did not actively engage in the sale of furnace stone, and made no solicitation of this business. Its principal reason for discouraging these sales was the fact it did not wish to exhaust its stone reserves in this manner in light of its heavy investment in plant and equipment utilized for the manufacture of limestone products. However, as an accommodation to the more reliable customers of its other products, it made certain “accommodation” sales of furnace stone during the instant tax period. 25. (

a) During the period in question, plaintiff made an additional charge for the sale of a barrel of its Portland cement in bags rather than bulk. On a unit basis, this additional charge was 30 cents per barrel more for cement sold in bags. (

b) Plaintiff shipped from Martinsburg 498,045 barrels of Portland cement packaged in bags during the taxable period in controversy. The additional bag premium charged by it on account of these shipments was $149,413.50. 26. (

a) During the 11-month period ended November 30, 1954, plaintiff’s books and records revealed total direct charges of $13,575,418.98. (

b) For this same period, its books and records reflected total Martinsburg direct charges of $4,152,496.70. (

c) Plaintiff’s total company overhead (selling, administrative and general expense) for the taxable period in controversy was $1,241,877.38, of which $379,870.40 was allocated to its Martinsburg facilities on the ratio which its Martinsburg direct charges bore to its total direct charges, plus an adjustment of $8,485 for estimated cement discounts which were reversed, or a total of $388,355.40. 27. (

a) At all times material hereto, plaintiff operated nine plants in different locations.

These plants, their locations, and the products produced by them, were as follows: Plant location Product Martinsburg, West Virginia_Cement Lime Furnace stone Commercial stone Millville, West Virginia_Dead-burned dolomite Bakerton, West Virginia_Lime Kimballton, Virginia_Lime Knoxville, Tennessee_Lime Pleasant Gap, Pennsylvania_Lime McCook, Illinois_Dead-burned dolomite Woodville, Obio_Lime Dead-burned dolomite Manistee, Michigan_Magnesite (b)' Plaintiff’s net sales of its Martinsburg cement and furnace stone, the pre-tax profit derived from such sales, and the percentage of such profit to sales for the period in controversy were as set forth below: MARTINSBURG, WEST VIRGINIA Percentage pre-taw Pre-taw profit to Product Net sales profit net sales Cement_$5, 371,406. 82 $1,577, 093. 62 29.63% Furnace stone_ 269,888.24 44,553.07 16.51% (

c) The pre-tax profit margin for each of the products set forth immediately above was derived on the basis of net sales less the sum of the direct costs to produce each of those products and a proportion of the total plant overhead and the home-office general expenses allocated thereto on the basis of recorded costs. 28. In its amended return, filed pursuant to its election under Public Law 86-781, plaintiff computed its percentage-depletion allowance with, respect to the depletable minerals used in the manufacture of cement on the proportionate-profits method. In making this computation, it treated the following items in the manner indicated: (

a) Cash Discounts. Cash discounts were treated as a financial expense allocated over plaintiff’s entire operation on the basis of direct costs. (

b) Interplant Overhead. Interplant overhead was allocated on the ratio which the direct cost of plaintiff’s Martinsburg plant bore to the total direct cost of all of its nine plants. (

c) Paching cmd Loading Costs. Packing and loading costs were allocated over plaintiff’s Martinsburg cement operation on a tonnage basis. Such costs were exclusive of the cost of containers in which the plaintiff shipped its product. No portion of the packing and loading costs was allocated to plaintiff’s pre-kiln operation. (

d) Cost of Containers. The additional price charged by the plaintiff to its customers for the shipment of its product in bags was eliminated from its gross income. The cost of containers so utilized, which was incurred by the plaintiff, was eliminated from its costs of operation. (e)' Additives. Gross income was allocated by the plaintiff to its purchased additives on a tonnage basis. The cost of these additives, as well as the profits attributable thereto, was determined on a tonnage basis. (

