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Materials on the site which the engineer characterized as
unusable became the property of GBI at or after the time of that
characterization. GBI removed the unusable materials from the
sites at its own expense and crushed and sold the removed
materials to third parties as crushed rock. GBI crushed the
unusable materials using equipment that it owned and maintained
at a rock quarry (quarry) that was located on land owned by GBI.
GBI used that equipment primarily to crush rock obtained from the
quarry. For Federal income tax purposes, GBI depreciated the
equipment in the subject years as well as in prior years.
GBI calculated and claimed percentage depletion deductions
of $330,082 and $140,660 for 1995 and 1996, respectively, which
passed through and were reported by the shareholders on their
individual Federal income tax returns. GBI’s deductions
reflected its sale of both the unusable materials and the
materials obtained from the quarry. Respondent disallowed GBI’s
deductions to the extent that they were attributable to the
unusable materials. Respondent determined with respect to the
unusable materials that GBI lacked an economic interest in a
mineral in place.
OPINION
Respondent determined that petitioners are not entitled to
the depletion deductions which GBI claimed as to the unusable
materials. Petitioners argue that GBI is entitled to those
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Last modified: May 25, 2011