No. 88-266
IN THE SUPREME COURT OF THE STATE OF MONTANA
W. R. GRACE & COMPANY,
a corporation,
Petitioner and Appellant,
-vs-
DEPARTMENT OF REVENUE OF THE STATE OF
MONTANA; and THE STATE TAX APPEAL BOARD
OF THE STATE OF MONTANA,
Defendants and Respondents.
APPEAL FROM: District Court of the First Judicial District,
In and for the County of Lewis & Clark,
The Honorable Henry Loble, Judge presiding.
COUNSEL OF RECORD:
For Appellant:
George T. Bennett argued; Helena, Montana
Paul H. Frankel argued; f orris on & Foerster, New York,
New York
Terry B. Cosgrove argued; Luxan & ~urfitt,Helena,
Montana
For Respondent:
Paul Van ~ r i c h targued; Tax Counsel, Dept. of Revenue,
Helena, Montana
For Amicus Curiae:
Bruce W. Moerer; Montana School Boards Assoc., Helena,
. Montana
Mr. ~usticeWilliam E. Hunt, Sr., delivered the opinion of
the Court.
W. R. Grace & Company appeals from an order of the
District Court of the First Judicial District, Lewis and
Clark County, upholding a ruling by the State Tax Appeal
Board (STAB), which denied certain deductions claimed by
Grace on its net proceeds of mines tax returns for the years
1977, 1978 and 1979. We affirm.
The following issues are raised on appeal:
1. Did the District Court err in holding that STAB
properly disallowed certain deductions in the calculation of
Grace's net proceeds taxes?
2. Did the Department of Revenue (Department) complete
its deficiency assessment of Grace's 1977 and 1978 net
proceeds taxes within the time allowed by law?
W. R. Grace & Company, a Connecticut corporation, owns
and operates a vermiculite mine and related plant and
facilities on Vermiculite ~ountain,located in Lincoln County
near the Kootenai River, approximately nine miles northeast
of Libby. Vermiculite is a micaceous mineral, which must be
expanded before being used in various construction materials.
After the vermiculite ore is extracted from an open pit
mine on Vermiculite Mountain, it is transported to a
"transfer point'' and, from there, into mine processing
facilities. Processing carries the mineral through a storage
and blending facility into a wet mill, then through a dry
screen plant to a sized product storage facility, bordering
the Kootenai River. From that point, a conveyor transports
most of the unexpanded mineral across the Kootenai to
rail-loading facilities adjacent to the Burlington Northern
railroad tracks, where it is loaded in bulk onto rail cars.
A small portion of the ore is hauled to separate facilities
in Libby, owned and operated by Grace, where it is bagged and
loaded onto rail cars. The unexpanded vermiculite is shipped
FOB from these two points to expanding plants owned by
Grace--none of which are located in Montana--or to expanding
plants owned by third parties.
Grace maintains offices at both the mine site and the
town of Libby. Personnel in the Libby office perform various
administrative functions, e.g., accounting, procurement and
payroll. A manager and assistant manager, who supervise the
Libby employees as well as the employees working at the mine
and milling facilities, also maintain an office in Libby.
The Montana facilities are part of Grace's Construction
Products ~ivision(CPD), located in cambridge, Massachusetts,
separate from Grace's corporate headquarters. The CPD
manufactures and markets numerous commercial products for the
construction and agricultural industries. It operates over
one-half dozen plants in Canada and over 40 in the united
States, although its only Montana plant is the mine and mill
site on vermiculite Mountain.
Grace timely filed its net proceeds of mines tax returns
for the years 1977, 1978 and 1979. On the returns, Grace
deducted the entire cost of the vermiculite ~ountain
facilities and the ~ i b b yoffice. It also deducted a portion
of the expenses incurred by the CPD in Cambridge.
The Department conducted an audit of the returns and
concluded, among other things, that deductions for expenses
incurred by the Libby and Cambridge offices were improper.
Therefore, by letter dated August 7, 1981, the Department
issued a proposed deficiency assessment. When an acceptable
resolution of the issues could not be reached through
assessment revision conferences between the parties, the
Department issued final notice of deficiency. Grace timely
appealed the final decision to STAB.
