larger than the tax the estate would have paid, had the securities not been sold. We first considered the possibility of allowing this credit only for elderly investors, say those over 65. That proposal was submitted to Senator Byrd, and he had it reviewed by the staff. We modified that proposal and have given it a broader approach, so that it provides now that the credit be allowed only on securities which are sold 10 years prior to death. We follow section 2013 of the code, which deals with a credit for taxes paid on prior transfers: Our proposal is not a modification of the capital gains tax. It is a modification of the estate tax. You will remember that the credit for taxes paid on prior transfers goes back as far as 1921, and in the 1954 code the credit was changed to allow full credit for taxes paid on prior transfers for the first 2 years prior to death, and then 80 percent for the next 2, and a declining ratio to the 9th and 10th. The formula which we have used, and which was worked out in the brief which has been filed, is the same as that used in section 2013, with this modification in time: that we allow a full credit on capital gains taxes which have actually been paid for the 5 years preceding death, and only 50 percent for the period 5 to 10 years prior to death. The formula follows the section 2013, as I say. It sets up 3 criteria and provides that the credit shall be the least of the 3 criteria which are set forth. The first one is the amount of the capital gains tax actually paid, and that is limited by the number of years prior to death; the second is the amount of the estate tax on the net estate, computed without effect to the credit; and the third one is the complicated computation which I will not go into here. I am sure your staff can brief you on that. The third criterion is the heart of the proposal and is designed to provide only for the elimination of the double tax which is involved if the investor sells, pays the capital-gains tax, and later the remaining assets are taxed in his estate. The purpose of this third criterion, this third calculation, is to insure that the estate tax paid is no greater than if the investor did not sell his securities prior to death. The formula could be simplified by leaving out this third criterion, and it would result in greater tax savings to the estate, but conceivably would mean less in revenues to the Government. The third criterion gives recognition to the fact that investors are not now selling their securities because of the impact of this double taxation, and assures that the tax paid by the estate is at least as great as if the investor did not sell his securities prior to death. As to the effect on Treasury revenues, the Treasury Department made an estimate, the most recent one of which that I could find was made in 1951, as to the actual receipts of capital-gains taxes. They were estimated in that year at approximately $890 million, which is 3.7 percent of the taxes paid by individuals, of the individual income taxes. Apparently, the tax on capital gains has ranged, according to this Treasury estimate, anywhere from 3 percent to 52 percent of the total taxes paid by individuals; so it is not a large amount. The revenues from estate and gift taxes were $1,377 million in the fiscal year ending June 30, 1957, and are estimated at $1,500 million for 1958. I believe that the revenues of the Government might conceivably be increased, since it would free-up securities which investors are not now willing to sell, and would provide a greater mobility of capital. I think the net effect, over all, would be very slight. You would gain possibly in capital gains taxes paid, and there would be an offsetting reduction of no greater amount in estate taxes which were subsequently paid by the estate of that same investor. The CHAIRMAN. Does that complete your statement, Mr. Nyce? The CHAIRMAN. Are there any questions of Mr. Nyce? If not, we thank you, sir, for your appearance and the information given to the committee. Our next witness is Mr. John J. Trenam. Mr. Trenam, will you please come forward and identify yourself for the record by giving your name, address, and the capacity in which you appear. Mr. HERLONG. Mr. Chairman? The CHAIRMAN. Mr. Herlong, do you desire to introduce the witness? Mr. HERLONG. I would like to say that Mr. Trenam is one of the most eminent tax lawyers in the State of Florida. He is a senior member of a firm which consists of some of the most distinguished lawyers in the State of Florida, and a man who a few years ago was president of the American Bar Association. Mr. TRENAM. Thank you very much, Mr. Herlong. STATEMENT OF JOHN J. TRENAM, BAY DREDGING & CONSTRUCTION CO., TAMPA, FLA. Mr. TRENAM. My name is John J. Trenam, and my firm is as Mr. Herlong has said. My statement was received, was it, Mr. Mills? The CHAIRMAN, Yes. Mr. TRENAM. May it be incorporated in the record? I am here today to talk about the silent oyster, and I will try to stay in character. The CHAIRMAN. Without objection, the entire statement will appear in the record. (The statement is as follows:) STATEMENT OF JOHN J. TRENAM IN BEHALF OF BAY DREDGING & CONSTRUCTION CO., TAMPA, FLA., IN RE TAXATION of NaturaL RESOURCES INCOME INTRODUCTION My name is John J. Trenam. I am the tax partner in the Tampa-Miami law firm of Fowler, White, Gillen, Yancey & Humkey. I appear here today in behalf of the Bay Dredging & Construction Co., of Tampa, Fla., a company engaged in the extraction of oyster shell in the Tampa Bay area. PURPOSE OF APPEARANCE The purpose of my appearance here is to urge amendment of section 613 of the Internal Revenue Code of 1954 so as to clarify the law applicable to computation of percentage depletion