
    THE H. FRAZIER COMPANY, INC. v. THE UNITED STATES
    [No. 100-59.
    Decided May 9, 1962]
    
      
      Harry Frazier, III, for plaintiff. Hunton, Williams, Gay, Powell <& Gibson, on the briefs.
    
      John F. Palmer, with whom was Assistant Attorney General Louds F. Oberdorfer, for defendant. Edioard 8. Smith, Lyle M. Turner, and Philip B. Miller, on the brief.
   Laramore, Judge,

delivered the opinion of the court:

This is a suit for refund of income tax allegedly overpaid by the taxpayer for the year 1951.

Plaintiff, a West Virginia corporation, operates a limestone quarry for the production of crushed limestone which it sells for use as railroad ballast.

This litigation grew out of a controversy between plaintiff and the Internal Eevenue Service concerning the applicable rate of depletion to which plaintiff was entitled under 26 U.S.C. (I.E.C. 1939) § 114(b) (4) (1952 Ed.). The defendant does not dispute the fact that plaintiff is entitled to a deduction for depletion of a natural resource, but it does dispute the rate claimed by plaintiff. The Internal Eevenue Code of 1939, as amended, in its relevant parts provides:

Seo. 23. Deductions From Gross Income.
In computing net income there shall be allowed as deductions:
!¡í *)•
(m) Depletion. — In the case of mines, oil and gas wells, other natural deposits and timber, a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each case; such reasonable allowance in all cases to be made under rules and regulations to be prescribed by the Commissioner, with the approval of the Secretary. * * *
* * * * *
Sec. 114. Basis for Depreciation and Depletion. *****
(b) Basis for depletion.—
*****
(4) Percentage depletion for coal and metal mines and for certain other mines and natural mineral deposits.—
(A) In general. — The allowance for depletion under section 23 (m) in the case of the following mines and other natural deposits shall be—
(i) in the case of sand, gravel, slate, stone (including pumice and scoria), brick and tile clay, shale, oyster shell, clam shell, granite, marble, sodium chloride, and, if from brine wells, calcium chloride, magnesium chloride, and bromine, 5 per centum.
(ii) in the case of coal, asbestos, brucite, dolomite, magnesite, perlite, wollastonite, calcium carbonates, and magnesium carbonates, 10 per centum.
(lii) in the case of metal mines, aplite, bauxite, fluorspar, flake graphite, vermiculite, beryl, garnet, feldspar, mica, talc (including pyrophyllite), lepidolite, spodumene, barite, ball clay, sagger clay, china clay, phosphate rock, rock asphalt, trona; bentonite, gilsonite, thenardite, borax, fuller’s earth, tripoli, refractory and fire clay, quartzite, diatomaceous earth, metallurgical grade limestone, chemical grade limestone, and potash, 15 per centum, and
*****
(iv) in the case of sulfur, 23 per centum,

of the gross income from the property during the taxable year, excluding from such gross income an amount equal to any rents or royalties paid or incurred by the taxpayer in respect of the property. Such allowance shall not exceed 50 per centum of the net income of the taxpayer (computed without allowance for depletion) from the property, except that in no case shall the depletion allowance under section 23 (m) be less than it would be if computed without reference to this paragraph.

The general issue presented by the parties is a determination of the proper rate allowable under the Code provisions. To establish this rate, we must determine precisely what deposit the plaintiff is exhausting since the concept of allowing a deduction for depletion is premised on the theory that a capital asset is consumed in the production of income through the severance of a mineral deposit. Anderson v. Helvering, 310 U.S. 404.

The plaintiff contends that the product of its quarry is calcium carbonate, depletable at 10 percent within the meaning of section 114(b) (4) (A) (ii). Conversely, the Government argues that plaintiff is entitled only to the five percent depletion rate allowable for “stone” as provided by section 114(b) (4) (A) (i).

