*151 Decision will be entered for the respondent.
In the taxable year 1948 petitioner mined coal from three mines under leases acquired at various times. All of the lands were contiguous and contained in a single boundary. All of the coal mined was carried by chute and conveyors to a bin where it was blended and dumped into a single tipple. The sulphur content of the coal from No. 1 mine had so increased that petitioner opened No. 2 mine, and later, No. 3 mine, both producing coal of low sulphur content, which, when blended with the coal from No. 1 mine, enabled petitioner to maintain its market. Only the blended coal was sold. It was not economically feasible to operate Nos. 2 and 3 mines as separate entities. Held, respondent properly computed petitioner's depletion allowance on the basis it was carrying on coal mining operations on three separate properties within the purview of section 114 (b) (4), Internal Revenue Code.
*399 This proceeding involves a deficiency in income tax for the year 1948 in the amount of $ 5,653.47.
The contested issue is whether the respondent erred in computing depletion allowable to petitioner for 1948 by treating petitioner's operation as three separate properties within the meaning of section 114 (b) (4) of the Internal Revenue Code, as amended.
A part of the facts have been stipulated and are found accordingly.
FINDINGS OF FACT.
Petitioner is a West Virginia corporation with its principal office and place of business at Amherstdale, West Virginia. Its income tax return for 1948 was filed with the collector of internal revenue for the district of West Virginia, at Parkersburg. Petitioner keeps its books and reports its income on the accrual method of accounting on the calendar year basis.
During the taxable year and in prior years, petitioner was engaged in mining coal in certain lands in Logan County, West Virginia. Petitioner*153 also operated food stores, a service station, and an electric service, and leased tenement houses which were rented to its employees.
On September 1, 1929, petitioner acquired by lease from Del Carbo Coal & Coke Company four separate tracts situate on the waters of Buffalo Creek and Pounding Mill Run in the Tridelphia District, containing 623.33, 268.87, 110, and 60 acres, respectively. On July 10, 1934, petitioner leased from the Buffalo Creek Coal & Coke Company two tracts situate on the waters of Buffalo Creek and Pounding Mill Run in the Tridelphia District, containing 527.64 and 39.55 acres, respectively. On September 1, 1941, petitioner leased from W. W. McDonald Land Company one tract similarly situate and containing 90 acres. An additional tract, owned by J. N. White, similarly situated and containing 48 acres, was operated under an oral agreement. The description, chain of title, and history of the acquisition of all the *400 leaseholds are set forth in an exhibit attached to the stipulation and are incorporated herein by reference.
All of the above-described lands were contiguous and contained within a single boundary line.
All of the property upon which petitioner*154 conducted its operations in the taxable year in question was underlaid, in whole or in part, by the Island Creek Powellton or "C," and No. 2 Gas seams of coal. The Island Creek is the highest seam, the Powellton the middle seam, and No. 2 Gas the bottom seam.
Petitioner commenced its operations in 1929, and prior to 1940 operated exclusively in the Island Creek seam, now known as No. 1 mine. The coal it mined from the Island Creek seam, because of its low sulphur content, high fusion point, and other coking characteristics, had been marketed as Chilton coal and was capable of being used in the manufacture of coke and its byproducts. Petitioner encountered difficulty in maintaining its market for coal produced in mine No. 1 because in the back of that mine the sulphur content increased to a point where it was no longer suitable for coking purposes. In order to bring down the sulphur content it was necessary to blend a coal having a low sulphur content. In 1940 petitioner opened the Powellton seam, which is located approximately 38 feet beneath the Island Creek seam. The Powellton coal, because of its low sulphur content, brings premium prices. The No. 2 mine was opened as an*155 exploratory operation. The thickness of the coal ran from 28 to 30 inches. The production from No. 2 mine proved insufficient to reduce the sulphur content in the blended coal to a point low enough to permit petitioner to maintain its market. In 1945 petitioner opened its No. 3 mine in the No. 2 Gas seam, which lies 175 feet beneath the Powellton seam. The coal from No. 3 mine has an extremely low sulphur content and is a premium coal. Because of the high cost of operation, mines Nos. 2 and 3 could not be operated economically as separate entities. Mine No. 3 did not come into actual production until 1946, when a small quantity was mined and marketed. In 1947 production reached substantial proportions.
