Rev. Rul. 83-100
Caution: Revoked by 85-192
Internal Revenue Service
Revenue Ruling
DEPLETION; NONMINING PROCESSES; CHINA CLAY
Published: July 18, 1983
26 CFR 1.613-4: Gross income from the property in the case of minerals other than oil and gas.
Depletion; nonmining processes; china clay. Fine pulverization and air separation of china clay are not mining processes under section 613(c)(4)(C) of the Code where the air separation is not applied to bring the clay to shipping grade and form and the fine pulverization is not necessary or incidental to a mining process.
ISSUE
To ascertain whether fine pulverization and air separation of china clay are considered mining processes under section 613(c)(4)(C) of the Internal Revenue Code, is the "shipping grade and form" limitation determined by the industry's practices or those of the taxpayer?
FACTS
China clay is customarily sold in the form of the crude mineral product. The taxpayer, a miner and processor of china clay, uses a dry grinding-air separation system in producing a very fine, uniform, pure product to meet customer specifications for the manufacture of specialized products. The clay in its natural state contains about 4 percent impurities, such as iron and titanium minerals, sand, and mica. The clay is selectively mined, transported to processing plants, shredded (to 3 inches or less), and air dried. A small amount of the clay is sold before pulverization. The balance is ground in a roller mill into which heated air is introduced to facilitate the drying and grinding process, producing a pulverized product 95.0 percent of which passes through a No. 325 screen (U.S. Standard Sieve Series) and 100 percent passes through a No. 45 screen.
The material from the roller mill passes through an air separation unit that, by removing the oversized clay particles and nearly all of the remaining impurities, produces a 99.6 percent pure clay product of which 99.2 percent passes through a No. 325 screen. The final product is either loaded directly into box cars for shipment or stored for later bulk or bagged shipments. The product from the air separation process commands a higher price than the product from the roller mill before air separation.
In the general geographic area of the taxpayer's mine there are a number of nonintegrated miners (i.e., miners who are not also manufacturers) who also process china clay by the application of some or all of the processes applied by the taxpayer. However, a substantial portion of the china clay produced by these other miners is sold and shipped to customers in the form of the crude mineral product without the application of either fine pulverization or air separation.
LAW AND ANALYSIS
Section 613(c)(4)(C) of the Code describes processes that shall be considered as mining. With respect to minerals customarily sold in the form of the crude mineral product, these processes are sorting, concentrating, sintering, and substantially equivalent processes to bring to shipping grade and form and loading for shipment.
Fine pulverization normally is not a mining process. Section 613(c)(5) of the Code; sections 1.613-4(f)(5)(i), (g)(1) and (g)(6)(v) of the regulations. Nevertheless, where fine pulverization is necessary or incidental to a mining process, fine pulverization is considered a mining process. Section 613(c)(2) of the Code; section 1.613-4(f)(2)(iii) of the regulations.
In the present case, the roller mill grinding process produces a pulverized product 95.0 percent of which passes through a No. 325 screen (U.S. Standard Sieve Series) and 100 percent of which passes through a No. 45 screen. This indicates that the normal topsize of the product is less than .0331 inches. Consequently, under section 1.613-4(g)(6)(v) of the regulations, the roller mill process is treated as fine pulverization. As such, it is not a mining process unless it can be shown that (1) the air separation process used by the taxpayer is a mining process, and (2) fine pulverization is necessary or incidental to the air separation.
Air separation is a mining process only if it is "sorting", "concentrating" or a "substantially equivalent" process. Sections 613(c)(4)(C) and (I) of the Code; sections 1.613-4(f)(2)(i)(c) and (f)(5)(i) and (ii) of the regulations. For this purpose, "sorting" and "concentrating" are defined as the process of eliminating substantial amounts of the impurities or foreign matter associated with the ores or minerals in their natural state, without changing the physical or chemical identity of the ores or minerals. Section 1.613-4(f)(3)(i) of the regulations.
Here the china clay in its natural state contains about 4 percent impurities and approximately 90 percent of those impurities are removed by the applied processes. It might, therefore, be argued that the removal of so much of the impurities in the natural clay is the elimination of substantial amounts of the impurities associated with the mineral in its natural state, and hence mining. See Rev. Rul. 73-556, 1973-2 C.B. 199 (silica, 4 percent impurities in natural state, 95 percent of impurities removed by applied processes, held mining); Rev. Rul. 73-250, 1973-1 C.B. 304 (china clay, air classification removed coarse impurities, percent of impurities removed not stated, held mining); Rev. Rul. 72-475, 1972-2 C.B. 287 (ball clay, air flotation to remove certain impurities, percent removed not stated, held mining). Cf. Rev. Rul. 77-13, 1977-1 C.B. 162 (potash, upgrading mineral from 98.9% pure to 99.9% pure is refining, not mining).