The Government, in seeking to assist in properly identifying the mineral, urges us to hold valid the Treasury regulations promulgated pursuant to this section of the Code. Treas. Eeg. Ill, §29.23(m)-5 (as amended by T.D. 6031, 1953-2 Cum. Bull. 120). This bulletin established what is commonly known as the “end-use” test. The Internal Keve-nue Service has occasionally taken the position that the “end-use” test is inherently necessary to effectuate the purpose of Congress in enacting section 114 (b) (4) (A). Spencer Quarries, Inc., 27 T.C. 392. At other times the Service has taken the position that the “end-use” test contained in the Treasury regulations is a reasonable and common sense approach in the administration of a statute. Iowa Limestone Co., 28 T.C. 881. The Government’s position has yet to be sustained. In Virginia Limestone Corp., 26 T.C. 553, the Tax Court expressly rejected the “end-use” test, stating at page 560:

We find nothing in the applicable statute, or in its legislative history, which tends to shown 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.
Accordingly, the Tax Court then found:
In such situation, there is no room for an interpretation, by the Commissioner or by the courts, which would vary (either upward or downward) the stated rates for specifically identified minerals, which. Congress has provided, [p. 561]

If plaintiff’s product is calcium carbonate, then the same reasoning applied by the courts in Virginia Limestone Corp., supra; Spencer Quarries, Inc., supra; Iowa Limestone Co., supra; Wagner Quarries Co. v. United States, 154 F. Supp. 655, aff’d 260 F. 2d 907; Blue Ridge Stone Corp. v. United States, 170 F. Supp. 569, would apply to the instant case. These cases stand for the proposition that the commonly understood commercial meaning of the mineral named, and not the “end-use” test, is controlling. The Internal Revenue Service no longer follows the “end-use” test with respect to dolomite and quartzite. Therefore, we can see no reason to apply that test to “calcium carbonates.” In effect, what the defendant is urging is a determination that if “calcium carbonates” are used in a manner that emphasize the physical properties rather than the chemical properties of the product, we should disregard entirely the express statutory provision. The defendant urges this despite the fact that Congress specifically provided a depletion allowance of 10 percent for “calcium carbonates” because this mineral was being exhausted without regard to how it was being used. We agree with the conclusion reached in the line of authority cited above, i.e., when a mineral has been specifically provided for at a stated rate, such rate may not be varied by the Commissioner owing to the use to which the product is put by the taxpayer’s customers.

Up to this point we have proceeded on the assumption that the plaintiff’s products were “calcium carbonates.” The Government contends that we might hold the “end-use” test to be invalid but that alone would not be dispositive of this case. This is certainly true, for we have the additional problem, not involved in any of the prior cases, of determining what the product is that the plaintiff is mining. The Government avers that the terms “stone” and “calcium carbonates” are mutually exclusive, and since “limestone” by definition is clearly “stone” the rate applicable is five percent. The plaintiff concedes, as it must, that its product is “stone,” but it contends that it is more specifically calcium carbonate. The parties, then, agree that the plaintiff’s product is stone. Although all limestone is “stone,” not all “stone” is limestone. The term “stone” is more general than the term “limestone.” If Congress intended the term “calcium carbonates” to be synonymous with ordinary limestone, it then follows that calcium carbonate is a more specific provision than “stone,” and plaintiff is entitled to a depletion allowance at the rate of 10 percent. The legislative history fully supports the rule that a more specific provision governs over a more general classification. The House Conference Beport provides:

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.

The term “calcium carbonates” is not defined in the statute. The test adopted by Congress and approved by the courts is whether the product meets the commonly understood commercial meaning of the substance in respect to which the depletion was granted. The Senate Finance Committee, which added the provisions now contained in paragraphs (i), (ii), and (iii) of section 114(b) (4) (A), stated in its report:

The names of all the various enumerated minerals are of course intended to have their commonly understood commercial meaning. [S. Bept. No. 781, 82d Cong., 1st sess., p. 38]

In the instant case the evidence fails to show that the term ■‘calcium carbonates” has a commonly understood commercial meaning. Absent this showing, it is the duty of the court to arrive at a reasonable interpretation of the intent of Congress in employing that term. Wagner Quarries v. United States, supra, at 662.

