Plaintiff, an Illinois corporation having its principal place of business in Chicago, is engaged in the pursuit of extracting, processing, and selling salt in its various forms and grades. As a salt producer, plaintiff is entitled to deduct from its income and excess profits taxes amounts based upon an allowance for the depletion of its mineral resources. Plaintiff seeks a refund of its taxes for the years 1951, 1952, 1953, and 1954 on the ground that it was not permitted to base its computations for depletion allowance on its gross income derived from the sale of finished products in those years. Taxpayer's claim for the first three years in question is predicated upon the provisions of the Internal Revenue Code of 1939 while its 1954 claim is derived from similar provisions of the Internal Revenue Code of 1954.

Section 23(m) of the Internal Revenue Code of 19391 provides for a reasonable depletion allowance for the mineral mining industry according to regulations to be prescribed by the Commissioner of Internal Revenue. The basis for this depletion allowance is as set forth in section 1142 of that Code, and establishes that sodium chloride (salt) is to be depleted at 5 per centum of the gross income from the property during the taxable year. Such "gross income," the Code explains, means "gross income from mining." Mining includes "not merely the extraction of the ores or minerals from the ground but also the ordinary treatment processes normally applied by the mine owners or operators in order to obtain the commercially marketable mineral product or products." These same provisions are carried forward essentially unchanged into the Internal Revenue Code of 1954, except that the depletion rate for sodium chloride is increased to 10 percent.3 For simplicity, then, we shall treat all plaintiff's claims as though they arose under the earlier statutory provisions.

The sole issue4 presented for decision in this case arises from plaintiff's contention that all of its processes, including the packaging of its salt, are "normally applied" by miners in order to obtain a commercially marketable product within the meaning of the depletion statute and associated Treasury Regulations.5

Plaintiff produces salt by hydraulic mining (brine wells) and dry mining (rock salt mines). The salt so produced falls into three basic categories: evaporated granulated salt, evaporated flake or grainer salt, and rock salt. The rock salt is produced by the dry mining method while both of the evaporated forms, basically, are produced by applying a heat evaporation process to the salt received in solution from the brine wells. These mining methods, with minor variations, are identical with those employed by other members of the salt industry. Since there are few secrets within the industry and since the systems are basically simple in principle, standardization is widespread. The process of dry mining, for example, has not been substantially changed in more than 50 years. As the parties have stipulated, and the trial commissioner has found, the treatment processes applied by plaintiff at its plants, with respect to the three basic types of salt, were as follows:

                                              TABLE 1
  ---------------------------------------------------------------------------------------------------------
      Evaporated granulated         |        Evaporated flake or        |
             salt                   |           grainer salt            |             Rock salt
  ----------------------------------|-----------------------------------|----------------------------------
  Stage |     Process               | Stage |          Process          | Stage |         Process
  ------|---------------------------|-------|---------------------------|-------|--------------------------
    1   | Underground brining       |   1   | Underground brining       |   1   | Undercutting, drilling
        |  and pump lift            |       |  and pump lift            |       |  and blasting.
        |  at wells.                |       |  at wells.                |       |
    2   | Treatment to remove       |   2   | Treatment to remove       |   2   | Underground conveying.
        |  brine impurities.        |       |  brine impurities.        |       |
    3   | Vacuum pan evaporation.   |   3   | Open pan and flash        |   3   | Through grizzly
        |                           |       |  evaporation.             |       |  and primary
        |                           |       |                           |       |  crusher (underground).
    4   | De-watering.              |   4   |  De-watering.             |   4   | Conveying and
        |                           |       |                           |       |  hoisting.
    5   | Kiln drying.              |   5   | Kiln drying.              |   5   | Scavenger screening.
    6   | Screening.                |   6   | Screening.                |   6   | Grinding.
    7   | Introduction of additives |   7   | Introduction of additives |   7   | Screening.
        |  where required.          |       |  where required.          |       |
    8   | Bulk loading.             |   8   | Bulk loading.             |   8   | Kiln drying (fine
        |                           |       |                           |       |  grades per seasonal
        |                           |       |                           |       |  requirements).
    9   | Packaging and             |   9   | Packaging.                |   9   | Introduction of additives
        |  block presses.           |       |                           |       |  where required.
   10   | Package loading.          |  10   | Package loading.          |  10   | Bulk loading.
        |                           |       |                           |  11   | Packaging and
        |                           |       |                           |       |  block presses.
        |                           |       |                           |  12   | Package loading.
  ---------------------------------------------------------------------------------------------------------

Plaintiff takes the position that its production cycle is closed and continuous. As plaintiff's counsel expresses it, plaintiff "* * * starts out with sodium chloride underground, it moves its sodium chloride through a closed production circuit with gravity as the important propelling factor and at the end of that production circuit it loads its sodium chloride products on broad transportation units at its plants." [Brief for the petitioner, p. 46.]

