*270 Decision will be entered for the respondent.
1. The petitioner's business consisted of the operation of motion picture theatres in Alexandria, Virginia. Petitioner had only two theatres prior to April 7, 1937. On that date it opened a third theatre. This theatre was modern and well furnished and almost doubled the combined seating capacity. Petitioner's net income increased with the opening of the third theatre and continued to do so (as did the population of Alexandria) through the base period and the taxable years of 1942, 1943, and 1944. Petitioner contends that the opening of the third theatre constituted a change in the capacity of the business during the base period such as to entitle it to relief under the provisions of section 722 (b) (4), I. R. C.Held, the petitioner is not entitled to relief under section 722 (b) (4) since it had over 2 1/2 years to develop its business after the addition of the third theatre and it has not shown that its earning level at 1939 would have been substantially greater if the change had been made 2 years earlier.
2. Prior to 1941 most public amusement facilities in Alexandria, including petitioner's theatres, were not open on Sunday. *271 The Virginia "Blue-laws" were then interpreted in Alexandria to prohibit such Sunday activities. In March 1941, coincident with the increase in military personnel in the area, the Virginia statute was interpreted to permit Sunday operation of certain amusement facilities and petitioner thereafter operated its theatres on Sunday. Petitioner contends that the fact that its theatres were not open for business on Sunday until after the base period resulted in an inadequate standard of normal earnings during those years which made it eligible for relief under section 722 (b) (5), I. R. C.Held, petitioner's claim for relief under this subsection is inconsistent with the principles underlying section 722, I. R. C., in that it violates the base period concept of not considering events subsequent to 1939 and is, therefore, disallowed.
*447 In a joint notice of deficiency and disallowance the respondent determined that:
1. There was an overassessment in petitioner's excess profits tax liabilities for 1942 in the amount of $ 168.07 and in 1943 in the amount of $ 136.23.
2. There was a deficiency of $ 6,103.04 in the petitioner's excess profits tax liability for 1944.
3. There were deficiencies in the petitioner's income tax liability for the years 1943 and 1944 in the amounts of $ 80.24 and $ 159, respectively.
4. The petitioner had not in its Application for Relief established its right to any relief under section 722 of the Code from excess profits tax for the years 1942, 1943, and 1944.
The petitioner does not contend that the respondent erred in his determination of deficiencies in paragraphs 2 and 3 above, but it makes the following assignments of error with respect to relief under section 722:
1. The Commissioner erred in determining that the petitioner has not established its right to relief under section 722, I. R. C., *273 requested in its Application for Relief.
2. The Commissioner erred in not determining that the petitioner is entitled to relief under section 722, I. R. C.
3. The Commissioner erred in not determining the amount of relief to which petitioner is entitled.
FINDINGS OF FACT.
The petitioner is a corporation organized in 1929 under the laws of Virginia and engaged in the business of operating motion picture theatres. In 1929 the petitioner operated two theatres, the Richmond and the Ingomar, both located in Alexandria, Virginia. The seating capacity in the Richmond was about 700 and in the Ingomar about 650. The buildings and furnishings were no longer modern. Neither building had air-conditioning nor were parking lot facilities available. The petitioner owned the Richmond and rented the Ingomar.
Alexandria, Virginia, is about eight miles from Washington, D. C. The petitioner was competing at a disadvantage with the more modern theatres in the other nearby Virginia communities and Washington, D. C. It was therefore determined that the petitioner would meet this competition with a new theatre to be constructed in Alexandria. This new theatre owned and built by the petitioner was*274 called the Reed. It was opened for business on April 7, 1937. The Reed was a larger theatre than the others, having a seating capacity of about *448 1,200. It was modern and well furnished and had a nearby parking lot with facilities for about 800 cars. The building contained space for three stores. Neither of the other two theatres had store space for rent. The Reed is located about 10 blocks from the Richmond and is 12 blocks from the Ingomar.
