East Texas Theatres, Inc. v. Commissioner

East Texas Theatres, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent East Texas Theatres, Inc. v. Commissioner Docket No. 27268 United States Tax Court 19 T.C. 615; 1952 U.S. Tax Ct. LEXIS 4; December 31, 1952, Promulgated *4 Decision will be entered under Rule 50. Petitioner, operator of a chain of motion picture theatres in Texas, seeks relief under section 722 of the Code. During the base period years petitioner acquired additional theatres, commenced the profitable sideline of selling candy and popcorn, and commenced to receive oil royalties. Held, petitioner qualifies for relief under section 722 (b) (4) of the Code; held, further, the facts fail to show that petitioner had abnormal income during the base period years which is excludible in determining petitioner's constructive average base period net income as respondent contends; held, further, a constructive average base period net income determined for petitioner. Milton H. West, Jr., Esq., and Lamar Cecil, Esq., for the petitioner. Irene F. Scott, Esq., for the respondent. Black, Judge. BLACK *616 This proceeding involves petitioner's excess profits tax liability for the calendar years 1941, 1942, 1943, 1944, and 1945, which the Commissioner determined as follows: Calendar year Liability [1941] $ 12,697.83 [1942] 60,861.31 [1943] 162,303.68 [1944] 212,733.09 [1945] 249,166.80 Reconstruction of petitioner's average base period net income for the year 1940 is also *5 in issue for the purpose of determining petitioner's unused excess profits credit carry-over for succeeding years as provided by statute. Respondent in his statutory notice of disallowance denied petitioner's applications for relief under section 722 and the petitioner here contends that in so doing the respondent erred. In its brief petitioner states that it seeks under section 722 of the Code refund of excess profits taxes in the following amounts: Year Amount [1941] $ 8,761.51 [1942] 16,138.62 [1943] 16,221.09 [1944] 18,002.71 [1945] 18,002.24 These amounts as claimed in the brief are in each year in lesser amounts than those claimed in the petition and in the applications for relief. Petitioner in its brief seeks a constructive average base period net income for each year as follows: Year CABPNI 1 [1940] $ 149,348.32 [1941] 158,300.58 [1942] 157,982.18 [1943] 157,982.18 [1944] 157,982.18 [1945] 157,982.18 In computing the above CABPNI petitioner used as a starting point the actual average base period net income computed without the benefit of section 713 (e). Each of the above CABPNIS, as reconstructed in petitioner's brief, was less than that claimed by petitioner *6 in its applications for relief. *617 The parties have stipulated that in the event relief under section 722 of the Code is denied petitioner its average base period net income for each year is as follows: Year Amount [1940] $ 112,501.76 [1941] 112,799.83 [1942] 116,744.51 [1943] 116,744.51 [1944] 116,321.84 [1945] 116,327.17 In computing these stipulated amounts effect has been given to certain adjustments, namely, (1) section 713 (e) has been applied to 1942 and subsequent years, and (2) in each year adjustments were made for certain 711 (b) (1) (J) abnormalities. Petitioner's average base period net income as unadjusted under section 713 (e) but after section 711 (b) (1) (J) adjustments were made for each year was as follows: Year Amount [1940] $ 112,501.76 [1941] 112,799.83 [1942] 112,481.43 [1943] 112,481.43 [1944] 112,143.28 [1945] 112,147.55 In its petition the petitioner relied on subsections (b) (1), (b) (4), and (b) (5) of section 722 as qualifying it for relief. In its brief, however, petitioner relies only on subsection (b) (4), and more specifically on the following events occurring during the base period: (1) a difference in its capacity by adding new theatres and remodeling a theater, (2) a change in the operation of its *7 business by assuming control of its confectionary business or, in the alternative, that by commencing on January 1, 1936, the sale of candy and popcorn in its theatres there was a difference in products furnished, (3) a change in management, and (4) a difference in product by selling crude oil. In computing petitioner's excess profits net income for years in the base period an adjustment was made and agreed to by respondent under the provisions of section 711 (b) (1) (J) for certain abnormal deductions incurred during the base period years. Should we determine that petitioner is entitled to relief because of section 722 (b) (4) factors a secondary issue that arises is whether the relief granted to petitioner under section 722 interferes with the relief which is automatically granted to petitioner because it incurred during the base period abnormal deductions which satisfy the provisions of section 711 (b) (1) (J) of the Code. Respondent raises the issue that even though petitioner has established statutory grounds for relief, it has failed to prove a CABPNI which would entitle it to any relief because petitioner has failed to exclude certain abnormal income which respondent alleges *8 petitioner *618 received in some of the base period years for the following reasons: (1) oil drilling in the East Texas oil fields during the first 