The tonnage produced from each mine during the years 1941 to 1949, inclusive, was as follows:
| Year | No. 1 Mine | No. 2 Mine | No. 3 Mine | Total |
| 1941 | Not available | 286,706.30 | ||
| 1942 | 235,776.45 | 78,906.00 | 314,682.45 | |
| 1943 | 250,701.10 | 38,606.00 | 289,307.10 | |
| 1944 | 216,474.58 | 44,005.97 | 260,480.55 | |
| 1945 | 212,880.31 | 44,579.59 | 257,459.90 | |
| 1946 | 184,939.81 | 42,578.02 | 5,592.77 | 233,110.60 |
| 1947 | 189,025.83 | 46,653.64 | 34,576.63 | 270,256.10 |
| 1948 | 154,540.20 | 49,532.98 | 44,338.92 | 248,412.10 |
| 1949 | 90,771.85 | 12,010.44 | 73,058.46 | 175,840.75 |
| 1,535,110.13 | 356,872.64 | 157,566.78 | 2,336,255.85 |
*156 *401 Petitioner operates under seven leaseholds each of which, except the White and McDonald leases, provides for the payment of an annual minimum royalty. Petitioner under each of its leaseholds is required to take all of the merchantable coal.
The tonnage produced for royalty purposes during the years 1941 to 1949, inclusive, was as follows:
| Del Carbo Coal & Coke Company | ||||
| Old lease | ||||
| Buffalo Creek | Chew, Feamster | |||
| Year | Coal & Coke | & Johnson | R. L. Joyce | H. G. Burgess |
| 1941 | 65,467.92 | 16,097.73 | 24,101.86 | 4,158.30 |
| 1942 | 64,142.44 | 10,757.06 | 35,485.45 | 4,631.87 |
| 1943 | 7,571.89 | 2,073.94 | 7,134.64 | 829.83 |
| 1944 | 2,967.42 | 4,692.76 | ||
| 1945 | 28,168.28 | |||
| 1946 | 23,346.35 | 10,522.75 | 30,994.64 | |
| 1947 | 31,141.26 | 48,443.78 | ||
| 1948 | 28,733.06 | 65,969.60 | ||
| 1949 | 41,741.37 | 59,377.38 | ||
| 293,279.99 | 217,935.00 | 97,716.59 | 9,620.00 |
| New lease | ||||
| Buffalo Creek | McDonald | Old and new | ||
| Year | Coal & Coke | Land Co. | J. N. White | total |
| 1941 | 174,535.49 | 2,345.00 | 286,706.30 | |
| 1942 | 125,318.46 | 74,347.17 | 314,682.45 | |
| 1943 | 121,883.55 | 122,693.35 | 27,119.90 | 289,307.10 |
| 1944 | 92,269.67 | 124,218.06 | 36,332.64 | 260,480.55 |
| 1945 | 87,822.00 | 120,326.71 | 21,142.91 | 257,459.90 |
| 1946 | 71,640.72 | 94,309.81 | 2,296.33 | 233,110.60 |
| 1947 | 117,780.67 | 72,890.39 | 270,256.10 | |
| 1948 | 128,240.05 | 25,469.39 | 248,412.10 | |
| 1949 | 74,722.00 | 175,840.75 | ||
| 994,212.61 | 636,599.88 | 86,891.78 | 2,336,255.85 |
*157 The coal mined from No. 1 mine is taken down the hill about 500 feet on a chute to a bin located above the tipple. The coal from No. 2 mine is carried on a conveyor which dumps the coal into the same chute, about 38 feet below the point where the chute begins, and the coal from No. 3 mine is taken directly to the bin from the conveyor line. The coal from the three mines is blended in the bin and then goes to a single tipple, where it is cleaned and loaded into railroad cars.
