Arkansas Motor Coaches, Ltd. v. Commissioner

Arkansas Motor Coaches, Limited, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent Arkansas Motor Coaches, Ltd. v. Commissioner Docket No. 32534 United States Tax Court 28 T.C. 282; 1957 U.S. Tax Ct. LEXIS 202; April 30, 1957, Filed *202 Decision will be entered under Rule 50. Respondent allowed petitioner's claim in part for relief under section 722 (b) (4), I. R. C. 1939. Throughout the base period it was involved in litigation regarding the granting of a certificate of convenience and necessity by the Interstate Commerce Commission, which it needed to operate. Although it was allowed to operate and those operations were not interfered with during the base period, it did not receive the certificate until 1940. It contends that the lack of a certificate was one of the prime causes of low base period earnings and that it is entitled to a reconstruction much greater than the Commissioner has granted in his deficiency notice, based on the assumption that it did have a certificate. Petitioner contends that under such construction its CABPNI for 1942 would be $ 68,188.86. Held, that even if we assume that petitioner had been granted the certificate of convenience and necessity prior to December 31, 1939, it would not have reached the level of earnings by December 31, 1939, for which it contends. Held, further, petitioner is entitled to a CABPNI somewhat higher than the Commissioner has determined. Petitioner's*203 CABPNI to be used for 1942 determined to be $ 22,000. Wentworth T. Durant, Esq., for the petitioner. Douglas M. Moore, Esq., and Allen T. Akin, Esq., for the respondent. Black, Judge. BLACK *282 This proceeding involves a redetermination of income tax and excess profits tax for the year 1942. The respondent has determined a deficiency in income tax of $ 10,107.57 and an overassessment in excess profits tax of $ 15,776.13. The statutory notice contained the following explanation: After careful consideration of your application for relief, Form 991, it has been determined that you established the existence of a qualifying factor under section 722 (b) (4) of the Internal Revenue Code, and therefore, were entitled to a constructive average base period net income in the amount of $ 15,472.00 for the taxable year ended*204 December 31, 1942. Furthermore, it has been held that you were entitled to constructive average base period net incomes in the respective amounts of $ 13,997.33 and $ 14,964.32 for the taxable years ended December 31, 1940 and December 31, 1941, for the purpose of determining any unused excess profits credit carry-over from these years to the taxable year ended December 31, 1942. * * * The Commissioner computed the constructive average base period net income (hereinafter referred to as CABPNI) of $ 15,472, which he has used for the taxable year 1942, as follows: Taxpayer's actual 1939 passenger revenue $ 121,127.00 Increased 7.6 per cent for first year 9,205.65 130,332.65 Increased 7.6 per cent for second year 9,905.28 Constructive passenger revenue for 1939 $ 140,237.93 Add: Taxpayer's 1939 "other revenue" 12,053.00 Constructive gross revenue for 1939 152,290.93 Constructive net profit for 1939 at 10 1/2 per cent ($ 15,990.54 rounded) 16,000.00 Constructive average base period net income at 96.7 per cent of 1939 15,472.00 *283 The petitioner, in its petition, alleges that the respondent's determination of taxes is based upon the following error: Failure*205 to allow Constructive Average Base Period Net Income to Petitioner in the amount of $ 59,486.70 to be used in lieu of petitioner's average base period net income in determining petitioner's excess profits tax for the year 1942 and for the purpose of determining the excess profits tax carry-over from the years 1940 and 1941, pursuant to the provisions of Section 722 of the Internal Revenue Code in accordance with the claim for Refund for the year 1942, filed September 3, 1943 by petitioner on Form 991. In its brief the petitioner contends for a CABPNI of $ 68,188.86. The question involved, therefore, is, has the petitioner established that "a fair and just amount representing normal earnings to be used as a CABPNI for purposes of an excess profits tax" is in excess of the amount determined by the Commissioner. FINDINGS OF FACT. A stipulation of facts has been filed and is incorporated herein by reference. Arkansas Motor Coaches, Limited, Inc. (hereinafter called petitioner), is a corporation organized under the laws of the State of Arkansas, having its principal place of business at Little Rock. It filed its income and excess profits tax returns for the years 1940, 1941, and 1942 *206 with the then collector of internal revenue at Little Rock, Arkansas. These returns were prepared upon the accrual basis of accounting. History of Operation and Operating Certificates. A partnership or joint venture known as Arkansas Motor Coaches, Ltd., which was the predecessor of petitioner, commenced operation as a passenger bus carrier between Memphis and Little Rock on or before September 16, 1935, and between Little Rock and Texarkana on or before September 17, 1935. Raymond Rebsamen (hereinafter referred to as Rebsamen), a wealthy and successful businessman of Little Rock, financed its operation. Its franchises, certificates, and permits were obtained in the name of Milton D. Leeper (hereinafter referred to as Leeper), doing business as Arkansas Motor Coaches, Ltd. Franchises, certificates, and permits obtained in the name of Leeper were as follows: *284 1. Interstate permit from the State of Tennessee dated September 16, 1935, authorizing operations as an interstate carrier in and out of Memphis, Tennessee, from West Memphis, Arkansas. 