21 T.C. 746">*747 Respondent determined deficiencies in petitioner's income taxes in the amounts of $ 689.14 and $ 798.61 for the taxable years ended April 30, 1948 and 1949, respectively. The sole contested issue is whether income derived from the subjection of coal mined by petitioner to an oil treatment process constitutes income from an ordinary treatment process normally applied to obtain the commercially marketable mineral product within the meaning of section 114 (b) (4) (A) and (B) of the Internal Revenue Code, so 1954 U.S. Tax Ct. LEXIS 290">*291 as to permit its includibility in gross income from mining property for purposes of computing percentage depletion thereon.

FINDINGS OF FACT.

Some of the facts have been stipulated and are found accordingly.

Petitioner is a corporation organized under the laws of the State of Virginia in 1909. It maintains its principal office and place of business in Chicago, Illinois. Petitioner kept its accounts on an accrual basis during the taxable years in controversy and filed its returns on that basis for those periods with the collector for the first district of Illinois.

During the periods in controversy, petitioner was engaged in the business of mining bituminous coal on properties owned by it in the States of Virginia and Kentucky, designated as Mines Nos. 30 and 31.

As an integral part of its business activities at its mines, petitioner processes its coal after it is extracted from the ground in various ways, including cleaning, breaking, sizing, and loading for shipment. During the fiscal years herein petitioner also oil-treated some of its coal.

The oil treatment of coal by producers of bituminous coal consists of the application, by various means, of oil to the surface of the coal, 1954 U.S. Tax Ct. LEXIS 290">*292 primarily for allaying dust. Dust is also allayed by the use of calcium chloride, calcium chloride and oil, and, to a lesser extent, by the use of other materials.

Petitioner's oil treatment is effected by fogging the coal with an extremely fine mist of preheated oil of suitable viscosity and temperature which is applied to the coal under pressure through suitable nozzles. The apparatus consists primarily of oil containers, pumps, 21 T.C. 746">*748 heaters, and supply and return lines (since the oil must be in constant circulation), together with a companion steam line used for heating purposes. Application of the oil is made by opening the nozzles as the coal to be treated passes from the surge bins on its way to the car, and closing the nozzles when the tonnage necessary to fill an order for oil-treated coal has passed the fogging device. While other means of applying oil to the coal at the mines are in use in the industry, the end result of such methods is substantially the same, that is, the application of a microscopic film of oil to the coal before or as it is loaded at the mines for transit to the consumer. Petitioner's oil treatment of coal does not measurably increase the British1954 U.S. Tax Ct. LEXIS 290">*293 Thermal Units of the coal so treated.

On the average, 6 quarts or 11 pounds of treating oil are applied to 1 ton, or 2,000 pounds of coal, by passing the coal through the fine mist or fog of the oil. The purpose of this treatment is to allay dust for a normal storage period. The technique of the treatment is such that it is not generally feasible or economical today for anyone other than the mine owner or operator to apply it. The oil treatment of coal at the mines for allaying dust was fully developed early in the decade commencing with the year 1930 in connection with the domestic stoker heating plant as a part of the development of the coal industry in meeting the competition of oil and gas as a domestic heating fuel. As early as 1922, oil treatment and other processes to allay dust were performed in retail dealers' yards.

In 1920 bituminous coal and lignite were the source of 67.8 per cent of the power produced in the United States as against 18.4 per cent for oil and gas; by 1930 the percentage had changed to 54.6 per cent and 34.1 per cent, respectively; by 1940, to 47.9 per cent and 43.4 per cent, respectively; and by 1949, to 35.9 per cent and 55.8 per cent, respectively. 1954 U.S. Tax Ct. LEXIS 290">*294 Before the development of the domestic stoker heating plant, coal in the sizes used therein was usually shipped to industrial users, railroads, and electric utility plants, along with screenings or slack (the next smallest size). After the development of the domestic stoker heating plant and the oil treatment process, the special stoker sizes and grades of coal became generally marketable for domestic use. Without the application of the oil treatment process, coal for domestic heating purposes would find it much more difficult to meet the competition of oil and gas.

Geologically, coal is classified in five broad categories: anthracite, low volatile bituminous, medium and high volatile bituminous, subbituminous, and lignite. Commercially, coal is classified in a multitude of categories or products depending on its kind, quality, and size. Of the 23 coal producing districts established under the Bituminous Coal Act of 1937, that district in which the petitioner's mines were 21 T.C. 746">*749 located had 27 price classifications of high volatile bituminous coal and 10 price classifications of low volatile bituminous coal.