Petitioner has one superintendent who is in charge of all its operations and who has his office at the general office of petitioner located at Amherstdale, West Virginia. Petitioner owns and maintains houses situate on the main Buffalo Creek and employs a man to supervise the renting and maintenance. The houses are available to men who work at any mine, no allocation of houses being made to any particular mine. Petitioner maintains one machine shop, which is used to service all of its mechanical equipment. Mine equipment is used interchangeably in the various mines and is purchased and kept *402 in a pool for use of all mines. One maintenance crew for all of its machinery is employed. Petitioner purchases*158 the power for all three mines through one meter. Petitioner also purchases insurance on a blanket rate covering all properties. Its use and occupancy insurance is purchased on the mining operation as a single unit. Its operation is classified by the West Virginia Inspection Bureau as a single property. It has one merit rating for unemployment compensation and one workmen's compensation rate, which are based on the relationship of the company's entire payroll to the total benefits received by its employees regardless of the mine at which they may work. Petitioner has a mine foreman for each of its mines which is required by state law. It has one gang of outside laborers who work all of the mines, and its maintenance crew generally is used interchangeably at all mines, although a few maintenance men are definitely assigned to each mine.
Petitioner's coal is sold exclusively by Guyan Eagle Coal Company under the trade name of "Buffalo Chilton Coal." Only the blended product is sold.
Production records were kept by petitioner for each lease and each mine. Daily face costs, consisting only of labor costs, were kept at each of the mines solely for the information of petitioner. *159 For accounting purposes petitioner allocated income and expenses for each mine on the basis of the proportion which the tonnage produced by each mine bears to the tonnage produced by the entire operation.
For the years 1942 to 1944, inclusive, petitioner, in its income tax returns, deducted percentage depletion upon the combined coal sales, less royalties of Nos. 1 and 2 mines. In 1945, as the result of an audit made by the respondent's agent for the years 1942 and 1943, petitioner was allowed percentage depletion on the sale of coal from the No. 1 mine and cost depletion on the No. 2 mine. In an examination made by the respondent's agent in 1948 percentage depletion was allowed for 1944 on the No. 1 mine and cost depletion on the No. 2 mine.
In its return for the year 1945 petitioner claimed percentage depletion on the No. 1 mine and cost depletion on No. 2 mine. In the year 1946 petitioner claimed percentage depletion on No. 1 mine and cost depletion on Nos. 2 and 3 mines.
In its return for the year 1947 petitioner claimed percentage depletion on the combined sales from Nos. 1 and 3 mines, and cost depletion on its No. 2 mine.
In the taxable year 1948 petitioner treated all three*160 of its mines as a single property and deducted percentage depletion on the combined sales of all three mines. The respondent disallowed the deduction as claimed on the premise that the three mines are separate properties and that depletion must, therefore, be computed separately for each mine.
*403 OPINION.
The primary question presented is whether in the taxable year 1948 the petitioner had a single property or three separate properties for depletion purposes, as determined by the respondent.
The record establishes that petitioner is engaged in mining in eight tracts. Petitioner owns leaseholds in all tracts under which it operates. The McDonald lease pertains only to the seam of coal mined through No. 1 mine. The land owned by J. N. White is operated by petitioner under an oral lease. No coal was mined on the White tract in the taxable year 1948. No. 1 mine has been operated since 1929. No. 2 mine was opened in 1940 and the No. 3 mine in 1945. The three mines are situate at three different depths. All of the lands are contiguous and contained within a single boundary. The No. 1 mine when first opened produced a coal of low sulphur content but, as the mining progressed, *161 the sulphur content increased, and in order to meet the specifications of the purchasers petitioner was faced with the problem of obtaining a coal of low sulphur content to blend with the coal mined from No. 1 mine. Thereupon, No. 2 mine in the Powellton seam was opened. This seam lies approximately 38 feet below the Island Creek seam and is between 28 and 30 inches in thickness. The coal mined in the Powellton seam has a low sulphur content and when blended with the coal from No. 1 mine enabled petitioner to maintain its market. The coal produced from No. 2 mine was insufficient to meet petitioner's requirement, and No. 3 mine was opened. This mine also produces a premium coal of low sulphur content. Because of the higher cost of operation of Nos. 2 and 3 mines it would not be economically feasible to operate them as separate units. The coal from No. 2 mine is carried by conveyor to the chute running from No. 1 mine to a bin. The coal from No. 3 mine is carried by chute directly to the bin where all of the coal is blended and then goes to a single tipple where it is cleaned and loaded into cars. The petitioner's methods of operation and accounting are set forth in our Findings*162 of Fact and need not be repeated here.