After a hearing, STAB ruled that the majority of the
expenses were not properly deducted as they were either:
1) not an actual cost of extracting the vermiculite;
2) incurred by employees not actually engaged in
working or superintending the mine;
3) incurred past the point of beneficiation; or
4) not properly prorated between the Libby office and
the plant facilities.
STAB did conclude, however, that a portion of the
expenses were properly deducted. These included:
1) expenses incurred in activities related to the
safety of the mine, whether incurred in Cambridge or on
Vermiculite Mountain;
2) salary and benefits for the two managers who
maintained offices in Libby because they were actually
engaged in superintending the mine;
3) salary of the chief geologist because he was
actually engaged in working the mine; and
4) legal and consulting fees for filing water rights
claims and obtaining patents.
On June 11, 1987, Grace filed a petition for judicial
review with the First Judicial District Court, Lewis and
Clark County. The Department filed a cross-petition. The
District Court upheld the STAB ruling in its entirety. Grace
appeals from the ~istrict Court determination. The
Department does not cross-appeal.
The standard of review governing appeals of
administrative rulings, including those made by STAB, is
codified at 5 2-4-704, MCA. Department of Revenue v.
avids son Cattle Co. (1980), 190 Mont. 326, 330, 620 P.2d
1232, 1234-35. The standard is delineated as follows:
(1) The review shall be conducted by the court
without a jury and shall be confined to the record.
(2) The court may not substitute its judgment for
that of the agency as to the weight of the evidence
on questions of fact. The court may affirm the
decision of the agency or remand the case for
further proceedings. The court may reverse or
modify the decision if substantial rights of the
appellant have been prejudiced because the
administrative findings, inferences, conclusions,
or decisions are:
(a) in violation of constitutional or statutory
provisions;
(b) in excess of the statutory authority of the
agency;
(c) made upon unlawful procedure;
(dl affected by other error of law;
(el clearly erroneous in view of the reliable,
probative, and substantial evidence on the whole
record;
(f) arbitrary or capricious or characterized by
abuse of discretion or clearly unwarranted exercise
of discretion; or
(g) because findings of fact, upon issues
essential to the decision, were not made although
requested.
section 2-4-704, MCA.
The statute sets out two basic standards. One, findings
of fact will be upheld unless they are clearly erroneous, and
two, conclusions of law will be upheld unless they constitute
an abuse of discretion. Swan Corp. v. Montana Dept. of
Revenue (Mont. 1988), 755 P.2d 1388, 1389-90, 45 St.Rep. 998,
1000; City of Billings v. Billings ire fighters Local No. 521
(1982), 200 Mont. 421, 430-31, 651 P.2d 627, 632.
Neither party contests the valuation of the deductions
declared by Grace nor whether Grace actually incurred the
expenses claimed. Therefore, the question raised by Grace's
first issue--whether the deductions are statutorily
permissible--involves only a question of law. Likewise, the
second issue presented for review--whether the deficiency
assessment is barred by the statute of limitations--involves
solely a question of law. Thus, we will use the broader
"abuse of discretion" standard in our analysis of both
issues.
I
Did the District Court err in holding that STAB properly
disallowed certain deductions in the calculation of Grace's
net proceeds of mines taxes?
The net proceeds of mines tax has been a part of the
property tax scheme of Montana since 1864, preceding
statehood itself. Faced with the difficulty of accurately
measuring the value of undeveloped minerals in place, the
territorial legislature adopted the net proceeds tax as a
substitute for an - valorem tax on the value of mines or
ad
mining interests. See Byrne v. Fulton Oil Co. (1929), 85
Mont. 329, 334, 278 P. 514, 517. The framers of the first
state constitution incorporated the tax into that document at
article XII, section 3. The current tax was separately
codified in 1921 and, with the exception of some minor
variations, the tax remains much as it was at that time. The
1972 Constitutional Convention eliminated the 1889
constitutional provision for the tax from the present
constitution.
The tax is centrally assessed by the Department.
Section 15-23-101, MCA. The producer or operator of the mine
annually reports, on a form provided by the Department, the
gross yield of the mineral, as well as various costs incurred
in the mining process. Section 15-23-502, MCA. From the
returns, the Department calculates the net proceeds of the
mine by subtracting certain expenses from the value of the
gross product. Section 15-23-503, MCA. The Department then
transmits the assessed value of the net proceeds to the
county assessor, who records the value in the assessment book
as class one property. sections 15-23-106 and 15-6-131, MCA.
