54 T.C. 668">*668 Respondent determined deficiencies in petitioner's income taxes for the calendar years 1961, 1962, and 1963 in the respective amounts of $ 5,725.83, $ 3,235.13, and $ 547.23.

Certain of the issues have been disposed of by agreement of the parties leaving for decision the following:

(1) Whether the dolomitic limestone used by petitioner in the manufacture of its patented product Poz-O-Pac is entitled to a depletion allowance of 5 percent or 15 percent.

(2) Whether dolomitic limestone used by petitioner in the manufacture of masonry cement is entitled to a 5- or 15-percent depletion rate.

54 T.C. 668">*669 3. What is the proper value to be used for the computation of the depletion allowance of the dolomitic limestone used in Poz-O-Pac for each of the years in issue?

FINDINGS OF FACT

Certain facts have been stipulated and are found accordingly.

Petitioner G. & W. H. Corson, Inc. (hereinafter sometimes referred to as Corson), is a Pennsylvania corporation with its principal place of business in Plymouth Meeting, Pa., at the time1970 U.S. Tax Ct. LEXIS 175">*178 the petition in this case was filed. Corson filed its Federal corporate income tax returns for the calendar years 1961, 1962, and 1963 with the district director of internal revenue at Philadelphia, Pa. It keeps its books and files its returns on an accrual method of accounting.

Corson was incorporated on January 10, 1928. During the years here in issue it was engaged in the business of mining a carbonate rock commonly called dolomite or dolomitic limestone, ¹ manufacturing lime, and engaging in various related manufacturing and merchandising activities including the manufacture of a material called Poz-O-Pac and a product called Corson's Masonry Cement.

Poz-O-Pac is a trade name which stands for "pozzolanic compacted road." The basic process involved and the1970 U.S. Tax Ct. LEXIS 175">*179 name are covered by patents and a trademark owned by petitioner through its wholly owned subsidiary Poz-O-Pac Co. of America. Through its subsidiary, petitioner sells all the Poz-O-Pac it produces and licenses a number of other companies and individuals to make Poz-O-Pac. Poz-O-Pac is composed of hydrated lime, fly ash, an aggregate, and water. The license contracts did not provide that petitioner's licensees use any specific aggregate in the manufacture of Poz-O-Pac and they generally used an inert siliceous gravel as the aggregate.

Petitioner during the years here in issue utilized only its own dolomitic limestone extracted from its Plymouth Meeting quarry in its manufacture of Poz-O-Pac. The carbonate rock produced in petitioner's quarry at Plymouth Meeting is a dolomitic limestone which is free from any significant measure of impurities and has a chemical analysis of:

54 T.C. 668">*670 In the manufacture of Poz-O-Pac petitioner uses dolomitic limestone of varying sizes. A typical mixture1970 U.S. Tax Ct. LEXIS 175">*180 is as follows: 16 percent passing a 1 1/2-inch screen but being retained on a 3/4-inch screen; 26 percent passing a 3/4-inch screen and being retained on a 3/8-inch screen; 20 percent passing a 3/8-inch screen and being retained on a No. 4 screen; 38 percent passing a No. 4 screen. A No. 4 screen is slightly smaller than a 1/4 inch.

The hydrated lime used by petitioner in the manufacture of Poz-O-Pac is made by petitioner from its dolomitic limestone. Fly ash is the finely divided ash residue produced by the combination of pulverized coal and carried off with the gases from which it is collected with a precipitation apparatus. Fly ash in the presence of moisture reacts with calcium hydroxide at certain temperatures to form a cementitious material. The hydrated lime used by petitioner in the manufacture of Poz-O-Pac consists essentially of calcium hydroxide.

Prior to 1958 petitioner mixed its Poz-O-Pac at the jobsite by a rototiller operation using gravel as an aggregate. The primary use of Poz-O-Pac is as a base for a road surface although it is also used in construction of airport runways, highway shoulders, and parking lots. It has been used as a lining material or moisture1970 U.S. Tax Ct. LEXIS 175">*181 barrier in the building of reservoirs. When Poz-O-Pac was mixed at the jobsites, the various ingredients were spread separately in their required proportions on the graded roadbed. After each ingredient was put in place a rototiller passed over the materials mixing them. After the proper amount of water was added to the mixture, the Poz-O-Pac was compressed.

