No. 88-266 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

W. R. GRACE & COMPANY, 

a corporation, 

Petitioner and Appellant, 

-vsDEPARTMENT OF REVENUE OF THE STATE OF 

MONTANA; and THE STATE TAX APPEAL BOARD 

OF THE STATE OF MONTANA, 

Defendants and Respondents. 

APPEAL FROM: District Court of the First Judicial District, 

In and for the County of Lewis & Clark, 

The Honorable Henry Loble, Judge presiding. 

COUNSEL OF RECORD: 

For Appellant: 

George T. Bennett argued; Helena, Montana 

Paul H. Frankel argued; f orris on & Foerster, New York, 

New York 

Terry B. Cosgrove argued; Luxan & ~urfitt, Helena, 

Montana 

For Respondent: 

Paul Van ~richt argued; Tax Counsel, Dept. of Revenue, 

Helena, Montana 

For Amicus Curiae: 

Bruce W. Moerer; Montana School Boards Assoc., Helena, . Montana 
Mr. ~ustice William E. Hunt, Sr., delivered the opinion of 

the Court. 

W. R. Grace & Company appeals from an order of the 

District Court of the First Judicial District, Lewis and 

Clark County, upholding a ruling by the State Tax Appeal 

Board (STAB) , which denied certain deductions claimed by 

Grace on its net proceeds of mines tax returns for the years 

1977, 1978 and 1979. We affirm. 

The following issues are raised on appeal: 

1. Did the District Court err in holding that STAB 

properly disallowed certain deductions in the calculation of 

Grace's net proceeds taxes? 

2. Did the Department of Revenue (Department) complete 

its deficiency assessment of Grace's 1977 and 1978 net 

proceeds taxes within the time allowed by law? 

W. R. Grace & Company, a Connecticut corporation, owns 

and operates a vermiculite mine and related plant and 

facilities on Vermiculite ~ountain, located in Lincoln County 

near the Kootenai River, approximately nine miles northeast 

of Libby. Vermiculite is a micaceous mineral, which must be 

expanded before being used in various construction materials. 

After the vermiculite ore is extracted from an open pit 

mine on Vermiculite Mountain, it is transported to a 

"transfer point'' and, from there, into mine processing 

facilities. Processing carries the mineral through a storage 

and blending facility into a wet mill, then through a dry 

screen plant to a sized product storage facility, bordering 

the Kootenai River. From that point, a conveyor transports 

most of the unexpanded mineral across the Kootenai to 

rail-loading facilities adjacent to the Burlington Northern 

railroad tracks, where it is loaded in bulk onto rail cars. 
A small portion of the ore is hauled to separate facilities 

in Libby, owned and operated by Grace, where it is bagged and 

loaded onto rail cars. The unexpanded vermiculite is shipped 

FOB from these two points to expanding plants owned by 

Grace--none of which are located in Montana--or to expanding 

plants owned by third parties. 

Grace maintains offices at both the mine site and the 

town of Libby. Personnel in the Libby office perform various 

administrative functions, e.g., accounting, procurement and 

payroll. A manager and assistant manager, who supervise the 

Libby employees as well as the employees working at the mine 

and milling facilities, also maintain an office in Libby. 

The Montana facilities are part of Grace's Construction 

Products ~ivision (CPD), located in cambridge, Massachusetts, 

separate from Grace's corporate headquarters. The CPD 

manufactures and markets numerous commercial products for the 

construction and agricultural industries. It operates over 

one-half dozen plants in Canada and over 40 in the united 

States, although its only Montana plant is the mine and mill 

site on vermiculite Mountain. 

Grace timely filed its net proceeds of mines tax returns 

for the years 1977, 1978 and 1979. On the returns, Grace 

deducted the entire cost of the vermiculite ~ountain 

facilities and the ~ibby office. It also deducted a portion 

of the expenses incurred by the CPD in Cambridge. 

The Department conducted an audit of the returns and 

concluded, among other things, that deductions for expenses 

incurred by the Libby and Cambridge offices were improper. 

Therefore, by letter dated August 7, 1981, the Department 

issued a proposed deficiency assessment. When an acceptable 

resolution of the issues could not be reached through 

assessment revision conferences between the parties, the 
Department issued final notice of deficiency. Grace timely 

appealed the final decision to STAB. 