f) Warehousing. The operational costs of the Georgetown and South Capitol warehouse in Washington, D.C., were treated as a selling and distribution expense, and were allocated over plaintiff’s entire Martinsburg cement operation on the basis of direct costs. (

g) Freight. The shipping costs incurred by plaintiff in transporting its finished cement to the Georgetown and South Capitol warehouse were not eliminated from its gross income. (

h) Inventory Adjustments. In computing its “gross income from tlie property,” plaintiff took into account all positive and negative inventory adjustments with respect to the materials utilized by it in the production of cement, including limestone, shale, purchased additives, clinker, and finished cement. 29. Nathaniel Arbiter, professor of Mineral Engineering, Krumb School of Mines, Columbia University, is a qualified expert in the mineral dressing field. 30. After a consideration of each of plaintiff’s operational steps, outlined in (

a) through (

s) in finding 17 above, Professor Arbiter expressed the opinion that processing of the mined minerals, used by plaintiff in the production of cement, ends at the point where materials in the form of cement clinker, having been mixed with gypsum and ground in the compeb mill to finished cement, come to rest in the silo. His opinion was based on the fact that after grinding in the compeb mill, the material is cement in physical as well as in chemical form. 31.

There is no representative field or market price at the kiln feed stage for the minerals mined by plaintiff at its Martinsburg, West Virginia, facilities and used by it in the manufacture of cement. Consequently, “gross income from the property” at that point may be determined at that point by use of the proportionate-profits method. There is no satisfactory evidence in the record of a better method. 32. Philip L. Defliese, a certified public accountant and a partner in the firm of Lybrand, Boss Brothers & Montgomery, is a qualified expert in the accounting field. 33. (

a) Mr. Defliese expressed the opinion that the expenses incurred by plaintiff in its packing and loading operation constituted distribution expenses, and were not a part of the cost of processing the cement itself. As such, Mr. De-fliese stated that the proper method of accounting for packing and loading expenses would be to allocate them over plaintiff’s entire operation rather than to allocate them to any part thereof. He based his opinion, in part, on the fact that plaintiff’s mode of shipment of its product, either in bags or in bulk, is not determined until requested by a particular customer. (

b) Mr. Defliese further stated that, in his opinion, the expenses incurred by plaintiff in making bulk shipments of its finished cement to its Washington, D.C., warehouse, as well as the expenses incurred in operating this warehouse, constituted distribution expenses, and were not expenses of producing cement. Mr. Defliese stated that the proper method of accounting for these bulk shipment and warehouse operational expenses would be to allocate them over plaintiff’s entire operation, rather than to allocate them to any part thereof.

He based his opinion primarily on the fact that the purpose underlying these expenditures was to place plaintiff’s product closer to the point of its sale. 34. Dr. Robert N. Anthony, a professor of business administration at the Harvard Graduate School of Business Administration, is a qualified expert in the field of management accounting. 35. (

a) Dr. Anthony expressed the opinion that the expenses incurred by plaintiff in its packing and loading operation constituted post-processing or distribution costs. Dr. Anthony stated that the proper method of accounting for these packing and loading expenses would be to allocate them over plaintiff’s entire operation. He based his opinion on the fact that, in the contemplation of a mineral dressing expert, the processing of plaintiff’s materials ceases prior to packing and loading of its finished cement for shipment to its customers. (

b) Dr. Anthony was also of the opinion that the expenses incurred by the plaintiff in shipping its finished cement in bulk to its Washington, D.C., warehouse, as well as the expenses incurred in operating that warehouse, constituted post-processing sale and distribution expenses. It was his opinion that these expenses should be allocated over the plaintiff’s entire operation in the same manner as other distribution costs. His opinion was based, in part, on the fact that shipment in bulk to the Washington, D.C., warehouse, as well as the operation of such warehouse, occurred after the processing of the plaintiff’s materials into cement had been completed. 36. (