In 1958 petitioner installed a Poz-A-Pac plant at its business location in Plymouth Meeting, Pa. Thereafter all Poz-A-Pac was mixed by petitioner at its plant and transported in a semidry condition by dump trucks to the jobsites, such as roadways, spread where desired, and compacted while in a semidry state to form a base material for load-supporting surfaces. While in the semidry state the material can be stored for a number of days without adverse effect.

Prior to the latter part of 1963 or early 1964 petitioner was not aware of any special advantages resulting from using its dolomitic limestone as the aggregate in Poz-O-Pac. Petitioner used its dolomitic limestone because it provided an additional use for this product which it produced. In late 1963 or early 1964 certain professionally trained employees of petitioner1970 U.S. Tax Ct. LEXIS 175">*182 became aware that when petitioner's dolomitic limestone is used as the aggregate in Poz-O-Pac not only is the primary chemical reaction between the hydrated lime and fly ash achieved but also a secondary reaction involving 54 T.C. 668">*671 the finely divided aggregate material. Since the mineral dolomite in this finely divided state also reacts with the fly ash in the composition, the amount of hydrated lime necessitated in the formula is reduced from that which is required in the Poz-O-Pac formula using nondolomitic limestone aggregates. A tertiary reaction is also effected between the ingredients and the larger grain dolomitic limestone pieces. An authigenic reaction occurs creating a bond at the interface of the aggregate in the matrix, thus resulting in a transition zone between pure dolomitic limestone below the interface and the cementitious matrix resulting from the lime, fly ash reaction. The end result is comparable to a gradual transformation analogous to that found in the formation of a weld. This creates a strong cohesion between the limestone aggregate grains and the matrix. During the years 1961 through 1968 Corson's formulae for Poz-O-Pac were as follows:

1970 U.S. Tax Ct. LEXIS 175">*183 During these years Corson sold its hydrated lime for approximately $ 14.50 a ton. The quantity of fly ash used in a ton of Poz-O-Pac during these years costs approximately 16 cents.

In normal industrial terminology riprap refers to large boulders generally of inert stone piled up primarily to prevent erosion.

Ballast is a smaller fist-size inert stone used to fill spaces in roadways or between ties in railroad beds.

Rubble is a material made up of broken brickbats and broken concrete which is placed in roadbeds as a filler.

Road material is aggregate material used in roadbeds as a filler. It is also generally an inert, stable material.

Concrete is a mixture of coarse aggregate, fine aggregate, water, and Portland cement. The term is loosely applied to any mixture of aggregate, water and cementitious material which achieves a resultant hard characteristic. Aggregate used in concrete is generally an inert material used as filler to occupy space. Although dolomite is used as an aggregate in concrete, sometimes it proves unsatisfactory for the purpose if it contains impurities which react with the cement. Concrete is mixed with sufficient water to produce a flowable composition1970 U.S. Tax Ct. LEXIS 175">*184 which is poured at the jobsite.

The primary function of Poz-O-Pac in road construction is to provide an improved base for the load-bearing surface. Roadstone is also 54 T.C. 668">*672 used as a base in road construction and petitioner during most of the years it has operated has sold roadstone for this purpose. A thin grade of concrete is occasionally but not often used as a base in road construction. The base of a road acts to prevent the ingress of water and provide protection against frost, freezing, and thawing as well as changing the distribution of the load stress allowing the load-bearing surface to perform in a superior manner by decreasing structural deflection. Concrete does not serve these functions in a sufficiently adequate manner to be in general use as a road base. Concrete and Poz-O-Pac have different flexional strengths with Poz-O-Pac being the weaker. When Poz-O-Pac serves as a liner for reservoirs to constitute a moisture-resistant membrane, the Poz-O-Pac will generally be covered by riprap to protect against erosion from wave action around the perimeter.

Corson's masonry cement is a combination of Portland cement, fly ash, finely divided hydrated lime, and pulverized1970 U.S. Tax Ct. LEXIS 175">*185 dolomitic limestone in the following proportions:

It is sold by petitioner as a "bagged" product. Virtually all other masonry cement contains only pulverized Portland cement and pulverized aggregate mixed in roughly equal proportions. The pulverized aggregate may be sand or may be pulverized limestone. Corson's formula allows a substantial reduction in the amount of Portland cement by using the pulverized dolomite with reactive silica and a substantial amount of hydrated lime to achieve the same effect. In ordinary masonry cement when pulverized limestone is used it is used only as an aggregate to act as a filler and diluent. In Corson's masonry cement the finely pulverized dolomite is used to contribute to the cementitious reaction, as well as to constitute a filler and diluent. The finely divided dolomite in combination with the lime and fly ash develops a cementitious ingredient. Masonry cement is used almost entirely in the manufacture of mortar for laying masonry construction. Lime is a fine cementing agent but lime mortars take a much longer time to harden than mortars containing1970 U.S. Tax Ct. LEXIS 175">*186 Portland cement. One of the reasons petitioner uses Portland cement in its masonry cement is to decrease the time required for the mortars to harden. In modern construction it is advantageous to put up a wall in the least feasible time and therefore a faster hardening mortar has an advantage over a mortar that hardens more slowly. Masonry cement developed by use of petitioner's special formula, including fly ash, lime, and pulverized dolomitic limestone aggregate, has better dimensional stability, better adhesion, less 54 T.C. 668">*673 effluence, and better workability and durability than does normal masonry cement.

Corson sold dolomite roadstone during the years 1956 through 1967, in the following amounts at the following prices:

During the years 1956 through 1967 the average sales prices per ton at which petitioner sold Poz-O-Pac were as follows:

1970 U.S. Tax Ct. LEXIS 175">*187 The primary difference in type (A) and type (B) Poz-O-Pac is the guarantees given and liabilities assumed by petitioner with respect thereto. Poz-O-Pac prices fluctuated to reflect a lowered price as an inducement to get the material accepted and to build up its use. After the material was accepted in a particular location petitioner tended to raise its price to recoup any earlier losses. At the date of the trial Poz-O-Pac was being sold by petitioner for a price as high as $ 3 a ton and by some of its licensees at different locations for as much as $ 6 per ton on some large jobs. The price at which its roadstone was sold was not a significant factor affecting petitioner's determination of the price of Poz-O-Pac in the years here in issue. The only difference between the roadstone and the chemical and metallurgical stone sold by petitioner was that the latter grade required additional screening, blending, and washing, as well as certain quality-control measures, all of which increased the labor cost involved in its preparation. However, since the stone in the quarry is uniformly pure, it is rare that anything had to be done to insure that the chemical and metallurgical grade1970 U.S. Tax Ct. LEXIS 175">*188 specifications were met.

In its 1961 and 1962 income tax returns petitioner claimed depletion on its dolomitic limestone sold as roadstone and that used in the manufacture of Poz-O-Pac at the 5-percent rate. It claimed depletion for the dolomitic limestone used in Corson masonry cement 54 T.C. 668">*674 at the 15-percent rate. In 1963 Corson claimed depletion at the 5-percent rate on its dolomitic limestone sold as roadstone and used the 15-percent rate for that used in the manufacture of Poz-O-Pac and Corson masonry cement. In its petition, Corson alleges that it is entitled to the 15-percent depletion rate on its dolomitic limestone used in Poz-O-Pac in all the years here in issue and that the value of the stone so used for computing depletion is the value of chemical stone.

Respondent in his notices of deficiency determined that the dolomitic limestone used by petitioner in Poz-O-Pac is used or sold for use as road material and as an aggregate, that its value is that at which roadstone is sold, and that the percentage depletion rate applicable to it is 5 percent. Respondent further determined that the dolomitic limestone used by petitioner in the manufacture of masonry cement is used1970 U.S. Tax Ct. LEXIS 175">*189 as an aggregate and is entitled to a 5-percent depletion rate. Respondent used the value at which chemical grade limestone is sold in computing the depletion allowance for the pulverized dolomitic limestone used in the manufacture of Corson's masonry cement which was the same value as that used by petitioner on its income tax returns. ²

