Iowa Limestone Co. v. Commissioner

Iowa Limestone Company, Petitioner, v. Commissioner of Internal Revenue, Respondent

Iowa Limestone Co. v. Commissioner

Docket No. 59519

United States Tax Court

28 T.C. 881; 1957 U.S. Tax Ct. LEXIS 133;

July 25, 1957, Filed

---

Decision will be entered under Rule 50.

During the taxable years involved petitioner was engaged in quarrying and processing limestone.

1. Held, that the first commercially marketable product produced by petitioner was chemical grade limestone within the meaning of section 114 (b) (4) (A) (iii), I. R. C. 1939, thereby entitling petitioner to compute its percentage depletion deduction at the statutory rate of 15 per cent.

2. Held, further, that the fine grinding or pulverizing and the heating to reduce the moisture content applied by petitioner to produce its product were ordinary treatment processes.

James Evans Cooney, Esq., for the petitioner.

Marvin E. Hagen, Esq., for the respondent.

LeMire, Judge.

---

LEMIRE

This proceeding involves deficiencies in income tax of petitioner as follows:

Year	Deficiency
1950	$ 2,954.96
1951	12,844.08

The issues are: (1) Whether the processes applied by petitioner in the production of its finely ground limestone are ordinary treatment processes for the purposes of computing percentage depletion; (2) whether petitioner's limestone is a "chemical grade limestone" within the meaning of section 114 (b) (4) (A) (iii) of the Internal Revenue Code of 1939; and (3) whether petitioner is entitled to an unused excess profits tax credit carryback from 1951 to 1950. This later issue arises only if the first issue is determined in favor of petitioner.

FINDINGS OF FACT.

The stipulated facts are found accordingly and are incorporated herein by reference.

Petitioner is an Iowa corporation with its principal office in Des Moines, Iowa. Its principal business is quarrying and processing limestone for sale. Petitioner's income tax returns for the years involved were filed with the district director of internal revenue at Des Moines, Iowa.

Petitioner's quarry is located at Alden, Iowa, adjacent to the Iowa River. The bed of the quarry is below the river bottom. Water from seepage and from underground springs is a constant problem.

Petitioner's limestone has been regularly tested by chemists. Dr. H. Garland Hershey, director and State geologist of the Iowa Geological Survey, in a report dated December 11, 1953, stated that petitioner's limestone had the highest percentage of calcium carbonate and the lowest impurity content of any limestone tested, except one from near Gilmore City, Iowa, and is available near the surface over a very small area as compared to the total exposed area of all other limestone in Iowa.

The processes employed by petitioner consist of stripping the overburden and blasting the face of the quarry with explosives in drill holes. The broken limestone is loaded in trucks and hauled to the primary crusher which reduces it to varying sizes from that of a tennis ball to that of a football or basketball. The large pieces are carried into the plant where a secondary crushing in hammermills takes place. The limestone is then conveyed into rollermills which process the material, and the moisture is removed by hot air from furnaces being forced through the rollermills. The limestone is drawn by air stream from the top of the rollermills by a series of collectors. Part of the finely processed limestone is treated with chemicals, such as iodine, upon specifications of particular customers. Both the chemically treated and the untreated pulverized limestone are packaged in 50- and 100-pound paper bags. A part of the processed product is shipped in bulk by loading in tank cars on petitioner's spur track. The introduction of air, heated to about 400 degrees, merely removes the moisture and does not cause any chemical change.

Limestone is divided commerically into three large fields, i. e., chemical and manufacturing industries, building industries, and agriculture. Limestone is chiefly used in Iowa for agricultural limestone, concrete aggregate, and road rock.

The customers of petitioner in 1951 were feed manufacturers and manufacturers of minerals. Its customers have definite specifications and requirements. The product must be at least 95 per cent pure calcium carbonate, and in most cases 98 per cent. It must be finely ground, free from toxic impurities, and must not contain more than 1 per cent moisture.

Petitioner employs a chemist, on a consulting basis, who makes regular tests of the product to determine its chemical characteristics.

Petitioner computed its claimed depletion deduction for the taxable year 1951 as follows:

Gross income -- limestone	$ 354,400.79
Deducts bags	77,831.24
Gross income as basis for depletion	276,569.55
Percentage depletion -- 15 per cent of $ 276,569.55	41,485.43
Net income from the property	63,868.61
Limitation of percentage depletion -- 50 per cent of $ 63,868.61	31,984.30

In the deficiency notice the respondent computed the allowable depletion deduction to be $ 9,563.32.