The petitioner's theatres were not open for business on Sunday during the base period. Harmon Reed was the petitioner's president and a director until his death in June 1938. Reed's theories concerning the management of the business usually prevailed over those of the other members of the corporation. Reed was opposed to the Sunday operation of motion picture theatres, although Sunday operation was advocated by other members of petitioner's board of directors.
In 1936, the other theatre then operating in Alexandria opened for business on Sunday. The manager of that theatre was arrested for violation of a Virginia statute sometimes referred to as a "Blue-law," which prohibited work on Sunday at any trade or calling except household, *275 charity, or other work of necessity. After being found guilty of the violation of the "Blue-law," the manager unsuccessfully appealed the decision. At that time motion picture theatres in other places in Virginia were operating on Sunday. The theatres in nearby Arlington County and Washington, D. C., with which the petitioner was competing, were open on Sunday.
The popular attitude toward Sunday operation of motion picture theatres in Alexandria changed with the growth of population. Alexandria had grown from 24,149 in 1930 to 33,523 in 1940, and to 46,608 by the end of 1942. A move was started to have all the theatres, roller skating rinks and bowling alleys in Alexandria opened on Sunday. This was opposed by certain groups. In a letter dated March 29, 1941, and addressed to the Chairman, Northern Virginia Defense Council, regarding the request of that organization that the motion picture theatres in Alexandria be allowed to operate on Sunday so as to provide recreation for personnel from nearby military posts, the Commonwealth Attorney stated:
Informed of the national defense exigencies, including the frequenting of the city now or in the near future of thousands of service*276 men on Sunday leave, I cannot conscientiously say that motion picture theatres, operating after noon, on Sunday are not a necessity in Alexandria during the period of the existing emergency. Nor can I say that the facts show beyond a reasonable doubt that such motion pictures are not a necessity. As this is my official judgment, I could not honestly or ethically put a person on trial, or urge a court or jury to convict him of a criminal offense, on these facts. My duty not to prosecute when I believe the prosecution not supported by the facts is as clear as my duty to prosecute whenever I think it is deserved.
*449 Following this pronouncement, on March 30, 1941, the petitioner's theatres began and continued to be open seven days each week.
The following table shows the admissions of the three theatres during the base period years and the effect thereon of the addition of the third theatre in 1937:
| Richmond | Ingomar | Total admissions | ||
| Year | Theatre | Theatre | Reed Theatre | |
| 1936 | ||||
| January-March | $ 19,924.55 | $ 6,745.25 | $ 26,669.80 | |
| April-June | 19,310.35 | 7,169.30 | 26,479.65 | |
| July-September | 20,470.40 | 9,637.05 | 30,107.45 | |
| October-December | 19,824.90 | 8,045.15 | 27,870.05 | |
| Totals | 79,530.20 | 31,596.75 | 111,126.95 | |
| 1937 | ||||
| January-March | 21,361.55 | 8,637.15 | 29,998.70 | |
| April-June | 12,338.22 | 6,982.15 | 1 $ 16,624.90 | 35,945.27 |
| July-September | 14,928.75 | 7,007.60 | 20,992.45 | 42,928.80 |
| October-December | 13,184.65 | 6,361.00 | 18,093.05 | 37,638.70 |
| Totals | 61,813.17 | 28,987.90 | 55,710.40 | 146,511.47 |
| 1938 | ||||
| January-March | 13,271.52 | 5,984.40 | 19,839.15 | 39,095.07 |
| April-June | 11,830.90 | 4,843.65 | 23,024.40 | 39,698.95 |
| July-September | 11,657.55 | 5,969.92 | 23,492.00 | 41,119.47 |
| October-December | 12,694.73 | 6,507.77 | 21,403.80 | 40,606.30 |
| Totals | 49,454.70 | 23,305.74 | 87,759.35 | 160,519.79 |
| 1939 | ||||
| January-March | 13,934.80 | 7,149.25 | 23,918.35 | 45,002.40 |
| April-June | 11,925.75 | 7,877.40 | 23,987.55 | 43,790.70 |
| July-September | 13,281.12 | 8,094.45 | 27,045.25 | 48,420.82 |
| October-December | 12,491.55 | 8,280.00 | 24,936.75 | 45,708.30 |
| Totals | 51,633.22 | 31,401.10 | 99,887.90 | 182,922.22 |
The petitioner's excess profits net income for the base period years was as follows:
| 1936 | $ 25,454.63 |
| 1937 | 28,436.75 |
| 1938 | 25,317.57 |
| 1939 | 38,513.89 |
The net operating profit (or loss) before administrative and unallocated expenses, realized from each theatre during the base period, was as follows:
| Theatre | 1936 | 1937 | 1938 | 1939 |
| Richmond | $ 29,833.11 | $ 16,347.59 | $ 7,429.65 | $ 11,633.16 |
| Ingomar | 3,955.81 | 2,550.14 | (3,358.26) | 4,437.47 |
| Reed | 17,870.04 | 30,811.74 | 35,274.94 |
*450 Included in the above net operating figures were the following amounts of gross rental income:
| 1936 | $ 130 |
| 1937 | 4,120 |
| 1938 | 4,674 |
| 1939 | 5,160 |
Petitioner made application for relief from excess profits tax for the years 1942, 1943, and 1944. In its Application for Relief, without regard for section 722 but using the benefits of section 713 (f), petitioner arrived at $ 34,900.75 as its average base period net income. The petitioner claimed this amount to be an inadequate standard of normal base period net income and sought to establish that its constructive average base period net income should be $ 57,574. The petitioner arrived*278 at this amount as follows:
1. The actual gross income of the base period years was increased by 25 per cent and the expenses relative thereto were increased in proportion. A recomputation was then made to arrive at a constructive net income for each of the base period years. The 25 per cent factor above was the proportion considered to be the amount which the admissions would have increased had the theatres been open for business on Sunday during the base period. The net income for the base period years so reconstructed by an increase of 25 per cent in admissions with a proportionate increase in expenses was as follows:
| 1936 | $ 38,018 |
| 1937 | 41,739 |
| 1938 | 40,666 |
| 1939 | 57,574 |
2. The amount of $ 57,574, the earnings reconstructed to reflect what petitioner contends would have been earned had the theatres been open on Sunday in 1939, was considered to represent the normal level for the prior base period years before taking into account the population growth. Into this figure of $ 57,574 the petitioner divided the estimated population of Alexandria for 1939, resulting in a figure of $ 1.7542 representing the earnings per capita. This latter amount was then multiplied by a similarly*279 estimated population figure for the other base period years as follows:
| Average population | Per capita | Constructive | |
| Year | earnings | net income | |
| for year | |||
| 1936 | 30,013 | 1.7542 | $ 52,649 |
| 1937 | 30,949 | 1.7542 | 54,291 |
| 1938 | 31,885 | 1.7542 | 55,933 |
| 1939 | 32,821 | 1.7542 | 57,574 |
*451 3. The petitioner then applied a "growth formula" to this "constructive net income" in a manner similar to that prescribed in section 713 (f). This was computed as follows:
| Constructive net income for base period years: | ||
| 1936 | $ 52,649 | |
| 1937 | 54,291 | |
| 1938 | 55,933 | |
| 1939 | 57,574 | |
| Aggregate amount for four years | 220,447 | |
| Constructive average base period net income, general average | $ 55,111.75 | |
| Increased earnings in last half of base period: | ||
| (1) Last half | $ 113,507.00 | |
| (2) First half | 106,940.00 | |
| (3) Increase | 6,567.00 | |
| (4) 1/2 of increase | 3,283.50 | |
| (5) Total of items (1) and (4) | 116,790.50 | |
| (6) 1/2 of item (5) | 58,395.25 |
This final amount of $ 58,395.25 was limited, however, to $ 57,574, the amount used in petiitoner's computations above for 1939 before the application of the "growth formula." The amount of $ 57,574 was then considered to be the*280 constructive average base period net income in the petitioner's application for relief.
OPINION.
The question in this case is whether petitioner is entitled to any relief under section 722 (b) (4) or (b) ( 5) of the Internal Revenue Code. 1
*281 *452 The petitioner corporation was organized in 1929. Its business then consisted of the operation of two small and rather obsolete theatres in Alexandria, Virginia. In 1937 it opened a third theatre, the Reed, in Alexandria. This new theatre almost doubled the combined seating capacity of petitioner's theatres.
The petitioner contends that the opening of the Reed on April 5, 1937, constituted a change in the capacity of the business during the base period such as to entitle it to relief under the provisions of section 722 (b) (4). The respondent concedes that the opening of the third theatre is "such a factor as is contemplated in section 722 (b) (4)."
The taxpayer having thus established that the tax computed without the benefit of section 722 results in an excess and discriminatory tax, must reconstruct what would be a fair and just amount representing normal earnings to be used in computing the excess profits tax. The push-back rule of section 722 (b) (4) applies where the petitioner has not reached "by the end of the base period, the earning level which it would have reached if [it] had commenced business or made the change in the character of the business two years*282 before it did so, * * *." If it has not, then the petitioner "shall be deemed to have commenced the business or made the change at such earlier time" and entitled to reconstruct its base period income accordingly.
The purpose of the push-back rule is to determine an earnings level at the end of the base period. (Bulletin on Section 722 (1944), page 68). The petitioner, in arguing for the benefits of the push-back rule, *453 contends that its base period earnings are not normal because its third theatre had not developed sufficiently by the end of 1939 so that the year 1939 represented a normal year of earnings. The petitioner offered the testimony of one of its officers and two accountants to the effect that it took longer than the end of 1939 for the earnings to reach a normal level. This theory was first advanced at the hearing. Prior thereto, in its application for relief, the petitioner's answer was "Yes" to the following question:
Did the business reach, by the end of the base period, the earning level it would have reached if the * * * change in the character of the business had occurred 2 years prior to the time the * * * change occurred?
It cannot now advance*283 a different theory. Blum Folding Paper Box Co., 4 T. C. 795. Moreover, there is no merit in petitioner's theory if the same could be urged.
Looking next to petitioner's reconstruction of net income as set forth in our Findings of Fact, it is apparent that the first adjustment was to include what would have been earned had the theatres been open on Sunday during the base period. This adjustment we can eliminate inasmuch as it takes into consideration conditions existing after December 31, 1939. Petitioner argues this point under section 722 (b) (5) and we discuss it below. It is sufficient to say here that a reconstruction of income based on other than petitioner's business hours during the base period is not warranted. Petitioner's next adjustment is to apply to the income as adjusted by Sunday operations, an adjustment for a growth formula. This is also incorrect in that we are assuming, as did the petitioner, that 1939 was normal and are reconstructing from the base here. We must also assume, as did the petitioner in its reconstruction, that the growth arising out of the change in the character of the business was complete by the end of 1939. *284 Proceeding with the assumption that 1939 was a normal year and using petitioner's method of correlating income to population, we divide the "normal" income for 1939 by the population for that year and get a yield of $ 1.1734 of earnings per capita (as opposed to petitioner's earnings of $ 1.7542 per capita based on what would have been earned had Sunday operation been permitted). Multiplying this figure of earnings per capita by the population in each year we get an average base period net income of $ 36,865.14 as follows:
| Constructive | |||
| Average | Movie earnings | net income | |
| Year | population | per capita | for year |
| 1936 | 30,013 | $ 1.1734 | $ 35,217.25 |
| 1937 | 30,949 | 1.1734 | 36,315.56 |
| 1938 | 31,885 | 1.1734 | 37,413.86 |
| 1939 | 32,821 | 1.1734 | 38,513.89 |
| Total | $ 147,460.56 |
$ 147,460.56 divided by 4 equals the Constructive Average Base Period Net Income of $ 36,865.14.
*454 By comparing our figure of $ 36,865.14 with the petitioner's average base period net income of $ 34,900.75 computed under section 713 (f), we see that the difference is considerably less than petitioner's original figure of $ 57,574. Were we to stop there it might seem that some relief should*285 be accorded to the extent of an increase of the base period income of approximately $ 2,000. This we can not do, however, since in order to arrive at the figure of $ 36,865.14 we must assume: first, that the same percentage of the local population would attend petitioner's theatres in 1936, 1937, and 1938 as would attend in 1939 and, second, that petitioner's profit margin per admission would remain the same. We do not feel that such assumptions are warranted by the evidence. As to the first, that business should have been as good prior to 1939 as during that year, petitioner's business would have to be an exception to the general business index for 1936 to 1939. See East Texas Motor Freight Lines, 7 T. C. 579, 595. If we apply the generally accepted business index there used to the present case we arrive at an average base period net income of only $ 31,763.22. 2 This is approximately $ 3,000 less than the amount respondent has allowed as base period income under section 713 (f). It is apparent then, that unless we can agree, which we do not, that petitioner's business was an exception to the general business index, the base period net income*286 computed under section 713 (f) is greater than that computed under the reconstruction above. As for the second assumption, that the petitioner's profit margin per admission would remain the same through the base years, it is apparent that the 1939 profit margin would not survive under a reduced gross income. Petitioner's total admissions increased from $ 160,519.79 in 1938 to $ 182,922.22 in 1939 -- an increase of approximately 13 per cent. But petitioner's profit increased from $ 25,317.57 to $ 38,513.89 in those years -- an increase of approximately 50 per cent. This would indicate that petitioner's net income is closely related to the amount its gross income exceeds fixed costs and that the 1939 profits would not survive very much of a decrease in attendance, which attendance we must assume is almost constant in relation to the population.
*287 It is apparent from the above that a reconstruction of the petitioner's base period net income would yield a base of only approximately *455 $ 2,000 in excess of the average income computed under section 713 (f). It is further apparent that the assumptions necessary to reach the base period income of approximately $ 36,000 and so to raise by approximately $ 2,000 the base under section 713 (f), are not justified in the light of the evidence. We hold, therefore, that petitioner is not entitled to any relief under the provisions of section 722 (b) (4).
We next consider whether or not the petitioner is entitled to any relief under the provisions of section 722 (b) (5). Following the interpretation by the Commonwealth Attorney that Sunday operation of theatres "would no longer be considered to violate the Virginia 'Blue-law,' "the petitioner first opened its theatres on Sunday in 1941. The petitioner contends that the fact that its theatres were not opened for business on Sunday until after the base period resulted in an inadequate standard of normal earnings during those years which makes it eligible for relief under section 722 (b) (5).
In the petitioner's reconstruction of*288 average base period net income in its application for relief, the major adjustment is based upon an increase in that income for what it contends would have been realized had the theatres been open on Sunday during those years. The respondent contends that the petitioner's reconstruction on this ground is incorrect in that it takes into consideration events during the post base period years, which consideration is prohibited by section 722 (a).
The petitioner states the question under this subsection as:
Does the actual experience of the corporation during the base period afford a fair and just measure of its normal earnings * * *?
The difficulty with this approach is that it makes no allowance for the fact that section 722 is not a means of extending equitable aid to all taxpayers affected by the excess profits tax. Section 722 affords relief, not on broad equitable principles, but only if certain conditions existed. A basic condition to any relief under subsection (b) (5) is that such relief must not be inconsistent with the other principles and conditions of section 722 (b). Among those other principles and conditions is one that the constructive base period net income shall*289 be determined without regard for "events or conditions affecting the taxpayer, the industry of which it is a member, or taxpayers generally occurring or existing after December 31, 1939. * * *" Thus, as a matter of law, events after December 31, 1939, cannot be considered. The petitioner insists, however, that its whole base period was abnormal and that this abnormality persisted until it began Sunday operations. This theory violates the base period concept of normal earnings.
From the time of its incorporation in 1929 the petitioner's operation was scaled to a 6-day week. There is no evidence that this was *456 an abnormal condition in the sense that the petitioner was maintaining an existence during those years waiting only for the day that it could open on Sunday. The record, on the contrary, shows that the business was a successful and profitable operation during those years from 1929 to 1940. True, it would in all probability have been more profitable during those years had it been able to open on Sunday. The fact that it was prohibited from doing so, as the Virginia "Blue-law" was then interpreted, does not prevent the business from being considered normal as we *290 interpret that word in section 722. The policy of the petitioner's officers then in control of the business was in accord at the end of 1939 with the statutory prohibition against Sunday operation. The petitioner's management personnel changed during 1939, 1940, and 1941 in which latter year the statutory provision against Sunday operation was removed and it was then considered advisable to operate on Sunday along with the rest of the amusement facilities of Alexandria. The question of whether or not the petitioner's business was normal over the base period years and at the end of 1939, in so far as Sunday operation is concerned, must be answered in the affirmative. The relief provisions of section 722 (b) (5) are, therefore, inapplicable.
Decision will be entered for the respondent.
Footnotes
1. April 5, 1937 to June 30, 1937.↩
1. SEC. 722. GENERAL RELIEF -- CONSTRUCTIVE AVERAGE BASE PERIOD NET INCOME.
(a) General Rule. -- In any case in which the taxpayer establishes that the tax computed under this subchapter (without the benefit of this section) results in an excessive and discriminatory tax and establishes what would be a fair and just amount representing normal earnings to be used as a constructive average base period net income for the purposes of an excess profits tax based upon 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. In determining such constructive average base period net income, no regard shall be had to events or conditions affecting the taxpayer, the industry of which it is a member, or taxpayers generally occurring or existing after December 31, 1939, except that, in the cases described in the last sentence of section 722 (b) (4) and in section 722 (c), regard shall be had to the change in the character of the business under section 722 (b) (4) or the nature of the taxpayer and the character of its business under section 722 (c) to the extent necessary to establish the normal earnings to be used as the constructive average base period net income.
(b) Taxpayers Using Average Earnings Method. -- The tax computed under this subchapter (without the benefit of this section) shall be considered to be excessive and discriminatory in the case of a taxpayer entitled to use the excess profits credit based on income pursuant to section 713, if its average base period net income is an inadequate standard of normal earnings because --
* * * *
(4) the taxpayer, either during or immediately prior to the base period, commenced business or changed the character of the business and the average base period net income does not reflect the normal operation for the entire base period of the business. If the business of the taxpayer did not reach, by the end of the base period, the earning level which it would have reached if the taxpayer had commenced business or made the change in the character of the business two years before it did so, it shall be deemed to have commenced the business or made the change at such earlier time. For the purposes of this subparagraph, the term 'change in the character of the business' includes a change in the operation or management of the business, a difference in the products or services furnished, a difference in the capacity for production or operation, a difference in the ratio of nonborrowed capital to total capital, and the acquisition before January 1, 1940, of all or part of the assets of a competitor, with the result that the competition of such competitor was eliminated or diminished. Any change in the capacity for production or operation of the business consummated during any taxable year ending after December 31, 1939, as a result of a course of action to which the taxpayer was committed prior to January 1, 1940, or any acquisition before May 31, 1941, from a competitor engaged in the dissemination of information through the public press, of substantially all the assets of such competitor employed in such business with the result that competition between the taxpayer and the competitor existing before January 1, 1940, was eliminated, shall be deemed to be a change on December 31, 1939, in the character of the business; or
(5) of any other factor affecting the taxpayer's business which may reasonably be considered as resulting in an inadequate standard of normal earnings during the base period and the application of this section to the taxpayer would not be inconsistent with the principles underlying the provisions of this subsection, and with the conditions and limitations enumerated therein.↩
2. Reconstruction of base income using 1939 as a normal year and correlating the other years to the general business index:
Business index in per cent of Petitioner's Year normal income 1936 96.9 $ 37,319.96 1937 97.7 37,628.07 1938 35.6 13,710.94 1939 100. 38,513.89 Total 127,172.86 $ 127,172.86 divided by 4 gives an average base period net income of $ 31,763.22.↩