Friendly, Chief Judge, Smith and Anderson, Circuit Judges.
These appeals involve the calculation of the percentage depletion permitted to Barton Mines Corporation (Barton) which mines ore containing eight to ten per cent garnet by volume and reduces it to garnet grains and powders of 98% purity by means of various processes, designed both to convert the garnet to desired sizes and to attain a purity level dictated by competition in the abrasives industry. At issue is the application of the term "mining" as used in the percentage depletion scheme of the 1954 Internal Revenue Code; and the case involves, for the first time, the amended definition of that term as added by the Public Debt and Tax Rate Extension Act of 1960 § 302 (the Gore Amendment), 74 Stat. 290 (1960), 26 U.S.C. § 613.
Under the percentage depletion scheme a "reasonable allowance for depletion" is allowed as a deduction, in the case of mines, in computing taxable income, 26 U.S.C. § 611(a). The allowance is established in § 613(a) as a specified percentage of "the gross income from the property," at 15% for garnet, § 613(b) (6). The phrase "the gross income from the property" is defined as "the gross income from mining," § 613(c)(1), and "mining" is defined in § 613(c)(2):
"(2) Mining. -- The term 'mining' includes not merely the extraction of the ores or minerals from the ground but also the treatment processes considered as mining described in paragraph (4) (and the treatment processes necessary or incidental thereto) * * *."
The parties have stipulated that garnet is not customarily sold in the form of the crude mineral product and, therefore, that the depletion of garnet is governed by sub-paragraph (D) of paragraph (4):
"(4) Treatment processes considered as mining. -- The following treatment processes * * * shall be considered as mining * * *:
(D) in the case of lead, zinc, copper, gold, silver, uranium, or fluorspar ores, potash, and ores or minerals which are not customarily sold in the form of the crude mineral product -- 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 * * *."
Under sub-paragraph (5) certain processes are specifically excluded from the definition of "mining."
"(5) Treatment processes not considered as mining. -- Unless such processes are otherwise provided for in paragraph (4) (or are necessary or incidental to processes so provided for), the following treatment processes shall not be considered as 'mining': electrolytic deposition, roasting, calcining, thermal or electric smelting, refining, polishing, fine pulverization, blending with other materials, treatment effecting a chemical change, thermal action, and molding or shaping."
The Commissioner asserted deficiencies for the taxable years ending June 30, 1962 through June 30, 1966 on the ground that certain of the processes used by Barton to convert the raw garnet ore into grains and powders were nonmining processes and were not entitled to the percentage depletion allowance. The Tax Court classified some of the processes as mining and some as nonmining and determined deficiencies totaling $89,796.58 for the taxable years in question, 53 T.C. 241 (1969). Both the taxpayer and the Commissioner have taken appeals from the Tax Court's determinations, the former claiming that the Tax Court erred in classifying some of the processes as nonmining and the latter claiming that all of the processes are nonmining.
The essential facts are not in dispute. Barton was incorporated in 1924 under the laws of the State of New York, with its principal place of business at Gore Mountain, North Creek, New York. It is the only domestic producer of garnet powder, which is used in grinding lenses, manufacturing plate glass and sand blasting, and its grains are the only ones used in the manufacture of coated abrasives (sandpaper). Garnet occurs in the form of round crystals or in pockets several inches in diameter and is encased in or encases other rock materials, chiefly hornblende, feldspar, magnetite and mica. The deposit was first mined by Barton in 1878, and at that time the garnet crystals were set in decomposed rock near the surface and were handpicked out of the surrounding rock. This high-purity garnet was shipped, without further processing, to a Philadelphia manufacturer of sandpaper who crushed the garnet and then sized it for use as an abrasive by passing the crushed garnet over screens with various-sized openings.
