37 T.C. 512">*513 1961 U.S. Tax Ct. LEXIS 10">*11 Respondent determined deficiencies in petitioner's income tax as follows:

Petitioner is claiming overpayments for the taxable years 1954 and 1955 in the 1961 U.S. Tax Ct. LEXIS 10">*12 amounts of $ 4,650.17 and $ 4,400.59, respectively.

The issues presented for our decision are:

(1) Whether petitioner may claim depletion on part of its gross income from mining and selling deposits at the percentage rate applicable to calcium carbonates or at the percentage rate applicable to oystershells.

(2) Whether the payments made by petitioner to Edgar Haden in the amounts of $ 9,600 for each of the years 1952 through 1955 and $ 6,900 for the year 1956 are deductible as ordinary and necessary business expenses.

All other issues raised by the pleadings have been agreed to by the parties and the tax effect thereof will be computed pursuant to Rule 50.

FINDINGS OF FACT.

A stipulation of facts, to which certain exhibits are attached, was filed by the parties and is incorporated by this reference.

Petitioner W. D. Haden Company, sometimes hereinafter called the Haden Company, incorporated under the laws of Texas with its principal office in Houston, Texas, filed Federal corporation tax returns on a calendar year basis for the taxable years 1951 through 1957 with the district director of internal revenue, Austin, Texas.

Issue 1.

During the taxable years 1951 to 1957, inclusive, 1961 U.S. Tax Ct. LEXIS 10">*13 the Haden Company was in the business of mining prehistoric deposits located in Galveston Bay and Trinity Bay off the Texas gulf coast.

The mineral mined and sold by the Haden Company was oystershell within the commonly understood commercial meaning of the term; oystershell is the specific name applicable to the mineral mined by petitioner.

37 T.C. 512">*514 The oystershell mined by petitioner during the taxable years 1951 through 1957 was composed of approximately 97 to 98 percent calcium carbonates. Calcium carbonates are found in the United States in commercial quantities in the forms of limestone, oystershell, and marl, oystershell being the purest commercial form of calcium carbonates.

The oystershell was removed by petitioner by mechanical cutter from the bottom of the bays -- it was underneath a layer of mud. It was lifted by suction pipe into barges where it was washed and screened while at sea. After being so washed and screened, the oystershell was hauled on barges towed by tugs to shore where it was stockpiled; or in the case of sales to various chemical companies which purchased the oystershell for its calcium carbonate content, it was taken directly to the docks of the chemical1961 U.S. Tax Ct. LEXIS 10">*14 companies where it was sold at dockside. While these deposits are sometimes called "reefs," in a geological sense such deposits are coquina, lightly cemented shell limestone and must be mined with a mechanical cutter containing blades, which is a part of an elaborate hydraulic dredge. From these deposits the Haden Company mined and sold to both calcium carbonate users and to users of oystershell for roadbuilding, railroad ballast, etc. Its technique of mining the oystershell for its calcium carbonate customers was slower than and different from that employed in producing oystershell for roadbuilding, railroad ballast, etc.

The rate of speed of removal of the oystershell could be controlled by petitioner during the mining operation and petitioner regulated the speed of its rig from time to time so as to obtain a cleaner product for the users of its product as calcium carbonate. The nature of the mineral mined by petitioner remained the same, namely, oystershell, no matter at what rate of speed it was removed from the bays.

Petitioner sold oystershell to the Lone Star Cement Corporation, Houston, Texas, hereinafter referred to as Lone Star, and to Dow Chemical Company, Freeport, 1961 U.S. Tax Ct. LEXIS 10">*15 Texas, hereinafter referred to as Dow, during the taxable years 1951 through 1957. In addition, petitioner sold oystershell to the Nyotex Chemical Company, hereinafter referred to as Nyotex, during the taxable years 1951 through 1956. Lone Star, Dow, and Nyotex are sometimes herein referred to as the chemical companies.

Lone Star purchased oystershell from petitioner as a source of calcium carbonate for use in the manufacture of cement. Nyotex purchased oystershell from petitioner as a source of calcium carbonate for use in the production of high-calcium quicklime. Dow purchased oystershell from petitioner as a source of calcium carbonate for use in the production of lime.

