
    (348 F. 2d 542)
    DRAVO CORPORATION v. THE UNITED STATES
    [No. 381-60.
    Decided July 16, 1965]
    
      
      Herbert L. Awe for plaintiff; Thomas E. Jenks, attorney of record. John P. Lipscomb and Alfred M. Osgood, of counsel.
    
      Philip B. Miller, with whom was Assistant Attorney General Louis F. Oberdorfer, for defendant. O. Moxley Feath-erston, Lyle M. Turner, and Oonrad T. Hubner, of counsel.
    Before CoweN, Chief Judge, Laramore, Durebe, Davis and ColliNS, Judges.
    
   Laramore, Judge,

delivered the opinion of the court:

This is an action for the recovery of income and excess profits taxes for the year 1958 and for the recovery of income taxes for the year 1955. There are two distinctly unrelated issues in this case, each based upon independent factual situations and different provisions of law. The first question for determination is whether plaintiff, a taxpayer reporting income for Federal income tax purposes on the accrual basis of accounting, should accrue and take as a deduction for the year 1953 an additional amount of Pennsylvania capital stock tax with respect to, the year 1953 determined to be due by the state authorities in 1956 and paid by plaintiff in the same year without protest. The second question concerns the proper percentage depletion decluction to be taken by plaintiff in 1955 for Federal income tax purposes with respect to plaintiff’s sand and gravel operations.

For the reasons given below, we hold for plaintiff on the first issue and for defendant on the second.

I. Pennsylvania Capital Stoch Accrual Issue

Taxpayer is a Pennsylvania corporation which maintains its accounts and files its Federal tax returns on the accrual basis using a calendar year period. As a Pennsylvania corporation it was required to pay to that state a tax commonly known as a capital stock tax.

Pennsylvania, during the years in question, had a self-assessment procedure whereby domestic corporations subject to the tax were required to value their capital stock and pay a tax thereon at a prescribed rate. In 1954 taxpayer filed with tire proper authorities its capital stock report indicating that the value of its stock as of the end. of 1953 was $23,000,000 and that the capital stock tax due thereon for the 1953 calendar year was $82,461.33, which amount was remitted to the Commonwealth of Pennsylvania at the same time.

The Pennsylvania Department of Eevenue had a statutory duty to notify each capital stock taxpayer within the calendar year during which the return was filed as to whether or not it accepted the valuation placed on the stock. This notification was known as a “settlement”.

On July 20,1954, the Department accepted the taxpayer’s valuation of the worth of its stock as of the end of 1953 and so notified it.

The taxpayer, which was on the accrual basis, deducted the entire amount of the capital stock tax for 1953 ($82,-461.33) on its Federal income tax return for its 1953 calendar tax year.

By statutory authority, the Department of Eevenue was authorized to re-examine and to reopen any “settlement” within two years after it was made and to redetermine the value of a taxpayer’s capital stock and the capital stock tax attributable thereto. In 1956, the Commonwealth taxing officials reviewed the 1953 capital stock tax report of plaintiff and determined that plaintiff did not correctly reflect on its balance sheet the actual value of the shares of its subsidiaries. The revaluation by taxing officials increased the value of the taxpayer’s capital stock to $32,000,000 with a resulting increase in the capital stock tax attributable to 1953 to $114,728.72, leaving a balance owing of $32,267.39 over the amount previously paid. By notice mailed on August 27, 1956, the tax authorities notified the taxpayer of the results of their revaluation. On September 11, 1956, the taxpayer paid the additional $32,267.39 to the Commonwealth without appeal or protest.

On June 1, 1959, the taxpayer filed a claim for refund of its Federal income taxes for 1953 on the grounds that the additional capital stock tax attributable to 1953, which was paid in 1956, was deductible in 1953. The claim for refund was disallowed and this suit followed.

The question of when items accrued for Federal income tax purposes has been the subject of extensive litigation and many decisions. From them emerge a series of simple propositions which determine the appropriate period for reflecting items of income and expense. We start with the admonition that in order for tax accrual accounting to provide a meaningful picture of operations, the expense items or deductions must be included in the same period as the income items they help to produce. In other words, interrelated items of expense and income must be “matched” in some particular period. United States v. Anderson, 269 U.S. 422, 440 (1926). To achieve this result the Supreme Court in Anderson, supra at 441, devised what is now called the “all events test” whereby an accrual basis taxpayer may deduct taxes or any other expense items if all the events fixing the fact of, and the amount of, the taxpayer’s liability have transpired though not paid. This requires that “each ‘taxable year’ must be treated as a separate unit, and all items of gross income and deductions must be reflected in terms of their posture at the close of such year.” United States v. Consolidated Edison Co., 366 U.S. 380, 384 (1961); Security Flow Mills Co. v. Commissioner, 321 U.S. 281 (1944). The Supreme Court somewhat departed from this traditional concept of accrual accounting when it added a refinement to the “all events test” by its holding in Dixie Pine Products Co. v. Commissioner, 320 U.S. 516, 519 (1944), that an accrual-basis taxpayer could not, while “contesting liability in the courts,” deduct “the amount of the tax, on the theory that the state’s exaction constituted a fixed and certain liability” but “must, in the circumstances, await the event of the state court litigation and might claim a deduction only for the taxable year in which its liability for the tax was finally adjudicated.” [Emphasis added.] The concept of contest since Dixie Pine has been expanded not only to include litigation in the courts but also a dispute formally lodged with the tax authorities. E.g., G.C.M. 25298, 1947-2 Cum. Bull. 89; Southwest Exploration Co. v. Riddell, 232 F. Supp. 13, 20 (S.D. Cal. 1964) (dicta); Great Island Holding Corp., 5 T.C. 150 (1945).

