Decision will be entered for the respondent.
The petitioner, since its incorporation in 1907, has attempted to lease its land for mineral extraction. In 1917 it leased its property for oil development; in 1925 it tried to interest persons in developing its salt deposits; in 1932 it leased part of its property for limestone extraction; in 1937 it leased for oil development; and in 1941 it again leased for oil development. Held, petitioner did not change the character of its business during or immediately prior to the base period nor was it committed to a course of action consummated subsequent thereto which resulted in any change in its capacity for production or operation, so as to qualify for relief from excess profits tax under section 722 (b) (4), I. R. C. 1939. Held, further, petitioner has not shown "any other factor" qualifying it for relief under section 722 (b) (5).
*803 This proceeding involves petitioner's claims for refund of excess profits tax under section 722 of the Internal Revenue Code of 1939, for the years 1944 and 1945, in the amounts of $ 4,906.95 and $ 6,634.97, *261 respectively. Petitioner sought relief under the provisions of section 722 (b) (4) and (5) of the Internal Revenue Code of 1939. Respondent disallowed the claims on the ground that petitioner had not established its right to relief under section 722.
*804 FINDINGS OF FACT.
The stipulated facts with attached exhibits are found as facts and incorporated herein by this reference. The petitioner, LeDanois Land & Stone Company, is a corporation organized under the laws of the State of Louisiana by articles of incorporation dated August 5, 1907. Petitioner filed its income and excess profits tax returns for the years in issue with the collector of internal revenue for the district of Louisiana. Such returns were filed on a cash receipts and disbursements method. The petitioner was formed for the pupose of leasing land for mineral operations.
Immediately after its organization the petitioner acquired some 528 acres of land in the Parish of Evangeline, State of Louisiana. The petitioner had no income until 1917. In December 1917, the petitioner executed an oil and mineral lease on its land in favor of H. M. Journee, which was assigned by H. M. Journee to F. V. B. Price. In pursuance of this *262 lease, oil was produced on the land in small quantities and royalties were received in the following years in the indicated amounts resulting in net profits to the petitioner in the sums shown in the following table:
| Gross | Net profit for | |
| Year | royalties | year |
| 1917 | $ 388.52 | $ 116.46 |
| 1918 | 1,098.67 | 826.00 |
| 1919 | 563.57 | 319.99 |
| 1920 | 185.35 | 1 |
Oil production thereafter ceased and the petitioner had no income until 1933.
In 1925 an effort was made to develop the salt deposit known to exist on the property owned by the petitioner, but owing to disadvantages in freight rates, it was not found possible to interest any individual or corporation of sufficient experience and financial strength to undertake such salt developments.
On September 14, 1932, the petitioner entered into a lease agreement with Warren G. Gray of Shreveport, Louisiana, for the quarrying of lime rock from its land. Two hundred and eighty acres of the petitioner's property were leased under this agreement. The agreement expressly provided that the lease did not confer upon the lessee any rights in and to the oil, gas, salt, or other minerals in and under the land and *263 further provided that the petitioner could lease all or any part of the land for production or development of oil, gas, salt, or minerals other than lime rock. The lease further provided that all quarrying should be confined to contiguous tracts not exceeding 40 acres, and that only one such tract should be quarried at one time. *805 After the lime rock supply was exhausted from such tract the lessee might then move the quarry operations to another tract.
This lease was subsequently assigned by Gray to LouisianaLime Products Corporation on November 21, 1932; by the LouisianaLime Products Corporation to J. L. Keenan on December 3, 1936; and by J. L. Keenan to Rock & Lime Co., Inc. From the operations carried on by Warren G. Gray and his successive assignees, the petitioner received royalties as follows:
| 1933 | $ 18.95 |
| 1934 | 1,645.66 |
| 1935 | 2,550.53 |
| 1936 | 7,039.87 |
| 1937 | 4,930.82 |
| 1938 | 7,852.57 |
All royalties from the production of lime rock ceased in 1938 since the impurities in the limestone precluded its further use, and the plant for quarrying and processing such rock was dismantled and demolished. Only one 40-acre tract was used in the quarry operations. Since that year the petitioner has received no *264 revenue from quarrying operations and was not interested in leasing the land again for limestone extraction.