2 years of the base period was much larger than the last 2 years of the base period and hence petitioner's theatre attendance was greatly affected thereby, (2) bank night in some of the base period years was discontinued in 1937 when such bank night programs were declared illegal under the laws of the State of Texas, and (3) respondent also alleges that: The record also indicates that petitioner has realized abnormal income during the base period years by reason of the practices and operating methods of Paramount Pictures, Inc. owner of fifty percent of the capital stock of the Jefferson Amusement Company which corporation owns fifty percent of the stock of the petitioner corporation. Such practices led to the filing of a complaint against Paramount Pictures, Inc. and others, for violation of the so-called Sherman Anti-Trust Act on July 20, 1938. Pre-trial negotiations for settlement of the proceeding resulted in a consent decree in which there was reserved to the Government the right to prosecute the suit at the end of a three-year trial *9 period. The Government exercised this reserved right after the expiration of the three year trial period, and the case was carried to the United States Supreme Court where it was decided in 1948, 334 U.S. 131. An injunction was granted as to several of the practices under review; and the cause was remanded to the trial court as to others. Although respondent does not allege that petitioner was in any way a party to that antitrust suit yet he seems to contend that its income was in some way affected thereby and made to some extent abnormal because Paramount Pictures, Inc., was the owner of 50 per cent of the stock of the Jefferson Amusement Company and the Jefferson Amusement Company was the owner of 50 per cent of petitioner's capital stock. FINDINGS OF FACT. The stipulated facts are so found. East Texas Theatres, Inc., the petitioner, is a Texas corporation organized on May 1, 1927. Its principal office is in the Jefferson Theatre Building, Beaumont, Texas. Petitioner has outstanding 2,500 shares of $ 100 par value capital stock and 50 per cent of the stock is owned by Jefferson Amusement Company of Beaumont, Texas, and the remainder of its shares of stock is owned by E. L. Kurth, *10 J. H. Kurth, Jr., and S. W. Henderson. The business activities of the petitioner embrace the operation of some 25 wholly owned theatres and 14 theatres in joint ownership with other individuals. All of these theatres are located in the East Texas area. Net revenues of the company consist primarily of profits from wholly owned and jointly owned theatres, profits from the operation of confectionary units, and rentals from tenants. Petitioner filed its Federal income and excess profits tax returns for each of the calendar years 1940 to 1945, inclusive, with the collector of internal revenue for the first district of Texas at Austin, Texas. *619 Facts -- Change in Capacity. At the beginning of the base period, on January 1, 1936, petitioner had 23 theatres which were wholly owned by the petitioner. One of these theatres, the Astor in Rusk, Texas, was never operated during the base period. Petitioner on January 1, 1936, was also operating 12 theatres which were 50 per cent owned by petitioner. The 50 per cent owned theatres were operated by petitioner as joint ventures with various individuals with 50 per cent of the earnings or losses belonging to petitioner. Petitioner during the base period *11 remodeled and increased the seating capacity of one of its 23 wholly owned theatres, the Rialto of Jacksonville, from 330 seats to 745 seats. The Rialto was closed for remodeling during the period December 1, 1936, to March 4, 1937. During the base period petitioner abandoned four of its 23 theatres, wholly owned as of the beginning of the base period. The names of these theatres, their capacity, location and date of abandonment are as follows: Date of Name of theatre Location Capacity abandonment Ritz Lufkin [388] Nov. 4, 1939 Gem Conroe [268] Nov. 1, 1938 Old Gem Overton [403] May 8, 1937 Rex Arp [325] Oct. 8, 1938 During the base period petitioner abandoned three of the 12 jointly owned theatres. The names of these theatres, their capacity, location, and date of abandonment are as follows: Date of Name of theatre Location Capacity abandonment Aladdin Longview [310] Dec. 11, 1937 Nu-Gulf Polly [470] Oct. 28, 1936 Old Ritz Kilgore [322] June 19, 1939 During the base period, 1936 to 1939, inclusive, petitioner added nine wholly owned theatres and four jointly owned theatres to its chain of theatres. However, six of these theatres, as indicated below, replaced other theatres previously operated during the base period. Another of the theatres *12 added during the base period, the Ritz at Gladewater, which was opened on October 11, 1936, was destroyed by fire 4 days later. The seating capacity, name, location, and date of acquisition of the theatres acquired or built by petitioner during the base period are as follows: *620 Seating capacity end of year Name Location Date acquired [1939] Wholly owned theatres: Lynn Lufkin 11-1-39 a [668] Cozy Gladewater 8-25-37 [492] Ritz do 10-11-36 b Palace do 10-11-36 [355] New Gem Overton 8-4-38 c [232] New Rex Arp 12-25-38 d [412] Talco Talco 7-25-37 [407] Strand