At least one court expressed the view that “calcium carbonates” means ordinary limestone. Riddell v. Victorville Lime Rock Co., 61-2 U.S.T.C., ¶9565 (dictum). However, that court was concerned with the meaning of “chemical grade limestone” and is of little authority here.

The evidence clearly supports a finding that plaintiff’s limestone contained at least 85 percent calcium carbonate The evidence further shows that plaintiff’s product was suitable for use in the manufacturing of cement or for agricultural purposes. Since we have held the “end-use” test to be an unreasonable exercise of the Commissioner’s authority, this suggests, in defendant’s view at least, that plaintiff’s product is actually calcium carbonate, since the Commissioner’s own regulations provide:

* * * * *
Calcium carbonates — -Miscellaneous limestones and other calcium carbonate rocíes * * *. * * * the term “calcium carbonates” include limestone which is not of chemical or metallurgical grade and which is used or sold for use for cement manufacture or soil treatment * * *. [Italic supplied] Treasury Regulations 111, § 29.23 (m)-5, as amended, by T.D. 6510, 1960-2 Cum. Bull. 458.

To classify minerals solely by their end use is one thing, to reach a reasonable interpretation of what Congress intended is another, even though the latter may be shaped and influenced in some degree by the potential use. Riddell v. California Portland Cement, 61-2 U.S.T.C., ¶9711; Wagner Quarries v. United States, 260 F. 2d 907.

Limestone, in petrography, is a rock consisting essentially of calcium carbonate (“calcium of lime”). 14 Encyc. Brit. 131 (1957 Ed.). Any rock consisting of at least 50 percent calcium carbonate may be properly termed limestone. Limestones are used for a variety of economic purposes. They are “burnt” for lime, or when argillaceous, hydraulic lime; when intimately mixed with sandy clay and burnt, they yield portland cement; in their purer forms they are widely used in the chemical, glass, soap-making and silicate industries; they serve as fluxes in the preparation of basic steel; as well as building stones and, as here, road stones. If “calcium carbonates” do not include limestone, we can give no meaning to that term as used in the statute. Calcium carbonate never occurs in nature in its pure form. The defendant argues that it occurs in an almost pure form in Iceland Spar. As the name indicates, this mineral is found in Iceland, its source is virtually exhausted, and the total world production probably equals one carload lot, and by the defendant’s admission this would qualify as “chemical grade limestone” entitled to an allowance for depletion at the rate of 15 per centum. We do not believe that it could reasonably be inferred that this is the mineral Congress intended to be known as calcium carbonate. The defendant further contends that Congress intended the term to apply to calcite and aragonite. The chemical composition of calcite and aragonite is the same as calcium carbonate, i.e., CaC03, but the only way to obtain pure calcite or aragonite is through a refining process. They are derived through the exhaustion of a natural deposit. This natural deposit may be limestone, marble, oyster shells or clam shells. Congress specifically provided for marble and shells, which are “calcium carbonates,” an allowance of 5 per centum (H. Conf. Eep. No. 1213, 82d Cong., 1st sess., p. 17). We think it is inconceivable that Congress would not have provided specifically for limestone, which is the most common source of calcium carbonate, if it had intended to remove limestone from the classification of “calcium carbonates.” We conclude that Congress intended the term “calcium carbonates” to include limestone. Thus plaintiff’s product comes under the express provision of the statute allowing for depletion at a rate of 10 per centum.

For the reasons indicated, it is determined that plaintiff is entitled to recover, and judgment will be entered to that effect. The amount of recovery will be determined pursuant to Rule 38 (c) of the Rules of this court.

It is so ordered.

Dtjrfee, Judge; Whitaker, Judge; and Jones, Chief Judge, concur.

FINDINGS OE FACT

The court, having considered the evidence, the report of Trial Commissioner Mastín G. White, and the briefs and argument of counsel, makes findings of fact as follows:

1. Since 1933, the plaintiff has been — and it is now — a corporation organized and existing under the laws of the State of West Virginia, with its principal place of business at Fort Spring, Greenbrier County, West Virginia, and its principal office at Richmond, Virginia.

2. The plaintiff operates a limestone quarry.

3. The plaintiff has kept its books of account in accordance with the accrual method and on the basis of the calendar year.

4. The plaintiff timely filed a Federal income tax return (Form 1120) for the year 1951 with the Collector of Internal Revenue, Parkersburg, West Virginia. The return disclosed a net income of $21,013.21 and an income tax liability of $6,041.30. The tax was paid as follows:

May 15, 1952_$2,114.46
June 12, 1952_ 2,114.46
September 12, 1952_ 906.19
December 11,1952_ 906.19
Total_ 6,041.30

5. In preparing its income tax return for 1951, the plaintiff computed depletion on its limestone operations at the rate of 10 percent for “calcium carbonates,” as provided in Section 114(b) (4) (A) (ii) of the Internal Revenue Code of 1939, as amended (26 U.S.C., 1952 ed., 114(b) (4) (A) (ii)). The return showed gross income of $246,196.04. Accordingly, depletion was initially determined at $24,619.60, but this figure was reduced to 50 percent of the net income of $42,026.42 computed without allowance for depletion, or $21,013.21.

6. An audit of the plaintiff’s 1951 income tax return by an agent of the Internal Revenue Service resulted in a disal-lowance of depletion at the rate of 10 percent for “calcium carbonates” and a determination of depletion at the rate of 5 percent for “stone,” as provided in Section 114(b) (4) (A) (i) of the Internal Revenue Code of 1939, as amended. The agent determined that the correct income tax liability was $9,581.18. On September 16, 1954, the plaintiff executed a waiver of restrictions on assessment (Form 870), and accepted a deficiency of $3,539.88. The plaintiff paid such deficiency, together with interest of $549.84, or a total of $4,089.72, on November 12,1954.

7. On or about August 7, 1956, the plaintiff timely filed a claim for refund. The basis of the claim was the contention that depletion should have been allowed at the rate of 10 percent for “calcium carbonates.” On April 17, 1958, the plaintiff filed an amended claim for refund with the District Director of the Internal Revenue Service at Richmond, Virginia, seeking a refund of $4,089.72, or such larger amount as might be legally refundable. The claim for refund was rejected by means of a letter dated August 29, 1958, from H. O. Butler, Associate Chief, Appellate Section, Internal Revenue Service, Richmond, Virginia.

8. The present action in the Court of Claims was filed on March 2, 1959.

9. No part of the sum claimed by the plaintiff as a refund of the income tax paid by it for the calendar year 1951 has been credited, remitted, refunded, or repaid to the plaintiff or to anyone else on its account, nor has the plaintiff assigned such claim or any part thereof to anyone.

10. The plaintiff’s limestone quarry is the open-pit type. In its quarrying operations, the plaintiff first strips or removes the overburden or waste, consisting of dirt and unusable rock, from the top of the quarry face. Below the overburden are the essentially horizontal limestone formations, the Union and the Pickaway, which provide the raw material for the plaintiff’s business. Each of the two formations is composed of different bands or layers of limestone. After the removal of the overburden, holes are drilled in the limestone beds, from top to bottom, and the holes are loaded with explosives. The limestone is then blasted to the quarry floor, where the broken fragments, mostly large and irregular in shape, are loaded into tracks and hauled to a nearby crashing plant. At the crushing plant, the limestone is crushed and is then subjected to a screening process whereby it is separated into three sizes. After that, the material is loaded into railroad cars for delivery to the plaintiff’s sole customer.

11. The plaintiff sells its entire output of crushed limestone, in three sizes, to one railroad. The purchaser uses both the largest size and the intermediate size for railroad ballast. The third size, which consists of quarry dust and the fines left over from the crushing operation, is used by the purchaser for various railroad maintenance and construction purposes, although not for ballast.

12. Limestone in place is a sedimentary rock containing calcium carbonate to an extent greater than 50 percent, in combination with other substances which vary in identity and extent among different formations of limestone. It is the presence of more than 50 percent of calcium carbonate in a sedimentary rock formation that makes the rock limestone, irrespective of what the other partial constituents of the rock may be.

13. Although all limestone is made up in principal part (i.e., more than 50 percent) of calcium carbonate, the actual percentage of calcium carbonate in different limestone formations may vary widely, and there may be substantial variation in the calcium carbonate content of different bands or layers of the same formation.

14. Limestone that contains calcium carbonate to an extent of 95 percent or more is known as high-calcium limestone and qualifies as chemical grade limestone or metallurgical grade limestone.

15. The calcium carbonate content of a number of limestone samples taken from reasonably accessible portions of the plaintiff’s quarry at different times has varied from a low of 10.24 percent to a high of 98.69 percent. The evidence as a whole indicates that the average calcium carbonate of the plaintiff’s Union limestone is not less than 90 percent and that the average calcium carbonate content of all the plaintiff’s limestone is not less than 85 percent.

16. The plaintiff does not separate, or make any sort of differentiation in, its crushed limestone on the basis of the calcium carbonate content. The physical properties, rather than the chemical content, of the plaintiff’s product are important in connection with the railroad purposes for which the plaintiff’s crushed limestone is used.

17. The plaintiff’s quarry contains some bands or layers of limestone that are of such high quality in calcium carbonate content (i.e., 95 percent or more) that, if such bands or layers were quarried or mined selectively, the product would qualify as chemical grade limestone or metallurgical grade limestone. The evidence does not show how extensive such high-quality bands or layers are.

18. Calcium carbonate is a chemical compound (CaC03) that appears in nature as a constitutent of (among other things) various kinds of rock, notably limestone. It is not found in nature to any appreciable extent as a separate deposit. Calcium carbonate to be used in laboratories or in the field of medicine is extracted commercially from rock containing a high percentage of calcium carbonate as a constituent. The extracted calcium carbonate is known as calcite if it crystallizes in hexagonal form, or as aragonite if it is in orthorhombic form.

19. The plaintiff has not at any time, including the year 1951, produced and sold either of the calcium carbonates, calcite or aragonite. The plaintiff sells its entire output of crushed limestone to a railroad for use as ballast. All of its limestone is suitable for at least three purposes for which its calcium carbonate content is important. It is suitable for making lime, for use as the principal raw material in making cement, and for agricultural limestone for use on farms to neutralize the acids of the soil.

20. The term “rock” means a geological formation, consisting of a mass of grain cemented together and constituting a unit of the earth’s crust. The three major classes of rock are sedimentary, igneous, and metamorphic.

21. “Stone,” as that term is used in commerce and industry, means pieces of rock that have been separated from the natural formation by quarrying or mining in order to be devoted to some useful purpose. Stone may be produced either in the form of dimension stone (i.e., blocks or slabs that are cut to definite shapes and sizes), or in the form of crushed stone. Crushed limestone is the most common form of crushed stone in the United States. The crushed limestone business is a very extensive one in this country.

CONCLUSION OF LAW

Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that plaintiff is entitled to recover, and judgment will be entered to that effect.

The amount of recovery will be determined pursuant to Rule'38 (c) of the Rules of this court.

In accordance with the opinion of the court and on a memorandum report of the commissioner as to the amount due thereunder, it was ordered on July 20, 1962, that judgment for plaintiff be entered for $4,089.12, together with interest as provided by law. 
      
       H. Conf. Rep. No. 1213, 82d Cong., 1st sess., p. 77.
     
      
       The percentages of calcium carbonate revealed by all the analyses of samples mentioned in the evidence were as follows: 70.24, approximately- 75, 83.40, 86.78, 88.88, 91.35, 91.94, 94.37, 95.91, 95.91, approximately 96, 96.51, 96.71, 96.91, 97.08, 97.30, 97.30, 98.69. However, there is a widie expanse of limestone in the middle portion of the quarry face from which no samples were taken, so far as the evidence in the record shows.
     
      
      
         There are some small deposits of practically pure calcium carbonate in Iceland, where naturally hot, swiftly flowing waters have apparently extracted calcium carbonate from rocks through the geologic ages and deposited small amounts of it in cavities or veins.
     