Central Commercial Co. v. Commissioner

40 T.C. 901, 1963 U.S. Tax Ct. LEXIS 63
CourtUnited States Tax Court
DecidedSeptember 3, 1963
DocketDocket Nos. 81985, 81986, 90682
StatusPublished
Cited by3 cases

This text of 40 T.C. 901 (Central Commercial Co. v. Commissioner) is published on Counsel Stack Legal Research, covering United States Tax Court primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Central Commercial Co. v. Commissioner, 40 T.C. 901, 1963 U.S. Tax Ct. LEXIS 63 (tax 1963).

Opinion

Atkins, Judge:

The respondent determined deficiencies in income tax and, by amendments to answers, made claim for additional deficiencies as follows:

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The petitioner in its petitions claimed overpayments of $110,000 in Docket No. 81985, $100,000 in Docket No. 81986, and $152,000 in Docket No. 90682.

The parties having entered into stipulations as to the computation of the petitioner’s “gross income from the property” and “taxable income from the property” in connection with certain of its quarries and as to the amounts of its percentage depletion deductions for all of such quarries except that at Kremlin, Wis., the only issue remaining for decision is whether the material extracted from the petitioner’s Kremlin quarry is “stone,” entitling it to compute its depletion deduction at the rate of only 5 percent pursuant to section 613(b) (5) of the Internal Revenue Code of 1954, as determined by the respondent, or whether such material falls within the category “all other minerals,” entitling it to compute such deduction at the rate of 15 percent pursuant to section 613(b)(6) of the Code.

FINDINGS OF FACT

Some of the facts have been stipulated and are incorporated herein by this reference.

The petitioner is a corporation organized under the laws of the State of Illinois with its principal place of business at Chicago, Ill., and is the successor to Central Commercial Industries, Inc., and affiliated corporations by statutory merger effective December 31, 1954. It filed its income tax returns for the taxable years 1954 to 1958, inclusive, with the district director of internal revenue at Chicago.

The petitioner’s principal business activity during the years in question was the mining and production of slate and rock granules which it sold to roofing manufacturers for use as roofing granules in asphalt roofing and siding. It had quarries located at Hampton, N.Y., Castleton, Vt., and Kremlin, Wis. It also maintained a complete granule research laboratory in Northfield, Ill.; product control laboratories at all its granule plants; and a number of test panels in Wheeling, Ill., Poultney, Vt., Bound Brook, N.J., and Miami, Fla., for the purpose of testing the effect of weathering upon various roofing granules developed and produced by it.

The petitioner does not sell the crude product from its Kremlin quarry but employs a number of treatment processes, which are typical in the roofing granule industry, in extracting the crude product and processing it for sale as roofing granules. It quarries the deposit by blasting it from the quarry face. Secondary breakage with a steel drop ball reduces the rock to a size which will fit into a primary crusher. Mechanical shovels lift this broken rock and place it on trucks to be hauled to the primary crusher, which reduces the rock to a size which can be moved on a conveyor belt, ranging from dust to a maximum size of less than 12 inches. The rock is then conveyed by means of a conveyor belt to a secondary crusher which reduces the rock in size to a maximum of 1 inch and dries some of the product to remove moisture. The product is then placed in intermediate storage silos for the purpose of providing surge between the final milling of the rock and the quarrying operation. The rock is reduced to a maximum size of approximately 10 mesh in the case of No. 11 granules by final crushing and sizing through the use of smooth faced rolls. Shaking screens are employed to remove the waste, which amounts to approximately 50 percent of the deposit. Such waste is conveyed by means of conveyors, or as a slurry, to the waste pile. The natural granules are then treated with oil to, among other things, promote adhesion to asphalt and to make them imbed better, and are conveyed to storage silos where they are held preparatory to shipment as natural granules or preparatory to further processing as artificially colored granules. Such artificial coloring is accomplished by applying a pigment to the natural granules, heating the coated granules, and subjecting them to certain additional surface treatments to maintain and provide essential qualities for roofing granules.

Roofing granules used in the manufacture of asphalt roofing serve a weather protection function, by shielding the asphalt coating from water and from the actinic rays of the sun, and an ornamental function, by making possible different colored roofs.

The following specific criteria must be met in a rock deposit intended for the manufacture of roofing granules: It must resist weathering conditions, both mechanical and chemical; it must be adaptable to the coloring process; it must be uniform; it must contain sufficient tonnage; it must have low porosity ;it must have low transmission of ultraviolet light; it must be tough; and it must provide equidimen-sional fracture upon crushing.

Granules to be used in roofing must meet certain quality control tests to evaluate the following properties: Durability of the granule base; size and shape (determined primarily by crushing characteristics of the base rock); initial color on fabrication as well as color permanence on exposure; ability to adhere to asphalt; opaqueness (since ultraviolet light decomposes asphalt and opaque granules protect the roofing from this photochemical reaction); resistance to staining and sooting; and ability to prevent bubbling of the asphalt.

The deposit quarried by the petitioner at its Kremlin quarry is an altered basalt. Basalt is a fine-grained dark igneous rock. It, and certain other dark igneous rocks, such as diabase, diorite, and gabbro, are sometimes referred to as traprock. Igneous rocks were originally formed by the crystallization of hot silicate solutions, such as lava, the grain size being smaller in the case of rocks formed by more rapid cooling. The petitioner’s deposit consists of more than 50 percent plagioclase, which is a form of feldspar. It also contains other fer-romagnesian minerals, including pyroxene which has been altered to hornblende or amphibole, chlorite, and epidote. Due to this alteration of the pyroxene and the fact that the feldspar in the petitioner’s deposit contains less calcium than is usually present in basalt, the petitioner’s deposit is mineralogically similar to andesite.1

Roofing granules are produced from a number of materials other than basalt, including slate (the material mined by the petitioner at its Hampton and Castleton quarries for the production of roofing granules), slag, aplite, greenstone, granite, feldspar, limestone, quartzite, rhyolite, syenite, and diabase, all of which are competitive with each other.2 However, many commercial stone deposits are not used for the production of granules because they lack one or more of the features which are essential to produce a satisfactory roofing granule. Deposits suitable for the production of roofing granules are of restricted occurrence. Many basalt deposits are not suitable.

Since the requirements, as to both chemical and physical characteristics, which a deposit must meet to qualify for use as roofing granules are more rigid than those which a deposit must meet to qualify for use as riprap, ballast, road material, rubble, concrete aggregates, and for other similar purposes, a deposit suitable for the former use is more valuable than one suitable for the latter.

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Related

Barry v. Commissioner
54 T.C. 1210 (U.S. Tax Court, 1970)
Central Commercial Co. v. Commissioner
40 T.C. 901 (U.S. Tax Court, 1963)

Cite This Page — Counsel Stack

Bluebook (online)
40 T.C. 901, 1963 U.S. Tax Ct. LEXIS 63, Counsel Stack Legal Research, https://law.counselstack.com/opinion/central-commercial-co-v-commissioner-tax-1963.