Ottawa Silica Company v. The United States

This tax refund suit for tax years 1964, 1967, 1969-1971, comes before us on appeal from the United States Claims Court. * Two issues are involved: (1) whether taxpayer Ottawa Silica Company is entitled to certain percentage depletion deductions for 1965-71, and (2) whether that company may claim a charitable contribution for the transfer of land to a high school district. On both questions, Judge Colaianni ruled against taxpayer and therefore dismissed its petition. We fully agree with that opinion, which is appended hereto, and therefore affirm on the basis of that opinion.

Affirmed.

APPENDIX

The opinion of Judge Colaianni of the Claims Court follows:

In this action, plaintiff, Ottawa Silica Company, seeks to recover federal income taxes and assessed interest for its tax years 1964, 1967, 1969, 1970 and 1971, plus statutory interest. There are two issues to be resolved: whether Ottawa Silica Company (Ottawa) is entitled to certain percentage depletion deductions for the years 1965-71, and whether it may claim a charitable contribution for the transfer of land to a high school district. 1

Ottawa is a family-owned corporation organized and existing under the laws of the State of Delaware and has its principal place of business in Ottawa, Illinois. Ottawa has been engaged in the mining, processing and marketing of industrial sand known as silica since 1900. Silica sand, also known as quartzite, as distinguished from *1126 common sand, is a highly refined industrial mineral. It is the basic raw material of the glass and ceramic industry. It is also used in the foundry industry as a core and molding sand. Its industrial uses in chemical markets include: paint, testing sand, and hydrofracing sand for the oil well industry.

Although Ottawa, Illinois, remains the company’s major mining location and its corporate headquarters, the high freight costs for shipping silica forced plaintiff to acquire other companies in various geographic locations throughout the country. Thus plaintiff acquired the Michigan Division in Richwood, Michigan, in the late 1940’s. To better serve the east coast market, plaintiff acquired the Connecticut Silica Company in 1959.

Similarly, plaintiff in the mid-1950’s was interested in acquiring mining property on the west coast so it could be as close as possible to its west coast customers. In 1956 plaintiff incorporated the Oceanside Realty and Development Company (ORDC), as a subsidiary under the laws of Delaware, to acquire and own its west coast mining properties. Its certificate of incorporation authorized ORDC to engage in a broad range of business activities, including the acquisition, development, and management of real property. At the same time, Ottawa purchased the stock of Crystal Silica Company (CSC), which operated a mining plant in Oceanside, California. CSC owned 80 acres of what was once silica-rich land in the eastern part of Oceanside on which its plant was located. CSC also held a mineral lease to lands on adjoining property known as the Freeman Ranch. In 1957, ORDC purchased the Freeman Ranch and granted CSC the right to mine the silica deposits. ORDC in turn received royalties from CSC for its mining operations. ORDC acquired the Freeman Ranch primarily to obtain its silica deposits, although only 377 acres of the 725-acre ranch contained mineable reserves. Eastern Oceanside was generally zoned for agricultural use, but the city’s general plan proposed eventual residential uses. CSC’s silica plant and mines have been operating under conditional use permits which allowed industrial activities in the agricultural zone.

The eastern part of Oceanside in which both the CSC operation and the Freeman Ranch are located was, in the late 1950’s, being primarily used as open ranch land and, to a lesser degree, for dry farming. The only developed area was a retirement community, known as Oceana, that lay to the northwest of the Freeman Ranch. The area in question, as shown in the following map, would eventually be serviced, in the main, by three major roads.

*1127

Plaintiff's Land Holdings in East Oceanside

To the south of the Freeman Ranch, Oceanside Boulevard ran in an east-west direction. El Camino Real ran along the western end of the Freeman Ranch, in a north-south direction, intersecting Oceanside Boulevard at the southwest corner of the ranch. Somewhat to the north of the Freeman Ranch, El Camino Real intersected Mission Boulevard, which ran generally in a northeasterly direction. ORDC later acquired other properties in Oceanside, all of which were substantially surrounded by these three roads.

In October 1964, Ottawa purchased another parcel of land in Oceanside, known as the Cubbison Ranch. The Cubbison Ranch *1128 was generally in the shape of a reversed “L” and its western boundary adjoined the eastern edge of the Freeman Ranch. From this common boundary the Cubbison Ranch extended to the east and then turned to the north. Approximately 104 acres of the Cubbison Ranch adjoining the Freeman Ranch contained mineable silica deposits. The remainder of the 1,054 Cubbison Ranch contained no mineable reserves. The cost for acquiring both the Freeman and Cubbison Ranches was approximately $4 million.

Oceanside, which was a sleepy city of 4.000 in 1940, has experienced rapid growth since World War II. During WWII, a U.S. Marine Corps base, Camp Pendleton, was established immediately north of Oceanside to train men for the war effort. Today the camp is home to some 40,000 servicemen and their families. The camp runs across the entire northern boundary of Oceanside. Nestled as it is on the California coast, the Pacific Ocean prevents any westward expansion of the city. The city of Carlsbad lies a little south of Oceanside. Thus the only direction in which the city can expand is to the east. The city, which covers some 40 square miles of area, had grown to about 12.000 by 1950. Its population doubled during the next decade, and by November 1980, the population had passed the 70,000 mark.

This phenomenal population growth forced the city to expand geographically in the only direction it could, eastward, and generally towards plaintiffs mining operations. It was because of the apparent collision course between its mining operations and the population growth of Oceanside that the Cubbison Ranch took on even more significance to plaintiff. Specifically, even though over 900 acres of the 1,054-acre Cubbison Ranch were silica poor, they served the useful purpose of slowing down growth and development in the vicinity of CSC’s mining operations.