a) In the opinion of Mr. Defliese, a cash discount is a discount which is granted to a customer for payment of an invoice within a specified time, its function being to stimulate prompt payment in order to reduce collection costs and credit risks, and to insure a quicker flow of working capital. (

b) On the other hand, Mr. Defliese defines a trade discount as a discount which is deducted from the list price of an

article to be sold, its purpose being to arrive at an effective sales price to the customer. According to Mr. Defliese, trade discounts may vary with the type of customer wholesaler or retailer), and/or may depend upon the quantity of the particular commodity purchased. Defliese stated that, in his opinion, a trade discount is in no way related to the payment of an invoice price, it being effective immediately without regard to the manner or time of payment. (

c) According to Mr. Defliese, the following distinction pertains between a cash discount and a trade discount: The former is obtained at the option of the customer to pay or not to pay the invoice within a specified period of time, while the latter is effective immediately, the customer having no influence whatsoever over its determination. (

d) In Mr. Defliese’s expert consideration, there is usually no relationship between the terms of a cash discount and prevailing bank interest rates. Mr. Defliese recognized that while cash discounts may be stated in terms of annual interest rates for theoretical reference purposes, such annual interest rates are not bank interest rates. (

e) In Mr. Defliese’s opinion, the most common cash discount is 2 percent off if paid within 10 days, with full payment to be made if paid in 30 days. However, he is aware, depending on trade usage, of discounts as high as 3 percent, the specified payment period varying from 5 to 20 days, and credit terms extending to 60 or 90 days. (

f) Mr. Defliese’s opinion is that, regardless of the prevailing bank interest rate, it is to a customer’s advantage to borrow money to take advantage of a 2 percent 10 days cash discount. Thus, he would conclude that such a cash discount effectuates its purpose, i.e., furnishing the customer an incentive to pay promptly even though he might have to borrow to do so. (

g) After consideration of plaintiff’s standard invoice terms of an average gross price per barrel of cement of $3.56, discount of 10 cents per barrel for payment within 15 days, net payment in 30 days, such discount being equivalent to a 2.8 percent interest rate for the 15-day period, Mr. Defliese’s opinion was that plaintiff’s discount was clearly a cash discount. 37. (

a) Dr. Anthony’s opinion with respect to a cash discount was in complete accord with that of Mr. Defliese insofar as its definition, purpose, usual terms, and distinction from a trade discount are concerned. Further, his opinion was the same as that of Mr. Defliese with respect to the lack of a relationship between a cash discount and annual bank interest rates. (

b) After consideration of plaintiff’s standard invoice terms with respect to its manufactured cement, Dr. Anthony’s opinion was that plaintiff’s discount of 10 cents per barrel for payment in 15 days, 30 days net, clearly is a cash discount. 38. (

a) Mr. Defliese and Dr. Anthony agreed that for the purposes of a proportionate-profits computation of “gross income from the property” at the kiln feed cut-off point, cash discounts should not be eliminated from gross income. (

b) In their opinion, cash discounts are indirect costs for the purpose of such proportionate-profits computation, and should be allocated over the entire processing operation in the same proportion as each part’s direct costs bear to their aggregate direct costs. (

c) Both Mr. Defliese and Dr. Anthony concurred in the opinion that allocation of cash discounts to only the post-kiln feed processing costs, and/or their elimination from gross income, is an unacceptable accounting procedure. 39. After careful consideration of plaintiff’s entire operation at all of its nine plants, Mr. Defliese and Dr.

Anthony concurred in the opinion that the proper accounting treatment to be afforded to its interplant overhead, for the purposes of a proportionate-profits computation of “gross income from the property” at the kiln feed stage, is to allocate such interplant overhead among its nine plants in the proportion which each plant’s direct costs bear to its aggregate direct costs. 40. Upon consideration of plaintiff’s operation, Mr.

