Rev. Rul. 84-26
1984-1 C.B. 142, 1984-8 I.R.B. 5.
Internal Revenue Service
Revenue Ruling
DEPLETION; PIPELINE TRANSPORTATION OF SLURRY TO MINING PROCESSING PLANT
Published: February 21, 1984
26 CFR 1.613-4: Gross income from the property in the case of minerals other than oil and gas
Depletion; pipeline transportation of slurry to mining processing plant. In transporting mineral slurry by pipeline from a beneficiation plant to a seaport where additional mining processes are applied before sale, only that portion of the transportation within 50 miles of the mine is considered "mining" under section 613(c)(2) of the Code. Rev. Rul. 73-474 revoked.
ISSUE
Whether, under the facts and circumstances described below, pipeline transportation of the concentrates to the seaport is "mining" as defined in section 613(c)(2) of the Internal Revenue Code?
FACTS
A corporate taxpayer mines and sells a mineral in which it has an economic interest. The mineral deposit is located 150 miles from a seaport and is mined by conventional open-pit mining methods. The extracted ore is transported by truck, 4 miles from the mine to the taxpayer's beneficiation plant where it is reduced in size and beneficiated by a flotation process. The concentrate product which contains about 60 percent water is then sent to a thickener where a portion of the water added during the flotation process is removed leaving approximately 35 percent water. The resulting concentrate is suitable for transportation by slurry pipeline. The slurry is transported over land by pipeline to the seaport where it is sold. At the seaport, most of the water is removed by filtering and drying the concentrates to about 4 percent water content. The concentrates are then delivered to the purchasers for transportation by ship to their plants.
LAW AND ANALYSIS
Section 613(c)(2) of the Code provides 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) as well as the treatment processes necessary or incidental thereto and so much of the transportation of ores or minerals 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 50 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.
Section 1.613-4(f)(1)(iii) of the regulations provides that mining includes transportation of ores or minerals from the place of extraction to plants or mills where mining processes are applied. Transportation for a distance greater than 50 miles is mining transportation only to the extent the Commissioner of the Internal Revenue finds that both the physical and other requirements are such that the ores or minerals must be transported more than 50 miles.
Section 1.613-4(f)(5)(iii) of the regulations provides that drying to remove free water, provided that such drying does not change the physical or chemical identity or composition of the mineral, is recognized as a mining process in addition to the specific processes recognized as mining under section 613(c)(4) of the Code.
Section 1.613-4(g)(2) provides that a process applied subsequent to a nonmining process (other than nonmining transportation) shall also be considered to be a nonmining process.
In the instant case, the taxpayer removed only a portion of the water that was added during the concentration of the valuable mineral product by flotation at its benefication plant. The taxpayer's election to retain a portion of the flotation water with the concentrates, after having served its purpose in the concentration processes, and not dry it any further was done solely as an aid to the transportation of the concentrates in the form of slurry.
Section 1.613-4(g)(3) of the regulations is only meant to disallow as mining the transportation that would otherwise be nonmining transportation because no mining process is applied at the end of such transportation, but during which a mining process incidentally results, e.g., transportation during the course of which some extraneous matter is removed from the mineral by the operation of forces of nature.
The filtering and drying of the mineral concentrates at the seaport qualify as mining processes under section 1.613-4(f)(5) of the regulations. Although the transportation in excess of 50 miles is nonmining transportation because the Commissioner did not authorize it as mining, drying cannot be disallowed solely because it follows nonmining transportation. The provisions of section 1.613-4(g)(2) contain an exception in the case of mining processes after nonmining transportation.
Therefore, the processes considered as "mining" under section 613(c) of the Code are the extraction of the ore from the mineral deposit, the four-mile transportation from the mine to the benefication plant, crushing, the reduction in size, beneficiation by
concentration using a flotation process, dewatering the concentrates from 60 percent water content to 35 percent, an additional transportation of 46 miles to the seaport and the filtering and drying processes at the seaport. The transportation of the concentrates in excess of the first 50 miles (4 miles from the mine to the plant plus 46 miles to the seaport is considered to be nonmining under section 1.613-4(f)(1)(iii) of the regulations.
HOLDING
The first 46 miles of the pipeline transportation to the seaport, in this case, is considered "mining" as defined in section 613(c)(2) of the Code.
EFFECT ON OTHER REVENUE RULINGS
Rev. Rul. 73-474, 1973-2 C.B. 200, is revoked.
Rev. Rul. 84-26, 1984-1 C.B. 142, 1984-8 I.R.B. 5.