In the instant case the government wants us to expand this concept by finding a “contest” for purposes of the rulé enunciated in Dixie Pine, where a taxpayer merely files a state tax return acknowledging a liability in a stated amount since this “entails a denial by the taxpayer that it owes an amount of tax greater than that specified on the return.” In support of this contention the government relies on Southwest Exploration Co. v. Riddell, supra; Agency of Canadian Car & Foundry Co., 39 T.C. 15 (1962); Gunderson Bros. Engineering Corp., 16 T.C. 118 (1951); Great Island Holding Co., supra, (dicta); Rev. Bul. 57-105, 1957-1 Cum. Bull. 193 (modified by Bev. Bui. 59-59, 1959-1 Cum. Bull. 97).

Contrary to the government’s position taxpayer cites National Forge & Ordnance Co. v. United States, 141 Ct. Cl. 880, 158 F. Supp. 860 (1958); Montgomery v. United States, 87 Ct. Cl. 218, 23 F. Supp. 130 (1938), cert. denied, 307 U.S. 632 (1939); Colt's Mfg. Co., 35 T.C. 78 (1960); Jack M. Chesbro, 21 T.C. 123 (1953); Gulf States Utilities Co., 16 T.C. 1381 (1951); H. E. Harman Coal Corp., 16 T.C. 787 (1951); Standard Paving Co., 13 T.C. 425 (1949), aff’d on other issues, 190 F. 2d 330 (10th Cir. 1951), cert. denied, 342 U.S. 860 (1951); Burton-Sutton Oil Co., Inc., 3 T.C. 1187 (1944), aff'd in part and rev'd in part on other grounds, 150 F. 2d 621 (5th Cir. 1945), rev’d on other grounds, 328 U.S. 25 (1946); Oregon Pulp & Paper Co., 47 B.T.A. 772 (1942).

The government argues that the mere filing of a state tax return acknowledging a liability in a stated amount is a “contest” since that entails a denial by the taxpayer that it owes an amount of tax greater than that specified on the return. By the same token, the argument can be made that a taxpayer in a self-assessment situation remits what he thinks is the proper amount but acknowledges that a greater amount might be due and levied by the taxing authorities. We do not think it proper to extend the concept of “contest” to the instant situation where the only basis for such an extension is taxpayer’s subjective motive as to what was intended when a return was filed. If a departure from the traditional concepts of proper accrual tax accounting is required by the fact of contest, it should be evidenced by taxpayer’s objective acts; lodging a formal protest with the tax authorities or instituting a suit in a court of law. To conclude otherwise would ignore the principle of an uncontested tax, and equate actual contest with acquiescence without contest. But more important, in order that income may be clearly reflected for any taxable year, it is necessary to reflect the state tax liabilities for that year. When the liability is not disputed and the precise amount is later determined, it is in accordance with sound principles of accounting that the tax accrue in the year in which the liability occurred. The government’s position would result in completely distorting taxpayer’s income for the years 1956 and 1953.

The government finally argues that if we do not find a contest by a mere filing in a self-assessment situation, taxpayer would be able to choose the year in which the deduction would benefit it the most by merely electing to contest the liability. The same result would be achieved under section 223(a)(1) of the Kevenue Act of 1964, supra. Congress did not deem important the tax benefits that a taxpayer could achieve by the election available to him under that section. Therefore, we think that this factor should not be controlling in the instant case.

For the foregoing reasons, we hold that the additional capital stock tax paid by plaintiff in 1956 with respect to the year 1953 accrued in 1953. Consequently, plaintiff is entitled to recover on this issue, and the amount of recovery will be determined pursuant to Rule 47(c) (2).

II. Percentage Depletion Issue

Taxpayer has over a period of many years owned and produced sand and gravel from substantial island deposits in the Ohio River. The percentage depletion issue involves sand and gravel which were dredged from such island deposits, transported to its installations on shore, and sold to customers during the year 1955. In taking its percentage depletion deduction on its income tax return for the year, taxpayer computed its depletion allowance by using per ton prices at the dredge. It now contends that its gross income with respect to these sales should be computed by using per ton prices at its installations on shore.

The sand and gravel was extracted from the islands by means of two dredges which wotild wash and size the extracted material; in addition, one dredge could crash gravel and had a heavy media separation plant which could eliminate the undesired light gravel. After the sand and gravel had been washed and sized on the dredges, it had to be removed from the dredges since stockpiling ,on the dredges is impossible. This was accomplished by barges which were adjacent to the dredges. The barges belonged either to plaintiff or its customers, depending upon who was the intended purchaser of the material.

During the year 1955 taxpayer’s dredges extracted from its island deposits 1,329,597 tons of sand and gravel. Sales of these materials were made to the following four classes of customers:

(1) One class of sales was made to one customer, Standard Sand and Gravel Company, Wheeling, West Virginia. During 1955, taxpayer sold 52,740 tons of sand and gravel to this company. Up until 1947, Standard Sand and Gravel Company had done its own dredging at which time its dredge sank, although it has continued to use its own tugs and barges. Taxpayer has found it worthwhile to sell to this former producer at a lower price than it would sell to anyone else. Standard has called for the material at taxpayer’s dredges with Standard’s own barges and tugs to transport it for resale in West Virginia. The resale prices in Standard’s market have been so low that it could not pay taxpayer the prices ordinarily paid in taxpayer’s market.

