T.C. Memo. 1997-51
UNITED STATES TAX COURT
BRYAN ROCK PRODUCTS, INC. AND SUBSIDIARY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 23230-94. Filed January 28, 1997.
Walter A. Pickhardt, for petitioner.
John C. Schmittdiel, for respondent.
MEMORANDUM OPINION
TANNENWALD, Judge: Respondent determined deficiencies in
petitioner's Federal income taxes for the taxable years ending
November 30, 1989, and November 30, 1990, in the amounts of
$23,926 and $25,622, respectively. The sole issue for decision
is whether petitioner is entitled to a 14-percent depletion
- 2 -
allowance under section 613(b)(7)1 for the red dolomitic
limestone mined and sold by petitioner as landscaping rock.
This case was submitted fully stipulated under Rule 122.
The stipulation of facts and attached exhibits are incorporated
herein by this reference.
Background
Petitioner is a Minnesota corporation with its principal
office in Shakopee, Minnesota. For the taxable years ending
November 30, 1989, and November 30, 1990 (1989 and 1990,
respectively), petitioner was the common parent of a consolidated
group of corporations that joined in the filing of a consolidated
corporate income tax return.
Petitioner mines a material referred to as either dolomite
or dolomitic limestone from three quarries in Shakopee,
Minnesota, and additional quarries in Bayport, Hastings, and
Denmark, Minnesota. This material comes within the meaning of
either dolomite or limestone, or both, as those terms are used in
section 613(b)(7). Hereinafter, we will refer to this material
as dolomite. Petitioner's dolomite comes from the Oneonta
Dolomite and Shakopee formation of the Prairie du Chien Group, an
expansive sedimentary rock deposit extending throughout
southeastern Minnesota and into portions of Wisconsin and Iowa.
1
Unless otherwise indicated, all statutory references are
to the Internal Revenue Code in effect for the years in issue,
and all Rule references are to the Tax Court Rules of Practice
and Procedure.
- 3 -
Oneonta Dolomite is composed of both limestone and dolomite, with
the latter distinguishable from the former by reason of its
greater magnesium content. Petitioner's dolomite is of
insufficient purity to be considered metallurgical or chemical
grade.
Most limestone and dolomite in Minnesota and neighboring
States is of a buff or brownish-gray color. Petitioner mines
buff and brownish-gray dolomite from its quarries. Petitioner
also has mined a reddish-brown colored dolomite from two of its
quarries at Shakopee, Minnesota. The reddish color most likely
is caused by its iron oxide content. We shall refer to this
particular dolomite as red dolomite. During 1989 and 1990,
petitioner mined red dolomite from its Merriam Quarry, located in
Shakopee, Minnesota. Petitioner currently mines red dolomite
from its 169 Quarry, which is located approximately one-half mile
from the Merriam Quarry.
Road material is aggregate2 used in the construction of
roads. Typically, a base consisting of crushed and graded
aggregate is placed on roadbeds, parking lots, and in utility
trenches to provide support for the overlying pavement or
utility. Road material aggregates are also material mixed with
2
"Aggregate" is: "1. rock composed of mineral crystals of
one or more kinds or of mineral rock fragments. 2. any of
several hard materials (as sand, gravel, or slag) used for mixing
with cement material to form concrete, mortar, or plaster."
Webster's Ninth New Collegiate Dictionary 64(1985).
- 4 -
asphaltic cement or concrete to produce asphalt or concrete. The
types of material suited for this use include crushed limestone
and dolomite, other quarried rock, and sand and gravel.
Concrete aggregate is aggregate used in the production of
concrete. It is generally made up of washed and graded natural
aggregate deposits or crushed quarry rock, typically occupies 65
to 75 percent of the concrete volume, and influences various
properties of concrete. Most rocks can be used as concrete
aggregate with the exception of rocks containing any appreciable
amounts of shale, soft porous materials, or chert.
Rip rap is a pile of rocks and boulders placed as an erosion
control measure and slope stabilizer to protect slopes, piers,
abutments, walls, or other structures. There are specific size
requirements and gradations for different classes of rip rap.
Rip rap may be any type of durable, field or quarried stone, free
of soil or other debris. In southeastern and central Minnesota,
where limestone is abundant, limestone and dolomite are used for
rip rap. In northern Minnesota, where carbonaceous deposits are
not available, field stone, taconite, and granite are used as rip
rap.
Ballast is a material which is placed on a railroad bed to
provide a stable foundation for the track and ties. Ballast
distributes train loading, drains the roadbed, and resists
deformation of the railbed. Ballast can be any rock of specific
size and gradation where it is durable and resists degradation.
- 5 -
In Minnesota, railroads generally use granite, gabbro, or
taconite for ballast. Dolomite is not generally used because it
is softer than desirable.
Rubble is a loose mass of angular fragments of rock or
masonry crumbled by natural or human forces and irregular
fragments or pieces of rock used in masonry or the masonry made
with such rocks. The type of angular rock which may be
incorporated in the rubble could be virtually any type of rock
that is used in manmade structures.
Petitioner processes and sells the dolomite that it mines
for the following products: driveway and road base rock;
concrete aggregate; utility and bedding rock; and "specialty
rock". "Specialty rock" includes rip rap, agricultural lime
(aglime), red ball diamond aggregate, and landscaping rock.
Petitioner did not sell dolomite for use as ballast during the
years at issue.
Petitioner sells driveway and road base rock, which is
available in sizes ranging from a maximum3 of 3/8" to a maximum
of 3" in diameter, for use as a base upon which a driveway or
road surface (concrete or asphalt) is laid. This product
includes dolomite fines, a powdery material created when dolomite
3
Each product size actually includes a range of rock
sizes. The maximum size within that range is used to label that
size. For example, 1-3/4" size rock may range from 3/4" to 1-
3/4"; the 3/4" size may range from 5/15" to 3/4".
- 6 -
is crushed; when compacted, dolomite fines facilitate the
hardening of the roadbed.
The concrete aggregate sold by petitioner is a washed
dolomite ranging in size from 5/16" to 3/4" in diameter. It is
used, together with water, fine aggregate (usually sand), and
cement, as an ingredient in concrete. During the years at issue,
only the Merriam quarry, of all of petitioner's quarries, had
washing facilities.
The utility and bedding rock sold by petitioner is dolomite
ranging in size from 3/4" to 4" in diameter, with smaller sizes
included in the product. Some dolomite fines are included, but
not to the extent they are included with road base. Utility and
bedding rock is used as a base for concrete pipe or PVC pipe,
especially sewer pipe.
The rip rap sold by petitioner consists of dolomite used for
erosion control, especially around waterways. Petitioner sells
rip rap as small as 4" to 9" in diameter, but also in a small
boulder size, 24" in diameter and sometimes larger. The aglime
sold by petitioner is a fine, pulverized dolomite material,
crushed to a size generally no larger than a grain of white rice,
which is used to neutralize soil acidity and to provide magnesium
to soil compositions. The red ball diamond aggregate sold by
petitioner is identical to aglime in size and composition but,
unlike aglime, always has a red color. Petitioner's customers
used this product as a ball diamond surface.
- 7 -
The red landscaping rock sold by petitioner is washed,
crushed red dolomite, sold in two sizes. The larger size is
screened to an individual diameter size of not less than 3/4" and
not more than 1-3/4" in diameter (1-3/4" red landscaping rock).
The smaller size is screened to an individual diameter size of
not less than 5/16" and not more than 3/4" in diameter (3/4" red
landscaping rock). The 3/4" red landscaping rock sold by
petitioner was identical to the 3/4" washed red rock that
petitioner sold for use as a concrete aggregate.
Petitioner does not run reflectance tests, dry brightness
test, or other test relating to the measurement of the color of
its red landscaping rock. Petitioner does not sell red
landscaping rock on bid in direct competition with a bona fide
bid to sell a mineral listed in section 613(b)(3).
A common use of landscaping rock, including petitioner's red
landscaping rock, is to lay it on the ground, several inches
deep, to act as a border or buffer between adjoining areas or
structure in a landscape or outdoor area. Landscape rock is also
used to separate shrubs and other plantings from adjoining
walkways, driveways, and lawn areas. Landscaping rock reduces
maintenance (e.g., trimming, spraying, weeding) because it
inhibits weed and grass growth in areas where growth is not
desired. In this regard, landscaping rock is often used over
plastic sheeting or a similar weed barrier. Consistent
appearance, including color and size, is a consideration for
- 8 -
customers purchasing landscaping rock. Color is not normally a
consideration for customers purchasing dolomite for use as
driveway and road base rock, concrete aggregate (unless it is an
exposed aggregate), utility and bedding rock, aglime, and rip
rap. Rocks used for landscaping purposes include: limestone,
dolomite, quartzite, sandstone, granite, pumice, marble, scoria,
baked clay or shale, diabase, gabbro, and river rock. In
addition to the various aggregates sold for landscaping rock,
organic materials such as shredded hardwood or bark chips are
sold for landscaping purposes.
On each of petitioner's price lists for 1989 and 1990, the
1-3/4" red landscaping rock was identified as "red decorative
rock"; the 3/4" red landscaping rock was not so designated. On
its price lists for 1989, the 3/4" red landscaping rock was
identified as "washed red rock", which was the same designation
given to rock sold as concrete aggregate. On its price lists for
1990, the 3/4" red landscaping rock was identified as "red rock",
which was the same designation given to rock sold as concrete
aggregate.
In general, during the years in issue, the geographical
market for dolomite sold by petitioner for use as driveway and
road base rock, utility and bedding rock, and rip rap consisted
of an area no greater than a 30-mile radius from the quarry out
of which the dolomite was extracted. Most of the dolomite sold
by petitioner as a concrete aggregate was for use within a 30-
- 9 -
mile radius from the quarry out of which the dolomite was
extracted; however, petitioner sometimes sold concrete aggregate
to truckers who, having made deliveries in the Twin Cities area,
would purchase a load of concrete aggregate as a back haul for
delivery beyond a 30-mile radius. In contrast, petitioner
regularly sold aglime and red ball diamond aggregate for use
beyond a 30-mile radius from the quarry out of which the dolomite
was extracted. Petitioner sold dolomite for use as red
landscaping rock to charge customers in the following areas:
Minnesota, Wisconsin, North Dakota, South Dakota, and Iowa. Red
landscaping rock occasionally was sold in other States as well.
Petitioner does not maintain records of the quantity of red
landscaping rock sold within a 30-mile radius of its quarries in
Shakopee.
For depletion purposes, petitioner identified instances when
it sold "washed red rock" or "red rock" as concrete aggregate and
when it sold this rock for landscaping purposes.
For 1989 and 1990, petitioner claimed percentage depletion
under section 613(b)(7) equal to 14 percent of sales less
royalties on its dolomite sold for use as red landscaping rock.
Petitioner also claimed 14-percent depletion on dolomite sold for
use as aglime and as red ball diamond aggregate. Petitioner
claimed 5-percent depletion on dolomite sold for use as driveway
and road base rock, concrete aggregate, utility and bedding rock,
and rip rap.
- 10 -
Respondent determined that the proper rate of depletion for
petitioner's red landscaping rock is 5 percent, not 14 percent.
Respondent has not proposed adjustments in connection with
petitioner's depletion deductions except for those claimed for
dolomite sold as red landscaping rock.
Discussion
Section 611 provides for a reasonable allowance for
depletion in the case of mines. This allowance is "the
percentage, specified in subsection (b), of the gross income from
the property excluding from such gross income an amount equal to
any rents or royalties paid or incurred by the taxpayer in
respect of the property." Sec. 613(a). Section 613(b)(6)
provides in relevant part:
(6) 5 Percent--
(A) gravel, peat, pumice, sand, scoria, shale
* * *, and stone (except stone described in paragraph
(7));
Section 613(b)(7) specifies a 14-percent depletion rate for:
all other minerals, including, but not limited to,
* * * dolomite, * * * limestone, * * * stone (used or
sold for use by the mine owner or operator as dimension
stone or ornamental stone), * * * except that, unless
sold on bid in direct competition with a bona fide bid
to sell a mineral listed in paragraph (3), the
percentage shall be 5 percent 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.
* * *
- 11 -
Initially, respondent argues that petitioner's red
landscaping rock should be classified as "stone" under section
613(b)(6) because the red landscaping rock was not used for its
chemical or metallurgical properties; this classification would
result in a 5-percent depletion rate. Prior to the enactment of
the 1954 Code, the predecessor to section 613(b) provided a 5-
percent depletion rate for sand, gravel, and stone; a 10-percent
rate for dolomite; and a 15-percent rate for chemical and
metallurgical grade limestone. Sec. 114(b)(4)(A) of the 1939
Code, as amended by the Revenue Act of 1951, ch. 521, sec.
319(a), 65 Stat. 452, 497; G. & W. H. Corson, Inc. v.
Commissioner, 54 T.C. 668, 675 (1970), affd. 453 F.2d 578 (3d
Cir. 1971). However, in section 613(b) of the 1954 Code, the
qualifiers "chemical grade" and "metallurgical grade" were
dropped from limestone, dolomite was added to the 15 percent (now
14 percent) depletion rate category, and the "use test", i.e.,
"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", was added. Thus, whether limestone is of
chemical grade is no longer a factor. G. & W. H. Corson, Inc. v.
Commissioner, supra; see also C. J. Langenfelder & Son, Inc. v.
Commissioner, 69 T.C. 378 (1977) (chemical attributes test
rejected for use of oyster shells). Accordingly, the chemical
and metallurgical properties foundation of respondent's argument
falls by the wayside.
- 12 -
The parties have agreed that petitioner's red landscaping
rock qualifies as either dolomite or limestone. As dolomite and
limestone both are listed in section 613(b)(7), and those terms
are more specific than stone, section 613(b)(7), rather than
section 613(b)(6), governs our determination of the proper
depletion rate.
Since petitioner did not sell its red landscaping rock on
bid in direct competition with a bona fide bid to sell a mineral
listed in section 613(b)(3), the focus of this case is on the
"use test". We are asked to decide whether petitioner sold its
red landscaping rock for a purpose similar to rip rap, ballast,
road material, rubble, or concrete aggregates (the enumerated
uses).
Congress added the use test in 1954 in order "to prevent
discrimination in percentage depletion rates between materials
which are used competitively for the same purposes." S. Rept.
1622, 83d Cong., 2d Sess. 77 (1954). When the minerals in the
category "all other minerals", otherwise entitled to a depletion
rate of 14 percent, are used "for certain purposes for which
crushed stone is commonly used, they are to be entitled to a
percentage depletion rate of 5 percent." Id. Congress specified
these certain purposes as "rip rap, ballast, road material,
rubble, concrete aggregates, or for similar purposes". Sec.
613(b)(7). The use test is one of actual use, not possible uses.
The statutory language speaks in terms of actual use. Sec.
- 13 -
613(b)(7) ("when used, or sold for use"). The legislative
history clearly points in the same direction. S. Rept. 1622,
supra at 77, 331-332.
The House version of this section had included dimension
stone and ornamental stone in the enumerated uses, but in the
final bill, those were eliminated and, instead, "stone (used or
sold for use * * * as dimension stone or ornamental stone)" was
included in the list of "all other minerals", thus entitling
stone used for those purposes to the higher depletion rate. Id.
at 78. Dimension stone means "blocks and slabs of natural stone,
subsequently cut to definite shapes and sizes and used or sold
for such uses as building stone (excluding rubble), monumental
stone, paving blocks, curbing and flagging." Sec. 1.613-2(b)(3),
Income Tax Regs. Ornamental stone means "blocks and slabs of
natural stone, subsequently cut to definite shapes and sizes and
used or sold for use for making ornaments or statues." Id.
The enumerated uses are generally construction uses. C. J.
Langenfelder & Son, Inc. v. Commissioner, supra at 390. We have
interpreted "similar purposes" to include those uses reasonably
commercially competitive with the enumerated uses. G. & W. H.
Corson, Inc. v. Commissioner, 54 T.C. at 677.
In G. & W. H. Corson, Inc. v. Commissioner, supra, the
taxpayer mined dolomitic limestone for its use in manufacturing
Poz-O-Pac and Corson's masonry cement. Poz-O-Pac was a product
composed of hydrated lime, fly ash, an aggregate, and water; it
- 14 -
was used primarily as a base for road surface. Other
manufacturers of Poz-O-Pac used gravel instead of limestone. We
found that the function of the limestone in the Poz-O-Pac was
similar to the function of road material in the laying of asphalt
and other forms of roadways. Poz-O-Pac also competed with
concrete, and the limestone in the Poz-O-Pac had a significant
use similar to a concrete aggregate. The primary use of the
taxpayer's masonry cement was as a mortar. We found that the
limestone in the product served the purpose of aggregate
comparable to that mixed with Portland cement to make other
masonry cements or mortars. The taxpayer's limestone acted as a
functional substitute for, and thus in actual competition with,
materials used as road material and concrete aggregate.
Consequently, we held that the lower depletion rate applied to
the limestone so used by the taxpayer.
In C. J. Langenfelder & Son, Inc. v. Commissioner, supra,
the taxpayer dredged oyster shells for sale as cultch, a surface
to which oyster larvae could attach and grow into mature oysters.
Mollusk shells, including oyster shells, are listed in section
613(b)(7). Following G. & W. H. Corson, Inc. v. Commissioner,
supra, we rejected respondent's argument that use for physical
rather than chemical attributes leads to the lower depletion rate
and applied the use test. We found that the use of oyster
shells as cultch was not a construction use. Respondent argued
"that construction stones could have been used competitively with
- 15 -
oyster shells as oyster cultch" and "therefore, that to allow
[the taxpayer] the higher depletion rate would discriminate
against miners of construction stones." C. J. Langenfelder &
Son, Inc. v. Commissioner, supra at 390. We rejected
respondent's potential-for-use argument and found that, used as
oyster cultch, oyster shells did not compete commercially with
materials that would qualify as rip rap, ballast, road materials,
rubble, and concrete aggregate. We, therefore, held that the
exception circumscribed by the use test did not apply, entitling
the taxpayer to the higher depletion rate.
In Maryland Green Marble Corp. v. United States, 528 F.2d 51
(4th Cir. 1975), the Court of Appeals for the Fourth Circuit
interpreted the use test to mean: sold or used for the same
purpose as, and in competition with, construction stones. The
taxpayers' marble and quartzite chips were used in the
manufacture of terrazzo flooring and architectural precast
panels, respectively, for their distinctive coloring and
decorative qualities. The Court of Appeals found that these
features distinguished the chips from ordinary hard stone and
that the chips did not compete with ordinary construction stones.
It held that the taxpayers were entitled to the higher depletion
rate.
In Bonsal Co. v. United States, 72-1 USTC par. 9175, 29 AFTR
2d 72-535 (W.D.N.C. 1971), the only case dealing with rock used
for landscaping purposes, the District Court looked strictly to
- 16 -
the statutory language of section 613(b)(7) and did not consider
competition to be a "significant consideration". It held that
the uses of quartzite for roofing, mosaic panels, golf course
sandtraps, and landscaping were not purposes similar to rip rap,
ballast, road material, rubble, or concrete aggregates in the
conventional sense and allowed the taxpayer the higher depletion
rate for these uses.
In the instant case, respondent argues that landscaping is
a construction use and that petitioner's red landscaping rock
competes with materials that could be used for one of the
enumerated uses, including petitioner's red rock used as concrete
aggregate.
Since actual use is the focus of the use test, whether the
sale of petitioner's red landscaping rock competes with the sale
of its same rock as concrete aggregate is not a determination.
In this connection, we think it highly significant that
petitioner kept detailed records that separated the sales of 3/4"
red rock for concrete aggregate from sales of the same rock as
landscaping rock and claimed only the 5 percent on the former.4
Furthermore, although the legislative history records Congress'
concern about competition between the listed minerals and common
4
Respondent has not questioned the accuracy of these
records either as to allocations of quantities or sales amounts.
Cf. Reagan v. Commissioner, T.C. Memo. 1973-266, where respondent
did not question the application of the 5-percent and 14-percent
rates to different uses of the same mineral.
- 17 -
stone, the use test as written in the statute does not extend to
include each use where common stone could be used. In keeping
with this Court's previous decisions involving the use test, we
think the critical test herein is whether the subject rock in
fact competed commercially with common stone in the specific use
placed at issue.
Petitioner's red rock when used as landscaping rock is not
used for a purpose which is a functional substitute for one of
the enumerated uses. Thus, it does not compete commercially with
the enumerated uses. Cf. G. & W. H. Corson, Inc. v.
Commissioner, 54 T.C. 668 (1970). It is used for a decorative
purpose, not for a construction use. Its purpose, although not
exactly that of dimension stone, i.e., stone used for building
stones, paving blocks, curbing, and flagging, is more similar to
the use of dimension stone than to the enumerated uses.
Many of the other materials sold as landscaping rock are
among those listed as "all other minerals" in section 613(b)(7).
The geographic market for petitioner's red landscaping stone is
much greater than for the same stone when sold as concrete
aggregate. These factors indicate that petitioner's red
landscaping rock is competing with the "other minerals", not with
ordinary stone. We find that petitioner's red landscaping rock
was not sold for a purpose similar to rip rap, ballast, road
material, rubble, or concrete aggregates. Therefore, petitioner
- 18 -
is entitled to the 14-percent depletion rate for its red
landscaping rock.
In accordance with the above holding,
Decision will be entered
for petitioner.