OPINION

Section 613(b)(7), ³ provides for a 15-percent depletion allowance for all other minerals not previously listed in the section, except that a 5-percent rate shall be used for any such other mineral "when used or sold for use, by the mine owner or operator as rip rap, ballast, road material, rubble, concrete aggregates, or for similar purposes." The terms used in this Code section should be defined as they are commonly understood within their commercially accepted context. In the industry riprap is a term which is used to define large boulders of stone piled up on beaches and other1970 U.S. Tax Ct. LEXIS 175">*190 areas primarily to prevent erosion. They provide an inert, stable, permanent material that will stay put and occupy the space in which it is placed. Ballast is a smaller size stone about the size of one's fist or less, used primarily for filling in the spaces between railroad ties. Road material is material placed in roadbeds as a filler which 54 T.C. 668">*675 is stable and permanent. Rubble is material made up of broken brickbats and broken concrete, which is used also as a filler in roadbeds. It is an aggregate other than natural stone. Concrete is a mixture of coarse aggregate, fine aggregate, water, and Portland cement, although the term is loosely used to include anything mixed up to achieve a hardness. Petitioner's dolomite is an "other mineral," the depletion rate for which is provided in section 613(b)(7). When this dolomite is used in Poz-O-Pac and Corson's masonry cement, it is not used as riprap, ballast, or rubble and respondent does not contend to the contrary. Within the narrow definition of concrete as containing Portland cement, petitioner's dolomitic limestone used in Poz-O-Pac and Corson's masonry cement is not used as a "concrete aggregate." However, in our view1970 U.S. Tax Ct. LEXIS 175">*191 this material is used as road material concrete aggregate, or purposes similar to each of these within the meaning of the statute.

Petitioner contends that since there is a chemical reaction between the dolomitic limestone and the fly ash both in Poz-O-Pac and Corson's masonry cement, the use of the dolomitic limestone in these products is a chemical used and not a use specified in the exceptions contained in section1970 U.S. Tax Ct. LEXIS 175">*192 613(b)(7).

In order to determine the definitional parameters of section 613(b)(7), we have examined the circumstances surrounding the enactment of the provision. Section 114(b)(4)(A) of the 1939 Code, as amended by section 319(a) of the Revenue Act of 1951, provided for a 5-percent depletion rate for sand, gravel, brick, granite, and marble; a 10-percent rate for dolomite; and a 15-percent rate for chemical and metallurgical grade limestone.⁴ Thus the depletion 54 T.C. 668">*676 rate was determined by reference to the innate qualities of the mineral. See Virginian Limestone Corporation, 26 T.C. 553">26 T.C. 553 (1956). Spencer Quarries, Inc., 27 T.C. 392">27 T.C. 392 (1956), and South Jersey Sand Co., 30 T.C. 360">30 T.C. 360 (1958), affd. 267 F.2d 591 (C.A. 3, 1959). In accordance with the provisions of section 114(b)(4)(A), I.R.C. 1939, as amended by the Revenue Act of 1951, taxpayers who were using chemical and metallurgical grade limestone for purposes which could be fulfilled as well by other minerals, such as granite or gravel, were taking the larger depletion rate to which they were entitled. The1970 U.S. Tax Ct. LEXIS 175">*193 uses involved were generally construction uses for which heavy, hard stone such as riprap, ballast, road material, rubble, and concrete aggregate were satisfactory. These uses required no special qualities or purity in the material used, other than size and weight and hardness common to most construction stones. Thus section 114(b)(4)(A), I.R.C. 1939, as amended by the 1951 Revenue Act, gave a competitive advantage to taxpayers who were using chemical and metallurgical-grade limestone for the same purpose and thus in competition with other minerals which did not have the special grade of purity for which the increased depletion rate was awarded. See 26 T.C. 553">Virginian Limestone Corporation, supra; 27 T.C. 392">Spencer Quarries, Inc., supra; 30 T.C. 360">South Jersey Sand Co., supra; Quartzite Stone Co., 30 T.C. 511">30 T.C. 511 (1958), affd. 273 F.2d 738 (C.A. 10, 1959); and United States v. W. R. Bonsal Co., 279 F.2d 465 (C.A. 4, 1960).

1970 U.S. Tax Ct. LEXIS 175">*194 Even though the above-cited cases were decided after the enactment of the 1954 Code, the legislative history of section 613(b)(7) shows that Congress, in providing the present general 15-percent depletion rate for all nonspecified minerals, except when such minerals were used for specified purposes which were comparable to those involved in the cited cases and limiting the rate to 5 percent when such minerals were so used was aware of the "discrimination in percentage depletion rates between materials which are used comparatively for the same purposes." S. Rept. No. 1622, to accompany H.R. 8300 (Pub. L. No. 591), 83d Cong., 2d Sess., p. 77 (1954). ⁵54 T.C. 668">*677 The purpose of the "use test" incorporated into section 613(b)(7) was to prevent such discrimination. It seems clear that Congress intended the "use test" contained in section 613(b)(7) to be interpreted in such a way that products competing with minerals which were entitled to only a 5-percent rate would not enjoy a competitive advantage merely because under section 613(b)(7) the producer of "other minerals" is entitled for purposes not so competitive to use the 15-percent depletion rate. Because of the general congressional1970 U.S. Tax Ct. LEXIS 175">*195 intent we consider it proper to interpret the phrase "and similar uses" in the exception contained in section 613(b)(7) in such a way as to include those uses reasonably commercially competitive with the uses specifically enumerated.

