27 T.C. 392">*392 Respondent determined deficiencies in income and excess profits taxes for the petitioner for the taxable years 1951, 1952, and 1953 in the respective amounts of $ 12,577.94, $ 14,716.22, and $ 10,138.59. He 27 T.C. 392">*393 now concedes on brief that as to certain sales during the taxable years of deposits quarried by petitioner, percentage depletion is allowable at a rate of 15 per cent. As to the remaining sales during said taxable years, the issue is whether the deposits quarried and sold are quartzite, and entitled to percentage depletion at the rate of 15 per cent under section 114 (b) (4) (A) (iii) or limited to a rate of 5 per cent under section 114 (b) (4) (A) (i) under respondent's end-use theory.

FINDINGS OF FACT.

Some of the facts are stipulated, and to the extent so stipulated are incorporated herein by reference.

Petitioner is now and was at all times during the taxable years involved herein, which are the calendar years 1951, 1952, and 1953, a corporation duly organized under and by virtue of the laws of the State of South Dakota with its office and principal place of business in the county of Hanson, State1956 U.S. Tax Ct. LEXIS 28">*30 of South Dakota.

During the taxable years involved, petitioner maintained its books and records and filed its Federal income tax returns on a calendar year basis, employing the accrual method of accounting. The Federal income tax returns of petitioner for the taxable years involved were duly filed with the collector (later district director) of internal revenue for the district of South Dakota.

During the taxable years involved herein, petitioner owned in fee simple certain real estate in the county of Hanson, State of South Dakota, including certain lands located approximately 1 1/2 miles southwest of the city of Spencer along Wolf Creek in the northeast portion of section 24 in Edgerton Township 102 North, Range 57 West, containing natural deposits, at which petitioner operated a quarry. During said taxable years, petitioner also owned a plant, machinery, and equipment, for the quarrying of said deposits from the earth, and was engaged in the business of quarrying and selling said deposits.

During the taxable years involved herein, petitioner did not pay or incur any rents or royalties with respect to any of the property or the quarrying operations above described.

In general, 1956 U.S. Tax Ct. LEXIS 28">*31 during the taxable years involved herein, petitioner caused its said deposits to be quarried and treated as follows:

Overburden, if any, was removed and holes were drilled directly into the deposits, within which holes explosives were placed and detonated, causing the breaking up of the deposits selected into large, irregularly shaped pieces known as the "quarry run."

The quarry run was putthrough one of two processes:

(1) Iron ball breaker (sometimes referred to as a "skull cracker"). This process broke the quarry run into the maximum and minimum range of weights 27 T.C. 392">*394 desired. These broken deposits were at times also sorted with respect to shape (i. e., length in relation to width). The deposits so treated were commonly referred to by petitioner as "riprap."

(2) Stone crushers and screens. This process broke the quarry run into units more nearly uniform in size and smaller than the deposits treated in the process described in subparagraph (1). Following the crushing, the deposits were graded according to size by being placed over square-hole screens, the weight of such deposits not being material with respect to such process. During the screening, the crushed deposits1956 U.S. Tax Ct. LEXIS 28">*32 were washed, causing the smaller particles to be carried away to settling tanks, from which tanks these smaller particles, generally one-eighth inch and less in size, were recovered. The deposits so crushed and screened were commonly referred to by petitioner as "crushed rock" or "crushed stone" and the deposits crushed, screened, washed and recovered from settling tanks were commonly referredto by petitioner as "fines" or "sand."

The appearance, weight, physical structure, and chemical composition of petitioner's deposits were generally uniform throughout petitioner's said quarry.

All of the natural deposits which petitioner removed from its said quarry and sold during the taxable years involved herein are composed of and identified and classified, according to their mineralogical, petrological, geological, and chemical content, as "quartzite." Said deposits are all mineral deposits of metamorphosed or silica-cemented sandstone having a free silicon dioxide content in excess of 95 per cent; are so firmly cemented that they have the physical characteristic of breaking across rather than around the original sand grains; have a low porosity; and are very resistant to high temperatures,1956 U.S. Tax Ct. LEXIS 28">*33 sudden changes in temperature, and most chemical reagents.

With the exception of the sales hereinafter described in the next succeeding paragraph, all of the deposits which petitioner removed from its said quarry and sold during the taxable years involved herein were sold to purchasers who used the same as crushed stone, crushed rock, riprap, and sand for such purposes as the construction of roads, highways, earth dams and as concrete aggregate. Petitioner's invoices and bills of lading respecting said sales variously described said deposits as crushed stone, crushed rock, riprap, and sand.