The respondent contends that petitioner, in the years when it opened its Nos. 2 and 3 mines, had to make an election as to whether it would treat its properties as a single property and that such election is binding for all subsequent years. Regs. 111, sec. 29.23 (m)-1 (i). 1 Petitioner contends that the quoted regulation is not a reasonable *404 interpretation of the statute as applied to mineral properties. It argues that the only conceivable basis for the regulations requiring consistent treatment of the properties was the requirement in the statute of election between percentage and cost depletion; that such requirement was eliminated by section 145 of the Revenue Act of 1942, amending section 114(b)(4) of the Internal Revenue Code, and, hence, Congress no longer intended a taxpayer should be bound forever in his initial choice of the treatment of his properties.
*163 While under section 114(b)(4) of the Code, as amended, a taxpayer has the option in each taxable year to compute depletion either on a percentage or cost basis, whichever method results in the greater benefit, we are of the opinion that such privilege is separate and distinct from the option provided by the above regulations to consider separate properties as a single property for purposes of computing depletion. We conclude that this contention of petitioner is without merit.
Regulations 111, section 29.23 (m)-1 (i), supra, has appeared in substantially the same form in corresponding articles of Regulations 77, 86, 94, 101, and 103. Although the sections of the revenue acts relating to depletion have been repeatedly amended, Congress has never adopted a statutory definition of the term "property" for such purposes. The courts have applied the definition as contained in the aforementioned regulations as a valid interpretation of the revenue acts. Helvering v. Jewel Mining Co., 126 F.2d 1011">126 F. 2d 1011; Black Mountain Corporation, 5 T. C. 1117; and Amherst Coal Co., 11 T. C. 209. The *164 petitioner's challenge to the validity of the regulations is without merit.
Even though the petitioner had several properties it had the option under the regulations to treat such properties as a single property for depletion purposes, provided such treatment was consistently followed. While in the years 1942, 1943, and 1944, the petitioner in its tax returns claimed percentage depletion on the combined sales of coal from mines Nos. 1 and 2, it accepted, without protest, the respondent's method of computing the depletion allowance for mine No. 2 on the cost basis. In 1945 the petitioner opened its No. 3 mine. In its tax returns for the years 1945 and 1946 the petitioner voluntarily claimed depletion on the basis of separate properties. In its 1947 return the petitioner claimed cost depletion on its No. 2 mine and percentage depletion on the combined sales of Nos. 1 and 3 mines. In the taxable year 1948 the petitioner claimed percentage depletion on the combined sales of all three mines. Therefore, the record clearly establishes that the petitioner has not consistently treated its properties as a single property for depletion purposes as required by the regulations.
*405 *165 In Jewel Mining Co., Black Mountain Corporation, and Amherst Coal Co., supra, upon which the petitioner heavily relies, consistency of treatment of the properties was held to be a material factor.
On this record, we are required to sustain the respondent's determination that petitioner's depletion allowance for the taxable year 1948 is to be computed on the basis of separate properties and not as a single property.
Decision will be entered for the respondent.
Footnotes
1. Sec. 29.23 (m)-1. Depletion of Mines, Oil and Gas Wells, Other Natural Deposits, and Timber; Depreciation of Improvements. -- * * *
* * * *
(i) "The property," as used in section 114 (b) (2), (3), and (4)↩ and sections 29.23 (m)-1 to 29.23 (m)-19, inclusive, means the interest owned by the taxpayer in any mineral property. The taxpayer's interest in each separate mineral property is a separate "property"; but, where two or more mineral properties are included in a single tract or parcel of land, the taxpayer's interest in such mineral properties may be considered to be a single "property," provided such treatment is consistently followed.