Court Opinion

ID: 9454069
Source: CourtListenerOpinion
Date Created: 2023-08-04 18:35:01.883535+00
Date Added: 2024-06-11T17:33:57.465776
License: Public Domain

LEWIS, Circuit Judge
(dissenting).
I must dissent for it appears to me that the reasoning of the majority, abandoning as it does both the views of the trial court and the arguments of the parties, reaches a result that is a rejection of the basic theory of the proportionate profit method itself. The method, by relating gross sales proportionately to mining costs and total costs, purports to isolate for tax purposes income from mining from that attributable to non-mining activity. The basic equation
• . mining costs X gross sales = gross income 1S* total costs from mining.
The formula is cost-oriented and assumes the premise that each dollar of cost is reflected proportionately in profit. This premise is, of course, one of convenience and practical necessity but artificial and thus lends itself to easy attack when specific items of cost are allocated to or excluded from the formula. Common sense dictates that if unproductive costs so corrupt the formula as to patently distort the reality of result such costs should be eliminated from the equation. United States v. Portland Cement Co. of Utah, 10 Cir., 378 F.2d 91, 92-93. But elimination of a specific element of cost must be the exception for the proportionate profit method assumes that every item of cost, directly attributable to mining or not, is incurred for the benefit of the integrated business and must therefore be reflected in both cost and gross sales if the equation is to be acceptable.
The trial court held that Ideal’s first marketable product was cement, whether sold in bulk or in bags, and allocated the element of bag expense within the cost fraction as a balance to the inclusion of such cost in total sales. Since the actuality of this particular company’s selling practice shows that bagging amounts to but a premium charge there may be justification for this view although I would agree with the United States that the cost of bagging, in general, is a non-mining cost. The main opinion, however, rejects the finding that cement is Ideal’s first marketable product, finds that bulk cement is such product, and then eliminates the cost of bagging completely from the equation. I would include such cost under either *128finding for certain it is that the quantity of bulk cement sold is increased by bagging and its contribution to gross sales thus actually exceeds the simple premium cost of bags.
As I have indicated, I can see some separate merit to the arguments of the parties that the cost of bagging should be included only in the denominator of the subject fraction (as argued by the United States), allocated between the numerator and denominator as the trial court determined (as supported by the argument of the appellee) or even eliminated from the equation because of the premium nature of the item to this particular company’s cost (as advanced as .an alternative position by appellee). And these contentions of the parties have been projected in support of or as an attack upon the judgment of the trial court whose decision treated each other item (such as transportation, warehousing, distribution and selling costs, etc.) with particularity and, with some exceptions, allocated a portion of these costs to mining. Since the main opinion with a broad sweep apparently eliminates all these costs and expenses from inclusion within the formula it would serve no present purpose to express my agreement or disagreement with those aspects of the judgment below. It is sufficient to note that neither the United States nor the taxpayer has made any suggestion that consideration of these items is not proper within the bounds of the proportionate profit method. Their disagreement lies with where and how such costs should be placed within the equation. I consider that to be the issue presented to us and inherent in the application of the proportionate profit method. To eliminate all post-manufacturing costs destroys consideration of the representative market or field price of the first marketable product, a prime factor in the application of the equation, and thus seems to me to reject the method itself.
I agree that taxpayer’s claim is not barred by limitation.