At issue in this case is the deductibility of certain
expenses claimed by Grace on its net proceeds returns.
Section 15-23-502, MCA (1977), the statute in effect during
the years in controversy, enumerates costs a taxpayer may
declare on its net proceeds tax statement, including the
following :
(6) cost of extracting from the mine;
(7) cost of transporting to place of reduction or
sale;
(8) cost of reduction or sale;
(9) cost of marketing the product and conversion
of same into money;
(10) cost of construction, repairs, and betterments
of mines and cost of repairs and replacements of
reduction works;
(12) cost of fire insurance and workers'
compensation insurance.
Section 15-23-502, MCA (1977), is read in conjunction
with 5 15-23-503, MCA (1977). The latter statute lists the
items the Department subtracts from gross value to arrive at
net proceeds, including:
(b) all moneys expended for necessary labor,
machinery, and supplies needed and used in the
mining operations and developments;
(c) all moneys expended for improvements, repairs,
and betterments necessary in and about the working
of the mine, except as hereinafter provided;
(d) all moneys expended for costs of repairs and
replacements of the milling and reduction works
used in connection with the mine;
(f) all moneys actually expended for transporting
the ores and mineral products or deposits from the
mines to the mill or reduction works or to the
place of sale and for extracting the metals and
minerals therefrom and for marketing the product
and the conversion of the same into money;
(g) all moneys expended for fire insurance and
workers' compensation insurance and for payments by
mine operators to welfare and retirement funds when
provided for in wage contracts between mine
operators and employees.
section 15-23-503(1), MCA (1977). The statute goes on to
restrict the allowable deductions in the following manner:
(4) No moneys invested in the mines and
improvements during any year except the year for
which such statement is made and except as provided
in this section may be included in such
expenditures, and such expenditures may not include
the salaries or any portion thereof of any person
or officer not actually engaged in the working of
the mine or superintending the management thereof.
section 15-23-503 (4), MCA (1977).
Grace maintains that 5 15-23-503, MCA (1977), allows the
deduction of all costs related to the vermiculite mine as
long as they are necessary to the mining operation.
Therefore, Grace argues, all general overhead, office and
administrative expenses attributable to the mining process
for which it has properly accounted are deductible, whether
incurred at the mine site, Libby or Cambridge.
Grace reads the statute too broadly. The law does not
permit the deduction of "every conceivable item of expense."
Anaconda Copper Mining Co. v. Junod (1924), 71 Mont. 132,
140, 227 P. 1001, 1004. The net proceeds tax is not an
income tax. It is a property tax. Its purpose is to arrive
at a fair valuation of mining interests by using net proceeds
as a proxy for the value of the mine itself. Byrne, 85 Mont.
at 334, 278 P. at 517. Therefore, what may be properly
deducted from net proceeds is construed restrictively. Only
the direct costs and expenses of extracting the mineral are
deductible. Anaconda, 71 Mont. at 138, 227 P. at 1004.
Certainly, overhead and administrative expenses incurred
by the Cambridge and ~ i b b yoffices are necessary in the sense
that they contribute to the smooth functioning of the
vermiculite mine. However, they are not necessary in the
sense contemplated by the net proceeds tax. Overhead, office
and administrative expenses, while properly deductible for
arriving at taxable income, are not properly deductible for
determining the value of this taxable property. Not only
must expenses be needed and used in the mining operation
before they may be deducted from net proceeds, they must also
be a direct cost of extracting the mineral.
In addition, subsection (4) of S 15-23-503, MCA (1977),
specifically provides that deductions shall not include "the
salaries or any portion thereof of any person or officer not
actually engaged in the working of the mine or superintending
the management thereof." Many of the expenses Grace seeks to
deduct are salaries of personnel who are not working or
superintending the mine, e.g., accountants, systems analysts,
financial planners and lawyers. While we do not doubt that
these individuals are important to the mining operation, the
statute simply does not allow the deduction of their
salaries.
Grace relies on our decision in Cyprus Mines Corp. v.