In 1937 the petitioner executed an oil and mineral lease with Frank B. Thomas covering the lands above mentioned. This lease was dated June 11, 1937, and granted to Thomas the exclusive rights to drill for and produce oil, distillate, and gas from approximately 540 acres of land owned by the petitioner. The lease expressly reserved to petitioner rights in all the minerals other than gas, oil, and distillate. This lease was subsequently assigned to Schlicher Production Company. In pursuance thereof 2 nonproducing wells were drilled upon the property to approximate depths of 3,105 and 5,916 feet, respectively. The second well was abandoned during January 1938 as a dry hole and thereafter in 1938 the Schlicher Production Company surrendered its lease.
After the abandonment of the quarrying operations and the surrender of the oil lease held by Schlicher Production Company in the year 1938 the officers of petitioner made several efforts to lease the land for oil and gas development. Telegrams were exchanged between petitioner and the Humble Oil & Refining Company in September *265 1938, whereby Humble was advised petitioner's lands were not under oil lease and permission was granted Humble to conduct a reflection seismograph survey.
In October 1938, in response to an inquiry by John H. Richerson of Echo, Louisiana, petitioner advised that its lands were not then under lease and if given more detail as to what he had in mind it would be glad to give it prompt consideration.
*806 In February 1939, officers of petitioner had personal interviews and correspondence with Jack Browning of Athens, Texas, setting forth tentative terms upon which the company would be willing to grant him an oil lease. No agreement was reached and petitioner canceled its offer on March 15, 1939.
During the period November 6, 1939, to January 12, 1940, petitioner engaged in correspondence with the Stanolind Oil & Gas Company of Lake Charles, Louisiana, wherein it attempted to interest Stanolind in entering into a lease of petitioner's property which would commit Stanolind to drill a 9,200-foot deep test well. By letters dated December 4 and 11, 1939, Stanolind advised petitioner it was not particularly interested in petitioner's property because most of it appeared to have little possibility *266 of producing and a deep test well thereon would only inure to the benefit of adjoining lands which were not under lease to Stanolind. By letter dated January 12, 1940, Stanolind's representative advised petitioner's president that, since it was not particularly interested in petitioner's property, he was unwilling to make a special trip to New Orleans to discuss the matter further with him.
On June 6, 1941, an oil, gas, and mineral lease, covering petitioner's property, was entered into between petitioner and the Texas Company, wherein the lessee agreed to drill to the horizon in which a producing well had recently been brought in by another company in a section of the same township in which petitioner's lands are located, or to a depth of 8,750 feet, unless oil, gas, distillate, or other liquid hydrocarbons were found in paying quantities at a lesser depth. Petitioner reserved the rights to all minerals, other than oil, gas, distillate, and other liquid hydrocarbons. Pursuant to this lease $ 15,000 was paid to the petitioner during 1941 as advance royalties and in addition thereto the lessee agreed to make an oil payment of $ 5,000 over and above the specified one-sixth royalty on *267 production.
