445 F.

2d 520
71-2 USTC P 9505

UNITED STATES STEEL CORPORATION, Plaintiffappellant,

v.
UNITED STATES of America, Defendant-Appellee.
No. 790, Dockets 35655, 35788.

United States Court of Appeals, Second Circuit.

Argued May 13, 1971.
Decided June 22, 1971.

A. Chauncey Newlin and Haliburton Fales, II, New York City (White &
Case, Raymond D. Ryan, Thomas B. Leary, Rayner M. Hamilton and
Edmund W. Pavenstedt, New York City, of counsel), for plaintiffappellant.
Alan B. Morrison, Asst. U.S. Atty. (Whitney North Seymour, Jr., U.S.
Atty., S.D.N.Y., Milton Sherman, Asst. U.S. Atty., Harry Marselli, David
A. Wilson, Jr. and Grant W. Wiprud, Attys., Dept. of Justice, of counsel),
for defendant-appellee.
Before FRIENDLY, Chief Judge, WATERMAN, Circuit Judge, and
ZAVATT, District Judge.*
FRIENDLY, Chief Judge:

In this action in the District Court for the Southern District of New York,
United States Steel Corporation sought large refunds of federal income and
excess profits taxes for 1950. The issue with respect to income tax involved
solely a question of law concerning the respective rights of the lessor and the
lessee of Minnesota iron mines to percentage depletion; it was decided
adversely to U.S. Steel on the Government's motion for partial summary
judgment, 270 F.Supp. 253 (1967). The other claims concerned the Korean
excess profits tax for 1950; it will be as well to reserve statement of them until
we have discussed the issue of percentage depletion.

I. Percentage depletion
2

The facts giving rise to this portion of the case are sufficiently stated in three
paragraphs of the complaining:

In 1950, Plaintiff was lessor and lessee of iron ore mining properties in the State
of Minnesota. Pursuant to the terms of the leases, for 1950 the lessee paid
Minnesota ad valorem taxes with respect to the mining properties and
Minnesota royalty taxes with respect to royalties paid by the lessee.

In determining the Federal income tax for 1950 which Plaintiff has paid, for
purposes of 114(b)(4) and the determination of the depletion deduction
allowable under 23(m), the Minnesota ad valorem taxes and the Minnesota
royalty taxes have been included in the lessor's 'gross income from the
property,' and have been excluded from the lessee's 'gross income from the
property.'

These adjustments were erroneous, and by reason thereof, in determining the

Federal income tax for 1950 which Plaintiff has paid, deductions for depletion
have been allowed in the amount of at least $304,323.54 less than the amount
which should have been allowed.

Both sides moved for partial summary judgment on this issue; the district court
granted the Government's motion, 270 F.Supp. 253 (1967).

A deduction for depletion, based broadly on 'the theory that the extraction of
materials gradually exhausts the capital investment in the mineral deposit,' 4
Mertens, Law of Federal Income Taxation 24.02 at p. 7 (1966 rev.), has been
allowed in one form or another since the Revenue Act of 1913. Id. 24.0624.15b. The general problem of allocating the depletion deduction between
lessor and lessee was first dealt with by Congress in the Revenue Act of 1918.
Section 214(a)(10) of the 1918 Act, 40 Stat. 1068, provided that 'in the case of
leases the deductions * * * shall be equitably apportioned between the lessor
and lessee.' See 234(a)(9), 40 Stat. 1078-1079, for the identical provision with
respect to the corporate income tax. Percentage depletion, i.e., depletion based
on a stated percentage of 'gross income from the property' (defined, insofar as
here relevant, as 'gross income from mining') rather than on the cost of the
property, originated, but then only for oil and gas wells, in the Revenue Act of
1926, 204(c)(2), 44 Stat. 16.1 Six years later in the Revenue Act of 1932,
Congress addressed itself specifically to the problem of apportioning the
depletion deduction between lessor and lessee with respect to percentage

depletion. In addition to retaining the 'equitable apportionment' provision, 23(l),

47 Stat. 181, Congress, in rewriting the provision for depletion of oil and gas
wells with respect to a percentage of the taxpayer's gross income from the
property and in extending this to coal, metal and sulphur mines, 114(b)(3) and
(4), 47 Stat. 202-03, inserted the phrase:
8

excluding from such gross income an amount equal to any rents or royalties
paid or incurred by the taxpayer in respect of the property.

The statutes here relevant, 23(m) and 114(b)(4) of the 1939 Code, do not differ
in any significant way.

10

In a case decided in 1934 with respect to the tax years 1925, 1926 and 1927, the
Supreme Court held in effect that the provision of the 1932 Act for the
deduction of royalties from the gross income of a lessee stated a result that
would have been reached without it, since Congress could not have intended
one consequence when the lessee turned over royalty oil in kind to the lessor
and a different one when the lessee sold the oil and paid the lessor in cash.
Helvering v. Twin Bell Oil Syndicate, 293 U.S. 312, 321, 55 S.Ct. 174, 79
L.Ed. 383 (1934).2 The decision did not speak to the question here at issue,
whether the deduction from the lessee's gross income (and the inclusion in the
lessor's) should comprehend the payments of taxes which the lessee had
contracted to make and would otherwise have been payable by the lessor.

11

The Regulations under the 1939 Code said nothing about excluding from the
lessee's gross income amounts it was obligated to pay as taxes. They read, as
had their predecessors going back to those under the 1932 Act:3

12

In all cases there shall be excluded in determining the 'gross income from the
property' an amount equal to any rents or royalties which were paid or incurred
by the taxpayer in respect of the property and are not otherwise excluded from
the 'gross income from the property.'

13

The taxpayer asserts, and the Government has shown nothing to controvert this,
that for many years the Commissioner made no attempt to require lessees to
exclude from gross income taxes they were required to pay for the account of
the lessor, and lessors did not seek to include such amounts in their depletable
gross income.

14

In the early 1950's several lessors, doubtless stimulated by the established rule
that 'taxes paid by a tenant to or for a landlord for business property are

additional rent and constitute a deductible item to the tenant and taxable income
to the landlord, the amount of the tax being deductible by the latter,' Reg. 45,
Art. 109 (1921), approved in United States v. Boston & Maine R.R., 279 U.S.
732, 49 S.Ct. 505, 73 L.Ed. 929 (1929), began to press for the inclusion of
taxes, which lessees were required to pay on the lessors' behalf, in the lessors'
gross income as 'rents or royalties,' thus requiring, in principle at least, a
corresponding exclusion of these amounts from the lessees' depletable income-since 'at all events (the depletion provision) must be read in the light of the
requirement of apportionment of a single depletion allowance.' Helvering v.
Twin Bell Oil Syndicate, supra, 293 U.S. at 321, 55 S.Ct. at 178. The Bureau,
doubtless responding to conflicting pressures, adopted a somewhat Solomonic
course, providing for the apportionment of such taxes.4 Dissatisfied with not
getting the whole hog, Burt, a lessor whose lease there involved is also one of
those in question in the instant case, brought the issue with respect to the
Minnesota ad valorem and royalty taxes before the Court of Claims.5 The court
ruled unanimously in his favor, Burt v. United States, 170 F.Supp. 953, 145
Ct.cl. 282 (1959). Speaking of the ad valorem tax, it reasoned:
15

We are unable to escape the conclusion that under the terms of this particular
lease the payment of the ad valorem taxes in the minerals in place was a part of
the royalty compensation to plaintiffs. But for the provision in the lease that the
mineral taxes were to be paid by the lessee, the levy would have been an in rem
tax against the land itself, of which plaintiffs were the actual owners.
Undoubtedly if the lessee had not agreed to pay these taxes the plaintiffs would
have asked for and been entitled to a larger royalty payment in cash or in an
increased percentage or payment of some kind. It seems to us, in essence, that it
was a part of the total production income which the plaintiffs received and
therefore they are entitled to the statutory depletion allowance on their part of
the total production income which includes the ad valorem tax on the minerals
as a part of the compensation, rent, or royalty.

