Appellant has brought this action for refund of a portion of corporate income tax for the years 1956 and 1957. The case arises out of a dispute as to the proper method of computing the depletion allowance to which appellant is entitled with respect to certain oil and gas properties. The Code sections and Regulations bearing on this dispute are set forth in the margin.1

*457During the years in question taxpayer had interests in two properties. As to one (which we shall designate as the “Lloyd property”), it owned an undivided one-half interest in the fee (the other half being owned by South Basin Oil Company) and the entire interest in a lease of the property. As to the other (which we shall designate as the “Shell-Lloyd property”), it owned a one-half interest in the fee (the other half being owned by South Basin Oil Company) and a one-half interest in a lease of the property (the other half being owned by Shell Oil Company).

The question presented is whether the two interests possessed by the taxpayer in both properties (that is, the leasehold and the royalty interests), may be combined by the taxpayer and treated as a single property for percentage depletion purposes, or whether, as the District Director claims, the depletion allowance must be computed on the income of each interest separately.

The District Court held2 that if, under California state law, the interests merged, then a single depletable interest resulted. As to the Lloyd property it held that no merger had resulted under state law since, by agreement between taxpayer and its co-owner, it appears that the parties had agreed that there would be no merger. From this ruling the taxpayer has appealed. As to the Shell-Lloyd property, the District Court held that a merger resulted. From this ruling the District Director has taken a cross-appeal.

Both parties agree that California state law of merger should not control. They disagree as to what the federal law is.

Taxpayer argues that we should look through form to substance and ascertain the true nature and extent of the economic interests in the properties. When this is done, it is argued, it is perfectly clear that as to the Lloyd property taxpayer owns the entire fee operating interest, subject only to a royalty interest in its co-owner; that as to the Shell-Lloyd property it has a one-half operating fee interest. It is contrary to the economic realities, it asserts, to resort to the fiction that it is paying royalties to itself and that it enjoys royalty income that in fact it never received.

The Government contends that what taxpayer has done is to aggregate for depletion purposes operating and non-operating interests3 in the properties, contrary to the law applying to percentage depletion; that that law and the principles upon which it is founded cannot be defeated by what is, in effect, a resort to the doctrine of merger of estates.

It is conceded that under section 614(d) taxpayer can [despite the defini*458tion of property set forth in section 614 (a)] aggregate or combine more than one interest if such aggregation was permissible under the 1939 Code. The District Court ruled that taxpayer had effectively elected to come under the 1939 Code provisions, pursuant to section 614 (d), and that ruling is not challenged here. The 1939 Code does not specifically define property, and the parties are in dispute as to whether operating and non-operating interests could be combined under those Code provisions. This dispute we need not resolve. We are satisfied that section 614(d) applies only to an aggregation of operating interests. That such was Congressional intent appears not only from the language of the Code subheading4 but from legislative history.5 Treasury Regulation 1.614-4, a reasonable interpretation of the Code in this respect, expressly provides that the “property” allowed under the section 614(d) option is “* * * each separate operating mineral interest * * ” (emphasis added).

We conclude that under the 1954 Code operating and nonoperating interests may not be combined.

Appellant argues that it has not resorted to an aggregation or combination of interests in this respect since its interest is a single one, without benefit of such aggregation, under the doctrine that the true economic interest shall control.

In this area, however, that doctrine has been limited by statutory rule, which in effect, renders operating and nonoperating interests, by virtue of the differing characteristics, separate and distinct economic interests.6 The sole question, in our judgment, is whether separate operating and nonoperating interests of the taxpayer actually exist.

We conclude that they do so exist here, where, in both cases, those interests are delineated by an existing lease under which the properties are operated. In the case of the Lloyd property the continued existence and vitality of the lease is due to the existence of an owner-lessor interest in South Basin separate from the interests of taxpayer. In the case of the Shell-Lloyd property it is due to the existence of both South Basin’s lessor and Shell’s lessee interest separate from those of taxpayer’s.7 This being so, such existing interests of the taxpayer may not be combined.

As to the Lloyd property, upon the appeal of Lloyd, judgment is affirmed. As to the Shell-Lloyd property, upon the cross-appeal of the District Director, judgment is reversed.