37 T.C. 512">*515 In the stipulation of facts, as Joint Exhibit 10-J, are photostatic copies of contracts between W. D. Haden Company and Lone Star Cement Company, signed February 18, 1946, and March 22, 1957. Clause 1 of the contract dated February 18, 1946, reads as follows:

1. Said Producer agrees to sell and deliver to said Purchaser * * * during the period aforesaid, and the Purchaser agrees to purchase under the terms hereof, all of the clean oyster shells said Purchaser may require * * *. Said shells shall 1961 U.S. Tax Ct. LEXIS 10">*16 be hydraulically dredged with sufficient water to reduce the foreign matter to approximately five percent (5%) * * *

The contract dated March 22, 1957, and which became effective April 1, 1957, begins with the following statement:

Whereas, W. D. Haden Co., a corporation with its principal office at Houston * * * has agreed to sell and deliver to the Lone Star Cement Corporation, * * * which Corporation is engaged in the manufacture of portland cement * * * from calcium carbonate in the form of oyster shells, all the calcium carbonate it may require in its process in the form of oyster shells during the life of this contract. For purposes of clarification, the words "oyster shell", may be used in the wording of this agreement instead of the words "calcium carbonate".

Then follows the agreement itself which it is not necessary to set out here. It has already been made a part of these findings of fact by reference.

Also in Exhibit 10-J is a photostatic copy of a contract between the Haden Company and Dow Chemical Company dated May 1, 1950. This contract contains, among other things, these provisions:

(2) Quantities to be Purchased

* * * From time to time the BUYER needs certain1961 U.S. Tax Ct. LEXIS 10">*17 quantities of washed shell for the operation of its lime kiln or kilns * * * and certain other quantities of so-called "mud" or road shell for use in the various roads and building sites at its said plants. BUYER, therefore, agrees to purchase and receive from SELLER, and SELLER agrees to sell and deliver to BUYER * * * not less than an average of 300 cubic yards per day * * * of shell (either washed or "mud" shell, or both, at the option of BUYER) * * *

No contracts are in evidence between petitioner and Nyotex Chemical Company.

Petitioner also mined and sold oystershell for use in building roads, as aggregate in concrete, as ballast, for use in chickenfeed, and for use in bone builders for cattle and other animals.

Petitioner's gross income from property, subject to depletion in each taxable year, was reported using two designations and was as follows: 37 T.C. 512">*516

Petitioner claimed that its gross income from sales to Dow, Lone Star, and Nyotex entitled it to use the depletion rate applicable to calcium carbonates. As to its gross income derived from other sources, 1961 U.S. Tax Ct. LEXIS 10">*19 petitioner claimed the 5 percent depletion rate applicable to oystershell. The dispute between the parties with respect to this issue is concerned only with the rate of depletion applicable to petitioner's sales of oystershell to Dow, Lone Star, and Nyotex. The categories in the foregoing table labeled "Shell delivered for its Calcium Carbonate Content," "Calcium Carbonate (screened shell)," "As Calcium Carbonate," "As Calcium Carbonates," and "Sale of Shell as Calcium Carbonate," all refer to petitioner's gross income resulting from sales to Dow, Nyotex, and Lone Star.

Issue 2.

Edgar Haden, sometimes referred to as E. D. Haden or Ed Haden, began working for the Haden Company as an employee prior to 1917. The Haden Company was founded by W. D. Haden, father of Edgar Haden and Cecil R. Haden. The employee-employer relationship between petitioner and Edgar continued, with the exception of a year or two during World War I, until 1937 when Edgar resigned.

37 T.C. 512">*517 During the latter part of this employment, from about 1930 to 1937, Edgar was a sales executive for the Haden Company.

In 1939, Edgar formed his own company, the Ed Haden Company, in competition with petitioner's retail1961 U.S. Tax Ct. LEXIS 10">*20 general building material business. Edgar remained in business until a year or two after the commencement of World War II when he discontinued his activities. Little was known of Edgar's business activities subsequent to that time.

On January 8, 1952, petitioner's board of directors held a meeting in Galveston, Texas. The minutes of the meeting are in part as follows:

Mr. C. R. Haden presented a proposition to the Board that some arrangement be worked out to quiet the unrest occassioned [sic] by the nonemployment of his brother, Edgar D. Haden, as Mrs. Lucy L. Haden, a substantial stockholder of this Corporation, was very desirous of having her son Edgar employed in some capacity. Motion was made by Mr. A. A. Horn appointing Mr. W. P. Hamblen, Cecil R. Haden and Edwin E. Lund as a committee to work out some arrangement that would serve this purpose. Motion was seconded and carried.