De-fliese was of the opinion that the proper accounting treatment to be afforded the additional price charged by plaintiff to its customers for the shipment of its finished cement in bags, in a proportionate-profits computation of “gross income from the property” at the Min feed cutoff point, is the elimination of such additional price from income by way of netting it against the bag costs incurred. Mr. Defliese was of the further opinion that such netting of premium against costs properly eliminates those costs from costs of the operation. 41. Dr.

Anthony, after full consideration of plaintiff’s operation, expressed the opinion that, in a Min feed proportionate-profits computation of “gross income from the property,” treatment of additional bag premiums such as charged by plaintiff to its customers as gross income, as well as the treatment of the expenses incurred for such containers as post-Min feed processing costs, is, in each instance, an unacceptable accounting procedure. 42. (

a) Accepting the proposition that the proportionate-profits computation of “gross income from the property” at the kiln feed cut-off point requires the removal of that portion of gross income allocable to purchased additives, Mr. Defliese expressed the opinion that such removal must be effected on a proportionate basis, and should carry with it not only all the allocable costs of such additives, but also their proportionate share of the profits. (

b) An acceptable method of allocating to purchased additives their proper share of the profits, according to Mr. Defliese, is an allocation on the basis of tonnage, i.e., that proportion of the total profits which the ratio of the total tons of purchased additives bears to the total tons of processed materials. 43. (

a) Dr. Anthony, having been familiarized with plaintiff’s method of purchasing additives, and acknowledging that these additives must be removed from “gross income from the property” for the purposes of a proportionate-profits computation at the Min feed cut-off point, was of the opinion that the only acceptable accounting method of effectuating such removal would be one which ascribes to the purchased additives not only their cost but a fair share of the profit realized on them. (

b) In Dr. Anthony’s opinion, such proper method for effectuating the removal of purchased additives is a removal on a relative tonnage basis, i.e., attribution to the additives of a profit factor based upon that proportion of the profits which the tons of purchased additives bear to the total tons of processed materials. (

c) In Dr. Anthony’s opinion, treating the costs of purchased additives solely as a post-kiln processing cost is unacceptable in that it severely understates the value of the mined minerals. 44. Dr. Anthony expressed the opinion that in making inventory adjustments for the purpose of determining costs of goods sold, where the inventory consists of limestone, shale, clinker, purchased additives, and finished cement, adjustments to inventory must be made to each of the items on a consistent basis. He further expressed the opinion that an inventory adjustment to shale alone is indefensible.

CONOLuSXON OK LAW Upon the foregoing findings of fact, which are made a part of the decision herein, since at this stage of the proceedings we do not know whether taxpayer’s depletion allowance based on “gross income from the property” at kiln feed computed in accordance with the opinion is greater than that which it took in its original return, entry of judgment is suspended and the case is remanded to the Commissioner for a computation of plaintiff’s taxes for the period in issue in conformity with the opinion.

In accordance with the opinion of the court, a memorandum report of the commissioner, and a stipulation of the parties, it was ordered on January 29, 1965, that judgment be entered for plaintiff for $58,567.71, with interest at six percent on $17,235.44 from May 28, 1956 until date of payment, and on $41,332.27 from December 16, 1955 until date of payment.

Section 613 of the Internal Revenue Code of 1951, as amended by

section 302(

b) of the Public Debt and Tax Rate Extension Act of 1960, 74 Stat. 290, 292, provides in pertinent part as follows : “SEC. 613. PERCENTAGE DEPLETION (

a) General Rule. — In the case of mines, wells, and other natural deposits listed in subsection (b), the allowance for depletion under

section 611 shall be the percentage, specified in subsection (b), of the gross income from the property excluding from such gross income an amount equal to any rents or royalties paid or incurred by the taxpayer in respect of the property. Such allowance shall not exceed 50 percent of the taxpayer’s taxable income from the property (computed without allowance for depletion). * * * * * * * $ (

c) Definition of Gross Income From Property. — For purposes of this section—

(1) Gross income from the property. — The term ‘gross income from the property’ means, in the case of a property other than an oil or gas well, the gross income from mining.