16

Although unnecessary to its decision,6 it applied the same reasoning to the

royalty tax, and added:

17

Of course, taxes as such are not a part of royalty production for either the lessor
or the lessee. In this particular case we are not holding that as taxes they are the
subject of depletion but as part payment to the lessor of his part of the depletion
allowance, it being a part of the yardstick to measure lessor's share of the
income from the production of iron ore in connection with the grant or privilege
to the lessee to conduct the mining operations on the property.
The same logic does not apply to the lessee's payment of the in rem taxes on the

18

18

property. They are not a part of his income from the property, but are a part of
the payment of the cost of securing the mining lease privilege on plaintiff's
property. He may be entitled to charge it off as a part of his expense or as a part
of the cost of the property, but such taxes are certainly not a part of his
production income. He is entitled to a depletion allowance on his income from
the production of the property but this income certainly does not include the
taxes which he may have paid.

19

Apparently concerned with the loss of revenue threatened in suits by lessors

challenging the partial or total disallowance of taxes paid by lessees as
depletable gross income, although recovery against the lessee would probably
be barred by limitation,7 see 26 U.S.C. 1311-1315, the Government sought
reconsideration of Burt, so far as concerned the Minnesota ad valorem tax, in
Handelman v. United States, 357 F.2d 694, 174 Ct.Cl. 1042 (1966).8 Its
argument was that whether or not the ad valorem taxes were 'rents or royalties,'
they were not depletable gross income to the lessor since they were payable in
any event regardless of production. After extensive review of the Supreme
Court decisions on depletion, none of which it found to be particularly relevant,
the court unanimously adhered to Burt with respect to any year where there was
sufficient production to cover the payment of the taxes. 357 F.2d at 703.9

20

U.S. Steel's multi-pronged attack on these precedents may be reduced to three

essential thrusts: that for percentage depletion purposes only royalties 'as such,'
determined by the agreement of the parties, should be treated as the lessor's
gross income from the property; that even if the lessee's assumption of the
lessor's tax obligations be deemed an additional 'rent or royalty' within the
meaning of the depletion provisions, under Minnesota law both the royalty and
ad valorem taxes are in rem and hence may not be treated as primarily the
lessor's obligation; and that in any event the ad valorem taxes are not dependent
on production and hence payment of them by the lessee can under no
circumstances be considered depletable income to the lessor excludable from
the lessee's share of the depletion allowance.

21

With respect to the first point, we, like other courts that have considered them,
have not found the multitude of cases on which U.S. Steel relies to be of much
assistance. Neither Helvering v. Mountain Producers Corp., 303 U.S. 376, 58
S.Ct. 623, 82 L.Ed. 907 (1938) nor Helvering v. Twin Bell Oil Syndicate,
supra, which U.S. Steel suggests to mandate the conclusion that only royalties
'as such' must be excluded from the lessee's gross income from the property, is
truly apposite. Mountain Producers dealt not with the narrow problem whether
payments of taxes should be considered as added royalties, but with a broader
contention that the contractual assumption by the lessee of all the mining

functions 'as part of the purchase price of the oil, 303 U.S. at 380, 58 S.Ct. at
624, should affect the allocation of the depletion allowance by allowing the
lessor to include in its gross income from the property 'the cost of production
defrayed by the (lessee) under its contract.' 303 U.S. at 379, 58 S.Ct. at 624.
When it rejected that contention and said that under the circumstances the cash
payments to the lessor represented its return on the extraction of the resources,
the Court was hardly meaning to lay down a general rule that only cash
payments made directly to the lessor may be considered as rents or royalties.
Twin Bell, as indicated above, likewise did not deal with the question before
us; indeed it may well be that in Twin Bell itself, some of the payments held
excludable from the lessee's gross income had been made to the tax authorities,
see fn. 2 although in diminution of rather than in addition to those labeled
strictly as rents and royalties.
22

The issue in Callahan Mining Corp. v. C.I.R., 428 F.2d 721 (2 Cir.), cert.
denied, 400 U.S. 903, 91 S.Ct. 141, 27 L.Ed.2d 140 (1970), on which U. S.
Steel also relies, was whether the lessor had an economic interest in the
working interest supporting a depletion deduction based on gross income from
the property or merely a net-profits, non-operating interest supporting a
depletion deduction 'only on the amounts he actually received as the ore is
mined and sold.' 428 F.2d at 725. U.S. Steel quotes this language and
apparently relies on the case for the proposition that the court cannot construct
a gross income based on anything other than the agreement of the parties and
that the lessor is entitled to a deduction for depletion 'only on the amounts he
actually received.' What neither party mentions, however, is that the very issue
here facing us-- at least insofar as the 'royalties as such' argument is concerned- was determined by the Tax Court consistently with the decisions in Burt and
Handelman, which it cited. 51 T.C. 1005, 1021-1022. While there appears to
have been no dispute over the question, the fact is that the lessee's payment of
the portion of the tax-- there an Idaho 'net profits' tax-- for which the lessor was
liable was held to be includible in the lessor's gross income. Finally, despite
appellant's attempt to depreciate its force, Louisiana Land and Exploration Co.
v. Donnelly, 394 F.2d 273 (5 Cir. 1968), 10 constitutes another precedent in
favor of the Government in this case. The court there upheld the claim of an oil
and gas lessor for inclusion in depletable gross income of a Louisiana severance
tax which the lessee had paid.

23

U.S. Steel next maintains that even if payment by the lessee of the lessor's taxes
may in some circumstances be considered as additional 'rents or royalties,' Burt
and its progeny were wrong in treating the Minnesota ad valorem tax as an
obligation of the lessor which was discharged by the lessee, since the tax is
merely in rem against the property, as, it asserts, is the royalty tax. Marble v.

Oliver Mining Co., 172 Minn. 263, 215 N.W. 71 (1927). While U.S. Steel
appears to be correct in contending that these taxes are treated as in rem
obligations under Minnesota law, it does not follow that the burden of paying
them is not on the lessor's interest and that the assumption of this burden does
not constitute additional rents or royalties within the meaning of the depletion
statute. As stated by the Supreme Court of Minnesota:
24

The royalty tax is an imposition upon the lessor's right, title, and interest in the
lands demised. * * * In absence of (a) covenant (to pay the tax), the tax would,
no doubt, have to be paid by the lessor to protect his title to the land. The intent
of the lawmakers was to lay the burden of this tax upon the interest and estate
of the one who granted the permission to mine.

