Internal Revenue Service
Revenue Ruling
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smRev. Rul. 66-24
1966-1 C.B. 157
Sec. 167
Sec. 612
Sec. 613
IRS Headnote
Clay used, or sold for use, by a mineowner or operator, as one of the constituents of the kiln feed in the manufacture of cement is not regarded as `brick and tile clay.' Under the Internal Revenue Code of 1939, percentage depletion is not allowable for such clay unless it is of a variety for which depletion is otherwise specifically provided by that Code.
Under the Internal Revenue Code of 1954, clay used, or sold for use, by a mineowner or operator, as one of the constituents of the kiln feed in the manufacture of cement falls within the category of `all other minerals' and is subject to a depletion rate of 15 percent as provided by section 613(b)(6) of that Code.
Full Text
Rev. Rul. 66-24
Advice has been requested with respect to the percentage depletion rate applicable to clay used, or sold for use, by a mineowner or operator, as one of the constituents of the kiln feed in the manufacture of cement for taxable years to which the Internal Revenue Code of 1939 applies and also for taxable years to which the Internal Revenue Code of 1954 applies.
Under section 114(b)(4)(i) of the 1939 Code, effective for years subsequent to 1950, as well as under section 613(b)(5) of the 1954 Code as first enacted and applicable through 1960, a depletion deduction of 5 percent was allowable for `brick and tile clay.' The statute did not define `brick and tile clay.'
However, by section 29.23(m)-5 of Regulations 111, by section 39.23(m)-5 of Regulations 118, pertaining to the 1939 Code, and by section 1.613-2(b)(1)(i) of the Income Tax Regulations, pertaining to the 1954 Code, applicable to years prior to 1961, `brick and tile clay' is defined as clay used or sold for use in the manufacture of common brick, drain and roofing tile, sewer pipe, flower pots, and kindred products (other than clay specifically identified as clay for which a 15-percent rate of percentage allowance is provided).
Clay used, or sold for use, in the manufacture of cement is manifestly not clay used, or sold for use, in the manufacture of brick, drainage and roofing tile, sewer pipe, or flower pots. Therefore, under the applicable law and regulations, clay used, or sold for use, in making cement cannot be properly treated as entitled or subject to a 5-percent deduction for depletion as `brick and tile clay.' Thus under the 1939 Code, if a particular clay does not qualify as a refractory clay, ball clay, china clay, etc., and is not used in making common brick and tile products, it is not entitled to percentage depletion.
Under the 1954 Code three paragraphs of section 613(b) deal with clay of specified kinds and clay used for specified purposes. As section 613(b) was originally enacted, section 613(b)(3) provided a 15-percent depletion rate for ball clay, bentonite, china clay, and sagger clay. Section 613(b)(5)(A) provided a 5-percent rate for `brick and tile clay.' Section 613(b)(6) provided a 15-percent rate for `all other minerals', including refractory and fire clay. The latter provision was subject to two exceptions: (1) The percentage allowed for `all other minerals' was limited to 5 percent (except under specified circumstances) for minerals used or sold for use as rip rap, ballast, road material, rubble, concrete aggregates, or for similar purposes; and (2) it was provided in the last sentence of paragraph (6) that the term `all other minerals' as used in that paragraph does not include soil, sod, dirt, turf, water, or mosses, or minerals from sea water, the air, or similar inexhaustible sources.
Section 302(a) of Public Law 86-564, C.B. 1960-2, 681, at 683, amended section 613(b) of the 1954 Code by dealing with refractory and fire clay in section 613(b)(3)(B), allowing the 15-percent rate to clay used or sold for use for purposes dependent on its refractory properties if paragraph (5)(B) of section 613(b), as amended, does not apply. The amendment of paragraph (5) dealt with `brick and tile clay' in a new subparagraph (B), which allows the 5-percent rate for clay used or sold for use in the manufacture of building or paving brick, drainage and roofing tile, sewer pipe, flower pots, and kindred products. Finally, paragraph (6) was amended to delete refractory and fire clay from the `all other minerals' category, such clay having been dealt with in the amended section 613(b)(3)(B).
It will be noted that both in its original form and as amended by Public Law 86-564, section 613(b) does not specifically provide a depletion rate for clay used in the manufacture of cement. Nevertheless, such clay falls within the term `all other minerals' for which the 15-percent rate is provided by section 613(b)(6) if it does not fall within either of the two exceptions referred to above. Such clay when used or sold for use as one of the constituents of the kiln feed in the manufacture of cement is used because it contributes to the setting qualities of the cement when mixed with water and does not fall within either of those exceptions. Such clay is therefore considered to be entitled to the 15-percent depletion rate provided by section 613(b)(6).
Accordingly, clay used, or sold for use, by a mineowner or operator, as one of the constituents of the kiln feed in the manufacture of cement is not to be regarded as `brick and tile clay.' For taxable years to which the 1939 Code is applicable, percentage depletion is not allowable for such clay unless it is a variety for which depletion is otherwise specifically provided for by that Code.
For taxable years to which the 1954 Code is applicable, clay used, or sold for use, by a mineowner or operator, as one of the constituents of the kiln feed in the manufacture of cement falls within the category of `all other minerals' and is subject to a depletion rate of 15 percent as provided by section 613(b)(6) of that Code.