do 8-25-36 e [399] Ritz Greggton 10-11-36 [369] Jointly owned theatres: Arlyne Longview 5-24-39 f [802] Alamo Polly 8-29-37 g [499] Port La Porte 7-26-36 [449] New Crim Kilgore 6-21-39 h [840] The financial results of petitioner's *13 operations during the base period years, 1936 to 1939, inclusive, as shown by petitioner's books, adjusted to reflect the adjusted base period net income appearing in petitioner's applications for relief are as follows: [1937] Wholly owned theatres Income: Admissions $ 696,414.55 $ 666,004.88 Confectionery -- Net a 857.69 5,410.87 Other 28,773.35 47,733.36 Total income $ 726,045.59 $ 719,149.11 Total expense 625,242.08 625,805.51 Net income b $ 100,803.51 $ 93,343.60 Jointly owned theatres Income: Admissions $ 474,826.23 $ 485,309.81 Confectionery -- Net a 598.08 4,126.10 Other 21,178.34 26,433.92 Total income $ 496,602.65 $ 515,869.83 Total expense 345,365.84 369,991.86 Net Income $ 151,236.81 $ 145,877.97 Less: Joint interest 75,618.41 72,938.99 Petitioner's share $ 75,618.40 $ 72,938.98 Less: Adjustments (not allocated) 6,587.27 6,181.96 Petitioner's net share b $ 69,031.13 $ 66,757.02 Summary of operations Petitioner's total net income b $ 169,834.64 $ 160,100.62 Adjustment for unallocated expenses 58,660.82 Petitioner's net income $ 169,834.64 $ 101,439.80 Other adjustments 1,757.09 839.63 Difference not reconciled (.01) Adjusted base period net income $ 171,591.73 $ 102,279.42 [1939] Wholly owned theatres Income: Admissions $ 584,934.37 $ 621,436.80 Confectionery -- Net a 15,558.28 16,093.34 Other 47,760.78 48,103.77 Total income $ 648,253.43 $ 685,633.91 Total expense 589,737.29 632,830.80 Net income b $ 58,516.41 $ 52,803.11 Jointly owned theatres Income: Admissions $ 441,092.86 $ 443,426.66 Confectionery -- Net a 9,916.17 9,132.18 Other 28,316.14 28,478.13 Total income $ 479,325.17 $ 481,036.97 Total expense 350,516.02 402,960.63 Net Income $ 128,809.15 $ 78,076.34 Less: Joint interest 64,404.57 39,038.17 Petitioner's share $ 64,404.58 $ 39,038.17 Less: Adjustments (not allocated) 9,083.82 Petitioner's net share b $ 55,320.76 $ 39,038.17 Summary of operations Petitioner's total net income b $ 113,836.90 $ 91,841.28 Adjustment for unallocated expenses 15,247.56 18,245.79 Petitioner's net income $ 98,589.34 $ 73,595.49 Other adjustments 725.00 3,051.85 Difference not reconciled 60.00 (.01) Adjusted base period net income $ 99,374.34 $ 76,647.33 *14 *621 The attendance at the theatres operated by petitioner during the years 1936 to 1939 was as follows: [1939] Wholly owned theatres 3,685,943 3,646.168 3,361.800 3,692,870 Jointly owned theatres 2,542,690 2,539,275 2,265.380 2,210,708 6,228,633 6,185,443 5,627,180 5,903,578 The attendance and box office admissions of the 19 theatres operated by Jefferson Amusement Company during the base period years were as follows: 2*15 [1939] Attendance 4,150,349 4,611,554 4,511,250 4,433.913 Admissions $ 865,538.19 $ 1,119,081.62 $ 1,111,839.59 $ 1,065,028.25 During the base period years 1936 to 1939, inclusive, the business affairs of petitioner corporation and its theatres were under the direct charge and management of the Jefferson Amusement Company, 2 the owner of 50 per cent of the capital stock of petitioner corporation. By reason of the addition of certain theatres to petitioner's business during the base period and the remodeling of one theatre, thereby increasing its seating capacity to a substantial extent, petitioner had greater receipts from admissions and larger net income than it would have had if the increased facilities had not been provided. We find this is true after full consideration has been given to the abandonment of some of petitioner's theatres during the base period and to the destruction of one of its theatres, the Ritz, by fire during the base period years. The tax of the petitioner computed under subchapter E without the benefit of section 722 is excessive and discriminatory. In a reconstruction of petitioner's average base period net income for the purpose of arriving at petitioner's CABPNI there should be added to petitioner's average base period net income as adjusted for the 711 (b) (1) (J) abnormalities during the base period $ 2,000 due to change in capacity during the base period *16 by reason of the addition of certain theatres and the remodeling of one theatre. Facts -- Oil Royalty Income. In 1938, petitioner owned the Strand Theatre and the lot on which it was built located in Block 153 of the townsite of Kilgore, Texas. *622 Some 10 feet of the lot was not covered by the theatre building. At an expense of $ 1,914.98, petitioner made alterations to the building so that an additional 12 feet of the lot was available for drilling. For a consideration of $ 1,000 cash bonus petitioner in 1938 entered into an oil and gas lease, reserving a one-quarter royalty interest. After the alteration of the building a permit was obtained to drill two wells on the lot. Both wells were completed as commercial producers, and beginning on October 11, 1939, through November 27, 1939, the lease produced $ 1,960.09 of oil. Petitioner's net income from its royalty interest in this production, after deducting production and pipeline taxes and also 27.5 per cent depletion, was $ 379.38. There were four other producing