The first commercially marketable product produced by petitioner from its limestone was finely ground or pulverized calcium carbonate, at least 95 per cent pure, free from toxic impurities, and containing not more than 1 per cent moisture.

The processes of original quarrying, crushing, heat treatment to remove moisture, and pulverization, which petitioner applied to arrive at its product, were ordinary treatment processes normally applied by mine owners to obtain the commercially marketable product.

OPINION.

Petitioner is engaged in the quarrying and processing of limestone, and computed its allowance for depletion on the basis of income derived from the sale of its finished product.

The respondent relying primarily on the decision in Dragon Cement Co. v. United States, 144 F. Supp. 188">144 F. Supp. 188, contends that all the processes beyond the secondary crushing in the hammermills were not ordinary treatment processes within the meaning of section 114 (b) (4) (B) of the Internal Revenue Code of 1939. Petitioner contends that the additional processes of fine grinding or pulverization and the application of heat to reduce the moisture content of the limestone were also ordinary treatment processes to produce its commercially marketable product.

It appears from the record that petitioner chemically treated some 13.72 per cent of its limestone with iodine to meet the specifications of certain of its customers.

The blending of chemicals would not constitute ordinary treatment processes. Black Mountain Corporation, 21 T.C. 746">21 T.C. 746. However, for the purpose of determining its depletion deduction, the gross sales from such chemically treated limestone have not been included in the gross income from mining. Furthermore, petitioner, on brief, states that it is not claiming the cost of bags as a part of its mining costs for purposes of depletion.

In the recent cases of American Gilsonite Co., 28 T.C. 194">28 T.C. 194, and Riverton Lime & Stone Co., 28 T.C. 446">28 T.C. 446, this Court refused to follow the Dragon Cement Co. decision, which has since been reversed, 244 F.2d 513">244 F.2d 513, and has followed its decision in International Talc Co., 15 T.C. 981">15 T.C. 981. See also, United States v. Cherokee Brick & Tile Co., 218 F.2d 424">218 F.2d 424; United States v. Merry Brothers Brick & Tile Co., 242 F.2d 708">242 F.2d 708, certiorari applied for.

We think the foregoing decisions are decisive and controlling on the first issue presented in the instant case. To reiterate the reasons basing those decisions would serve no purpose other than to extend this Opinion.

We, therefore, have found as a fact that all the processes applied by petitioner to its limestone, except the blending of chemicals and the bagging, were ordinary treatment processes normally applied by mine owners to obtain the commercially marketable product. We sustain petitioner on this issue.

Thus holding, the applicable rate of depletion must be determined. Petitioner contends that its product is chemical grade limestone and that the statutory rate is 15 per cent. The respondent argues that petitioner's product is pure calcium carbonate for which the statutory rate is 10 per cent. The pertinent statutory provisions are contained in section 114 (b) (4) (A) (ii) and (iii) of the Code.

The statute does not define what is meant by the term "chemical grade limestone." This Court has adopted the general rule of statutory construction that the words and terms used in a revenue act are to be given their ordinary, obvious, and generally accepted meanings. International Talc Co., supra.

The respondent relies upon Regulations 111, section 29.23 (m)-5, which provide in part material hereto, that the indicated mineral shall have the following meaning: "Limestone, chemical grade -- Limestone used or sold for use in the chemical trades."

We have heretofore refused to sustain the validity of the "end use" test adopted by the respondent. Virginian Limestone Corporation, 26 T.C. 553">26 T.C. 553; Spencer Quarries, Inc., 27 T.C. 392">27 T.C. 392.

The record shows that limestone which is at least 95 per cent pure, free from toxic impurities, and containing not more than 1 per cent moisture, is known in industry and commerce as chemical grade limestone. The product of petitioner meets such specifications. We therefore conclude that petitioner's limestone product is chemical grade limestone within the statutory term, and petitioner is entitled to compute its percentage depletion deduction at the prescribed rate of 15 per cent, limited to the extent of 50 per cent of the net income from the property.

Finally, petitioner waives any claim to a percentage depletion deduction with respect to the taxable year 1950. However, it claims, and respondent concedes, that petitioner is entitled to an unused excess profits tax credit carryback from 1951 to the year 1950. The amount of such credit will be computed under Rule 50.

Decision will be entered under Rule 50.