Petitioner sells various sizes of bituminous coal, ranging from 5-inch1954 U.S. Tax Ct. LEXIS 290">*295 block to 1/4-inch by 0 carbon. The total coal tonnage produced and sold by petitioner, and the amount thereof sold as oil-treated coal during its fiscal years ended April 30, 1948, and April 30, 1949, were as follows:

Petitioner oil-treated 45.06 per cent and 36.33 per cent of its total coal production in the fiscal years ended April 30, 1948 and 1949, respectively.

Petitioner's gross income from oil treatment and the cost of the oil for the fiscal years ended April 30, 1948, and April 30, 1949, were as follows:

The following table is a summary of the treatment of bituminous coal and lignite at the mines for allaying dust in the United States for the1954 U.S. Tax Ct. LEXIS 290">*296 years 1940-49, inclusive: 21 T.C. 746">*750

21 T.C. 746">*751 The sharp falling off of the percentage of coal treated with oil during the years 1942 through 1945 was due to restrictions imposed on the use of oil during World War II.

The following table shows figures published by the Bureau of Mines of the United States Department of Interior:

The following table shows, by years, the percentage of total1954 U.S. Tax Ct. LEXIS 290">*298 bituminous coal produced in the United States at mines where none of the production is treated in any way to allay dust:

The following table shows by years, from 1940 through 1949, the percentage of bituminous coal production oil-treated at the mines in the United States:

The following table shows, for the years 1940 through 1949, the number of bituminous coal and lignite mines in the United States producing more than 1,000 tons, the number of these mines treating coal with oil for allaying dust, the percentage of these mines treating 21 T.C. 746">*752 with oil to the total number of mines, and the percentage of mines treating with all materials to the total number of mines:

1954 U.S. Tax Ct. LEXIS 290">*299 The following table shows in thousands of net tons, for the years 1940 through 1949, (A) the total tonnage of bituminous coal and lignite oil-treated at the mines; (B) the total retail dealer deliveries during those years, treated and untreated; and (C) the percentage that the total oil-treated tonnages bear to the retail dealer deliveries for each year:

Statistics published by the Bureau of Mines of the United States Department of Interior divide coal consumers into 8 classes: (1) electric power utilities, (2) bunker foreign trade, (3) railroads (class I), (4) coke plants, (5) steel and rolling mills, (6) cement mills, (7) other industrials, and (8) retail dealer deliveries. Not more than 50 per cent of bituminous coal in the retail dealer deliveries class was oil-treated to allay dust in any of the years 1940 through 1949. The following table shows (A) the percentage of1954 U.S. Tax Ct. LEXIS 290">*300 total bituminous coal consumed in the retail dealer deliveries class; (B) 50 per cent of column A; and (C) the percentage of total production of bituminous coal treated at the mines for allaying dust by all methods: 21 T.C. 746">*753

With the exception of size 1/4-inch by 0 carbon, petitioner made some sales of non-oil-treated coal in all sizes sold to domestic customers.

The following table shows the combined totals of petitioners' shipments of coal in all sizes, oil-treated and untreated, to industrial and domestic consumers during the months of February and November in each period in controversy, in tons and fractions of tons:

1954 U.S. Tax Ct. LEXIS 290">*301 The following table relating to Kentucky and Virginia shows, for the years 1947, 1948, and 1949, the number of bituminous coal and lignite mines producing more than 1,000 tons, the number of mines 21 T.C. 746">*754 treating coal for allaying dust, and the percentage of mines treating coal for allaying dust to the total number of mines in those states:

The following table shows for the years 1947, 1948, and 1949, the tonnage of bituminous coal produced in Kentucky and Virginia, the tonnage of such coal from these States which was treated at the mines for allaying dust, and the percentage of production treated to total production:

Coal which is not oil-treated represents the first commercially marketable mineral product.

Oil-treated coal is coal which is specially treated.

At least since 1905 and through the year 1949, all coal has been cleaned by mine owners or operators, either by hand or by machine.

At least since 1905 and through the year 1949, most coal has been sized by mine owners or operators.