After a hearing, STAB ruled that the majority of the 

expenses were not properly deducted as they were either: 

1) not an actual cost of extracting the vermiculite; 

2) incurred by employees not actually engaged in 

working or superintending the mine; 

3) incurred past the point of beneficiation; or 

4) not properly prorated between the Libby office and 

the plant facilities. 

STAB did conclude, however, that a portion of the 

expenses were properly deducted. These included: 

1) expenses incurred in activities related to the 

safety of the mine, whether incurred in Cambridge or on 

Vermiculite Mountain; 

2) salary and benefits for the two managers who 

maintained offices in Libby because they were actually 

engaged in superintending the mine; 

3) salary of the chief geologist because he was 

actually engaged in working the mine; and 

4) legal and consulting fees for filing water rights 

claims and obtaining patents. 

On June 11, 1987, Grace filed a petition for judicial 

review with the First Judicial District Court, Lewis and 

Clark County. The Department filed a cross-petition. The 

District Court upheld the STAB ruling in its entirety. Grace 

appeals from the ~istrict Court determination. The 

Department does not cross-appeal. 

The standard of review governing appeals of 

administrative rulings, including those made by STAB, is 

codified at 5 2-4-704, MCA. Department of Revenue v. 

 avids son Cattle Co. (1980), 190 Mont. 326, 330, 620 P.2d 

1232, 1234-35. The standard is delineated as follows: 
(1) The review shall be conducted by the court 

without a jury and shall be confined to the record. 

(2) The court may not substitute its judgment for 

that of the agency as to the weight of the evidence 

on questions of fact. The court may affirm the 

decision of the agency or remand the case for 

further proceedings. The court may reverse or 

modify the decision if substantial rights of the 

appellant have been prejudiced because the 

administrative findings, inferences, conclusions, 

or decisions are: 

(a) in violation of constitutional or statutory 

provisions; 

(b) in excess of the statutory authority of the 

agency; 

(c) made upon unlawful procedure; 

(dl affected by other error of law; 

(el clearly erroneous in view of the reliable, 

probative, and substantial evidence on the whole 

record; 

(f) arbitrary or capricious or characterized by 

abuse of discretion or clearly unwarranted exercise 

of discretion; or 

(g) because findings of fact, upon issues 

essential to the decision, were not made although 

requested. 

section 2-4-704, MCA. 

The statute sets out two basic standards. One, findings 

of fact will be upheld unless they are clearly erroneous, and 

two, conclusions of law will be upheld unless they constitute 

an abuse of discretion. Swan Corp. v. Montana Dept. of 

Revenue (Mont. 1988), 755 P.2d 1388, 1389-90, 45 St.Rep. 998, 

1000; City of Billings v. Billings ire fighters Local No. 521 

(1982), 200 Mont. 421, 430-31, 651 P.2d 627, 632. 
Neither party contests the valuation of the deductions 

declared by Grace nor whether Grace actually incurred the 

expenses claimed. Therefore, the question raised by Grace's 

first issue--whether the deductions are statutorily 

permissible--involves only a question of law. Likewise, the 

second issue presented for review--whether the deficiency 

assessment is barred by the statute of limitations--involves 

solely a question of law. Thus, we will use the broader 

"abuse of discretion" standard in our analysis of both 

issues. 

I 

Did the District Court err in holding that STAB properly 

disallowed certain deductions in the calculation of Grace's 

net proceeds of mines taxes? 

The net proceeds of mines tax has been a part of the 

property tax scheme of Montana since 1864, preceding 

statehood itself. Faced with the difficulty of accurately 

measuring the value of undeveloped minerals in place, the 

territorial legislature adopted the net proceeds tax as a 

substitute for an - ad valorem tax on the value of mines or 

mining interests. See Byrne v. Fulton Oil Co. (1929), 85 

Mont. 329, 334, 278 P. 514, 517. The framers of the first 

state constitution incorporated the tax into that document at 

article XII, section 3. The current tax was separately 

codified in 1921 and, with the exception of some minor 

variations, the tax remains much as it was at that time. The 

1972 Constitutional Convention eliminated the 1889 

constitutional provision for the tax from the present 

constitution. 

The tax is centrally assessed by the Department. 

Section 15-23-101, MCA. The producer or operator of the mine 

annually reports, on a form provided by the Department, the 

gross yield of the mineral, as well as various costs incurred 
in the mining process. Section 15-23-502, MCA. From the 

returns, the Department calculates the net proceeds of the 

mine by subtracting certain expenses from the value of the 

gross product. Section 15-23-503, MCA. The Department then 

transmits the assessed value of the net proceeds to the 

county assessor, who records the value in the assessment book 

as class one property. sections 15-23-106 and 15-6-131, MCA. 

