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 section 722 (b) (4), Internal Revenue Code; therefore that it is not entitled to relief thereunder.
*357 This proceeding involves petitioner's claim for refund under section 722 of the Internal Revenue Code of corporation excess profits taxes for the years 1940, 1941, and 1942. At the hearing it was stipulated that the petitioner was entitled to an addition of $ 1,986.75 to the equity invested capital as allowed in the deficiency notice. Certain standard issues raised in the pleadings were conceded at the hearing, thereby leaving as the sole issue for our determination the question of whether the petitioner is *89 entitled to relief from excess profits taxes for 1940, 1941, and 1942 under section 722.
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 sections 722 and 713 (f) of the Internal Revenue Code) a constructive average base period net income of $ 73,597.57. On July 29, 1944, petitioner filed *90 on Treasury Department Form 843 a claim for refund of $ 33,855.89 representing the balance of the relief claimed for 1942 which had not been paid by petitioner when its 1942 application for relief was filed.
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 section 722 petitioner is entitled to use the so-called "growth formula" provided in section 713 (f). Petitioner's actual "average base period net income" under section 713 (f) without regard to section 722 is $ 19,936.29 for 1940 and $ 23,168.20 for 1941 and 1942.
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 | 1 20,833.33 | |
| 1937, 4,000.00 | 1 33,333.33 | |
| 2 1938, 7,500.00 | 1 62,500.00 | |
| Aug. 1, 1935, Pocahontas Coal & | ||
| Coke Co., et al. | 1936, 3,999.93 | 3 23,529.00 |
| 1937, 6,999.92 | 3 41,176.00 | |
| 2 1938, 8,999.97 | 3 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 | 1 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 section 722 (b) (4), Internal Revenue Code.
Under section 722 (b) (4) the petitioner must show that during *99 or immediately prior to the base period it either commenced business or changed the character of its business. Though the petitioner was incorporated on June 21, 1935, it makes no claim that it commenced business "during or immediately prior to the base period." Petitioner's case is based primarily upon the contention that it "changed the character of the business" by the acquisition of a new mining lease in the fall of 1939, which change petitioner contends resulted from a "difference in the capacity for production or operation" within the language of section 722 (b) (4). Although before the end of the base period the petitioner had mined about 2,200 tons of coal from the new lease, and states that it had built tramroads to the new lease, almost doubled its investment in mine cars, and added to its investment in locomotives, the gist of its position is that acquisition of the new lease is a change in character of business. Petitioner points out the addition of equipment in 1940 but any such addition was, of course, not during the base period and can not be considered.
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 section 722. The addition of more land available for mining might, of course, eventually result in a greater total production than would be available from original holdings, and if the expression "capacity for production or operation" could reasonably, in the light of the objectives of the statutes involved, be so broadly construed as to mean, in effect, capacity for ultimate total production, petitioner's view would be correct; but we can not so interpret the crucial phrase. Capacity for production appears to be the ability of a given plant to produce that which it is designed to create or produce and is expressed in terms of the number of units manufactured, created or produced in a given period. It was in *101 this sense that "capacity for production" was used in National Grinding Wheel Co., 8 T. C. 1278, where, we said, the maximum capacity of petitioner's ovens at the end of the base period was about three times what it was at the beginning. In Chicago Distilling Co. v. Stone, 140 U.S. 647, the Supreme Court construed sections 3259, 3264, 3309, and 3311 of U. S. Revised Statutes, involving the quotation "spirit-producing capacity" of a distillery; and the Court concluded that "those expressions mean no more than average producing capacity in a given time." We see nothing different in principle in the question before us and believe that "capacity for production" in the statute we now interpret means mere "average producing capacity in a given time," that is, actual ability to produce within a given time. Capacity for production, in such sense, is not increased by the mere acquisition of additional raw material though therefrom a greater total production would, of course, be the final result. Thus, the capacity for production of a steel mill is rationally gauged by the number of tons of steel per day or per year and the acquisition of a large backlog of pig iron or other raw material, *102 for use in the future and not necessary in the given period, would not increase the plant's capacity for production, in any ordinary or reasonable sense. We see no difference between the acquisition of raw material to be used in the future, by a steel mill, and the acquisition by the petitioner of land for mining purposes. It is clear from the record before us that the petitioner's plant could have been engaged to capacity, in the mining of the lands it had before acquisition of the 1,035 acres, far beyond the base period. The meaning of "capacity" is "dependent entirely upon its relationship to the subject matter under consideration," 9 Corpus Juris 1275; and the meaning is to be arrived at "from consideration of all of the statutory provisions having relation to the subject matter," Campbell *364 v. Cornish, 22 P. 2d 63. In our view, the excess profits tax law, designed as it was to cause taxation of unusual profits during a war period, and section 722 to prevent inequities in such taxation, had to do with a more or less temporary situation, and the interpretation of "capacity for production or operation" should, therefore, not be so greatly broadened as to mean the total amount of *103 production which might eventually over a long period of years be attained. Clearly. if the new 1,035 acres of land produced coal in paying quantities the lease thereof would finally result in greater production; but this, in our view, is beyond the intent of the statutes involved. Though the petitioner did produce some coal within the base period from the new lease nothing of record indicates that such amount of production was because of the acquisition of the new lands and could not have been produced from the original leases had the same effort been there placed. Indeed, the record though somewhat indefinite indicates that the new lease was acquired late in 1939, yet production of coal in August 1939, 19,243 tons, was considerably higher than at any time later in that year, thus indicating that the acquisition of the new lands and the mining of 2,200 tons therefrom did not increase the capacity of petitioner's plant for production. September's production was higher than any later month in that year. Thus, if we disregard the fact that the lease was actually not executed until June-July 1940, for the reason that such idea is not argued, we must nevertheless notice that correspondence *104 between petitioner and the lessor companies though starting in 1938 reached the point of proposing terms by August 23, 1939, and that agreement to enter the contract appears not earlier than September 5, 1939, also the fact that it was not until November 17, 1939, that the petitioner advised that its prospecting had proceeded to the point where it wished to accept the proffered terms. Apparently, therefore, the approximately 2,200 tons of coal produced from the new lease was in November or December 1939. The lease when finally executed is dated December 1, 1939. The fact that production in those months was less than in August and September negatives the idea that acquisition of the new lands increased the petitioner's capacity for production of operation.
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 section 722 (b) (4) of the Internal Revenue Code.
Decision will be entered for the respondent.