25

Marble v. Oliver Mining Co., supra, 172 Minn. at 266, 215 N.W. at 72. In
Fraser v. Vermillion Mining Co., 175 Minn. 305, 221 N.W. 13, 14, appeal
dismissed, 278 U.S. 572, 49 S.Ct. 93, 73 L.Ed. 512 (1928), the same court, in
speaking of the royalty tax, noted that 'the shifting of the burden of the tax from
lessor to lessee is a matter of contract between the two. * * *' And in State v.
Rea, 189 Minn. 456, 250 N.W. 41, 42 (1933), the Supreme Court of Minnesota
was confronted with a case which was

26

the only one that has come to our notice where the state has not collected
royalty tax from the recipient of the royalty, or from the lessee who may have
stipulated to pay it as part consideration for the lease or permit under which
exploring for or mining ore is done.

27

We have no reason to believe that the Minnesota courts would regard the
agreement of the lessee to pay ad valorem (as distinct from royalty) taxes of the
lessor as anything other than 'part consideration for the lease.' In any event, we
think it rather fanciful to assume that in entering a lease agreement the lessee's
contractual assumption of state taxes, which is obviously of value to the lessor,
does not correspondingly reduce the amount of cash payments which the lessor
receives from the lessee upon the extraction of the ore. Indeed, we can do little
better than recite the hypothetical put by Judge Jones, speaking for the court in
Burt, 170 F.Supp. at 959:

28

The writer is familiar with one oil lease contract covering 1,000 acres, only a
small part of which was believed by the parties to be an area of production. The
lease contract provided that the owner, for a three-year period of production
should receive only a payment of all taxes by the lessee. After three years he
was to receive the payment of all taxes or 1/8 of the proceeds of the oil

produced, whichever was larger.

29

Does anyone believe that in such a contract the lessee would be entitled to all
the depletion allowance and the lessor to none; or that in the event the 1/8
royalty exceeded the amount of taxes, the owner's part of the depletion
allowance should be limited to the excess of payments above the amount of the
taxes?

30

Finally, U.S. Steel's contention that the payment of ad valorem taxes by the
lessee cannot be depletable income to the lessor since they are not dependent
solely on production was dealt with at length, and, we believe, correctly, in the
Handelman opinion so that it is unnecessary to repeat those considerations here.

31

If the question were arising for the first time, we should find the lessee's
position somewhat more impressive, and the lessor's correspondingly less so,
then the other courts that have considered the problem. One reason, not argued
by U.S. Steel, is that when Congress wished to authorize a lessee to deduct
sums other than rents properly so-called, it demonstrated its knowledge of how
to say so. Section 23(a) of the 1932 Act, later 23(a)(1)(A) of the 1939 Code and
now 162(a)(3) of the 1954 Code,11 permitted the deduction of 'rentals or other
payments required to be made as a condition to the continued use or possession,
for purposes of the trade or business, of property to which the taxpayer has not
taken or is not taking title or in which he has no equity.' Cf. Duffy v. Central
R.R., 268 U.S. 55, 45 S.Ct. 429, 69 L.Ed. 846 (1925). If Congress had used the
italicized words in 114(b)(4)(A) of the 1939 Code, the Government would
surely be entitled to prevail; since Congress used a narrower phrase and has
allowed the variance to persist for forty years, arguably it desired 'rents and
royalties' to mean only payments specifically denominated as such. Although
courts often indulge in such an approach to statutory interpretation, often for
want of any better way to 'find' an intent where probably there was none, there
may be something rather irrational about it, especially in regard to revenue acts.
The depletion provisions in the 1932 Act were doubtless drafted by specialists
on the subject, quite without regard to the longstanding provision in the
deductions section; and the spectacle of the average Congressman, or even of
the knowledgeable members of the Ways and Means and Finance Committees,
scrutinizing the language with the powerful magnifying glass needed to detect
the different phrasing of the two sections and appreciate its possible
significance is somewhat unrealistic.12

32

Again there is something essentially grotesque in the notions that a lessor's

depletable interest grows as a state increases rates under existing tax laws and
imposes new ones (as Minnesota did with the royalty tax here), or that it is

'equitable' that a lessee, in addition to paying these heavier taxes, should suffer
a loss in the proportion of the gross income on which it can take percentage
depletion. We are also somewhat impressed by U.S. Steel's argument that many
mineral lands in Minnesota are owned and leased by the State, that an ad
valorem tax is nonetheless imposed, that payment of such a tax by the lessee
cannot be regarded as discharging an obligation of the lessor, and that the
Government's position would thus result in a lessee of state lands being able to
include a larger proportion of gross income as subject to depletion than the
lessee of privately owned land.13 Yet it may be said against such arguments that
the logical underpinnings of percentage depletion are so elusive-- some would
use a stronger adjective-- that it is idle to attempt principled reasoning about its
division between lessor and lessee.
33

Moreover, despite these considerations we are bound to agree that there is

much force in the arguments in favor of the lessor, well expressed in the
extracts from the Burt opinion we have quoted. There would seem to be little
sense in a rule that would attribute different tax consequences to a situation
where the lessor accepted a lower royalty and required the lessee to pay the
taxes and another where the lessor insisted on a royalty higher by his estimate
of what the taxes would be. The arguments here forcefully made by U.S. Steel
have been considered and rejected on more than one occasion by two courts
particularly expert in tax matters and by another court of appeals having much
experience with oil and gas leases, as well as by the able district judge. While
we are not bound by any of these decisions and would not hesitate to reject
them if we were truly convinced they were in error, our beliefs simply do not
rise to that height. Burt has been on the books for a dozen years, during which
Congress has adopted a number of corrective tax measures but has not chosen
to alter Burt. Under the circumstances we think it best to follow the uniform
line of authority and leave correction, if that is called for, to the Supreme Court
or, for the future, to the Congress.
II. Excess Profits Tax

34

The Excess Profits Tax Act of 1950, 64 Stat. 1137 (1951), sometimes referred
to as the Korean Excess Profits Tax, imposed a heavy tax on 'excess profits' for
years ending after June 30, 1950, and beginning before January 1, 1954.
Broadly speaking, it followed the general scheme of the Excess Profits Tax Act
of 1940 (the World War II Excess Profits Tax) in determining excess profits by
comparing net income during the war years either with the actual average net
income during a 'base period' consisting of the four preceding taxable years,
435, or with a stipulated percentage rate of return on invested capital, 436, 437,
whichever was higher. A taxpayer using the average income method, as U.S.

Steel did here, was allowed to eliminate the worst of the four years in
determining its general average base period net income, 435(d)(2); the
company eliminated 1946. Under the Korean Excess Profits Tax only 83% Of
the average base period net income, plus and minus certain adjustments, could
be used as a credit against wartime profits, 435(a)(1); the corresponding figure
under the World War II Act had been 95%, 713.
35

Knowing that such a comparison might work unfairly in certain cases.

