Rev. Rul. 84-82

1984-1 C.B. 145, 1984-24 I.R.B. 6.

                       Internal Revenue Service
                                 Revenue Ruling

        PERCENTAGE DEPLETION;  PROPORTIONATE PROFITS;  SELLING EXPENSES

                            Published: June 11, 1984

Section 613. - -Percentage Depletion, 26 CFR 1.613-4:  Gross income from the property in the case of minerals other than oil and gas.

  Percentage depletion;  proportionate profits;  selling expenses.  The selling expenses of an integrated miner-manufacturer of cement are nonmining costs in the proportionate profits method of computing gross income from mining.

ISSUE

  Whether for purposes of computing the allowable deduction for percentage depletion by use of the proportionate profits method, the selling expenses of integrated cement producers are nonmining costs.

FACTS

  The taxpayer, an integrated miner-manufacturer, owns a cement rock mine, operates a cement plant, produces and sells bagged and bulk cement, and maintains sales offices in its market areas.  The taxpayer does not sell any kiln feed and since there is no field or market price in the area of the taxpayer's plant, computes gross income from mining under the proportionate profits method.

LAW AND ANALYSIS

  Section 613(c)(4)(F) of the Internal Revenue Code provides that in the case of calcium carbonates and other minerals when used in making cement, all processes (other than preheating of the kiln feed) applied prior to the introduction of the kiln feed into the kiln, but not including any subsequent process, shall be considered as mining processes.

  Section 1.613-4(d)(4)(ii) of the Income Tax Regulations provides that the proportionate profits method of computation is applied by multiplying the taxpayer's gross sales of his first marketable product or group of products by a fraction whose numerator is the sum of all the costs allocable to those mining processes that are applied to produce, sell, and transport the first marketable product or group of products, and whose denominator is the total of all the mining and nonmining costs paid or incurred to produce, sell, and transport the first marketable product or group of products.

  Section 1.613-4(d)(4)(iv) of the regulations provides that the term "first marketable product or group of products" means the product (or group of essentially the same products) produced by the taxpayer as a result of the application of non-mining processes, in the form or condition in which such product or products are first marketed in significant quantities by the taxpayer or by others in the taxpayer's marketing area.  For this purpose, bulk and packaged products are considered to be essentially the same product.

  Section 1.613-4(d)(3)(iii) of the regulations provides that in determining gross income from mining by use of methods based on the taxpayer's costs, the costs of bags and bagging and similar operations, costs of bulk loading, and the costs of storage and distribution shall be considered as nonmining costs.

  Section 1.613-4(d)(3)(iv) of the regulations provides that in computing gross income from mining by the use of methods based on the taxpayer's costs, the principles set forth in section 1.613-5(c) will apply when determining whether selling expenses are to be treated, in whole or in part, as mining costs or as nonmining costs.

  Section 1.613-5(c)(4)(ii) of the regulations provides that in computing taxable income from the property, a reasonable portion of the expenses of selling a manufactured product shall be subtracted from the gross income from the property.  Such reasonable portion must be equivalent to the typical selling expenses that are incurred by unintegrated miners or producers in the same mineral industry so as to maintain equality in the tax treatment of unintegrated miners or producers in comparison with integrated miner- manufacturers or producer-manufacturers.  If unintegrated miners or producers in the same mineral industry do not typically incur any selling expenses, then no portion of the expenses of selling manufactured product may be subtracted from gross income from the property when determining the taxpayer's taxable income from the property.

  When read together, sections 1.613-4(d)(3)(iv) and 1.613-5(c)(4)(iv) provide that, for purposes of computing gross income from mining under section 1.613- 4(d)(4), integrated miner-manufacturers must treat sales expenses as nonmining costs except to the extent that unintegrated miners, in the same mineral industry, typically incur such expenses in selling their mineral product.

  The Supreme Court, in its decision in Commissioner v. Portland Cement Company of Utah, 450 U.S. 156 (1981), 1981-1 C.B. 378, dealing with similar facts, interpreted the definition of "mining" under section 613(c)(4)(F) of the Code by classifying all processes subsequent to the cutoff point of the kiln feed as nonmining processes.  The Court recognized that sections 1.613-4(d)(3)(iv) and 1.613-5(c)(4)(ii) of the regulations provide that an integrated miner- manufacturer may allocate selling

expenses between mining and nonmining with the objective of parity of tax treatment between integrated miner-manufacturers and unintegrated miners.  The Court found no unintegrated miners in the cement industry and, therefore, no evidence to show that selling expenses were typically incurred by those unintegrated miners.  Therefore, the Court concluded that all the selling expenses were to be treated as nonmining costs.

HOLDING

  For purposes of computing the allowable deduction for percentage depletion by use of the proportionate profits method, the selling expenses of integrated cement producers are nonmining costs.

Rev. Rul. 84-82, 1984-1 C.B. 145, 1984-24 I.R.B. 6.