Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 77-63

1977-1 C.B. 60

Section 167

IRS Headnote

Class life asset depreciation range system; alumina plants. The assets used by a taxpayer at alumina plants in the processing of bauxite ore into primary aluminum, including those used in chemical processes, are classified in asset guideline class 33.2, Manufacture of Primary Nonferrous Metals, in Rev. Proc. 77-10. Assets required to process alumina for use in activities other than those required to produce primary aluminum should be classified in other guideline classes.

Full Text

Rev. Rul. 77-63

Advice has been requested whether the assets used by a taxpayer at alumina plants are classified in asset guideline class 33.2--Manufacture of Primary Nonferrous Metals, under Rev. Proc. 77-10, page 548, this Bulletin.

The taxpayer is a fully integrated corporation that mines bauxite, produces alumina and uses such alumina in the production of semifinished and finished aluminum products.

The taxpayer's alumina plants produce various forms of hydrated, partially dehydrated, and anhydrous alumina products. A minor part of the taxpayer's alumina is sold to other industries for various uses.

All plants utilize the Bayer process to refine bauxite. Some plants use a combination process, which includes all phases of the Bayer process with additional processing to recover trace amounts of soda and alumina that would otherwise be lost with Bayer process waste. The mined ore (bauxite) is refined chemically by dissolving the bauxite ore in a strong, hot caustic soda solution. The unwanted constituents do not dissolve, but remain as a mud that can be removed by settling and filtration. The alumina is recovered from the remaining solution by crystallization in huge tanks called precipitators. The precipitated alumina is then sized, washed, and calcined to remove water. The solids (red mud) remaining after filtering are sintered with limestone and soda ash to recover a sodium aluminate solution that is returned to the digesters for processing through the remaining steps of the refining process.

A portion of the washed alumina may be left in the trihydrate form for chemical uses or may be further processed under controlled conditions to produce a variety of chemical aluminas.

The processes result in the production of aluminum oxide and aluminum hydroxide. Both of these are either used as finished chemical products by customers, or used further in the manufacture of aluminum salts or inorganic chemicals containing aluminum. Most of the aluminum oxide (alumina) is electrolytically smelted to produce molten aluminum metal. This molten metal is cast into ingots for further fabrication.

The question is whether the production of alumina, in part, by chemical processes precluded classification of the assets used to produce alumina under Guideline Class 33.2--Manufacture of Primary Nonferrous Metals.

Section 1.167(a)-11 of the Income Tax Regulations provides an asset depreciation range and class life system for determining the reasonable allowance for depreciation of designated classes of assets placed in service after December 31, 1970. Rev. Proc. 77-10 prescribes asset guideline classes and periods and depreciation ranges referred to in section 1.167(a)-11(b)(4).

Rev. Proc. 77-10 generally provides a single asset guideline class for the primary activity of each industry. Asset guideline class 33.2--Manufacture of Primary Nonferrous Metals, includes assets used in the smelting, refining and electrolysis of nonferrous metals from ore, pig, or scrap.

The asset guideline classes of Rev. Proc. 77-10, and amendments thereto, have been set up to cover broad segments of industry. The production of the primary metal aluminum is the function of the aluminum industry. Alumina is produced from bauxite and is subsequently smelted into primary aluminum. The primary nonferrous metals asset guideline class contains assets used in the production of aluminum whether starting from bauxite ore or from alumina.

The chemical process used at the taxpayer's bauxite refining plant to produce alumina is an integral part of the refining of the nonferrous metal.

Accordingly, inasmuch as the chemical process in the instant case is an integral part of the refining of the nonferrous metal, all of the assets used by the taxpayer in the processing of the bauxite ore into primary aluminum, including those used in the chemical process described above, are classified in asset guideline class 33.2--Manufacture of Primary Nonferrous Metals, of Rev. Proc. 77-10. Assets required to process the alumina for use in activities other than those required to produce the basic metal, primary aluminum, should be classified in other asset guideline classes.

Further, the same analysis applies to the application of Rev. Proc. 62-21, 1962-2 C.B. 418, which provides guideline classes and class lives for certain groups of assets for years preceding years for which Rev. Proc. 77-10 is applicable. Therefore, the taxpayer's assets used in processing bauxite ore into primary aluminum are classified in Group Three, Class 19(b)--Primary Nonferrous Metals, of Rev. Proc. 62-21, for the years that the taxpayer elected to apply the provisions of that Revenue Procedure.