DENISON, Circuit Judge
(after stating the facts as above). The proper application of this statute, to facts more or less analogous to those now involved, has recently been considered by the Supreme Court in a line of cases of which the Sargeant Land Co. Case (january 15, 1917) 242 U. S. 503, 37 Sup. Ct. 201, 61 L. Ed. 460, is the latest, and by this court in Doyle v. Mitchell, 235 Fed. 686, 149 C. C. A. 106, and in Cleveland, etc., Ry. Co. v. United States, 242 Fed. 18, - C. C. A. -, this day decided. The facts of the present case differ considerably from any of the others, and the inquiry must be whether the principle of decision involved in these cases may control or indicate the result to he reached here. This statute measures taxation by net income. It declares the net income to be what is left after certain deductions [14]*14from gross income. Obviously, we can make no headway in applying this measure, until we define “gross income”; and, it is equally sure, we can only learn what “gross income” is by first defining “income.”
[ 1 ] It is urged that we are not concerned with the meaning of “income,” because, under this statute, income is not the thing taxed, but is the measure of taxation. We do not appreciate the force of the claimed inference. “Income” is a word capable of definition. Of course, its definition may cover a variety of specific meanings, and its context may determine which specific meaning should be accepted; but no reason has been suggested, and none occurs to us, why the mere fact that the term is used as a yardstick for measuring taxation or something else, rather than as describing the thing upon which the tax rests, should indicate that one or another specific meaning is the right one. It is well known that Congress was driven to tax the privilege (according to its value as indicated by its net income) because of the failure of the law taxing “income” directly; and — to say the least— there can be no presumption that, between the old law and the new one, Congress had changed its idea of what the word “income” meant. When reduced to final»terms, to say that “income,” in this law, does not mean, generally, the same thing as it does in income tax laws, is to say that levying upon the income of a company a tax of 1 per cent, will produce $10, while levying upon the franchise of that company a tax of 1 per cent, of its income may produce $12; and we cannot approve that proposition.
It would have been perfectly natural for Congress to decide that the tax which it was to impose upon the privilege should be measured-either by the amount of business done thereunder or by the proved value of the privilege. Either would have been a logical basis for such taxation. If the former had been the adopted theory, the tax would have been measured by total receipts, or by total sales, or by total disbursements, or by some combination of these measurements, and any thought of profits would have been utterly foreign to the scheme of measurement. The most casual inspection of the law shows that this theory was not adopted. On the contrary, all ordinary expenses and losses in the conduct of the business were expressly to be deducted, and only the remainder was to be taxed. Whether this remainder happened to be called net income or net profits was a matter of no consequence; by either name it was the same thing. It is of the essence of the law that a corporation doing a business of $100,000 and making $50,000 profit, is to be taxed 1 per cent, upon that profit, less the exemption, or $450, while a corporation doing a business of $10,000,000 and making no profit is not to be taxed at all. It is clear to a demonstration that Congress deliberately intended to tax the franchise according to its actual value to the user, as determined by the annual profit derived therefrom, without regard to its value as indicated by the amount of business done.
• So, too, it is urged that we should not be concerned with this definition, because the statute itself carefully defines what the tax upon income shall be. As has been pointed out, this idea rests upon a clear misapprehension of the statute;' the law does not purport to do this or anything like this. The statutory computation rests upon the assump[15]*15tion that we already know what income is as distinguished from other matters; otherwise, it would be impossible to state that gross income which is the foundation of that statutory computation.
[2] We therefore are confirmed in our opening statement that, to rightly interpret this law, we must interpret and define “income.” It must, by certain attributes, be distinguished out of the mass, or from other things with which it is compared. Distinctive definitions involve contrast. Since the law specifies “income,” and not “sales,” or “receipts,” or “capital and surplus,” or any other standard of measurement which might have been named, what should be set over against “income” to bring ont this distinctive character? In every case in the Supreme Court and in the lower courts, including and since the Strat-ton’s Independence Case, it has been assumed that the receipts and accumulations of a business corporation are of two classes: One, those which constituted its gross income; and the other, those which represented the sale or conversion of its capital — and the controversy has always been as to the respective definitions of those two classes. We accept this as the rightful criterion, not only because it has been universally accepted, but because we think it must be right. The only alternative is to say that all receipts from the conduct of a business according to its intended plan are income. To say this is to destroy the effect of carefully selected words. It would involve the conclusion that, in case of a company organized to buy land and subdivide and sell lots, all receipts from the sales of lots were “gross income,” even though the lots were all sold and the invested capital not realized, and that, since only disbursements made during the year can be deducted, the capital so invested in one year and realized the next year would be taxable net income. So far as words are concerned, it is impossible to say that the law did not intend to go to that very extent; but to say so would be such a departure from the administrative practice and rules which have prevailed from, the beginning, and from what we think the law has always been assumed to mean that we are unwilling to take so radical a step.