wells located in the same city block at the time the two wells were drilled on petitioner's lot, the earliest of the four having been drilled in the latter part of 1936. *17 None of these wells has ever failed to produce its allowable quota of oil. Each well located in Block 153 of the townsite of Kilgore was entitled during the period January 1, 1936, to December 31, 1939, to produce 20 barrels of oil on each producing day. During the base period the number of shut-in days * in Kilgore, Texas, was as follows: Year Days [114] During each of the two months, October and November 1939, there were 11 shut-in days in Kilgore, Texas. During the base period the average posted price of crude oil per barrel in Kilgore varied from $ 1.10 to $ 1.35. From January 1, 1936, to October 31, 1936, the gross production tax on crude oil was 2 per cent of the value of the production, and from November 1, 1936, through December 31, 1939, it was 2.75 per cent of the value of production. The pipeline tax throughout the four base period years was .1875 per cent on the value of 99 per cent of the production. The execution of the oil and gas lease and the receipt of oil *18 royalties by petitioner during the base period constitutes a difference in products and hence a "change in the character of the business." Because of this change in the business petitioner's average base period net income is an inadequate standard of normal earnings. In a reconstruction of petitioner's average base period net income for the purpose of arriving at petitioner's CABPNI, $ 2,256.83 should be added because of this change in petitioner's business resulting from the receipt of oil royalty income. *623 Facts -- Decline in Oil Production. The oil production and number of wells (oil, gas, and dry) drilled in the East Texas field, which consists of the Counties of Cherokee, Gregg, Rusk, Smith, and Upshur, during the years 1933 to 1944, inclusive, were as follows: Oil production Wells (million Year drilled barrels) [1933] 2,467 [1934] 3,517 [1935] 4,166 [1936] 2,456 [1937] 2,329 [1938] 1,645 [135] Facts -- Difference in Products, Confections. Prior to 1936, petitioner corporation had no popcorn or confectionary units in any of its theatres. On October 1, 1935, petitioner entered into a contract with a partnership composed of Julius M. Gordon *19 and T. R. Clemmons, both of whom were employees of the Jefferson Amusement Company, whereby a license was granted by petitioner and by the Jefferson Amusement Company to the partnership to sell candy and confections in the theatres operated and managed by Jefferson Amusement Company, including the theatres of petitioner. Under the terms of that license agreement which became effective on January 1, 1936, the partnership agreed to pay to the respective licensors 10 per cent of the gross receipts from sales for such privilege. This agreement was terminated at the close of business on October 30, 1937, and thereafter the confectionary units were operated by and for the account of the respective theatre owners. For the purpose of reconstructing its earnings from confections during the base period petitioner has classified its theatres into four groups: (1) theatres operated throughout the base period, wholly owned by petitioner, (2) theatres operated throughout the base period, 50 per cent owned by petitioner, (3) theatres added during the base period, wholly owned by petitioner, and (4) theatres added during the base period, 50 per cent owned by petitioner. Actual confectionary profits *20 of each of these groups of theatres during the base period were as follows: Group [1] $ 692.44 $ 3,384.95 $ 8,898.27 $ 9,464.08 [2] 406.56 3,161.59 7,525.48 7,010.39 [3] 61.56 1,079.18 4,180.49 4,698.71 [4] 316.63 997.39 1,649.85 Total $ 1,160.56 $ 7,942.35 $ 21,601.63 $ 22,823.03 *624 The introduction of the sale of confections in petitioner's theatres in 1936 constituted a change in the character of petitioner's business. The tax of the petitioner computed under subchapter E without the benefit of section 722 is excessive and discriminatory. In a reconstruction of petitioner's average base period net income for the purpose of arriving at petitioner's CABPNI there should be added $ 3,250 because of the change in the character of its business which took place when it began the sale of popcorn and confections in its theatres on January 1, 1936. The operation of the confectionary units in petitioner's theatres for its own account rather than by a concessionaire, which took place on or about October 30, 1937, was not a substantial change in the nature of petitioner's operations and does not qualify as changes in the character of petitioner's business within the meaning of section 722 (b) (4) of the Code. OPINION. In *21 order for the petitioner to be entitled to general relief from excess profits taxes as provided by section 722 of the Internal Revenue Code, it must satisfy the two requirements appearing in section 722 (a) of the Code. The general rule, as contained in section 722 (a), provides as follows: * * * In any case in which the taxpayer [1] establishes that the tax computed under this subchapter (without the benefit of this section) results in an excessive and discriminatory tax and [2] 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 