Internal Revenue Service
Revenue Ruling
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smRev. Rul. 77-13
1977-1 C.B. 162
Section 613
IRS Headnote
Depletion; potash; mining processes. Neither the compacting of fine screenings of KCl or of standard grade KCl fertilizer to produce granular grade KCl, nor the secondary crystallization of fertilizer grade KCl to produce chemical grade KCl, is an allowable mining process within the meaning of section 613(c)(4)(D) or 613(c)(4)(1) of the Code. Determination of a representative market or field price was prevented by the application of the nonmining processes of storage and loading for shipment prior to sale, requiring a computation of gross income from mining by the proportionate profits method or an approved alternative method.
Full Text
Rev. Rul. 77-13
Advice has been requested whether, under the circumstances described below, the treatments described as (1) compacting fine screenings of muriate of potash (KCl) or standard grade KCl fertilizer to produce granular grade KCl, and (2) the secondary crystallization of dissolved fertilizer grade KCl to produce chemical grade KCl are allowable mining processes within the meaning of either section 613(c)(4)(D) or 613(c)(4)(I) of the Internal Revenue Code of 1954. Further, advice has been requested whether the fact that sales of KCl do not occur, in this case or in the industry in general, until after the non-mining processes of storage and loading for shipment are applied prevents the determination of a representative market or field price thereby necessitating the use of the proportionate profits method to determine the gross income from mining.
"Potash" is the term applied to the various salts of potassium and, as used commercially, applies to the theoretical potassium oxide (K2O) content of a potassium salt. Sylvinite, the potash ore mined by the taxpayer, is basically a mixture of halite (sodium chloride, NaCl) and sylvite (potassium chloride, KCl) with clay impurities.
The KCl produced by the taxpayer in the instant case is sold principally for use as fertilizer. A small amount of fertilizer grade KCl is further processed to remove a small amount of impurities and is then sold as chemical grade KCl. Usually the KCl is placed in storage until it is sold. After it is sold it is removed from storage and loaded for shipment.
The mining processes applied by the taxpayer to sylvinite ore to produce fertilizer grade KCl are crushing, grinding, concentration by flotation, leaching, crystallization, dewatering, drying, and sizing. These processes have been recognized as allowable mining processes in Rev. Rul. 73-538, 1973-2 C.B. 197. The fertilizer grade KCl is separated by screening into commercial grades standard and coarse. The undersized fines that pass through the screens are also recovered. After sizing the fertilizer is conveyed to storage bins to await sale and shipment.
A compacting treatment is applied to KCl fines and sometimes to standard grade KCl to produce granular KCl, a third commercial grade of fertilizer. Granular KCl is produced in the compacting mill by passing KCl fines or standard grade KCl through rollers which compact the KCl into a sheet. The sheet is crushed and the granules are passed over screens to size them. The granular size KCl is cooled in a water bath, redried, and conveyed to storage. Any under or oversize granular KCl is reprocessed in the compaction mill.
Fertilizer grade KCl is about 98.9 percent pure while chemical grade KCl is 99.9 percent pure. To remove the small amount of impurities from fertilizer grade KCl required to bring it to chemical grade KCl, the taxpayer applies a secondary crystallization treatment.
The 98.9 percent pure KCl is dissolved into a slurry which is pumped into leach tanks and then to the high grade thickener. The overflow from the high grade thickener goes to the high grade crystallizer feed tank and then to the crystallizers. The crystallizer slurry containing the KCl crystals is cycloned, centrifuged, and dried. The KCl produced by this treatment is 99.9 percent pure chemical grade KCl.
Section 613(c)(2) of the Code provides, in part, that 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 section 613(c)(4) and the treatment processes necessary or incidental thereto.
Potash is included among the minerals specifically named under section 613(c)(4)(D) of the Code. The treatment processes considered as mining that are named in sections 613(c)(4)(D) and 1.613-4(f)(2)(i) of the Income Tax Regulations are crushing, grinding, and beneficiation by concentration (gravity, flotation, amalgamation, electrostatic, or magnetic), cyanidation, leaching, crystallization, precipitation (but not including electrolytic deposition, roasting, thermal or electric smelting, or refining), or by substantially equivalent processes, or combinations of processes, used in the separation or extraction of the product or products from the ore, or the mineral or minerals from other material from the mine or other natural deposit.