[3] So we come to what we deem the decisive question, viz.:
“So far as the selling price of the ore in 1910 represented its actual value to the company in the ground on January 1, 1909; was it income or was it the sale price of capital assets?”
In its general aspect, this question is the same as that discussed in Doyle v. Mitchell. We may here refer to that opinion, without repeating it at length, for the matters there stated. Unless that case was wrongly decided, the question must be whether this case is to be distinguished in principle. Certainly there is no great difference in the inherent character of the assets transferred and sold. The ore below the surface and the trees above were interests in realty until they were severed. Upon severance and preliminary treatment, each became the raw material for further process of manufacture. The extent and quality of each before severance were determined by expert appraisal. Each, before severance, had a known and realizable market value.
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DENISON, Circuit Judge
(after stating the facts as above). The proper application of this statute, to facts more or less analogous to those now involved, has recently been considered by the Supreme Court in a line of cases of which the Sargeant Land Co. Case (january 15, 1917) 242 U. S. 503, 37 Sup. Ct. 201, 61 L. Ed. 460, is the latest, and by this court in Doyle v. Mitchell, 235 Fed. 686, 149 C. C. A. 106, and in Cleveland, etc., Ry. Co. v. United States, 242 Fed. 18, - C. C. A. -, this day decided. The facts of the present case differ considerably from any of the others, and the inquiry must be whether the principle of decision involved in these cases may control or indicate the result to he reached here. This statute measures taxation by net income. It declares the net income to be what is left after certain deductions [14]*14from gross income. Obviously, we can make no headway in applying this measure, until we define “gross income”; and, it is equally sure, we can only learn what “gross income” is by first defining “income.”
[ 1 ] It is urged that we are not concerned with the meaning of “income,” because, under this statute, income is not the thing taxed, but is the measure of taxation. We do not appreciate the force of the claimed inference. “Income” is a word capable of definition. Of course, its definition may cover a variety of specific meanings, and its context may determine which specific meaning should be accepted; but no reason has been suggested, and none occurs to us, why the mere fact that the term is used as a yardstick for measuring taxation or something else, rather than as describing the thing upon which the tax rests, should indicate that one or another specific meaning is the right one. It is well known that Congress was driven to tax the privilege (according to its value as indicated by its net income) because of the failure of the law taxing “income” directly; and — to say the least— there can be no presumption that, between the old law and the new one, Congress had changed its idea of what the word “income” meant. When reduced to final»terms, to say that “income,” in this law, does not mean, generally, the same thing as it does in income tax laws, is to say that levying upon the income of a company a tax of 1 per cent, will produce $10, while levying upon the franchise of that company a tax of 1 per cent, of its income may produce $12; and we cannot approve that proposition.
It would have been perfectly natural for Congress to decide that the tax which it was to impose upon the privilege should be measured-either by the amount of business done thereunder or by the proved value of the privilege. Either would have been a logical basis for such taxation. If the former had been the adopted theory, the tax would have been measured by total receipts, or by total sales, or by total disbursements, or by some combination of these measurements, and any thought of profits would have been utterly foreign to the scheme of measurement. The most casual inspection of the law shows that this theory was not adopted. On the contrary, all ordinary expenses and losses in the conduct of the business were expressly to be deducted, and only the remainder was to be taxed. Whether this remainder happened to be called net income or net profits was a matter of no consequence; by either name it was the same thing. It is of the essence of the law that a corporation doing a business of $100,000 and making $50,000 profit, is to be taxed 1 per cent, upon that profit, less the exemption, or $450, while a corporation doing a business of $10,000,000 and making no profit is not to be taxed at all. It is clear to a demonstration that Congress deliberately intended to tax the franchise according to its actual value to the user, as determined by the annual profit derived therefrom, without regard to its value as indicated by the amount of business done.