a 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. * * * [Brackets and italics have been added for emphasis.] The first requirement of section 722 (a) of the Code, that the excess profits tax must be excessive and discriminatory, is further defined in some detail in subsections (b) and (c) of section 722 of the Code. *22 As to the second requirement as italicized above there is no further definition of it in the Code. In December 1946, there appeared E. P. C. 6 (1946-2 C. B. 123-126) which discusses in some detail the concept of "normal earnings" as that term is used in the context of section 722 (a) of the Code. 3 Petitioner contends it satisfies the first requirement of section 722 (a) of the Code under section 722 (b) because of one or more of the *625 following factors: (1) the acquisition of additional theatres, wholly owned and jointly owned, during the base period years; (2) the increase in the seating capacity of certain of its theatres which were remodeled during the base period; (3) the operation of the confectionary units in petitioner's theatres for its *23 own account after October 30, 1937, instead of leasing them to a concessionnaire, or, in the alternative, that by commencing on January 1, 1936, the sale of popcorn and confections in its theatres there was a difference in products furnished; (4) a change in the management of the Jefferson Amusement Company which managed the affairs of petitioner; (5) the gas explosion in the Consolidated Public School building at New London, Texas, on March 18, 1937, which resulted in the death or injury of a number of the children of families residing in the area served by certain of petitioner's theatres; and (6) the receipt, beginning in 1938, of income from an oil and gas lease on certain theatre property at Kilgore, Texas, in which petitioner owned an undivided one-half interest. Petitioner received a bonus of $ 1,000 in 1938 and actual production of oil began in 1939. In its brief petitioner recomputed the amount of its CABPNI. In those computations petitioner adjusted its actual average base period net income by adding the following amounts: Excess profits tax year 1941 and subsequent years Confectionary profits $ 17,677.63 Theatre profits 25,892.92 Oil lease profits 2,256.83 Total constructive increase in average base period net income $ 45,827.38 Thus, *24 in its brief petitioner in the reconstruction seeks no adjustments to its actual earnings during the base period for the alleged change in management of Jefferson Amusement Company or for the New London gas explosion, nor is there any indication in the record as to the approximate effect on petitioner's actual base period earnings of these two alleged factors. Therefore, we shall consider these two grounds as being no longer pressed by petitioner. In order to be entitled to general relief under section 722 of the Code petitioner must establish for the applicable excess profits taxable year a constructive average base period net income larger than the following: Average base period net Year income, as stipulated [1940] $ 112,501.76 [1941] 112,799.83 [1942] 116,744.51 [1943] 116,744.51 [1944] 116,321.84 [1945] 116,321.17 *626 Issue -- Abnormal Net Income. Respondent strongly contends in his brief that even if it be assumed that petitioner has proved one or more of the qualifying factors under section 722 (b) (4), that nevertheless petitioner cannot prevail because it had certain abnormal income during the base period years which must be excluded in arriving at any CABPNI and that when this is done, the CABPNI thus arrived *25 at will be smaller than petitioner's average base period net income which has been stipulated and, therefore, petitioner would get no relief. We shall first take up this contention of respondent for if the record sustains it, respondent contends that we would need to go no further because petitioner could not prevail. In the absence of evidence indicating unusual conditions or events it is to be inferred, of necessity, that during the taxable years in the base period the actual earnings are normal earnings. That this is true is discussed in some detail in E. P. C. 6, supra. We quote from E. P. C. 6 two separate paragraphs pertinent in this proceeding: In cases where there are actual earnings for any of the taxable years in the base period, such earnings will be considered normal (i. e., acceptable elements to be employed in the process of determining normal earnings) in the absence of factors requiring a contrary conclusion or of circumstances requiring a reconstruction based upon factors other than actual earnings. Thus, normal earnings will frequently be the average of actual earnings for the taxable years in the base period, adjusted to compensate for the effects of unusual and peculiar *26 events and temporary economic circumstances. * * * In using base period experience in the determination of normal earnings, it is necessary to take account of the abnormalities; i. e., substantial and outstanding departures from the usual and ordinary income and expense that would be expected to characterize the profits history of the taxpayer during such period. Thus appropriate adjustment will be made for all such abnormalities, whether favorable or unfavorable