Petitioner made sales of deposits removed from its said quarry in the amounts of $ 10,340.46, $ 7,194.64, and $ 7,737 in the taxable years 1951, 1952, and 1953, respectively, through National Foundry Sand Co. of Detroit, Michigan. Said sales were made to ultimate purchasers who used said deposits for refractory and other purposes for which said deposits were peculiarly adapted by reason of their chemical composition and physical characteristics.

Set forth below is petitioner's gross income from the property and petitioner's net income for depletion purposes for each of the taxable years 1951, 1956 U.S. Tax Ct. LEXIS 28">*34 1952, and 1953: 27 T.C. 392">*395

The natural deposit contained in petitioner's quarry, part of which was removed and sold during the taxable years in question, is officially identified and classifiedas "quartzite" in the Areal Geology Sheet of Hanson County, South Dakota, contained in the United States Geologic Atlas, Alexandria Folio No. 100, an official publication of and prepared by the United States Geological Survey of the Department of the Interior. Petitioner's quarry is located completely within this one massive quartzite deposit.

In the quarry-operating business and in the refractories business, all of the natural deposits removed from petitioner's quarry and sold during the taxable years involved herein are "quartzite" within the commonly understood commercial meaning of the term.

At the time when the deposits involved herein were still in an untouched, unbroken state within petitioner's quarry, such deposits were composed of quartzite.

The use or uses to which1956 U.S. Tax Ct. LEXIS 28">*35 a purchaser of petitioner's deposits intends to put such deposits do not affect either the selection of the deposit to be quarried or the manner by which such deposit is removed from petitioner's quarry.

Before the quartzite can be sold or used commercially, it is necessary for petitioner to blast out from the face of the quarry huge blocks of the mineral. Then, by further breaking, crushing, and screening, it is possible to offer a prospective purchaser pieces ranging anywhere from small particles less than one-sixteenth inch in size up to solid blocks weighing as much as 15 tons. Some of the broken pieces are crushed into sizes so small as to be described as "sand," "fines," or even "dust."

Quartzite, when reduced by petitioner to the form of large, unevenly shaped pieces called riprap, is capable of being used to line river banks and to protect dam faces from erosion. When crushed into smaller pieces, it is capable of being used for road building, general construction work, and as concrete aggregate. In addition, because of its silica content, which prevents the mineral from melting or fusing except at extremely high temperatures, quartzite may also be used as a refractory.1956 U.S. Tax Ct. LEXIS 28">*36 All of the deposits were suitable for use as a refractory material.

A refractory is any material having certain properties which make it able to withstand extremely high temperatures and is used to protect 27 T.C. 392">*396 furnaces, ladles, forges, or other containers from the heat generated either in the melting of metal ore within the container or to protect the container from the heat of molten material being pouredinto the container. For example, an iron ore melting furnace must be lined with a refractory material so as to prevent the furnace (which itself is made of iron) from melting when the heat within the furnace is equal to the melting point of the iron. Because quartzite does not tend to fuse until the temperature rises to around 3,190 degrees (as compared with the melting point of iron, which may be as low as 2,750 to 2,800 degrees), quartzite is an ideal refractory material.

Although petitioner makes a greater profit on its sales of quartzite to purchasers who use it for refractory purposes (rather than for construction purposes), such sales do not form a large part of petitioner's business because the general need of the construction industry exceeds the general need for1956 U.S. Tax Ct. LEXIS 28">*37 refractory material and also because purchasers who use petitioner's quartzite as a refractory are all located long distances away from petitioner's quarry.

All of deposits quarried and sold by petitioner involved herein were quartzite within the commonly understood commercial meaning of that term.

OPINION.

The issue here presented arises over the construction and application of the provisions of the Internal RevenueCode, as amended, which control the rates of percentage depletion for petitioner's product. The material provisions of the statute are set forth in footnote 1. ¹

1956 U.S. Tax Ct. LEXIS 28">*38 27 T.C. 392">*397 Petitioner's position is that, when Congress provided in section 114 (b) (4) (A) (iii) that the allowance for depletion "shall be * * * in the case of quartzite * * * 15 per centum * * * of the gross income from the property during the taxable year" it intended the word "quartzite" to mean a particular class of natural deposit which is commonly and commercially known by that name; that the deposits here involved were of such a class; and that percentage depletion should be allowed in respect of all of such deposits of petitioner at the uniform rate of 15 per cent, irrespective of the end uses to which its products were put by its customers.

Respondent concedes on brief that petitioner is entitled to a 15 per cent rate of depletion on all of the sales of its deposits through National Foundry Sand Co. in the years in question, the amounts of which are set forth in our findings. Respondent makes this concession because the end use of the deposits so sold was for refractory purposes, to which quartzite is specially adapted.