Madison County (1977), 172 Mont. 116, 560 P.2d 1342, for the
proposition that necessary overhead, office and
administrative expenses are deductible as long as the
taxpayer uses a proper cost accounting system. Indeed, in
Cyprus Mines, we denied the taxpayer's claims due to an
improper method of allocating costs. However, the opinion
does not stand for the proposition that a proper cost
accounting system turns otherwise nondeductible expenditures
into deductible expenditures. Before the items at issue may
be subtracted from gross value to arrive at net proceeds,
they must be needed and used in the mining operation as a
direct cost of extracting the mineral. General overhead,
office and administrative expenses are indirect costs, and,
as such are not deductible--regardless of the accounting
system employed by the taxpayer.
Our opinion today does not abrogate the general
principle of Cyprus ~ i n e s. Expenses that are improperly
acounted for will not be permitted. Thus, STAB did not abuse
its discretion in concluding that computer use, electricity,
telephone and transportation costs were not deductible
because they were improperly prorated between the mine site
and the Libby office.
Grace also contests STAB'S failure to allow deductions
for transporting and marketing the mine product. STAB
disallowed these expenses because it found that they were
incurred beyond the point of beneficiation.
Section 15-23-503 (1)(f), MCA (1977), provides for the
deduction of costs incurred in transporting the mineral from
the "mines to the mill or reduction works or to the place of
sale and for extracting the metals and minerals therefrom and
for marketing the product and the conversion of the same into
money. " ,
However, in ~ f i z e r ,Inc. v. Madison County (1.9731
161 Mont. 261, 5 0 5 P.2d 399, we limited the deductions
allowed by this subsection. In Pfizer, we rejected the State
Board of Equalization's contention that the net proceeds tax
extends all the way through the mining process to the point
where the product is marketed, sold and converted into money.
Instead, we held that the net proceeds tax applies only to
the mining stage of the operation. Once the mineral passes
the beneficiation stage--the pre-manufacturing phase of the
mining process--the net proceeds tax no longer applies.
Value added to the mineral from operations undertaken beyond
the point of beneficiation is not included in the value of
net proceeds. Therefore, deductions from such operations are
not allowed.
Where the net proceeds tax ends, there also ends
the deductions for such tax. Only deductions for
the mining operation will be allowed up through the
beneficiation stage. All other expenses will be
incurred as to the manufacturing process.
Pfizer, 161 Mont. at 267, 5 0 5 P.2d at 4 0 2 .
Grace points out that our affirmance of the STAB
decision may result in some inconsistent applications of the
law. For example, STAB permitted deductions for costs
associated with the safety of the miners even though these
expenses were incurred by personnel who were not directly
engaged in working or superintending the mine. Any
inconsistencies, however, may be attributed to the fact that
the Department did not appeal the STAB decision to this
Court. Whether STAB properly permitted deductions for costs
associated with the safety of the miners is not in issue here
and we will not attempt to address the question.
With regard to the issues that have been properly raised
on appeal, we find that STAB did not abuse its discretion.
Statutes and case law do not permit the expenses Grace sought
to deduct on its net proceeds of mines tax returns.
I1
Did the Department complete its deficiency assessment of
Grace's 1977 and 1978 net proceeds taxes within the time
allowed by law?
By letter dated August 7, 1981, the Department issued
its deficiency assessment of Grace's 1977, 1978 and 1979
taxes. Grace argues that, because the Department did not
complete the assessment of the 1977 and 1978 taxes until more
than two years after the returns were due, it was barred by
the statute of limitations from pursuing any deficiencies in
net proceeds taxes for these years. Grace does not raise the
statute of limitations issue with regard to the 1979 taxes
because the Department issued the deficiency assessment
within two years after that return was filed.
Grace relies on Caterpillar Tractor Co. v. Department of
Revenue (Mont. 1981), 633 P.2d 618, 38 St.Rep. 1245, to
support its argument that a two-year statute of limitations
applies to deficiency assessments of net proceeds taxes. In
Caterpillar, we held that, in the absence of a specific
statute of limitations governing the particular tax in
question, the general two-year limitations period prescribed
in § 27-2-211(1)(c), MCA, for a liability created by statute
other than a penalty or forfeiture applied.