1970 U.S. Tax Ct. LEXIS 175">*196 Petitioner's Poz-O-Pac is used primarily as a road base. Even though the dolomitic limestone functions in Poz-O-Pac as a participant 54 T.C. 668">*678 in the cementitious reaction it also serves significantly as a filler and diluent. This latter function is similar to the function of road material in the laying of asphalt and other forms of roadways. Moreover, Poz-O-Pac competes with concrete particularly in the broad use of the term as referring to any combination of aggregates, water, and cementitious material which forms a resultant structurally hard end product. As such the limestone used in Poz-O-Pac has a significant use similar to a concrete aggregate. The face that the dolomitic limestone serves an additional function as part of the cementitious reaction is not sufficient, in light of the significance of its aggregate function, to remove it from the exception provided for in section 613(b)(7).

54 T.C. 668">*679 The importance of the function of the dolomitic limestone as an aggregate in Poz-O-Pac and its competitiveness in this use with various gravels is highlighted by the evidence showing that manufacturers of Poz-O-Pac under licenses from petitioner's subsidiary use gravel in making1970 U.S. Tax Ct. LEXIS 175">*197 Poz-O-Pac.

The major portion of the evidence in this case and an appreciable portion of the argument of the parties concern the question whether there was a chemical reaction between the dolomitic limestone used in petitioner's Poz-O-Pac and the fly ash used therein. From the evidence we conclude that there is a chemical reaction between the dolomitic limestone used by petitioner in its Poz-O-Pac and the fly ash used therein. We have set forth in our findings the facts on which we base this conclusion. However, we do not agree with petitioner's contention that because such a reaction occurs the dolomitic limestone used in Poz-O-Pac is entitled to the 15-percent depletion rate since in our view the use of this dolomitic limestone within the meaning of section 613(b)(7) is as road material and the primary and competitive function served by this dolomitic limestone is as an aggregate.

From the evidence in this case we have concluded that the primary usage of Corson's masonry cement is as a mortar. ⁶ We have also concluded that the product is used as a mortar as it comes from the bag and the pulverized limestone in the product serves the purpose of the aggregate comparable to the1970 U.S. Tax Ct. LEXIS 175">*198 aggregate mixed with Portland cement to make other masonry cements or mortars.

In our view "concrete" as used in section 613 refers to the broader category of materials which compete with concrete and not to "concrete" in its limited definitional sense, a mixture of Portland cement, aggregates, and water. The evidence shows that Corson's masonry cement is used in competition with concretes containing Portland cement within the broader definition of "concrete." Certainly the usage of the dolomite in this cement is similar to the usage of a concrete aggregate.

Although the pulverized dolomite1970 U.S. Tax Ct. LEXIS 175">*199 used in Corson's masonry cement serves a function in the cementitious reaction, the material also functions as an aggregate filler and diluent. The significance of this latter function is unclear from the evidence, but such evidence as does bear on this point indicates that the only significant aggregate contained in Corson's masonry cement is the pulverized dolomite. We therefore conclude that the dolomite used in the production 54 T.C. 668">*680 of Corson's masonry cement is an aggregate, that Corson's masonry cement is a concrete within the meaning of section 613(b)(7), and that the usage of dolomitic limestone in Corson's masonry cement is for a similar purpose to usage as a concrete aggregate.

We hold that the dolomitic limestone used by petitioner in Poz-O-Pac and in Corson's masonry cement in each of the years here in issue is entitled to the 5-percent depletion rate.

We have found that petitioner's dolomitic limestone was uniformly of chemical and metallurgical grade and that the only additional functions involved in selling it as such were the sizing, washing, blending, and quality-control steps. These additional labor consuming steps were the primary reasons for the price differential1970 U.S. Tax Ct. LEXIS 175">*200 in the stone sold for chemcial purposes and that sold as roadstone. There is no evidence that these steps were involved in the stone used in Poz-O-Pac and the indication is that they were not. We find that the average price of roadstone is the appropriate base on which to compute the depletion allowance of dolomitic limestone used in Poz-O-Pac.

Decision will be entered under Rule 50.