The Texas Company commenced the first well on September 18, 1941, which was completed as a dry hole on November 11, 1941. Two producing wells were drilled by the Texas Company between February 22, 1942, and November 12, 1942, from which royalties and oil payments were received in the year 1942 of $ 4,644.06. These 2 wells were drilled to a depth of approximately 9,000 feet. Other producing wells were drilled on the petitioner's property in the years 1943 and 1944. During the years 1943-1945, royalties from oil and oil payments were received by the petitioner as follows:
| 1943 | $ 26,508.24 |
| 1944 | 36,381.88 |
| 1945 | 37,768.82 |
The excess profits tax credits used on its returns and allowed by the Commissioner for the years 1944 and 1945 were determined by the use *807 of the income method. The excess profits net income for the base period was as follows:
| 1936 | $ 6,606.22 |
| 1937 | 4,142.94 |
| 1938 | 7,292.98 |
| 1939 (loss) | (445.16) |
| Total | $ 17,596.98 |
| General average (one-fourth) | 4,399.24 |
Average base period net income used by petitioner and allowed by the Commissioner was determined as follows:
| Total net income for the base period | $ 17,596.98 |
| Increase in net income by the use of section 713 (e), Internal | |
| Revenue Code | 4,955.69 |
| Total | $ 22,552.67 |
| Average (one-fourth) | 5,638.16 |
Petitioner *268 paid excess profits taxes for 1944 and 1945, as follows:
| 1944 | |
| Oct. 10, 1945 | $ 1,343.40 |
| Nov. 23, 1945 | 2,096.43 |
| Dec. 18, 1945 | 1,467.12 |
| Total | $ 4,906.95 |
| 1945 | |
| Mar. 21, 1946 | $ 1,658.75 |
| June 18, 1946 | 1,326.99 |
| Sept. 17, 1946 | 1,492.88 |
| Dec. 16, 1946 | 1,492.85 |
| June 28, 1948 | 43.02 |
| Total | $ 6,014.49 |
Applications for relief under section 722 of the Internal Revenue Code of 1939 for the years 1944 and 1945 were duly filed by the petitioner on Form 991.
Petitioner did not change the character of its business either during or immediately prior to the base period, and was not committed, prior to January 1, 1940, to a course of action consummated subsequent thereto which resulted in any change in the capacity for production or operation of the business.
OPINION.
Petitioner bases its claims for relief primarily under section 722 (b) (4), its contention being that during the base period it changed the character of its business in that it was no longer leasing its property for production of limestone but had leased it for the *808 production of oil and gas and that this constituted a change in its capacity for production and operation of the business. It further contends that prior to January 1, 1940, it had committed itself to a course *269 of action, consummated subsequent thereto, which resulted in a change in the capacity for production or operation of the business.
Section 722 (b) (4) provides that the excess profits tax computed without the benefit of section 722, shall be considered excessive and discriminatory, in the case of a taxpayer entitled to use the excess profits credit based on income, if its average base period net income is an inadequate standard of normal earnings because the taxpayer, during the base period, changed the character of its business and the average base period net income does not reflect the normal operation for the entire base period of the business. It defines "change in the character of the business" to include a change in the operation of the business, a difference in the products or services furnished, and a difference in the capacity for production or operation. It further provides that "any change in the capacity for production or operation of the business consummated during any taxable year ending after December 31, 1939, as a result of a course of action to which the taxpayer was committed prior to January 1, 1940, * * * shall be deemed to be a change on December 31, 1939, in *270 the character of the business." It is conceded that petitioner is entitled to use the excess profits credit based on income.
In order, however, for a taxpayer to be entitled to relief under section 722 (b) (4) because of a change in operation, a difference in products, or a difference in capacity for production or operation, it must demonstrate that the nature of the operations is essentially different after the change from the nature of the operations prior to the change, that the change is substantial, of a permanent or lasting nature, and that there is a higher level of earnings which is directly attributable to the change. Bulletin on Section 722, part V, subpart I (C); Regs. 112, sec. 35.722-3 (d); Bergstrom Paper Co., 26 T. C. 1167; Charis Corporation, 22 T. C. 191; Central Produce Co., 18 T. C. 267; Farmers Creamery Co. of Fredericksburg, Va., 18 T. C. 241; National Grinding Wheel Co., 8 T. C. 1278. As stated in Avey Drilling Machine Co., 16 T. C. 1281, 1298, "A change in character, within the intent of the statute, must be a substantial departure from the preexisting nature of the business."