with respect to "*** mollusk shells (including clam shells and oyster shells) Section 613 presently allows percentage depletion of 5 percent with respect to mollusk shells, such percentage depletion to be computed upon "* * * the gross income from property * ." As will be more fully explained hereinafter, the meaning of "*** gross income from the property is apparently unclear. In any event, it is being interpreted by the Internal Revenue Service in a manner which my client and I and, indeed, the mollusk shell industry generally, consider inequitable, contrary to the intent of Congress, and inconsistent with the interpretation accorded percentage depletion provisions pertaining to other types of minerals. MINING OF MOLLUSK SHELLS Such Mollusk shells are found in deposits in inland and coastal waters. deposits are frequently located several miles from shore. The shells are dredged from the deposits, along with a great deal of mud and silt, onto barges where the shells are screened and washed. The barges are then brought to a dockside mill, plant, or storage yard for storage and transshipment to customers. In some few instances, the shells are further processed on land prior to transshipment. Most of the shells extracted by Bay Dredging are sold in their crude form, without further processing except drainage and evaporation, for use as a road base. A small portion of the extracted shell undergoes additional processing and is used in chickenfeed. PRESENT STATUTORY PROVISIONS Section 613 of the Internal Revenue Code of 1954 provides in pertinent part: “(a) General rule.—In the case of the mines, wells, and other natural deposits listed in subsection (b), the allowance for depletion under section 611 shall be the percentage, specified in subsection (b), of the gross income from the property excluding from such gross income an amount equal to any rents or royalties paid or incurred by the taxpayer in respect of the property. Such allowance shall not exceed 50 percent of the taxpayer's taxable income from the property (computed without allowance for depletion). In no case shall the allowance for depletion under section 611 be less than it would be if computed without reference to this section. "(b) Percentage depletion rates.-The mines, wells, and other natural deposits, and the percentages, referred to in subsection (a) are as follows: "(5) Five percent "(A) brick and tile clay, gravel, mollusk shells (including clam shells and oyster shells), peat, pumice, sand, scoria, shale, and stone, except stone described in paragraph (6); "(c) Definition of gross income from property.— "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 or minerals (whether 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." COMMISSIONER'S INTERPRETATION Section 613 grants to mollusk shell producers percentage depletion at the rate of 5 percent of "gross income from mining." By judicial and administrative interpretation, to which we take no exception, "gross income from mining" means the consideration received upon sale of the mineral mined minus nonmining expenses. Thus, in the case of mollusk shell, percentage depletion is determined by taking 5 percent of the difference between the amount for which the shell is sold and the nonmining costs incurred in effecting such sale. Our quarrel with the Commissioner's interpretation of section 613 arises out of his determination as to what constitutes "nonmining costs" in connection with mollusk shell. It appears to be his position that unless shell is further processed, upon reaching land, into some product such as chicken feed additive, the expense of transporting shell from dredgeside to dockside is a "nonmining cost" to be deducted from gross income in computing percentage depletion. Rev. Rul. 56-346, C. B. 1956-2, 330. To put it otherwise, the Commissioner takes the position that where shell is to be used in its crude state as a road base without any processing other than drainage, "gross income from mining," upon which percentage depletion is to be computed, is the amount of the total consideration received for the shell minus all costs incurred with respect to the shell from the time it is placed on barges to the time it is sold. Ssee Bay Dredging and Construction Co., Tax Court Dockets No. 63989, 65494; Matagorda Shell Co., Tax Court Docket No. 54959. The net result is that the mollusk shell producer is denied percentage depletion with respect to that portion of gross income which is represented by costs incurred in bringing shell to land as well as costs incurred after shell has been brought to land. POSITION OF TAXPAYER We have no quarrel with the Commissioner's application of the depletion statute with respect to shell which is processed. Further, even where the shell is to be used as a road base without further processing, we agree that costs incurred subsequent to the deposit of shall on land should be excluded from "gross income from mining" in determining percentage depletion. Our quarrel is with the Commissioner's disallowance of costs incurred in transporting shell from dredgeside to dockside where such shell is to be used without further processing. It is our position that the Commissioner's policy in this respect is out of harmony with the congressional intent, common sense, and the treatment accorded in fields involving other types of minerals. DISCUSSION As previously stated, the deduction allowable for percentage depletion of mollusk shell is 5 percent of the "gross income from mining." "Mining" is defined as including "*** not merely the extraction of the ore 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 ***" It follows that if transportation of mollusk shell from dredgeside to dockside constitutes "mining," in