to the taxpayer and whether or not attributable to the qualifying factor. Such adjustment will usually take the form of eliminating, reducing, or increasing items of gross income or deduction. The abnormalities referred to in this paragraph do not include the high and low points in a variant cycle or sporadic profits experience because these extremes are characteristic of such experience. [Emphasis added.] It seems to us that the above discussion as to what are normal earnings is sound and in harmony with the statute. The excess profits tax is predicated upon the proposition of applying this tax to such profits as are in excess of the normal earnings from the operation of the taxpayer's business, Philadelphia, Germantown & Norristown R. R. Co., 6 T. C. 789. *27 In computing its tax credit on the basis of normal earnings under the provisions of section 711 (a) of the Code, the taxpayer may use the arithmetic average of its actual earnings during the base period years, which in general are the years 1936 to 1939, inclusive. In most of the cases wherein general relief *627 under section 722 (a) and (b) has been determined by this Court, it has been necessary to adjust the taxpayer's actual earnings during the base period years only to the extent that the qualifying factor would have affected actual earnings. The respondent here contends that in the reconstruction of petitioner's normal earnings during the taxable years of the base period its actual earnings must be adjusted because of certain unusual conditions which existed during that period and from which petitioner received earnings which are not normal. In order to prevail in his contention, respondent must be able to show from the evidence that during this period income was received which was unusual, peculiar, or abnormal to the petitioner, and the evidence must further show that because of such abnormal income petitioner's actual earnings during the taxable years of the base period do not *28 properly reflect the normal earnings of its business during that period. See Studio Theatre Inc., 18 T. C. 548. It is the respondent's contention that in the reconstruction of the CABPNI proper adjustments must be made for three unusual conditions from which petitioner received income which was not a part of petitioner's normal earnings. First, he contends that the decline of drilling operations in the East Texas oil field affected the earning capacity of a majority of petitioner's theatres. Secondly, he contends that there must be eliminated from actual earnings during the base period the income realized by petitioner from the conduct of a lottery, that is, "bank night" which was discontinued in June 1937. Thirdly, respondent contends that petitioner violated sections 1 and 2 of the Sherman Act and that in the reconstruction of the CABPNI the income arising from the maintenance of the monopoly must be eliminated from actual earnings during the taxable years in the base period. The record is insufficient to establish, however, that "abnormal income" was, in fact, realized by petitioner because of its use of "bank night" programs for awhile in the early part of the base period years, *29 or because of petitioner's relationship with the Jefferson Amusement Company, 50 per cent of which stock was owned by Paramount Pictures, Inc., or if such abnormal income was received, the amount thereof. There is consequently no occasion to discuss further these two items of alleged abnormal income. Cf. Studio Theatre Inc., supra.There is nothing in the record which establishes any such abnormal income. We think that respondent must also fail in his contention that petitioner received abnormal income in some of the earlier base period years between 1936 and 1939 because of the decline in oil drilling in the East Texas oil fields. The facts do establish that there was a decline in oil drilling in the East Texas oil fields during the base *628 period years and we have embodied findings of fact to show this decline. But we fail to see where that factor had anything to do with proving that petitioner had abnormal income which should be excluded in any of the base period years. Doubtless the attendance at some of petitioner's theatres which were situated in the East Texas oil fields during this period was increased when the drilling was heavy by reason of the larger number of workers *30 in the field and doubtless the attendance was decreased when the drilling became less because of the decreased number of workers in the field, but we fail to see where these factors have anything to do with establishing the abnormality of income. Petitioner's main source of income in all the base period years still remained paid admissions to its moving picture theatres and these admissions were its normal source of income. Whether these total admissions went up or down by reason of the fluctuating of oil drilling in the field would not affect their normalcy. E. P. C. 6, supra, among other things, says: "In using base period experience in the determination of normal earnings, it is necessary to take account of abnormalities; i. e., substantial and outstanding departures from the usual and ordinary income and expense that would be expected to characterize the profits history of the taxpayer during