As to all other sales, in which the end uses were otherwise, as described in our findings, respondent's position is that employment of the end-use test1956 U.S. Tax Ct. LEXIS 28">*39 is inherently necessary in order to effectuate the purpose of Congress in enacting section 114 (b) (4) (A) wherein several natural deposits are specifically named with different rates of percentage being assigned, but where, according to respondent's contention in the instant case, such natural deposit may qualify under more than one category and rate of depletion.

Respondent does not deny that the deposits in question were quartzite within the generally accepted meaning of that term. He argues that it is not quartzite within the meaning of the statute solely on the basis of his theory of end use. In support of this view, he contends that in the case of all of petitioner's sales in which he would allow only a 5 per cent depletion rate under section 114 (b) (4) (A) (i) instead of 15 per cent under section 114 (b) (4) (A) (iii), petitioner is competing with other quarries that are quarrying common stones and other natural deposits in that category. He asserts that Congress did not intend that such a competitive advantage be given petitioner, and that the end-use test is necessary and must, therefore, have been intended.

1956 U.S. Tax Ct. LEXIS 28">*40 We cannot accept respondent's view. In Virginian Limestone Corporation, 26 T.C. 553,we considered, in principle, the identical issue. 27 T.C. 392">*398 That case involved dolomite (entitled to a 10 per cent rate under section 114 (b) (4) (A) (ii)) and the surrounding circumstances were the same. There we found as a fact that the rock in question was dolomite within the commonly and commercially accepted meaning of that term. We have made a like finding here that the deposits quarried were quartzite within its commonly and commercially accepted meaning. There the respondent did not deny the rock was dolomite, and here he does not deny the deposits were quartzite. In Virginian Limestone Corporation, supra, the history of the legislation which added paragraphs (i), (ii), and (iii) to section 114 (b) (4) (A) was carefully considered and it was clearly demonstrated that the names of the various enumerated items were intended to have their commonly understood commercial meaning, and further that it was intended, in any case where an item was specifically provided for at a stated rate of percentage allowance, the specific provision would govern over the allowance1956 U.S. Tax Ct. LEXIS 28">*41 provided (whether higher or lower) for a more general classification. Cf. National Lead Co., 23 T.C. 988,reversed on other grounds 230 F.2d 161, certiorari granted 351 U.S. 981">351 U.S. 981.

As to the end-use principle, we said in Virginian Limestone Corporation, supra, at page 560:

We find nothing in the applicable statute, or in its legislative history, which tends to show any intention of Congress that, where a mineral has therein been specifically provided for at a stated rate, such rate may be varied by the Commissioner in accordance with the end use to which the product is put by the taxpayer's customers. An allowance for depletion has been recognized in our revenue laws since 1913, based on the theory that the extraction of minerals gradually exhausts the capital investment in the mineral deposit, and that a deduction from gross income should be allowed to compensate for such exhaustion. All of the revenue acts enacted prior to 1954, in which such allowance was provided, speak in terms of the wells, mines, and natural deposits which are subject to the exhaustion, as distinguished from the products therefrom or the uses to1956 U.S. Tax Ct. LEXIS 28">*42 which such products may be put by customers.

In the Revenue Act of 1926, there wasintroduced the new concept of percentage depletion. Under this concept, the determination of the "reasonable allowance" for depletion of certain minerals, was removed from the control of the Commissioner; and such allowance was fixed by Congress itself at certain stated percentages of the gross income from the property. One of the principal reasons for this change was the determination by Congress that administration of the then existing provisions for discovery depletion in respect of oil and gas had proved difficult; and that a change was desirable "in the interest of simplicity and certainty in administration."

Subsequently, under the Revenue Acts of 1928, 1932, 1942, 1943, and 1951, the benefits of percentage depletion were extended to various other minerals and natural deposits. Although the history of these Acts indicates that one of the reasons for such extension was that certain minerals not previously entitled to percentage depletion were competing with other minerals receiving such benefit, there is no indication that after Congress had selected the additional minerals and had provided stated1956 U.S. Tax Ct. LEXIS 28">*43 rates of depletion therefor, such rates were to be subject to variation by theCommissioner.

27 T.C. 392">*399 We think the provisions of the statute are specific and free from ambiguity. Under the circumstances, there is no room for interpretation which would permit the Commissioner to vary the stated rates either upward or downward.

In view of the thorough consideration given to the problem in Virginian Limestone Corporation, supra, we think further discussion is unnecessary except to add that we have reviewed E. J. Lavino & Co. v. United States, 72 F. Supp. 248">72 F. Supp. 248 (E. D., Pa., 1947), and find it as clearly inapplicable to quartzite as it is to dolomite.

We hold, therefore, that the deposits here in issue, quarried and sold by petitioner, were quartzite within the meaning of section 114 (b) (4) (A) (iii) and that the applicable depletion rate is 15 per cent.

Decision will be entered under Rule 50.