Lucy L. Haden was the wife of the founder of the Haden Company and mother of Edgar D. Haden and Cecil R. Haden.

Petitioner entered into a written agreement to pay Edgar $ 800 a month on a month-to-month basis retroactive to January 1, 1952. The agreement was executed by Cecil R. Haden as president1961 U.S. Tax Ct. LEXIS 10">*21 of the Haden Company and by E. D. Haden. This agreement reads as follows:

The Directors of the W. D. Haden Company have offered to employ Mr. Ed Haden as consultant at a salary of $ 800.00 per month, to be paid monthly at the will of the Directors and cancelable at any time upon giving ten (10) days notice prior to the end of the period of employment. Employment shall begin as of January 1, 1952 and the services shall be paid for at the end of each month.

It shall be particularly understood and agreed that the said Ed. Haden shall not hold himself out as a representative of the W. D. Haden Company in any manner and shall not make any sales or contracts on behalf of said company or undertake to bind said company in any manner whatsoever.

The said Ed. Haden shall not have an office with the company or at any of the company's plants or material yards, but shall maintain such office as he cares to maintain at his own responsibility and without any indication that he is an employee of the said W. D. Haden Company. The said Ed. Haden shall not visit the office of the company or any of its substations or auxiliary offices except when requested by the Board of Directors or by the President1961 U.S. Tax Ct. LEXIS 10">*22 of the company, it being distinctly understood that the said Ed. Haden shall perform no services for the company except that which he is requested to do by the Board of Directors, his services being entirely as a consultant and adviser and only when requested by the Board of Directors or by any officer of the company at the request of the Board of Directors. Should the said Ed. Haden violate any of these provisions, his employment shall terminate.

This is a contract from month to month and may be terminated at any time by either party by giving the other party ten (10) days notice prior to the expiration of any one month. This is in accordance with the action of the 37 T.C. 512">*518 Board of Directors of the company at a meeting held January 8, 1952, and the said Ed. Haden shall evidence his acceptance hereof by his signature on the left hand side of this page.

(s) Cecil R. Haden

Accepted:

(s) E. D. Haden

Ed. Haden

Petitioner paid Edgar $ 9,600 per year in each of the taxable years 1952 through 1955. In 1956, petitioner paid Edgar $ 800 per month through the month of June, after which payments were discontinued. During the period, Edgar complied fully1961 U.S. Tax Ct. LEXIS 10">*23 with all the terms and provisions of the contract.

On August 10, 1956, Edgar filed suit against the Haden Company in the District Court of Galveston County, Texas, seeking payment under the agreement for the months of July and August 1956, and seeking an additional amount of $ 500 for attorney's fees. Edgar pleaded that no formal notice of termination of the agreement had been given until August 7, 1956. On motion for summary judgment, judgment was entered against the Haden Company in the amount of $ 2,100 (2 months' salary, plus $ 500 attorney's fees). Petitioner paid Edgar $ 6,900 in the taxable year 1956, which amount included the $ 2,100 paid under the judgment. Edgar did not render to petitioner any services as consultant and adviser, or in any other capacity, during any of the taxable years here involved. He was not called upon to do so by the board of directors or any officer of petitioner.

Petitioner claimed deductions of $ 9,600 for each of the taxable years 1952 through 1955, and $ 6,900 for 1956, for the payments made to Edgar. Respondent determined that the payments made to Edgar were not payments for services rendered and were not deductible by petitioner as ordinary1961 U.S. Tax Ct. LEXIS 10">*24 and necessary business expenses.

OPINION.

Issue 1.

The first issue to be decided is whether the Haden Company may claim a depletion deduction on that part of its gross income derived from sales of oystershell to the chemical companies -- Dow, Lone Star, and Nyotex -- at the depletion rate applicable to calcium carbonates for the taxable years 1951 through 1957. Other questions raised by the pleadings involving depletion have been agreed to by the parties and are no longer in issue. Under the 1939 Code, as amended by section 319(a) of the Revenue Act of 1951, the rate 37 T.C. 512">*519 of depletion applicable to calcium carbonates was 10 percent and the rate applicable to oystershell was 5 percent. ¹1961 U.S. Tax Ct. LEXIS 10">*26 Petitioner used the 10 percent figure in computing its depletion deduction for the years 1951, 1952, and 1953 as applied to its gross income from sales to Dow, Nyotex, and Lone Star. Under the 1954 Code, the rate of depletion applicable to calcium carbonates is 15 percent and the rate for oystershell remains at 5 percent. ² Petitioner again used the higher figure 37 T.C. 512">*520 when computing its depletion deduction for the years 1954, 1955, 1956, and 1957 on its gross income derived from1961 U.S. Tax Ct. LEXIS 10">*25 sales to Dow, Lone Star, and Nyotex. As to its sales to all other purchasers, petitioner used the 5 percent figure for all the taxable years in question. We are concerned here only with petitioner's application of the 10 and 15 percent rates to part of its gross income.