All mines serving the coal trade in competition with each other, and producing more than 1,000 tons, size and clean their coal.

The greater share of anthracite coal is broken by mine owners or operators.

21 T.C. 746">*755 Practically all coal, except what might be used in the boiler at the mines, is loaded for shipment.

In cleaning, breaking, sizing, and loading for shipment, no material is added to the coal.

The fines, i. e., sizes less than 2 inches, represent roughly one-half the tonnage of a coal mine.

A stoker uses sizes less than 2 inches in order to gain the difference in cost between those sizes and the larger sizes.

There is a market for petitioner's stoker coal and for bituminous stoker coal generally which 1954 U.S. Tax Ct. LEXIS 290">*303 is not oil-treated.

The oil treatment of coal represents a further refinement of the first salable product which is a step beyond the mining operation.

The oil treatment of bituminous coal is not an ordinary treatment process normally applied by mine owners or operators in order to obtain the first commercially marketable coal product.

OPINION.

Petitioner subjected a part of the output of its coal mine to an oil treatment process designed to make the coal more salable for domestic home heating purposes. The question is whether the price received for coal so treated may be used in its entirety as gross income from the mining property for purposes of computing depletion under section 114 (b) (4) (A), Internal Revenue Code, ¹ or whether as respondent has determined a deduction must be made for the part of the value of the product attributable to the oil treatment.

1954 U.S. Tax Ct. LEXIS 290">*304 The statute was amended in 1943 so that as applicable to this proceeding it reads as follows:

(B) Definition of Gross Income From Property. -- As used in this paragraph the term "gross income from the property" means the gross income from mining. The term "mining", as used herein, shall be considered to include not merely the extraction of the ores or minerals from the ground but also the ordinary treatment processes normally applied by mine owners or operators in order to obtain the commercially marketable mineral product or products. The term "ordinary treatment processes", as used herein, shall include the following: (i) In the case of coal -- cleaning, breaking, sizing, and loading for shipment * * *.

The section has been the subject of litigation with respect to talc in International Talc Co., 15 T.C. 981">15 T.C. 981, and the predecessor regulation as to quicksilver in New Idria Quicksilver Mining Co., 2 T.C. 412">2 T.C. 412, 21 T.C. 746">*756 revd. (C. A. 9) 144 F.2d 918">144 F.2d 918. We have, however, been referred to no judicial authority throwing light on the question we are now called upon to decide.

From the statute itself1954 U.S. Tax Ct. LEXIS 290">*305 and the cases cited it becomes apparent that the provisions requiring special interpretation are the words "ordinary" and "normally"; and the application to the facts before us of the phrase "commercially marketable mineral product or products."

Petitioner's position in brief is that it is required to apply oil treatment to the coal it sells in competition with domestic fuels such as gas and oil; that the coal so treated is the commercially marketable product; and that it is an ordinary treatment process normally applied under the circumstances.

Only by classifying the stoker-size bituminous coal as a separate "commercially marketable mineral product" can petitioner succeed in any event in qualifying its oil treatment under the statute as "ordinary" or "normally applied." Compared to all coal, or even to all bituminous coal, any treatment for allaying dust is almost negligible. ² It would be anomalous to say that a process used in as little as 9 1/2 per cent of the total coal output was an ordinary one.

1954 U.S. Tax Ct. LEXIS 290">*306 Moreover, the regulations, if not the statute, treat the phrase "commercially marketable mineral product" as meaning "first commercially marketable mineral product." Regs. 111, sec. 29.23(m)-1. This we think a reasonable interpretation if not the only one possible. The objective is to reach the gross income from "mining." Mineral products resulting from subsequent processing are not to be considered the result of mining operations. Brea Canon Oil Co., 29 B.T.A. 1134">29 B.T.A. 1134, affd. (C. A. 9) 77 F.2d 67">77 F.2d 67, certiorari denied 296 U.S. 604">296 U.S. 604. Otherwise any refinement not changing the basic nature of the article would have to be considered a part of the mining activity itself, a result obviously not intended.

Granting that by its use of the word "include" the section intended to encompass also other processes used to produce commercially marketable coal; ³ and granting further in the absence of any legislative history to the contrary, that use of the word "the" especially coupled with the term "product or products" includes the possibility that more than one commercially marketable product might constitute the1954 U.S. Tax Ct. LEXIS 290">*307 output of a single mine; it hence, nevertheless, remains necessary 21 T.C. 746">*757 for the facts as established by the present record to show not only that the oil treatment of coal is ordinary and that it is normally resorted to, but that oil-treated coal is itself the first commercially marketable mineral product in petitioner's operation.