The handpicking method of mining continued until about 1924 when the supply of decomposed rock near the surface was exhausted. The remaining garnet crystals were trapped in the hard mass of surrounding rock which had to be separated to render the garnet usable. Garnet has a hardness of 8 to 9 on the Moh's scale (diamond is the hardest with a rating of 10), and the encasing minerals have a hardness ranging from 2.5 to 6. To be an effective abrasive, therefore, the garnet must be separated from the lower hardness minerals and impurities. In 1924 a mill was built to effect the separation by employing a method of gravity separation. The ore, containing 12% to 14% garnet by volume, was crushed and placed in a jig (a tray with a screened bottom), and the jig was immersed in water and made to pulsate. As the specific gravity of garnet (the ratio of the mass of a given volume of garnet to the mass of an equal volume of water) is higher than the specific gravity of all the impurities except magnetite, the garnet would sink to the bottom and the impurities would come to the top. Using this method of separation, Barton captured about 50% of the garnet from the ore, the other half going off with the impurities. The usable half, termed garnet concentrate, contained 91% garnet and was sold to the large manufacturers of coated abrasives, such as the Minnesota Mining and Manufacturing Company, who prepared it for use as coated abrasives by crushing it and passing it over a screen which reduced the garnet to a size suitable for use on sandpaper and also removed a small amount of the remaining impurities.
During this period a number of small manufacturers of coated abrasives came into being which had neither the technical skill nor the equipment to prepare the garnet concentrate for use as abrasives, and in 1933 Barton acquired a grading or grain mill which crushed and sized the concentrate into grains and raised its purity level. By the late 1930's it had become increasingly difficult to separate efficiently the garnet from the ore because of changes in the physical characteristics of the deposit as the strip mine moved to different levels; and the jig method of separation was no longer adequate. In 1941 Barton adopted a new technique of gravity separation, the heavy media or sink and float technique. Although more efficient than the jig process, it operated effectively only on the larger pieces of garnet (the relative weights of the smaller pieces of garnet and the impurities were too close for gravity separation to be effective), and much of the garnet was thrown off with the impurities. At the same time much garnet was lost in the waste from the grain mill, which contained about 85% garnet. In 1944, at the suggestion of the War Production Board, Barton introduced a powder mill process to operate on the throw-offs from the grain mill and produce powders. In 1946 it adopted a flotation technique to capture the smaller garnet particles thrown off in the waste from the heavy media tanks. By the end of 1958 the sale of 91% concentrates ended.
Barton's grains were in competition with a number of other products such as corundum, natural and manufactured diamonds, synthetic aluminum oxide and synthetic silicon carbide -- all harder than garnet and, therefore, more effective abrasives. Consequently, it became essential that the grains reach a high level of purity to be competitive. As the result of Barton's various processes, it produced a highly pure product -- 90-92% pure in 1920, 94% pure in 1940, 95% pure in 1944 and 98% pure during the tax years in question. The large manufacturers of coated abrasives discovered that Barton's grading and purifying processes yielded higher purity grains than their own, and, gradually, the sales of 91% concentrate declined, until in 1958 they ceased altogether.
During the tax years in question, therefore, Barton's basic processes consisted of the heavy media tank, the flotation tank, the grain mill and the powder mill.*fn1 They operated essentially as follows. From the mine, the ore, which contained eight to ten per cent garnet by volume, was transported to Barton's mill where it was placed in a jaw crusher and reduced to a size which would pass through a 1" to 1 1/4" screen (material that did not pass through was subjected to continued crushing until it did). A magnetic separator then withdrew magnetite and "tramp iron," and the mixture dropped onto a second screen which separated out pieces in excess of approximately 1/8" to 1/4". The material (fines) that passed through the second screen was crushed in ball mill No. 1 and then processed through the flotation tank, and the particles which were too large to pass through the screen were processed through the heavy media tank which operated on the theory of gravity separation. The particles were suspended in a liquid, the specific gravity of which was lower than that of garnet, and the garnet sank to the bottom while the impurities floated off the top. In the flotation process, the smaller particles were placed in a tank containing water, and chemicals were added which adhered only to the garnet particles, causing them to be coated with air bubbles and to float to the top. The material emerging from the heavy media and flotation tanks was called "garnet concentrate" and contained 91% garnet by volume. It was, of course, wet and contained oils, grease and flotation chemicals which were introduced during the initial separation processes. The material, carried by a single feed, entered a dryer called dryer "H" where it was heated to an average temperature of 700 degree F. and sprayed with ferrous sulfate. The heat dried the concentrate and burned off the contaminants, introduced during the flotation and heavy media process, and the ferrous sulphate reacted with the heat to restore color uniformity to the concentrate, which had been streaked by the heavy media process. Ninety-nine per cent of the emerging concentrate (1% went directly to the powder mill) passed through a second magnetic separator where more magnetite was removed and then was processed through the grain mill, where further impurities were removed and the garnet was graded into 17 or 18 commercially usable sizes.