1961 U.S. Tax Ct. LEXIS 10">*27 At the outset of the discussion of the issue involved, we think it is well that we point out that it is not our function to decide upon the reasonableness or the unreasonableness of any particular rate of depletion granted by the statute to various articles produced by mining, drilling, etc. That is a matter for Congress to determine and not for us to decide. Our duty is to determine the rates of depletion fixed by Congress in the applicable statute to any particular product and apply them as Congress has fixed them. That we shall endeavor to do in the instant case.

Petitioner has well established that the mineral it mined off the Texas gulf coast did have a very high calcium carbonate content, perhaps the purest commercial form of calcium carbonate found in the United States. In order to apply the rate of depletion for calcium carbonates to part of its gross income, petitioner argues that it mined both calcium carbonates and oystershell from the Texas gulf bays from the same deposits but its method of mining oystershell sold for calcium carbonates was different from that sold for oystershell, hence it is entitled to the different rates of depletion which it claimed on its returns. 1961 U.S. Tax Ct. LEXIS 10">*28 We cannot agree with this contention. We think the law and the facts, when all are considered, are to the contrary. We have carefully studied the evidence of record and have found that petitioner mined and sold but one mineral and that mineral was oystershell. Petitioner's showing that it mined the deposits at a slower rate of speed from time to time and thereby obtained a cleaner shell when it mined shells for sale to its chemical purchasers, Dow, Lone Star, and Nyotex, did not change the nature of the mineral. The mineral was oystershell before it was mined from the gulf and remained oystershell after it was loaded into petitioner's barges or when it was delivered to its purchasers. It undoubtedly made the oystershell thus 37 T.C. 512">*521 treated more usable as calcium carbonate but it still remained oystershell.

When hearings were held on the Revenue Bill of 1950 by the Senate Finance Committee, W. P. Hamblin, director and attorney for the Haden Company, appeared before the committee. His testimony is recorded on pages 703 to 706, inclusive, of the Hearings Before the Senate Finance Committee. The House of Representatives had included in its bill, H.R. 8920, in section 204, oystershell, 1961 U.S. Tax Ct. LEXIS 10">*29 which was then being mined in the Gulf of Mexico, at a depletion rate of 5 percent. The chairman of the Finance Committee asked Hamblin this question:

The Chairman. Does this tax bill affect you?

Mr. Hamblin. We are trying to get a depletion allowance. We are allowed 5 percent under the bill. * * *

The Senate Finance Committee struck out the section of the bill which applied the various new depletion rates, including those for oystershell, and the Revenue Act of 1950, as it was finally enacted, did not include the new depletion rates. See page 53 of the Finance Committee Report on the Revenue Act of 1950. However, when the Revenue Act of 1951 was enacted, new depletion rates were included and oystershell was granted a depletion rate of 5 percent. In the "Summary of the Provisions of the Revenue Act of 1951, as Agreed to by the Conferees," it is stated on page 31, as follows:

Section 319 of the bill sets up a new group of minerals to which percentage depletion is available at the rate of 5 percent. This rate is extended to the following substances none of which are presently entitled to percentage depletion: sand, gravel, slate, stone (including pumice and scoria), brick1961 U.S. Tax Ct. LEXIS 10">*30 and tile clay, shale, oyster shell, clam shell, granite, marble, sodium chloride, and, if from brine wells, calcium chloride, magnesium chloride, and bromine. [Emphasis supplied.]

Thus it is plain that a specific rate of 5 percent was granted to "oyster shell" as such.

