FINDINGS OF FACT. Most of the facts are stipulated and are incorporated herein by reference as stipulated. Petitioner is a New Jersey corporation, having its principal office at 100 Park Avenue, New York, New York. It filed its 1953 income tax return with the district director of internal revenue, Upper Manhattan, New York. 1. Capital gain.-Since 1901, petitioner has been engaged in manufacturing containers for sale to canners. An indispensable part of this business is the availability of container-closing machines, related and auxiliary equipment (hereinafter collectively called closing machines), which affix tops to containers automatically and at high speeds. The closing machine is similar to a machine used by petitioner to put the bottoms on its containers, except that the closing machine seals filled containers. Due to the precise requirements of this process, these closing machines are elaborate and costly, necessitating skilled maintenance and periodic overhaul. Petitioner, the largest and one of the few manufacturers of closing machines, chose to lease them solely to its container customers under contracts providing for the purchase of the customer's container requirements, or some percentage thereof, from petitioner and at nominal rentals in order to promote the sale of its containers. The terms of the leases were from 1 to 5 years and the leases were customarily renewed. These closing machines were not offered for sale. They were treated as part of petitioner's depreciable assets upon which depreciation was regularly taken. Petitioner manufactured only enough closing machines to meet its current needs. The marketing of many different kinds of containers was made possible by petitioner's ability to furnish appropriate closing machines. By 1951 petitioner was marketing more than 1,000 types of containers, for all of which it furnished closing equipment. Petitioner's gross sales of containers, less returns and allowances, for the years 1951 through 1953, were as follows: 1951 $565, 272, 321.06 614, 410, 455. 12 During this period approximately 95 percent of petitioner's container sales were made to users of its closing equipment. On August 27, 1946, the United States commenced an action against petitioner in the United States District Court for the Northern District of California (hereinafter called the District Court). The Government alleged violations of applicable antitrust laws and challenged petitioner's contracts with its customers covering the sale to them of their container requirements and petitioner's system of leasing its closing equipment. Among other things, the Government asked in the alternative for an order of "Divestiture of the closing machine part of defendant's business, that is, the manufacture, ownership and leasing of closing machines by defendant," or for an order "directing defendant to sell or lease its closing machines to any applicant on non-discriminatory terms and conditions and to provide service for said machines to all lessees on the same terms and conditions." The trial was completed March 31, 1949, and on November 10, 1949, the District Court filed its opinion (reported at 87 F. Supp. 18) finding that petitioner violated sections 1 and 2 of the Sherman Antitrust Act and section 3 of the Clayton Act. Extensive hearings pertaining to the decree to be entered continued until June 22, 1950. On June 22, 1950, the District Court entered its decree (hereinafter sometimes called the judgment) which was to become effective on January 1, 1951, and regulated in detail petitioner's closing machine operations. Pertinent provisions of the judgment are substantially as follows: Policy III. MACHINES AND EQUIPMENT 1. It is the express purpose of this Judgment to assure to those interested in owning container closing machines * * *the opportunity to purchase such machines *** owned *** by [petitioner] as of January 1, 1951; and, with respect to *** closing machines *** manufactured or acquired by [petitioner] after January 1, 1951, for [petitioner] to adopt a policy of affording to all those desiring such machines *** every available economic incentive to purchase such machines *** [Petitioner] is * * * directed to utilize its maximum efforts to promote, implement and achieve the purposes as set forth herein; and to afford * to existing lessees of closing machines * ** owned by it on January 1, 1951, complete information as to the methods of purchasing such machines * as compared with the continued leasing of them. Closing Machines-Sale 2. [Petitioner] is *** directed to sell, for a period of ten (10) years to any applicant * * * any *** closing machine which it owns on the effective date of this provision, or thereafter manufactures or acquires. 2a. In order to effectuate and implement the provisions ***, the Court does hereby appoint a master who shall be empowered to take all necessary steps *** to evaluate [petitioner's] efforts under the foregoing provisions *. On or before January 1, 1952 the master *** shall file with the Court and with the Attorney General a full and complete survey and report * Closing Machines-Presently Owned-Sales Price 5. The maximum sales price for any *** closing machine owned by [petitioner] on or prior to January 1, 1951, shall be computed in the following manner: A. The base price shall be ten (10) times the rental *** in effect for the calendar year 1950. In the event that the weighted average depreciated cost of ** closing machine, on the effective date of this Judgment, is higher than the base price such weighted average depreciated cost shall be taken as the base price; but in no instance shall this latter base price be higher than the current factory cost of that * * * closing machine on the effective date of this Judgment. C. If any purchaser of any such closing machine desires to purchase it in its existing condition, there shall be deducted from the applicable base price four (4) per cent * * for each complete calendar year of use since the date the * * closing machine was last reconditioned * * * * D. In the event that any purchaser *** desires to purchase any closing machine *** [where-is, as-is] a further deduction of two (2) per cent shall be allowed from the sales price. E. *** Every lease of any closing machine owned by [petitioner] on January 1, 1951, shall contain * an option to purchase the leased machine * * * Notice of Price and Location 7. Within