In the cited silica, china clay and ball clay cases, however, the treatment processes applied were necessary to bring the mineral to shipping grade and form. In this case, a substantial portion of the china clay mined by nonintegrated miners (i.e., miners who are not also manufacturers) in the general geographic (i.e., trading) area of the taxpayer's mine is sold and shipped by such miners to customers without either fine pulverization or air separation. The critical question in this case is, therefore, whether the term "shipping grade and form" refers to the treatment and shipping practices of the taxpayer or to those of nonintegrated miners in the same industry and trading area.
The 1960 Gore Amendment to section 613(c)(4)(C) of the Code reflected no change in the Congressional intent with respect to the meaning of the statutory phrase "bring to shipping grade and form". Public Law 86-564, 86th Cong., 2d Sess., June 30, 1960, 1960-2 C.B. 681; 1960 U.S. Code Congressional and Administrative News 2563, 2580, 2582. Before that amendment, the Supreme Court concluded that "It would be strange, indeed, to ascribe to the Congress an intent to permit each miner to adopt processes peculiar to his individual operation." United States v. Cannelton Sewer Pipe Co., 364 U.S. 76, 86 (1960), 1960-2 C.B. 452. The regulatory approach that a technical evaluation of the process itself should be the basis for its classification as mining or nonmining goes only to the determination of whether the treatment process is sorting, concentrating, sintering, or a substantially equivalent process. That approach does not and cannot define "shipping grade and form".
Nor can a taxpayer-by-taxpayer reading of the "shipping grade and form" requirement be sustained, since such a reading would eviscerate the requirement and accord different treatment to taxpayers identically situated, contrary to the lawmakers' intent. Before the Gore Amendment, court decisions made it clear that the Congressional intention required an examination of the treatment and shipping practices in the taxpayer-miner's industry to determine the point at which substantial quantities of the tonnage production of the ore or mineral were sold by nonintegrated miners in the general geographic area of the taxpayer's mine. See Cannelton at 87; Iowa Limestone Co. v. United States, 365 F.2d 63, 68 (8th Cir. 1966); Food Machinery and Chemical Corp. v. United States, 348 F.2d 921, 930 (Ct.Cl.1965); Morton Salt Co. v. United States, 316 F.2d 931, 935 (Ct.Cl.1963), cert. denied, 375 U.S. 951 (1963). Those decisions did not purport to interpret the "shipping grade and form" requirement, but all of them dealt with the congressional intent underlying the statutory cut-off point for "mining", and since those decisions there has been no change in the pertinent statutory language that would warrant a different interpretation of the present law on this point.
It should be recognized, therefore, that for china clay and other class "C" crude mineral products, to be classified as "mining" a treatment process must meet not only the technical evaluation test of being either sorting, concentrating, sintering, or a substantially equivalent process, but it must also meet the second test of being applied to bring the ore or mineral to shipping grade and form; and for the last mentioned purpose it is necessary to examine the treatment and shipping practices in the taxpayer's industry to determine the point at which substantial quantities of the tonnage production of the ore or mineral are sold to customers by nonintegrated miners in the general geographic area of the taxpayer's mine.
In the present case, a substantial portion of the china clay mined by nonintegrated miners in the general geographic area of the taxpayer's mine is sold and shipped to customers without either fine pulverization or air separation. It follows that the china clay mined by taxpayer is in shipping grade and form before the fine pulverization and air separation are applied by taxpayer. Therefore, the air separation process in this case is not mining, since it is not applied to bring the china clay to shipping grade and form; and the fine pulverization is not a mining process, since it is not necessary or incidental to a mining process. See Rev. Rul. 77-13, 1977-1 C.B. at 164 and Rev. Rul. 73-556, 1973-2 C.B. at 200.
HOLDING
Fine pulverization and air separation of china clay are not mining processes under section 613(c)(4)(C) of the Code when, as in the present case, a substantial portion of the china clay mined by nonintegrated miners in the general geographic area of the taxpayer's mine is sold and shipped to customers without either fine pulverization or air separation.
Rev. Rul. 83-100, 1983-2 C.B. 101, 1983-29 I.R.B. 4.