In the early 1960’s Oceanside was experiencing a very active development boom. The upturn in building was not confined to residential development, for a new junior college was established just south of the Cubbison Ranch. Plaintiff was concerned that the growth in building and development would bring larger concentrations of population nearer to its mining operations. Silica mining is done in a large open pit area and is a notoriously dirty operation. The production process, which is carried out in a plant, in addition to being noisy, is extremely dirty. This sort of mining activity is incompatible with residential use of adjoining land. For this reason, increases in population in the vicinity of a mine have usually led to the shutdown of the mine. The Cubbison Ranch acted as a buffer to isolate CSC’s mining operations from neighboring land uses, especially residential development, with which it was incompatible. Plaintiff hoped, through the use of large buffer areas, to control the pace of development of much of the land surrounding its mining properties.

Following the purchase of the Cubbison property, ORDC was faced with high tax bills, sizable loan carrying costs, and a concern over the future use and disposition of its rather significant land holdings. These concerns in April 1965 led to the retention of William L. Pereira & Associates (Pereira), a land planner, to advise the plaintiff on possible uses for the substantia] nonmineral-bearing portions of its Oceanside property. Mr. John Steiger, a realtor, former member of the city council and vice mayor of Oceanside, had referred plaintiff to Pereira. Mr. Steiger was a long-time friend of Edmund B. Thornton, who during the period relevant to these proceedings, was president of plaintiff. ORDC informed Pereira that CSC’s primary business was silica mining and that the mineral-bearing property should be considered exclusively for mining. Plaintiff, however, allowed Pereira to use its own judgment in planning for the remainder of the property.

On the recommendation of Pereira, ORDC purchased two additional parcels of land, the Talone and Jones Ranches, which abutted its property to the north of the Cubbison and Freeman Ranches, respectively. ORDC purchased the 366-acre Talone Ranch in January 1966 for about $1,200,000 and the 118-acre Jones Ranch in June 1966 *1129 for $400,000. Plaintiff planned no mining on either of these ranches at any time. The four ranches, which cost plaintiff some $5,600,000, totalled about 2,300 acres and together formed a “U” shape, with the Jones Ranch being at the top left (western) side of the “U”, the Freeman Ranch being to the south, the Cubbison Ranch to the east of Freeman, and the Talone Ranch to the north of Cubbison at the top right (eastern) side of the “U”. The 750 acres in the center of the “U” belonged to a Mr. Ivey, who had over the years declined all of plaintiff’s offers to purchase or jointly develop the land, and was content to continue his ranching operation.

During the time that the Pereira report was being formulated, Edmund Thornton, president of Ottawa, met with the Pereira staff on several occasions to review their work and to comment on their recommendations. The Pereira staff also met with officials of the city of Oceanside to coordinate the Pereira Plan with the city’s master street plan. It was intended that the Pereira Plan would be submitted to the city for adoption as part of the city’s master street plan. Thus the road system was planned to integrate with the plans of the city, county and state agencies. Indeed the periphery of ORDC’s land holdings was very carefully dovetailed with the proposed plans so that the Pereira Plan could become a meaningful part of the overall city mosaic. The city planners ultimately did adopt most of the Pereira Plan as its own for the area it covered.

In December 1967, Pereira completed its study and presented to Ottawa a detailed plan calling for the residential and commercial development of the ORDC property in Oceanside, as well as neighboring property owned by others. The report envisioned two stages of development for the area: an “Interim Development Plan” for the short term, and a “Horizon Development Plan,” according to which the whole area would be developed as the population grew. During the interim period, the land would retain its rural character. The land would be used primarily for agricultural purposes and be divided into individual residential lots of relatively large acreage. Once the market for housing made residential development economically feasible, the land would be developed, for its ultimate use, into an urban residential area. This long-term transition from rural to urban land use was intended to allow uninterrupted concurrent mining of silica by ORDC on its mineral rich acreage. The mineral deposits on the Freeman and Cubbison Ranches were expected to last for another 40-50 years and thus full implementation of the Horizon Development Plan was some years in the future. The plan sought by plaintiff, and as produced by Pereira, allowed plaintiff to complete an orderly extraction of silica free of any concern that residential development would force it to stop its mining operations before it wanted to.

An important feature of the Pereira Plan was the “Loop Parkway,” a 6-mile long “scenic collector” road that would traverse and unify the entire development. As planned, the Loop Parkway would extend almost entirely through the ORDC property, following the “U-shaped” configuration of the Jones, Freeman, Cubbison, and Talone Ranches. To the north, at the tops of the “U”, the Loop Parkway was intended to connect with the proposed San Luis Rey Freeway, which was to run in a northeasterly direction somewhat parallel to Mission Boulevard. ORDC had acquired the Jones and Talone Ranches, at Pereira’s urging, in part to assure access to the proposed, but to this date never constructed, San Luis Rey Freeway, and also in the hope of being able to guide and control the development of the area pursuant to its overall plan. 2

ORDC adopted the Pereira Plan and used it as a guide in developing its property. *1130 The plan cost ORDC $82,983.90 and was the largest such report prepared in Oceanside between 1956 and 1977. In 1967, in keeping with Pereira’s Interim Development Plan, ORDC began planting citrus crops on a portion of the Cubbison Ranch. Incremental plantings of lemons, limes, tángelos, oranges, and avacados on some 400 to 600 acres of the ranch were made. The staged plantings were completed in 1974. At the time of trial plaintiff was conducting a commercial citrus operation to help defray the acquisition and carrying costs of the property.

By the mid-1960’s it became apparent