• So, too, it is urged that we should not be concerned with this definition, because the statute itself carefully defines what the tax upon income shall be. As has been pointed out, this idea rests upon a clear misapprehension of the statute;' the law does not purport to do this or anything like this. The statutory computation rests upon the assump[15]*15tion that we already know what income is as distinguished from other matters; otherwise, it would be impossible to state that gross income which is the foundation of that statutory computation.
[2] We therefore are confirmed in our opening statement that, to rightly interpret this law, we must interpret and define “income.” It must, by certain attributes, be distinguished out of the mass, or from other things with which it is compared. Distinctive definitions involve contrast. Since the law specifies “income,” and not “sales,” or “receipts,” or “capital and surplus,” or any other standard of measurement which might have been named, what should be set over against “income” to bring ont this distinctive character? In every case in the Supreme Court and in the lower courts, including and since the Strat-ton’s Independence Case, it has been assumed that the receipts and accumulations of a business corporation are of two classes: One, those which constituted its gross income; and the other, those which represented the sale or conversion of its capital — and the controversy has always been as to the respective definitions of those two classes. We accept this as the rightful criterion, not only because it has been universally accepted, but because we think it must be right. The only alternative is to say that all receipts from the conduct of a business according to its intended plan are income. To say this is to destroy the effect of carefully selected words. It would involve the conclusion that, in case of a company organized to buy land and subdivide and sell lots, all receipts from the sales of lots were “gross income,” even though the lots were all sold and the invested capital not realized, and that, since only disbursements made during the year can be deducted, the capital so invested in one year and realized the next year would be taxable net income. So far as words are concerned, it is impossible to say that the law did not intend to go to that very extent; but to say so would be such a departure from the administrative practice and rules which have prevailed from, the beginning, and from what we think the law has always been assumed to mean that we are unwilling to take so radical a step.
[3] So we come to what we deem the decisive question, viz.:
“So far as the selling price of the ore in 1910 represented its actual value to the company in the ground on January 1, 1909; was it income or was it the sale price of capital assets?”
In its general aspect, this question is the same as that discussed in Doyle v. Mitchell. We may here refer to that opinion, without repeating it at length, for the matters there stated. Unless that case was wrongly decided, the question must be whether this case is to be distinguished in principle. Certainly there is no great difference in the inherent character of the assets transferred and sold. The ore below the surface and the trees above were interests in realty until they were severed. Upon severance and preliminary treatment, each became the raw material for further process of manufacture. The extent and quality of each before severance were determined by expert appraisal. Each, before severance, had a known and realizable market value. .Each had been purchased in its unsevered form by the company taxed, and each, while still in that form, had increased in market value after [16]*16the purchase and before the law was passed, and had then further increased before severance, and in each case the market value when the iaw went into effect had been ascertained and stated accurately and in good faith. What are the distinctions urged ?
The first is that the company was a mining company, and not a manufacturing company. The law makes no such distinction, and there can be no magic in the word “mining” as part of a corporate name. Where a mining business is of the character described in the Stratton’s Independence Case, it is clear enough that there is great, if not insuperable, difficulty in ascertaining the value of the ore in the ground at a fixed date. The whole subject may well be thought too speculative to justify attributing to “depletion of capital” any ore which had been removed. The annual operations of such a mine are expected to and often do develop new ore bodies of even greater value than those removed. Not only are the value and the extent of the ore in place unknown, but the cost of removal is highly uncertain, since it will depend upon unknown and constantly changing conditions. The same considerations apply more or less perfectly to the gas and oil operations and to the coal mining which have been considered in decided cases. These tilings are so typical of mining operations, as a class, that perhaps we should apply to everything belonging in that general class a general rule which will prevent an appraisal of the ore in place as a capital asset at the beginning of the period. The present case does not belong in that class. The parties have stipulated to the extent and value of the ore in the ground on January 1, 1909. Nothing could be more definite or certain. As was said in the statement of facts, this was a quarrying operation. It involved no elements of uncertainty, except those future contingencies which affect the value of all raw materials. In spite of the name of the company, the business more nearly approximated manufacturing than it did mining, as the latter term is commonly understood.