Can it then be said that the oil-treated coal has been shown on this record to be the first commercially marketable mineral product? We think not.

Although oil treatment may have made the product more salable the inescapable fact remains that the first commercially marketable mineral product was the coal itself. That came in different sizes and was apparently sold in different markets. 1954 U.S. Tax Ct. LEXIS 290">*308 But the evidence does not convince us that any processes comparable to those itemized in the statute ⁴ were necessary to create a commercially marketable mineral product out of the coal in question.

1954 U.S. Tax Ct. LEXIS 290">*309 Nor will it do to say that the "commercially marketable mineral product" in the case of domestic stoker coal is necessarily the oil-treated product on the ground that this treatment is necessary to compete with other domestic fuels. Even were the argument otherwise sound the present record shows that some stoker coal was sold for domestic use without oil treatment; and that on the other hand some oil-treated stoker sizes were sold for industrial use. ⁵ True the proportions in each instance were small but if petitioner's theory were adopted larger and larger percentages might stray from the norm without depriving the processor of his depletion allowance. Somewhere a line would have to be drawn and it seems simpler and more logical to draw it here since it is the principal rather than the amount with which we are now concerned.

1954 U.S. Tax Ct. LEXIS 290">*310 21 T.C. 746">*758 Even were we inclined to apply the "end-use" test, cf. E. J. Lavino & Co. v. United States, (E. D., Pa.) 72 F. Supp. 248">72 F. Supp. 248, and conclude that the coal actually sold and used for domestic stoker purposes was a separate class of "mineral product" we could not here do other than sustain respondent's determination. The figures already cited show that some portion of petitioner's oil-treated coal was used for industrial purposes and that a further portion of the larger sizes were oil-treated in spite of the lack of proof of any necessity therefor. Yet the entire proceeds of all oil-treated coal are claimed as gross mining income. To hold that the oil treatment of these items was a mining process and that the income derived from their sale was the gross income from mining would be so obvious a distortion of the record and of the depletion provisions that no such result would in any event be permissible. On that theory any coal producer who chose to augment his gross income by subjecting the coal produced to oil treatment would automatically entitle himself to an increased depletion allowance regardless of any other factor.

We conclude that 1954 U.S. Tax Ct. LEXIS 290">*311 the deficiency was correctly determined.

Decisions will be entered for the respondent.

Arundell, J., dissenting: Petitioner subjected a part of the output of its coal mine to an oil treatment process designed to make the coal more salable for domestic home heating purposes. Our query is whether the price received for the coal so treated may be used in its entirety as gross income from the mining property for purposes of computing depletion under section 114 (b) (4) (A) of the Internal Revenue Code. The applicable statutes are quoted in the majority opinion.

The statute makes clear that mining is not limited to the mere extraction of the ore, but includes the "ordinary treatment processes normally applied by mine owners or operators in order to obtain the commercially marketable mineral product or products." There is no question that the oil treatment was a process applied by mine owners to obtain a commercially marketable product, but the majority have concluded that the oil treatment was not an ordinary treatment process normally applied by mine owners. This conclusion is based largely on statistics.

Certainly the oil process was not unusual or extraordinary, for1954 U.S. Tax Ct. LEXIS 290">*312 the amount of coal treated with oil or in a similar manner to allay the coal dust ran into millions and millions of tons a year and a very large part of the bituminous coal which was used for heating homes was so treated. In fact, it is doubtful if there would have been any considerable market for bituminous coal for home heating purposes if the coal 21 T.C. 746">*759 had not been given this treatment. In a competitive economy, there are always new and better methods being used to accomplish the same end, and whether the coal was washed with water or oil to allay the coal dust should not be a determinative matter in the construction of this statute.

The statute looks to a broad construction for, while it names certain treatment processes as "ordinary," its very wording suggests that other treatment processes may well come within the ambit of the statute.

I would hold that the oil treatment was an ordinary process normally applied by mine owners in order to obtain a commercially marketable product within the meaning of the statute. It would follow that the price received for the coal so treated would constitute gross income for the purposes of computing depletion.