This position is the fabric of petitioner's ultimate contention that it is entitled to a depletion allowance computed by taking the permitted percentage of its net sales of all its salt products, and that net sales equal gross income from those sales less returns, allowances, freight, warehousing, and salt purchased for resale. Defendant, on the other hand, maintains that plaintiff's crude extraction product is brine at the wellhead (in the case of brine wells), and rock salt from the muck pile (in the dry mining operation). If this contention were adopted with its full implications, plaintiff would be restricted to an allowance based upon only that percentage of gross income attributable to the mining of salt to these points and no further. Alternatively, the Government contends that all processes through drying and screening (step 6 for the evaporated salts and step 7 for rock salt, Table 1, supra) are allowable,6 but that percentages of gross income attributable to the introduction of additives, compressing, and packaging are excluded. For reasons hereinafter set forth, we adopt the latter position.

Depletion at its inception in 1913,7 was designed to make an allowance for the exhaustion of the mineral resources of a producer on the basis of the market value of the mineral at the mine. In 1918, the Congress authorized the introduction of the "discovery" concept of depletion.8 In 1926, because the earlier methods created extreme administrative problems relating to the proper methods of determining "value," the system of percentage depletion was introduced into the computation of allowances with regard to the gas and oil industries.9 At subsequent intervals other minerals and mining products were added to the approved list of depletable items, sodium chloride being included by section 319 of the Revenue Act of 1951, 65 Stat. 497.

Throughout the long history of depletion, it has been clear that the Congress intended to tax only the income from mining without touching the resources upon which the mine depended. The underlying depletion theory has always been to make an allowance from income for the exhaustion of the wasting assets. United States v. Cannelton Sewer Pipe Co., 364 U.S. 76, 81, 80 S. Ct. 1581, 4 L. Ed. 2d 1581 (1960). For that reason it is important in this case to determine with accuracy the cut-off point between "mining" and "manufacturing" in the salt industry. The statute specifies that "mining" includes not just the process of extraction but also the processes normally applied by the miners to prepare their product or products for market. Section 114(b) (4) (B) defines "ordinary treatment processes" by means of inclusion.10 Although sodium chloride is not included as such, we feel that these statutory delineations are helpful in that they indicate the type of processes intended by the Congress to be a part of mining. In each of the four statutory classifications, the allowable processes are directed at preparing crude ores or minerals for earliest sale prior to formal refining. This is emphasized by the express exclusion of thermal or electric smelting, refining, roasting, and other similar processes. Of course it would be arbitrary to insert salt into any one of these classifications at this point, and we do not attempt to do so.

In the application of the theory to the facts, we believe that the decision of the Supreme Court in the case of United States v. Cannelton Sewer Pipe Co., supra, is controlling. In that case the plaintiff mined raw fire clay and shale and manufactured it into a high-grade sewer pipe. The record showed that the Cannelton Company was unable to market raw clay profitably because the cost of transporting the clay to the nearest market alone exceeded the market price for that commodity. It was clear, however, that there did exist a substantial industry-wide market for raw clay. The Supreme Court, in reversing the Seventh Circuit,11 held that "commercially marketable" did not mean marketable at a profit and that the plaintiff was its own economical market for its raw clay. The result of this was that the Cannelton Company was forced to compute its depletion allowance only on that portion of its gross income attributable to the constructive sale of raw clay to itself.

Defendant interprets this decision as requiring us to locate the cutoff point at the place where the first marketable product of the mine is produced, thus placing a gloss on the statutory language. In Cannelton, raw clay was the first product to be removed from the ground. The Court said:

"Ever since the first percentage depletion statute, the cut-off point where `gross income from mining' stopped has been the same, i. e., where the ordinary miner shipped the product of his mine. [United States v. Cannelton Sewer Pipe Co., supra, 364 U.S. at 87, 80 S. Ct. at 1587, 4 L. Ed. 2d 1581.]

To determine the character of the ordinary product, it was essential to investigate the nature of the sales of the raw product on an industry-wide scale, and not restricted solely to the practices of the Cannelton Company. In this regard the Court said:

"The findings are that three-fifths of the fire clay produced in Indiana in 1951 was sold in its raw state. This indicates a substantial market for the raw material.

