*1288 DEPLETION - DISCOVERY VALUE. - A basalt rock quarry is not a "mine" and deductions for depletion thereof may not be based on discovery value. Further, the evidence does not establish fair market value at the basic date, which is a necessary element to the allowance of depletion deductions on the basis of discovery value.
*663 The respondent determined deficiencies in petitioner's income tax for the years 1929 and 1930 in the respective amounts of $903.78 and $1,313.67. At the hearing counsel for the parties stipulated a settlement of issues relating to depreciation, which will be reflected in the recomputation. One issue remains for each year, whether petitioner is entitled to deductions for depletion of a rock quarry on the basis of a discovery value. The two cases were consolidated for hearing.
FINDINGS OF FACT.
Petitioner is an Oregon corporation, with its principal office at Klamath Falls. It is engaged in general contracting. A large part of its work has been that of highway construction. In 1925*1289 petitioner acquired several tracts of land near Klamath Falls for the purpose of establishing an operating base. The first tract acquired consisted of 6 acres, for which petitioner paid $250 per acre. On this tract it established its offices and plant. It next acquired two tracts of 40 acres each at a cost of $100 per acre. The next acquisition was of a 40-acre tract in June 1925 at a cost of $50 an acre. This last mentioned parcel is the one involved in these proceedings. This land lay about a half mile north of the city limits of Klamath Falls. There were loose pieces, "float" as it is called, of basaltic rock on the surface of the tract, but no outcropping or any other indication of any extensive deposit of basalt. Petitioner had been purchasing basaltic rock for use in highway construction and after acquiring the land near Klamath Falls it sent prospectors out over the surrounding country in search of deposits of the rock. It took an option on one piece of land for the purpose of prospecting for basalt and, finding no suitable deposit, allowed the option to lapse.
In the late summer or early fall of 1926 petitioner engaged a driller to put down test holes on the 40-acre*1290 tract acquired in June *664 1925, for the purpose of determining whether it contained a deposit of basaltic rock of suitable quality for petitioner's use and of sufficient extent to warrant quarrying. The sinking of the test holes was completed on or about October 26, 1926, and disclosed a deposit of basaltic rock of a thickness of at least 40 feet, that being the depth of the drilling. The overburden of earth and loose rocks was light, varying from a few inches to 2 or 3 feet in thickness. Trenches were dug to ascertain the boundaries of the deposit and it was found to cover an area of about 5 acres. On the data available in 1926 as to the extent and depth of the deposit, petitioner's officers estimated its content at 200,000 cubic yards. Samples of the rock were sent to the Oregon State College and the Oregon Highway Department for analysis and it was found suitable for use in concrete for highway construction. In 1927 petitioner installed equipment for extracting the rock and crushing it. The "open cut" or "stripping" method of removal is employed. After removing the soil and loose rock from the surface, the basalt deposit is drilled and portions blasted free from*1291 the mass. The rock thus blasted loose is hoisted into cars and hauled to the crusher on the premises. From 1927 to the latter part of 1932 approximately 100,000 cubic yards of crushed stone had been removed. Most of the stone removed was used by petitioner in highway construction, but some was sold. In November 1932 a survey of the property disclosed 226,998 cubic yards of rock remaining in the deposit down to the depth it had then been drilled.
Basalt is a lava rock, quite common in various forms throughout a large portion of the State of Oregon. In the vicinity of Klamath Falls much of the basalt rock is of light weight and known as scoria or cinder. This type is not suited for highway construction. The basalt on petitioner's property was dense, hard, and black, had not been affected by weathering, and was well adapted for highway surfacing material and for durable concrete aggregate. In the vicinity of Klamath Falls a faulting between large blocks of rocks has resulted in the basaltic rock being imbedded in isolated masses in diatomaceous earth, a light colored material. Due to this conditioon, deposits of basaltic rock of the type found on petitioner's property could*1292 be located only by exploration. Such deposits are irregular both in shape and size and only by detailed exploration can it be determined whether they are of sufficient extent to warrant the cost of opening a quarry and installing plant and equipment to produce commercial rock.
At the time petitioner purchased its property only one quarry in that vicinity was being operated and was producing commercial *665 basalt rock. That quarry was about a half mile from petitioner's property. It was operated under lease, the owner receiving a royalty of 25 cents per cubic yard of crushed rock removed. In the vicinity of Klamath Falls and petitioner's property there are a number of abandoned quarries, the majority having been abandoned because of failure to find sufficient rock to warrant operations. In others the supply of rock has been exhausted.
OPINION.
ARUNDELL: Petitioner claims deductions for the depletion of its basalt rock deposit on the basis of discovery value. Section 23(1) of the Revenue Act of 1928 provides for a reasonable allowance for depletion of "mines, oil and gas wells, other natural deposits, and timber." Section 114 prescribes the basis for depletion*1293 allowances. The general rule under that section as to property acquired by purchase is that the basis is cost of the property. Two exceptions are made, one of which relates to oil and gas wells and the other, contained in section 114(b)(2), 1 relates to mines and allows depletion based on discovery value. Petitioner seeks to bring its case under the latter provisions.