Congress provided for a number of specific adjustments. But it recognized also
that these might not be sufficiently comprehensive. It therefore, included what
has come to be known as a general relief provision, 442(a), which reads in
pertinent part:

36

If a taxpayer which commenced business on or before the first day of its base
period establishes that, for any taxable year, within, or beginning or ending
within its base period:

37

(1) normal production, output or operation was interrupted or diminished

because of the occurrence, either immediately prior to, or during such taxable
year of events unusual and peculiar in the experience of such taxpayer, or

38

(2) the business of the taxpayer was depressed because of temporary economic
circumstances unusual in the case of such taxpayer, the taxpayer's average base
period net income determined under this section shall be the amount computed
under section (c) or (d), whichever is applicable.

39

In any year for which this section applied, a constructive income was to be
computed for the affected months by applying the industry's yearly rate of
return as determined by the Secretary of the Treasury, 442(e).14 If only one year
was affected by an abnormality within the meaning of 442(a) and the
constructive income exceeded 110% Of the actual, the constructive income was
to be substituted for that year alone, 442(c). If 442(a) applied to two or more
years, constructive income (if it exceeded 110% Of the actual) was to be used
for all three years of the base period, 442(d).15

40

U.S. Steel claimed that each of the three base years remaining after elimination
of the worst year, 1946, came within the general relief provision of 442(a). The
grounds for this, summarily stated, were as follows:

41

(1) With respect to 1947 and 1948, because its production was curtailed and its
costs increased by abnormalities in the supply of raw materials due to causes

hereafter described (the 'materials' issue); (2) With respect to 1947 and 1948,
because the price controls that had expired on November 13, 1946, and
President Truman's request of July 15, 1947, that coal and steel companies
forego price rises, prevented its making price increases it would other wise
have made to meet rising costs of goods and services, resulting in an
abnormally narrow cost-price gap (the 'cost-price' issue); (3) With respect to
1948, because its production was significantly curtailed as a result of two
strikes, one from March 15 to April 22 and the other from July 5 to July 14, by
the United Mine Workers which shut down coal producing facilities (the 'coal
strike' issue) and an explosion at one of its Chicago works; (4) With respect to
1949, because of an interruption of production by a strike of the United Steel
Workers from October 1 to November 11 (the 'steel strike' issue).
42

Judge Levet found against the company on the first three issues and for it on
the fourth. The first two issues were decided on motions by the Government for
summary judgment, 305 F.Supp. 497, 508 (1969); U.S. Steel has appealed with
respect to the first of these and apparently also with respect to the second. But
see, fn. 33 infra. The third and fourth issues were decided after trial, 316
F.Supp. 990 (1970). U.S. Steel has appealed from the decision against it on the
coal strike issue, but the Government has withdrawn its appeal from the
decision in the taxpayer's favor with respect to the 1949 steel workers' strike.
The questions on the coal strike issue are largely of fact, on the materials and
cost-price issues, at least at the present stage, of law. We shall deal initially
with the issue concerning the 1948 coal strikes.
A. 1948 Coal Strikes

43

The judge and the parties were in agreement with respect to the basic legal
principles determining whether the 1948 coal strikes brought U.S. Steel within
442(a)(1).16 Strikes are listed in the Regulations' definition of 'events,' Regs.
130, 40.442-2(3). On the other hand, the event must be 'unusual and peculiar in
the experience of the taxpayer'; 'its occurrence' must not be 'ordinarily
encountered in the taxpayer's business operations.' Regs. 130, 40.442-2(3). Also
'the interruption or diminution' of normal production by the unusual and
peculiar event 'must be significant and not trivial.' Regs. 130, 40.442-2(2).

44

The first breach in the harmony on this issue concerns the judge's ruling that, in
determining whether the 1948 strikes were 'unusual,' the comparison should not
be simply with previous coal strikes, of which there apparently had been none
of serious consequence during the period of comparison, but rather with all
sorts of work stoppages due to labor disputes. We see no basis for faulting this
ruling on the facts of this case. U.S. Steel was not a seller of coal in any

substantial degree; its business was the integrated production of finished iron
and steel products and coal mining was simply a part of the process. It would
be unreasonable to read 442(a)(1) as entitling a taxpayer to relief because it had
suffered a strike from a previously peaceful craft in one of the base years,
although it had been the victim of equally or more serious strikes by other
crafts in a period appropriate for comparison. The court selected the years
1941-45 as such a period. While U.S. Steel asserts that the court 'simply
disregarded the testimony of qualified witnesses about the taxpayer's
experience in the period prior to 1942 because no 'statistics' were kept' for those
years-- testimony to the effect that during the 1930's strikes and other labor
difficulties did not interrupt steel production in any serious way-- it does not
challenge Judge Levet's findings that 'the only relevant years prior to 1948 for
which plaintiff has presented any statistical evidence regarding strike losses are
1941, 1942, 1943, 1944, and 1945' and that 'plaintiff started in 1941 to record
estimates of production losses due to strikes.' 316 F.Supp. at 1008. Apart from
any question of remoteness, given the lack of reliable data for earlier years,
Judge Levet was justified in limiting his comparison to the 1941-45 period.
45

The court assumed the production losses from the two 1948 coal strikes were
those alleged by U.S. Steel on the basis of its exhibits, finding it unnecessary, in
light of its ultimate determination, to consider the Government's contention that
these figures were excessive. 316 F.Supp. at 1011. These exhibits indicated the
following loss figures:

46
March-April Strike
July Strike
Total

Thousands of Tons
Equivalent
Ingots Finished Products
502,986
358,135
76,870
55,210
------- ----------------579,856
413,345

47

The difficulty in making a comparison between these figures of lost production

in 1948 and the results for the years in the period chosen for comparison
stemmed from the lack of similar reports for the earlier years. During those
years the company had generally prepared 'Strike or Work Stoppage Reports,'
called Form B, which showed the loss for each type of production for each of
its plants. The problem was twofold. After so much time had elapsed, some of
the Form B reports were missing for some of the years. Moreover, since they
showed the loss of each type of product and in a number of cases a product loss
of more than one type was recorded on individual or related reports, mere
addition would result in pyramiding.

48

Faced with these problems Judge Levet engaged in what U.S. Steel properly

48

Faced with these problems Judge Levet engaged in what U.S. Steel properly
characterizes as 'a painstaking analysis.' For two of the comparison years, 1943
and 1945, he arrived at firm figures of losses in net shipments (which the
parties agreed was the appropriate loss indicator since 'in the stell-making
industry production and total shipments are generally correlative,' 316 F.Supp.
at 1008) of steel products due to work stoppages; for the other three, 1941,
1942 and 1944, he was able to arrive only at a range. These findings were as
follows:

Reasonable Approximation of Potential Tonnage

49
Loss in Net Shipments of Steel Products
Due to Strikes: 1941-1945
1941
50 ................
1942
1943
1944
1945

13,456 -(Min.)
................
6,552 -(Min.)
............................
................ 343,985 -(Min.)
............................

