OPINION.
Van Foss an, Judge:
The petitioner contends that its income for 1943 from the Maxton Slope Mine was income of a separate class within the purview of section 721 (a) (2) (C) of the Internal Revenue Code; that such income was abnormal to the extent of $150,855.90, the amount by which petitioner's 1943 gross income exceeded 125 per cent of its gross income from this class during the four preceding years; and that its net abnormal income, as defined in section 721 (a) (3), of $92,594.02 is attributable to the prior years 1940, 1941, and 1942.
The respondent contends that the income derived under each lease should have been segregated, since the two properties acquired under separate leases are separate properties. Sec. 35.721-7 of Regulations 112, as interpreted in Mim. 6082,1946-2 C. B. 95.
Section 35.721-7 of Regulations 112, relating to section 721 (a) (2) (C) of the Internal Revenue Code, provides, in so far as pertinent, as follows:
Sec. 35.721-7 The second class of potentially abnormal income specifically set forth in section 721 (a) (2) is income resulting from exploration, discovery, prospecting, research, or development of tangible property (such as mines, oil producing property, and timber tracts), extending over a period of more than 12 months.
An item of income resulting from exploration, discovery, prospecting, research, or development is all such income for the taxable year arising out of a unit of property such as an oil lease or other mineral property defined in section 29.23 (m)-l(i) of Regulations 111 .
Section 29.23 (m)-l of Regulations 111, relating to depletion, provides as follows:
(j) "The property," as used in section 114 (b) (2), (3), and (4) and sections 29.23 (m)-l 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.
A "mineral property" is defined in section 29.23 (m)-l (b) of Regulations 111 as:
the mineral deposit, the development and plant necessary for its extraction, and so much of the surface of the land only as is necessary for purposes of mineral extraction.
The respondent made a similar contention in Black Mountain Corporation. 5 T. C. 1117. In that case the taxpayer had acquired three coal properties in 1909, 1911, and 1917, respectively, and numerous smaller ones thereafter, which were all contiguous. The Commissioner contended that each separate acquisition of coal lands gave the taxpayer a separate property for the purpose of computing the deduction of percentage depletion. The taxpayer contended that "the property," as used in section 114 (b) (4), meant the economic and practical unit which the taxpayer must use and develop in order to extract a particular block of coal, i. e., whatever portion of the mineral deposit can be properly mined as a unit, also the development, plant, and surface land necessary for the extraction of that particular block of coal. The determination of the question in that case, as herein, revolved upon the meaning of the word "property." The Tax Court, after considering article 23 (m)-l (5) and (j) of Regulations 94, containing substantially the same definitions of "the property" and "mineral property" as contained in section 29.23 (m)-l (b) and (i) of Regulations 111, and various cases, including Allie M. Turbeville, 31 B. T. A. 283; affd., 84 Fed. (2d) 307; certiorari denied, 209 U. S. 581, and Vinton Petroleum Co. of Texas, 28 B. T. A. 549; affd., 71 Fed. (2d) 420; certiorari denied, 293 U. S. 601, cited by the respondent herein, stated, in part, as follows:
The regulations and decided cases support the petitioner's contention. *
We are unable to see the necessity for the Commissioner's contention that every separate acquisition of coal lands must be treated as a separate property for the purpose of computing percentage depletion. Separate acquisitions can, under proper circumstances, be combined to form one property and, likewise, under proper circumstances, one acquisition may become a part of two different properties for this purpose. We hold for the petitioner on this point.
See also Gifford-Hill & Co., 11 T. C. 802, wherein the respondent made the contention that each tract of land, or lease, constituted a "mineral property" within the meaning of section 735 (b) of the Internal Revenue Code and section 35.735-2 (f) of Regulations 112. This Court held (p. 815) that the:
part of respondent's regulation which provides that "If the mineral deposit in which a taxpayer owns an economic interest extends beyond the boundaries of a single tract or parcel of land a separate mineral property exists with respect to each tract or parcel of land into which the mineral deposit extends" does not correctly interpret the language of the statute as expressed in subsection (a) (6) of section 735, and is invalid.