2. Letter from the Railroad Commission of the State of Texas dated October 3, 1935, advising that no Texas permit was required*207 to operate out of a terminal located on the Texas side of Texarkana. 3. Interstate permit from the State of Arkansas dated October 8, 1935, authorizing operations as an interstate carrier between Texarkana and Memphis over U. S. Highway 67 from Texarkana to Arkadelphia, thence over Arkansas Highway 7 to Hot Springs, thence over U. S. Highway 70 to Little Rock and Memphis, Tennessee, a total distance of 315 miles. 4. Intrastate permit from State of Arkansas dated February 13, 1936, authorizing intrastate service between Texarkana and West Memphis, Arkansas, via Hot Springs and Little Rock, serving all intermediate points. These franchises, certificates, and permits enabled petitioner and/or its predecessor to operate along the 315-mile route between Memphis and Texarkana. Section 206 of the Motor Carrier Act of 1935, 1 required motor carriers operating in interstate commerce to secure a certificate of convenience and necessity from the Interstate Commerce Commission (hereinafter referred to as the I. C. C.) which enforced the Act. Carriers in operation on June 1, 1935, could obtain a certificate without further proof of convenience and necessity under the "grandfather" clause. *208 The Act also, in effect, provided that carriers which began operations after June 1, 1935, but prior to October 15, 1935, if they filed an application for a certificate in time, could continue to operate until the I. C. C. ordered otherwise. Petitioner's predecessor fell within this latter category. On January 17, 1936, Leeper filed an application with the I. C. C. for a certificate of public convenience and necessity as an interstate carrier over the route on which the partnership or joint venture was operating from Texarkana to Memphis. Leeper's application to the I. C. C. for a certificate of public convenience and necessity as an interstate carrier was opposed by the MissouriPacific Railroad Company, the MissouriPacific Transportation Company (hereinafter sometimes referred to as Missouri Pacific), Southwestern Greyhound Lines, Inc., and Dixie Greyhound Lines, Inc. The petitioner was*209 organized for the purpose of operating passenger buses in intrastate and interstate commerce between Texarkana and Memphis. Its authorized capital stock was 100 shares. Rebsamen and his family subscribed to 51 shares. Leeper subscribed to 49 shares. *285 Petitioner's corporate charter was issued on November 15, 1935; however, it did not commence business until March 14, 1937. On that date, in fulfillment of an agreement of its subscribers entered into prior to October 15, 1935, petitioner took over all of the franchises, licenses, permits, applications for permits or licenses then pending, equipment, and other assets and assumed the liabilities of Arkansas Motor Coaches, Ltd. On March 30, 1937, the application of Leeper dated January 17, 1936, for a certificate of public convenience and necessity, was heard by Joint Board No. 34, and on January 4, 1938, the findings of that Board recommending the granting of a certificate were served on the protestants. Joint Board No. 34 of the I. C. C. was composed of a representative from Arkansas, a representative from Tennessee, and a representative from Texas. This Board granted a motion to substitute Arkansas Motor Coaches, Ltd., *210 Inc., as the successor of the applicant Leeper. After an extensive hearing, the Board found as facts (1) that since the applicant had received a certificate from the Arkansas Corporation Commission it could continue to operate in interstate or foreign commerce over the highways of Arkansas, which constituted over 99 per cent of its route, 2 without the need of the proceeding before that Board; (2) that the public convenience and necessity required the continuance of operations by petitioner as a common carrier, by motor vehicle, in interstate and foreign commerce, of passengers and their baggage, and of newspapers, express, and mail in the same vehicle with passengers, between Memphis and Texarkana via Little Rock and Hot Springs; and (3) that petitioner was fit, willing, and able properly to continue said service and to conform to the provisions of the Motor Carrier Act of 1935 and the requirements, rules, and regulations of the I. C. C. The board recommended that a certificate of public convenience and necessity be issued to petitioner. *211 An order of Division 5 of the I. C. C. granting the certificate 3 applied for and recommended by the Joint Board No. 34, was published on November 14, 1938. On objection by the MissouriPacific Transportation Company, the case was reopened for oral argument on April 17, 1939. The earlier findings and order were upheld by the I. C. C. on March 5, 1940, but by inadvertence the order was not served on the petitioner until November 20, 1940. The I. C. C. denied the contention of Missouri Pacific that petitioner's operation merely diverted traffic from Missouri Pacific but indicated that new business had been developed and Missouri*286 Pacific's operation had been expanded to meet the increased demand for service. Other Routes. On April 8, 1938, the petitioner purchased the McKee Bus Lines, including certificates covering routes between Jonesboro, Arkansas, and Cape Girardeau, Missouri, and between Paragould, *212 Arkansas, and Sikeston, Missouri, additional routes totaling 320 miles. On June 1, 1939, the petitioner acquired Jeff's Taxi Line and its certificate issued by the I. C. C. to operate interstate between Memphis and West Memphis. This acquisition insured the petitioner right to operate over its 315-mile route in the event its application for a certificate was denied by the I. C. C. On October 1, 1939, these franchises and some of petitioner's buses were transferred or sold to the Arkansas Motor Coaches of Tennessee, Inc., a separate corporation controlled by Rebsamen. After these transfers to Arkansas Motor Coaches of Tennessee and continuing throughout 1939, petitioner operated only the 315-mile route from Texarkana to Memphis, via Hot Springs and Little Rock. Management. M. E. Moore, a man with about 7 years' experience in various phases of the bus industry, was hired by petitioner's predecessor as traffic manager in 1936, and in 1937 he became manager of the petitioner. He remained with petitioner in that capacity until 1943, when he became president of Bowen Motor Coaches of Fort Worth, Texas, which through later affiliation became the Continental Bus System. Rebsamen*213 was not active in petitioner's management other than in a financial capacity. Moore consulted with him with respect to the financial matters relative to the corporation and its operations. Equipment. The equipment used by petitioner's predecessor consisted of several elongated 11-passenger Ford sedans. Shortly after petitioner took over the active operation of its predecessor's business in March 1937, it began replacing the 11-passenger Ford sedans with buses having capacities for 16, 19, and 21 passengers. In 1938, petitioner acquired some large buses seating 25 passengers. In 1939, petitioner acquired more 25-passenger buses and also three 29-passenger buses. By 1939, only these new larger buses were used on the Memphis, Little Rock, Hot Springs, and Texarkana route. On August 31, 1939, 4 of its smaller buses were sold to Arroway Coaches, Inc., a carrier having its principal place of business at Jonesboro and operating between Jonesboro and Little Rock. On October 1, 1939, 10 of petitioner's buses *287 were transferred to Arkansas Motor Coaches of Tennessee, Inc. In 1940, 1941, and 1942, the buses that petitioner acquired were mostly 29-passenger buses. Listings*214 . Russell's Official National Motor Coach Guide is an official publication of buslines in the United States, Alaska, Canada, and Mexico, and is known in the trade as the "Red Book." It is published monthly and contains indices indicating in alphabetical order the carriers serving each town, their terminal addresses in the major cities, schedules and timetables, individual advertisements, and, in some instances, the tariffs. Although only those carriers buying representation are listed, most of the carriers are represented in the Red Book. Commencing with the May 1936 issue and continuously thereafter, petitioner's schedules, tariffs, terminals in Texarkana, Hot Springs, Little Rock, and Memphis, and advertisements have been listed in the Red Book and petitioner has been fully represented in the Red Book indices. The schedules listed in the Red Book as operated by Arkansas Motor Coaches include both those of petitioner and Arkansas Motor Coaches of Tennessee, Inc. The Official National Bus Guide and Basing Tariff is an official publication of buslines in the southwestern region and is known in the trade as the "Green Book." Arkansas is a part of the southwestern region. The Green*215 Book is published monthly and contains indices indicating in alphabetical order the carriers serving each town in the region, their schedules and timetables, their tariffs, and individual advertisements. Only those carriers buying representation are listed; however, all significant carriers in the region are represented in the Green Book. Commencing with the July 1936 issue and continuously thereafter, petitioner has been fully represented in the Green Book. The official publishing agent for the bus industry is the National Bus Traffic Association in Chicago. It publishes the official tariffs for the industry. The petitioner was not fully represented in that association's publications during the base period years. Terminal Arrangements. Through the base period, the principal bus lines operating into points served by Arkansas Motor Coaches were as follows: Texarkana Arkansas Motor Coaches Missouri Pacific Transportation Co. Southwestern Greyhound Lines Dixie Motor Coaches Tri-State Transit Company of Louisiana Nance Bus Lines Hot Springs Arkansas Motor Coaches Missouri Pacific Transportation Co. Santa Fe Trailways Dixie Motor Coaches and its lessees Tri-State Transit Company of Louisiana Little Rock Arkansas Motor Coaches Missouri Pacific Transportation Co. Southwestern Greyhound Lines Crown Coach Co. Interurban Transportation Co. Santa Fe Trailways Arroway Coaches Memphis Arkansas Motor Coaches Missouri Pacific Transportation Co. Southwestern Greyhound Lines Dixie Greyhound Lines MissouriArkansas Coach Lines Tri-State Transit Company of Louisiana *216 *288 All of the carriers listed as operating into Memphis, except Tri-State Transit Company of Louisiana, also operated into West Memphis, Arkansas. The terminal arrangements of petitioner, its connecting carriers, and competitors, during the base period are summarized as follows: Texarkana. Commencing prior to May 1936, petitioner operated out of a separate terminal at the Grimm Hotel in Texarkana. The Grimm Hotel had no facilities for colored passengers, who constituted a substantial portion of petitioner's passengers. Commencing approximately October 1936 and continuing until March 1938, petitioner operated out of the Greyhound terminal at 103 State Line, as well as out of its terminal at the Grimm Hotel. From March 1938 through the remainder of the base period and continuing thereafter, petitioner operated out of the Greyhound terminal in Texarkana. Petitioner did not have its own ticket agent at the Greyhound terminal; all tickets were sold by the Greyhound agents. Petitioner picked up passengers but did not discharge them at the Greyhound terminal. Throughout the base period and continuing thereafter, Southwestern Greyhound Lines, Tri-State Transit Company of*217 Louisiana, and Nance Bus Lines, all operated out of the Greyhound terminal in Texarkana. Throughout the base period and continuing thereafter, MissouriPacific Transportation Company and Dixie Motor Coaches operated out of the Union Bus terminal (later known as the Trailways Union Bus terminal) at 102 State Line, Texarkana. From July 1937 throughout the remainder of the base period and continuing thereafter, MissouriPacific Transportation Company also picked up passengers at the Greyhound terminal in Texarkana before commencing scheduled runs from its own terminal. Hot Springs. Commencing prior to May 1936 and continuing until about October 1937, petitioner operated out of its separate terminal *289 at the Broadway Hotel in Hot Springs. The Broadway Hotel did not have facilities for colored passengers. After October 1937, petitioner operated out of the Tri-State Transit Company of Louisiana's terminal in Hot Springs. Throughout the base period and continuing thereafter, MissouriPacific Transportation Company operated a bus terminal at Bridge and Central in Hot Springs. Dixie Motor Coaches operated out of the Missouri Pacific terminal throughout that period. Commencing*218 about April 1938, throughout the remainder of the base period and continuing thereafter, Santa Fe Trailways operated out of the Missouri Pacific terminal in Hot Springs. MissouriPacific Transportation Company also picked up and discharged passengers at the Missouri Pacific railroad station in Hot Springs. Little Rock. Commencing in May 1936 and continuing until January 1939, petitioner operated out of a terminal at 106 West Markham in Little Rock. This terminal had no facilities for colored passengers. Commencing in January 1939, throughout the remainder of the base period, and continuing thereafter, petitioner operated out of its new terminal at 100 East Markham in Little Rock. 4 Arroway Coaches shared petitioner's new terminal during 1939 and the period thereafter. Commencing in March 1937, throughout the remainder of the base period, and continuing thereafter, petitioner also picked up passengers at the Greyhound terminal in Little Rock before commencing scheduled runs from its own terminal. Greyhound agents sold all tickets at the Greyhound terminal. Throughout the base period and continuing thereafter, Southwestern Greyhound Lines, Crown Coach Company, and Interurban*219 Transportation Company, all operated out of the Greyhound terminal at Sixth and Louisiana in Little Rock. During 1936, 1937, and 1938, these three companies also picked up and discharged passengers at the Greyhound terminal at 113 West Markham in Little Rock. Throughout the base period and continuing thereafter, MissouriPacific Transportation Company and Santa Fe Trailways operated out of a terminal at the corner of Markham and Louisiana in Little Rock. *220 Memphis. Commencing prior to July 1936 and continuing until August 1937, petitioner operated out of its separate terminal at 122 South Third in Memphis. This terminal did not have adequate facilities. Commencing about September 1937, throughout the remainder of the base period, and continuing thereafter, petitioner and Tri-State Transit Company of Louisiana both operated out of, and *290 Missouri-Arkansas Coach Lines picked up passengers at, a terminal at 269 South Main in Memphis. During 1938 and 1939, petitioner and Tri-State Transit Company of Louisiana operated an additional station at 156 Monroe in Memphis at which they picked up and discharged passengers. Throughout the base period and continuing thereafter, Southwestern Greyhound Lines and Dixie Greyhound Lines operated out of the Union bus terminal at 161 Monroe in Memphis. During the base period neither petitioner nor Missouri Pacific Transportation Company picked up or discharged passengers at the Union bus terminal in Memphis. Throughout the base period and continuing thereafter, MissouriPacific Transportation Company and Missouri-Arkansas Coach Lines operated out of a terminal at 170 Monroe in Memphis. *221 MissouriPacific Transportation Company also picked up and discharged passengers at the Missouri Pacific railroad passenger station in Memphis. West Memphis. Throughout the base period and continuing thereafter, all of the bus carriers operating into West Memphis, Arkansas, operated out of a single, privately owned Union bus terminal. Interchange and Competition. Interchange agreements 5 between motor carriers of passengers are usually oral. Throughout the base period, the petitioner did carry on interchange at all of its terminal points with all the major connecting carriers except MissouriPacific Transportation Company. The MissouriPacific Transportation Company specifically refused to accept any tickets for passage over its lines if such tickets also contained a routing over petitioner's line. It is the usual custom and practice for *222 all motor carriers of passengers to route business on their own lines for the greatest mileage possible. Unless passengers make a request for specific routings, each carrier will attempt to haul them on its own line, even though such may not be the most direct route. Throughout the base period and continuing thereafter, petitioner had competition from the MissouriPacific Transportation Company which had long supplied its interconnecting carriers with substantial interchange revenue in exchange for which such interconnecting carriers routed their continuing passengers over the Missouri Pacific lines. Petitioner and its predecessor, throughout the base period and continuing thereafter, were faced with this competition for interchange. After the petitioner started in business, Missouri Pacific put all new equipment on its schedules between Memphis and Texarkana. During the base period, neither petitioner's equipment, schedules, nor *291 passenger terminals were as desirable as those of MissouriPacific Transportation Company. In January 1936, petitioner's predecessor had three schedules in each direction between Memphis and Little Rock, and one schedule in each direction between*223 Little Rock and Texarkana. By the summer of 1936, it had added two schedules between Little Rock and Texarkana. Later in the year, it added another schedule between Memphis and Little Rock and between Little Rock and Texarkana. As of December 1939, petitioner was operating daily schedules as follows: Westbound: 3 schedules Memphis to Texarkana 1 schedule Memphis to Hot Springs 1 schedule Little Rock to Texarkana Eastbound: 3 schedules Texarkana to Memphis 1 schedule Texarkana to Little Rock 1 schedule Little Rock to Memphis 1 schedule Hot Springs to Little Rock U. S. Highway 70, Memphis to Little Rock, practically parallels the route between those points of the Chicago, Rock Island, and Pacific Railroad Company. U. S. Highway 67, Little Rock to Texarkana, practically parallels the route between those points of the MissouriPacific Railroad Company. Both of those railroads serve Hot Springs. Commencing in 1929 and continuing throughout the base period and thereafter, MissouriPacific Transportation Company operated buslines between Texarkana and Memphis over the most direct route via Malvern and Little Rock. It operated additional schedules between Texarkana and Memphis*224 via Hot Springs and Little Rock over the exact route used by petitioner. It also operated additional shuttle service between Little Rock and Hot Springs. Since 1929, MissouriPacific Transportation Company had expanded its operations to 10 States. As of the summer of 1935, MissouriPacific Transportation Company was operating four schedules each way between Memphis and Little Rock, and three schedules each way between Little Rock and Texarkana, in addition to local schedules between Hot Springs and Little Rock. By January 1938, it had added an additional schedule each way between Memphis and Little Rock and an additional schedule each way between Little Rock and Texarkana. Certain local schedules were also added between Memphis and Brinkley, Arkansas. As of December 1939, MissouriPacific Transportation Company was operating daily schedules in competition with petitioner, as follows: *292 Westbound: 6 schedules Memphis to Little Rock 4 schedules Little Rock to Texarkana, one of which was via Hot Springs and three via Malvern 5 additional schedules Little Rock to Hot Springs Eastbound: 5 schedules Little Rock to Memphis 1 schedule Forrest City, Arkansas, To Memphis, *225 originating at Marianna, Arkansas 4 schedules Texarkana to Little Rock, one of which was via Hot Springs and three via Malvern 5 additional schedules Hot Springs to Little Rock As of December 1939, MissouriPacific Transportation Company was also operating daily schedules between Little Rock and St. Louis; Little Rock and Fort Smith; between Little Rock and Monroe, Louisiana; over U. S. Highway 65 from Little Rock southeast into Louisiana; as well as many additional routes between smaller cities in Arkansas and interstate lines extending to Brownsville, Texas; Topeka, Kansas; Omaha, Nebraska; Cairo, Illinois; and Natchez, Mississippi. Prior to, during, and continuing after the base period Southwestern Greyhound Lines operated between Texarkana and Memphis over a different route via Camden, Pine Bluff, Stuttgart, and Brinkley. It also operated between Memphis and Little Rock via Brinkley and Stuttgart. As of December 1939, Tri-State Transit Company of Louisiana was advertising in the Red Book bus connections between Shreveport and Memphis, via Tri-State Transit Company Shreveport to Camden, and via Southwestern Greyhound Lines Camden to Memphis, and between Hot Springs and Memphis*226 via Tri-State Transit Company Hot Springs to Pine Bluff, and via Southwestern Greyhound Lines Pine Bluff to Memphis. Throughout the base period the petitioner and its predecessor were financially fit, willing, and able to provide such funds and equipment as were necessary to operate as an interstate carrier over its route, and so advised the I. C. C. CABPNI. The following schedules contain information 6 relating to the operation of the petitioner 7 and of 21 class I motor carrier passengers (including petitioner) in the southwest region for the years 1938 and 1939: *293 Petitioner's 315-mile Main Route * Year Passenger Bus miles Revenue per revenue mile [1938] $ 109,503 896,795 $ 0.12210 [1939] 121,127 977,994 .12385 Revenues and Expenses Total Total Net Net Year operating expense operating operating Bus miles revenue revenue revenue percent Petitioner [1938] $ 148,194 $ 149,267 ($ 1,073) (1.07) 1,333,250 [1939] 183,395 177,457 5,938 3.2 1,375,947 21 Carriers [1938] $ 14,540,290 $ 12,157,912 $ 2,382,378 16.4 75,600,361 [1939] 14,978,463 12,864,058 2,114,405 14.1 77,677,715 *227 Revenue and Expenses Per Mile Year Revenue Expenses Net operating revenue Petitioner [1938] $ 0.11115 $ 0.11196 ($ 0.00081) [1939] .13329 .12897 .00432 21 Carriers [1938] $ 0.19233 $ 0.16082 $ 0.03151 [1939] .19283 .16561 .02722 Percentage of Increase in Passenger Revenues Petitioner Year (315-mile 21 carriers route) * [1938] $ 109,503 $ 13,611,299 [1939] 121,127 14,058,365 Percentage of increase 11.06 3.28 Percentage of Increase in Passengers Year Petitioner * 21 carriers [1938] 236,484 13,722,621 [1939] 275,922 14,304,543 Percentage of increase 1938-39 16.68 4.24 *228 *294 Petitioner's excess profits net income or (loss) was as follows: 1937 1 ($ 2,493.13) [1938] (16.21) [1939] 690.51 The petitioner's average base period net income (hereinafter sometimes referred to as ABPNI) computed under section 713 (f), Internal Revenue Code of 1939, 8 is $ 19.88. The excess profits credits allowed by the Commissioner before the application of section 722 were based on invested capital and are $ 1,552.37, $ 1,552.37, and $ 2,718.66 for the years 1940, 1941, and 1942, respectively. The Commissioner determined that petitioner qualified for relief under section 722 (b) (4); that its reconstructed normal earnings for 1939 was $ 16,000; and that it was entitled to a CABPNI of $ 13,997.33, $ 14,964.32, and $ 15,472 for the years 1940, 1941, and 1942, respectively. The excess profits credit based on a CABPNI allowed by the Commissioner in his statutory notice of deficiency dated November 7, 1950, is as follows: 1940 1 $ 13,297.46 1941 1 14,216.10 [1942] 14,698.40 The unused excess profits credit for the years 1940 and 1941, carried over into 1942, allowed by the Commissioner*229 in his statutory notice is $ 15,972.98 ($ 10,446.61 from 1940, plus $ 5,526.37 from 1941). A fair and just amount representing the petitioner's reconstructed net profit for 1939 is $ 22,765.15. Petitioner's CABPNI to be used for the taxable year 1942 is $ 22,000. Petitioner's CABPNI should be computed for its taxable years 1940 and 1941 in the same manner as the Commissioner used in his deficiency notice for the purpose of determining any unused excess profits credit carryover from those years to the taxable year 1942, except in making such computation the Commissioner shall use $ 22,000 as petitioner's CABPNI for the year 1942, instead of $ 15,472, which he used in the deficiency notice. OPINION. The respondent has recognized the existence of a qualifying factor under section 722 (b) (4) and has made a partial allowance of petitioner's claim for relief. He has used a CABPNI of $ 15,472 9 in determining the excess profits tax for the *230 year 1942, in lieu of petitioner's ABPNI of $ 19.88 computed under section 713 (f). *295 The petitioner contends in its petition that a CABPNI of $ 59,486.70 10 should be used. The question, therefore, is, has the petitioner established that "a fair and just amount representing normal earnings to be used as a CABPNI for purposes of an excess profits tax" is in excess of the amount determined by the Commissioner. The petitioner qualifies for relief under section 722 (b) (4) since it commenced business during the base period on March 14, 1937, and since the respondent has recognized that its ABPNI is an inadequate standard of normal earnings. Cf. Victory Glass, Inc., 17 T. C. 381 (1951).*231 Throughout the base period, the petitioner and its predecessor, which commenced business on September 16, 1935, were engaged as intrastate and interstate carriers of passengers by bus between Memphis and Texarkana via Little Rock and Hot Springs, a distance of 315 miles. The petitioner's predecessor had certificates from the various State authorities that entitled it to operate over the route. These were all transferred to the petitioner when it commenced business. The Motor Carrier Act of 1935, was approved on August 9, 1935, and its provisions became effective October 1, 1935. It provided, inter alia, that carriers in interstate commerce were required to acquire a certificate of convenience and necessity from the I. C. C. Under the grandfather clause, carriers in operation on June 1, 1935, could acquire a certificate without further proof of convenience and necessity. It also, in effect, provided that carriers which commenced operations after June 1, 1935, but prior to October 15, 1935, could, if they filed an application for a certificate, continue to operate until the I. C. C. ordered otherwise. The petitioner's predecessor filed an application for a certificate, and*232 since it commenced operations between June 1, 1935, and October 15, 1935, it was entitled to continue until the certificate was denied. The I. C. C. granted a motion substituting the petitioner for its predecessor. After an extensive hearing, an order granting the certificate was filed on November 14, 1938; however, Missouri Pacific, the principal protestant, objected to the granting of the certificate and the case was reopened. The I. C. C. finally granted the certificate in 1940. As stated previously, the petitioner and its predecessor were entitled to operate during the base period, and they did operate throughout the base period without any interference, except for the I. C. C.'s denying it the right to operate locally between West Memphis and Memphis. Petitioner's predecessor began operation with elongated Ford sedans that seated 11 passengers. These were replaced by 16-, 19-, and 21-passenger buses starting in 1937. In 1938 and 1939, it acquired 25- and 29-passenger buses. By the end of the base period it only used these new larger buses on its Memphis to Texarkana route. *296 The petitioner was fully represented in the Red Book and the Green Book, which were official*233 publications of the buslines for North America and the southwest region (the region where petitioner was located), respectively. These publications contain information relating to terminals, schedules, timetables, and, in some instances, tariffs. The petitioner, however, was not fully represented during the base period in the publication of the National Bus Traffic Association, which contained the official tariffs for the industry. These publications are used by ticket agents throughout the country in routing passengers on other carriers to places beyond where their own carriers travel. The petitioner's predecessor had meager terminal facilities when it commenced operations but by the end of the base period the petitioner acquired its own separate terminal in Little Rock on a 5-year lease and had improved the property at a cost of not less than $ 8,350, and had arrangements for operating out of the terminals of other major carriers at the other main stops on its route. The petitioner carried on interchange with all of the major connecting carriers, except Missouri Pacific which specifically refused to accept any tickets for passenger over its lines if such tickets also contained*234 a routing over petitioner's line. Missouri Pacific, the petitioner's principal competitor, commencing in 1929, operated over the shortest and most direct route from Memphis to Texarkana and also over the exact route that petitioner used. In addition, Missouri Pacific had many other routes out of Little Rock and operated in 10 States. Missouri Pacific had long supplied its interconnecting carriers with substantial interchange revenue in exchange for which such interconnecting carriers routed their continuing passengers over the Missouri Pacific lines. After the petitioner's predecessor commenced operations Missouri Pacific, which up to that time had been rendering inadequate service and had been using old equipment, put all new equipment on its route between Memphis and Texarkana. The petitioner's ABPNI was only $ 19.88. The petitioner claims that its low base period earning was due to the lack of a certificate of convenience and necessity, i. e., if the certificate were denied it would have to cease interstate operation and its investment would be worthless; its financial backer, Rebsamen, would not invest in new equipment and terminals; it could not secure full representation*235 in the publication which contained the official tariffs for the industry; and interconnecting carriers were reluctant to enter into interchange agreements. Petitioner argues that it is entitled to assume that it had a certificate in reconstructing its base period earnings since under the 2-year pushback rule it is deemed to have commenced business on March 14, 1935, rather than March 14, 1937; if it had commenced business on March 14, 1935, it would have been operating on June 1, 1935, thereby entitling it *297 to a certificate under the grandfather clause of the Motor Carrier Act of 1935, without the prolonged litigation to which it was subjected. On the basis of these contentions petitioner contended in its petition that it was entitled to a CABPNI of $ 59,486.70 as against the $ 15,472 allowed by the Commissioner in his deficiency notice. Petitioner now argues in its brief that we should allow a CABPNI of $ 68,188.86. We think that the petitioner has unduly emphasized the role that the lack of a certificate played in its base period difficulties. The record shows that by the end of the base period the petitioner was using only new large buses on its main route from Memphis*236 to Texarkana and that its terminal facilities were comparable to those of other carriers, except for Missouri Pacific. The petitioner was continuously fit, willing, and able to provide such funds and equipment as were necessary properly to continue its services as an interstate carrier of passengers between Memphis and Texarkana. Also, the petitioner could operate over 99 per cent of its route without the need of a certificate from the I. C. C. This indicates that the lack of a certificate was not the sole or the principal cause of petitioner's base period difficulties. 11 Conversely, it appears that competition of Missouri Pacific, in addition to that afforded by the other motor carriers and railroads, was a cause of petitioner's difficulties. *237 This competition is not a basis for relief. Cf. Lamar Creamery Co., 8 T. C. 928, 939 (1947). Petitioner's contention for a CABPNI of $ 68,188.86 is largely based on the testimony of M. E. Moore, its former general manager, that if certain things had happened prior to the end of petitioner's taxable year 1939, it would have attained a net income by December 31, 1939, of $ 75,000. Moore testified that in March 1937, when he became general manager of petitioner, he estimated that petitioner would reach a net income of $ 75,000 for the year ending December 31, 1939, provided the following things happened: That the certificate of public convenience and necessity with the I. C. C. would be cleared up and that by December 31, 1939, petitioner would have its certificate; that it would obtain adequate terminals; that it would get adequate equipment and would be able, as a result of these things, to establish reasonable and permanent connecting carrier relations and get its tariffs properly set forth in the publication of the National Bus Traffic Association so that it could participate in through rates. As we have already said, the record shows that some *238 of the things upon which the witness Moore laid emphasis had already happened by December 31, 1939. Even if it be assumed that all of the things which the witness emphasized had happened prior to December 31, 1939, including the granting of the certificate of convenience and necessity, we are convinced *298 that there would have been no likelihood at all that petitioner would have attained a net income by that time of $ 75,000. We have carefully examined the record, including the stipulated facts, the numerous exhibits thereto, and the testimony of petitioner's witness Moore. After doing so, we have reached the conclusion that petitioner's CABPNI to be used for 1942 is somewhat in excess of the $ 15,472 allowed by the Commissioner in his deficiency notice. We have concluded that figure should be $ 22,000, and we have so found in our Findings of Fact. That amount should be used in a recomputation under Rule 50, instead of the $ 15,472 which the Commissioner has used in his deficiency notice. Adjustments to the CABPNI for 1942 of $ 22,000 should be made as indicated in our Findings of Fact in the determination of the carryover of unused excess profits credit which petitioner*239 is entitled to bring over from its taxable years 1940 and 1941. Reviewed by the Special Division. Decision will be entered under Rule 50. Footnotes 1. 49 Stat. 543, 551 (1935). This Act was approved on August 9, 1935, and its provisions became effective on October 1, 1935.↩ 2. Practically the entire route is within the State of Arkansas. Petitioner's terminal in Memphis is 2.6 miles from the Arkansas-Tennessee line and its terminal in Texarkana is a half block across the Arkansas-Texas line.↩ 3. The certificate did not cover local traffic between West Memphis, Arkansas, and Memphis, Tennessee.↩ 4. On November 5, 1938, petitioner leased for a term of 5 years commencing January 1, 1939 (with additional 5-year option at increased rental), the lower floor and basement of a building located at 100-102 East Markham, Little Rock. The lease rental was set at $ 100 per month for 1939, $ 150 per month for 1940, and $ 200 per month in 1941, 1942, 1943, and if the additional 5-year option should be exercised, $ 250 per month for such additional period. Petitioner was to bear all costs of alterations and improvements and agreed to keep the premises in good repair. In late 1938, petitioner altered and improved the leased premises for use as its Little Rock terminal at a cost of not less than $ 8,350.↩ 5. Agreements whereby a carrier which had a passenger, who wanted to travel beyond the point where such carrier traveled, would send such passenger on another carrier.↩ 6. All of the basic figures, except those with an asterisk (*), are taken from Statement No. Q-750 (BRE) for the years 1938 and 1939 of the Bureau of Statistics, I. C. C. The figures with an asterisk are from Joint Exhibit 6-F filed as part of the stipulation of facts.↩ 7. The figures for petitioner, except where an asterisk appears (see footnote 6, supra) are for its total operation, including McKee Bus Lines and Jeff's Taxi Line which were transferred to Arkansas Motor Coaches of Tennessee, Inc., on October 1, 1939. See finding of fact, supra↩. *. See footnote 6.↩ *. See footnote 6.↩ *. See footnote 6.↩ 1. March 14 to December 31.↩ 8. All section references are to the Internal Revenue Code of 1939, as amended.↩ 1. For carryover purposes to 1942.↩ 9. The respondent has applied the variable credit rule and has used CABPNI's of $ 13,997.33 and $ 14,964.32 for 1940 and 1941, respectively, for the purpose of determining any unused excess profits credit carryover from these years to the year 1942.↩ 10. In its brief the petitioner contends for a CABPNI of $ 68,188.86.↩ 11. Also, the acquisition of Jeff's Taxi Line, which had an interstate certificate for operations between West Memphis, Arkansas, and Memphis, Tennessee, made it possible for petitioner to operate over its 315-mile route even if its application for a certificate was denied.↩