270,852
(Max.)
45,223
(Max.)
246,389
553,370
(Max.)
828,639

51

Comparing these figures with those for 1948 cited above, he concluded that
U.S. Steel had failed to show that the 1948 coal strikes had constituted 'events
unusual and peculiar in the experience of such taxpayer.'17

52

Apart from the arguments that coal strikes should have been considered as
something separate and apart from other work stoppages, and that the
comparison should have included still earlier years, which we have already
rejected, U.S. Steel does not seriously contest that this conclusion would follow
if the factual findings were correct. It insists, however, that the judge did not
succeed in doing what he plainly intended, namely, to eliminate the duplication
or worse that would result from simply adding up the figures in the Form B
Reports. It insists that the only way in which double or triple counting could be
avoided would be to base the calculations on loss in ingots, the 'bottleneck' in
the production of finished steel, or-- what amounts to the same thing-- on a loss
of finished products determined by applying to ingot losses an apparently
recognized ration of approximately 70%. On these bases U.S. Steel comes up
with the following tables:

Year
53

Ingot Loss
Coal Strikes
All Strikes
Only
1941 ....... 18,715

1942
1943
1944
1945
1948

........ 9,441
....... 48,000
...... 118,721
...... 478,500
................. 579,856

Year
54

Loss of Equivalent
Finished Product
Coal Strikes
All Strikes
Only
....... 13,456
........ 6,552
....... 31,920
....... 81,917
...... 333,036
................. 413,345

1941
1942
1943
1944
1945
1948

55

Mere statement of the theory behind U.S. Stell's calculations is almost

sufficient to demonstrate its unsoundness, even ignoring the fact that some of
the lost ingot figures are based on Form B reports for years in which they were
concededly incomplete. Unlike the 1948 coal strikes, may of the work
stoppages in the comparison years did not affect ingot production at all. Hence
a comparison solely in terms of loss of ingots or of finished products
determined on a ratio basis could not possibly be fair, since it fails to consider
that losses of net shipments may result from interruptions in the production
schedule at a stage subsequent to ingot production. While U.S. Stell baldly
asserts that 'loss of finished net product production does not, could not, and did
not translate into loss of shipments unless equivalent ingot production was * * *
lost,' it points only to the rather general statements of two of its witnesses
concerning the ability of the company to 'shift' its production from one
finishing plaint to another in support of that proposition. Assuming that some
shifting is possible U.S. Steel has referred us to no evidence that such shifting
in fact occurred during the strike periods so as to eliminate all but reported
ingot losses-- let alone, with the few exceptions noted below, see fns. 19 and
20, a substantial portion of those losses which Judge Levet carefully
determined.

56

No useful purpose would be served by our endeavoring to restate the methods

whereby the judge determined production losses for 1941-45, an analysis filling
some 20 printed pages of his opinion, 316 F.Supp. 1011-1030.18 Suffice to say
that we have carefully examined this and that while we recognize some validity
in certain of U.S. Steel's criticisms,19 the company has not come forward with
any more accurate figures, as it had the burden of doing, and we surely are not
prepared to brand the judge's careful findings as 'clearly erroneous.'20

B. The Materials Issue

57

Paragraph 11 of the complaint, relying on both subsections of 442(a) claimed

that U.S. Steel's normal production in 1947-48 was diminished by reason 'of
events unusual and peculiar in the experience' of the taxpayer and its business
'was depressed because of temporary economic circumstances unusual' to it.
Among the 'temporary abnormalities' were 'low quality of coking coal and iron
ore, resulting in loss of production' and, also apparently, in higher costs.

58

Since this issue was decided against the taxpayer on a motion for summary
judgment by the Government, we must consider assertions in the company's
affidavits and depositions to be true, except insofar as these are invalidated by
admissions or uncontradicted proof. Since we consider that the judge's findings,
305 F.Supp. at 501, drawn mainly from a joint statement under Rule 9(g) of the
district court which he required, are not sufficiently generous to the taxpayer
under this standard, a fuller statement of plaintiff's contentions is needed.

59

The problem concerned U.S. Steel's northern plants comprising 80% Of its total
production. Before World War II the iron ore for these plants, principally of
high grade,21 came from mines on the Mesabi Range in Minnesota. The coking
coal came principally from mines in western Pennsylvania (Frick District coal),
which was of high grade,22 and to a lesser degree from southern West Virginia
(Pocahontas coal) and western Kentucky (the Lynch District coal). Such
washing of the Frick District coal which needed further 'beneficiation' was done
at a facility at plaintiff's Clairton, Pa. plant. Although it was foreseeable before
World Was II that the high grade Frick District coal would ultimately be
exhausted, it was thought that the problem could be met for some years by
diminishing the relative share furnished by such coal and blending this with
lower grade coal to obtain a suable mixture-- although ultimately beneficiating
facilities to utilize lower grade coal would have to be installed. Similarly,
although U.S. Steel foresaw before World War II that its reserves of high grade
iron in the Mesabi Range would not last forever, the war produced problems
concerning sources of future iron production more quickly than could have
been anticipated.

60

The enormous demand for steel induced by the advent of World War II made it
necessary for U.S. Steel to maximize coal and iron ore mining and production
regardless of the effect of such action on post-war operations.23 For reasons
about to be developed, the effect of this was to deteriorate the quality of coal
and iron available for use in 1947 and 1948.

61

The Palmer and Colonial coal mines in the Frick District which had been the

61

The Palmer and Colonial coal mines in the Frick District which had been the
company's principal source of high grade coal were mined during World War II
to such a degree that their reserves were rapidly depleted. Idle mines in the
Frick District, on whose production plaintiff had counted for future mixing with
lower grade coal, were brought into production, but this also did not suffice.
Accordingly the company had to begin tapping reserves of low quality coal in
Greene County. In 1944 it brought the Robena Mine in that county into full
production. Although this turned out to have relatively high proportions of
sulphur and ash, it was still possible to achieve satisfactory results by blending
it with the high quality coals from the reopened mines in the Frick District and
also by using the Clairton washer, although this had not been designed for coal
of such poor quality. Realizing that a new washer would be required for the
Greene County coal, plaintiff prepared specifications in 1944, but when the
bids came in, it was found that the proposed plant (which was similar in
concept to the Clairton washer) would be inadequate for the job due to
insufficient reduction of the sulphur content in the coal. In an effort to develop
a beneficiation process sufficiently effective to reduce the impurities in the
Greene County coal to appropriate levels, U.S. Steel then conceived the plan of
using a method (a heavy media process) that had been used for beneficiating
iron ore but was novel in the coal industry. After preliminary tests indicated
that this had promise, U.S. Steel took bids in the latter part of 1945, but
warinduced shortages of men and materials delayed completion of the Robena
washer until the latter part of 1948. When it came on line, the quality of the
beneficiated Robena coal was greatly improved.24 Because of these conditions
and those described in footnote 24, plaintiff was obliged in 1947 and 1948 to
purchase coal from other producers. Due to scarcity in supply, it was necessary
to purchase relatively small amounts from many sources, with consequent lack
of uniformity. In summary, as stated in plaintiff's brief, 'the quality of coal
available to charge plaintiff's coke ovens and the quality of resultant coke to
charge to plaintiff's blast furnaces was the worst in history.'

62

The iron story was much the same, although less specifically documented.
During World War II plaintiff used its best grades of iron ore in order to
maximize production. For the same reason it deferred its normal stripping
program on the Mesabi Range. It was necessary to catch up on this thereafter.
Also, by 1950 and 1951, plaintiff had added sintering and washing facilities
that in the average iron content in iron-bearing materials. Again, to quote
plaintiff's brief, 'as a result of the conditions described above, the quality of the
furnace burdens charged to plaintiff's blast furnaces in 1947 and 1948 was
inferior to that experienced at any other time outside the base period.'