The properties leased under the two leases involved herein were contiguous, the coal in each was known as the "B" seam or Lower Kittan-ning seam, running at approximately the same level below the surface, and the coal in the Philipsburg Coal & Land Co. property was extracted and removed through the developments and the slope on the Maxton Coal Co. property. In our opinion, the two properties, under the circumstances disclosed, constituted one property. Since the development extended over a period of more than 12 months, the income derived therefrom, resulting from its development, is within the classification of section 721 (a) (2) (C).
We are not bound by the interpretation of the word "property" contained in Mim. 6082, supra, issued November 5, 1946, upon which respondent relies to support his contention. Helvering v. New York Trust Co., 292 U. S. 455; Cole v. Commissioner (CCA-9), 81 Fed. (2d) 485; Ellen Ayer Wood, 29 B. T. A. 1050.
It is also contended by respondent that the income derived from the Maxton Slope Mine constituted merely one item of a class of income. He argues that the petitioner has been engaged in the mining of bituminous coal since 1932; that "operation of all the mines was the same except that the only mechanized mine was the Maxton Slope Mine": that all the bituminous coal, regardless of its source, which was mined by the petitioner was necessarily the result of exploration and development in prior years by someone; that, presumably, all these other properties were developed during a period of over 12 months; and that, therefore, "the income received therefrom is of the class de scribed in section 721 (a) (2) (C) to the same extent that income from the Maxton Slope Mine ("B" Seam) might be of that class."
Section 721 (a) (2) in each of its lettered subparagraphs describes "a separate class of income." The "separate class of income" described in subparagraph (C) is "Income resulting from exploration, discovery, prospecting, research, or development of tangible property, extending over a period of more than 12 months." The income derived by the petitioner in 1943 from the Maxton Slope Mine, in so far as it resulted from development, which development extended over a period of more than 12 months, falls clearly within that definition. Thus under the statute it is a "separate class of income" and not "one item of a class of income" as contended by the respondent.
Moreover, the other mines operated by petitioner were separate mines and in no way connected with the Maxton Slope Mine. The coal was not of the same quality. The other mines were not mechanized mines, as was the Maxton Slope Mine. All of them had been for some time in the production stage. In fact it was thought in 1940 that the coal in such mines would be exhausted in the near future.
Rochester Button Co., 7 T. C. 529, cited by respondent, does not support his position that the income derived from the Maxton Slope Mine constituted merely one item of a class of income, but rather the contention of petitioner that the income from that mine constituted income resulting from its own exploration and development of tangible property and hence a class of income within section 721 (a) (2) (C).
In that case the taxpayer was, and had been since 1926, engaged in the manufacture and sale of buttons used largely in the clothing trade. Upon its incorporation in April 1926 it acquired certain assets, including the name and business of the predecessor Rochester Button Co., organized in 1904, and the assets and business of two other corporations, organized in 1920 and 1924, respectively, all three of which had been theretofore engaged in the manufacture and sale of buttons. Research commenced by taxpayer in 1930 resulted in the development of five different types of buttons. The income received in the taxable year from four of such buttons was in excess of 125 per cent of the average base period income derived from such buttons, whereas the income received from the fifth button fell below 125 per cent of the average base period income by approximately $19,000. The taxpayer argued that the exclusion should be the total shown for the four buttons only, whereas the respondent insisted that the $19,000 should be deducted and the remaining net excess from the five buttons should measure the outer limit of permissible relief. The Tax Court held that, since all five types of buttons resulted from the research and development, the income received from all of them must be taken into consideration in computing the amount of the abnormal income under section 721 (a) (1). It is, in discussing this question, that the Tax Court stated:
Nowhere does the legislation refer to individual items within a class. The abnormal income is defined only by reference to the total derived from any class.
However, and notwithstanding that the taxpayer had a gross profit in the taxable year in excess of $1,187,000 from the manufacture and sale of buttons, the Tax Court held that the receipt of the part of such gross income, approximately $280,700, from the manufacture and sale of the five types of buttons developed from its own research, entitled the taxpayer to relief under section 721 (a) (2) (C).
It is not important that the petitioner had other income derived from the extraction and sale of coal. The determining factor is that the income from the Maxton Slope Mine constitutes income resulting from petitioner's own exploration and development of such property extending over a period of more than 12 months and that the gross income therefrom in th% taxable year was in excess of 125 per cent of the average amount of the gross income of the same class for the four previous taxable years.