(2) Mining. — The term ‘mining’ includes not merely the extraction of the ores or minerals from the ground but also the treatment processes considered as mining described in paragraph (4) (and the treatment processes necessary or incidental thereto), and so much of.the transportation of ores or minerals (whether or not by common carrier) from the point of extraction from the ground to the plants or mills in which such treatment processes are applied thereto as is not in excess of 5ft miles unless the Secretary or his delegate finds that the physical and other requirements are such that the ore or mineral must be transported a greater distance to such plants or mills. * » * * *

(4) Treatment Processes Considered as Mining. — The following treatment processes where applied by the mine owner or operator shall be considered as mining to the extent they are applied to the ore or mineral in respect of which he is entitled to a deduction for depletion under

section 611: (

E) in the case of calcium carbonates and other minerals when used in making cement — all processes (other than preheating of the kiln feed) applied prior to the introduction of the kiln feed into the kiln, but not including any subsequent process ; * *

Section 302(

c) of the Public Debt and Tax Rate Extension Act of 1960, 74 Stat. 290, 293, provided that the

section 302(

b) amendments applied only with respect to taxable years beginning after December 31, 1960. In order to eliminate the gap created for years prior to 1960, Congress passed Public Law 86-781, 74 Stat. 1017, 1018 (1960) which amended

section 302(c), supra, permitting an election to be made by a taxpayer, in the case of calcium carbonates when used in making cement, to apply the provisions of

section 613(

c) of the 1954 Code, as amended, to all open years in lieu of corresponding provisions of prior law. This is in accordance with Treasury Regulation 118, § 39.23(m)-1(e) (3) made applicable to taxable years under the 1954 Code by T.D. 6091, 1954-2 Cum. Bull. 47. We denied the motion without prejudice and the case proceeded to trial. Internal Revenue Code of 1954, § 7422(a). Internal Revenue Code of 1954, § 6532(a) (1). In the instant case, the Secretary or his delegate did not render a decision on taxpayer’s amended return filed in 1960. Internal Revenue Code of 1954, § 7422(a).

Internal Revenue Code of 1954, § 613(c)(1). Internal Revenue Code of 1954, § 613(c) (4) (F). The main issue -with which we are concerned is whether all or some of taxpayer’s indirect cost can be properly allocated to this hypothetical gross income we are asked to compute. This regulation provides in pertinent part, as follows: “

(3) If the taxpayer sells the crude mineral product of the property in the immediate vicinity of the mine, 'gross income from the property’ means the amount for which such product was sold, but, if the product is transported or processed (other than by the ordinary treatment processes described below) before sale, ‘gross income from the property’ means the representative market or field price (as of the date of sale) of a mineral product of like kind and grade as beneficiated by the ordinary treatment processes actually applied, before transportation of such product (other than transportation treated, for the taxable year, as mining).

If there is no such representative market or field price (as of the date of sale), then there shall be used in lieu thereof the representative market or field price of the first marketable product resulting from any process or processes (or, if the product in its crude mineral state is merely transported, the price for which sold) minus the costs and proportionate profits attributable to the transportation (other than transportation treated, for the taxable year, as mining) and the processes beyond the ordinary treatment processes. * * *” The pre-kiln feed processes, as defined by statute, end at the point where the slurry is pumped from the slurry storage basin to ferris wheel feeders and fed into a rotary kiln (step (

k) of taxpayer’s operations as set out in our findings of fact). Taxpayer’s expert, after considering the steps of taxpayer’s operations, expressed the opinion that processing of the mined minerals used by plaintiff in the production of cement ends at the point where materials in the form of cement clinker having been mixed with gypsum and ground in the compeb mill to finished cement, come to rest in the storage silo. His opinion was based on the fact that, after grinding in the compeb mill, the material stored in the silo is cement, in physical as well as chemical form.