[4] It is next said that the company was not the owner, but only a lessee — indeed, the internal revenue department made this the controlling fact, since, by its rules and regulations, it permitted mining companies who owned the fee of the lands in which the ore was located to treat as capital assets the value of their ore in the ground at the beginning of the year, if they were able to ascertain that value, but the de-patrment refused to extend this ruling to cases where the mining company was only a lessee. (Regulation 75, supra; but see, also, regulation 91, supra.) It is difficult to appreciate the supposed distinction. This company was removing 500,000 tons per year. The deposit was 6,000,000 tons. There were 30 years remaining of the period permitted for removal. The lessee’s interest could be and had been bought and sold, and it had been salable for the stipulated price at the beginning of the taxing period. Counsel for the government has not pointed out the reason for this distinction made by the department. We suppose it must lie in the thought that, since the lease may be forfeited or given up before the .ore is all removed, the annual operations must be treated as an annual purchase from the lessor, at the royalty price, of the amount each year removed, and so all the value realized above the royalty must be income for the year. We doubt the force [17]*17of this construction. It comes to saying that what would otherwise have been capital at the beginning of the year must not be so treated, because the company might have elected or been compelled to forfeit to one who had an underlying claim, or to saying that the owner of mortgaged mining property could not consider the existing value of his equity as his capital, because, if conditions changed, he might lose it by foreclosure. We think that the lessee of such property and under such a lease is as much entitled as is the owner of the fee to treat the value of his interest in the ore in the ground at the beginning of the tax period as his capital — indeed, the lessee’s right to do so, is, in some respects, the stronger of the two, as hereafter pointed out. Such a lease, as applied to this situation, is in every substantial way pro tanto a purchase.
Finally, it is urged that this case is controlled by the decision of the Supreme Court in the Sargeant Land Company Case. The mining leases involved in that case and in this one seem to be identical in substance, and it is now said with great plausibility that the ore in the ground and affected by such a lease belongs partly to the lessor and partly to the lessee, and that, if the interest of the lessor is not capital assets, no more is the interest of the lessee, and that, if the receipts of the former are income, so must those of the latter be. We are convinced that the analogy between the two cases is superficial and not substantial. In that case the Supreme Court had to determine whether the royalties received by the lessor were income or were a depletion of capital. Many considerations led to the conclusion that they must be treated as income. The contract was a “lease,” the receipts were “royalties,” and royalties, being rentals, are inherently income, and have been commonly so considered. All these things seem to have affected the conclusion of the court, but, after all, the dominating thought appears to be that, when land is devoted to mining, it is put to only one of those productive uses of which it is capable, and that the product of the use should be called income. The land itself is the chief thing; after the mining is finished, the land remains suitable for other uses; and the fact — if it is a fact — that the minerals are the greater part of its value cannot operate to make the incidental overshadow the principal. These reasons do not apply at all to the case of the lessee whose existing interest, at the beginning of the taxing period, over and above the royalty which he must pay, amounted to $3,000,000; his entire interest was each year, as far as he went, consumed and exhausted for.ever; he did not have remaining the principal thing, the land, which he. could put to some other use; the receipt in 1910 of his January 1, 1909, interest in the ore was not the offshoot and income of his property; it was the transformation and eating up of the very property, and of the whole of it. We therefore think that applying the principle of the Sargeant Case results in holding that these receipts were from the sale of capital assets and not from income.
It results in our opinion that, as exemplified in its 1910 operations, the Biwabik’s 40 cents a ton profit was income, upon which it was properly taxed, and which tax it has paid; but that its 4 cents per ton “capitalized value” and its 45 cents per ton “increment value,” existing January 1, 1909, but realized during 1910, were not income, and that [18]*18these items were rightly omitted from its report. We see no distinction between that value of its interest in the ore as existing January 1, 1909, which was based upon the amount it had actually paid therefor, and that value of its other interest in the same ore at the same time, which had resulted from the appreciation of its market value before the taxing law went into effect.
The judgment below must be reversed. Ordinarily, a new trial would be awarded; but the record seems to indicate that there is permanent agreement upon all material facts, and, if so, a new trial would be unnecessary. Unless, before the mandate goes down, counsel for the government indicates a desire for a new trial, the order will be that the judgment be reversed, and the court below directed to dismiss the petition. This disposition of the matter will then be of such final character that the case will be ripe for review by certiorari, if the Supreme Court should think review advisable.