Much of the argument is devoted to urging that basalt rock is a mineral and the deposit from which it was removed is a mine, apparently in an effort to distinguish the case from that of . In that case we went at length into some of the definitions of mines and minerals, concluding that Congress intended the word "mines" in the statute to*1294 be given a restricted meaning as relating to the extraction of minerals, as distinguished from other natural resources, and that gravel is not a mineral as that term is generally understood. We said in part:
It is apparent, we think, that Congress no more intended the word "mines" as used in this statute to include "other natural deposits" than it was intended to include oil and gas wells or timber. We can not assume that Congress was engaged in idle expression when it employed the words "oil and gas wells" and "other natural deposits" in association with the word "mines" and in order to give meaning to all of the words used, it is obvious that the word "mines" must be read in its restricted sense as including only what is generally included under the word "minerals."
If it be held that the word "mines" is here used in its broad sense to embrace a gravel pit, it must be held that gravel in the same sense is a "mineral." We would then be unable to attach any significance to the words "other *666 natural deposits" used in the statute, since any natural deposit is within the broad meaning of the word a "mineral" and an excavation to recover such mineral is a "mine." Water*1295 in the broad sense of the word, is a mineral, and a well in that sense might then be called a "mine", but certainly the word "mine" is not generally so understood. If such a construction be given to the statute, not only would the words "other natural deposits" have no meaning or effect, but a direct conflict in terms would result, for the reason that there could be no natural deposits other than mines.
If Congress had intended such meaning, the statute could easily have been framed to read: "mines, including oil and gas wells, and other natural deposits", but we can not supply what has been thus omitted. It is our conclusion, therefore, that a gravel pit or deposit is not embraced within the term "mines" as used in the sections of the Revenue Act of 1926, above quoted. * * *
The same reasoning is applicable here. As generally understood a surface working for the extraction of stone is a quarry and not a mine. While a mine is sometimes broadly defined to include any excavation for minerals, it is more strictly used to denote subterranean workings as distinguished from quarries, placers, and surface or open works. *1296 Minerals and mineral lands have sometimes been construed to include various kinds of stone deposits, but in mining parlance mineral means ore, and mineral deposit means a valuable mass of ore. For definitions see "A Glossary of the Mining and Mineral Industry" by Albert H. Fay, Bulletin 95, Department of Interior. These distinctions obtain as well outside the mining industry and the popular concept of a mine does not include a rock quarry. "The legislature must be presumed to use words in their known and ordinary signification." , quoted in . As pointed out in the Parker Gravel Co. case, had Congress intended that the word "mines" was to be given the broad construction contended for the statute could easily have been so framed. Undoubtedly, petitioner's deposit of stone is a natural deposit which Congress specifically directs shall be subject to depletion allowances, but which it carefully refrained from including in the discovery provisions of the statute. We are of the opinion that the term "mines" as used in the statute was not intended to*1297 include rock quarries; consequently, petitioner is not entitled to depletion deductions on the basis of discovery value.
There is an additional reason which compels the denial of petitioner's claim. Where the discovery provisions of the statute are applicable the basis is "the fair market value of the property at the date of discovery or within 30 days thereafter." Thus it is vital to a claim for discovery depletion that fair market value be established. Petitioner claims a fair market value of $50,000 based on the originally estimated content of 200,000 cubic yards at 25 cents *667 per yard. That price we assume is taken because in prior years the owned of a quarry about a half mile distant from petitioner's received a royalty in that amount for each cubic yard of stone removed. That price would not necessarily be controlling in petitioner's case. The evidence is that petitioner used part of its quarried rock in its own construction projects and sold some to outsiders, but the sale price is not given. There is also testimony that, by charging itself with the same prices at which rock was sold to others, petitioner's operation of the quarry showed a profit, before depletion, *1298 of some $56,000 during a 4-year period when something like 80,000 cubic yards of stone were quarried. If this has anything to do with the case, it serves to show the lack of any standard of valuation in the evidence. Moreover, there is evidence that petitioner purchased quarried rock at a price as low as 3 cents per cubic yard, and paid as high as $1.75 per yard. Another purchaser paid as high as $6 per yard at the quarry near petitioner. From these varying figures it is impossible to say what price petitioner could command for its rock. But even assuming a determinable content and a fixed price, the multiplication of the two figures does not give fair market value. .
The petitioner has the burden of establishing as of the discovery date, or within 30 days thereafter, the fair market value of the property with respect to which depletion is claimed. That is, the value of the entire property "in money as between one who wishes to purchase and one who wishes to sell; the price at which a seller willing to sell at a fair price and a buyer willing to by at a fair price will trade, both having reasonable knowledge of the facts. *1299 " , quoting . The burden is not met by a mere showing of the present selling price of units of the property, particularly where, as here, the property is of a kind that will be disposed of over a period of years during which it will naturally be affected by such undeterminable factors as changes in demand and variations in production costs.
Petitioner has not established the fair market value of its rock deposit at the basic date, and for this additional reason its claim for discovery depletion must be denied.
Decision will be entered under Rule 50.
Footnotes
1. (2) DISCOVERY VALUE IN CASE OF MINES. - In the case of mines discovered by the taxpayer after February 28, 1913, the basis for depletion shall be the fair market value of the property at the date of discovery or within thirty days thereafter, if such mines were not acquired as the result of purchase of a proven tract or lease, and if the fair market value of the property is materially disproportionate to the cost. * * * ↩