We think that it is well established that the names of the various minerals enumerated in the depletion sections of the 1939 Code, as amended, and in the 1954 Code, are intended to have their commonly understood commercial meaning and that in any case, where an item was specifically provided for at a stated rate of percentage allowance, the specific provisions would govern over the general classification. Spencer Quarries, Inc., 27 T.C. 392">27 T.C. 392 (1956), and United States Pumice Supply Co., 36 T.C. 1160">36 T.C. 1160 (1961).

We have found that the name of the deposits mined by petitioner was oystershell within the commonly understood commercial meaning of the term. We do not think that the facts in the record would permit any other finding. The term "oyster shell" is the specific name for 37 T.C. 512">*522 all the deposits mined by petitioner even though the more general term1961 U.S. Tax Ct. LEXIS 10">*31 calcium carbonates would also identify them.

The testimony at the trial of the instant case was to the effect that the principal sources of commercial calcium carbonates were three: (1) Oystershell, (2) limestone, and (3) marl. Paragraphs (i), (ii), and (iii) were added to section 114(b)(4)(A) of the 1939 Code by section 319(a) of the Revenue Act of 1951. Oystershell is listed in paragraph (i) in the 5 per centum category and calcium carbonates in paragraph (ii) in the 10 per centum category. The Senate Finance Committee stated in its report: "The names of all the various enumerated minerals are of course intended to have their commonly understood commercial meaning." ³1961 U.S. Tax Ct. LEXIS 10">*32 The Conference Report to the House further said:

Under the conference agreement calcium carbonates are granted an allowance of 10 percent, while marble, which is a calcium carbonate, receives 5 percent. It is intended, in any case where a mineral is specifically provided for at a stated rate of percentage allowance, that the specific provision will govern over the allowance provided (whether higher or lower) for a more general classification. ⁴

In Virginian Limestone Corporation, 26 T.C. 553">26 T.C. 553 (1956), this legislative history was carefully analyzed and the principles announced therein were applied, and we apply them again to the instant case. Oystershell is the specific name of the mineral which petitioner was mining within the commonly understood commercial meaning of the term. Calcium carbonates is a more general term that can also be used to identify the mineral. See also Albin C. Halquist, 33 T.C. 304">33 T.C. 304 (1959), the second point in that case.

In section 613(b)(5) of the 1954 Code, oystershells are included in the category molluskshells (including clamshells and oystershells) in the 5 percent listing. The term calcium carbonates is found in paragraph (6) "15 percent -- all other minerals." It is obvious that the specific provision is molluskshells (including clamshells and oystershells) and we hold that the 5 percent depletion rate is applicable for the years 1954, 1955, 1956, and 1957.

Petitioner's argument is, in effect1961 U.S. Tax Ct. LEXIS 10">*33 (although it disavows the end use is determinative), that the end use of the product mined controls the rate of depletion applicable. The evidence as to the nature of the uses of the shells made by Dow, Nyotex, and Lone Star shows that these concerns were interested in the high calcium carbonate content of the oystershells purchased from petitioner. However, the end-use test has been expressly rejected by this Court, 26 T.C. 553">Virginian 37 T.C. 512">*523 , and 27 T.C. 392">Spencer Quarries, Inc., supra.In the Virginian Limestone Corporation case we stated that:

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 1961 U.S. Tax Ct. LEXIS 10">*34 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 to which such products may be put by customers.

The provisions of the 1954 Code are substantially the same as section 114(b)(4)(A) of the 1939 Code, as amended, for purposes herein, and we apply the same principles announced in the Virginian Limestone Corporation and Spencer Quarries, Inc., cases.

Petitioner cites Quartzite Stone Co., 30 T.C. 511">30 T.C. 511, affd. 273 F.2d 738 (C.A. 10, 1959). However, we think that in respect to the issue here involved the instant case more closely resembles South Jersey Sand Co., 30 T.C. 360">30 T.C. 360, affd. 267 F.2d 591 (C.A. 3, 1959), and which is in accord with the result which we have reached herein.

Petitioner herein alleges that the materials are either oystershells or calcium carbonates depending on what use is made of the mineral. This is the1961 U.S. Tax Ct. LEXIS 10">*35 type of end-use test we rejected in the Spencer Quarries and Virginian Limestone cases. The recently decided case in the Ninth Circuit, Riddell v. California Portland Cement Co., 297 F.2d 345 (C.A. 9, 1962), affirming in part the District Court of the Southern District of California, to which petitioner refers in an amended brief, also holds that it is sometimes necessary to apply an end-use test to help determine the common commercial nomenclature of the particular deposit. It was stated therein:

To classify them solely by their end use is one thing -- to classify them by their commonly understood commercial meaning is another, even though the latter may be shaped and influenced, in some smaller or larger degree, by the end use.