(2) A second class of sales was made to river producers of sand and gravel who constituted competitors of taxpayer. These competitors owned their own deposits, dredges, tugs and barges. They were J. K. Davison & Bros, and Ir,on City Sand and Gravel Company. Taxpayer and these competitors established interchange prices for sand and gravel based upon the material being picked up at the dredge, subject to adjustment according to actual method of delivery. The sales were for the convenience of the parties in cases such as breakdown of production equipment or lack of a required specification amount at the time. These prices were higher than those to Standard Sand and Gravel Company but lower than to other customers. During 1955 taxpayer- sold 130,646 tons of sand and gravel to these two customers, delivery being made as follows: (a) 47,749 tons picked up by J. K. Davison & Bros, with its barges and tugs at taxpayer’s dredges; (b) 18,109 tons.delivered by plaintiff’s barges and tugs to J. K. Davison & Bros, and to Iron City Sand and Gravel Co.; and (c) 64,788 tons delivered to J. K. Davison & Bros, on Davison’s barges by means of taxpayer’s tugs.

(3) A third class of sales was made at delivered prices on taxpayer’s barges with its own tugs to customers’ shore installations. These sales amounted to 460,626 tons. In those instances described in the stipulation where sand and gravel was delivered by barge to a customer’s or purchaser’s dock, the sand and gravel would be unloaded from the barges by the customer or purchaser and any further processing would be d,one by them.

(4) The fourth and largest class of sales, amounting to 685,586 tons of sand and gravel, was made by plaintiff from its shore installations or “hoists”. It is the percentage depletion deduction • with respect to these 685,586 tons with which this case is concerned. When the barges carrying the materials from the dredges arrived at the taxpayer’s docks, the sand and gravel would be removed by Whirler Hoists with buckets directly (or by conveyor belts) to large bins or to the stockpiles for future binning. At the bins, the sand and gravel was stored, weighed and from them loaded on to trucks or cars f,or shipment to customers.

Taxpayer’s deck barges used for carrying the sand and gravel away from the dredge were specially equipped with decks higher in the middle than on the sides and with “weep holes” in the sides of the cargo boxes to provide for drainage of water from the sand and gravel. Thus during the trip from the dredges to taxpayer’s shore installations the water content of the sand and gravel would be appreciably reduced.

Under the Internal Revenue Code of 1954, applicable to the tax year 1955 which is here in question, Congress provided in section 611 that:

* * * In the case of mines, oil and gas wells, other natural deposits, and timber, there shall be allowed as a deduction in computing taxable income a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each case * * *.

Section 613 of the Code provides for a deduction based on “percentage depletion,” and taxpayer for the years in issue, as well as in other years, computed its depletion deduction under this section.

Under section 613(b) (5) sand and gravel is entitled to a five percent depletion allowance. The percentage is applied to the “gross income from the property” which is defined in section 613(c) as follows:

* * * For purposes of this section—
(1) Gross Income from the Property. — The term “gross income from the property” means, in the case of a property other than an oil or gas well, the gross income from mining.
(2) Mining. — The term “mining” includes not merely the extraction of the ores or minerals from the ground but also the ordinary treatment processes normally applied by mine owners or operators in order to obtain the commercially marketable mineral product or products, and so much of the transportation of ores and minerals (wether or not by common carrier) from the point of extraction from the ground to the plants or mills in which the ordinary treatment processes are applied thereto as is not in excess of 50 miles unless the Secretary or his delegate finds that the physical and other requirements are such that the ore or mineral must be transported a greater distance to such plants or mills.
í',í $ * Hi H<
(4) Ordinary Treatment Processes. — The term “ordinary treatment processes” includes the following:
:ft ‡ * £ *
(C) in the case of iron ore, bauxite, ball and sagger clay, rock asphalt, and minerals which are customarily sold in the form of a crude mineral product — sorting, concentrating, and sintering to bring to shipping grade and form, and loading for shipment * * *.

The sales of sand and gravel with which this case is concerned consist of the largest class of sales made by taxpayer, namely, that tonnage sold and loaded for shipment at taxpayer’s plant installations on shore, commonly known as “hoists”. The issue here is whether taxpayer is entitled to take into account for depletion purposes the cost of transportation of the sand and gravel from the dredge to its plant installations on shore, its stockpiling costs, and its loading costs for shipment to customers, all of which are reflected in the price at the “hoist”. This, in turn, depends on whether these processes, beyond the dredge, are “ordinary treatment processes,” as above defined.

Taxpayer contends that all processes applied to the sand and gravel up to the point of sale from its shore installations or “hoists” were “ordinary treatment processes” as defined in the statute. Taxpayer then argues that being “ordinary treatment processes” allowed by statute, depletion should be based on actual sales, whether prior to the completion of such processes or upon their completion, i.e., the actual “gross income” from the property. Defendant argues that once marketability exists, a taxpayer is not entitled to the benefit of any additional ordinary treatment processes even though ■permitted by statute. In other words, as a matter of statutory construction, the government argues that the statutory phrase “commercially marketable mineral product or products” restricts the permissible “ordinary treatment processes normally applied by mineowners.” The effect of defendant’s argument is that if a miner of a mineral were to sell any portion of his annual production prior to applying all the processes permitted by statute, its gross income from the entire property would be based on that price. We believe that neither Congress nor the Supreme Court in United States v. Cannelton Sewer Pipe Co., 364 U.S. 76 (1960) intended such a result.

