Opinion
Docket No. 22597-81.
1986-06-18
MONSANTO COMPANY AND SUBSIDIARIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
James F. Gordy, for the petitioner. James F. Kidd, for the respondent.
Petitioner operates integrated mining-manufacturing plants for the production of elemental phosphorous. To reduce costs, petitioner uses carbon in both mining and nonmining activities.
HELD: The costs of carbon are to be allocated between petitioner's mining and nonmining activities. The allocation is to be based on the substituted fuel method, and the substitute fuel to be used in the allocation is coal. James F. Gordy, for the petitioner. James F. Kidd, for the respondent.
SWIFT, JUDGE:
By notice of deficiency dated June 11, 1981, respondent determined deficiencies in petitioner's Federal income tax liabilities for the years 1975 and 1976 in the total amount of $2,052,613 ($1,479,982 for 1975 and $572,631 for 1976). In its timely filed petition, petitioner disputed $1,967,757 of the total deficiencies for both years, and petitioner also claimed refunds in the total amount of $3,226,786. By amendment to petition, petitioner made a protective claim for additional refunds in the total amount of $5,307,777. The protective refund claims made in the amended petition relate to excess foreign tax credit carrybacks from 1978. After settlement of some issues, the issue for decision concerns the proper method of computing the percentage depletion allowances to which petitioner is entitled with respect to its production of elemental phosphorous.
FINDINGS OF FACT
Many of the facts have been stipulated and are so found.
Monsanto Company (‘Monsanto‘) is a corporation organized under the laws of Delaware. It maintains its office and principal place of business in St. Louis, Missouri. Monsanto is a multi-national company engaged directly and through its subsidiaries in the manufacture and sale of a diversified line of chemicals, plastics, fibers, and other products derived from petroleum, natural gas, and phosphate rock.
Monsanto mines phosphate rock and processes it into elemental phosphorous at two plants that are located in Columbia, Tennessee (hereinafter referred to as the ‘Columbia Plant‘) and Soda Springs, Idaho (hereinafter referred to as the ‘Soda Springs Plant‘). The plants were designed and are operated to integrate the mining and manufacturing processes of the production of elemental phosphorous. There is no commercial market for unprocessed phosphate rock in the United States. Monsanto, annually produces approximately 180,000 tons of elemental phosphorous, is one of the largest producers of elemental phosphorous in the western world. All four domestic miners of phosphate rock (Monsanto, Occidental Chemical Company, Sauffer Chemical Company, and FMC) have integrated their mining of phosphate rock with their manufacturing of elemental phosphorous.
Monsanto's Columbia Plant began operating in 1937. Initially, the manufacturing process of its operation was conducted with three electric furnaces. The plant's capacity was increased in 1941, 1950, and 1951 with the installation of three additional electric furnaces, making a total of six furnaces. Since 1951, the capacity of individual furnaces has been increased with the last major increase being made in 1965. The Columbia Plant annually processes approximately 1,100,000 tons of phosphate rock, producing approximately 95,000 tons of elemental phosphorous.
The Soda Springs Plant began operating in 1952. Initially, the manufacturing process of its operation was conducted with one electric furnace. The plant's capacity was increased in 1954 and 1966 with the construction of two additional furnaces. The Soda Springs Plant annually processes approximately 975,000 tons of phosphate rock, producing approximately 85,000 tons of elemental phosphorous.
Set forth below is a flow chart which diagrams generally the steps for processing phosphate rock at Monsanto's Columbia and Soda Springs Plants:
ELEMENTAL PHOSPHOROUS PRODUCTION AT THE COLUMBIA, TENNESSEE, AND SODA SPRINGS, IDAHO, PLANTS
Image 1 (3.02" X 7.46") Available for Offline Print
The process by which elemental phosphorous is derived from phosphate rock begins by extracting the rock from open pit mines. Phosphate rock in the ground has approximately 9 to 13 percent phosphorous content. After extraction from the ground, the two primary processes through which phosphate rock must pass to produce elemental phosphorous are the nodulizing process and the furnacing process. The nodulizing process is a method by which phosphate rock is fused together or ‘agglomerated‘ to form larger rock clusters.
Electric smelting furnaces for the production of elemental phosphorous operate most efficiently when the phosphate rock that is fed into the furnaces is reasonably uniform in size and has the necessary strength to withstand mechanical and thermal shock. Phosphate rock introduced into the furnaces also must be in a form that provides adequate porosity to permit the rapid release of gaseous substances from the reaction zone in the furnaces.
Because phosphate rock is a fine material, it must be agglomerated to achieve the desired uniformity in size and the desired porosity. Such treatment is essential to the economic and operational feasibility of the electric furnacing process, which actually produces the elemental phosphorous. In the United States, the most common methods of accomplishing the necessary agglomeration of phosphate rock prior to furnacing are referred to as the nodulizing and sintering of phosphate rock. Briquetting or pelletizing are less common methods of agglomerating phosphate rock.
At Monsanto's Columbia and Soda Springs Plants, the agglomeration of phosphate rock is accomplished through nodulizing the rock in kilns prior to feeding it into the furnaces. At the Columbia Plant, the rock is processed through washing facilities which remove undesirable clay and iron oxides. The washed phosphate rock is then blended with kiln dust, pond solids, and nodule fines (which have been recycled from the kilning process), to obtain the desired phosphate rock content and is fed into the kilns.
At the Soda Springs Plant, the phosphate rock does not need to be washed. It is delivered directly from the mine to the processing plant where it is blended with other stockpiled phosphate rock and fed into the kilns. The blended phosphate rock fed into the kilns is composed of rock fragments three inches in length and smaller.
The nodulizing kilns are inclined rotating steel cylinders, lined with refractory brick, which range from 11 to 15 feet in diameter and are 300 to 325 feet in length. The Columbia Plant has three nodulizing kilns, and the Soda Springs Plant has one nodulizing kiln. The kilns rotate at a rate of three to four revolutions per minute. A kiln normally operates continuously, unless it is shutdown for repairs or maintenance. The Columbia Plant can process a total of 100 to 250 tons of phosphate rock per hour in its kilns. The Soda Springs Plant can process 150 to 200 tons of phosphate rock per hour in its kiln.
+---------------------------------------------+ ¦ ¦Columbia Plant ¦Soda Springs ¦ ¦ ¦ ¦Plant ¦ +-----------+---------------+-----------------¦ ¦ ¦1975 ¦1976 ¦1975 ¦1976 ¦ +-----------+-------+-------+--------+--------¦ ¦CO gas ¦51.52% ¦52.91% ¦72.21% ¦56.22% ¦ +-----------+-------+-------+--------+--------¦ ¦Natural gas¦.02% ¦--- ¦4.51% ¦9.76% ¦ +-----------+-------+-------+--------+--------¦ ¦Coal ¦48.46% ¦47.09% ¦23.28% ¦34.02% ¦ +-----------+-------+-------+--------+--------¦ ¦Coke fines ¦