Del Mar Turf Club v. Commissioner

Del Mar Turf Club, Petitioner, v. Commissioner of Internal Revenue, Respondent Del Mar Turf Club v. Commissioner Docket No. 11471 United States Tax Court 16 T.C. 749; 1951 U.S. Tax Ct. LEXIS 230; April 12, 1951, Promulgated *230 Decision will be entered under Rule 50. Petitioner corporation is a race track in California. It filed a claim for relief under section 722 (a) and 722 (b) (2), (4), and ( 5) of the Internal Revenue Code for the taxable year ended September 30, 1941. Held, petitioner is entitled to relief under section 722 (a) and (b) (4) but not under (b) (2) or (b) (5), and reconstructed average base period net income determined for excess profits credit purposes for a decision to be entered under Rule 50. Adam Y. Bennion, Esq., for the petitioner. R. E. Maiden, Jr., Esq., for the respondent. Rice, Judge. RICE *750 This proceeding arises from the Commissioner's disallowance of petitioner's claim for relief under section 722 (a) and 722 (b) (2), (4), and ( 5) of the Internal Revenue Code, for the taxable year ended September 30, 1941. The question presented is whether the petitioner is entitled, under such provisions of the Code, to a refund of all or any part of the excess profits tax paid for such taxable year. FINDINGS OF FACT. Petitioner was incorporated under the laws of the State of California on May 6, 1936, for the purpose of conducting horse racing meets, which have been legalized and regulated by the State of California since 1933. Its principal place of business is at Del Mar, California, and its excess profits tax return for the fiscal year ended September 30, 1941, was filed with the collector of internal revenue for the sixth collection district at Los Angeles, California. Said return showed excess profits tax in the sum of $ 39,967.29, which the petitioner paid on or before the dates required by law. An additional assessment of $ 1,609.49*232 was subsequently made and paid by petitioner, making total excess profits tax paid of $ 41,576.78, for the excess profits tax year of 1941. The excess profits credit used in said return was based upon average base period net income in the sum of $ 39,766.31 computed by use of the growth formula provided by section 713 (f) of the Internal Revenue Code. On or about September 13, 1943, petitioner filed with the respondent its Application for Relief under Section 722 of the Internal Revenue Code, claiming a constructive average base period net income for use in computing excess profits tax for the year ended September 30, 1941, in the sum of $ 183,441.52, and consequently claiming a refund of the excess profits tax theretofore paid by it in the sum of $ 41,576.78. Said application for relief was supplemented by the filing on or about July 2, 1945, of "Supplemental Data" consisting of Exhibits A to I, inclusive, wherein a constructive average base period net income was claimed in the amount of $ 199,169.40, and by the filing on or about November 23, 1945, of "Second Supplemental Data" consisting of Exhibits J to T, inclusive, wherein a constructive average base period net income was *233 claimed in the amount of $ 159,418. By statutory notice dated April 5, 1946, respondent advised petitioner, in accordance with the provisions of section 732 of the Internal Revenue Code, of the disallowance of its said Application for Relief. Copies of said Application and Supplements were attached to the petition. *751 The California Horse Racing Act, legalizing and regulating horse racing under the pari-mutuel system of betting, established for the administration and execution of the Act a board known as the California Horse Racing Board, which board was vested with the powers necessary and proper to enable it to carry out fully and effectually the purposes and provisions of the Act. In this connection, the board was given the full power to prescribe rules, regulations, and conditions under which all horse races, upon the results of which there was to be wagering, should be conducted. The Board was authorized to grant licenses to persons, associations or corporations for the purpose of holding racing meets, and to determine the place, dates, and conditions of the racing meets. The purpose of the Act was the encouragement of agriculture and the breeding of horsese in the*234 State of California. The proceeds derived by the State were distributed to the various State fairs, State Agricultural Associations, and State Colleges and Universities. In addition to various license fees from all horse owners, riders, agents, trainers, stewards, timers, judges, and others, the State derived revenue during the base period years at the fixed percentage of 4 per cent of all money handled (bet) in the pari-mutuel machines of the various licensed tracks. The Act also classified the counties of California according to population and prescribed the maximum number of racing days that the Board could authorize in various classes of counties. Section 10 of the Act provided as follows: For the purpose of this act there shall be three classes of counties in the State of California, as follows: 1. Counties of the first class shall be those having a population of one million or over; 2. Counties of the second class shall be those having a population of six hundred thousand or over and less than a million; 3. Counties of the third class shall be all those counties under six hundred thousand population. In counties of the first class there may be allowed by said board not to*235 exceed one hundred (100) racing days per year; In the area embraced within counties of the second class and such territory as may be within twenty miles from the exterior boundaries thereof, there may be allowed, in the discretion of said board, not to exceed one hundred (100) racing days per year for said entire area and county; In counties of the third class, but outside the area specified in the next preceding paragraph hereof, there may be allowed by said board not to exceed fourteen (14) racing days per year, and in addition in counties of the third class having a population of over two hundred thousand, but outside of the area specified in the next preceding paragraph hereof, there may be allowed by said board not to exceed twenty-five (25) racing days additional per year. In counties of either or any of said classes there may be allowed by said board not to exceed fourteen (14) racing days per year to county fairs and to rodeos having horse races on tracks less than a mile in circumference or length. That said fourteen days, when and if allowed by the board in any county or area of the first or second class, shall not diminish the one hundred (100) *752 days racing per*236 year permitted to be allowed to tracks of a mile or more in circumference or length as set out in the preceding two paragraphs of this section. The board may apportion racing days, not to exceed the maximum number of racing days permitted in the respective counties and/or areas above mentioned, to one or more licensees as it in its judgment shall appear to be for the best interests of legitimate racing and of the public. At all times material hereto Los Angeles County was the only county in California of the first class (having a population in excess of 1,000,000); San Francisco County was the only county of the second class (having a population between 600,000 and 1,000,000); and San Diego County was the only county of the third class (having a population in excess of 200,000 but less than 600,000). After the enactment of the California Horse Racing Act the first commercial track to commence horse racing in California was the Tanforan Company, Ltd., whose track is located at San Bruno, which is situated approximately 10 miles south of San Francisco, in San Mateo County, and whose first meeting was held in 1933. The second commercial track to commence operations in California was*237 the California Jockey Club, whose track, Bay Meadows, is located in San Mateo, approximately 18 miles south of San Francisco. Bay Meadows held its first meeting in 1934. Both Tanforan and Bay Meadows are located within 20 miles from the exterior boundary of San Francisco County, and thus, under the quoted statute, were entitled to share between them a maximum of 100 racing days per year. The third commercial track to commence operations was Santa Anita, operated by the Los Angeles Turf Club, located at Arcadia, California, 16 miles northeast of metropolitan Los Angeles, in Los Angeles County. Its first meeting commenced on December 25, 1934. The fourth commercial track was the petitioner, which held its first meeting in 1937. Its track is located at Del Mar, California, in San Diego County, approximately 110 miles south of Los Angeles and approximately 25 miles north of the city of San Diego. The fifth commercial track to commence operations in California was the Hollywood Turf Club, whose track, Hollywood Park, is located at Inglewood, approximately 10 miles southwest of metropolitan Los Angeles, in Los Angeles County. Its first meeting was held in 1938. The greatest revenue*238 of a race track is derived from its portion of the money handled in its pari-mutuel machines, or pools. Section 14 of the Act, as effective during the years material hereto, was as follows: (Deering's General Laws of California, 1937, Vol. 1, Act 3421, Sec. 14, p. 1641). Commission: Deductions. The commission deducted by any licensee from pari mutuel pools shall not exceed eight per cent of the gross amount of money handled, and the odd cents of all redistributions to be made on all mutual contributions exceeding a sum equal to the next lowest multiple of ten. The said *753 amount so deducted shall be in addition to the license fee of four per cent of the gross amount of said money handled, as provided in section 12 herein. In addition to revenue derived from commissions on pari-mutuel handle, plus the odd cents of all redistributions to be made on all mutual contributions exceeding a sum equal to the next lowest multiple of ten (known as "breakage"), the track received revenue from admissions, parking, programs, concessions, and some other minor sources. The following table shows, for Tanforan, Bay Meadows, Santa Anita, and petitioner, the number of days raced each year*239 from their respective first years of operations through 1941, their total pari-mutuel handles (being the total amount of money wagered through the pari-mutuel machines), the average daily handle of each track for each year, and an index of average daily handle for each track based upon the first year as 100: Tanforan Index of Total Average average Year Days handle daily daily handle handle [41] $ 2,210,071 $ 53,904 [50] 3,809,245 76,185 [50] 4,750,777 95,016 [50] 7,463,929 149,279 [50] 8,763,918 175,278 [50] 6,545,269 130,905 [49] 7,154,107 146,002 [41] 7,036,114 171,613 [42] 8,971,878 213,616 [396] Bay Meadows [38] $ 3,876,126 $ 102,003 [50] 5,490,845 109,817 [50] 7,902,064 158,041 [50] 9,207,816 184,156 [50] 7,677,442 153,549 [50] 6,687,531 133,751 [46] 8,242,775 179,191 [43] 9,516,454 221,313 [217] Santa Anita (During its 1940 racing season, Santa Anita raced 1 day in 1939 and 44 days in 1940) [65] $ 15,987,684 $ 244,580 [58] 25,251,933 435,378 [55] 30,068,466 546,699 [58] 37,889,491 653,267 [54] 36,386,263 673,820 [45] 28,376,066 630,579 [51] 35,989,166 705,670 [289] Del Mar (Petitioner) [22] $ 2,224,301 $ 101,104 [25] 3,920,251 156,810 [24] 3,469,965 144,582 [23] 4,417,733 192,075 [32] 7,852,745 245,398 [243] *240 *754 As reflected in the foregoing figures, it normally takes a period of approximately four or five years for a race track commencing business, under circumstances which were faced by these four tracks, to become integrated into the national racing picture and to reach a normal level of operations. One of the principal reasons for this is that horse racing is a national sport and horses come from all parts of the country. A beginning track must lay out a program of races and purses which will attract horses from various sections of the country. Such a program involves the commitment of large sums of money. It is difficult to know in advance what horses are available, which horses will come, and what amount of purses will be required to attract them. It is necessary for stables to know in advance where their horses are going to run, because a horse cannot run the year round. A trainer will map a horse's schedule to fit into certain racing programs as much as six months or a year in advance. A particular horse will be trained for a particular race at a particular track, and may not fit into other races or other tracks at all. It follows from this that when a new track *241 is organized the trainers and owners of horses already have their schedules worked out for some time in advance; and in order to work into the racing picture or to become integrated into the national racing program with other tracks, a schedule must be projected not only for one year but for several years, so that trainers and owners can know and depend upon the type of program intended to be presented and can point their horses toward a participation in that program in the future. Then, too, it takes a period of years for the local patrons to become interested in the sport and acquainted with the horses that run. These factors, requiring a period of years of initial development, applied to petitioner, even though Santa Anita had been in operation for two years prior thereto and had created an interest in horse racing among southern Californians. Del Mar was a difficult territory to pioneer as part of the national racing circuit, because a first-class race track could not be maintained on patronage from San Diego County alone. A substantial part of the patronage came from Los Angeles and other areas. Arrangements were made with the Santa Fe Railroad to run special trains from Los*242 Angeles to Del Mar, and such trains were run every racing day during the base period, the trains waiting on the siding to return the patrons to Los Angeles after the races. Many patrons drove their automobiles the 110 miles from Los Angeles to Del Mar. Annually the petitioner sent literature all over the United States to advertise the vacation facilities of the Del Mar area and to encourage people to take their vacations in and around Del Mar during August, its racing season. Petitioner carried daily advertisements in the Los Angeles newspapers during the racing season *755 for people from outside states to take their vacations at Del Mar in August. Notwithstanding financial difficulties encountered by petitioner in its early days, petitioner set about during 1937, 1938, and 1939 to enlarge its purse commitments progressively, in order to attract more of the better horses, with the result that by 1939 its purses (of $ 161,000 for 24 days of racing) exceeded those paid for the same number of days by both Tanforan ($ 147,400) and Bay Meadows ($ 142,100). Petitioner's minimum purse per race was increased from $ 500 in 1937 to $ 600 in 1938 and to $ 700 in 1939. The following, *243 insofar as the information is available in the record, shows the total purse offered at each private track for each racing meet in California, and the daily average purse: Year Track Days race Total purse Daily average [1933] Information not shown for any track [1935] Santa Anita [65] $ 604,495.68 $ 9,299.93 Bay Meadows [50] 317,225.00 6,344.50 Tanforan [50] 216,908.48 4,338.17 [1936] Santa Anita * [58] 642,600.00 12,357.69 Bay Meadows [50] 318,700.00 6,374.00 Tanforan [50] 298,500.00 5,970.00 [1937] Santa Anita * [55] 683,500.00 12,427.27 Bay Meadows [50] 359,800.00 7,196.00 Tanforan [50] 352,900.00 7,058.00 Del Mar [22] 106,700.00 4,850.00 [1938] Santa Anita * [58] 790,000.00 13,620.69 Bay Meadows [50] 391,300.00 7,826.00 Tanforan [50] 355,800.00 7,116.00 Del Mar [25] 181,900.00 7,276.00 Hollywood Park [34] 442,100.00 13,002.94 [1939] Santa Anita * [54] 903,500.00 16,731.48 Bay Meadows [50] 291,500.00 5,830.00 Tanforan [50] 295,175.00 5,903.00 Del Mar [24] 159,800.00 6,658.33 Hollywood Park [46] 600,300.00 13,050.00 [1940] Breakdown of purses by tracks not shown *244 If petitioner had commenced business two years earlier, in 1935, an average base period net income of $ 125,000 would have been achieved. By letter dated January 14, 1937, petitioner filed its application with the Horse Racing Board for a permit to conduct its first race meeting and requested from the Board permission to race 25 days, beginning July 3, 1937, and, in support of the days requested, stated in said letter, among other things, the following: The applicant has had local statistics checked rather carefully and it appears that during the months of July and August the population in the area adjacent to the proposed race meet is increased by 40 to 50% during the months of July and August. The influx of tourists and visitors to the area appears to commence about the first of July and to have practically diminished by the following Labor Day. Most of the people who come to the area are unable to complete their plans for a visit to California, for the reason that many of them have children *756 in school during June. This is typified by LaJolla, which has a normal population of 3,000 and during July and August has a population of approximately 4,500. This is also true*245 of the Del Mar Hotel, the Coronado Hotel, the El Cortez and other large hotels in the vicinity. This is also true of the smaller towns in and about Del Mar and as well the inland towns. Therefore, it appears to the directors of Del Mar Turf Club that a successful meeting can best be put on during the month of July. It is also a fact that some of the most pleasant and favorable weather in the particular area occurs during that month. Consideration must also be given to the fact that the Twenty-Second District Agricultural Association is a state body organized by statute primarily for the purpose of conducting a fair. You will observe that in the franchise agreement, a copy of which is filed with the application, that the association has the right to hold a fair, at its fairgrounds, annually during July or August of each year, provision being made that the time selected by the association shall not conflict with the dates allotted to Del Mar Turf Club by the California Horse Racing Board. It is anticipated that the association will hold its annual fair, at least in the year 1937, in August, after the close of the race meeting proposed to be conducted by Del Mar Turf Club. The *246 Twenty-Second District Agricultural Association (San Diego County Fair) was granted a license to conduct, and conducted, a racing meet from August 7, 1937, to August 14, 1937, inclusive, excluding Sunday, at the track leased to petitioner by the Association. The Agricultural Association did not hold a race meeting during the base period years subsequent to 1937 and the Franchise Agreement between petitioner and the Association specified that the dates of the county fair and its races should not conflict with the racing dates allotted to petitioner by the Racing Board. Pursuant to the request of petitioner, the Racing Board granted petitioner a 25-day racing meet to commence on July 3rd, and end on August 7, 1937, with Sundays, Mondays, and one week day during the period excluded. Petitioner requested the Racing Board to reduce the racing days from 25 to 22, commencing July 3rd and ending July 31, 1937, because the twenty-second day fell on Saturday, July 31, and it would have been uneconomical to race a part of a week and be forced to carry overhead for a full week. The 1937 meet was held during the above days, Sundays and Mondays excluded, except Monday, July 5th, (which was a holiday, *247 July 4th, falling on Sunday), for a total of 22 days. Under date of August 3, 1937, petitioner, by letter to the Racing Board, requested a racing meet for the 1938 racing season of 25 days, to commence June 29, 1938, and end on July 30, 1938, excluding Sundays and Mondays with the exception of Monday, July 4th. The Racing Board, at its official meeting on December 29, 1937, fixed the racing dates for petitioner's 1938 racing meet at a different time than that requested by petitioner. It was allotted 25 days of racing commencing July 29 and ending September 5, 1938, excluding Sundays *757 and Mondays except September 5, 1938, and excluding three week days. Petitioner's 1938 racing meet was held, commencing July 29th and ending September 5, 1938 (Labor Day), excluding Sundays and Mondays, except Labor Day, and excluding three week days selected by petitioner, which were Tuesdays, for a total of 25 days. After careful study of the population records for the county petitioner learned that the largest population for the area was during August of each year. Since it was desirous of holding its racing meets when the greatest number of people were there and since it was anxious to *248 have its racing during the same period each year for the convenience of horsemen and public planning to attend, under date of June 15, 1938, petitioner wrote the Racing Board, requesting permission to hold its meeting from July 29, 1939, to Labor Day. In compliance with this request, the Racing Board allotted petitioner 24 days commencing August 2nd and ending September 4, 1939. Petitioner's 1939 racing meet was held commencing August 2nd, 1939, which was Wednesday, and ending September 4, 1939, with racing on 4 days per week for 2 weeks, 5 days per week for 3 weeks (excluding Sundays and Mondays) and on Labor Day, September 4th, for a total of 24 days. The net proceeds of Wednesday, August 16th, were donated to charity. The Racing Board allotted petitioner for its 1940 meet, 23 days between the period August 12th and September 12, 1940. At the request of petitioner the dates were changed and the Racing Board allotted 23 days from August 7th to September 2, 1940, since the summer season at Del Mar closes upon Labor Day and petitioner would probably have been forced to run at a substantial loss if it operated after Labor Day. Petitioner's 1940 racing meet being the last year of its*249 base period, was held, commencing August 7, 1940, which was Wednesday, and ending September 2, 1940, which was Monday (Labor Day), excluding Sundays for a total of 23 days. During the base period the petitioner filed no application with the Horse Racing Board to be allowed to conduct a racing meet for more than 25 racing days; nor did the petitioner write any letters or file any protests, or any briefs or memoranda, with the Racing Board during the base period years, raising or presenting the question of whether the maximum number of racing days allowable under the statute to petitioner was 39 rather than 25. The official minutes of the petitioner's board of directors, during the base period years, do not disclose any desire or intention on the part of petitioner to race more than 25 days in any one year, or to request the Racing Board for more than 25 racing days. Neither do the official minutes of the Racing Board show or indicate that at any time during the base period years *758 the petitioner desired to race more than 25 days during any one year, nor that petitioner took the position, during the base period years, that the maximum number of racing days allowable was 39. *250 The following, according to the Survey of Current Business by the United States Department of Commerce, shows the total income payments to individuals in California for the years 1933 through 1940: (000,000 omitted) Year Total income [1933] $ 3,163, [1934] 3,583, [1935] 3,952, [1936] 4,786, [1937] 5,105, [1938] 4,808, [1939] 5,080, [1940] 5,604, The following indices are computed from individual income tax returns for California from yearly statistics of California State Franchise Tax Commissioner. 1936-1939 = 100. [1940] Los Angeles-San Diego [139] San Francisco-Alameda [133] San Diego [174] Los Angeles [137] 1st Calif. Coll. Dist [140] 6th Calif. Coll. Dist [138] The following shows the population estimates (Statistics -- Tax Digest, Vol. 19), for California as a whole, a breakdown between the 6th and 1st U. S. Collection Districts, and the population of the counties in the 6th Collection District, which covers Southern California, for the years 1936 through 1940: 10 counties Total for in 6th 1st District state District [1936] 6,135,000 3,388,260 2,746,740 [1937] 6,453,000 3,592,610 2,860,390 [1938] 6,687,000 3,741,770 2,945,230 [1939] 6,755,000 3,776,000 2,979,000 [1940] 6,907,387 3,840,733 3,066,654 *251 Ten counties in 6th California Collection District: [1940] Imperial 57,700 58,390 63,140 60,440 59,740 Kern 93,130 107,450 118,540 125,650 135,124 Los Angeles 2,453,970 2,609,270 2,718,780 2,738,390 2,785,643 Orange 120,760 125,510 130,320 130,710 130,760 Riverside 93,050 98,430 101,520 104,630 105,524 San Bernardino 152,410 158,090 159,670 159,930 161,108 San Diego 254,080 267,450 278,250 281,170 289,348 San Luis Obispo 30,390 32,090 32,670 33,790 33,246 Santa Barbara 71,590 73,220 73,420 72,400 70,555 Ventura 60,880 62,710 65,460 68,890 69,685 Total 3,388,260 3,592,610 3,741,770 3,776,000 3,840,733 *759 The following shows the petitioner's excess profits net income for each of the base period years, the aggregate and simple average for said base period years, and the average base period net income computed under the growth formula provided by section 713 (f): Fiscal year ended September 30 [1937] $ 11,302.84 [1938] 35,010.15 [1939] 47.99 [1940] 101,410.12 Aggregate $ 147,771.10 Simple average $ 36,942.78 Average under section 713 (f) $ 39,766.31 The following is a comparative*252 statement of petitioner's revenues and expenses for the years 1937 through 1940: [1938] Amount Amount Pari-mutuel handle $ 2,224,301.00 $ 3,920,251.00 Revenue: Pari-mutuel operations 219,103.66 375,144.66 Admissions 68,093.46 90,797.27 Parking 7,488.75 10,988.75 Programs 10,381.21 16,533.93 Concessions 12,730.75 17,049.29 Sundry 14,172.33 Gross revenue 317,797.83 524,686.23 Deduct net receipts of Charity days [0] Net revenue 317,797.83 524,686.23 Expenses: Racing 130,198.76 205,452.58 Maintenance and general 49,007.23 95,732.51 Attendance 21,603.89 31,170.79 Pari-mutuel 41,952.42 60,206.70 242,762.30 392,562.58 Administrative and general 57,691.69 70,813.15 Total expenses 300,453.99 463,375.73 Profit from racing operations 17,343.84 61,310.50 Other deductions 2,569.71 25,023.88 Profit before taxes on income 14,744.13 36,286.62 [1940] Amount Amount Pari-mutuel handle $ 3,469,965.00 $ 4,417,733.00 Revenue: Pari-mutuel operations 334,647.70 423,687.98 Admissions 79,190.07 94,209.55 Parking 9,193.25 11,110.50 Programs 15,069.14 17,508.05 Concessions 14,140.95 14,437.06 Sundry 6,165.58 10,657.83 Gross revenue 458,406.69 571,610.97 Deduct net receipts of Charity days 2,000.00 [0] Net revenue 456,406.69 571,610.97 Expenses: Racing 183,657.89 181,136.04 Maintenance and general 100,238.46 93,170.22 Attendance 26,811.08 27,395.10 Pari-mutuel 55,659.38 58,658.19 366,366.81 360,359.55 Administrative and general 71,060.64 71,051.38 Total expenses 437,427.45 431,410.93 Profit from racing operations 18,979.24 140,200.64 Other deductions 18,551.57 32,246.32 Profit before taxes on income 427.47 107,953.72 *253 The revenue designated "Pari-mutuel Operations" in the foregoing table, which constitutes the major source of revenue of the petitioner and other tracks operating in California, represents commissions and "breakage" which the tracks are authorized by law to retain out of the money wagered through the pari-mutuel betting machines. At all times material hereto, section 14 of the California Horse Racing Act permitted tracks to deduct and retain from the pari-mutuel pools a sum not in excess of 8 per cent of the gross amount of money handled or wagered, plus the odd cents of all redistributions exceeding a sum *760 equal to the next lowest multiple of ten. In other words, the track pays winning tickets only in multiples of 10 cents, and is permitted by law to retain the odd cents in excess thereof. Hence, the major source of revenue of the petitioner is a constant or fixed percentage of its total pari-mutuel handle. Based on petitioner's experience for 1937, 1938, and 1939, reconstructed gross revenues of the petitioner may reasonably be determined upon the basis of 13 per cent of reconstructed total pari-mutuel handle for the base period years. The expenses of the petitioner *254 fall into four categories: 1. Certain expenses are fixed, and vary neither with the number of days of racing nor with the volume of handle. 2. Certain expenses, primarily the purses, salaries and supplies, vary in direct relation to the number of days raced. 3. Two expenses, the plant rental and totalizator rental, vary in direct relationship to the volume of pari-mutuel handle, and during each year from 1937 through 1940 they amounted together to 1.8 per cent of the handle. 4. Two expenses, a 10 per cent bonus for the petitioner's director of racing and the 4 per cent California franchise tax, vary with the amount of net income after deducting the foregoing expenses. The following table shows the total expenses of petitioner for each of the base period years, the per day expenses (the amount of each expense which varies with the number of days raced in a particular year), and the fixed expenses: Total expenses Per day expenses Fixed expenses [1937] $ 304,534.88 $ 9,035.90 $ 58,808.75 [1938] 459,785.86 11,752.95 68,837.69 [1939] 456,149.21 12,618.03 69,126.62 [1940] 448,091.21 12,181.17 67,828.34 Based upon petitioner's experience in 1937, 1938, and 1939, reconstructed*255 expenses of the petitioner may reasonably be based upon (a) $ 66,000 as fixed expenses; (b) daily expenses of $ 11,200 for each reconstructed day of racing; (c) 1.8 per cent of reconstructed total handle for plant and totalizator rental, and (d) 13.6 per cent of the net income remaining after deducting the three foregoing classes of expense, to cover the bonus and franchise tax. During the base period years petitioner made interest payments amounting to $ 62,679.79 on money borrowed by petitioner and loaned to the Twenty-Second District Agricultural Association, a political subdivision of California, to permit the Association to complete construction of the race track at Del Mar, in time for petitioner's opening meet in 1937. Petitioner was unable to charge such interest to the Association as it was a state agency. *761 Petitioner's excess profits tax for the year ended September 30, 1941, computed without the benefit of section 722, resulted in an excessive and discriminatory tax. Petitioner's average base period net income of $ 39,766.31 is an inadequate standard of normal earnings because petitioner commenced business during the base period and the sum of $ 39,766.31 does*256 not reflect the normal operation for the entire base period, nor does it reflect the earning level which petitioner would have attained by the end of its base period if it had commenced business in 1935. OPINION. Petitioner contends it is entitled to relief from excess profits taxes under section 722 (a)1 and 722 (b) (1), (2), (4) and ( 5) of the Internal Revenue Code, for the fiscal year ended September 30, 1941. Since the petitioner claimed relief under subsection (b) (1) for the first time in its opening brief and since the record does not disclose "any other factor affecting the taxpayer's business which may reasonably be considered as resulting in an inadequate standard of normal earnings during the base period" under subsection (b) (5), claim for relief under such provisions is denied. Blum Folding Paper Box Co., 4 T. C. 795 (1945); Monarch Cap Screw Manufacturing Co., 5 T. C. 1220 (1945). *257 This leaves for our consideration whether, on this record, the petitioner qualifies for relief under section 722 (b) (2), section 722 (b) (4), or both. Petitioner claims it qualifies for relief under section 722 (b) (2)2*762 because the normal operation of its business was diminished due to the occurrence during the base period of events unusual and peculiar in the experience of the petitioner, or because petitioner's business was depressed during the base period due to temporary economic circumstances unusual in the case of the petitioner and its industry. We will limit our discussion under the (b) (2) issues to the petitioner's individual business as this record does not support a finding that petitioner was a member of an industry which was depressed by reason of temporary economic events unusual in the case of such industry. *258 As set out in our findings of fact, petitioner's operations during the base period years were limited to not to exceed 25 days of racing during its season. Petitioner claims the members of the California Horse Racing Board interpreted the California statute erroneously during this period, that petitioner under the statute was actually entitled to not to exceed 39 racing days, and that the failure of the Racing Board to grant it the additional days was the unusual and peculiar event which depressed its business in the base period. Petitioner points to the fact that in 1941, at the request of the Racing Board, the Attorney General of California rendered an opinion (interpreting the same statute which was in effect during the base period years) that petitioner was entitled under such statute to not to exceed 39 racing days. Petitioner argues that if the Racing Board had so interpreted the statute during the base period years that petitioner would have been allotted 39 days for its racing season as a matter of course, because the Racing Board had always granted to other race tracks the maximum number of racing days allowable under the law and there was no reason for supposing that *259 it would limit petitioner to less than the allowable 39. Petitioner argues further that if it had been allotted 39 days, it would have raced more days than it raced in the base period and its average daily handle and, therefore, its average base period net income would have been greater than it was. Respondent argues that petitioner's contentions indulge several assumptions, each of which must be supplied with at least some reasonable basis in fact before this Court would be justified in finding that the failure to allot more than 25 racing days had any depressing effect on petitioner's base period earnings. He specifies these assumptions as (1) that the Racing Board would have permitted petitioner to race more than 25 days during the base period meetings; (2) that petitioner would have requested more than 25 days, and (3) that petitioner could have raced profitably the days allotted to it by the Racing Board in excess of 25. No member of the Racing Board testified in this case. The attorney for petitioner talked to Mr. Carlton Burke, who was Chairman of *763 the California Horse Racing Board during 1937 and 1938 and who was ill and in the hospital when this proceeding was *260 heard, and related to the Court a summary of his conversation with Mr. Burke as follows: I questioned him about the matters in controversy here, and he told me that he had no recollection of any discussions with officers of Del Mar regarding the number of days that Del Mar was entitled to, but that it was his opinion -- and he was definite in this -- it was his opinion in 1937 and 1938 that under the wording of the California Horse Racing Act a commercial race track in San Diego County was entitled to a maximum of 25 days of racing, and that an additional 14 days was allowable only to County fairs. Respondent stipulated that Mr. Burke would have so testified if he had appeared in court as a witness. The question of the allotment of the number of racing days to petitioner in any one year, as was true of all tracks in California, so long as it did not exceed the statutory maximum, was a matter wholly within the discretion of the Racing Board. It required consideration not only of petitioner's desires but the desires of all the tracks, including the state and county fairs which also held racing meets, as well as consideration of the racing program as a whole, during an entire year *261 so as to carry out the purposes of the Act to promote the breeding of race horses in California, the state and county fairs, agriculture and education in general, and last, but not least, revenue with which to carry out such purposes. In addition to lack of evidence in the record that the Racing Board would have permitted petitioner to race more than 25 days during the base period years, even if it had been of the opinion that the maximum allowable under the Racing Act was 39 days, the record indicates, on the other hand, that petitioner was satisfied with the maximum of 25 racing days during the base period years. Petitioner requested 25 racing days for its 1937 meet which was granted. Subsequently petitioner requested the Racing Board to change such allotment to 22 days which was granted and that was the number of days it raced in 1937. Petitioner requested and was granted 25 racing days for its 1938 meeting and raced the full 25 days which was the only time during the base period years it raced the full 25 days. It raced 24 days during its 1939 season and 23 days during its 1940 season. Irrespective of the evidence or lack of evidence in this record with respect to how many *262 racing days the Racing Board would have allotted to petitioner during the base period years, the fact remains that the number of days authorized to be allotted, up to a certain maximum, was entirely within the discretion of the Racing Board. Since the Board never allotted more than 25 days to petitioner and since such allocation is not alleged or shown to be an abuse of discretion, the Board remained within its statutory authority and its actions were *764 the normal, usual, and permanent conditions of petitioner's business and the industry as a whole. Petitioner, in order to gain relief under the subsection (b) (2) issue discussed above, must establish that its average base period net income is an inadequate standard of normal earnings because its business was depressed in its base period; that the cause of the depression was a temporary economic event unusual in the case of petitioner, and, finally, what would be a fair and just amount representing normal earnings to be used as a constructive average base period net income. Since the petitioner has failed to show that the action of the Racing Board in failing to allot more than 25 racing days to it in its base period was a*263 temporary economic event unusual in the case of petitioner, it has failed to establish the requirements of the statute on this issue and no relief can be granted. El Campo Rice Milling Co., 13 T. C. 775 (1949); Lamar Creamery Co., 8 T. C. 928 (1947). See also Acme Breweries, 14 T. C. 1034 (1950). Petitioner also claims it qualifies for relief under 722 (b) (4) 3 because (1) it commenced business in 1937, during the base period; (2) its average base period net income of $ 39,766.31 does not reflect the normal operation for the entire base period, and (3) such average does not reflect the earning level that petitioner would have reached by the end of the base period if the business had been commenced in 1935. *264 Petitioner was on a fiscal year basis ending September 30. It conducted its first race meeting beginning July 3, 1937, and is entitled to use the excess profits credit based on income pursuant to section 713 of the Code. The first question presented in connection with petitioner's (b) (4) claim is whether or not its average base period net income of $ 39,766.31 reflects the normal operation of petitioner for the entire base period. *765 Petitioner's actual experience during the 4 years of its base period was as follows: Fiscal year ended Sept. 30 Total handle Average daily Gross revenue handle [1937] $ 2,224,301 $ 101,105 $ 317,797.83 [1938] 3,920,251 156,810 524,686.23 [1939] 3,469,965 144,582 456,406.69 [1940] 4,417,733 192,075 571,610.97 Fiscal year ended Sept. 30 Net profit Excess profits from racing net income [1937] $ 17,343.84 $ 11,302.84 [1938] 61,310.50 35,010.15 [1939] 18,979.24 47.99 [1940] 140,200.04 101,410.12 The above table shows that petitioner's handle, gross revenue, and net profit increased in each of its base period years with the exception of 1939. During 1939, the record indicates that race tracks in California*265 and elsewhere experienced some decline in revenue. Respondent argues that the last base period year did not reflect "normal operation," since the income of that year contained abnormal income influenced by economic conditions "greatly swollen and ballooned by reason of the preparation for war * * *"; and that if such abnormal income were eliminated, petitioner would have a reconstructed income representing "normal operation" in an amount less than its average of $ 39,766.31. Respondent also argues that petitioner reached its normal level of operation in 1938, its second year of existence. We can not agree with respondent on this issue. Based upon the entire record of this case, and after comparing the development period of petitioner with the other California commercial tracks, we conclude that petitioner had an initial development period of approximately five years. In addition to the usual development problems experienced by all commercial race tracks in California, petitioner had other problems to face. It was 110 miles south of Los Angeles and a substantial part of its patronage came from the Los Angeles area. Also, the Chicago Circuit, the New York Circuit, the New England*266 Circuit and the New Jersey and Maryland Circuits were operating at the same time that the petitioner raced. Owners and trainers of horses were accustomed to scheduling their racing operations at these eastern tracks which increased petitioner's development problem of becoming integrated into the national racing picture. We, therefore, further conclude that petitioner's average base period net income of $ 39,766.31 is an inadequate standard of normal earnings because it does not reflect the normal operation of the business in a fully developed state for the entire base period; that it did not reach by the end of the base period the earning level that would have been reached by the end of the base period if the business had been commenced in 1935 instead of 1937, and that, as a consequence, petitioner qualifies for relief under section 722 (b) (4). It is appropriate to note at this point that there is no statutory prohibition against our looking at post-1939 events in order to determine *766 whether petitioner qualifies under section 722 (b) for a reconstruction of its base period net income. The statutory prohibition against regarding post-1939 events relates only to the reconstruction*267 of the average base period net income. East Texas Motor Freight Lines, 7 T. C. 579, 587 (1946); Dyer Engineers, Inc., 10 T. C. 1265, 1274 (1948); Commissioner's Bulletin on Section 722, Part V, Subpart II. Since petitioner's average base period net income is an inadequate standard of normal earnings during the base period, the next question is what would be a fair and just amount representing normal earnings to be used as a constructive average base period net income. Because of the varying lengths of meets at the different tracks, the most reasonable basis on which to reconstruct petitioner's base period income would seem to be its average daily handle, as the net income of a race track bears a direct relation to the handle and can be estimated with reasonable accuracy after the handle is known. Petitioner's reconstruction, argued for in its brief, was based upon a misconception of the application of the 2-year push-back rule. Petitioner reconstructed an average daily handle for 1935 using its actual daily handle for 1937 and readjusting it downward on the basis of lower individual incomes for 1935 as compared with *268 1937. It then went forward reconstructing an average daily handle for 1938 and 1939, assumed one for 1940, and reconstructed a fourth for 1937. The purpose of the 2-year push-back rule is to establish a figure which is assumed to be the maximum amount which would have been earned by the taxpayer in its last base period year, if it had commenced business 2 years before it did. Once one has arrived at this assumed figure, the function of the 2-year push-back rule has been achieved and we are no longer concerned with it. Such assumed figure is then used as a point of departure in reconstructing the taxpayer's average base period net income (using appropriate indices based on national income, state income, industry experience, corporate profits, etc.) in order to determine his excess profits credit. See Suburban Transportation System, 14 T. C. 823, 829 (1950). Since we can not use petitioner's reconstruction as it is based on an erroneous conception of the 2-year push-back rule and since respondent denied any relief to petitioner and therefore submitted no reconstruction, it is appropriate for us to make a reconstruction which we think is reasonable based*269 on the entire record. Our first problem, therefore, is to reconstruct the average daily handle petitioner would have achieved during its last base period year ended September 30, 1940, if it had commenced business in 1935. This may be achieved by using a growth index based upon the experience of the three older tracks, Tanforan, Bay Meadows, and Santa Anita, and applying said index to petitioner's average daily handle for its first year of operation. The result will be an average daily handle for *767 petitioner's assumed sixth year of operation (fiscal year 1940) comparable to the growth experience of said three tracks. For purposes of comparison, we can also reconstruct petitioner's average daily handle for its four base period years by using a national income index, a California income index, and a corporate profits index. Inasmuch as petitioner's costs and expenses were fairly uniform from year to year and our reconstructed average daily handle takes into account the fluctuations in petitioner's industry during the base period, a single computation of constructive average base period net income is indicated, as approximately the same result would obtain if separate computations*270 were made for each year and the figure then averaged. 7- Up Fort Worth Co., 8 T. C. 52, 67 (1947). We have heretofore held in this opinion that petitioner failed to show that the action of the Racing Board in failing to allot more than 25 racing days to it in its base period was a temporary economic event unusual in the case of petitioner, entitling it to relief under section 722 (b) (2). Therefore, in the reconstruction allowed herein, only 25 racing days are permitted. The reconstruction of petitioner's expenses can be made with some certainty. These expenses fall into four categories as follows: 1. Expenses which vary in relation to the number of days of racing. These consist primarily of the purses, supplies, utilities, and salaries of the many individuals who are employed either on a daily basis or for a racing season of a given number of days. 2. Fixed expenses which remain constant regardless of the number of days raced or the volume of the handle. These consist principally of the amortization of the franchise payment of $ 100,000, depreciation of furnishings, amortization of leasehold improvements, and much of the fixed administrative overhead*271 expense. 3. Two expenses which vary directly with the volume of handle, namely, the plant rental and the rental of the totalizator board. 4. Two expenses which vary in accordance with net income, namely, the bonus of 10 per cent of net income before taxes to the director of racing and the California franchise tax of 4 per cent of net income. The table of expenses included in our Findings of Fact shows the constancy of petitioner's expenses which were fixed expenses. Thus, the fixed expenses amounted to $ 58,808.75 in 1937, $ 68,837.69 in 1938, and $ 69,126.62 in 1939, although there was a large difference in total handle between the three years. Said table also shows that the per day expenses (the expenses which vary with the number of days raced) amounted to $ 9,035.90 in 1937, $ 11,752.95 in 1938, and $ 12,618.03 in 1939. Therefore the fixed expenses and the per day expenses may be reasonably reconstructed upon the average of said 3 years of $ 66,000 and $ 11,200, respectively. *768 Two expenses which vary in direct relationship to the total handle are plant rental and totalizator rental. The following table shows for the years 1937, 1938, and 1939 the percentage which *272 these two expenses bore to the total pari-mutuel handle: [1939] Pari-mutuel handle $ 2,224,301.00 $ 3,920,251.00 $ 3,469,965.00 Plant rental 27,387.96 46,893.08 41,830.96 Totalizator rental 12,441.50 23,370.51 22,026.94 Total 39,829.46 70,263.59 63,857.90 Per cent of pari-mutuel handle 1.8 1.8 1.8 Based upon the foregoing figures it is seen that these two expenses may reasonably be reconstructed upon the basis of a reconstructed pari-mutuel handle. Expenses based upon net income are the 10 per cent bonus to the director of racing and the 4 per cent California franchise tax. Inasmuch as the 10 per cent bonus would be deductible in computing the 4 per cent California franchise tax, that tax in effect would be 4 per cent of 90 per cent of the net income after the bonus had been deducted, or 3.6 per cent of the net income before deduction of the bonus. Hence, to cover both sums adequately it is sufficient merely to deduct 13.6 per cent of the net income. Petitioner also contends that it is entitled to a further deduction for interest payments made during the base period years because they were abnormal payments and, by reason thereof, tended*273 to depress its base period earnings. The interest payments amounted to $ 62,679.79 during the base period years. The interest was paid on money borrowed by petitioner and loaned to the Twenty-second District Agricultural Association, a political subdivision of California, to complete construction of the race track at Del Mar. Petitioner was unable to charge the interest to the Association as it was a state agency. Respondent argues that petitioner neither claimed in the application for relief nor in the petition that this factor caused its business to be depressed and the issue is therefore not properly before us. Respondent concedes that if this Court permits the use of the push-back rule petitioner would be entitled to some adjustment for such interest payments. It is our view, however, that petitioner is not entitled to any additional allowance by virtue of such interest payments as the reconstruction granted hereunder gives petitioner a reasonable reconstructed average base period net income for purposes of its excess profits credit and no further allowance is warranted. By way of summary, a reasonable reconstruction in this case is arrived at by multiplying the reconstructed*274 average daily handle by *769 25 racing days, taking 13 per cent of that figure for gross income, and by deducting therefrom the sum of the reconstructed expenses, the state franchise tax, and the reconstructed average Federal income tax for the base period. We, therefore, finally conclude, based upon the entire record of this case and in accordance with the standards enunciated herein, that petitioner is entitled to use a reconstructed average base period net income in the sum of $ 125,000. Decision will be entered under Rule 50. Footnotes *. Since Santa Anita's meets fall within two calendar years, it is necessary to put Santa Anita on a fiscal year basis in order to show each meeting as a whole.↩ 1. SEC. 722. GENERAL RELIEF -- CONSTRUCTIVE AVERAGE BASE PERIOD NET INCOME. (a) General Rule. -- In any case in which the taxpayer establishes that the tax computed under this subchapter (without the benefit of this section) results in an excessive and discriminatory tax and establishes what would be a fair and just amount representing normal earnings to be used as a constructive average base period net income for the purposes of an excess profits tax based upon comparison of normal earnings and earnings during an excess profits tax period, the tax shall be determined by using such constructive average base period net income in lieu of the average base period net income otherwise determined under this subchapter. In determining such constructive average base period net income, no regard shall be had to events or conditions affecting the taxpayer, the industry of which it is a member, or taxpayers generally occurring or existing after December 31, 1939, * * *.↩ 2. SEC. 722. GENERAL RELIEF -- CONSTRUCTIVE AVERAGE BASE PERIOD NET INCOME. * * * * (b) Taxpayers Using Average Earnings Method. -- The tax computed under this subchapter (without the benefit of this section) shall be considered to be excessive and discriminatory in the case of a taxpayer entitled to use the excess profits credit based on income pursuant to section 713, if its average base period net income is an inadequate standard of normal earnings because -- * * * * (2) the business of the taxpayer was depressed in the base period because of temporary economic circumstances unusual in the case of such taxpayer or because of the fact that an industry of which such taxpayer was a member was depressed by reason of temporary economic events unusual in the case of such industry, * * * *↩ 3. SEC. 722. GENERAL RELIEF -- CONSTRUCTIVE AVERAGE BASE PERIOD NET INCOME. * * * * (b) Taxpayers Using Average Earnings Method. -- That tax computed under this subchapter (without the benefit of this section) shall be considered to be excessive and discriminatory in the case of a taxpayer entitled to use the excess profits credit based on income pursuant to section 713, if its average base period net income is an inadequate standard of normal earnings because -- * * * * (4) the taxpayer, either during or immediately prior to the base period, commenced business or changed the character of the business and the average base period net income does not reflect the normal operation for the entire base period of the business. If the business of the taxpayer did not reach, by the end of the base period, the earning level which it would have reached if the taxpayer had commenced business or made the change in the character of the business two years before it did so, it shall be deemed to have commenced the business or made the change at such earlier time. * * *↩