*193 Decisions will be entered under Rule 50.
1. Held, Kimble Glass meets the requirements of section 435(e) (1)(B), 1939 Code, and is entitled to compute its average base period net income under section 435(e)(2).
2. Held, Kimble Glass satisfies the requirements of section 433 (b)(18), so that in determining its excess profits net income for 1948 and 1949, it is entitled to exclude losses which it realized from its Kaylo products business.
3. Held, in computing excess profits credit of Owens-Illinois there should be excluded Kaylo losses realized by or allocated under part II to Kimble Glass, and there should be included profits of the television tube business realized by Owens-Illinois.
4. Held, each petitioner's liability for 1950 excess profits tax imposed under section 430 is a liability to be taken into account in computing its net capital addition for 1951 under section 435(g).
5. Held, the Commissioner properly determined the deduction for depletion of feldspar mined by petitioner in accordance with sections 23(m) and 114(b)(4)(A)(iii).
*1238 The Commissioner determined deficiencies in income tax for the years 1950 and 1951, as follows: *1239
| Docket No. | Year | Deficiency | |
| 59484 | Kimble Glass Co | 1950 | $ 209,024.21 |
| 1951 | 143,884.02 | ||
| 64203 | Owens-Illinois Glass Co | 1951 | 330,462.50 |
Each petitioner claims that there was overpayment of tax. Kimble Glass has received a tentative carryback*195 refund of $ 210,845.11. It claims an additional carryback refund of $ 837,634.01 for 1950 and a refund of $ 1,925,56 for 1951. Owens-Illinois claims a refund of not less than $ 179,417.51 for 1951.
The issues are:
(1) Whether Kimble Glass Company meets the requirements of section 435(e)(1)(B) so as to be entitled to compute its average base period net income under section 435(e)(2), 1939 Code.
(2) Whether Kimble Glass Company is entitled to exclude its Kaylo losses for 1948 and 1949 in the computation of its average base period net income.
(3) Whether in computing the average base period net income of Owens-Illinois, there should be included television bulb profits realized by Owens-Illinois, and there should be excluded Kaylo losses realized by Kimble Glass or allocated to Kimble Glass under section 435(e)(1) (B)(ii).
(4) Whether or not the liabilities of Kimble Glass and Owens-Illinois for 1950 excess profits tax constituted a liability of each petitioner existing at the beginning of 1951 so as to be taken into account in computing the equity capital of each petitioner under section 437(c) in determining each petitioner's net capital addition for 1951.
(5) Whether Owens-Illinois*196 Glass Company is entitled to larger deductions for depletion of feldspar under sections 23(m) and 114(b)(4)(A)(iii) than the Commissioner allowed.
FINDINGS OF FACT.
The petitioners are Ohio corporations having their principal offices in Toledo, Ohio. They filed their separate returns for the taxable years with the collector of internal revenue for the tenth district of Ohio.
Owens-Illinois Glass Company, hereinafter called Owens, was organized in the late 1920's. Its principal business at all times has been and is the manufacture of glass bottles and other glass products, and containers made of wood and paper, and bottle closures.
In December 1947, Owens caused the organization of an Ohio corporation known as American Structural Products Company. Its name was changed on May 26, 1952, to Kimble Glass Company. It is referred to herein as Kimble. Owens acquired all of the stock of Kimble. Kimble is its wholly owned subsidiary.
*1240 Some of the questions in these cases relate to certain transactions between Owens and Kimble which grew out of the production of two distinct and different lines of products, namely, Kaylo products, and the manufacture of television bulbs.
Kaylo*197 Products.
In the latter part of 1939, because of increased competition in the glass container business, Owens began to extend its production to other products. In the latter part of 1939, it began developing roofing tile made of lime, silica sand, and asbestos, which product originally was given the trade name "Microporite," which was changed to Kaylo. Kaylo is not glass. Owens began producing Kaylo products in 1941 at its plant located in Berlin, New Jersey. Kaylo can be used as roof deck slabs, structural wall panels, and fire doors. It was believed that Kaylo also could be used as a heat-insulating material, such as a covering for pipes. For the manufacture of Kaylo products, Owens acquired the Berlin plant, which was a sand-lime-brick plant, and another plant at Sayreville, New Jersey.
During the 1940's, Owens also made blocks and insulators of glass. These products and Kaylo products are used in the building and construction industry. Owens produced glass blocks and insulators at its plants at Muncie, Indiana, and Columbus, Ohio. It called this division of its business the Insulux Products Division. Kaylo products and glass blocks and insulators are different products*198 than glass bottles and containers, and are sold in different markets.
As stated above, Owens brought about the organization of a new corporation (now called Kimble) on December 23, 1947. On December 24, 1947, Owens made a written offer to subscribe for all of the authorized capital stock of Kimble, 10,000 shares of common stock, to be paid for by the transfer of certain properties, subject to liabilities, which offer was accepted by Kimble. As of the end of 1947, the 10,000 shares of stock of Kimble was issued to Owens in exchange for the stipulated properties. Thereafter, Kimble was a wholly owned subsidiary of Owens.
The chief reason of Owens for organizing Kimble was to transfer to it the two divisions of Owens engaged in making glass blocks and insulators, and Kaylo products. Owens believed that it would be profitable and efficient to have the production of products used in the construction business carried on by a separate corporation, and that Kaylo products could be marketed through the same outlets which distributed glass blocks. In accordance with that plan, Owens transferred as of the end of 1947, in exchange for Kimble's stock, the assets (subject to certain liabilities) *199 used in its glass block and insulator and Kaylo divisions. Such assets included cash and prepaid items, and notes and accounts receivable; and the plants at or near Columbus, *1241 Ohio, Muncie, Indiana, Sayreville, New Jersey, and Berlin, New Jersey, together with the machinery, equipment, fixtures, raw materials, finished goods, work in process, supplies, and machine parts located at and belonging to each plant.
Kimble made no sales during 1946 and 1947, and did not get into any productive business until after the end of 1947.
Kimble produced Kaylo products at the two New Jersey plants, and glass blocks and insulators at the plants in Muncie and Columbus. Within a short period of time, after a relatively small production of glass blocks and insulators at the Columbus plant, such production there was discontinued, and on June 15, 1948, Kimble sold the Columbus plant, with its machinery, equipment, and assets, to Owens for cash at their book value, $ 1,736,459.19. No gain or loss was reported from this transaction by either Kimble or Owens.
Kimble carried on the production of glass blocks and insulators at the Muncie plant where such production is still carried on.
Kimble*200 was unable to manufacture Kaylo products at a sufficiently low cost so as to sell it at a profit. More efficient manufacturing processes were essential. Moreover, contrary to original expectations, it was found that it was not possible to market Kaylo through glass block distribution channels. It was concluded that the problem of producing Kaylo profitably could best be solved by combining the more experienced research personnel of Owens (who had participated in the initial development of Kaylo) with the production personnel, who then could devote undivided attention to the problems involved, and that in the meantime efforts to market Kaylo products should be curtailed. It was decided that the Kaylo business should be transferred back to Owens. Therefore, on July 1, 1949, Kimble sold to Owens the assets used in the Kaylo business, including the two plants in New Jersey, for $ 11,631,741.46, the book value of the assets, which was paid partly in cash and partly by cancellation of amounts owed by Kimble to Owens. No gain or loss was reported by either Kimble or Owens from this transaction. As of June 30, 1949, Kimble discontinued the Kaylo business, and no losses from such business*201 were sustained by Kimble after that date.
The period during which Kimble produced Kaylo was from January 1, 1948, through June 30, 1949. Kimble produced only Kaylo products at the two plants in New Jersey in Berlin and Sayreville, and it maintained a separate sales organization to sell Kaylo products.
Kaylo is classifiable in major group 32, subgroup 329, of the Standard Industrial Classification Manual of the Bureau of the Budget of the United States. All other products produced by Kimble, namely, glass blocks, glass insulators, differed substantially from Kaylo, as did television bulbs which Kimble produced after June 30, 1949. Glass *1242 blocks, insulators, and television bulbs are classified in major group 32, subgroup 322, of the above-named manual.
Kimble sustained losses from the production and sale of Kaylo products which amounted to $ 2,335,152.17 during 1948, and $ 1,161,859.66 during the first 6 months of 1949; a total loss of $ 3,497,011.83.
After the sale on July 1, 1949, by Kimble to Owens of the assets used in the Kaylo business, Owens sustained losses in 1949, 1950, and 1951 from its conduct of the Kaylo business, in the respective amounts of $ 978,616.77, *202 $ 2,338,204.48, and $ 2,123,607.01. Subsequently, however, Owens' operations were more successful and recently Owens has conducted its Kaylo business at a profit.
As determined by the respondent, Kimble's excess profits net income for 1949 was $ 3,116,615.65. It sustained a loss for 1948 of $ 2,107,561.75. The net amount of Kimble's excess profits net income for 1948 and 1949 was, therefore, $ 1,009,053.90.
As defined by section 433(b)(18), 1939 Code, Kimble's aggregate excess profits net income, i.e., the net amount of its excess profits net income increased by the sum of its Kaylo losses for those years, was $ 4,506,065.73. The sum of Kimble's net losses from its Kaylo business during the base period was more than 15 percent of its aggregate excess profits net income during the base period.
Television Bulbs.
During the second World War, Owens engaged in the production of handblown, cathode-ray tubes for use in radar equipment. They were forerunners of television bulbs. After the end of the war, Owens experimented with the production of television bulbs and it believed that the production of them would become an expanding and profitable business. A television bulb is the*203 glass portion of the picture tube in a television set. It consists of a glass faceplate, funnel, and neck. Television bulbs and television sets were not generally available to the public at any time before January 1, 1946.
As the television industry grew, it became necessary to produce larger television bulbs, and production by glass blowing was not practical. Owens began to produce, separately, the faceplate, the funnel, and neck. The faceplate and the funnel are produced by glass pressing, and the neck is made from glass tubing. The three component parts are sealed together to make a television bulb.
The production of glass blocks by Kimble, at its Muncie, Indiana, plant, involved the same basic process of glass pressing and sealing as were involved in making a television bulb. For example, the two halves of a glass block are produced by pressing glass and then sealing together two halves to make a glass block. In the glass block business, there was the greatest experience with glass-pressing processes. Because that is true, Owens decided to transfer its television bulb business *1243 to Kimble in order to unify the manufacture of two products (television bulbs and *204 glass blocks) which were produced by essentially the same manufacturing processes.
On July 1, 1949, the same day that the Kaylo assets were sold by Kimble to Owens, Owens sold its assets used in the production of television bulbs (including the plant at Columbus, Ohio, which had been converted to the production of television bulbs in 1948) to Kimble. Such assets were sold for $ 2,288,043.22, in cash, which was the book value. No gain or loss was reported by either Owens or Kimble. Thereafter, Kimble produced and sold television bulbs. It is still engaged in that business.
Kimble had no sales of any kind during 1946 and 1947. Its net sales for the period January 1, 1950, through June 30, 1950, after discounts of $ 133,021.65, amounted to $ 13,559,275.54. Such amount multiplied by 2 equals $ 27,118,551.08.
The net sales of Owens for 1946 were $ 187,040,467.47; and for 1947, they were $ 227,384,498.35. The average net sales of Owens for 1946 and 1947 amounted to $ 207,212,482.91.
The net sales of Owens of Kaylo products and of glass blocks and insulators for 1946 were $ 6,041,197.85, and for 1947 were $ 6,845,225.07. Its average net sales of such products for 1946 and 1947 were*205 $ 6,443,211.46.
On June 16, 1952, Kimble and Owens entered into an agreement relating to earnings during the years 1946 and 1947 of the glass block and glass insulator business, and the Kaylo business, i.e., attributable to the assets transferred by Owens to Kimble at the end of 1947. The net 1946-1947 excess profits net income attributable to such assets was $ 52,514.16, namely, income of $ 884,296.89 for 1946, and a loss of $ 831,782.73 for 1947. These amounts were set forth in the agreement. The agreement provided, in part, that:
6. The excess profits net income of Owens for that portion of the base period preceding the above-mentioned transfer on January 2, 1948, i.e., calendar years 1946 and 1947, shall be allocated between the parties as provided in Section 462(i)(6) of the Internal Revenue Code on the basis of the earnings experience set forth in Exhibits B and C hereto, and it is the understanding of the parties that on that basis, in accordance with said Section 462(i)(6), there should be allocated to Products [Kimble Glass] $ 52,514.16 and to Owens $ 42,658,988.24.
7. This agreement shall be applicable with respect to the parties' taxable years 1950 and subsequent years.
*206 An executed copy of the agreement was filed with Kimble's 1951 income tax return, and a duplicate executed original was attached to Kimble's claim for refund of 1950 income tax filed on December 15, 1952.
The ratio of the excess profits net income of Owens for the years 1946 and 1947 allocated to Kimble pursuant to the above agreement executed between Kimble and Owens, dated June 16, 1952, to the *1244 excess profits net income of Owens for those years, as set forth in the agreement, was 0.123 of 1 percent, or, $ 52,514.16 to $ 42,711,502.40.
Owens' net sales of television bulbs for the year 1946 were not more than $ 354,430.89, and they were not more, for 1947, than $ 1,394,364.56 ($ 873,736.99 plus $ 520,627.57). The average net sales of television bulbs of Owens for 1946 and 1947 were not more than $ 874,397.72.
Kimble's net sales for the period January 1, 1950, through June 30, 1950, multiplied by 2, exceeded 150 percent of the actual average net sales of Kimble for the years 1946 and 1947, and they exceeded 150 percent of the average net sales of Owens for the years 1946 and 1947 allocable to Kimble, if any, under section 462 of the 1939 Code.
Kimble's gross sales of all*207 products for the year 1950 were $ 32,537,547.15. Its net sales were not more than that amount.
Kimble's gross sales of television bulbs for the calendar year 1950 were $ 26,171,610.58. Total allowances for the industrial and electronics line of Kimble, which included television bulbs, for 1950 were $ 131,458.27, and total "other deductions" (which includes discounts) for that line were $ 359,892.30. Kimble's net sales of television bulbs for 1950 were not less than $ 25,680,260.01.
More than 40 percent of Kimble's net sales for the year 1950 were attributable to a product (television bulbs) not generally available to the public at any time prior to January 1, 1946.
Kimble's gross sales of television bulbs for the year 1949 were $ 8,401,003.64. Total allowances for the industrial and electronics line of Kimble, which included television bulbs, for 1949 were $ 62,206.34, and total "other deductions" (which includes discounts) for that line were $ 163,902.17. Net sales by Kimble of television bulbs for 1949 were not less than $ 8,174,895.13.
The net sales of Owens of television bulbs for the year 1946 were not more than $ 354,430.89.
Kimble's net sales of television bulbs for the*208 year 1946 were not more than 5 percent of its net sales of television bulbs for the calendar year 1949.
Kimble filed its return for 1950 on June 15, 1951, and paid 1950 Federal income tax in the aggregate amount of $ 6,845,373.53, as follows:
| 1951 | |
| March 15 | $ 2,250,000.00 |
| June 15 | 1,857,224.12 |
| September 14 | 1,369,074.71 |
| December 14 | 1,369,074.70 |
On December 15, 1952, Kimble applied for a tentative carryback adjustment of 1950 income tax under section 3780 of the 1939 Code based upon a carryback of 1951 unused excess profits credit. On March 6, 1953, Kimble received a tentative carryback adjustment of $ 210,845.11.
*1245 On March 1, 1954, Kimble filed with the district director of internal revenue at Toledo, an amended claim for refund of 1950 income tax in the amount of $ 1,084,479.12. The claim for refund was filed within 3 years after the filing of Kimble's 1950 return and within 3 years after the payment by Kimble of $ 6,845,373.53 of 1950 income tax.
On December 22, 1953, Kimble and respondent entered into an agreement extending to June 30, 1955, the period of limitations for the assessment of a deficiency in 1950 income tax. The agreement was executed within *209 3 years after the filing of Kimble's 1950 return, and within 3 years after the payment by Kimble of $ 6,845,373.53 of 1950 income tax. On March 25, 1955, Kimble and respondent entered into an agreement further extending to June 30, 1956, the period of limitations for the assessment of a deficiency in 1950 income tax.
On June 16, 1952, Kimble filed its 1951 return with the collector of internal revenue for the tenth district of Ohio.
Kimble paid 1951 Federal income tax in the aggregate amount of $ 1,060,703.74, as follows:
| 1952 | |
| March 17 | $ 400,000.00 |
| June 16 | 342,492.62 |
| September 15 | 159,105.56 |
| December 15 | 159,105.56 |
On January 21, 1955, Kimble Glass and respondent entered into an agreement extending to June 30, 1956, the period of limitations for the assessment of a deficiency in 1951 Federal income tax.
The agreement was entered into within 3 years after the filing of Kimble Glass' 1951 return and within 3 years after the payment by Kimble Glass of $ 1,060,703.74 of 1951 income tax.
Kimble Glass satisfies the requirements of section 435(e)(1)(B) and is entitled to compute its excess profits credit for the calendar years 1950 and 1951 under section 435(e)(2) of the 1939 *210 Code.
In determining its excess profits net income for 1948 and 1949 for the purpose of determining its excess profits credit, Kimble Glass is entitled to exclude under section 433(b)(18) of the 1939 Code Kaylo losses of $ 2,335,152.17 for 1948 and $ 1,161,859.66 for 1949.
In determining Kimble Glass' equity capital at the beginning of 1951 under section 437(c) for the purpose of computing its capital addition for the calendar year 1951 under section 435(g), Kimble Glass' liability for excess profits tax under section 430 for the calendar year 1950 was a liability existing at the beginning of 1951 and is to be taken into account in computing such equity capital and such capital addition.
During 1946 and 1947 Owens-Illinois realized losses from Kaylo of $ 472,848.80 and $ 798,027.37, respectively. Such losses were reflected in the excess profits net income allocated to Kimble Glass *1246 pursuant to the agreement executed between Owens-Illinois and Kimble Glass on June 16, 1952.
Owens-Illinois realized profits from television bulbs for 1946 of $ 43,949.43, for 1947 of $ 196,736.78, for 1948 of $ 203,312.74, and for 1949 of $ 1,289,022.22.
In determining Owens-Illinois' normal-tax*211 net income and surtax net income for 1946, 1947, 1948, and 1949, the respondent did not exclude therefrom the above television bulbs profits and did not reduce such net incomes for 1948 and 1949 by losses realized by Kimble Glass from Kaylo during 1948 and the first 6 months of 1949.
Owens-Illinois paid 1951 Federal income tax in the aggregate amount of $ 30,494,533.75 as follows:
| 1952 | |
| March 17 | $ 11,000,000.00 |
| June 16 | 10,346,173.63 |
| September 15 | 4,574,180.06 |
| December 15 | 4,574,180.06 |
On April 6, 1955, Owens-Illinois and the respondent entered into an agreement extending to June 30, 1956, the period of limitations for the assessment of a deficiency in 1951 Federal income tax.
The agreement was entered into within 3 years after the filing of Owens-Illinois' 1951 Federal income tax return and within 3 years after the payment by Owens-Illinois of 1951 Federal income tax of $ 19,494,533.75.
In computing the average base period net income of Owens-Illinois for the purpose of determining its excess profits credit, the net income realized by Owens-Illinois from television bulbs for the calendar years 1946, 1947, 1948, and the first 6 months of 1949, is includible in the average*212 base period net income of Owens-Illinois.
In computing the average base period net income of Owens-Illinois for the purpose of determining its excess profits credit, losses realized from Kaylo by Owens-Illinois for the calendar years 1946 and 1947, and losses realized by Kimble Glass from Kaylo for the calendar year 1948 and the first 6 months of 1949 are not includible therein.
In determining Owens-Illinois' equity capital at the beginning of 1951 under section 437(c) of the 1939 Code, for the purpose of computing its capital addition for the calendar year 1951 under section 435(g) of the 1939 Code, Owens-Illinois' liability for excess profits tax under section 430 of the Code for the calendar year 1950 was a liability existing at the beginning of 1951, and is to be taken in account in determining the equity capital and capital addition.
Depletion Issue.
During 1951 Owens-Illinois operated two glass bottle manufacturing plants in California, one at Los Angeles, and the other at Oakland, *1247 California. The two principal ingredients used in this production of glass are feldspar and silica. Throughout its other glass-manufacturing operations in other parts of the country, *213 Owens-Illinois purchased the necessary feldspar and silica separately and had them mixed together with other ingredients used in making glass. However, as for the two California plants, Owens-Illinois was able to acquire the necessary silica and feldspar from nearby mining operations. The two ingredients when taken from the ground were together in a mixed form.
The Oakland plant acquired its supply of silica and feldspar from mining operations at Pacific Grove, California. Owens-Illinois had, in 1944, leased property at Pacific Grove from Del Monte Properties Company for 10 years and acquired mineral rights to such property. By supplemental agreements dated July 13, 1945, and February 1, 1948, additional properties were added to the property covered by the 1944 lease.
The deposit of silica and feldspar at Pacific Grove was in the form of sand. The sand was composed of 53 percent feldspar and 47 percent silica. The feldspar content of this sand was excellent for glass making and was ideal in grain size. From the chemical and from the commercial glassmaking points of view, the Pacific Grove deposit could not be distinguished from the product which would have been obtained had*214 feldspar and silica been purchased separately and then mixed together.
The mining of the Pacific Grove sand amounted to hauling the sand from the dunes to the place where it was washed to screen out vegetation and coarser particles. It was then dried and passed through magnetic separators to remove iron-bearing minerals. The sand was then ready to be used in the manufacture of glass without any additional feldspar or silica being added.
Owens-Illinois' lessor, Del Monte Properties Company, conducted mining operations on property adjoining that leased by Owens-Illinois. In 1951 its mining operation was substantially the same as Owens-Illinois'. The end product it produced was similar to Owens-Illinois', i.e., sand which was a combination of 53 percent feldspar and 47 percent silica. Del Monte Properties Company sold its sand.
The Los Angeles plant acquired its requirements of silica and feldspar from mining operations at Corona, California. In 1945 Owens-Illinois had leased property located near Corona, California, from Peter J. and Louis H. Weisel for 10 years and acquired mineral rights to such property. By supplemental agreement dated April 12, 1948, additional properties*215 were added to the property covered by the 1945 lease.
The deposit at Corona, California, had the physical form of clay-bound dirt. It consisted principally of 40 percent clay and 60 percent *1248 silica and feldspar. The deposit, after mining, was washed to remove clay particles; was crushed in rotating ball mills to reduce the deposit to the desired granular size; and, after draining and drying, was passed through magnetic separators to remove iron-bearing heavy minerals. The feldspar and silica were never separated. The end product was sand which was composed of 23 percent feldspar and 77 percent silica, and was used to make glass with no additional feldspar or silica being added.
During 1951, Owens-Illinois mined 134,609 tons at Pacific Grove, California, after washing and separation processes, of which 71,343 tons constituted feldspar and 63,266 constituted silica. During 1951, Owens-Illinois mined 113,981 tons at Corona, California, after washing, crushing, and separation processes, of which 26,216 tons constituted feldspar and 87,765 constituted silica.
The sand mined by Owens-Illinois in 1951 at Pacific Grove and Corona was a commercially marketable product. The *216 market value of the Pacific Grove product was $ 4 a ton and the market value of the Corona product was $ 4.99 per ton.
For its other glass-manufacturing plants in other parts of the country Owens-Illinois purchased the necessary silica and feldspar in a separated form which were then mixed together. Owens-Illinois purchased approximately 45 percent of all glass-grade feldspar sold in the United States in 1951. The following table shows the location of mills from which Owens-Illinois purchased feldspar during 1951 and the open market prices per ton of feldspar f.o.b., the mill paid by Owens-Illinois:
| Mill | Price |
| Bedford, Virginia | $ 11.00 |
| Denver, Colorado | 10.25 |
| Fink, Colorado | 11.50 |
| Keystone, South Dakota | 11.50 |
| Kona, North Carolina | 11.50 |
| Parksdale, Colorado | 10.25 |
| Salida, Colorado | 10.25 |
| Spruce Pine, North Carolina | 11.25 |
The mill closest to the Los Angeles plant from which feldspar could have been purchased by Owens-Illinois during 1951, was at Kingman, Arizona. The closest mill to the Oakland plant from which feldspar could have been purchased by Owens-Illinois was either the mill at Kingman, Arizona, or a mill at Salida, Colorado.
During 1951, glass-grade feldspar *217 was being offered at the Kingman, Arizona, mill at a price of $ 14 per ton, f.o.b., the mill.
The stipulated facts are found as stipulated. The stipulations of fact are incorporated herein by this reference.
OPINION.
In the case of Kimble Glass, the basic issue relates to the determination of the amount of its excess profits credit for the *1249 years 1950 and 1951. In the case of Owens-Illinois, there are two primary issues, (1) the amount of its excess profits credit for the year 1951, and (2) the amount of the percentage depletion allowance for the mining of feldspar, under sections 23(m) and 114(b)(4), for which deduction is allowable. Consideration is given first to the excess profits credits issues.
The contentions of the petitioners are as follows: Kimble Glass claims that it satisfies the requirements of section 435(e)(1)(B) of the 1939 Code (the television growth formula) and is entitled to compute its average base period net income under section 435(e)(2) in determining its excess profits credit. Kimble Glass claims in addition that it is entitled to exclude losses sustained in 1948 and 1949 from its Kaylo business, under section 433(b)(18), in determining its excess*218 profits net income for 1948 and 1949 for the purpose of determining its average base period net income.
Owens-Illinois contends that in determining its average base period net income there should be included in its average base period net income the profits which it realized from its television bulb business, and there should be excluded the losses of the Kaylo business which were realized by Kimble Glass, or which are allocated to Kimble Glass under section 462(e)(6).
The petitioners contend further that the amounts of the excess profits tax for 1950 of Kimble Glass and Owens-Illinois, imposed retroactively by the 1950 Excess Profits Tax Act, should be disregarded in determining under section 437(c) the equity capital of each petitioner, respectively.
In its 1951 income tax return, Kimble Glass reported income tax net income of $ 2,102,418.47, and excess profits net income of $ 2,099,354.04, and tax in the amount of $ 1,060,703.74, which it paid. Kimble Glass claimed an excess profits credit for 1951 in the amount of $ 6,608,022.29, which amount exceeded its excess profits net income for 1951 by $ 4,508,668.25. Kimble Glass claimed the foregoing amount as an excess profits credit*219 carryback to 1950 and received a refund of $ 210,845.11 for 1950. For 1950, Kimble Glass reported income tax net income in the amount of $ 13,149,220.78, excess profits net income of $ 13,146,608.90, and a tax of $ 6,845,373.53, which was paid. The above refund of $ 210,845.11 resulted from the carryback from 1951.
In the notice of deficiency the respondent, making two minor adjustments, determined that for 1951 Kimble Glass' income tax net income was $ 2,098,624.27, that its excess profits net income was $ 2,095,559.84, and that the excess profits credit was $ 1,609,527.92. This resulted in a deficiency of $ 143,884.02 for 1951 and the disallowance of the tentative refund of $ 210,845.11 made to Kimble Glass for 1950. For the year 1950 respondent made two small adjustments, resulting in a *1250 reduction of total income tax liability as assessed by petitioner on its original return of $ 1,850.90, which, when combined with the disallowance of the $ 210,845.11 tentative refund for 1950, resulted in a deficiency of $ 209,024.25.
Kimble Glass in its petition asserts that it is entitled to compute its average base period net income, for purposes of the excess profits credit, *220 under section 435(e)(2), and further, that in arriving at such base period net income it may exclude certain losses during 1948 and 1949 from its Kaylo business within the provisions of section 433(b) (18). Under this theory Kimble Glass claims a refund, based on a claimed excess profits credit of $ 6,287,016.68, of $ 837,634.01 for 1950, in addition to the $ 210,847.11 tentative refund previously received. For 1951, Kimble Glass claims a refund of $ 1,925,56 which results from the downward adjustment in its income tax net income made by respondent coupled with its prior and present assertion that its excess profits credit exceeds its excess profits net income.
In computing its excess profits credit for the year 1951, Owens-Illinois eliminated from its base period losses sustained in the operation of the Kaylo business under the provisions of part II of the Excess Profits Act of 1950, and included in its base period the profits realized from its television bulb operations.
The respondent, in his notice of deficiency, determined that the provisions of part II are not applicable to the losses arising from the operation of the Kaylo business, and that such losses must be restored to*221 the base period income of Owens-Illinois. Furthermore, the respondent determined that the provisions of part II are applicable to the television bulb operations and, therefore, the base period profits of the television bulb business are to be eliminated from Owens-Illinois' base period net income.
These two changes in the computation of Owens-Illinois' excess profits credit, along with several minor adjustments, including the allowance of an increased depletion deduction of $ 38,591.64, resulted in the determination of a deficiency of $ 330,462.50 for 1951.
In its petition, Owens-Illinois maintained its position as to the proper computation in determining its excess profits credit. Furthermore, it claimed an additional depletion deduction of $ 160,275.10 over the amount claimed on its original return. The claim for an additional depletion deduction resulted in a claim for an overpayment of tax of $ 179,417.51.
Both petitioners for the year 1951, in computing their net capital additions, one of the elements affecting their excess profits credit, failed to reduce their equity capital for January 1, 1951, by the amount of excess profits taxes for the year 1950, which taxes were imposed*222 retroactively by the Excess Profits Tax Act of 1950, which became effective on January 3, 1951.
*1251 Owens-Illinois has been, and is, a leading manufacturer of glass bottles and other glass containers. However, with the increased competition in the container business Owens-Illinois began, as long ago as the 1930's, to broaden its line of manufacture into other types of glass products. In 1940 Owens-Illinois began developing a structural product known as Kaylo Roof Tile, composed of lime, silica sand, and asbestos. Subsequent to this Owens-Illinois acquired plants at Berlin and Sayreville, New Jersey, where the manufacture of this Kaylo product was started.
During the 1940's Owens-Illinois was also engaged in the production of glass blocks and, to a minor extent, glass insulators at plants in Muncie, Indiana, and Columbus, Ohio.
Because these three products, Kaylo, glass blocks, and glass insulators, were or were expected to be marketed in the construction and building business and also because the manufacture and marketing of these products differed substantially from its glass container operations, Owens-Illinois decided to set up a subsidiary corporation and transfer to*223 it the assets necessary to manufacture these three products.
This transaction was carried out in late December 1947, by the creation of Kimble Glass and the transfer to it of the plants located at Columbus, Ohio, Sayreville and Berlin, New Jersey, and Muncie, Indiana, including machinery, equipment, furniture and fixtures, inventories, and other assets relating to the properties above described. In return Owens-Illinois acquired 10,000 common shares of Kimble Glass, its entire authorized capital stock, and Kimble Glass became a subsidiary.
Following the transfer of the Kaylo and the glass block and insulator businesses to Kimble Glass, it engaged in (1) the production of Kaylo at the Sayreville and Berlin, New Jersey, plants and (2) the production of glass blocks and insulators at the Muncie, Indiana, and Columbus, Ohio, plants. Shortly thereafter, the relatively small production of glass blocks and insulators at the Ohio plant was discontinued. On June 15, 1948, Kimble Glass sold the Columbus, Ohio, plant to Owens-Illinois for $ 1,736,458.19, paid in cash. The production of glass blocks and insulators at the Muncie, Indiana, plant continued and Kimble Glass is still engaged in*224 that activity.
Kimble Glass was unable to manufacture Kaylo at a cost which would enable it to be sold profitably. More efficient manufacturing processes were essential. Moreover, contrary to the original expectation, it was not possible to market Kaylo through existing glass block distribution channels. The management concluded that the problem of producing Kaylo profitably could best be solved by teaming the more experienced research personnel of Owens-Illinois, who had participated in the initial development of Kaylo, with production personnel who could devote undivided attention to the problems involved, *1252 and that in the meantime there should be curtailment of efforts to market Kaylo products. It was decided that the Kaylo business should be transferred from Kimble Glass to Owens-Illinois.
On July 1, 1949, Kimble Glass sold to Owens-Illinois the assets used in the Kaylo business, including the Sayreville and Berlin, New Jersey, plants for $ 11,631,741.46, paid partly in cash and partly by cancellation of amounts owed by Kimble Glass to Owens-Illinois. The sale of these assets was at their book value. No gain or loss was recognized by either party.
Following the*225 above sale, Owens-Illinois conducted the Kaylo business and was still doing so at the time of the trial.
On the same day, July 1, 1949, that Kimble Glass sold the Kaylo assets to Owens-Illinois, Owens-Illinois sold to Kimble Glass its assets used in the production of television bulbs, including the plant at Columbus, Ohio, which had been converted to the production of television bulbs in 1948. Such assets were sold at their book value for cash in the amount of $ 2,288,043.22. No recognized gain or loss to either party resulted from this sale.
Before 1949, Owens-Illinois had been developing and improving the television bulbs which it manufactured. The earlier television bulbs manufactured were of small dimensions and could be made by the glassblowing process. However, as the size of the bulbs increased, Owens-Illinois was forced to abandon the glassblowing process and produce the three components of the television bulb, i.e., faceplate, funnel, and neck, separately. The faceplate and funnel were produced by a glasspressing process and then all three components were sealed together to make the finished television bulb. These glass pressing and sealing operations were similar to*226 the pressing and sealing operations performed by Kimble Glass in its manufacture of glass blocks. Because of Kimble Glass' experience with these two operations, it was deemed advisable by Owens-Illinois to transfer the television bulb business to Kimble Glass.
From the date of the sale, July 1, 1949, on to the time of the trial Kimble Glass has operated the television bulb business.
The Excess Profits Tax Act of 1950 (secs. 430-474), as amended, set up two general standards for determining the excess profits credit which is deducted from net income to determine the portion thereof subject to excess profits tax, namely, (1) the taxpayer's earnings experience during a base period of 4 years, 1946 to 1949, inclusive, or (2) the taxpayer's invested capital.
Congress recognized that both standards required material exceptions and qualifications in order to avoid gross inequities and to limit the tax, as far as possible, to truly excessive income brought about by war conditions. One of such qualifications was the so-called television *1253 growth formula set forth in section 435(e)(1)(B). 1Congress was informed that the television industry had started during the base period, but*227 its enormous growth had occurred toward the end of that period and thereafter. Television was a new method of bringing entertainment into the home which had grown phenomenally due to its great inherent interest and convenience. If the general standards for determining the excess profits credit were applied to earnings attributable to the production and sale of components of television sets during excess profits tax years, a great part of such earnings would be subject to a heavy tax although they were not war earnings. Consequently, Congress adopted a special growth formula in section 435(e)(1)(B) applicable only to taxpayers selling a product not generally available to the public prior to 1946, whose 1949 sales of such product were at least 20 times its 1946 sales of the same product, whose 1950 sales of the product were 40 percent of its total net sales, and whose sales for the first 6 months of 1950, multiplied by 2, equaled or exceeded 150 percent of its average net sales for 1946-1947. It is clear that, first, the application of the television growth formula is narrowly limited, and, second, that the Congress made a special effort to insure fair treatment for the particular*228 taxpayer falling within the scope of the provision.
Kimble Glass contends that it meets the requirements of clauses (i) and (ii) of section 435(e)(1)(B). With respect to those clauses, respondent, on brief, does not make any argument or contention. Rather, he makes the limited contention that Kimble Glass has failed to show that it satisfied the requirement of clause (iii) of section 435(e)(1)(B). In this situation, we deem it unnecessary to discuss the argument of Kimble Glass dealing with the application of clauses (i) and (ii) and conclude that Kimble Glass has shown that it complied with the provisions of clauses (i) and (ii). We turn, therefore, to consideration of the provisions of clause (iii).
Subdivision (iii) requires that the amount of the taxpayer's net sales which is attributable *229 to such product or class of similar products (referring to the manufacture of television bulbs) for the calendar year 1946 is 5 percent, or less, of the amount of its net sales attributable to such products for the calendar year 1949. The net sales of television bulbs by Owens-Illinois during 1946 was $ 354,430.89, and for purposes of determining petitioner's qualification under this subdivision, these sales may be attributed to Kimble Glass. Such amount is less than 5 percent of petitioner's actual sales of television bulbs for 1949 of $ 8,174,895.13. Therefore, it is the contention of Kimble Glass that it satisfies the test set forth in clause (iii) of section 435(e)(1)(B).
*1254 Respondent argues that at the time of the sale of the television bulb assets by Owens-Illinois to Kimble Glass on July 1, 1949, there was an inventory of finished goods and work in process, and that for the purpose of determining the amount of the sales of television bulbs by Kimble Glass in 1949, there must be allocated to Owens-Illinois those sales made by Kimble Glass of the finished or partly finished inventory items, i.e., television bulbs. Respondent argues that Kimble Glass never made the*230 necessary allocation and, therefore, has failed to prove that it complied with section 435(e)(1)(B)(iii).
Respondent's point is not well taken. There is no requirement in section 435(e)(1)(B)(iii) that any such allocation must be made. This clause is phrased in terms of a test of sales by the taxpayer, not profits. There is no requirement that the sales to be used in determining the qualification by the taxpayer shall be restricted to sales of products manufactured by the seller. Sales by Kimble Glass of television bulbs which it purchased from Owens-Illinois were indisputably sales of television bulbs by Kimble Glass, the taxpayer. Therefore, we hold that Kimble Glass meets the literal requirements of section 435(e)(1)(B)(iii).
Respondent further argues that the business of Kimble Glass was not a growing business as envisioned by the statute. But he does not cite any authority for this theory. Respondent argues, citing Lucky Lager Brewing Co., 26 T.C. 836">26 T.C. 836, affd. 246 F. 2d 621, that Congress intended to measure increase in physical volume of production in section 435(e)(1), and that in the case of Kimble Glass, it has*231 not been shown that it had such an increase; but, rather, that Kimble Glass merely substituted a profitable product, television bulb assets, for an unprofitable product, the Kaylo assets.
In the Lucky Lager case, we recognized that the general approach of section 435(e)(1)(A) was to measure increase in physical volume, and that one of the tests there used for this purpose was that gross receipts for the last half of the base period should be 150 percent or more of gross receipts for the first half of the base period. However, we observed that the gross receipts test is not a direct measure of physical volume of production because an increase in gross receipts could result solely from an increase in the price of the commodity sold without any attendent increase in the physical volume of production. We stated that this possibility was in the legislative mind, but that the percentage used in the gross receipts test was deemed by Congress to be sufficiently large so that only those taxpayers will be able to qualify whose business has grown substantially more rapidly than the average.
Section 435(e)(1)(B) was introduced as a floor amendement in the Senate (96 Cong. Rec. 16803) and, *232 therefore, the House and Senate committee reports do not discuss this subsection. It may be presumed, *1255 however, that subsection (B) also attempts to measure increase in physical volume of production, using sales as the yardstick. However, what we said about subsection (A) must also apply to subsection (B), namely, that Congress, though it may have intended to require an increase in physical volume of production, used net sales as the criterion to measure an increase in production, and that the required percentage increase in subsection (B) was set by Congress high enough so that a taxpayer would have to have an increase in production in order to meet the percentage requirement.
Kimble Glass has shown that it has complied with all the requirements of subsection (B). This is all that it had to do. Congress has assumed that anyone who has met the requirements of subsection (B) has had the requisite increase in production without measuring this increase in production directly. Furthermore, we can fairly conclude from the record that petitioners did have the requisite increase in volume of production. The total net sales of Kimble Glass for the first half of 1950 alone *233 was $ 13,559,275.54. The net sales of television bulbs of Kimble Glass in 1950 amounted to $ 25,682,060.01, as compared to net sales for the last 6 months of 1949 of $ 8,174,895.13. We are convinced that an increase in such an amount cannot be explained solely by inflation or the like, but must be deemed to be due, in part at least, to an increase in the volume of production. The television bulb business was a growing business and exactly the type of business for whose benefit section 435 (e)(1)(B) was intended.
Respondent also argues that there was "unauthorized use" by Kimble Glass of 1946 and 1947 sales of Owens-Illinois and that this results in a duplication of earnings experience. He cites Industrial Loan Society, Inc., 14 T.C. 487">14 T.C. 487. There is no merit in this contention. The statute requires that part of the net sales in 1946-1947 by Owens-Illinois shall be allocated to Kimble Glass for the purpose of determining whether Kimble Glass is qualified under the television growth formula; i.e., whether Kimble Glass' own 1949 and 1950 sales exceeded the 1946 and 1947 sales allocated to it by the required percentages. In determining its own base*234 period net income under section 435(e)(2), Kimble Glass has to use only its own base period experience for 1949 and 1950. On the other hand in determining its average base period net income, Owens-Illinois has to use its own base period income reduced by the 1946-1947 excess profits net income allocated to Kimble Glass under section 462(i)(6), which Kimble Glass cannot use in computing its average base period net income under section 435(e)(2). We agree with the petitioners that the respondent's concern about a duplication of earnings experience is unfounded because there is no duplication of earnings experience.
It is concluded that Kimble Glass has satisfied each of the requirements of section 435(e)(1)(B) and, therefore, is entitled to the benefits *1256 of its provisions, and may compute its average base period net income under section 435(e)(2).
The next question is whether in determining its excess profits net income for 1948 and 1949, Kimble Glass is entitled to exclude losses from its Kaylo products business.
In determining average base period net income, it is necessary first to determine the excess profits net income for each month in the base period. Such amount*235 is, in general, one-twelfth of the excess profits net income for each taxable year in the base period. The definition of excess profits net income, insofar as it relates to the base period, is contained in section 433(b). It is there provided that, for purposes of computing the average base period net income, the excess profits net income for any taxable year shall be the normal-tax net income, as defined in section 13(a)(2) as in effect for such taxable year, increased or decreased by the adjustments enumerated in paragraphs (1) through (18).
For present purposes, we are concerned with the adjustment described in section 433(b)(18), 2 which reads as follows:
Adjustment for base period losses from branch operations. -- In the case of a taxpayer which during two or more such taxable years operated a branch at a loss, the excess profits net income for each such taxable year (determined without regard to this paragraph) shall be increased by the amount of the excess of such loss above the loss, if any, incurred by such branch during the taxable year for which the tax under this subchapter is being computed. As used in this paragraph, the term "branch" means a unit or subdivision*236 of the taxpayer's business which was operated in a separate place from its other business and differed substantially from its other business with respect to character of products or services. A unit or subdivision of the taxpayer's business shall not be considered to differ substantially from the taxpayer's other business unless it is of a type classifiable by the Standard Industrial Classification Manual in a different major industry group or in a different subgroup of the taxpayer's major industry group than that in which its other business is so classifiable: Provided, however, That this paragraph shall not apply unless the sum of the net losses of such branch during the base period exceeded 15 per centum of the aggregate excess profits net income of the taxpayer during the base period. For the purposes of this paragraph, the aggregate excess profits net income of the taxpayer during the base period shall be the sum of its excess profits net income for all years in the base period, increased by the sum of the net losses of such branch during the base period.
*237 Kimble Glass acquired the Kaylo and the glass block and insulator businesses from Owens-Illinois at the end of 1947. Kimble Glass produced and sold Kaylo in 1948 and 1949. It realized a loss from its Kaylo business for 1948 of $ 2,335,152.17. During 1949 it realized a further loss from that business of $ 1,161,859.66. The question is whether such Kaylo losses are excludible in computing Kimble Glass' excess profits net income for 1948 and 1949 under section 433(b)(18).
*1257 The first requirement under section 433(b)(18) is that the branch must have been operated at a loss during 2 or more taxable years in the base period. Kimble Glass operated the Kaylo business during the taxable years 1948 and 1949 and realized losses therefrom during each of such 2 years.
The second requirement is that the Kaylo business must have been a branch of Kimble Glass' business. That term is defined in section 433(b)(18) to mean a "unit or subdivision of the taxpayer's business which was operated in a separate place from its other business and differed substantially from its other business with respect to character of products or services." Kaylo was produced by Kimble Glass at separate plants*238 at Sayreville and Berlin, New Jersey, and was marketed through a separate sales organization. During the same period, Kimble Glass was producing glass blocks and insulators at Muncie, Indiana, and at Columbus, Ohio. Kimble Glass has shown that Kaylo differed substantially from the other base period products of Kimble Glass which consisted of glass blocks and insulators and, after June 30, 1949, television bulbs. Glass blocks and insulators and television bulbs were all glass products. Kaylo was not a glass product. Kaylo was a chemical compound of lime, asbestos, and sand and was useful as an insulating material, as well as for roof deck slabs, wall panels, and fire doors. If Kaylo had not differed substantially from the other base period products, it would not have been possible for Kimble Glass to have sold the Kaylo business to Owens-Illinois on June 30, 1949, and to have retained the glass block and insulator business and acquired the television bulb business. Kaylo is still being produced by Owens-Illinois, and Kimble Glass is producing glass blocks, glass insulators, and television bulbs.
Respondent argues that Kaylo was similar to glass blocks and insulators because *239 all were used in the building and construction industry, and, therefore, that the Kaylo business did not differ substantially from the glass block and insulator business. This contention is clearly without merit. For example: Many products other than glass are used in the building and construction industry, such as steel and wood. It cannot be said that the steel business and the lumber business do not differ substantially from the glass block business. As a matter of fact, the glass insulators produced by Kimble Glass were used primarily by the communication industry. Furthermore, Kaylo products were not restricted to the building and construction industry because Kaylo had important uses as an insulating product, and it was in the high-temperature insulation field that Kaylo ultimately was found to have its best application.
Another requirement of section 433(b)(18) is that the branch business must have been classified by the Standard Industrial Classification *1258 Manual in a different major industry group or in a different subgroup of such major industry group than that in which the taxpayer's other businesses were classified. It has been stipulated that Kimble Glass*240 satisfies this requirement; that is to say, that the production of Kaylo was classified in a different major industry subgroup than the production by Kimble Glass of its other base period products, consisting of glass blocks and insulators and television bulbs.
The final requirement is that the sum of the branch net losses during the base period must have exceeded 15 percent of the taxpayer's aggregate excess profits net income during the base period which, for this purpose, is increased by the sum of the net losses from the branch in question. Kimble Glass easily satisfies this requirement. Its excess profits net income during 1948 and 1949, when increased by the Kaylo losses, aggregated $ 4,506,065.73.
It is concluded that Kimble Glass is entitled to exclude its Kaylo losses for 1948 and 1949 in the computation of its average base period net income. Since Kimble Glass did not realize any Kaylo losses for the years 1950 and 1951 here involved, the adjustment under section 433(b)(18) is the full amount of its 1948 and 1949 net Kaylo losses.
Respondent argues that if Kimble Glass' contentions are sustained, the result will be that neither the average base period net income of Owens-Illinois*241 nor of Kimble Glass will reflect the Kaylo losses of Kimble Glass. That is true, but we believe it is immaterial. As far as Owens-Illinois is concerned, the Kaylo losses of Kimble Glass were not realized by Owens-Illinois, and such losses should not be reflected in the average base period net income of Owens-Illinois. The inevitable effect of section 433(b)(18) in any case to which it is applicable is that the losses excluded thereunder are not reflected in the average base period net income of the taxpayer which realized them and are not reflected in the average base period net income of any other taxpayer. The respondent erred in failing to allow Kimble Glass the benefit of section 433(b)(18).
Computation of Average Base Period Net Income of Owens-Illinois.
This issue involves the determination of the average base period net income of Owens-Illinois, for the purpose of computing its excess profits credit, with respect to which the respondent has made adjustments for which, the petitioners contend, there is no supporting authority. The respondent made his determination under a view about certain transactions of Owens-Illinois and Kimble Glass, involving both Kaylo and *242 television bulb products and assets, with which petitioners vigorously disagree. Furthermore, respondent's adjustments were made under a theory which the petitioners claim is without foundation.
*1259 The respondent excluded from the average base period net income of Owens-Illinois, the television bulb profits realized by it when Owens-Illinois operated the television bulb business during the period January 1, 1946, to June 30, 1949. That determination of the respondent was made in computing the excess profits credit of Owens-Illinois. Respondent made that determination upon his theory and conclusion that the television bulb business, in 1949, was transferred to Kimble Glass in a part II transaction (secs. 461-464, 1939 Code), which the petitioners deny. They say that there was a sale for cash.
The transfer of assets to Kimble Glass was made on July 1, 1949. Respondent refers to that transfer as Transaction 2 (under his theory), as distinguished from the transfer of the Kaylo, Insulux, and other assets by Owens-Illinois to Kimble Glass on January 2, 1948, which he refers to as Transaction 1 (under his theory). Reference is made hereinafter to these transactions. Petitioners*243 object to respondent's premise that what respondent calls Transaction 2 was a "finalization" of Transaction 1.
Petitioners maintain that when the Kaylo assets were transferred to Kimble Glass (then A.S.P.) at the end of 1947, or the beginning of 1948, there was then no predetermined plan contemplating any subsequent transfers of properties such as were made on July 1, 1949.
Since the very statement of the problem involves referring to the operation of the Kaylo products business by one or the other of the petitioners, and, also, the operation of the television tube business by one or the other of the petitioners, it may be convenient, to say the least, to restate the background facts before turning to the questions to be decided.
Kimble Glass was incorporated on December 23, 1947, under the name of American Structural Products Company.
Owens-Illinois developed prior to 1947 a chemical-compound product made of lime, silica, asbestos, and sand to which it gave the trade name "Kaylo." Owens-Illinois operated the Kaylo business during 1946 and 1947, prior to transferring it to Kimble Glass. It began production of Kaylo in 1941.
As of January 2, 1948, or at the end of 1947, Owens-Illinois*244 transferred several assets and production divisions, including the Insulux Division (which made glass blocks and insulators) and the Kaylo Division to Kimble Glass (A.S.P.) in return for all of its authorized capital stock, consisting of 10,000 shares of the common stock and it became a wholly owned subsidiary of Owens-Illinois.
The respondent points out that this transaction was a part II transaction of the type described in section 461(a)(1)(E), part II, subchapter D, and that Kimble Glass became an acquiring corporation, and Owens-Illinois became a component corporation within the definitions *1260 contained in section 461 (a) and (b). The petitioner does not deny this. Under respondent's theory, this is the start of the problem here.
Kimble Glass carried on the Kaylo production business from the beginning of 1948 until July 1, 1949. It sustained losses. They amounted to $ 2,335,152.17 in 1948, and $ 1,161,859.66 in the first 6 months of 1949.
On July 1, 1949, Kimble Glass sold the Kaylo business and assets, including two plants in New Jersey to Owens-Illinois for cash in the sum of $ 11,631,741.46. Thereafter, Kimble did not carry on any Kaylo business. The assets were*245 sold at book value. Accordingly, Kimble carried on the Kaylo business only from January 1, 1948, through June 30, 1949.
After June 30, 1949, Owens carried on the Kaylo business from July 1, 1949, on, and it still operates that business. Owens sustained losses, as stated in the facts in each of the years 1949, 1950, and 1951. Subsequently that business showed a profit.
It is at this point that respondent's views under this issue turn to an allegation about what he regards as a tendency of Owens to transfer assets back and forth rather freely, for on July 1, 1949, Owens sold assets to Kimble, namely, its television bulb production assets, including a plant in Columbus, Ohio, where TV bulbs were made. Owens sold the assets for cash, at book value, for the sum of $ 2,288,043.22, and no gain or loss was realized. Thereafter Kimble produced TV bulbs and still does so.
Owens owned and operated the TV bulb business from January 1, 1946, to June 30, 1949. From that business, Owens realized net profits as follows: $ 43,949.43 for 1946; $ 196,736.78 for 1947; $ 203,312.74 for 1948; and $ 1,289,022.22 for 1949.
The respondent takes the following position: Transaction 1, at the end of 1947, *246 the exchange of Kimble's stock for the Kaylo assets, was a part II transaction. Transaction 2, on July 1, 1949, involved two transactions, the sale of Kaylo assets by Kimble to Owens, and the sale of TV bulb assets by Owens to Kimble. The respondent argues that these two sales of assets were mere form, and that in substance there was only an exchange of assets by Owens and Kimble and a "finalization" of the 1947 transfer of the Kaylo business to Kimble, whereby those assets went back to Owens-Illinois. As such, respondent argues that Transaction 2 was a part II transaction, also, and that Kimble is still, in this transaction, the acquiring corporation, as described in section 461(a)(1)(E), and Owens is still its component.
It is the respondent's primary contention that the losses sustained from the carrying on of the Kaylo productions business must be included in Owens-Illinois' "base period experience in order that *1261 its excess profits credit and excess profits net income be computed on a consistent basis." He argues that since Owens operated the Kaylo business during the base period years of 1946 and 1947 and the last 6 months of 1949 and all of the excess profits*247 tax years, it is only proper that all of the Kaylo losses incurred during the base period years should be included by Owens in the computation of its excess profits credit. He applies the same reasoning to the profits realized from the conduct of the TV bulb business, namely, that since Owens did not have the TV bulb business during its excess profits years, it would be improper to include the TV bulb profits in Owens' base period experience. Therefore, the respondent contends that he properly excluded the profits realized from the TV bulb business in computing Owens' excess profits credit. Cf. Wood-Mosaic Company v. United States, 160 F. Supp. 636">160 F. Supp. 636, affd. 272 F. 2d 944, involving a part II transaction, which held that a component corporation is not entitled to use its pre-1947 base period earnings experience where it transferred assets to an acquiring corporation in 1947 in a transaction described in section 461.
The question is, therefore, whether the transactions on July 1, 1949, constituted a part II transaction, so that in computing the excess profits credit of Owens-Illinois, the losses sustained in the years 1946-1949, *248 inclusive, from the operation of the Kaylo business must be included in the base period experience of Owens, and the profits earned during the years 1946 to 1949, inclusive, in operating the television bulb business must be excluded from the base period experience of Owens.
The position of Owens-Illinois is that there were bona fide, arm's-length sales of properties on July 1, 1949, and that the evidence does not provide any support for respondent's claim that the transfers of properties by Kimble Glass to itself, or the transfers by itself to Kimble constituted a part II transaction, in which Owens-Illinois was a component corporation.
The crux of the issue is whether the July 1, 1949, transaction was a part II transaction. The respondent argues for the application of the substance-over-form rule in these cases, and he urges the invocation of that rule here to avert distortion of the purpose of the statute. We are of the opinion, however, that the record does not support a finding that the transactions of both corporations with each other involved mere paper transfers of property between affiliated corporations. For example, on the record here, a holding that the 1949*249 transfers of properties were not sales for cash would be unwarranted. Nor are we able to conclude that Kimble's sale in 1949 of the Kaylo business properties to Owens-Illinois was the last step in a series of several planned steps. Distributors Finance Corporation, 20 T.C. 768">20 T.C. 768; Charles R. Mathis, Jr., 19 T.C. 1123">19 T.C. 1123.
*1262 It is concluded that the 1949 transaction was not a part II transaction.
The television bulb profits were realized by Owens-Illinois during the period when it owned and operated the television bulb business. Section 433(b) provides that a corporation's excess profits net income for taxable years in the base period shall be "the normal-tax net income, as defined in section 13(a)(2)" adjusted as provided in paragraphs (1) through (18). Respondent does not contend that the television bulb profits realized by Owens-Illinois were not includible in its "normal-tax net income" for the years involved. In fact, he treated them as being the income of Owens-Illinois rather than of Kimble Glass for purpose of determining the income tax liability of Owens-Illinois and Kimble Glass for the years 1946-1949. *250 Nor does respondent contend that any of the adjustments specified in paragraphs (1) through (18) of section 433(b) are applicable. Since the television bulb assets were not transferred to Kimble Glass in a part II transaction, we are unable to find a legal basis for respondent's action in excluding those profits from the average base period net income of Owens-Illinois. 3
The situation is the same with respect to the Kaylo losses. Kimble Glass owned and operated the Kaylo business during 1948 and the first 6 months of*251 1949. The losses for those periods were realized by Kimble Glass. In determining the income tax liability of Owens-Illinois and of Kimble Glass for 1948 and 1949, the respondent did not attempt either to allow to Owens-Illinois or to disallow to Kimble Glass the losses realized by Kimble Glass for those years. Respondent does not contend that any of the adjustments prescribed in section 433(b) justify the allocation of the Kaylo losses of Kimble Glass to Owens-Illinois.
With respect to the 1946 and 1947 Kaylo losses realized by Owens-Illinois but allocated to Kimble Glass under section 462(i)(6), we understand that respondent's attempt to reallocate those losses is based on the same theory as his proposal to allocate to Owens-Illinois the 1948 and 1949 losses of Kimble Glass. It is our view that the 1946 and 1947 Kaylo losses were, however, properly allocated to Kimble Glass under section 462(i)(6), together with the glass block and insulator profits of Owens-Illinois for 1946 and 1947, and, therefore, that such Kaylo losses should be excluded from the average base period net income of Owens-Illinois.
We conclude that the base period transactions between Kimble Glass and Owens-Illinois*252 were undertaken for sound business purposes *1263 and were bona fide. Originally Kaylo was transferred to Kimble Glass, along with the glass block and insulator business, because it was thought that both operations were foreign to the basic glass container business of Owens-Illinois, that both products could be marketed in the building and construction industry, and that a strong company in that industry could be established. The evidence shows that it soon became apparent that considerable additional work had to be done in order to produce Kaylo profitably. It was decided that the Kaylo business should be transferred to Owens-Illinois to take advantage of its more experienced research personnel. In the meantime, it was decided that there should be a curtailment of efforts to market Kaylo. Technological problems in connection with the production of television bulbs led the management of Owens-Illinois to conclude that that operation should be transferred to Kimble Glass since Kimble Glass was producing glass blocks and insulators by the same glass pressing and sealing techniques which were required in the manufacture of television bulbs. Both moves turned out advantageously. *253 Television bulbs were produced profitably by Kimble Glass, and Owens-Illinois ultimately was able to solve the problems involved in producing Kaylo which is now being produced at a profit. The business soundness of the 1949 transactions is evidenced today by the fact that Kimble Glass is still producing television bulbs, glass blocks, and insulators, and Owens-Illinois is still producing Kaylo. There is nothing in the record to support respondent's contention that the transactions were not bona fide. The fact that the television bulb properties and the Kaylo properties were sold at book value is not evidence of lack of bona fides or proof that the transaction was not an arm's-length transaction.
We hold that the respondent erred in excluding from the average base period net income of Owens-Illinois, the profits which it realized from the production of television bulbs; and that the respondent also erred in including in the average base period net income of Owens-Illinois, the Kaylo losses realized by, or allocated under part II to, Kimble Glass.
Liability for 1950 Excess Profits Tax.
The issue is whether the liability for 1950 excess profits tax of each petitioner, *254 imposed under section 430, was a liability to be taken into account at the beginning of 1951 in computing each petitioner's equity capital for the purpose of determining net capital addition for 1951 under section 435(g).
Each petitioner contends that its excess profits tax liability for 1950 did not constitute a liability at the beginning of 1951 which is to be taken into account.
*1264 It is the respondent's position that each petitioner's excess profits tax liability for 1950 was a liability to be taken into account in computing its equity capital for 1951. He relies on the provisions of section 40.437.5(c) of Regulations 130 (explaining the definition of equity capital), as amended by T.D. 6065, which added subparagraph (2) to paragraph (c). See 1 C.B. 164">1954-1 C.B. 164. The amendment, subparagraph (2), provides as follows:
(2) In computing liabilities as of the beginning of the taxable year, a taxpayer keeping its books and making its income tax returns on the accrual basis shall, in accordance with the principles applicable in the determination of earnings and profits, treat as a liability the Federal income and excess profits*255 taxes imposed for the preceding taxable year. This rule is applicable whether or not such taxes were definite and ascertainable in amount at the close of the preceding year and whether or not such taxes were contested by the taxpayer. The provisions of the Excess Profits Tax Act of 1950 shall be taken into account for this purpose in determining the income and excess profits tax for taxable years ending after June 30, 1950. In general, changes in the Federal income and excess profits tax laws applicable to a taxable year, enacted after the close of such year, will be taken into account in determining liabilities if the last date prescribed for filing the return for such year is subsequent to the date of enactment of such changes.
The petitioners argue that the regulation is invalid, and that it is in conflict with a general rule that only absolute liabilities (not contingent ones) are to be taken into account in determining equity capital at any particular point of time. Sec. 40.437-5(c)(1), Regs. 130.
The petitioners argue that there was no absolute liability for excess profits at the beginning of 1951, and that such liability was only a contingent one because as of January 1, *256 1951, the Excess Profits Tax Act of 1950 had not been enacted and had not become law.
The petitioners also present an argument about the technical accounting rule which is to the effect that since "liabilities are debts" there can be no liability, or debt, for a tax which does not exist, absent the enactment of the law imposing the tax.
The term "equity capital" is defined in section 437(c) as follows:
The equity capital of the taxpayer as of any time shall be the total of its assets held at such time in good faith for the purposes of the business, reduced by the total of its liabilities at such time * * *
The contention of the petitioners is incorrect; the respondent's position is clearly the right one.
The Excess Profits Tax Act of 1950 was enacted by the Congress on January 2, 1951, and became law upon signature by the President on the morning of January 3, 1951, at 10:13 a.m. No Federal excess profits tax law had been in effect throughout the calendar year 1950, but the Excess Profits Tax Act of 1950 by express terms (sec. 430) *1265 was made retroactively applicable with respect to taxable years ending after June 30, 1950.
In American Enka Corporation, 30 T.C. 684">30 T.C. 684, 697,*257 we considered the same general contention of a taxpayer. There the petitioner argued that section 40.437-5(c)(2), Regs. 130, was invalid and contrary to established law insofar as it required the accrual of a not-yet-enacted tax. There, as in these cases, the parties disagreed about the degree of certainty to be attached to the prospective passage of the 1950 Excess Profits Tax Act on the date of December 31, 1950.
We held in American Enka (p. 699) that section 40.437-5(c)(2) of Regulations 130 was a reasonable interpretation of section 437(c), insofar as it applied in that case, and pointed out that the taxpayer had more than a full year after the enactment of the law to make the required adjustments in its opening balance sheet for 1951 before filing its return for 1951. We rejected the taxpayer's contentions, which were substantially the same as those made here. Cf. Commissioner v. Pacific Affiliate, Inc., 224 F. 2d 578, affirming 19 T.C. 245">19 T.C. 245. We said (p. 699):
While for income tax inclusion or deduction purposes petitioner's argument has merit * * *, nevertheless such a holding when applied to a taxpayer's equity*258 capital computation leads to a patently inaccurate inclusion of financial worth. This is because the computation as at December 31, 1950, would reflect the total of petitioner's net earnings after income tax for that year, but would not reflect the excess profits tax subsequently imposed upon these earnings.
Each petitioner files its return on the basis of a calendar year and the returns for 1950 were due subsequent to January 3, 1951, when the 1950 Excess Profits Tax Act was signed by the President. The petitioners had sufficient time after the date when the law became effective to make the required adjustments in their opening balance sheet for 1951. The reasoning of American Enka applies here and we reach the same conclusion under the issue presented in these cases. It is concluded that each petitioner's liability for its 1950 excess profits tax was a liability to be taken into account in computing its equity capital for 1951 under section 437(c). Furthermore, we are unable to conclude that the applicable regulation (sec. 40.437-5(c)(2), Regs. 130) is either unreasonable, or invalid, or representative of clear abuse of discretion on the part of the Commissioner and Secretary*259 of the Treasury. In the absence of proof of any of the above factors, we should be slow to hold that the regulation is invalid and should not overrule it "except for weighty reasons." On this general principle, see Fawcus Machine Co. v. United States, 282 U.S. 375">282 U.S. 375. In principle, the respondent's view under this issue is supported by United States v. Anderson, 269 U.S. 422">269 U.S. 422. See also E. B. Crabtree Co., *1266 5 B.T.A. 732">5 B.T.A. 732; Cruickshank Brothers Co., 11 B.T.A. 177">11 B.T.A. 177; and Nichols v. Sylvester Co., 16 F.2d 98">16 F. 2d 98.
The liabilities of petitioners for their respective 1950 excess profits taxes existed at the beginning of 1951 and are to be taken into account in determining the net capital addition of each for 1951.
Depletion of Feldspar.
During the year 1951 Owens-Illinois operated glassmaking plants at Oakland and Los Angeles, California. Two of the principal ingredients used in making glass are silica and feldspar. In the early 1940's Owens-Illinois, in order to obtain its own supply of the two necessary ingredients, *260 entered into arrangements for the leasing of properties at Pacific Grove and Corona, California. These properties contained natural deposits of silica and feldspar. The leases gave Owens-Illinois the privilege of mining these natural deposits, and provided for rental payments computed by the number of tons mined.
The operations at both locations were relatively easy. At Pacific Grove the feldspar and silica were in the form of granulated sand located on the land surface in sand dunes. The sand was merely scooped up, washed, and screened to remove foreign matters, such as vegetation and then subjected to magnetic flotation to remove the iron content. The sand was then shipped to the Oakland plant, where it was used to make glass.
The operation at Corona, California, was only slightly more difficult. There, an overburden had to be removed before the dirt, consisting of approximately 40 percent clay and 60 percent silica and feldspar, was reached. This dirt, after mining, was washed to remove the clay particles; was crushed in rotating ball mills to reduce the deposit to the desired granular size; and, after draining and drying, was passed through magnetic separators to remove*261 iron-bearing, heavy minerals. The resulting product, now in granulated form, was shipped to the Los Angeles plant where it was used in the manufacture of glass.
It must be observed that in both operations the feldspar and silica taken from the land were together in a mixture; they were never separated. In both instances the deposits, after the above-mentioned processing, were shipped to their respective glassmaking factories where they were used in the manufacture of glass without any additional silica or feldspar being added.
In its original income tax return for the year 1951, Owens-Illinois claimed a deduction for percentage depletion for the unseparated product as sand at 5 percent under the provisions of sections 23(m)*1267 and 114(b)(4) of the 1939 Code. 4 In determining the gross income from the property, Owens-Illinois used the value of $ 4 per ton for the amounts mined from the Pacific Grove property and $ 4.99 per ton for the amounts mined from the Corona property. Owens-Illinois' computation resulted in a depletion deduction of $ 46,112.98.
*262 Respondent determined that the sand in its unseparated condition was a commercially marketable product. He further determined that the market price of the unseparated sand was $ 4 per ton with respect to the sand mined at Pacific Grove and $ 4.99 per ton for the dirt mined at Corona. Since silica is depletable at 5 percent while feldspar is depletable at 15 percent, and since silica is not as valuable as feldspar, the respondent applied a weighted percentage in determining that portion of the adjusted gross income from the property which is depletable at the rate of 15 percent and that portion which is depletable at the rate of 5 percent. The weighted percentage was determined by multiplying the relative values of separated feldspar and separated silica by the weight percentage of each mineral in the unseparated product.
The respondent's computation is as follows: *1268
| Owens-Illinois Glass Company -- Pacific Grove, California, Property -- 1951 | ||||
| Total | Feldspar | Silica | ||
| 100% | 53% | 47% | ||
| Tons produced and shipped | 134,609 | 71,343 | 63,266 | |
| Relative value times weight | ||||
| percentages | 100% | 63.5% | 36.5% | |
| Gross income from property: | ||||
| Unseparated product at $ 4/ton | $ 538,436.00 | $ 341,906.86 | $ 196,529.14 | |
| Byproduct sales | 6,772.20 | 6,772.20 | ||
| Less royalties | 170,163.78 | 108,054.00 | 62,109.78 | |
| Adjusted gross income | 375,044.42 | 233,852.86 | 141,191.56 | |
| Direct costs | 173,003.87 | |||
| Adm. prorated | 28,586.31 | |||
| Net income | 173,454.24 | |||
| 50% of net income | 86,727.12 | |||
| 15% of gross income | 35,077.93 | |||
| 5% of gross income | 7,059.58 | |||
| Total percentage depletion | 42,137.51 | |||
| Allowable depletion | 42,137.51 | |||
| Owens-Illinois Glass Company -- Corona, California, Property -- 1951 | ||||
| Total 100% | Feldspar 23% | Silica 77% | ||
| Tons produced and shipped | 113,981 | 26,216 | 87,765 | |
| Relative value times weight | ||||
| percentages | 100% | 31.6% | 68.4% | |
| Gross income from property: | ||||
| Unseparated product at $ 4.99/ton | $ 568,765.19 | $ 179,729.80 | $ 389,035.39 | |
| Byproduct sales | 1,345.05 | 1,345.05 | ||
| Less royalties | 22,895.89 | 7,235.10 | 15,660.79 | |
| Adjusted gross income | 547,214.35 | 172,494.70 | 374,719.65 | |
| Direct costs | 440,229.89 | |||
| Adm. prorated | 21,850.24 | |||
| Net income | 85,134.22 | |||
| 50% of net income | 42,567.11 | |||
| 15% of gross income | 25,874.20 | |||
| 5% of gross income | 18,735.98 | |||
| Total percentage depletion | 44,610.18 | |||
| Allowable depletion -- Corona | 42,567.11 | |||
| Allowable depletion -- Pacific Grove | 42,137.51 | |||
| Total depletion allowable on sand | 84,704.62 | |||
| Claimed on return -- | ||||
| Corona | $ 27,360.76 | |||
| Claimed on return -- | ||||
| Pacific Grove | 18,752.22 | 46,112.98 | ||
| Increased depletion deduction | ||||
| allowable on sand | 38,591.64 |
*263 *1269 The respondent's determination resulted in an increased depletion deduction of $ 38,591.64 over the amount claimed by Owens-Illinois on its return.
Owens-Illinois now takes the position that although it was taking sand or dirt out of the ground it was, in effect, mining two minerals, namely, feldspar and silica. Therefore, in determining the income from the property for computing the depletion deduction, Owens-Illinois has valued the amount of unseparated feldspar taken from the land at $ 13 per ton, and has valued the silica, which it treats as sand, mined at Pacific Grove at $ 4 per ton and has valued the silica or sand mined at Corona at $ 4.99 per ton.
Owens-Illinois' computation is as follows:
| Corona, California, Property | |||
| Total 100% | Feldspar 23% | Silica 77% | |
| Tons produced and shipped | 113,981 | 26,216 | 87,765 |
| Gross income from property: | |||
| Feldspar at $ 13 | $ 340,808.00 | $ 340,808.00 | |
| Sand at $ 4.99 | 437,947.35 | $ 437,947.35 | |
| Byproduct sales | 1,345.05 | 309.36 | 1,035.69 |
| Total | 780,100.40 | 341,117.36 | 438,983.04 |
| Less royalties | 22,895.89 | 5,266.05 | 17,629.84 |
| Gross income -- adjusted | 757,204.51 | 335,851.31 | 421,353.20 |
| Direct costs | 442,809.13 | ||
| Subtotal | 314,395.38 | ||
| Administration expense at 3.3% | 25,743.31 | ||
| 50% of net income | 288,652.07 | ||
| 15% of adjusted gross income from | |||
| feldspar | 50,377.70 | ||
| 5% of adjusted gross income from | |||
| sand | 1,067.66 | ||
| Total percentage depletion | 71,445.36 | ||
| Allowable depreciation | 71,445.36 |
| Pacific Grove, California, Property | |||
| Total 100% | Feldspar 53% | Silica 47% | |
| Tons produced and shipped | 134,609 | 71,343 | 63,266 |
| Gross income from property: | |||
| Feldspar at $ 13 | $ 927,459,00 | $ 927,459.00 | |
| Sand at $ 4 | 253,064.00 | $ 253,064.00 | |
| Byproduct sales | 6,772.20 | 3,589.27 | 3,182.93 |
| Total | 1,187,295.20 | 931,048.27 | 256,246.93 |
| Less royalties | 170,163.78 | 90,186.80 | 79,976.98 |
| Gross income -- | |||
| adjusted | 1,017,131.42 | 840,861.47 | 176,269.95 |
| Direct costs | 172,964.81 | ||
| Subtotal | 844,166.61 | ||
| Administration expense at | |||
| 3.3% | 39,180.74 | ||
| Net income | 804,985.87 | ||
| 50% of net income | 402,492.94 | ||
| 15% of adjusted gross income | |||
| from feldspar | 126,129.22 | ||
| 5% of adjusted gross income | |||
| from sand | 8,813.50 | ||
| Total percentage depletion | 134,942.72 | ||
| Allowable depletion | 134,942.72 |
This computation results in a claimed depletion deduction of $ 206,388.08 which is $ 121,683.46 more than the amount allowed by respondent.
Owens-Illinois argues that if it had not had its mining operations at Pacific Grove and Corona it would have had to, as it did for its other glassmaking plants around the country, purchase feldspar and silica in a separated form*265 and mix the two ingredients together. In this event Owens-Illinois would have had to pay $ 13 per ton for the feldspar it purchased. Furthermore, Owens-Illinois observes that had it, in fact, separated the feldspar from the silica as it was mined from the ground, then the statute would have allowed them to compute income from the land upon the market value of the silica and feldspar in the separated form. Therefore, it is argued that in this case Owens-Illinois is entitled to have its income from the land computed as though this separation process were performed, thereby acquiring the higher value for the feldspar in computing the income, and yet not be required to make the separation because it would only *1271 be a useless step, the two ingredients would have to be immediately mixed together again in order to manufacture the glass.
Respondent agrees that Owens-Illinois should be treated as though it were mining feldspar and silica, or sand, and that it is entitled, in the case of the feldspar, to the depletion rate applicable to it rather than the rate applicable to sand. However, respondent argues that in determining the income from the property the market value for the*266 sand, composed of silica and feldspar mixed, must be used, and that for determining the depletion deduction, the income so computed is to be apportioned between the silica and feldspar so that the applicable depletion rate may be applied. To adopt Owens-Illinois' theory, respondent argues, is to allow a depletion deduction on a separation process which is unnecessary and not performed.
We agree with the respondent. Regulations 111, section 29.23(m)-1, provides, insofar as it is material here, as follows:
(f) "Gross income from the property," as used in section 114(b)(3) and (4) and sections 29.23(m)-1 to 29.23(m)-28, inclusive, means the amount for which the taxpayer sells the crude mineral product of the property in the immediate vicinity of the mine or well, but, if the product is transported or processed (other than by the processes excepted below) before sale, it means the representative market or field price (as of the date of sale) or crude mineral product of like kind and grade before such transportation or processing. If there is no such representative market or field price (as of the date of sale), then there shall be used in lieu thereof the representative market *267 or field price of the first marketable product resulting from any process or processes (or, if the product in its crude state is merely transported, the price for which sold) minus the costs and proportionate profits attributable to the transportation and the processes not listed below. * * *
* * * *
(h) "Crude mineral product," as used in paragraph (f) of this section, means the product in the form in which it emerges from the mine or well.
We understand this regulation to provide that in determining gross income from the property where the mined commodity is not sold in the immediate vicinity of the mine, and where the mined commodity is transported or processed (other than by certain excepted processes not applicable here), the representative market or field price of a mineral product of like kind and grade before such transportation or processing must be used. In the case of the mining operations at Pacific Grove and Corona the commodity being mined is a sand composed of silica and feldspar.
Owens-Illinois' evidence relating to the price of pure feldspar is not acceptable since feldspar is not a mineral product of a like kind and grade as the sand, composed of feldspar*268 and silica, which results from the mining operations at Pacific Grove and Corona. Pure feldspar has been benefited by treatment processes beyond that actually applied to the Pacific Grove and Corona products.
*1272 We have found as a fact that the representative market price of the sand mixed and processed at Pacific Grove was $ 4 per ton and that the representative market price of the dirt mined and processed at Corona was $ 4.99 per ton. These are the values determined by respondent and there is nothing in the record to rebut them. It is upon these values that the income from the property should be computed, as the respondent has done.
In support of its position Owens-Illinois has cited Revenue Ruling 76, 1953-1 C.B. 176.
This revenue ruling says no more than that where a material, containing two or more minerals which have different percentage rates of depletion, is mined, then in determining the depletion deduction, the percentage rate applicable to each particular mineral is applied to the gross income from that mineral. When related to our problem it would mean that where sand, composed of silica and feldspar, is mined the depletion*269 rates applicable to silica and feldspar are to be applied to the gross income from their respective minerals. This is not authority for the proposition, urged by Owens-Illinois, that in determining the income from the land a value for feldspar in a separated form may be imputed to the amounts of feldspar mined in a form mixed with silica, and which is never separated.
The respondent has done in this case what this revenue ruling states. He has determined properly the amount of income attributable to the feldspar and silica, and he has applied the applicable percentage rate of depletion to such amounts in determining the depletion deduction. His determinations of the amounts of allowable depletion deductions are sustained. The petitioner's claim for a larger depletion deduction is denied.
Decisions will be entered under Rule 50.
Footnotes
1. The legislative history of section 435(e)(1)(B)↩, which was introduced as a floor amendment in the Senate, shows that Congress was primarily concerned with the television manufacturing industry. See 96 Cong. Rec. 16803.
2. Section 433(b)(18)↩ was added in 1952 by section 4 of Public Law 594, effective for taxable years ending after June 30, 1950.
3. Even if the television bulb assets had been transferred to Kimble Glass in a part II transaction, respondent's attempt to allocate to Kimble Glass the actual earnings experience of Owens-Illinois would not be proper because, under section 462(i)(6)↩, such an allocation can only be made if an earnings experience agreement is executed between the parties to the part II transaction. There was, of course, no such agreement between Owens-Illinois and Kimble Glass, with respect to the 1949 transaction.
4. SEC. 23. DEDUCTIONS FROM GROSS INCOME.
(m) Depletion. -- In the case of mines, oil and gas wells, other natural deposits, and timber, a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each case; such reasonable allowance in all cases to be made under rules and regulations to be prescribed by the Commissioner, with the approval of the Secretary. * * *
For percentage depletion allowable under this subsection, see section 114(b), (3), and (4).
SEC. 114. BASIS FOR DEPRECIATION AND DEPLETION. (b) Basis for Depletion. --
(1) General rule. -- The basis upon which depletion is to be allowed in respect of any property shall be the adjusted basis provided in section 113(b) for the purpose of determining the gain upon the sale or other disposition of such property, except as provided in paragraphs (2), (3), and (4) of this subsection.
* * * *
(4) Percentage depletion for coal and metal mines and for certain other mines and natural mineral deposits. --
(A) In General. -- The allowance for depletion under section 23(m) in the case of the following mines and other natural deposits shall be --
(i) in the case of sand, * * * 5 per centum,
* * * *
(iii) in the case of * * * feldspar, * * * 15 per centum, * * *
* * * *
of the gross income from the property during the taxable year, excluding from such gross income an amount equal to any rents or royalties paid or incurred by the taxpayer in respect of the property. Such allowance shall not exceed 50 per centum of the net income of the taxpayer (computed without allowance for depletion) from the property, except that in no case shall the depletion allowance under section 23(m) be less than it would be if computed without reference to this paragraph.
(B) Definition of Gross Income from Property. -- As used in this paragraph the term "gross income from the property" means the gross income from mining. The term "mining" as used herein, shall be considered to include not merely the extraction of the ores or minerals from the ground but also the ordinary treatment processes normally applied by mine owners or operators in order to obtain the commercially marketable mineral product or products, * * *↩