63

Plaintiff avers that the combined effect of the conditions summarized was
equivalent to the daily charging to its blast furnaces of a hundred 60-ton

railroad cars of inert or harmful materials, more than had ever been charged
before or since, with a consequent loss of 2,000,000 tons in annual production
of hot metal. Efforts to remedy this through the purchase of scrap were only
partially successful, due, among other things, to a shortage of good quality
scrap and a premium price. In consequence, finished steel production was at
least 900,000 tons below normal in 1947 and 850,000 tons below normal in
1948,25 with resulting adverse effect on earnings of at least $36,000,000 and
$42,000,000.
64

On these facts we do not think it was proper to render summary judgment

against the plaintiff, whatever the right decision may be after a full
development of the circumstances at a trial.26

65

The district court's adverse ruling with respect to 442(a)(1) seems to have rested
primarily on the judge's belief that U.S. Steel had failed to show an 'event' such
as that section requires. The Regulations, 40.442-2(a)(3), say:

66

Unusual and peculiar events contemplated in section 442(a)(1) consist primarily

of physical rather than economic events or circumstances. Such physical events
include floods, fires, explosions, strikes, and other exceptional and uncommon
circumstances hindering production, output, or operation.

67

Apart from the use of the word 'primarily,' we do not see why such effects of
the greatest war in the world's history as we have described above should not be
regarded as unusual and peculiar 'physical' events.27 Neither do we perceive
why it should be material that the effects of World War II should take the form
of a loss of access to suitable raw materials as distinguished, say, from the
physical destruction of plants in the area of hostilities.28 We can see no
significant difference between the latter case, which surely should qualify under
442(a)(1), and one where World War II deprived a manufacturer of access to a
needed raw material, e.g., Malayan tin or rubber, and he had not been able to
restore his imports to the accustomed scale in one of the base years.29 Coming
even closer to the instant case, if the Government had seized all of U.S. Steel's
high grade coal and iron mines because it thought the company was not mining
them as effectively as the war effort required, see 54 Stat. 885, 892 (1940), as
amended by 57 Stat. 163, 164 (1943), had exhausted them, and had left U.S.
Steel completely dependent on low grade or purchased coal and iron with
consequent diminution of normal production through 1947 or 1948, we cannot
see why the statutory test would not be met. The company should not fare
worse for having behaved as a good citizen and voluntarily done what the
Government might have compelled.

68

Alternatively, we fail to see why, on the affidavits and depositions before the
district court, U.S. Steel did not qualify under 442(a)(2). Subsection (2) covers
situations rendered abnormal by factors other than interruption or disruption of
normal production output or operation, e.g., a taxpayer producing usual volume
at unusually high cost or selling at unusually low prices. However, the two
subsections are closely related; as the Bulletin relating to the World War II
Excess Profits Tax recognized, pp. 16-17, 'the same basic cause might lead to a
section 722(b)(1) claim in the case of one taxpayer and a section 722(b)(2)
claim in the case of another.' 7A Mertens, supra, 42.121 at 719. It would seem
enough to qualify under 722(b)(2) (or 442(a)(2)) that a taxpayer's business was
depressed because of being obliged to use low quality or high cost raw
materials, if he had consistently followed a contrary course before the year in
question and followed it again thereafter, at least when these 'temporary
economic circumstances' were not ones for which he was at fault-- which the
Government has not here asserted.

69

The Bulletin issued by the Treasury with respect to 722 of the World War II
Excess Profits Tax, at p. 18, quoted in 7A Mertens, supra, 42.121 n. 42 at p.
726, gave as an example of a taxpayer entitled to relief because of temporary
economic circumstances a brush company, normally importing its bristles from
China, which was obliged to seek them elsewhere and accept inferior
substitutes at higher prices because of the Japanese invasion of China in 1937.
While in that case there was an 'event,' 422(a)(2) does not require one.
Presumably the taxpayer in the case put in the Bulletin would have fared
equally well if the Chinese producers had simply decided to sell elsewhere but
an alternate source of supply was in sight a few years hence.

70

We have had some concern whether the business of U.S. Steel could be said to
have been 'depressed' in 1947 or 1948. The annual reports received in evidence
at the trial on the coal-strike issue show income after taxes of $127,100,000 in
1947 and $129,600,000 in 1948, which were the highest since 1929.30 As
against this, however, the Bulletin issued in connection with the World War II
Act said, p. 16, that 'In order for the depression of the business of a taxpayer to
come under 722(b)(2), it is not necessary that the taxpayer's earnings be
reduced to any particular level, nor even that they be less than the average for
the taxpayer's industry. It is necessary only that they be less than they normally
would have been for the taxpayer in the absence of the temporary economic
circumstances shown.' 7A Mertens, supra, 42.121 at 720. While the Senate
Finance Committee report on the World War II Act, quoted at n. 10 on the
same page, says that 'As a general rule, high costs of production because of
high costs of material, labor, capital, or other elements' would not qualify, this
scarcely covers the case of temporary high costs unusual to a particular

taxpayer and not incurred by the industry generally. Furthermore, despite U.S.
Steel's relatively large profits in 1947 and 1948, a circumstance taken into
account at least in part by Congress' decision to allow only 83% Of base year
profits, whether actual or constructive, as a credit against the Korean excess
profits tax in contrast to the higher percentage permitted for World War II,
there are indications summarized in the margin,31 that something may have
been going wrong at U.S. Steel during the base period in comparison to the rest
of the industry.
71

The Government comes up with a number of other arguments which do not

impress us. It says the taxpayer can point to no precedent where relief has been
accorded in such a situation as this; the taxpayer makes the rather obvious
response that the Government has cited none where it has been denied. The
Government argues that the increase in capacity from the new beneficiating
plants did not measure up to the quantitative tests for increase in capacity for
production specified in 444. Taxpayer answers that it was the inadequacy of
that and other special relief provisions that led Congress to enact 422. The
Government points to 450, wholly exempting from excess profits tax the
portion of adjusted excess profits net income attributable to the mining of
certain strategic minerals, the bulk of which had previously been imported. U.S.
Steel answers that this extraordinary measure of relief does not negate the right
to a proper credit for the producer of such old-fashioned but essential
substances as coal, iron and steel.

72

In the final analysis, the difference between the Government and the taxpayer
on this issue is in approach. The Government, in a commendable desire to
protect the revenue and curtail further litigation (although one would suppose
that Korean Excess Profits Tax litigation must be nearing its end), would read
the general relief provisions with peculiar, almost eviscerating, narrowness. On
its view an 'event' must be a catastrophe affecting a particular taxpayer and
perhaps a few others; 'unusual' must be not merely unusual in the ordinary
sense but unexpectable. As in Oxford Paper Co. v. C.I.R., 302 F.2d 674, 678 (2
Cir. 1962), 'we find no basis for the glosses' the Government 'would impose
upon what seems the straightforward language of the statute.' While the general
'relief provisions are not considered to be a means of conferring general
equitable relief on taxpayers, or to confer relief just because base period
earnings of a taxpayer may be low or depressed,' still 'it is incorrect and
unrealistic to say that equities play no part in the decision of such cases. Their
weight is not to be ignored, even if it cannot always be measured, and it is well
within the legislative intent that they be viewed sympathetically in relation to
the purposes intended to be advanced by these relief provisions.' 7A Mertens,
supra, 42.117 at 632.32 Whether U.S. Steel can show at a trial that World Was

II in fact created unusual problems that led to diminution of 'normal production

output or operation' in 1947 or 1948, or that its business during those years 'was
depressed because of temporary economic circumstances unusual' in its
experience, we cannot now say. We hold only that summary judgment should
not have been rendered against it.33
73

This opinion would be incomplete if we failed to pay tribute to the quality and
quantity of effort devoted by Senior Judge Levet to the resolution of this
difficult case or, more accurately, cases. We also express our gratitude for the
helpful briefs and argument of counsel for both parties.