* * * * * *

"Proof of these sales is significant not because it reveals an ability to sell profitably — which the respondent could not do — but because the substantial tonnage being sold in a raw state provides conclusive proof that, when extracted from the mine, the fire clay and shale are in such a state that they are ready for industrial use or consumption — in short, they have passed the `mining' state on which the depletion principle operates." [United States v. Cannelton Sewer Pipe Co., supra, 364 U.S. at 86, 80 S. Ct. at 1586-1587, 4 L. Ed. 2d 1581. (Emphasis added.)]

This language, taken in the context of that case, makes it clear that the salient feature was the substantial nature of the clay mined. This consideration has been borne out in a whole series of subsequent cases12 and it controls the instant case.

We shall first consider the hydraulic mining aspect of plaintiff's operations. Because the Commissioner of Internal Revenue assessed the plaintiff on the assumption that step 6, Table 1, was the proper cutoff point in the computation of depletion allowance for the brine well production of salt, we are not in a position procedurally to consider whether the proper cutoff point should be placed prior to step 6. We need only decide whether, in the light of Cannelton, it should be located at some later point so as to include some or all of the additional steps.

To take 1954 as a typical year of the period in question, some 12 million short tons of brine were sold or used in comparison with approximately 8½ million tons of salt in the dry form.13 It is true that this large quantity of brine was used chiefly by chemical companies which produced brine for their own use, and not for sale to others. It is also true that in the years in question, plaintiff produced little or no brine for sale. But the Cannelton case teaches us that these considerations are immaterial. To borrow from the language of that case, modified to our own use, these sales are significant "because the substantial tonnage being sold in a raw state provides conclusive proof that, when extracted from the [ground], the [salt] is in such a state that [it] is ready for industrial use or consumption." Thus at stage 6, if not sooner, salt was produced in substantially marketable quantities within the meaning of the statute.

We now consider the dry mining portion of the case. An examination of the record shows that out of approximately 20 million tons of salt produced annually between 1951 and 1954, roughly 5 million tons were rock salt. While plaintiff produced a very low percentage (1.30 per cent average) of rock salt for sale prior to step 10, four other major producers14 in those same years sold about half of their total production in bulk form at step 7 of the dry salt process. Since there is no showing of any appreciable sales in the industry prior to this step, we conclude that this is the proper cutoff point, as determined by the Commissioner of Internal Revenue, for sale produced by dry mining.

Plaintiff would have us distinguish the Cannelton decision on the ground that the producer in that case was integrated, while plaintiff herein is a nonintegrated producer. While it is true that plaintiff does not utilize its salt in the production of any other product that is chemically or physically different, there is some doubt as to the validity of that conclusion. Be that as it may, we believe the distinction to be without legal significance. It is apparent that the Supreme Court referred to the integrated nature of the producer in Cannelton only for the limited purpose of showing that the integrated producer was entitled to no benefits superior to its nonintegrated counterparts. United States v. Cannelton Sewer Pipe Co., supra, 364 U.S. at 86-87, 80 S. Ct. at 1586-1587, 4 L. Ed. 2d 1581. There is no such distinction suggested by section 114 of the Code. In addition, we find the pre-Cannelton cases stressed by plaintiff to be unpersuasive in this case. As indicated by the Supreme Court, these cases for the most part go off on concessions not present in our case, or they are predicated upon the misconception corrected in Cannelton that for a product to be commercially marketable, its sale must produce a profit to the plaintiff.15 By comparison, the post-Cannelton decisions16 are consistent in their nonsupport of plaintiff's contentions.

As we have previously stated, the procedural aspect of this case constrains us to agree with the Commissioner of Internal Revenue that all processes subsequent to screening and drying be disallowed; thus, plaintiff's petition as to Counts I and III must be dismissed. By a stipulation filed June 13, 1960, the parties agreed that (1) with respect to the allegations contained in Count II, plaintiff is entitled to recover the amount of the deficiencies paid, together with interest thereon as provided by law, and (2) with respect to the allegations contained in Count IV, plaintiff is entitled to recover an amount equal to 67½ percent of the amount of the deficiency set forth in that count, together with interest thereon as provided by law. For that reason plaintiff is entitled to recover on Counts II and IV of its petition and judgment will be entered to that effect.

The exact amount of recovery will be determined pursuant to Rule 38(c) of the Rules of this court.