The grain mill consisted of three sets of screens, two air tables and a heat treatment unit. The first set of screens, No. 5, contained five screens which separated the garnet into five group grades, each of which was processed into specific grain sizes. The three largest sizes passed to the air tables which separated out impurities by means of air currents and vibration of the tables, thereby increasing the garnet content from 91% to 93%. This material, plus the two smaller sized groups, then passed to the main screens, the second set of screens in the grain mill (labelled Nos. 6 and 7 in the diagram), which effected the primary removal of impurities from the ore. As described by the Tax Court:
" Lighter non-garnet particles of a given size have less tendency to pass through the screens than similar size, but heavier, garnet particles. To efficiently implement the separation the particles being processed through the screens must be graded to very close size. Screens No. 6 consist of several different sized screens which separate each group grade into two feeds for two finished grades; the in-between sizes are rejected. Screens No. 7 grade the garnet grains to reasonably precise sizes."
Fifty per cent of the material passed through the screens and emerged with a garnet content of about 98%. The other 50% had an 85% garnet content and, having resisted separation by screening, served as the chief source of supply for the fluid gravity separation processes of the powder mill.
The material that passed through the screens was subjected to magnetic separation to remove magnetite. Although a small amount (untreated finished grains) then went directly to the final set of screens, No. 8, most of the material went to a revolving cylinder called the capillarity unit, where the material was heated to a temperature of 1600 degrees to 1800 degrees F. The heat treatment restored color uniformity, healed fractures in the grains caused by the initial crushing, produced a tough skin and rounded some of the sharp edges of the garnet. These final screens were termed the scalper screens, and they effected the final removal of impurities (consisting primarily of mica), removed any oversized garnet grains, which went to the powder mill along with the impurities, and separated the remaining garnet grains into 17 ultimate sizes of 98% pure garnet, ready for packaging and shipping. The sizes were those set by the National Bureau of Standards to meet the requirements of the coated abrasives industry. Barton also set sizes according to individual customer specification.
The feed for the powder mill was comprised of the throw-offs from the grain mill which had resisted separation there, and had an average garnet content of 85%. The major constituent was the material rejected at the second set of screens Nos. 6 and 7 in the grain mill, but, additionally, it consisted of (1) the small amount of fines coming out of dryer "H", (2) surplus sizes that did not pass through the first set of screens No. 5 in the grain mill, and (3) various other small amounts from the grain mill process. The processes in the powder mill consisted basically of ball mill No. 2 (a rotating cylinder filled with steel blades), a cone dewaterer, "F", and a thickener and classifying separator. The feed passed through a magnetic separator, where magnetite was removed, into the ball mill which crushed the feed into desired sizes, scrubbed the garnet, restored uniformity of color and liberated some impurities. The powder then passed into the cone dewaterer, " F", where the larger particles sank to the bottom and the smaller ones floated. Because the later purification and sizing processes operated effectively only on the smaller particles, the large particles were recirculated back through ball Mill No. 2 for further crushing; and the small particles, which had floated off the top of the dewaterer, flowed past a magnetic separator into a large tank called a thickener. The tank was filled with moving water, and the garnet sank while the impurities floated off the top. The particles that settled in the thickener were pumped into a classifying separator. As described by the Tax Court, the classifying separator
"is a long tube-like device containing approximately 15 successively larger bins set one next to the other. The feed enters the smallest bin first, where a regulated flow of water causes the largest, heaviest particles to settle out at the bottom. The water from the first bin overflows into the next larger bin, where the velocity of the water is reduced somewhat from that in the first bin, with the result that the next smaller powder size settles to the bottom. This procedure is continued through all ...