74

The orders with respect to the depletion, coal strike, and cost-price issues are
affirmed. The order granting summary judgment to the Government on the
materials issue is reversed and the case remanded for further proceedings
consistent with this opinion.34 No costs.

Of the District Court for the Eastern District of New York, sitting by
designation

For the treatment under earlier acts, see 4 Mertens, Law of Federal Income
Taxation 24.04-24.11 (1966 rev.)

The royalties were one-quarter of the oil extracted-- to be paid in cash or in

kind; during the years in question the royalties were apparently paid in cash.
But see text, infra. The lessee was 'authorized to pay all the taxes on said lands
and improvements and to deduct the lessor's share thereof from the amount of
royalties which shall fall due.'

Reg. 111, Sec. 29.23(m)-1(f); Reg. 103, Sec. 19.23(m)-1(f); Reg. 101, Art. 23
(m)-1(g); Reg. 94, Art. 23(m)-1(g); Reg. 86, Art. 23(m)-1(g); Reg. 77, Art.
221(g)

This was stated in Revenue Ruling 16, 1953-1 Cum.Bull. 173, 175-76, as
follows:
* * * in order to determine the amount of such taxes (ad valorem taxes) paid by
the lessee for the account of the lessor it is necessary to ascertain the
proportionate values of their respective interests in the property and to use such
values as a basis for determining a ratio which is to be used to allocate the taxes
between the parties. * * * The ratio may be determined by the Bureau, in case
no agreement can be reached between the parties, or, if an agreement thereon is

reached between the parties which is considered reasonable by the Bureau, such
ratio will be accepted. * * * where ad valorem property taxes are imposed on
mineral-bearing lands and the lessee pays the lessor's share of such taxes
pursuant to the mineral lease on the land, such payments shall be treated as
additional royalties which are excludable from the lessee's gross income and
includible in the lessor's depletable gross income * * *. If there is insufficient
gross income from production to cover the tax, such payments shall be treated
as delay rental, a deductible expense of the lessee and nondepletable income to
the lessor.
5

Counsel for U.S. Steel submitted a brief as amicus curiae

The Government had conceded that for the purpose of the action 'the taxpayer
is entitled to include in his gross income from the mineral property for the
purposes of computing his depletion allowance his * * * share of all royalty
taxes paid by his lessee.' 170 F.Supp. at 955

The Tax Court followed Burt in Higgins, 33 T.C. 161 (1959), with only scant
discussion. The Internal Revenue Service thereupon revoked its prior rulings
and announced it was prepared to litigate the question both ways until it was
decided. Rev.Rul. 64-91, 1964-1 (pt. 1) Cum.Bull. 219, 220

Again, counsel for U.S. Steel submitted a brief as amicus curiae

Two recent decisions of the Tax Court have also sustained the Government's
position here. McLean, 54 T.C. 569 (1970); John S. Thornton, T.C.Mem. 1970321, 29 CCH T.C.M.Dec. 1471 (1970)

10

Counsel for U.S. Steel also submitted an amicus brief in this case

11

The lineage goes back to 12(a) of the Act of 1916. 39 Stat. 767

12

Indeed, as the Court warned in Mountain Producers, 'analogies sought to be

drawn from other applications of the revenue acts may be delusive and lead us
far from the intent of Congress. * * *' 303 U.S. at 381, 58 S.Ct. at 625
While U.S. Steel also urges upon us the 'well established rule that where a law
has been administered in a certain way over a long period of time, during which
the law has been repeatedly re-enacted, the legislative intention is deemed to be
in accord with the administrative interpretation,' the 'rule' has been followed
with less than undeviating consistency, see 1 Davis, Administrative Law
Treatise 5.07 and cases cited therein (1958), and the truth of the matter, to use
Justice Harlan's phrase, is that we are 'left with a legislative history which, on
the precise point at issue, is essentially negative, which shows with fair

conclusiveness only that Congress was not squarely faced with the problem
these cases present.' National Woodwork Mfr's Ass'n v. NLRB, 386 U.S. 612,
649, 87 S.Ct. 1250, 1271, 18 L.Ed.2d 357 (1967) (Memorandum of Harlan, J.).
See H.R.Rep.No.1492, 72nd Cong., 1st Sess. (1932), reprinted in 1939-1 Cum.
Bull. (Part 2) 542; Seidman's Legislative History of Federal Income Tax Laws
1938-1861 464-67 (1938).
13

Perhaps, however, the state compensates for this by charging higher royalties

14

This simple method of determining constructive income was a significant

departure from the World War II Excess Profits Tax, which required
reconstruction on an individual basis of what the taxpayer's income would have
been apart from the abnormalities. See Oxford Paper Co. v. C.I.R., 302 F.2d
674, 678 (2 Cir. 1962)

15

The foregoing is merely a crude summary, omitting many details of this

complicated legislation not essential for decision of this case

16

There is no need to consider the explosion at the company's South Works in

Chicago, since U.S. Steel concedes in brief that its results, taken alone, were
not significant enough to qualify the taxpayer for relief in the year 1948

17

Using the 'maximum' figures the average loss per annum for the five years was
388,895 tons; using the 'minimum' figures, such average loss was 287,804;
using a mean of the maximum and minimum figures, such average loss was
388,349. The annual report for 1948 shows that total shipments of finished steel
products were 20,655,000 tons. For the five years 1941-1945, total shipments
averaged 20,128,000 tons

18

A word of explanation on the meaning of the 'minimum' and 'maximum' figures

for certain years may be helpful. The minimum for 1941 and 1942 is the loss in
net shipments, determined on the approximately 70% Basis, see text supra,
from losses in ingot production alone which were reported on the available
Form B reports; the minimum for 1944 is the loss in net shipments, determined
(a) on the approximately 70% Basis, see text supra, from losses in ingot
production alone which were reported on the available Form B reports and (b)
on an approximately 90% Basis (average yield of net shipments from total
shipments), from losses in steel product production which were reported on the
available Form B reports. The maximum for 1941 and 1942 is the loss in net
shipments calculated as the sum of (a) the minimum for those years and (b) on
an approximately 90% Basis, see supra, the difference between the combined
total production loss of iron, ingots and steel products, 300,000 tons for 1941
(as reported in the 1941 U.S. Steel Annual Report, p. 7), 53,000 tons for 1942
(as reported in the 1943 U.S. Steel Annual Report, p. 19, and in a non-

contemporaneous summary estimate of lost tonnage from work stoppages) and

the total reported ingot losses, which were used as the basis of the minimum.
The maximum for 1944 is the loss in net shipments calculated as the sum of (a)
the minimum for that year and (b) on an approximately 90% Basis, see supra,
the difference between the combined total production loss of iron, ingots and
steel products, 871,000 tons (as reported in the 1944 U.S. Steel Annual Report,
p. 12, a non-contemporaneous summary estimate of lost tonnage from work
stoppages, and a contemporaneous summary of Form B reports) and the total
ingot and steel product losses reported on the available Form B reports, which
was used as the basis of the minimum, less specified losses for ore, crushed
slag, coke, and hot metal (or iron), shown on the available Form B reports
19

The more important of these are as follows:

For 1941, for which the Form B reports were incomplete, Judge Levet began
with a production loss estimate of 300,000 tons in U.S. Steel's annual report,
subtracted a known figure of 18,715 tons of ingot losses, applied a 71.9% 'yield'
to arrive at his minimum figure and, after deducting the ingot losses, applied a
91.6% 'average yield net shipments of steel products from total shipments' to
arrive at his maximum figure. More accurate data for later years, such as 1943
and 1945, suggest that the company's undifferentiated loss figures were
inflated, and the maximum figure for 1941 is thus likely to be too high. We are
also inclined to think that analysis of the substantial number of Form B reports
available for 1944 in a manner similar to that used for the complete reports
available for 1943 and 1945 might have reduced the maximum and minimum
figures for that year.

20

In its reply brief U.S. Stell has reproduced two Form B reports which do show
possible duplication, not itself significant in amount. The possible duplication in
at least one of these was not eliminated by the judge's methodology; as to the
other, it is unclear from page 6 of Exhibit 7 of May 22, 1970, to which the
judge refers, 316 F.Supp. at 1018, whether he meant to disregard this report
entirely, since his reference is to a South Works report dated July 14, 1945, and
the South Works report reproduced by U.S. Steel is dated July 31, 1945 (with
respect to a work stoppage of July 5, 1945) whereas the South Works reports
listed on the page noted are listed by the date of the work stoppage (June 24,
30, July 5, September 13, 28, 29). In any event, we draw an inference from
these instances opposite to that desired by the company, since we are rather
confident that if other such examples existed, U.S. Steel's diligent and able
counsel would have brought them to our attention. The other Form B report
reproduced in the reply brief does not support U.S. Steel's criticism since, while
it is possible that the losses on finished products there reported were made up
later in the year, there is no proof to that effect

21

That is to say, relatively low in sand and clay, collectively known as 'gangue.'

22

That is to say, relatively low in sulphur and a variety of non-combustible

materials collectively known as 'ash.'

23

Figures in U.S. Steel's annual reports, submitted in evidence on the coal-strike

issue, show that ore mining jumped from 24,225,000 tons in 1939 to
52,012,000 in 1942, and coal mining from 21,624,000 to 32,317,000 tons

24

The quality of plaintiff's low volatile Pocahontas coal also deteriorated during
the war years. This required devising a method whereby coals of different
expansion characteristics could be properly blended during washing.
Construction of the Alpheus washer, which was designed to meet this and other
problems, at Gary, W. Va., began in 1945. Due to the same conditions noted in
the text, this did not come into operation until late 1948 or attain adequate
capacity until late 1949. World War II also accelerated the exhaustion of high
quality coal from the Lynch District, which plaintiff was unable to replace until
after the base period

25

Average production of ingots in the northern plants was as follows:

In Thousands
of Tons
1941-44 ..... 26,887
1947-48 ..... 24,597
1950-53 ..... 28,510

Shipments from these plants in 1947-48 averaged 17,783 thousand tons as

against an average of 18,821 that would have been available for shipment
during the 1941-44 period and of 19,957 for the 1950-53 period-- the two latter
figures representing 70% Of ingot production.
26

We note, for example, that figures from U.S. Steel's annual report for 1948,
received in evidence at the later trial of the 1948 coal strike issue, show that
1948 shipments from all plants were the highest in history except for 1944 and
that the 1947 figures had been exceeded only in 1941, 1942 and 1944
27 U.S. Steel noted in its reply brief below that 'it is not claimed World War II
itself is a basis for relief'-- apparently to avoid the application of an alleged
general 'rule' that 'the valid exercise of governmental power does not constitute
the basis for relief under either Section 442(a)(1) or (a)(2),' 305 F.Supp. at 504.
Rather it rests its claim on the circumstances that confronted it during the base
years, which it attempts to distinguish from 'World War II itself.' While we are
not overly impressed by this distinction, we are even less impressed with the
Government's attempted distinction of the 'exceptions' to the alleged

'governmental action' rule. Since the Government concedes that 'these

authorities can be viewed as holding that some forms of governmental action
may provide a basis for relief under Section 442,' we find it unnecessary to reexamine the 'rule' itself.
28

E.g., if an American manufacturer had important plants in West Germany

which were bombed out in 1945 and were not restored to normal production
until after the beginning of the base period

29

Although 442(a)(1) requires that the event occur 'either immediately prior to, or
during' the alleged untypical year in the base period, the Bulletin issued in
connection with 722 of the World War II Excess Profits Act, which used the
same phrase with a variation not here material, 722(b)(1) stated, p. 10, that 'An
event is deemed to occur immediately prior to the base period if under normal
circumstances the effect of such event would not be fully manifested until a
year in the base period and such effect is directly related to such occurrence.'
7A Mertens, Law of Federal Income Taxation 42.119 at 708 n. 80. (Zimet and
Weiss Rev. 1955)

30

After tax earnings during the World War II years were, of course, affected by
the Excess Profits Tax

31

The Secretary of the Treasury found that the average rate of return on assets in
plaintiff's industry for the base period was 13.6%. It was stipulated that, using
this factor, plaintiff's average base period net income would be $415,635,212.
In contrast, its actual average base period net income was $270,660,471,
approximately 65% Of the industry average rate of return. Since plaintiff's
assets account for a substantial share of the industry, a comparison between
plaintiff's return on capital and the rest of the industry would show an even
greater discrepancy. The explanation of this will be appropriate for
development at a trial

32

See also the statement by Randolph E. Paul, Esq., then General Counsel for the
Treasury, before the New York Society of Certified Public Accountants, May
10, 1943, quoted in 7A Mertens, supra, 42.117 at pp. 641-44
33 U.S. Steel has devoted scant attention in its brief to the 'cost-price' issue-indeed, the Government assumed in its brief that 'plaintiff is not even appealing'
on this issue, a statement U.S. Steel does not deny in its reply brief.
Nevertheless, U.S. Steel's opening brief does appear to request a remand for
trial not only on the materials but also on the cost-price issue. In any event,
while our discussion above indicates that we do not agree with all of the
reasoning in Judge Levet's opinion on the cost-price issue, 305 F.Supp. at 508,
we do not see how U.S. Steel's general allegations about the effects of price

controls, political pressures, general public opinion, etc. would be sufficient to

bring it within the statute. We think it wisely soft-pedaled this issue in favor of
its more powerful and specifically documented argument with respect to raw
materials.
34

Affirmance on the cost-price issue is not meant to prevent U.S. Steel from
arguing its inability to raise prices if this should become relevant to the issue
remanded for trial