one hundred twenty (120) days * [petitioner] shall send written notice in a form approved by the Attorney General *** to each person with whom [petitioner] then has a * * * lease for any closing machine * * * informing said person of his right to purchase *** said machines * * * and quoting therein the computed sales price * * Credit Terms in Sale 9. The [petitioner] is * * directed to provide *** credit terms for ten (10) years Compensatory Rentals to On and ** rentals 10. The [petitioner] is * directed for * * three (3) years establish *** a rental for each type * * * of * * * closing machine which shall be not less than reasonable under circumstances * * after January 1, 1954, [petitioner] is *** directed to establish * for leased * * * closing machines *** at compensatory rates which shall take account of *** not less than * ** [petitioner's expenses and] a reasonable return on the current investment *** and the cost of * * * [servicing]. Leasing of Machines 11. [Petitioner] is *** directed, for a period of five (5) years lease * to any applicant (other than a container manufacturer) to any closing machine * * *. [Petitioner] shall not be required to manufacture for compulsory leasing hereunder any additional *** closing machines * * * requiring an aggregate expenditure of more than $2,000,000 in any calendar year Priorities for Purchase and Lease of Machines 16. Container closing machines *** are to be made available in the following order of priority to be established by January 1, 1951. A. The lessee of any *** closing machine * * * on lease by the [petitioner] shall have an absolute priority for the purchase of the leased machine C. [Petitioner] shall be permitted to supply its own requirements of any equipment necessary for use in its own manufacturing operations 647066-63-14 D. Priorities thereafter shall be afforded to supply applicants for purchase or prospective lessees of each ✦✦✦ model of * * * closing machine *** in the chronological order in which their written firm orders are received, and such application for purchase or for lease shall be considered together Service Schools 18. [Petitioner] is * * directed to afford to the employees of any applicant the opportunity to attend, without payment of tuition, the service training schools which [petitioner] provides for the employees of its container customers Reports 19. The [petitioner] is *** directed for a period of five (5) years from January 1, 1951 to file with the Attorney General a semi-annual statement setting forth the number of *** closing machines *** sold in the particular six months period, the number of such machines *** leased to non-customers during the same period, and the sales prices of each unit of closing machines✶ ✶✶ sold and any changes in rentals occurring during said preceding six months period. * * XI. RETENTION OF JURISDICTION AND COSTS Jurisdiction of this cause is retained for the purpose of enabling any of the parties to this Judgment to apply * * * for the amendment or modification of any of the provisions thereof, or the enforcement of compliance therewith and for the punishment of violations thereof. In conducting the closing machine phase of its business, petitioner intended to and did comply with the requirements of the judgment including selling to those wishing to buy at the set prices and subject to the required warranties, priorities, and credit terms, inserting an option to purchase in all leases, manufacturing and selling new machines, making it known that its closing machines were subject to sale, and providing schools to train the purchasers' employees. The judgment pricing formula, although suggested by petitioner, represented the culmination of negotiations between petitioner and the Department of Justice. As required by section VII of the judgment, under date of July 5, 1950, petitioner distributed copies of the judgment to its container customers and lessees in the form of a pamphlet which contained a summary of the provisions of the judgment and on October 20, 1950, pursuant to paragraph 7 of section III of the judgment, petitioner sent written notice to each lessee of its closing equipment, notifying said lessee of his right to purchase the leased closing equipment and quoting the judgment-computed price of each unit of equipment held by the lessee. The price provisions of the judgment (section III, paragraph 5) deducting 4 percent for each year of use since the last overhaul, resulted in setting low prices on some closing machines. In cases where closing machines had gone 25 years or more without overhaul, the judgment price would be zero. Lessees of closing machines with such low prices made early purchases of them. Other lessees waited until the compulsory rental increases approximated the installment sale price before purchasing the pre-1951 closing machines. The judgment prices, selected installment terms, and rentals charged for a typical closing machine were as follows: CANCO 117B VACUUM CLOSING MACHINE The rental increases required under the judgment (section III, paragraph 10) expressed in percentages were: Jan. 1, 1951-5 percent of its 1950 rentals. May 1, 1951-An additional 15 percent of its 1950 rentals. The magnitude of these increases was attributable in substantial part to the sharp increase in petitioner's costs which commenced with the rapid inflation following the outbreak of hostilities in Korea. On January 26, 1951, the Economic Stabilization Agency announced a general ceiling price regulation which had the effect of freezing rentals on petitioner's closing equipment at 105 percent of its 1950 rentals and prohibiting a 15 percent rental increase that petitioner had announced for the lease year commencing May 1, 1951. The special master under the judgment, section III, paragraph 2a (hereinafter called the master), came to New York and discussed this price freeze with representatives of petitioner and then took the matter up with the Office of Price Stabilization. The master succeeded in having the price restrictions lifted insofar as they applied to petitioner. Up until this time petitioner had taken no steps to alleviate the freezing of its low rentals by the OPS. As of January 1, 1954, the rental rates charged by petitioner had reached the compensatory level. During the years 1940 to 1950, inclusive, the number of containerclosing machines manufactured each year by petitioner ranged be |