At issue in this case is the deductibility of certain 

expenses claimed by Grace on its net proceeds returns. 

Section 15-23-502, MCA (1977) , the statute in effect during 

the years in controversy, enumerates costs a taxpayer may 

declare on its net proceeds tax statement, including the 

following : 

(6) cost of extracting from the mine; 

(7) cost of transporting to place of reduction or 

sale; 

(8) cost of reduction or sale; 

(9) cost of marketing the product and conversion 

of same into money; 

(10) cost of construction, repairs, and betterments 

of mines and cost of repairs and replacements of 

reduction works; 

(12) cost of fire insurance and workers' 

compensation insurance. 

Section 15-23-502, MCA (1977) , is read in conjunction 

with 5 15-23-503, MCA (1977). The latter statute lists the 

items the Department subtracts from gross value to arrive at 

net proceeds, including: 

(b) all moneys expended for necessary labor, 

machinery, and supplies needed and used in the 

mining operations and developments; 
(c) all moneys expended for improvements, repairs, 

and betterments necessary in and about the working 

of the mine, except as hereinafter provided; 

(d) all moneys expended for costs of repairs and 

replacements of the milling and reduction works 

used in connection with the mine; 

(f) all moneys actually expended for transporting 

the ores and mineral products or deposits from the 

mines to the mill or reduction works or to the 

place of sale and for extracting the metals and 

minerals therefrom and for marketing the product 

and the conversion of the same into money; 

(g) all moneys expended for fire insurance and 

workers' compensation insurance and for payments by 

mine operators to welfare and retirement funds when 

provided for in wage contracts between mine 

operators and employees. 

section 15-23-503(1), MCA (1977). The statute goes on to 

restrict the allowable deductions in the following manner: 

(4) No moneys invested in the mines and 

improvements during any year except the year for 

which such statement is made and except as provided 

in this section may be included in such 

expenditures, and such expenditures may not include 

the salaries or any portion thereof of any person 

or officer not actually engaged in the working of 

the mine or superintending the management thereof. 

section 15-23-503 (4), MCA (1977). 

Grace maintains that 5 15-23-503, MCA (1977), allows the 

deduction of all costs related to the vermiculite mine as 

long as they are necessary to the mining operation. 

Therefore, Grace argues, all general overhead, office and 

administrative expenses attributable to the mining process 

for which it has properly accounted are deductible, whether 

incurred at the mine site, Libby or Cambridge. 
Grace reads the statute too broadly. The law does not 

permit the deduction of "every conceivable item of expense." 

Anaconda Copper Mining Co. v. Junod (1924), 71 Mont. 132, 

140, 227 P. 1001, 1004. The net proceeds tax is not an 

income tax. It is a property tax. Its purpose is to arrive 

at a fair valuation of mining interests by using net proceeds 

as a proxy for the value of the mine itself. Byrne, 85 Mont. 

at 334, 278 P. at 517. Therefore, what may be properly 

deducted from net proceeds is construed restrictively. Only 

the direct costs and expenses of extracting the mineral are 

deductible. Anaconda, 71 Mont. at 138, 227 P. at 1004. 

Certainly, overhead and administrative expenses incurred 

by the Cambridge and ~ibby offices are necessary in the sense 

that they contribute to the smooth functioning of the 

vermiculite mine. However, they are not necessary in the 

sense contemplated by the net proceeds tax. Overhead, office 

and administrative expenses, while properly deductible for 

arriving at taxable income, are not properly deductible for 

determining the value of this taxable property. Not only 

must expenses be needed and used in the mining operation 

before they may be deducted from net proceeds, they must also 

be a direct cost of extracting the mineral. 

In addition, subsection (4) of S 15-23-503, MCA (1977), 

specifically provides that deductions shall not include "the 

salaries or any portion thereof of any person or officer not 

actually engaged in the working of the mine or superintending 

the management thereof." Many of the expenses Grace seeks to 

deduct are salaries of personnel who are not working or 

superintending the mine, e.g., accountants, systems analysts, 

financial planners and lawyers. While we do not doubt that 

these individuals are important to the mining operation, the 

statute simply does not allow the deduction of their 

salaries. 
Grace relies on our decision in Cyprus Mines Corp. v. 

Madison County (1977), 172 Mont. 116, 560 P.2d 1342, for the 

proposition that necessary overhead, office and 

administrative expenses are deductible as long as the 

taxpayer uses a proper cost accounting system. Indeed, in 

Cyprus Mines, we denied the taxpayer's claims due to an 

improper method of allocating costs. However, the opinion 

does not stand for the proposition that a proper cost 

accounting system turns otherwise nondeductible expenditures 

into deductible expenditures. Before the items at issue may 

be subtracted from gross value to arrive at net proceeds, 

they must be needed and used in the mining operation as a 

direct cost of extracting the mineral. General overhead, 

office and administrative expenses are indirect costs, and, 

as such are not deductible--regardless of the accounting 

system employed by the taxpayer. 

Our opinion today does not abrogate the general 

principle of Cyprus ~ines . Expenses that are improperly 

acounted for will not be permitted. Thus, STAB did not abuse 

its discretion in concluding that computer use, electricity, 

telephone and transportation costs were not deductible 

because they were improperly prorated between the mine site 

and the Libby office. 

Grace also contests STAB'S failure to allow deductions 

for transporting and marketing the mine product. STAB 

disallowed these expenses because it found that they were 

incurred beyond the point of beneficiation. 

Section 15-23-503 (1) (f) , MCA (1977), provides for the 

deduction of costs incurred in transporting the mineral from 

the "mines to the mill or reduction works or to the place of 

sale and for extracting the metals and minerals therefrom and 

for marketing the product and the conversion of the same into 

money. " However, in ~fizer, Inc. v. Madison County (1.9731 , 
161 Mont. 261, 505 P.2d 399, we limited the deductions 

allowed by this subsection. In Pfizer, we rejected the State 

Board of Equalization's contention that the net proceeds tax 

extends all the way through the mining process to the point 

where the product is marketed, sold and converted into money. 

Instead, we held that the net proceeds tax applies only to 

the mining stage of the operation. Once the mineral passes 

the beneficiation stage--the pre-manufacturing phase of the 

mining process--the net proceeds tax no longer applies. 

Value added to the mineral from operations undertaken beyond 

the point of beneficiation is not included in the value of 

net proceeds. Therefore, deductions from such operations are 

not allowed. 

Where the net proceeds tax ends, there also ends 

the deductions for such tax. Only deductions for 

the mining operation will be allowed up through the 

beneficiation stage. All other expenses will be 

incurred as to the manufacturing process. 

Pfizer, 161 Mont. at 267, 505 P.2d at 402. 

Grace points out that our affirmance of the STAB 

decision may result in some inconsistent applications of the 

law. For example, STAB permitted deductions for costs 

associated with the safety of the miners even though these 

expenses were incurred by personnel who were not directly 

engaged in working or superintending the mine. Any 

inconsistencies, however, may be attributed to the fact that 

the Department did not appeal the STAB decision to this 

Court. Whether STAB properly permitted deductions for costs 

associated with the safety of the miners is not in issue here 

and we will not attempt to address the question. 

With regard to the issues that have been properly raised 

on appeal, we find that STAB did not abuse its discretion. 

Statutes and case law do not permit the expenses Grace sought 

to deduct on its net proceeds of mines tax returns. 
I1 

Did the Department complete its deficiency assessment of 

Grace's 1977 and 1978 net proceeds taxes within the time 

allowed by law? 

By letter dated August 7, 1981, the Department issued 

its deficiency assessment of Grace's 1977, 1978 and 1979 

taxes. Grace argues that, because the Department did not 

complete the assessment of the 1977 and 1978 taxes until more 

than two years after the returns were due, it was barred by 

the statute of limitations from pursuing any deficiencies in 

net proceeds taxes for these years. Grace does not raise the 

statute of limitations issue with regard to the 1979 taxes 

because the Department issued the deficiency assessment 

within two years after that return was filed. 

Grace relies on Caterpillar Tractor Co. v. Department of 

Revenue (Mont. 1981), 633 P.2d 618, 38 St.Rep. 1245, to 

support its argument that a two-year statute of limitations 

applies to deficiency assessments of net proceeds taxes. In 

Caterpillar, we held that, in the absence of a specific 

statute of limitations governing the particular tax in 

question, the general two-year limitations period prescribed 

in § 27-2-211(1)(c), MCA, for a liability created by statute 

other than a penalty or forfeiture applied. 

The tax examined in Caterpillar, however, differs from 

the tax in question here. In Caterpillar, we considered the 

corporation license tax, which is a self-assessing tax on 

corporate income. The tax in issue in this case, on the 

other hand, is the net proceeds of mines tax, which is a 

centrally assessed tax on property. Prior to 1983, the 

limitations period for assessment revisions of property 

taxes, including the net proceeds of mines tax, was found at 

S 15-8-601, MCA. Because a specific statute of limitations 

governed the mines net proceeds tax during the years in 
question, the two-year limitations period found in 5 

27-2-211(1)(c), MCA, does not control this case. 

Section 15-8-601, MCA, provides as follows: 

(1) Whenever the department of revenue discovers 

that any taxable property of any person has in any 

year escaped assessment, been erroneously assessed, 

or been omitted from taxation, the department may 

assess the same provided the property is under the 

ownership or control of the same person who owned 

or controlled if at the time it escaped assessment, 

was erroneously assessed, or was omitted from 

taxation. All such revised assessments must be 

made within 10 years after the end of the calendar 

year in which the original assessment was or should 

have been made. 

The statute sets out two prerequisites. The factual 

situation must involve taxable property that has "escaped 

assessment, been erroneously assessed, or been omitted from 

taxation;" and, the property sought to be assessed must 

remain "under the ownership or control of the same person who 

owned or controlled it at the time it escaped assessment, was 

erroneously assessed, or was omitted from taxation." The 

circumstances of this case fulfill both conditions. 

~irst, taxable property owned by Grace was omitted from 

taxation when Grace claimed statutorily impermissible 

deductions on its net proceeds of mines tax returns. In 

Butte & superior ~ining Co. v. McIntyre (1924), 71 Mont. 254, 

229 P. 730, we noted that unlawful deductions taken by the 

taxpayer on its net proceeds of mines returns resulted in 

property omitted from taxation within the meaning of a 

predecessor to the present 5 15-8-601, MCA. Here too, we 

hold that unlawful deductions claimed by a taxpayer on its 

net proceeds of mines tax returns allows taxable property to 

be omitted from taxation within the meaning of S 15-8-601, 

MCA . 
Second, even though it had sold the vermiculite ore 

mined in 1977 and 1978 by the time the Department completed 

its deficiency assessment, Grace retained ownership and 

control of the property subject to taxation. This is because 

the "taxable property" contemplated by the statute is the 

mine itself. As we stated earlier, the net proceeds tax is 

an attempt to place an accurate fair market value upon the 

mine. The tax "is simply a tax in lieu of, or as a 

substitute for, [an] - ad valorem tax on the value of mines or 

mining interests." Byrne, 85 Mont. at 334, 278 P. at 517. 

The tax measures the value of the mine itself, not merely the 

value of the extracted minerals. Therefore, as long as Grace 

owns the vermiculite mine, it retains control of taxable 

property subject to the ten-year limitations period for 

reassessment under 5 15-8-601, MCA. 

Grace also argues that the legislature's enactment of § 

15-23-116, MCA, a comprehensive five-year statute of 

limitations for centrally assessed property, impliedly 

repealed the ten-year limitations period provided in § 

15-8-601, MCA. 

This Court looks disfavorably upon repeals by 

implication. State ex rel. Sol v. Bakker (1982), 199 Mont. 

385, 392, 649 P.2d 456, 460. without an express declaration 

by the legislature that an enactment repeals an existing law, 

a later statute will not repeal an earlier law unless the two 

are "plainly and irreconcilably repugnant to or in conflict 

with each other. . . " Johnson v. arias ~iver ~lectric 

Coop. (1984), 211 Mont. 518, 523, 687 P.2d 668, 671. 

The legislature did not adopt the five-year statute, 5 

15-23-116, MCA, until 1983. The statute was made retroactive 

to taxes due after December 31, 1980. Act of March 23, 1983, 

ch. 194, S 3, 1983 Mont. Laws 389. The tax years at issue in 

this case, however, are 1977 and 1978. Therefore, even if 
the statutes are repugnant to each other, a question we will 

not consider at this time, they cannot possibly conflict 

prior to 1981, as the five-year statute of limitations had no 

force or effect prior to that year. with regard to the 1977 

and 1978 tax years, Grace's argument that § 15-23-116, MCA, 

impliedly repealed § 15-8-601, MCA, is without merit. 

A ten-year statute of limitations governed the 

reassessment of Grace's net proceeds taxes for the years 1977 

and 1978. Therefore, when the Department issued its 

deficiency assessment in 1981, it did so within the time 

allotqed by law. 

~f f irmed. 

We Concur: