Decision will be entered for the respondent.
Petitioner, a coal mining corporation, acquired two leases in 1935 and thereafter conducted mining operations thereon. In the fall of 1939 it acquired a new lease and in that year mined about 2,200 tons of coal from it. Held, on the facts, that it is not shown that petitioner during the base period changed the character of its business by increasing its capacity for production or operation within
*357 This proceeding involves petitioner's claim for refund under
FINDINGS OF FACT.
The petitioner is a corporation organized on June 21, 1935, under the laws of West Virginia. It is engaged in the business of mining and selling coal and has its principal place of business at Welch, West Virginia.
The petitioner keeps its books and files its Federal tax returns on an accrual basis of accounting. Its Federal income and excess profits tax returns for the periods here involved were filed with the collector of internal revenue for the district of West Virginia. Petitioner's excess profits tax returns filed for the years in question and its applications for relief from excess profits tax filed on or before September 14, 1943, reveal the following: *358
| Amount of relief sought | ||
| Amount of excess profits | through application | |
| taxes shown as | filed on or before | |
| Year | due on returns | Sept. 14, 1943 |
| 1940 | $ 3,409.58 | $ 3,409.58 |
| 1941 | 45,611.02 | 30,570.26 |
| 1942 | 63,745.75 | 40,832.60 |
In each of these applications for relief petitioner claimed (by use of
The excess profits net income of the petitioner determined under section 711 (b) for each of the base period years to be considered for each of the excess profits tax taxable years here involved is as follows:
| 1940 | 1941 and 1942 | |
| Base period years | computation | computations |
| 1936 | ($ 2,203.23) | ($ 2,203.23) |
| 1937 | 12,059.71 | 13,487.86 |
| 1938 | 14,750.84 | 17,064.93 |
| 1939 | 19,936.29 | 23,168.20 |
In computing its "average base period net income" without regard to
In 1942 petitioner used an excess profits credit based on invested capital. The amount of the credit claimed by petitioner was $ 24,548.13, the amount allowed by respondent was $ 24,230.29, and the respondent has since conceded that petitioner is entitled to increase this credit by the amount *91 of $ 1,986.75.
Following its organization petitioner acquired through two leases the right to mine coal on some 778.478 acres of land (the actual coal acreage was approximately 250 acres), located at Jacob's Fork, West Virginia. The leases provide the following:
| Number of | Rate of | |
| Date of lease and name of lessor | acres | rent per |
| ton | ||
| June 24, 1935, Slate Creek Pocahontas | ||
| Coal Co. | 589.948 | 1 12 cents |
| Aug. 1, 1935, Pocahontas Coal & | ||
| Coke Co., et al. | 188.53 | 3 17 cents |
| Minimum tons | ||
| Minimum royalties to | of coal to be | |
| Date of lease and name of lessor | be paid and year | mined to offset |
| payments to | ||
| be made | ||
| June 24, 1935, Slate Creek Pocahontas | ||
| Coal Co. | 1935, actual tonnage | |
| 1936, $ 2,500.00 | 20,833.33 | |
| 1937, 4,000.00 | 33,333.33 | |
| 2 1938, 7,500.00 | 62,500.00 | |
| Aug. 1, 1935, Pocahontas Coal & | ||
| Coke Co., et al. | 1936, 3,999.93 | 23,529.00 |
| 1937, 6,999.92 | 41,176.00 | |
| 1938, 8,999.97 | 52,941.00 |
*359 Adjoining the two leases referred to in the preceding paragraph was an additional tract of land which contained 1,035 acres of coal land which had not been mined. Petitioner hoped that it might sometime acquire the right to mine this additional 1,035-acre tract and accordingly *92 it built in 1935 a tipple with a capacity of 250 tons an hour which was a larger tipple than would have been needed to operate the land which the petitioner had acquired in 1935.
The coal land that petitioner acquired in 1935, i. e., the original lease, was a part of what is known generally as the Pocahontas No. 3 seam. The coal in this tract was, in general, to the north of petitioner's tipple and uphill from the tipple at a grade of from 8 to 10 per cent.
In the years 1935 through 1939 petitioner's production of coal, in net tons, was by months as follows:
| Month | 1935 | 1936 | 1937 | 1938 | 1939 |
| January | 5,220.64 | 7,580.51 | 10,314.13 | 15,626.94 | |
| February | 3,636.07 | 6,199.13 | 7,272.76 | 15,574.74 | |
| March | 4,741.52 | 7,313.47 | 8,972.36 | 15,505.46 | |
| April | 5,687.58 | 7,067.52 | 6,431.52 | 853.38 | |
| May | 4,573.01 | 8,951.85 | 10,838.79 | 9,740.62 | |
| June | 4,969.91 | 10,678.57 | 9,507.06 | 18,435.07 | |
| July | 8,198.93 | 12,286.83 | 9,938.24 | 16,898.98 | |
| August | 8,744.04 | 11,035.96 | 12,597.67 | 19,243.27 | |
| September | 7,243.73 | 11,036.97 | 12,943.42 | 17,639.92 | |
| October | 8,843.52 | 12,204.52 | 15,862.17 | 16,997.37 | |
| November | 2,321.53 | 7,400.05 | 11,359.22 | 14,662.11 | 17,494.34 |
| December | 4,248.00 | 7,764.47 | 11,869.22 | 15,948.61 | 16,870.87 |
| Total | 6,569.53 | 77,023.47 | 117,583.77 | 135,288.84 | 180,880.96 |
During 1935, 1936, and part of 1937, petitioner mined coal *93 from its No. 1 mine which was a drift entrance into the coal vein about one-half mile to the east of the tipple. In 1937, petitioner encountered a fault in the coal vein and made a new opening into the same coal vein by a drift opening which was designated as No. 2 mine. The elevation at the bottom of the coal of the No. 3 seam in the general location of the No. 2 mine was approximately 2,150 feet. In order to reach this new opening petitioner had to construct about 4,000 feet of tramroad around the mountain, and in order to let the coal cars down to the tipple, it was necessary to install a 1,400 foot incline hoist whereby the mine cars would be let down three at a time. In 1939 about 99 per cent of petitioner's coal, mined from its No. 2 mine, went over this incline, and five men were needed to operate it. While petitioner for its own records has referred to the various entries or openings as the No. 1 mine, the No. 2 mine, etc., it has throughout the period here involved been carrying on only one coal mining operation, and all of the coal from the new lease, as well as the old leases, has gone over the same tipple.
The coal mined by petitioner was firmer and more volatile than *94 ordinary Pocahontas No. 3 seam coal elsewhere mined and ran only *360 about 50 per cent in slack instead of 70 per cent as in some mines. The majority of petitioner's steam coal was sold to utilities in the East, while its prepared coal was sold to dealers in the Midwest. The prepared coal was sold to the dealers in the Midwest for 25 to 50 cents a ton over the ordinary price of Pocahontas coal.
Substantially all of petitioner's coal was sold by the Leckie Coal Company of Columbus, Ohio, which is a selling agency for eleven coal mining companies, and which during the years 1936-1939 was selling on a commission basis in excess of 2,500,000 tons of coal a year.
Large amounts of coal were mined by the petitioner, after 1939, from the two leases acquired in 1935.
In the years 1935 through 1939 petitioner's mine was being worked whenever its tipple was operated (except for 1938 -- see below) and the number of days its tipple was in operation was by months as follows:
| Month | 1935 | 1936 | 1937 | 1938 | 1939 |
| January | 23 | 21 | 16 | 17 | |
| February | 21 | 20 | 10 | 19 | |
| March | 20 | 23 | 13 | 17 | |
| April | 19 | 19 | 7 | 0 | |
| May | 20 | 21 | 11 | 12 | |
| June | 22 | 22 | 10 | 22 | |
| July | 22 | 22 | 9 | 19 | |
| August | 22 | 22 | 12 | 23 | |
| September | 19 | 22 | 13 | 24 | |
| October | 23 | 21 | 20 | 24 | |
| November | 13 | 21 | 21 | 19 | 23 |
| December | 23 | 22 | 18 | 21 | 20 |
| Total | 36 | 254 | 252 | 161 | 220 |
In 1938 *95 petitioner's mine worked more days than its tipple was operated. During April and the first half of May 1939, petitioner's mine was shut down by a strike.
Petitioner's actual average selling price, cost and profit or loss per ton for the base period years were as follows:
| Average cost | |||
| Year | Average selling | production | Average profit |
| price per ton | 1 per ton | or loss per ton | |
| 1936 | $ 1.9381 | $ 2.0590 | ($ 0.1209) |
| 1937 | 2.1199 | 2.0946 | 0.0253 |
| 1938 | 2.1134 | 2.0568 | 0.0567 |
| 1939 | 2.1236 | 2.0584 | 0.0652 |
During the latter part of 1938 and the first part of 1939 petitioner was negotiating for the right to mine the additional 1,035 acres of coal land (hereinafter sometimes referred to as the new lease) which adjoined its original operation to the east. In June 1939, petitioner's *361 secretary-treasurer went to Pittsburgh to confer with the holders of the mineral rights in this adjoining tract, and on this trip a tentative agreement was reached whereby petitioner would acquire a lease on this property. During the fall of 1939 this tentative agreement was amplified and confirmed by correspondence between the parties. On August 23, 1939, *96 proposals were made to petitioner as to mining the 1,035 acres by some of the owners. These were accepted on the same date and petitioner's proposition was accepted by one other company owning an interest, on September 5, 1939. This was subject to petitioner's prospecting, and on November 17, 1939, petitioner gave notice that it wished formally to accept the terms of the lease proposed.