We think that the fact that taxpayers sold almost half of its production at the dredge is of no consequence, if in fact, taxpayer performed “ordinary treatment processes” beyond the dredge. To hold otherwise would cause the discrimination which the Oannelton decision intended to prevent. Thus the question which we must decide is whether the processes taxpayer performed, beyond the dredge, are “ordinary treatment processes” as defined by statute. This in turn depends on whether the mined product after the processes on the dredge were completed was ready for ordinary industrial use or consumption and had thus passed the mining stage. Food Machinery & Chemical Corp. v. United States, post, p. 313; Morton Salt Co. v. United States, 161 Ct. Cl. 640, 648, 316 F. 2d 931, 936, cert. denied, 375 U.S. 951 (1963). It is with respect to this question that taxpayer’s sales at the dredge become significant as one of the factors which would indicate that the mined minerals were ready for ordinary industrial use or consumption. In other words, if the purchasers of the minerals at the dredge had to apply what the statute defines as “ordinary treatment process” on the minerals before the minerals were ready for ordinary industrial use or consumption, then the cut-off point for depletion purposes for the other sales is not at the dredge but at a subsequent point. This would be true also if the purchaser had a special use for the mined mineral in a “crude” state vis-a-vis fully processed in the statutory sense. The presence of these factors would negate the inference to be drawn from the sales that the raw product was in a state ready for ordinary industrial use or consumption. In their absence, these sales at the dredge are strong indicators that what taxpayer did beyond this point was not an ordinary treatment process normally applied by miners in order to obtain the commercially marketable mineral product.

In the stipulated facts before us, there is no indication that the purchasers at the dredge either had a special use for the “crude” mineral or that they performed ordinary treatment processes to the minerals in order to make them ready for industrial use or consumption. The fact that during the trip from the barge to the shore installation the water content of the minerals was reduced is of no consequence, since it is not necessary that the sand and gravel dry out in order to make it marketable. In fact, too little moisture can be undesirable. What taxpayer did to the minerals after arrival at their shore installations cannot be considered an ordinary treatment process. Cf., Matagorda Shell Co., 29 T.C. 1060 (1958). The minerals were washed, crushed and sorted at the dredge. What taxpayer did at its shore installations was to stockpile the sand and gravel at its own docks and load the materials for delivery to its customers. In United States v. Utco Products, Inc., 257 F. 2d 65, 68 (10th Cir. 1958), the court stated:

* * * the phrase “ordinary treatment process,” except where the statute otherwise provides, means a process of treating which separates the mineral from other minerals in which it is found or with which it is associated, or which effects a chemical or physical change in the mineral itself, such as crushing, separating, removing impurities, pulverizing, hardening and the like.

Stockpiling is not designed to effect a physical or chemical change in the sand and gravel. The physical separation was done at the dredge. Moreover, stockpiling here was not a requisite for making the mined minerals marketable. Cf., Lumaghi Coal Co. v. Helvering, 124 F. 2d 645 (8th Cir. 1942). We have determined that taxpayer did not perform beyond the dredge any ordinary treatment processes. The fact that taxpayer had to transport its mineral product to shore to make it accessible to some of its customers is not determinative, since under the statute transportation is in-cludible in mining only if the transportation was to a location where the mineral underwent ordinary treatment processes. Zonolite Co. v. United States, 211 F. 2d 508 (7th Cir. 1954); Winnsboro Granite Corp., 32 T.C. 974 (1959), aff’d per curiam,, 283 F. 2d 307 (4th Cir. 1960).

We hold that taxpayer’s depletion allowance with respect to its sales to customers on shore should be computed by using per ton prices at the dredge, since for the year in issue (1955) taxpayer did not perform any ordinary treatment process beyond this point. Consequently, taxpayer is not entitled to recover and this portion of the petition is dismissed.

FINDINGS OF FACT

The court, having considered the facts as stipulated by the parties, and the briefs and argument of counsel, makes findings of fact as follows:

1. The petition in this proceeding was filed against defendant pursuant to the provisions of section 1491, Title 28 of the United States Code, for the recovery of income and excess profits taxes for the year 1953 and for the recovery of income taxes for the year 1955.

2. Plaintiff is a corporation organized and existing under the laws of the State of Pennsylvania, with its principal office located at Neville Island, Pittsburgh, Pennsylvania. At all times material herein, plaintiff maintained its books of account and filed its Federal tax returns on the accrual basis and for a fiscal period ending December 31.

3. For the calendar year 1953 plaintiff paid to the District Director of Internal Revenue at Pittsburgh, Pennsylvania, income and excess profits taxes in the total amount of $4,334,-355.96. Said taxes were paid pursuant to returns made by plaintiff and to adjustments made thereto by the Commissioner of Internal Revenue. Pursuant to said adjustments deficiency interest was paid in the amount of $12,424.94.

4. During the years mentioned in this stipulation, domestic corporations were required to pay a capital stock tax to the Commonwealth of Pennsylvania, which tax was based, using the words of the statute, on “the actual value” of the capital stock of the corporation.

5. During the years mentioned in the stipulation, plaintiff was required to file with the Pennsylvania Department of Revenue a corporate capital stock tax return before March 15th of each year showing the value of its stock for tbe calendar year immediately preceding and the amount of capital stock tax owing for the preceding year. The amount of the tax was to be paid at the same time the return was filed.

6. The Department of Revenue was authorized to make a new valuation of a corporation’s capital stock on the basis of any information found in the capital stock tax return, any information already in the possession of the Department of Revenue, or any other information acquired by the Department of Revenue.

7. The acceptance by the Department of Revenue of the valuation and tax payment as found in a capital stock tax return was known as a “settlement”; the first assertion by the Department of Revenue of a capital stock valuation and tax liability different from that found in the original capital stock tax return would also be known as a “settlement”.