such period." As an example of what we would deem to be abnormal income within the meaning of E. P. C. 6, supra, take the situation in Premier Products Co., 2 T. C. 445. In that case the taxpayer corporation had acquired title to certain insurance policies on the life of its principal stockholder. *31 The stockholder died and the corporation collected the insurance policies. We held under these facts that the net proceeds thus received constituted "abnormal income" as that term is defined in section 721 (a) (1) of the Code. While, of course, we do not have here the determination of what is abnormal income under section 721 (a) (1) of the Code, nevertheless, we do think that in order for income of a taxpayer seeking relief under section 722 of the Code to be excluded as "abnormal income" in arriving at a constructive base period net income it must be abnormal at least in somewhat the same sense as we held in Premier Products Co., supra.If, for example, the life of petitioner's president had been insured for let us say $ 100,000 and the president had died during one of the base period years and petitioner had collected the policy, whatever income resulted to the petitioner by reason of the collection of the policy would have been abnormal income and could doubtless be excludible in a computation of CABPNI. But for reasons we have already explained we do not think that the fact that petitioner's base period net income may have been influenced to some substantial extent by the *32 increase or decrease of oil drilling in the East Texas oil fields would have anything to do with characterizing *629 some of its income as "abnormal income." On this issue the Commissioner is not sustained. We now further consider the second requirement of section 722 (a) of the Code and whether petitioner has established "what would be a fair and just amount of normal earnings" for the base period. When the reconstruction of normal earnings is based upon actual earnings of the taxpayer during the base period, the actual earnings must be adjusted for the effect of the qualifying factor or factors, and in addition for the effect of any other condition or event which was not a part of the normal operation of the taxpayer's business. It is so provided in section 722 (a) of the Code which reads "a fair and just amount" of normal earnings. It is incumbent upon the taxpayer if relief is to be granted to establish what is the amount of normal earnings, and if he fails to establish the amount of such earnings, then the general relief from excess profits taxes is to be denied the taxpayer. After examining the facts contained in the record, we have determined petitioner has fulfilled this second *33 requirement of section 722 (a) of the Code. If it is at all possible from the record we must determine what is the proper amount of the adjustment to be made to actual earnings during the base period in the reconstruction of normal earnings. We must do so even if the CABPNI is only a reasonable estimate based upon all the pertinent facts. National Grinding Wheel Co., 8 T. C. 1278; Victory Glass, Inc., 17 T. C. 381; Jefferson Amusement Co., 18 T. C. 44. In its brief petitioner proposes for the year 1940 a CABPNI of $ 149,348.32 and for the year 1941 a CABPNI of $ 158,300.58. For the subsequent taxable years before us petitioner would adjust the base period years in a manner similar to that for 1941. For the year 1941, petitioner has proposed a CABPNI as follows, having additional schedules in its brief in support of the reconstruction: Actual Confectionary Theatre Oil lease Year earnings profits profits profits Total [1936] $ 171,591.73 $ 34,821.16 $ 60,810.01 $ 2,981.02 $ 270,203.92 [1937] 102,279.42 17,511.01 15,197.49 3,325.97 138,313.89 [1938] 99,374.34 8,977.89 19,454.67 1,605.71 129,412.61 [1939] 76,647.33 9,400.45 8,109.51 1,114.61 95,271.90 Totals $ 449,892.82 $ 70,710.51 $ 103,571.68 $ 9,027.31 $ 633,202.32 Average $ 112,473.20 $ 158,300.58 Oil *34 Royalty Reconstruction. We are satisfied that petitioner's adjustment to actual earnings for the oil lease profits is reasonable. For the first time in its period of existence petitioner received net income during the base period from oil royalties. Petitioner received a lease bonus of $ 1,000 in 1938 and *630 net income from oil production of $ 379.38 for the period October 11, 1939, through November 27, 1939. Actual earnings during the base period years 1936, 1937, and 1938 include no earnings from oil royalties, and for the year 1939 only oil royalties were received and included in actual earnings during a part of the year. In reconstructing normal earnings for the base period, petitioner's actual earnings during each of the base period years must, therefore, be adjusted for additional income based on the oil royalties. This has been done and the result is reflected in our Findings of Fact. Reconstruction -- Popcorn and Confection Sales. For certain of its base period years petitioner has reconstructed additional confectionary profits which it contends are to be added to its actual confectionary profits by applying year-to-year attendance ratios as the index for computing the amount *35 of additional confectionary profits. In so doing, petitioner assumes that year-by-year confectionary sales will vary directly and in proportion to theatre attendance and petitioner also assumes that confectionary sales will vary directly and in proportion to confectionary profits. Such assumptions are not warranted from the record in this proceeding. While we cannot accept petitioner's reconstruction of what would be normal base period profits from its candy and popcorn business, the record shows that some adjustment is warranted in reconstructing normal earnings. We have done this and the result is reflected in our Findings of Fact. Reconstruction -- Change in Capacity. In reconstructing petitioner's normal earnings for each of the base period years as we have already considered the oil royalty income and candy and popcorn profits, the final adjustment to actual earnings is based upon the theatres added to petitioner's chain of theatres and a theatre remodeled during the base period. Petitioner's reconstruction of additional theatre profits when compared with the facts contained in the record is, in our opinion, greatly overstated. Respondent in his brief has pointed out several *36 objections to the reconstruction as made by petitioner under this particular ground for 722 (b) (4) relief. Some of these objections, we think, are good. We shall not undertake in this opinion to enter into a detailed discussion of these objections. After a consideration of all the facts we have found in our Findings of Fact that: * * * In a reconstruction of petitioner's average base period net income for the purpose of arriving at petitioner's CABPNI, there should be added to petitioner's average base period net income as adjusted for the 711 (b) (1) (J) abnormalities during the base period, $ 2,000 due to change in capacity during the *631 base period by reason of the addition of certain theatres and the remodeling of one theatre. That figure will be used in a computation under Rule 50. As we have heretofore stated, petitioner and respondent have stipulated that petitioner's average base period net income as adjusted for section 711 (b) (1) (J) abnormal deductions during the base period for each excess profits tax year was as follows: Year Amount [1940] 4 $ 112,501.76 [1941] 112,799.83 [1942] 5*37 112,481.43 [1943] 5 112,481,43 [1944] 5 112,143.28 [1945] 5 112,147.55 Petitioner's section 711 (b) (1) (J) abnormal deductions were based upon legal and auditing expenses and taxes incurred by petitioner during the base period years. The adjustments arising under section 711 (b) (1) (J) and (K) are not inconsistent with the basis upon which we have computed petitioner's relief. See Jefferson Amusement Co., supra.See also the last paragraph quoted heretofore in this opinion from E. P. C. 6, supra. It is, therefore, determined that petitioner is entitled in the computation of its excess profits tax to use as a CABPNI the above amounts, plus $ 7,506.83 which is the sum of the reconstruction which we have determined should be made because of the three 722 (b) (4) factors which we have above discussed. Having held that petitioner is entitled to certain relief under section 722, the constructive carry-over from 1940 will be computed in accordance with the applicable statute and regulations under Rule 50. See Jefferson Amusement Co., supra. Reviewed by the Special Division. Decision will be entered under Rule 50. Footnotes 1. Abbreviation of constructive average base period net income.↩ a. Replaced Ritz Theatre (closed November 4, 1939).↩ b. Destroyed by fire October 15, 1936.↩ c. Replaced old Gem Theatre (destroyed by fire May 8, 1937).↩ d. Replaced old Rex Theatre (destroyed by fire October 8, 1938)↩ e. Closed April 3, 1938, abandoned August 5, 1939.↩ f. Replaced Aladdin Theatre (destroyed by fire December 11, 1937).↩ g. Replaced Nu-Gulf Theatre (destroyed by fire October 28, 1936).↩ h. Replaced Ritz Theatre (abandoned June 19, 1939).↩ a. Confectionery income January 1, 1936 to October 30, 1937, consists of rental amounting to 10 per cent of licensee's gross receipts from sales; thereafter, income represents sales minus cost of goods sold and direct↩ expenses. b. These amounts for years 1937, 1938, and 1939 represent net income or (loss) before deduction of "net Corporate expense -- not allocated."↩ 2. It is stipulated by the parties that "* * * the Court may find as facts those contained in the stipulation filed in the case of Jefferson Amusement Company v.↩ Commissioner of Internal Revenue, Tax Court Docket No. 27267." *. Shut-in days are those days when the production of oil is prevented by closing down the wells. The shut-in days here referred to are those arising under the order of a state administrative agency.↩ 3. The term "normal earnings" appears also in subsection (b) of section 722 of the Code, but the term as used there is concerned with the test of whether or not the qualifying factor, as considered by itself in its effect on actual earnings during the base period, causes the taxpayer's average base period net income to be an inadequate standard of normal earnings. See Green Spring Dairy, Inc., 18 T. C. 217 and E. P. C. 16 (1947-1 C. B. 190↩). 4. Computed under 1941 law for carry-over purposes.↩ 5. Without giving effect to section 713 (e) of the Code which is effective for taxable years beginning after December 31, 1941.