Rev. Rul. 76-389

Advice has been requested as to the proper method of computing gross income from mining for purposes of the percentage depletion allowance in the case of granite and marble, under the circumstances described below.

The taxpayer owns and operates quarries with the main objective of producing granite and marble quarry blocks. There is no representative market or field price for granite or marble quarry blocks. After extraction from the ground the granite and marble blocks are shipped by rail to the taxpayer's processing plant where the granite or marble quarry blocks are sawed, shaped, polished, and further processed into specific pieces according to the purchaser's specifications. Crushed granite and marble is produced from waste at the quarries as a byproduct of the quarry operations and at the processing plant as a byproduct of the taxpayer's coping, sawing cutting, shaping, and polishing operations.

Section 613(c)(5) of the Internal Revenue Code of 1954 provides, in part, that polishing and shaping are treatment processes not considered as mining.

Section 1.613-4(f)(5) of the Income Tax Regulations provides, in part, that crushing is recognized as an allowable mining process. However, section 1.613-4(g)(2) provides, in part, that notwithstanding any other provisions of section 1.613-4, a process applied subsequent to a nonmining process (other than nonmining transportation) shall also be considered to be a nonmining process.

Section 1.613-4(d)(1)(i) of the regulations provides, in part, that if it is impossible to determine a representative market or field price, gross income from mining shall be computed by use of the proportionate profits method set forth in section 1.613-4(d)(4). Section 1.613-4(d)(4)(ii) provides that the proportionate profits method is applied by multiplying the taxpayer's gross sales (actual or constructive) of its first marketable product or group of products by a fraction whose numerator is the sum of all of the costs allocated to those mining processes that are applied to produce, sell, and transport the first marketable product or group of products, and whose denominator is the total of all the mining and nonmining costs paid or incurred to produce, sell, and transport the first marketable product or group of products.

Under the provisions of section 1.613-5(a) of the regulations taxable income from the property means gross income from the property less all allowable deductions (computed without allowance for depletion) that are attributable to mining processes, including mining transportation, with respect to which depletion is claimed.

Accordingly, where the main objective of mining granite or marble is the production of rough quarry blocks, the mining processes end when the rough quarry blocks of granite or marble are removed to the rim of the quarry and before they are shipped or transferred to a processing plant for sawing, shaping, and polishing. See: Gray Knox Marble Co. v. United States, 257 F. Supp. 632 (E.D. Tenn. 1966), where the court held that mining ceases when the rough quarry blocks are brought to the rim of the quarry. If the taxpayer incidentally produces crushed granite or marble as a byproduct of the extraction process at the mine or quarry, crushing of such granite or marble is considered to be a mining process and amounts received for such crushed granite or marble are to be included in gross income subject to percentage depletion. When because of subsequent nonmining operations, it is necessary to compute gross income from mining for the granite or marble quarry blocks by the proportionate profits method under the provisions of section 1.613-4(d) of the regulations, any income from crushed granite or marble byproduct incident to operations subsequent to mining is includible in determining the overall profits to be allocated to mining and nonmining activities for percentage depletion purposes. However, the costs incurred to produce crushed granite or marble as a byproduct of the processing plant are not mining costs in the proportionate profits computation since that crushing follows nonmining processes and is a nonmining process.

Rev. Rul. 55-390, 1955-1 C.B. 290, which deals with a similar factual situation, is amplified and, as amplified, is superseded, since the position is restated under current law in this Revenue Ruling.