8. All settlements and estimated settlements were subject to audit and approval by the Department of the Auditor General and to correction by the Boad of Finance and Revenue.

9. The Department of Revenue was under a statutory duty to attempt to reach a settlement before the end of the calendar year following whatever corporate fiscal year might be under consideration by the Department and promptly to mail a copy of the settlement to the corporation.

10. Within 90 days of the time that the settlement was mailed a corporation had the right to file a petition for a “resettlement” with the Department of Revenue.

11. The disposition of the petition would be known as a “resettlement”.

12. Section 1105 of the Pennsylvania Fiscal Code, 72 Purdon’s Penna. Statutes Annotated, ch. 1, art. XI, sec. 1105, authorized the Department of Revenue to open up any settlement or resettlement within two years after it was made and to redetermine a valuation of capital stock and the amount of the capital stock tax liability attributable thereto. The valuation reached and the amount of tax found due as a result of this reopening would also be known as a “resettlement”.

13. Within 60 days of the mailing of the notice of action taken on a petition for resettlement or mailing of a notice of a resettlement under section 1105 a corporation had a right to petition the Board of Finance and Revenue to review such action. In addition, an appeal thereafter was afforded from the action of the Board of Finance and Revenue to the Court of Common Pleas of Dauphin County.

14. During each of the years mentioned in this stipulation, plaintiff computed its tax based upon valuations of its capital stock on returns filed through representatives in the state capitol. These representatives would have a conference with the state tax authorities on the basis used by plaintiff and the state would issue its document entitled “Settlement— Capital Stock”.

15. In 1949 plaintiff reported the value of its capital stock f,or 1948 as being $17,000,000. The Department of Revenue increased the value to $19,500,000 and this Settlement which was mailed September 16,1949, was accepted by the plaintiff without protest.

16. In 1950 plaintiff reported the value of its capital stock for 1949 as being $18,000,000. The Department of Revenue increased the value to $18,750,000 and this Settlement, which was mailed July 10, 1950, was accepted by the plaintiff without protest.

17. In 1951 plaintiff reported the value of its capital stock for 1950 as being $20,500,000. This figure was accepted by the Department of Revenue in a Settlement mailed on July 6,1951.

18. In 1952 plaintiff reported the value of its capital stock for 1951 as being $21,500,000. This figure was accepted by the Department of Revenue in a Settlement mailed on August 28,1952.

19. In 1953 plaintiff reported the value of its capital stock for 1952 as being $21,500,000. This figure was accepted by the Department of Revenue in a Settlement mailed on May 29, 1953.

20. In 1954 plaintiff filed with the Commonwealth of Pennsylvania a Capital Stock Tax Report for the calendar year 1953, in which it showed the value of its capital stock as reported by plaintiff to be $23,000,000 and showed a capital stock tax due thereon, of $82,461.33, which amount was paid to the Commonwealth of Pennsylvania. In the computation of the income and excess profits taxes of plaintiff for the year 1953, as adjusted by the Commissioner of Internal Revenue, there was allowed a deduction from plaintiff’s income pursuant to section 23 (c) of the Internal Revenue Code of 1939 the amount of $82,461.33 attributable to the above Pennsylvania capital stock tax for the calendar year 1953.

21. In 1956 the taxing officials of the Commonwealth of Pennsylvania reviewed the 1953 Capital Stock Tax Report of plaintiff and the taxing- officials were of the opinion that plaintiff did not correctly reflect on its balance sheet the actual value of the shares of its subsidiaries. A revision of the value of the shares of stock of said subsidiaries by said Pennsylvania taxing officials resulted in increasing the company’s net worth which, in turn, brought about the increase in the valuation of the capital stock of plaintiff.

22. By notice dated June 15, 1956, and mailed August 27, 1956, the tax authorities of the Commonwealth of Pennsylvania informed plaintiff that its capital stock had been reappraised for the calendar year 1953 at $32,000,000 and that the capital stock tax for said year was redetermined at a total of $114,728.72 leaving a balance owing of $32,267.39 over the amount previously paid. Said notice informed plaintiff of its right, pursuant to Pennsylvania law, to appeal said redetermination within 60 days. This was the only document pertaining to the resettlement received by plaintiff from the taxing officials of the Commonwealth of Pennsylvania as was the practice in such resettlements of capital stock taxes. Plaintiff did not appeal or otherwise protest said redetermination of capital stock tax and on September 11, 1956 paid the $32,267.39 to the Commonwealth of Pennsylvania.

23. On June 1, 1959, within the time prescribed by law, plaintiff filed with the District Director of Internal Revenue at Pittsburgh, Pennsylvania, a claim for refund dated May 29,1959, in which it was alleged that plaintiff had overpaid its income and excess profits taxes for the year 1953 in the amount of $26,459.26, or such other amount as might be legally refundable on account of an additional deduction from income arising out of the .previously described further payment of Pennsylvania capital stock tax for the year 1953 hi the amount of $32,267.39. By notice dated August 26, 1960, sent by certified mail, the Commissioner of Internal Revenue disallowed said claim in full on the grounds that said additional Pennsylvania capital stock tax liability did not accrue so as to be deductible from plaintiff’s, income in determining its income and excess profits taxes for the calendar year 1953.