The tax examined in Caterpillar, however, differs from
the tax in question here. In Caterpillar, we considered the
corporation license tax, which is a self-assessing tax on
corporate income. The tax in issue in this case, on the
other hand, is the net proceeds of mines tax, which is a
centrally assessed tax on property. Prior to 1983, the
limitations period for assessment revisions of property
taxes, including the net proceeds of mines tax, was found at
S 15-8-601, MCA. Because a specific statute of limitations
governed the mines net proceeds tax during the years in
question, the two-year limitations period found in 5
27-2-211(1)(c), MCA, does not control this case.
Section 15-8-601, MCA, provides as follows:
(1) Whenever the department of revenue discovers
that any taxable property of any person has in any
year escaped assessment, been erroneously assessed,
or been omitted from taxation, the department may
assess the same provided the property is under the
ownership or control of the same person who owned
or controlled if at the time it escaped assessment,
was erroneously assessed, or was omitted from
taxation. All such revised assessments must be
made within 10 years after the end of the calendar
year in which the original assessment was or should
have been made.
The statute sets out two prerequisites. The factual
situation must involve taxable property that has "escaped
assessment, been erroneously assessed, or been omitted from
taxation;" and, the property sought to be assessed must
remain "under the ownership or control of the same person who
owned or controlled it at the time it escaped assessment, was
erroneously assessed, or was omitted from taxation." The
circumstances of this case fulfill both conditions.
~ i r s t ,taxable property owned by Grace was omitted from
taxation when Grace claimed statutorily impermissible
deductions on its net proceeds of mines tax returns. In
Butte & superior ~ i n i n g Co. v. McIntyre (1924), 71 Mont. 254,
229 P. 730, we noted that unlawful deductions taken by the
taxpayer on its net proceeds of mines returns resulted in
property omitted from taxation within the meaning of a
predecessor to the present 5 15-8-601, MCA. Here too, we
hold that unlawful deductions claimed by a taxpayer on its
net proceeds of mines tax returns allows taxable property to
be omitted from taxation within the meaning of S 15-8-601,
MCA .
Second, even though it had sold the vermiculite ore
mined in 1977 and 1978 by the time the Department completed
its deficiency assessment, Grace retained ownership and
control of the property subject to taxation. This is because
the "taxable property" contemplated by the statute is the
mine itself. As we stated earlier, the net proceeds tax is
an attempt to place an accurate fair market value upon the
mine. The tax "is simply a tax in lieu of, or as a
substitute for, [an] - valorem tax on the value of mines or
ad
mining interests." Byrne, 85 Mont. at 334, 278 P. at 517.
The tax measures the value of the mine itself, not merely the
value of the extracted minerals. Therefore, as long as Grace
owns the vermiculite mine, it retains control of taxable
property subject to the ten-year limitations period for
reassessment under 5 15-8-601, MCA.
Grace also argues that the legislature's enactment of §
15-23-116, MCA, a comprehensive five-year statute of
limitations for centrally assessed property, impliedly
repealed the ten-year limitations period provided in §
15-8-601, MCA.
This Court looks disfavorably upon repeals by
implication. State ex rel. Sol v. Bakker (1982), 199 Mont.
385, 392, 649 P.2d 456, 460. without an express declaration
by the legislature that an enactment repeals an existing law,
a later statute will not repeal an earlier law unless the two
are "plainly and irreconcilably repugnant to or in conflict
with each other. .. " Johnson v. arias ~ i v e r ~lectric
Coop. (1984), 211 Mont. 518, 523, 687 P.2d 668, 671.
The legislature did not adopt the five-year statute, 5
15-23-116, MCA, until 1983. The statute was made retroactive
to taxes due after December 31, 1980. Act of March 23, 1983,
ch. 194, S 3, 1983 Mont. Laws 389. The tax years at issue in
this case, however, are 1977 and 1978. Therefore, even if
the statutes are repugnant to each other, a question we will
not consider at this time, they cannot possibly conflict
prior to 1981, as the five-year statute of limitations had no
force or effect prior to that year. with regard to the 1977
and 1978 tax years, Grace's argument that § 15-23-116, MCA,
impliedly repealed § 15-8-601, MCA, is without merit.
A ten-year statute of limitations governed the
reassessment of Grace's net proceeds taxes for the years 1977
and 1978. Therefore, when the Department issued its
deficiency assessment in 1981, it did so within the time
allotqed by law.
~f firmed.
We Concur: