Lester & Witcher Abstract Co. v. Commissioner

Lester & Witcher Abstract Company, Petitioner, v. Commissioner of Internal Revenue, Respondent Lester & Witcher Abstract Co. v. Commissioner Docket Nos. 10928, 26815 United States Tax Court 27 T.C. 744; 1957 U.S. Tax Ct. LEXIS 270; January 31, 1957, Filed *270 Decisions will be entered for the respondent. 1. Excess profits tax relief under section 722 (b) (4), I. R. C. 1939, disallowed where petitioner, a Mississippi title-abstracting company, failed to establish by competent evidence a basis for reconstruction of normal base period earnings productive of greater excess profits credits than those allowed by the respondent on the invested capital basis. 2. Held, petitioner not entitled to relief under section 722 (b) (2) or (5), or section 722 (c), I. R. C. 1939. James Monroe Walker, Esq., for the petitioner. Douglas M. Moore, Esq., for the respondent. Bruce, Judge. BRUCE *744 In these consolidated proceedings petitioner seeks to recover excess profits taxes paid by it for the taxable years 1943 to 1945, inclusive, in the following amounts: Year Amount [1943] $ 10,202.34 [1944] 5,818.18 [1945] 4,600.28 *271 Petitioner seeks relief under section 722 (b) (2), (4), and (5), and section 722 (c) (2) and (3), and claims a constructive average base period net income of $ 7,391.18. *745 FINDINGS OF FACT. Petitioner was incorporated under the laws of the State of Mississippi. On November 21, 1939, the date of incorporation, it commenced business in that State. Petitioner filed its tax returns on the calendar year basis. The tax returns for the taxable years in question were filed with the collector of internal revenue in Jackson, Mississippi. Petitioner specialized in the preparation of transcript abstracts of titles for oil companies and independent oil operators. It was organized after the discovery of an oil field at Tinsley, Mississippi, in August 1939, by the partnership of Lester & Witcher which had been operating similar abstracting businesses in Indiana and Illinois. However, petitioner did not operate as a partnership but incorporated in November 1939 in order to comply with the requirements of Mississippi law. Prior to petitioner's incorporation, no detailed abstracts of title of the type required by oil companies were being prepared by abstractors in Mississippi. The initial*272 oil production at the Tinsley field was developed at 4,900 feet as compared with the shallower production at 1,700 to 2,500 feet found in Illinois oil fields. Because of the increased depth of production in Mississippi, wildcat oil operators were reluctant to risk the additional expense of drilling deeper wells. Also, the entry of the United States into World War II brought about a freeze on oil prices. As a consequence, the development of "oil play" in Mississippi was much slower than it had been in Illinois or Indiana. Petitioner's receipts and net income (or loss) for the years 1939 to 1945, inclusive, were as follows: Net income Year Receipts (or loss) [1939] $ 934.43 ($ 517.27) [1940] 14,433.92 (2,488.63) [1941] 19,440.12 892.42 [1942] 31,778.00 5,623.29 [1943] 89,733.75 5,623.29 [1944] 233,693.60 19,348.14 [1945] 300,932.18 27,870.00 Petitioner's excess profits tax credit computed on the invested capital basis, and its excess profits tax liability, as determined by the Commissioner, for the taxable years 1943, 1944, and 1945, are as follows: Excess profits Excess profits Year tax credit tax liability [1943] $ 575.22 $ 13,612.57 [1944] 897.22 7,177.57 [1945] 1,399.00 14,414.22 *273 *746 Petitioner filed excess profits tax returns for the taxable years in question, and later filed claims for relief, Form 991, under section 722, Internal Revenue Code of 1939, and claims for refund of portions of the taxes paid for each of such years. Respondent denied relief under section 722 (b) (4) and determined that petitioner was not qualified under section 722 (c). OPINION. Respondent has stipulated that petitioner commenced business during the base period. This fact qualified petitioner for relief under section 722 (b) (4), Internal Revenue Code of 1939, and petitioner is entitled to reconstruct its average base period net income under the 2-year push-back rule. But the existence of the "qualifying factor" is only the initial step toward relief. Union Parts Mfg. Co., 24 T. C. 775. To be entitled to any of the relief sought, petitioner must establish a fair and just amount representing normal earnings to be used as a constructive average base period net income, which would result in excess profits credits, based on income, greater than those allowed by the respondent under the invested capital method. Green Spring Dairy, Inc., 18 T. C. 217,*274 affd. 208 F. 2d 471; Jackson-Raymond Co., 23 T. C. 826 (1955). Petitioner has failed to meet this burden. Petitioner has submitted a proposed reconstruction which results in a constructive average base period net income of $ 7,391.18. Petitioner obtained this figure by first computing the net average earnings per employee per year of other oil abstracting companies operating in Illinois, Indiana, and Oklahoma over the period 1936 to 1939, inclusive. Petitioner then multiplied this average net earnings per employee figure by its own average number of employees per year for the years 1940 to 1943, inclusive, to arrive at the average net income per year that it allegedly would have received if it had commenced business earlier. There is considerable doubt, aside from the evidentiary question hereinafter discussed, whether the reconstruction proposed by petitioner could be approved in view of the differences in the economic and geographic conditions existing in the oil abstracting business in Mississippi as compared to those existing in such business in Illinois, Indiana, and Oklahoma. Of particular significance are the differences*275 between shallow and deep well fields, the length of time such fields have been operating and the amount of "oil play" involved, and more especially the fact that, prior to the discovery of the Tinsley field in August 1939, there was little or no market for services such as petitioner rendered. Discussion of these factors is deemed unnecessary, however, in view of the fact that the evidence upon which petitioner predicates its computation was never admitted at the hearing. *747 Petitioner did not produce the books and records of the other abstracting companies nor did petitioner make any showing that these books and records were unavailable. In fact, the testimony of petitioner's principal witness indicated that at least some of the original records were available. Since no foundation for the introduction of secondary evidence was laid, petitioner's attempt to introduce extracts of the original records and testimony as to the contents of the original records of other abstracting companies was rejected and respondent's objections to the introduction of such evidence were sustained. See 4 Wigmore, Evidence, secs. 1185, 1192 (3d ed. 1940). Furthermore the data contained in *276 petitioner's administrative claims for relief, Form 991, consisted of correspondence from other abstracting companies subject to the same evidentiary objections. These forms, although admitted into evidence, were admitted solely for the purpose of showing that such applications for relief were made. Nothing contained in these exhibits is evidence of the accuracy of the constructive average base period net income claimed by petitioner, and the presence of these documents in the record does not support petitioner's contention in any manner. For the foregoing reasons, it is held that petitioner has failed to establish a fair and just amount representing its prospects for normal earnings if it had commenced business in Mississippi 2 years earlier, and that respondent did not err in denying petitioner relief under section 722 (b) (4). Petitioner's claims for relief under section 722 (b) (2) and (5) were not set forth as grounds for relief in any of petitioner's administrative applications and are accordingly beyond the scope of review by this Court. Blum Folding Paper Box Co., 4 T. C. 795 (1945); Wadley Co., 17 T. C. 269 (1951).*277 Also, since the petitioner commenced business and was in existence prior to January 1, 1940, it does not qualify for relief under the provisions of section 722 (c), Internal Revenue Code of 1939. Flotill Products, Inc., 26 T. C. 222. See Bulletin on Section 722, p. 142. Reviewed by the Special Division. Decisions will be entered for the respondent.