The difficulty with petitioner's contention is that it does not meet any of the tests *271 mentioned above. Ever since its organization in 1907, petitioner has attempted to lease its lands for the extraction of minerals. In 1917 it leased its property for oil development; in 1925 it tried to interest others in the development of its salt deposits; in 1932, it leased part of its property for limestone extractions; in 1937 it again leased its property for oil development; and in 1941 it leased it *809 for oil development. Petitioner has at no time attempted to develop the mineral resources of its property itself. Thus, it appears that from the time it acquired the lands in 1907, the character of petitioner's business has been that of exploiting all the mineral resources of such property, including limestone, salt, and other minerals, as well as oil, gas, and distillates, by leasing the property to others. In each of the leases executed by it, petitioner consistently reserved the right to lease the property for the development of mineral resources other than those specifically covered by the particular lease.
In view of its previous activities, it is clear that when petitioner leased its property to Frank B. Thomas in 1937 for the exclusive right to develop oil, gas, and distillate, *272 it did not effect any substantial change in the preexisting nature of its business. Moreover, no increase in its normal level of earnings resulted from such lease or the drilling of the 2 unproductive wells in 1937 and 1938. In fact petitioner received no income whatever from this lease and the drilling thereunder. If anything, the drilling of the unproductive wells had an adverse effect on petitioner's business by casting a cloud upon the prospects of finding oil on its lands.
Nor did petitioner's attempts, during the base period, to induce other parties to drill a deep test well on its lands constitute a commitment within the meaning of section 722 (b) (4). Mere discussions, inquiries, and negotiations are not sufficient to establish a commitment to increase the capacity of the business. Central Produce Co., supra; Continental Folding Paper Box Co., 17 T. C. 984. Something more than hope, desire, and expectation are required to constitute a commitment under the statute. Robinson Terminal Warehouse Corporation, 19 T.C. 1185">19 T. C. 1185.
During the base period, subsequent to the cancellation of the 1937 lease, petitioner made no change of position toward effecting an oil and gas lease on *273 its lands. It merely tried to induce others to assume such risks. As of December 31, 1939, it had no agreement with, or offer by, anyone else to drill for oil or gas, nor was it obligated to anyone else to cause such drilling to be done. Not until 1941, some 18 months after the end of the base period and after a deep well had been brought in on nearby lands, was petitioner able again to lease its property for oil and gas development.
Accordingly we hold that petitioner did not change the character of its business during or immediately prior to the base period, nor was it committed, prior to January 1, 1940, to a course of action consummated subsequent thereto which resulted in any change in its capacity for production or operation, so as to qualify for relief from excess profits tax under section 722 (b) (4) of the Internal Revenue Code of 1939.
*810 Next to be considered is petitioner's contention that it is qualified for relief under section 722 (b) (5), the provisions of which permit qualification on the existence "of any other factor affecting the taxpayer's business," which results in an inadequate standard of base period earnings, and in the absence of inconsistency with the principles *274 underlying subsection (b) and with the conditions and limitations enumerated in that subsection. In Clermont Groves, Inc., 1616">17 T. C. 1616, it was held that the phrase "any other factor" in subparagraph (5) means a factor other than those enumerated in subparagraphs (1) to (4). See also Bulletin on Section 722, part VI; Regs. 112, sec. 35.722-3 (e). In the instant case, petitioner's claim for relief under section 722 (b) (5) is not based on "any other factor" than those to which subsection (b) (4) is directed and must therefore be denied. Crane Co. of Minnesota, 25 T.C. 727">25 T. C. 727, 758; Pratt & Letchworth Co., 21 T.C. 999">21 T. C. 999, 1007; Granite Construction Co., 19 T.C. 163">19 T. C. 163, 173.
Finally, while our conclusion that petitioner has not shown it qualifies for relief under section 722 (b) makes unnecessary any consideration as to the computation of a constructive average base period net income, it may be pointed out that the record herein contains no facts upon the basis of which a constructive average base period net income could be determined. Hence petitioner has not established that the average base period net income allowed by the respondent under the provisions of section 713 (e) is an inadequate *275 standard of normal earnings.
Reviewed by the Special Division.
Decision will be entered for the respondent.
Footnotes
1. The taxes for the year 1920 exceeded the royalties and there was no net income.↩