Section 613(c)(4)(I) of the Code provides that the Secretary of the Treasury or the Secretary's delegate may prescribe by regulations other treatment processes to be considered as mining that are not inconsistent with other provisions of section 613(c)(4).
Section 613(c)(5) of the Code provides in part, that the processes of electrolytic deposition, roasting, calcining, thermal or electric smelting, refining, polishing, fine pulverization, blending with other materials, treatment effecting a chemical change, thermal action, and molding or shaping shall not be considered as mining unless such processes are provided for in section 613(c)(4) or are necessary or incidental to processes so provided for.
Section 1.613-4(f)(4) of the regulations provides that crystallization, which is listed in section 613(c)(4)(D) of the Code as a treatment process considered as mining, and the processes (or combination of processes) that are substantially equivalent thereto will be recognized as mining only to the extent that they are applied to the taxpayer's ore or mineral for the purpose of separation or extraction of the valuable mineral product or products from the ore, or for the purpose of separation or extraction of the mineral or minerals from other material extracted from the mine or other natural deposit. A process, no matter how denominated, will not be recognized as mining if the process beneficiates the ore or mineral to the degree that such process, in effect, constitutes smelting, refining, or any other nonmining process within the meaning of section 1.613-4(g).
Section 1.613-4(g)(1) of the regulations provides that unless they are otherwise provided for in section 1.613-4(f) as mining processes (or are necessary or incidental to processes listed therein), the following processes are not considered to be mining processes: electrolytic deposition, roasting, calcining, thermal or electric smelting, refining, polishing, fine pulverization, blending with other materials, treatment effecting a chemical change, thermal action, and molding or shaping.
Section 1.613-4(g)(6)(iii) of the regulations provides that the term "refining" refers to processes (other than mining processes designated in section 613(c)(4) of the Code or the section itself) used to eliminate impurities or foreign matter from smelted or partially processed metallic and nonmetallic ores and minerals. In general, a refining process is designed to achieve a high degree of purity by removing relatively small amounts of impurities or foreign matter from smelted or partially processed ores or minerals.
Section 1.613-4(f)(5) of the regulations provides that under the authority granted the Secretary of the Treasury or the Secretary's delegate in section 613(c)(4)(I) of the Code, the processes that are described in section 1.613-4(f)(5)(i) through (iv), and the processes necessary or incidental thereto, are recognized as mining processes for taxable years beginning after December 31, 1960. The processes described in section 1.613-4(f)(5)(i) through (iv) are in addition to the specific processes recognized as mining under section 613(c)(4). Such additional processes are: (i) crushing and grinding, but not fine pulverization; (ii) size classification processes applied to the products of an allowable mining process; (iii) drying to remove free water, provided that such drying does not change the physical or chemical identity or composition of the mineral; and (iv) washing or cleaning the surface of mineral particles (including the washing of sand and gravel and the treatment of kaolin particles to remove surface stains), provided that such washing or cleaning does not activate or otherwise change the physical or chemical structure of the mineral particles.
To be considered a mining process within the meaning of section 613(c)(4)(D) of the Code, a treatment process must be applied to an ore or mineral for the purpose of separation or extraction of the valuable mineral product from the ore, or for the purpose of separation or extraction of the mineral from other material extracted from the mine.
In the instant case, KCl is the only mineral recovered from the sylvinite ore and the KCl has been separated from the ore prior to the application of the compaction process. The compaction process is applied to the KCl merely to produce a third commercial grade of fertilizer rather than as an extraction or separation process.
Compaction is not a named mining process under section 613(c)(4)(I) of the Code and the regulations applicable thereto.
Accordingly, the compacting of fine KCl screenings or standard commercial grade KCl to produce granular commercial grade KCl is not an allowable mining process within the meaning of either section 613(c)(4)(D) or 613(c)(4)(I) of the Code and the applicable regulations thereunder.