It is necessary to establish this point since all costs which are incurred subsequently are not considered direct processing costs, and a determination must be made as to whether or not they can be properly allocated to both stages of production. We accept taxpayer’s expert’s uncontradicted opinion and find .that the post-kiln feed processes end at the point where the materials in the form of cement come to rest in the storage silos (step (

q) of taxpayer’s operation as set out in our findings of fact). This must be done since the basic assumption of the proportionate profits method is that each dollar of costs (either direct or indirect) expended to produce and sell the end product earns the same percentage of the profit. Thus, in eliminating these cost items, the profits attributable thereto should also be eliminated from the total profit on the ratio which the cost of these indirect expenses bears to the total cost of producing cement. The position taken by the Government in this ease is contrary to that which it took in United States v.

Henderson Clay Products, supra. In that case, the Eifth Circuit was confronted with the problem of whether the taxpayer should be required to use the proportionate profits method for computing its depletion allowance, and in so doing using the sales price of Its final product or was it allowed to use the representative field or market price of its first marketable product. The situation in Henderson was unique in that the sales price of the final product was considerably less than the representative market or field price of the first marketable product which taxpayer did not sell.

The court, in ruling against the taxpayer, held that it was required to use the proportionate profits method for its computation and that the sales price of the final product must be the starting point. See the court’s definition of the proportionate profits method at page 9. . Judge Wisdom, speaking for a unanimous court, in United States v. Henderson Clay Products, supra, seems to indicate at page 9, footnote 3, that the first marketable product test, as clarified by the Oannelton decision, has been effectively removed by Congress by the addition of

section 613(c)(4) which particularizes those treatment processes which are to be treated as part of the mining operation. Indeed, in the explanation of how the proportionate profits method is applied, the court states at page 9 that “[t]hls is the proportion of the sales price of the final product * * This reasoning, if followed a step further, appears to invalidate that portion of Treasury Regulation 118, § 39.23(m)-l(e) (3) requiring that the first marketable product be used in the application of the proportionate profits method. We need not reach this issue.

Although the record indicates what items make up taxpayer’s overhead costs, we are not passing on them since we have not had the benefit of the parties’ arguments with respect to the specific items composing taxpayer’s overhead costs. Originally the Government took the position that interplant overhead should be allocated among plaintiff’s various plants on the basis of each plant’s gross receipts. Cash discounts are granted to purchasers in order to encourage prompt payment thus producing a quicker Sow of working capital.

They differ from trade discounts in that the latter are granted at the option of the seller no- matter when payment is made, depending on market conditions, while the former are availed of entirely at the option of the purchaser. Thus trade discounts are deemed reductions in sales price thus not includible in taxpayer’s total gross income, while cash discounts are treated as a financial expense to the vendor and thus includible in taxpayer’s gross income. See Rev. Rui. 55-13, 1955-1 Cum. Bull. 285; Rev. Rui. 60-257, 1960-2 Cum. Bull. 197.

If considered a direct non-mining expense, tills would increase the denominator of the formula, supra, thus having a greater reducing effect in taxpayer’s gross income from the property at Min feed, we cannot consider these items direct non-mining costs since we have accepted taxpayer’s expert’s opinion concerning the point at which the mining-manufacturing processes cease. Supra, footnote 12. See, infra, our discussion on item D. Taxpayer’s own experts state that these are distribution costs and not considered direct processing costs.

The cost of packing and loading bulk cement and the proportion of the total profits attributable to them must be taken out from the computation in the manner prescribed above. As to the manner in which the costs attributable to packing and loading cement bags are taken out, see our discussion of item D. At step (

h) of taxpayer’s operations, as set out in our findings of fact, small quantities of sand and iron ore are added to taxpayer’s pre-kiln feed minerals. No explanation appears in the record for the apparent discrepancy between the date of the revenue agent’s report and the date of the payment of the tax, plus interest, by the plaintiff. This Item relates to warehouse operating expenses In Washington, D.C. (see finding 18). The record Is.unclear as to whether the figure for 1955 is for a calendar or for a fiscal year.