24. For the calendar year 1955 plaintiff paid to the District Director of Internal Revenue at Pittsburgh, Pennsylvania, income taxes in the total amount of $443,416. Said taxes were paid pursuant to returns made by plaintiff and to adjustments made thereto by the Commissioner of Internal Revenue. Pursuant to said adjustments deficiency interest was paid in the amount of $660.85. During the calendar year 1955 plaintiff was engaged in the production and sale of sand and gravel. In computing its income taxes for 1955 plaintiff, pursuant to section 611 of the Internal Revenue Code of 1954, deducted from income the amount of $63,468 as a depletion allowance computed under the percentage depletion provisions of section 613 of the Internal Revenue Code of 1954 with respect to gross income from sand and gravel.

25. Plaintiff, through its Keystone Division, has over a period of many years owned and produced sand and gravel from substantial' deposits. In the year 1955 plaintiff produced sand and gravel which were dredged by plaintiff from island deposits in the Ohio River owned by plaintiff, namely, Black’s Island, Cluster’s Island, and Baker’s Island, all in Hancock County, West Virginia, and Georgetown Island in Beaver County, Pennsylvania. For the purpose of its sand and gravel operations during the year in question, plaintiff owned and maintained in the Ohio River 2 floating dredges, 5 diesel towboats and 97 deck barges and operated plant installations on shore known as “hoists,” all in Pennsylvania, at Rochester, Aliquippa, Neville Island, South Side (Pittsburgh) Braddock and McKeesport. Keystone Division also extracted sand and gravel from the bed of the Ohio River, did some river towing, and at its shore installations sold building supplies other than sand and gravel, which operations are not involved in this lawsuit.

26. The terms bank-run, river-run, run-of-mine, run-of-pit unprepared sand and gravel and unprocessed sand and gravel, are synonymous, except that the first four terms refer to the type of location out of which the material is extracted and the composition thereof will depend upon the particular deposit in question. There are frequently limits on the marketability and use of sands and gravels. For example, sea sand being too fine and rounded and containing deleterious minerals cannot be used in most types of sand applications. Some gravels are, for example, too porous or water absorbent or of a composition which would easily disintegrate limiting severely their use for most types of gravel applications. Chemical content and resistance to pressure are sometimes matters of concern to sand and gravel producers and users. Likewise, the percentage of sand and gravel as opposed to other foreign materials contained in a deposit or even the percentage of sand to gravel may determine whether it may be mined for most types of applications on an economical basis. The island deposits of plaintiff are generally called river-run sand and gravel and are composed of a conglomerate, containing principally a mixture of different sizes of sands and gravels with claylike binding substances therein as well as other items such as pieces of coal, sticks, and other river trash, and non-commercial traces of gold. Plaintiff has not and does not sell such unprocessed materials. All of its sales are of processed sand and gravel most of which are used in concrete, mortar and like binding substances.

27. Usually in the sand and gravel business it is impossible to dig or dredge from deposits only a particular size or grade of sand or gravel necessary to meet a required specification. The dredges bring up all of the various sizes and grades contained in the particular deposit being dredged. From past experience plaintiff knows the general composition of some of its deposits and has been able in some instances to send its dredges to locations where a particular specification is most likely to be satisfied with the least waste. Plaintiff’s dredging and processing activities normally have been conducted with the purpose of meeting special requirements of specific customers and to keep up its own stockpiles of those sizes of sand and gravel for which there is the greatest demand.

28. Diver as well as any other type producers of sand and gravel range from small marginal operators with antiquated equipment to large operators with modern equipment. Plaintiff falls in the latter category. The processing of sand and gravel by a river producer or any other producer depends on specifications and requirements, the capacity and equipment of the producer and his particular method of operation, the quality and content of the raw material deposits, and like considerations. Most producers find it necessary both to wash and size their sand and gravel for most applications. Another operation is the crushing of gravel to meet a crushed gravel requirement or to utilize over-size material brought up by the dredges in order to avoid wasting it. In addition, most producers of sand and gravel maintain stockpiles of materials and use bins for weighing and loading for shipment. None of these processes change the chemical composition of the individual sand and gravel particles, nor is anything added to them.

29. Ordinarily producers of river sand and gravel try to keep their floating equipment in steady operation. In order to keep such an operation going the sand and gravel have to be removed from the dredges since it is impossible to stockpile the sand and gravel on the dredges themselves. For this purpose the sands and gravels are placed on barges (each having a 500 or 600 ton capacity) alongside the dredge (Dredges 8 and 9 having the ability, respectively, to load three and four barges at the same time) and when they are filled they are moved and empty barges take their places. After a sufficient number of barges have been loaded, they are removed from the vicinity of the dredge by tug to a'shore installation. (During the period under consideration when plaintiff had loaded 15 barges, a number which along with a tug would fill a river lock, they were so removed, or if less than 15 barges were loaded in a day’s operation of a dredge, that number would have been so removed.) When the barges reach shore destinations the sand and gravel are unloaded fr,om the barges usually onto stockpiles or into bins on shore and the barges are returned by tug to the dredges for reloading.

30. Specifications for sand and gravel are many and varied because of numerous different uses for these materials. Specifications are dependent mainly on the type of local deposits available as well as the use to which the materials are to be put. Sand can be produced in one or more size gradations, for example, fine, coarse, or mixed. Gravel likewise can be produced in one or more size gradations. Gravel can be specified as natural, crushed or mixed natural and crushed grades; also, specifications of gravel might even require the gravel to have a certain chemical content, or limit its degree of porosity or friability. Within each locality there are standard sizes of sand and gravel for major construction projects. While most sand and gravel producers stockpile and bin such materials, they usually do so only for those specifications which are normally in demand from their local customers. The economics of the operation with these low priced commodities and the availability nationwide of deposits generally prevent transportation of the materials over great distances. For example, the cost of transportation over a distance in excess of 100 miles would normally destroy the possibility of meeting local competition.