The Ninth Circuit cited with approval, among other cases, Virginian Limestone Corporation and Spencer Quarries, Inc., and held that the District Court could have properly concluded from the evidence of record that the name of the specific mineral was calcium carbonates in the commercial meaning commonly understood in the trade.

In the instant case, even by taking into consideration the commercial uses1961 U.S. Tax Ct. LEXIS 10">*36 made of the shell sold to Dow, Nyotex, and Lone Star, we cannot find that the substance which petitioner was mining was calcium carbonates within the meaning of the depletion statute whenever sold 37 T.C. 512">*524 to Dow, Lone Star, and Nyotex, and whenever sold to others was oystershell. The argument that the materials were oystershell at one time and calcium carbonates when mined at a slower rate of speed and cleaned up is not impressive to us. What governs is what was mined and not at what rate of speed it was mined.

In the recent case of Lehigh Portland Cement Co. v. United States, 198 F. Supp. 877">198 F. Supp. 877 (1961), the court, among other things, stated as follows:

After these three defeats in the Tax Court, paragraph (b) of the Regulation, § 39.23(m)-5, was amended November 29, 1960, T.D. 6510, 1960-2 Cum. Bull. 458, to read:

(b) For the purpose of identifying the minerals listed in paragraph (a) such minerals shall be given their commonly understood commercial meanings. If a mineral of a taxpayer is within both a specific and a general mineral classification listed in paragraph (a), such mineral shall be considered1961 U.S. Tax Ct. LEXIS 10">*37 to fall within the more specific classification. If the name of a mineral listed in paragraph (a) has no commonly understood commercial meaning but the name implies a particular use or uses, such mineral is to be defined in terms of such use or uses. Certain of the minerals listed in paragraph (a) are defined below in accordance with the foregoing criteria set forth in this paragraph:

* * * *

Calcium carbonates -- Miscellaneous limestones and other calcium carbonate rocks (not specifically provided for at a 5 percent or 15 percent rate of percentage allowance) which are used or sold for use for purposes for which the calcium carbonate content is a major requirement. For example, the term "calcium carbonates" includes limestone which is not of chemical or metallurgical grade and which is used or sold for use for cement manufacture or soil treatment. However, the term "calcium carbonates" does not include any carbonate mineral which is identifiable as dolomite, marble, stone, oyster shells, or clam shells within the commonly understood commercial meaning of those terms. [Emphasis supplied.]

We think that the part of the amended regulation which is here applicable is the last1961 U.S. Tax Ct. LEXIS 10">*38 sentence quoted above which reads as follows:

However, the term "calcium carbonates" does not include any carbonate mineral which is identifiable as dolomite, marble, stone, oyster shells, or clam shells within the commonly understood commercial meaning of those terms.

In the Lehigh Portland Cement Co. case the United States District Court held that the product which the taxpayer was mining was chemical limestone within the meaning of the statute notwithstanding the amended regulation which defined chemical limestone as "Limestone which contains a calcium carbonate and magnesium carbonate content totaling 95 percent or higher by weight." The court held that the regulation as to its definition of chemical limestone was invalid, was beyond the power of the Commissioner to make, and, therefore, that part of the regulation was invalid. The court, however, said 37 T.C. 512">*525 nothing about the part of the amended regulation which we have quoted above. We see no reason to hold it invalid. Certainly, if it is a valid interpretation of the statute, petitioner is only entitled to a depletion rate of 5 percent on all of its gross income from its mining operations, and not a depletion 1961 U.S. Tax Ct. LEXIS 10">*39 rate of 10 percent under the 1939 Code, and 15 percent under the 1954 Code, on part of its gross income, as it claimed on its returns and still contends.

We, therefore, hold that petitioner is only entitled to the 5 percent depletion rate for oystershell which the Commissioner has allowed.

Issue 2.

The second issue to be decided is whether the amounts paid by petitioner to Edgar are deductible as ordinary and necessary business expenses. Petitioner relies upon section 23(a)(1)(A) of the 1939 Code for deduction of the amounts paid to Edgar prior to 1954. That section reads as follows:

In computing net income there shall be allowed as deductions:

(a) Expenses. --

(1) Trade or business expenses. --