*63 Decision will be entered for the respondent.
1. During 1955 petitioner was engaged in mining and selling pumice from a property it had acquired in 1943. Using bulldozers and levers, the pumice was broken into pieces of varied sizes. The larger pieces were hauled to a mill, sawed into blocks of two sizes, 4 by 4 by 8 and 3 by 3 by 6 inches, and packaged in cartons for sale to operators of restaurants, who used the blocks to cut grease and carbon from their grills. Held, that the rate of depletion applicable to petitioner's operation is the 5 percent rate provided for pumice in section 613(b)(5)(A) of the Internal Revenue Code of 1954, and not the 15 percent rate provided for dimension stone in section 613(b)(6).
2. Held, further, that petitioner may not include the cost of the cardboard cartons used for packaging its products in computing its depletion. United States v. Cannelton Sewer Pipe Co., 364 U.S. 76">364 U.S. 76.
*1161 The respondent determined a deficiency in income tax against the petitioner for the fiscal year ended November 30, 1955, in the amount of $ 17,003.54. The questions are (1) whether petitioner is entitled to a depletion allowance on the product extracted from its mine deposit of 5 percent as applied to "pumice," or 15 percent as applied to "dimension stone," and (2) whether petitioner may include in its computation of depletion the cost of the carton containers in which its finished products are delivered to its customers.
FINDINGS OF FACT.
Some of the facts have been stipulated and are found as stipulated.
Petitioner is a corporation organized under *65 the laws of California, with its principal place of business in Los Angeles. It filed its income tax return for the fiscal year ended November 30, 1955, with the district director of internal revenue at Los Angeles. It uses a fiscal year ending November 30 and an accrual method of accounting in keeping its books and reporting income.
Petitioner was organized on November 19, 1941, by Sheldon P. Fay and others. Fay has been president of petitioner since its inception, and now owns 80 percent of its stock. After its organization, petitioner mined natural deposits of pumice. Fay called it "pumice stone."
Deposits of pumice originate in two ways. Pumice may be blasted or blown out of a volcano into the air, and carried varied distances before settling on the earth, or it may ooze or flow from a fissure or crater of a volcano along the slopes or adjoining area. Pumice may be found in the form of little pebbles, large pieces, or in masses called flows. There are layers of pumice and layers of hard glass. Many gradations have been observed and found from time to time. Pumice of a kind is found in great quantities in the earth's crust.
In petrology, the science of rocks in its broad*66 aspects, pumice is an excessively cellular glassy lava generally of the composition of rhyolite, a sort of volcanic froth. Its color is generally whitish or light gray, and it is very light and will float in water.
*1162 Common uses of pumice are as a lightweight aggregate in the making of concrete and cement, as an abrasive, and as a scouring agent. It is also used for many other purposes.
Until the latter part of 1943, petitioner's operations were in an area in California known as Blind Springs, located between Benton Station and Bishop, on Highway 6, approximately 340 miles north of Los Angeles. The pumice was mined and then hauled to petitioner's plant at North Hollywood, 10 miles from Los Angeles. The mined material was crushed into small pieces and, by a vibrating screen, different-sized particles were separated. Then, through an air system, finer material was separated. The various materials were bagged according to their respective groups, and constituted petitioner's products. The coarse materials were sold to concrete users and pumice tile manufacturers. The sand-type material was sold to United States Gypsum Company for accoustical plaster, and the finer material*67 was sold to chemical concerns who made polishes.
In the latter part of 1943, petitioner acquired an open-face pit or quarry of a volcanic deposit, and began mining its present product. This deposit was not in the form of particles which had been blown from the volcano, but was in the form of a flow of lava from the crater or a fissure or fissures of the volcano. The deposit is located about 17 miles from Lee Vining, a small town located on Mono Lake in Mono County, California, approximately 340 miles north of Los Angeles, on Highway 395. It is about 50 miles from the Blind Springs deposit. Petitioner's mill is located at Lee Vining. In 1955 petitioner had another but lesser deposit of similar material in an area called Glass Mountain, situated south of Tule Lake. It also had a small operation in Utah. Petitioner gave up the right to mine the Blind Springs deposit.
The major part of petitioner's operations is at the deposit near Lee Vining. The deposit is known as the Frank Sam Mine, but petitioner refers to it as the Lee Vining mine. The material is broken loose by crowbars and a bulldozer. The larger pieces are pushed to loading platforms, hand sorted, and loaded on trucks*68 by means of a skiploader or conveyor belts. The trucks then haul the material to the mill, which consists of a shed and several circular saws. During the taxable year petitioner cut the usable material into rectangular blocks of two sizes, the larger size being 4 by 4 by 8 inches and the smaller 3 by 3 by 6 inches. The blocks were packaged in cardboard cartons, and were sold under the trade name of Grillmaster. In connection with the petitioner's business, the blocks are referred to as grillstones. Some of the material that had hard streaks in it was not suitable for grillstones, and was not so used. The same was true of the pieces that were not of sufficient shape or size to be cut to the 3 by 3 by 6 inch dimensions.
*1163 Petitioner sells its products to restaurant supply dealers. The grillstones are used for cleaning restaurant grills. The blocks consist of minute glass particles which through a rubbing or scraping motion cut burnt carbon from the grill, without injuring the metal of the grill. The blocks are also permeable, which permits them to absorb grease and have a lubricating quality.
The blocks produced and sold by petitioner are grayish in color and are very*69 light in weight, and float in water, all of which are natural characteristics of pumice. The index of refraction of petitioner's products is 1.495 plus or minus 0.005, and indicates that the product is of the composition of rhyolite or rhyolitic rock, which is consistent with an identification thereof as pumice.
The blocks are packaged and delivered in individual cardboard cartons. The cartons make it easier to handle the blocks and afford a protection from chipping and breaking.
During the middle 1950's lumps or pieces of material, similar to those taken from petitioner's quarry, were sold in their natural form, uncut, for use in gardens as ornaments. The president of petitioner, at the time of the trial herein, was interested in an organization that sold such ornamental pieces.
On its income tax returns for the fiscal years ended November 30, 1950, 1951, 1952, 1952 amended, and 1953, petitioner declared that its principal business activity was "mining and manufacturing pumice."
The returns for 1950, 1951, and 1952 show that petitioner had inventories of pumice.
On its return for the taxable year ended November 30, 1955, petitioner listed its principal business activity as mining*70 and cutting dimension stone. As being the proceeds from sales of dimension stone quarried at Lee Vining, Tule Lake, and in Utah, it reported the respective amounts of $ 423,124.72, $ 110,550.64, and $ 2,529.60, and from "Purchased Dimension Stone" sales of $ 5,524.32. It also reported sales proceeds from "Lump Pumice" quarried at Lee Vining in the amount of $ 4,266.55. The return further showed that depletion on the reported sales of "Lump Pumice" was computed at the rate of 5 percent, and that depletion on the proceeds reported as sales from quarried dimension stone was computed at the rate of 15 percent. On the return, petitioner showed its inventory to be as follows:
| Beginning of | End of | |
| taxable year | taxable year | |
| Crude pumice | $ 36,844.10 | $ 41,525.48 |
| Pumice block products | 78,548.79 | 46,843.80 |
| Per cost of goods sold | 115,392.89 | 88,369.28 |
| Packaging material | 10,987.27 | 19,634.32 |
| 126,380.16 | 108,003.60 |
*1164 The material mined by petitioner in the taxable year ended November 30, 1955, was pumice.
Petitioner's gross income for the taxable year, for purposes of computing depletion allowance, was $ 404,956.94, including the cost of the cardboard containers*71 used by it in packaging its products. The cost of the cartons was $ 25,953.66. On its return, petitioner deducted that amount as an expense, but included it in its computation of percentage depletion.
In his determination of deficiency, respondent determined that such cost was improperly included in the depletion computation, but made no adjustment to the expense deduction. He also determined that the product mined by petitioner was classifiable as pumice, and that depletion was allowable at the rate of 5 percent.
OPINION.
The question is whether the depletion allowance on petitioner's product should be at the rate of 5 percent, the allowance for pumice under section 613(b)(5)(A) of the Internal Revenue Code of 1954, or at the rate of 15 percent, the allowance for dimension stone under section 613(b)(6). 1
*72 While denying that its product is pumice, petitioner has made no effort to prove that it was other than pumice, but contends it is stone and since it is cut according to specified dimensions for the purpose *1165 of marketing, the applicable depletion rate is 15 percent, allowed by section 613(b)(6), whether or not its product is pumice.
We have studied and considered the evidence of record, and we are satisfied and convinced that petitioner's product is pumice, and we have so found.
The statute, in our opinion, is definite and clear. By section 613(b)(5)(A), the rate of 5 percent applies to "gravel, mollusk shells (including clam shells and oyster shells), peat, pumice, sand, scoria, shale, and stone, except stone described in paragraph (6)." Congress has thus identified pumice as one of the items to which the 5 percent rate applies. By section 613(b)(6), the 15 percent rate for which petitioner contends has been specified as the rate for "all other minerals."
In Virginian Limestone Corporation, 26 T.C. 553">26 T.C. 553, it was found that the mineral in question was dolomite, and that the 10 percent rate specified for dolomite was applicable, even though *73 the mineral might generally be considered as falling within the general classification of "stone," for which a 5 percent rate applied, or, to some extent, as metallurgical limestone, for which a 15 percent rate applied, the reason being that the term "dolomite" was a term of specific designation in the statute, whereas the others were terms of general classification.
In Spencer Quarries, Inc., 27 T.C. 392">27 T.C. 392, the same reasoning was applied in the case of quartzite. See also Albin C. Halquist, 33 T.C. 304">33 T.C. 304, reversed on other grounds 291 F. 2d 49; South Jersey Sand Co., 30 T.C. 360">30 T.C. 360, affd. 267 F. 2d 591, where the mineral was found to be sand, and not quartzite; and Riddell v. Victorville Lime Rock Co., 292 F.2d 427">292 F. 2d 427, where the mineral deposit was found to be a chemical and metallurgical grade of limestone, rather than marble.
Any question which might exist in the circumstances here is, in our opinion, resolved upon examination of the wording of the statute. As being subject to the 5 percent rate, the various*74 items covered by section 613(b)(5)(A) are specifically enumerated, and where an explanation or qualification is intended or regarded as necessary, qualifying words appear. It is specifically shown, for instance, that shells include clamshells and oystershells. Otherwise there are no amplifications or qualifications of any of the items listed except stone, the last of the items enumerated. At that point the statute reads, "and stone, except stone described in paragraph (6)." In the listing of pumice there is no exception or limitation.
It is to be noted also that in section 114(b)(4)(A)(i) of the Internal Revenue Code of 1939, the statute reads, "sand, gravel, slate, stone (including pumice and scoria)," and so forth. There pumice was included in the specified category of stone. In the drafting of section 613(b)(5)(A), pumice was listed separately from stone, and *1166 then when stone was listed as an item separate and apart from pumice and the other items covered, that listing was qualified by the phrase "except stone described in paragraph (6)." In complete harmony with such a reading of section 613(b)(5)(A) are the opening words of paragraph (6) of section 613(b), "15 *75 percent -- all other minerals," namely, the minerals not theretofore covered. Pumice, having previously been covered, does not fall within the classification "all other minerals."
The petitioner seeks to find support for the interpretation sought in the reports of the congressional committees. As we have pointed out, the statute, in our opinion, is abundantly clear, and there is no occasion for reference to the committee reports. We have, however, examined the committee reports relating to the enactments beginning with the Revenue Act of 1951, 2 to and including the Internal Revenue Code of 1954, 3 and it is our conclusion that if reference should be made to the committee reports they would support the interpretation which we make here.
*76 The remaining question is whether petitioner is entitled to add the cost of cardboard cartons to its base for the computation of percentage depletion.
In United States v. Cannelton Sewer Pipe Co., 364 U.S. 76">364 U.S. 76, the Supreme Court determined that the taxpayer, an integrated miner-manufacturer who mines a deposit and then manufactures it into a product, is not to have a preferred position for percentage depletion purposes over a taxpayer who only mines a deposit.
Petitioner mines pumice into large pieces, assorts them, hauls them some 17 miles to its mill, cuts them into blocks, similar to bricks, puts them into cardboard cartons, and sells and delivers them to its customers. It appears that there is a market for pumice as an abrasive agent, as a scouring agent, as an aggregate for cement, for polishes, and also in the form of uncut pieces for garden decorations and other ornaments. Petitioner has shown that it purchased "dimension stone," from which it received some sales proceeds. Presumably it purchased similar material from which it manufactured its block products. It thus appears that petitioner had a marketable product before it manufactured*77 and packaged its "Grillmasters." The cost of the cartons is not a cost in producing a marketable product. It is a cost of marketing the finished product. In the light of the Cannelton case, petitioner, an integrated miner-manufacturer, may not include the cost of the cartons in the computation of percentage depletion. See also United States v. Utco Products, Inc., 237 F. 2d 65; Riddell v.*1167 .Cf. Commissioner v. Halquist, 291 F. 2d 49, and Fannin Investment Co. v. United States, F. Supp. (July 5, 1961).
Decision will be entered for the respondent.
Footnotes
1. SEC. 613. PERCENTAGE DEPLETION.
(a) General Rule. -- In the case of the mines, wells, and other natural deposits listed in subsection (b), the allowance for depletion under section 611 shall be 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. Such allowance shall not exceed 50 percent of the taxpayer's taxable income from the property (computed without allowance for depletion ). In no case shall the allowance for depletion under section 611 be less than it would be if computed without reference to this section.
(b) Percentage Depletion Rates. -- The mines, wells, and other natural deposits, and the percentages, referred to in subsection (a) are as follows:
* * * *
(5) 5 percent --
(A) gravel, mollusk shells (including clam shells and oyster shells), peat, pumice, sand, scoria, shale, and stone, except stone described in paragraph (6);
* * * *
(6) 15 percent -- all other minerals (including, but not limited to, aplite, barite, borax, calcium carbonates, diatomaceous earth, dolomite, feldspar, fullers earth, garnet, gilsonite, granite, limestone, magnesite, magnesium carbonates, marble, phosphate rock, potash, quartzite, slate, soapstone, stone (used or sold for use by the mine owner or operator as dimension stone or ornamental stone), thenardite, tripoli, trona, and (if paragraph (2)(B) does not apply) bauxite, beryl, flake graphite, fluorspar, lepidolite, mica, spodumene, and talc, including pyrophyllite), 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. For purposes of this paragraph, the term "all other minerals" does not include --
(A) soil, sod, dirt, turf, water, or mosses; or
(B) minerals from sea water, the air, or similar inexhaustible sources.↩
2. H. Rept. No. 586, 82d Cong., 1st Sess., pp. 29, 114; S. Rept. No. 781, 82d Cong., 1st Sess., p. 37; Conf. Rept. No. 1213, 82d Cong., 1st Sess., p. 76.↩
3. H. Rept. No. 1337, 83d Cong., 2d Sess., pp. 57-58, 184-185; S. Rept. No. 1622, 83d Cong., 2d Sess., pp. 77-79, 330-332; Conf. Rept. No. 2543, 83d Cong., 2d Sess., pp 51-52.↩