31. In its market, comprising generally the metropolitan Pittsburgh area, plaintiff has found over the years that most of its sales have been covered by two specifications of sand and four specifications of gravel. While it has produced numerous other specification materials, these would be on special demand only. The sands ordinarily in demand from plaintiff and consequently almost continuously stockpiled and binned may be covered by two general descriptions: The gravels ordinarily in demand from plaintiff and consequently almost continuously stockpiled and binned may be covered by four descriptions:

(a) Fine sand (in Pittsburgh generally specified as ranging from %" in diameter and down, such as is ordinarily used in mortar and plastering).
(b) Coarse sand (in Pittsburgh generally specified as ranging from %" in diameter and down, such as is ordinarily used in concrete, sometimes also referred to as concrete or highway sand).
(a) Sbot gravel (in Pittsburgh generally specified as ranging in diameter from %" to %").
(b) Pea gravel (in Pittsburgh generally specified- as ranging in diameter from %" to %").
(c) 2-B gravel (a Pennsylvania State specification calling for gravel ranging in diameter from iy2" to coming either 50% crushed or all uncrushed).
(d) 3-A gravel (a Pennsylvania State specification calling for gravel ranging in diameter from 2to 1", coming either 50% crushed or all uncrushed).

Special demand specifications would vary by requirement. For example the United States Engineers, a large customer of plaintiff, have a specification calling for gravel from 3" to U/a" in diameter and even for cobbles up to 6" in diameter. Special demand material would also, be stockpiled and binned while the demand was being filled. Plaintiff ordinarily has loaded for shipment from its bins where materials may be weighed and by means of gravity flow load the transportation equipment. Plaintiff has in some instances loaded directly from the stockpiles. Any special screening or resereening of extraordinary specification materials would be conducted prior to placing in the bins.

32. During the - year in question plaintiff’s dredges, known as Dredge Number 8 and Dredge Number 9, extracted sand and gravel from its river deposits by means of continuous bucket conveyers from which the material emptied into screens where it was washed and sized. These processes were common to both dredges. It was also possible on Dredge Number 9, when the gravel was muddy or contained lumps of mud, to put it through a scrubber or to crush it (either because it was over-size, that is, larger than the day’s specifications required, or because the day’s specifications required that part of the gravel be crushed, or for both reasons), and to send it, if necessary, through a separation process, in this case a heavy media separation plant, which would eliminate the undesired light gravel as well as other undesired matter. Throughout all processing the material would constantly be washed with water to get the material clean. For example, it would not be necessary to scrub muddy gravel if it were to be crushed since in the crushing process the mud would be washed away. Dredge Number 8 could simultaneously produce and load onto barges by means of conveyor belts three different specifications of material and Dredge Number 9 could simultaneously produce and load onto barges by means of conveyor belts four different specifications of material. The number of specifications which can be produced by a dredge are limited to the various sizes of openings in the screens. The screens are not changed from normal demand sizes except for large orders because of the cost involved.

33. Prior to being loaded onto barges from the dredges sand would be in a very soupy state containing 10 to 12 percent of water, whereas gravel would contain somewhat less. In the process of loading the sands and gravels onto the barges they would go over some bars which would take out a part of the water. Such sand materials would contain six to ten percent by weight of water when placed on the barge. Likewise the gravel would contain lesser amounts of water. The deck barges used for carrying the sand and gravel away from the dredge are specially equipped with decks higher in the middle than on the sides and with “weep holes” in the sides of the cargo boxes to provide for drainage of water from the sand and gravel. When the sand reaches shore in the barges on the average it contains approximately four percent by weight of water. After stockpiling and binning on shore sand contains on an average approximately one percent by weight of water. For most types of sand applications knowledge of water content is necessary or desirable. When gravel reaches shore on the average it contains negligible amounts of water. It often dries out and becomes undesirably hot for use in concrete when stockpiled and binned and some customers, such as the Pennsylvania State Highway Commission, a large customer of plaintiff, require that gravel be moistened before being shipped to it. This operation may be performed by placing a water sprinkler on the stockpile.

34. During the year 1955 plaintaiff dredged from its island deposits 1,329,597 tons of sand and gravel. Sales of these materials were made to four classes of customers at varying prices, depending on the customer and method or place of delivery to the customer. All of such sales are described hereinafter.

35. One class of sales was made to one customer, Standard Sand and Gravel Company, Wheeling, West Virginia. During 1955, plaintiff sold 52,740 tons of sand and gravel to this company. Up until 1947 Standard Sand and Gravel Company had done its own dredging at which time its dredge sank, although it has continued to use its own tugs and barges. Plaintiff has found it worthwhile to sell to this former producer at a lower price than it would sell to anyone else. Standard has called for the material at plaintiff’s dredges with Standard’s own barges and tugs to transport it for resale in West Virginia. The resale prices in Standard’s market have been so low that it could not pay plaintiff the prices ordinarily paid in plaintiff’s market.

