U. S. Pumice Company v. Commissioner of Internal Revenue

Appellant, U.S. Pumice Co., is an integrated miner-manufacturer of pumice, a porous light weight volcanic rock used as an abrasive or polish. The pumice is mined in Northern California and transported to appellant’s mill where it is cut and shaped into various sizes suitable for commercial use. The finished product is then shipped by common carrier to its warehouses in Los Angeles, Chicago and New York where it is stored until ordered by a customer.

Appellant challenges the Tax Commissioner’s finding of deficiency for the years 1965, 1966, 1967 and 1968. Both parties agree that the proportionate profits method was the appropriate formula for computing appellant’s taxes for the years in question. The formula is as follows:

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Appellant included in its mining cost a portion of the shipping (from the mill to the warehouse) and storage costs believing this was permissible under the regulations. Inclusion of the costs increased appellant’s gross income from mining and provided a greater depletion allowance deduction. The Commissioner disallowed the storage and transportation cost apportioned to the mining operation finding that these costs were directly attributable to…