Petitioner's president and general manager under date of August 23, 1939, wrote the president of Slate Creek Pocahontas Coal Co. that on the basis of certain named considerations petitioner agreed to increase the "maximum minimum" royalties from $ 7,500 to $ 9,000 per year and in addition to pay it (i. e., Slate Creek Pocahontas Coal Co.) 1 cent per ton for the right of haulage on all coal removed from the new lease.
The tentative agreement (between petitioner and the Pocahontas Land Corporation, et al.) was formalized by a written lease executed in June-July 1940 but under date of December 1, 1939. It provided that petitioner was to pay to the lessor and sublessor a royalty of 18 cents per gross ton of 2,240 pounds of coal mined. Petitioner was to pay minimum annual rentals as follows:
| For the year | |
| 1939 | $ 6,000 |
| 1940 | 8,000 |
| 1941 | 10,000 |
| 1942 | 12,000 |
| 1943 and each year thereafter | 16,000 |
The *97 lease also provided that mining of coal from the No. 5 seam in any particular area of the lease was to be completed in advance of mining the coal on the No. 3 seam in the same area.
Petitioner sometime in the fall of 1939 entered upon the new lease and constructed a tramroad and began mining the property.
There were two seams of coal in the new lease, and they lay parallel to one another. The higher seam is referred to as the Pocahontas No. 5 seam and is about 130 feet above the other and lower seam, which is referred to as the Pocahontas No. 3 seam. The seams on the new lease had a firm slate bottom and the top was excellent compared to that in the No. 2 mine. The schedules of expenses in petitioner's Federal income and excess profits tax returns filed for the base period years do not list any amount that can be identified with corduroy roads. The grades in the new lease were "roughly" between 7 and 8 per cent.
*362 In the latter part of 1939, petitioner had begun mining the No. 3 seam of the new lease at two locations. It had extended the operations of its No. 2 mine opening to cross into the new lease, and it had started a new entry on the southwestern part of the new lease and had *98 removed coal from its No. 3 mine opening. The elevation at the bottom of the coal of the No. 3 seam in the general location of the No. 3 mine was approximately 1,894 feet. Petitioner had also begun mining the No. 5 seam of the new lease in 1939, and the coal from it was removed through the No. 5 mine opening and over a tramroad which it had constructed in 1939. The elevation at the bottom of the coal of the No. 5 seam in the general location of the No. 5 mine was approximately 1,927 feet.
Petitioner produced approximately 2,200 tons of coal from its new lease in 1939. The only coal produced from the new lease that went over the incline hoist was the coal mined through the No. 2 mine.
The acquisition of the new lease did not enable petitioner to produce more tons of coal per day than it was capable of producing prior thereto from its existing leases.
OPINION.
The only question presented is whether the petitioner is entitled to any relief from excess profits taxes for 1940, 1941, and 1942 and, if so, the amount thereof. The petitioner claims relief in this proceeding solely under
Under
Our problem here is to interpret the meaning of "difference in the capacity for production or operation." Did the *100 petitioner during the base period change the character of its business by making a difference *363 in its capacity for production or operation? After reviewing all of the evidence we have come to the conclusion that it did not. In our view, merely increasing the amount of land available for mining does not increase capacity for production except perhaps in the very broadest sense and in a sense not compatible, we think, with the objects of the excess profits tax law, including
We recognize that the acquisition of new lands, so much better for mining purposes that the petitioner's plant could have been used to produce therefrom more coal in a given time than from the earlier lease, might have resulted in an increase in capacity for production, but such a situation is not disclosed by the record before us. The petitioner has not so argued. There is no doubt that as petitioner's counsel at trial said "our *105 case is based on the acquisition of this new lease in the fall of 1939." It is true that the petitioner contends that "top and bottom" conditions were better in the new mine, also that the grades in *365 the new mine were somewhat better, and that there were additional investments in tramroads; but after review of all the evidence in this regard we have concluded that the new land has not been shown to offer greater capacity for production from petitioner's plant. The suggestion that there were additional investments in mine cars and locomotives we find unjustified by the record before us. The amount of production, petitioner's witness testified, was a matter depending upon conditions; and it has nowhere been shown or argued that, absent and aside from the acquisition of the new lease, the conditions were such that capacity for production was increased, merely because of any additional investments in mine cars, locomotives or tramroads.
We conclude and hold upon all of the evidence that the petitioner has not shown that during or immediately prior to the base period it changed the character of its business by a difference in the capacity for production or operation.
Since the statute provides *106 that in addition to making such showing of change of character of business the petitioner must show that average base period net income does not reflect normal operation for the entire base period of the business and must establish a fair and just amount representing normal earnings to be used as a constructive average base period net income, it is apparent that in the absence of proof of the change of character of business it would be dictum for us to examine further as to reflection of normal operation over the base period, or as to computation of a constructive average base period net income.
We conclude and hold that petitioner has not shown it is entitled to relief under
Decision will be entered for the respondent.