36, A second class of sales was made to river producers of sand and gravel who constituted competitors of plaintiff. These competitors owned their own deposits, dredges, tugs and barges. They were J. K. Davison & Bros., and Iron City Sand and Gravel Company. Plaintiff and these competitors established interchange prices for sand and gravel based upon the material being picked up at the dredge, subject to adjustment according to actual method of delivery. These sales were for the convenience of the parties in cases such as breakdown of production equipment or lack of a required specification amount at the time. These prices were higher than those to Standard Sand and Gravel Company but lower than to other customers. During 1955 plaintiff sold 130,646 tons of sand and gravel to these two customers, delivery being made as follows: (a) 47,749 tons picked up by J. K. Davison & Bros, with its barges and tugs at plaintiff’s dredges; (b) 18,109 tons delivered by plaintiff’s barges and tugs to J. K. Davison & Bros, and to Iron City Sand and Gravel Co.; and (c) 64,788 tons delivered to J. K. Davison & Bros, on Davison’s barges by means of plaintiff’s tugs. (During 1955 the plaintiff, under the conditions described above, purchased 15,186 tons of gravel from J. K. Davison & Bros., some of which, was picked up by the plaintiff’s barges at J. K. Davison’s dredge and some of which was delivered to the plaintiff’s South Side installation in J. K. Davison barges.)

37. A third class of sales was made at delivered prices on plaintiff’s barges with its own tugs to customers’ shore installations. These sales amounted to 460,625 tons.

38. In those instances described in this stipulation where sand and gravel were delivered by barge to a customer’s or purchaser’s dock, the sand and gravel would be unloaded from the barges by the customer or purchaser and any further processing would be done by them.

39. The fourth and largest class of sales, amounting to 685,586 tons of sand and gravel, was made by plaintiff from its shore installation or “hoists”. It is the percentage depletion deduction with respect to these 685,586 tons with which this case is concerned. When the barges carrying the materials from the dredges arrived at the plaintiff’s docks the sand and gravel would be removed by Whirler Hoists with buckets directly (or by conveyor belts) to large bins or to the stockpiles for future binning. At the bins, the sand and gravel was stored, weighed and from them loaded onto trucks or cars for shipment to customers.

40. During 1955 the plaintiff’s two main sand and gravel competitors, J. K. Davison & Bros, and Iron City Sand and Gravel Co. extracted by means of dredges their sand and gravel from either river beds or island deposits, sold sand and gravel at their dredges, at customer’s docks, and at their own docks. These two competitors also had deposits of sand and gravel on shore from which they extracted and processed the sand and gravel solely in land operations.

41. The methods of operation described in this stipulation both for the plaintiff and its competitors were typical of their operations in other years as well as 1955 and represented the river and shore operations of large producers with expensive equipment. The locality of the processing by river producers varies according to the type of equipment utilized. For example, during the year 1955 the predecessor of plaintiff’s subsidiary, Potomac Sand & Gravel Company of Washington, D.C., using less modem equipment, extracted its materials from river deposits, barged it to shore installations, and did all of its processing on shore.

42. When filing its income tax return for the year 1955, plaintiff based its percentage depletion deduction on the amount of $666,115 gross income from the 685,586 tons of sand and gravel in question. The amount of $666,115 was computed using per ton prices, which did not take into account the actual gross income from the sale of the said tonnage at the hoists where the prices included costs of barging and towing, stockpiling, binning, and loading for shipment. Thereafter, for the purposes of filing a claim for refund, plaintiff recomputed its percentage depletion deduction for sand and gravel, substituting its actual sales prices at the hoists for that portion of its production sold therefrom. In computing the gross income from the said sales at the hoists, plaintiff excluded an amount, for the purpose of covering the cost and profit attributable thereto, of any transportation of sand and gravel to its hoists in excess of 50 miles from the deposits. A table of distances to the nearest mile between the several island deposits and the Keystone hoists is as follows:

To Blade’s Cluster’s Baiter’s Georgetown Island Island Island Island
Rochester_ 30 28 25 12
Aliquippa_ 36 36 33 20
Neville Island_ 47 45 42 29
South Side (Pittsburgh) 56 54 51 38
Braddock_ 64 62 59 46
McKeesport_ 68 66 63 51

43. On March 12, 1959, plaintiff filed with the District Director of Internal Revenue at Pittsburgh, Pennsylvania, a timely claim for refund of income taxes alleged to be overpaid for the year 1955 in the amount of $16,365 or such other amount properly due with respect to an additional deduction for percentage depletion based upon gross income from sand and gravel production for the year 1955, consisting of Form 843, one page of written explanation and a two-page schedule entitled Dravo Corporation, Revised Computation of Percentage Depletion of Sand and Gravel, Based on Gross Income at Hoists, 1955. By notice dated August 26,1960, sent by certified mail, tbe Commissioner of Internal Eevenue disallowed said claim in full.

CONCLUSION OF LAW

Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that plaintiff is entitled to recover as to its claim with respect to the year 1953 concerning the accrual issue. The amount of recovery will be determined pursuant to Rule 47(c)(2).

It is further adjudged and ordered that plaintiff is not entitled to recover on its claim for the year 1955 with respect to the depletion issue, and as to this claim the petition is dismissed.

In accordance with the opinion of the court and a memorandum report of the commissioner as to the amount due thereunder, it was ordered on November 8, 1965, that judgment for the plaintiff be entered for $28,934.64, together with statutory interest as provided by law. 
      
       Congress, through section 223(a)(1) of the Revenue Act of 1964, 78 Stat. 19, 76, 26 U.S.C. § 461(f) (1964 ed.), has stripped the authority from those cases which denied the deductibility of an asserted liability in the year of payment if there was a subsequent contest. E.g., United States v. Consolidated Edison Co., 366 U.S. 380 (1961). Although we think this amendment has no bearing on the issue at bar, we note it as an example of congressional intent to restrict the effect of the concept of “contest” in tax cases. See S. Rep. No. 830, 88th Cong., 2d Sess. 243 (1964); Charles Leich & Co. v. United States, 165 Ct. Cl. 127, 329 F. 2d 649, rehearing denied, 165 Ct. Cl. 151, 333 F. 2d 871 (1964).
     