Fertilizer grade KCl is 98.9 percent pure KCl and chemical grade KCl is 99.9 percent pure KCl. The taxpayer removes the minor amount of impurities from the fertilizer grade KCl necessary to produce chemical grade KCl by secondary crystallization.
Section 1.613-4(f)(4) of the regulations recognizes crystallization as an allowable mining process only to the extent it is applied to an ore for the purpose of extracting the valuable mineral product from the ore. The taxpayer's secondary crystallization treatment, however, is applied to a 98.9 percent KCl partially processed concentrate to produce a 99.9 percent chemical grade product.
Section 1.613-4(g)(6)(iii) of the regulations defines "refining" as a process, other than a mining process designated in section 613(c)(4) of the Code, designed to achieve a high degree of purity by removing relatively small amounts of impurities from partially processed ore. The taxpayer's secondary crystallization treatment meets this definition of refining and is, therefore, a nonmining process in accordance with sections 1.613-4(g)(1) and 1.613-4(g)(6)(iii). See also Rev. Rul. 73-556, 1973-2 C.B. 199, which holds that a magnetic process used to remove a minor amount of impurities from a quartzite concentrate is a nonmining refining process.
Secondary crystallization is not a named mining process under section 613(c)(4)(I) of the Code or the applicable regulations thereunder.
Accordingly, the secondary crystallization of dissolved commercial fertilizer grade KCl to produce chemical grade KCl is a nonmining refining process rather than an allowable mining process within the meaning of either section 613(c)(4)(D) or 613(c)(4)(I) of the Code and the regulations thereunder.
Section 1.613-4(c)(1) of the regulations provides, in pertinent part, that if the taxpayer processes the ore or mineral before sale by the application of nonmining processes, or uses it in his operations, gross income from mining shall be computed by use of the representative market or field price of an ore of like kind and grade as the taxpayer's ore or mineral after the application of the mining processes actually applied (if any), and before any nonmining processes are applied. The objective in computing gross income from mining by the representative market or field price method is to ascertain, on the basis of an analysis of actual competitive sales by the taxpayer or others, the dollar amount that most nearly represents the approximate price at which the taxpayer, in light of market conditions, could have sold his ores or minerals if, prior to the application of nonmining processes, the taxpayer had sold the quantities and types of ores and minerals to which he applied nonmining processes.
Section 1.613-4(d)(1)(i) of the regulations provides in part that if it is impossible to determine a representative market or field price then, except as provided in section 1.613-4(d)(1)(ii), gross income from mining shall be computed by use of the proportionate profits method.
Section 1.613-4(d)(1)(ii) of the regulations provides, in part, that the Office of the Assistant Commissioner (Technical) may determine that a method of computation is more appropriate than the proportionate profits method or the method being used by the taxpayer. The taxpayer may request such a determination. If the taxpayer is using a method of computation which has been determined by the Office of the Assistant Commissioner (Technical) to be more appropriate than the proportionate profits method, such method shall continue to be used until it is determined by the Office of the Assistant Commissioner (Technical) that either the proportionate profits method or another method is more appropriate.
The KCl products produced by the taxpayer in the instant case, and by the potash industry in general, are placed in storage until they are sold. After the products are sold they are removed from storage and loaded for shipment. The storage is to facilitate loading rather than a mining process, and therefore, storage and loading are nonmining processes in accordance with the holding of Rev. Rul. 73-538. Section 1.613-4(c)(1) of the regulations provides that, if nonmining processes are applied before the sale of the product recovered from the ore, gross income from mining must be computed by use of a representative market or field price.
A representative market or field price, however, can not be determined in this case because of the absence of actual sales of KCl by the taxpayer or some other taxpayer that sells KCl of a like kind and grade prior to the application of the nonmining processes of storage and loading for shipment.
Accordingly, because a representative field or market price cannot be determined, section 1.613-4(d) of the regulations requires that the taxpayer compute the gross income from mining by the proportionate profits method, or by an alternative method determined by the Office of the Assistant Commissioner (Technical) to be more appropriate than the proportionate profits method in that it more clearly reflects gross income from mining than the proportionate profits method.