the conventional sense, or ***** ordinary treatment processes normally applied *** in order to obtain the commercially marketable product or products ***", then the Commissioner's exclusion of the costs of such transportation from "gross income from mining" in determining percentage depletion is unjustified and improper. We submit that such transportation costs fall into either or both categories. Looking at the word "mining" in its conventional sense, it seems fair to say that the transportation of mollusk shell from dredgeside to dockside is as surely a mining operation as is the transfer of ore from the face of an ore deposit to the mouth of a mine. If the Commissioner has ever taken the position that the latter is a nonmining operation, we are not aware of it. It seems obvious that the present statute would prevent his taking that position. Otherwise, deple tion allowable with respect to the deep mine would be less than that allowable with respect to the shallow mine. Just as certainly, the transportation of mollusk shell to land is a part of the mining thereof. The existing statute should be amended to make this clear. We arrive at the same result when we consider that transportation of mollusk shell is one of "*** the ordinary treatment processes normally applied * in order to obtain the commercially marketable mineral product or products Little argument is needed to demonstrate that shell on a barge in the middle of a bay, lake, river, or miles out in the ocean, is not commercially mar ketable at that point. The shell must be brought to land before it reaches its first marketable state. CONCLUSION The cost of transporting mollusk shell from dredgeside to dockside can be and frequently is substantial. Exclusion of such cost from "gross income from mining" in determining percentage depletion is inequitable and creates a hardship upon mollusk shell producers. Bay Dredging asks, on behalf of itself and all other shell producers, that Congress clarify the statutory provisions concerning percentage depletion of mollusk shell to eliminate this inequity and this hard ship. Only after such revision will the formula for computation of percentage depletion on mollusk shell be brought into harmony with the computation of percentage depletion with respect to other natural resources. We suggest that the desired result could be accomplished by amending section 613 (c) (2) by adding at the end thereof the following: "In the case of mollusk shells (including clam shells and oyster shells), the term 'mining' includes so much of the transportation of the shells from the point of extraction from the deposit in a bay, lake, or other body of water to the dockside plant or mill of the mine owner or operator, or to a dockside sales point, as is not in excess of 50 miles." I am informed that a bill containing the foregoing language, H. R. 2034, was introduced at the 1st session of the 85th Congress by Mr. Thompson of Texas. There may be another such bill, H. R. 1067, the precise provisions of which are not known to me. I strongly recommend the favorable consideration of any bill containing language substantially equivalent to that suggested above. The CHAIRMAN. Sir, you are recognized for 10 minutes. Mr. TRENAM. I am here to talk specifically about percentage depletion on oyster shell. Oyster shell is found in deposits in lakes and coastal waterways. It is dredged up from the place where it is found, and brought to shore. After little more processing than drying, it is used primarily as a road base. In my own particular area there is one additional use made of it, but it is not a very prominent use. It is ground up and used as an additive in chicken feed. The code presently allows 5 percent percentage depletion with respect to oyster shell. Such depletion is computed on gross income from mining, as in the case of other depletable minerals. The problem is in the computation of gross income from mining. That figure has to be backed into. You do not have gross income on anything until the product is actually sold. The oyster shell is actually sold. Then, by eliminating from that total consideration received for the oyster shell the nonmining costs, you arrive at the gross income from mining. That is the figure, of course, against which the 5 percent depetion rate is applied. The taxpayer naturally desires a high figure for gross income from mining. The Internal Revenue Service is interpreting the code in a way which produces, we feel, an unfairly low figure for gross income from mining. That results from this circumstance: Among the nonmining costs which are deducted in arriving at gross income from mining are the costs applying to transportation of shell from dredgeside to dockside. All costs, in effect, are taken out from the moment the shell is raised to the dredge and placed on barges until it is sold. Although the amount of shipping done from dredgeside, that is, the space to be covered, is not usually great-in the case of my own client, Bay Dredging and Construction Co., it is 3 to 10 miles still the cost of that transportation is rather great. We feel that that cost should not be extracted from the from mining before applying the depletion rate. gross The law presently provides that the term "mining" includes: income * not merely the extraction of the ore or minerals from the ground, but also the ordinary treatment processes normally applied by mine owners or operators in order to obtain the commerially marketable mineral product or products * In addition, the code specifically provides that where minerals must be further processed after extraction from the ground, the cost of transporting them to the mill for processing up to 50 miles will be included in the term "mining." |