The respondent in his brief states that the record does not disclose how figures contained in petitioner's computation of net abnormal income, viz., direct cost of $89,074.26 and cost depletion of $1,019.55, were arrived at by petitioner. These amounts were shown in the original claims for refund filed May 24,1945. Petitioner's accountant testified that the figures in the computation were taken from the petitioner's books and records and tax return as filed and the revenue agent's changes thereon; that if called upon to do so, he could show by reference to the books in the court room where each figure came from. After cross-examination of the witness, counsel for respondent reserved the right to recall the witness for further questioning with respect to the computation submitted, but did not do so. Under the circumstances, "the burden of going forward with any possible contradictory material reasonably fell upon respondent." Rochester Button Co., supra.
Section 35.721-3 of Regulations 112 provides, in part, ás follows:
To the extent that any items of net abnormal income in the taxable year are the result of high prices, low operating costs, or increased physical volume of sales due to increased demand for or decreased competition in the type of product sold by the taxpayer, such items shall not be attributed to other taxable years. Thus no portion of an item is to be attributed to other years if such item is of a class of income which is in excess of 125 per cent of the average income of the same class for the four previous taxable years solely because of an improvement in business conditions.
The above provisions of the regulation were approved in Soabar Co., 7 T. C. 89. The evidence shows that the 1943 average selling price per ton was greater than the 1942 average selling price per ton. Part of the increase in selling price was accounted for by an increase in the cost of production in 1943, leaving an increase to the extent of 6.45 cents in 1943 average selling price over 1942 average selling price. There being no evidence to the contrary, such increase was due to higher prices or improvement in business conditions. Under the regulations, therefore, to that extent the net abnormal income of $92,594.02 may not be attributed to prior years and must be reduced accordingly before allocation to prior years upon recomputation under Pule 50.
Reviewed by Special Division.
Decision will be entered under Bule 50.
SEC. 721. ABNORMALITIES IN INCOME IN TAXABLE PERIOD.
(a) Definitions. — For the purposes of this section—
(1) Abnormal income. — The term "abnormal income" means income of any class in-cludible in the gross income of the taxpayer for any taxable year under this subchapter if it is abnormal for the taxpayer to derive income of such class, or, if the taxpayer normally derives income of such class but the amount of such income of such class includible in the gross income of the taxable year is in excess of 125 per centum of the average amount of the gross income of the same class for the four previous taxable years, or, if the taxpayer was not in existence for four previous taxable years, the taxable years during which the taxpayer was in existence.
(2) Separate classes of income. — Each of the following subparagraphs shall be held to describe a separate class of income:
*
(C) Income resulting from exploration, discovery, prospecting, research, or development of tangible property, patents, formulae, or processes, or any combination of the foregoing, extending over a period of more than 12 months ; or
*
(3) Net abnormal income. — The term "net abnormal income" means the amount of the abnormal Income less, under regulations prescribed by the Commissioner with the approval of the Secretary, (A) 125 per centum of the average amount of the gross income of the same class determined under paragraph (1), and (B) an amount which bears the same ratio to the amount of any direct costs or expenses, deductible in determining the normal-tax net income of the taxable year, through the expenditure of which such abnormal income was in whole or in part derived as the excess of the amount of such abnormal income over 125 per centum of such average amount bears to the amount of such abnormal income.
(b) Amount Attributable to Other Years. — The amount of the net abnormal income that is attributable to any previous or future taxable year or years shall be determined under regulations prescribed by the Commissioner with the approval of the Secretary.
Mim. 6082, relating to "Development period of oil properties in conection with the application of section 721 (a) (2) (C) of the Internal Revenue Code," is, so far as material, as follows:
" Some taxpayers have claimed that for the purpose of section 721 (a) (2) (C) of the Code all of the producing property should be considered one property. For excess profits tax purposes, the Bureau, as indicated in section 35.721-7 of Regulations 112, has considered an oil lease as an example of a unit of property. While there has been some ambiguity in the use of the term 'property,' there is nothing to indicate that any unit larger than a lease was contemplated by Congress. The determination of the development period of a property is, therefore, based on the conception of a lease or individual tract as 'the property.' "