Rev. Rul. 84-70

1984-1 C.B. 144.

                       Internal Revenue Service
                                 Revenue Ruling

                     DEPLETION; PERCENTAGE; NONMINING COSTS

                                Published:  1984

26 CFR 1.613-4: Gross income from the property in the case of minerals other than oil and gas

  Depletion; percentage; nonmining costs. Costs associated with certain dust collection systems in cement plants are nonmining costs for purposes of computing gross income from mining by the proportionate profits method.

ISSUE

  Whether dust collection systems in the production of cement are mining or nonmining processes in computing gross income from the property by the proportionate profits method.

FACTS

  The taxpayer, an integrated miner-manufacturer, owns and operates three cement rock mines, each of which supplies a different cement plant in which the taxpayer produces and sells cement.  The taxpayer computes its allowance for depletion for each property in accordance with the proportionate profits method under section 1.613-4(d)(4) of the Income Tax Regulations.  In each plant, the taxpayer employs dust collection systems to collect the dust particles that otherwise would escape into the atmosphere.  The amount of retrieved dust particles constitutes a small part of the kiln feed mix.  The two operations are described below.

Situation 1

  The taxpayer employs the wet processing method in producing the kiln feed.  In this process, the raw materials, cement rock and additives in correct proportions, are finely ground in a ball mill with water, thereby producing a slurry.  The slurry is stored in tanks and continually agitated to maintain a uniform mixture.  The slurry is transferred from the storage tanks and fed into a kiln and burned.  The hot gases from the kiln's reverse air flow dry the feed and carry dust particles to the kiln dust collection system.  The collected dust is transferred to the storage tanks for mixing with the slurry.

Situation 2

  In this operation, the taxpayer employs the dry processing method in producing the kiln feed.  In this process, the raw materials are finely ground in a grinding mill.  The hot gases from the kiln and the kiln dust collection system are used in the grinding mill operation for drying the raw materials. The ground raw material is conveyed to storage silos prior to the burning in the kiln.  The raw material is transferred from the storage silos to a preheater that uses hot gases from the kiln.  The raw material in the preheater is heated to temperatures that result in about 40 percent calcination before the feed enters the kiln.  The hot gases from the kiln's reverse air flow carry dust particles to the preheater and then to the dust collection system.  The collected dust is transferred to the raw material feed.

LAW AND ANALYSIS

  Section 613(c)(4)(F) of the Internal Revenue Code and section 1.613- 4(f)(2)(ii)(a) of the regulations provide that, in the case of calcium carbonates and other minerals when used in making cement, mining includes all processes (other than preheating the kiln feed) applied prior to the introduction of the kiln feed into the kiln, but not including any subsequent process.

  In Commissioner v. Portland Cement Company of Utah, 450 U.S. 156  (1981), 1981-1 C.B. 378, involving an integrated cement miner-manufacturer, the Court upheld the regulations implementing the statute that classifies all processes applied after the introduction of the feed into the kiln as nonmining processes.  The facts in Portland Cement, as in Situation 1, involve the wet processing method in which the taxpayer finely grinds the rock in water, producing a slurry.  The slurry is stored in tanks and continually agitated to maintain a uniform mixture.  The taxpayer feeds the slurry from the storage tanks into a fired kiln that heats it to prepare a hard, glass-like substance known as clinker.  The Court stated that in applying sections 613(c)(2) and 613(c)(4)(F) of the Code, the taxpayer's mining phase ends when the slurry has been produced and is stored in tanks to await introduction into the kiln.  In the instant case, dust collection in Situation 1 is applied after the introduction of the kiln feed into the kiln and operates only to recover dust particles contained in the hot gases escaping from the kiln.  Therefore, the dust collection system is to be considered a part of the nonmining processes under section 613(c)(4)(F).

  In Situation 2, the preparation of the kiln feed is by the dry process method.  Here, the dry kiln feed is stored in silos as a dry powder prior to being transferred to the kiln.  Preheating of the kiln feed is expressly classified as a nonmining process in the Code and regulations, and since dust collection is applied after the introduction of the kiln feed into the kiln, the dust collection process is considered to be a nonmining process under section 613(c)(4)(F) of the Code.  The mining cut-off point in Situation 2 ends when the dry powder has been produced and is stored in silos to await introduction into the kiln.

HOLDINGS

  In the case of the wet process method in Situation 1, the cost of the kiln dust collection system is considered a nonmining cost.

  In the case of the dry process method in Situation 2, the cost of the dust collection system associated with the preheater and kiln operations is considered a nonmining cost.

Rev. Rul. 84-70, 1984-1 C.B. 144.