Opinion ID: 493685
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Heading Rank: 1

Heading: facts

Text: 3 Since 1926, Congress has granted a deduction from gross income for mineral depletion, a deduction intended to offset the exhaustion of capital assets by mine owners. 26 U.S.C. Sec. 611; United States v. Cannelton Sewer Pipe Co., 364 U.S. 76, 81 et seq., 80 S.Ct. 1581, 1584, 4 L.Ed.2d 1581 (1960). The deduction was originally available to oil and gas producers only, but subsequent amendments have extended the tax benefit to nearly all mineral producers. In general, the deduction equals the taxpayer's gross income attributable to mining multiplied by a percentage that varies with the particular mineral produced. 26 U.S.C. Sec. 613. 1 If a producer engages in both mining and nonmining activities, the regulations provide a way to calculate the portion of gross income to which the percentage deduction may be applied. See Treas.Reg. Sec. 1.613-4(a-e). Obviously, it is in the taxpayer's interest to characterize as mining as many of its activities as possible, so as to maximize the deduction. The statutory definition of mining at issue in this case appears at Sec. 613(c)(4)(D):[I]n the case of ... minerals which are not customarily sold in the form of the crude mineral product 2 [mining processes include] crushing, grinding, and beneficiation by concentration (gravity, flotation, amalgamation, electrostatic, or magnetic), cyanidation, leaching, crystallization, precipitation (but not including electrolytic deposition, roasting, thermal or electric smelting, or refining), or by substantially equivalent processes or combination of processes used in the separation or extraction of the product or products from the ore or the mineral or minerals from other material from the mine or other natural deposit....
4 Sunshine's ore is valuable chiefly for its silver content, but antimony is recovered as well. Recovery of antimony not only yields a marketable metal, it also facilitates the ultimate smelting of the silver. 5 The following is an outline of Sunshine's operation. The raw ore is first crushed and then separated by a flotation process into high grade silver-copper concentrate, several low grade concentrates, and worthless waste rock. The waste is discarded and the low grade concentrates are sold to smelters which recover lead and iron. The high grade concentrate cannot profitably be sold to a silver smelter until its high antimony content is reduced by leaching in hot sodium sulfide. Once this is done, the purified silver-copper concentrate is washed and sent to the smelter. Finally, the dissolved antimony is recovered from the leachate solution by electrowinning: direct current is passed through the solution, causing metallic antimony to form on the cathode. The remaining solution can be recycled to leach antimony from a fresh load of ore. 6 The parties agree that the extraction, crushing, flotation and leaching stages of this operation count as mining for purposes of the depletion deduction. They differ on the proper characterization of the electrowinning process.
7 The Commissioner disallowed part of Sunshine's claimed depletion deduction for 1975 on the ground that the electrowinning process was not mining and that Sunshine was not entitled to a deduction based on its gross income from the sale of antimony. Sunshine paid the assessed tax and sued for recovery in the district court. Both parties agreed to a stipulation of facts and moved for summary judgment. In October 1985, the district court ruled, with little explanation, in favor of Sunshine. 3 The government timely appealed. We have jurisdiction pursuant to 28 U.S.C. Sec. 1291. II