*177 Decision will be entered for respondent.
Petitioner filed a claim for refund of excess profits tax for 1940, claiming that it is entitled to relief under section 722 of the Internal Revenue Code because it was forced by "circumstances" prevailing in 1935 to agree to reduce the annual rental paid to it by its lessee. The facts show that that reduction in rental was forced by the events of the general depression of the early 1930's. Held, petitioner may not have any relief under section 722 (a) or (b) (5) because the application of subsection (b) (5) to petitioner's case would be inconsistent with the provisions of section 722 (b) of the code.
*943 The Commissioner disallowed petitioner's application for relief under section 722 of the Internal Revenue Code and its claim for refund for excess profits tax in the amount of $ 1,311.75 for the year 1940 for the reason that petitioner has not established (1) that the tax computed under subchapter E of chapter 2 of the Internal Revenue Code without the benefit of section 722 resulted in an excessive and discriminatory tax within the provisions of section 722 (a) and (b) (5), and (2) that its base period earnings were an inadequate standard of normal earnings during the base period. The petitioner contends that the determination of the Commissioner is erroneous and asks that its claim for overpayment be allowed for 1940 in the amount above stated.
FINDINGS OF FACT.
Parts of the facts have been stipulated and they are so found.
Petitioner was organized in 1902. The returns for the year involved were filed with the collector of internal revenue for the third district of New York. Since approximately 1903 petitioner's chief source of income has been rentals*179 from property on the east side of Fifth Avenue between 49th and 50th Streets, New York City. Between 1903 and 1922 that property was known as Nos. 611, 613, 615, 619, and 621 Fifth Avenue. Petitioner did not own No. 617 Fifth Avenue. The premises were improved by four or five structures comprising the entire block front of Fifth Avenue extending to a depth easterly of 208 feet for the northerly half of the block front and to a depth of 200 feet for the southerly half of the block front, except 42 feet front and rear by 100 feet in depth which was known as 617 Fifth Avenue. The fact that petitioner did not own No. 617 Fifth Avenue made its property involved U-shaped.
*944 In 1920 petitioner leased all of the above property to Saks & Co. (sometimes hereinafter referred to as the lessee) at a fixed net rental of $ 200,000 per year from October 1, 1922, to May 1, 1924, after which the net rental was to be $ 300,000 per year, all of which was to be payable quarterly. Saks & Co. is a stock corporation, the stock of which is owned 100 per cent by Gimbel Brothers, Inc., which also owns several department stores in New York and other cities. Gimbel Brothers, Inc., and its subsidiaries*180 will sometimes hereinafter be referred to as the Gimbel group.
The term of the lease was for 21 years, expiring on October 1, 1943, with several renewal periods of 21 years, each at the election of the lessee. The lease also provided that the lessee was to remove the existing improvements on the premises and erect a unified building covering the property then known as No. 611 through No. 621 Fifth Avenue. That unified building also was to cover No. 617 Fifth Avenue, which, as stated heretofore, was not owned by petitioner.
The building was completed approximately in 1922. It has since been operated by Saks & Co. and is known as "Saks Fifth Avenue."
In 1926 Saks & Co. issued $ 6,500,000 in 6 per cent bonds, secured by the leasehold interest in petitioner's land and the fee interest in lot No. 617, the two together forming the premises of the unified store building erected thereon. On or about November 15, 1932, a readjustment agreement was made between the obligor and a committee representing about 92 per cent of the bondholders, who had agreed to accept 10-year script in payment for part of the bond coupons and for postponement of maturity of serial installments.
The Gimbel group, *181 including Saks & Co., petitioner's tenant, suffered severe financial reverses during the general business depression following 1931. Heavy fixed charges, particularly rent and mortgage interest, were too high and had to be scaled down. This was done, beginning in 1932, and by 1935 the Gimbel group was kept in business only by the concession made by its lessors and mortgagees. Everyone of the lessors of the Gimbel group agreed to reductions in rent during the depression. Concessions were also made by its mortgagees.
The concessions in rental for the U-shaped property made by petitioner from 1932 to 1935 were the following for each year:
| 1932 | $ 25,000 |
| 1933 | 100,000 |
| 1934 | 75,000 |
| 1935 | 50,000 |
In 1935 the Gimbel group desired to effect a more permanent reformation of their obligations so as to give them a breathing spell to reestablish their financial position. They desired to reduce the current payments on their fixed obligations, and to acquire liquid funds *945 with which to buy their own depressed bonds so as to decrease their mortgage obligations. In order to achieve this, the Gimbel group had carried on negotiations for some time with petitioner to obtain a long*182 term concession in rent, and to obtain large liquid funds by selling petitioner No. 617 Fifth Avenue. The liquid funds were to be paid out of a loan secured by a mortgage on No. 617 and on the rest of petitioner's property underlying the Saks Fifth Avenue store, which mortgage the Gimbel group offered to arrange for petitioner without expense to it. The Gimbel group plan also included an agreement to pay sufficient rental for No. 617 after it was sold to petitioner to cover petitioner's interest obligation on the mortgage given for the purchase.
In 1935 the Gimbel group represented to petitioner that it would be in danger of collapsing if petitioner did not agree to its plan for the concession in rent and the raising of liquid funds. Gimbel further stated to petitioner that the value of No. 617 was in excess of the desired purchase price. Furthermore, the Gimbel group emphasized the fact that not only did it have a large outstanding indebtedness as a result of the general depression, but that the lessee, its subsidiary, which was liable to petitioner, was also liable on large intercompany debts to the parent company, and that petitioner stood to realize little upon the failure*183 of the enterprise because the creditors of the Gimbel group would insist on realizing on this debt. Petitioner acted on the basis of these representations.
Reductions in rent during the depression were not unusual, and they were quite frequent in respect of comparable properties. Every other lessor of the Gimbel group reduced its rent.
In December 1935 the petitioner entered into an agreement with Gimbel Brothers, Inc., the parent company, with Saks Realty Corporation, a subsidiary thereof, and with Saks & Co., its tenant, providing for the following:
(a) Rent. -- Petitioner agreed to reduce the rent on its U-shaped property by $ 50,000 per year for the period between December 1, 1935, and June 30, 1940, and at the same time the lessee agreed to enter into a lease for No. 617, which was sold to petitioner, providing for rent of $ 55,000 per year to petitioner.
(b) Sale of No. 617. -- The Gimbel group sold to petitioner No. 617, as above indicated, for $ 1,000,000, free and clear of all encumbrances. The purchase price was raised by a mortgage on both No. 617 and petitioner's U-shaped property for $ 2,750,000 due in 10 years, which transaction included refinancing petitioner's*184 mortgage on its U-shaped property. The mortgage was at 4 per cent interest, leaving petitioner a net balance of $ 15,000 on its rent for No. 617. All of the expenses in connection with the mortgage on petitioner's property was paid for by the Gimbel group.
*946 (c) Preferment of petitioner's claims. -- The Gimbel group subordinated all of its intercompany debts to any claims petitioner might thereafter have under the leases with Saks & Co.
(d) Solvency of tenant. -- The Gimbel group agreed to reduce the leaseheld bond issue to $ 3,000,000 (or to deposit specified securities for the excess of the bonds over $ 3,000,000), and Saks & Co. agreed not to pay its stockholders any dividends or any amount out of earnings, or surplus, or capital, and not to make any payment on indebtedness or interest to any stockholder, parent, subsidiary, or affiliated corporation if the following excesses (which were present upon the receipt of $ 1,000,000 for No. 617) were not present or would not be present by reason of the payment:
| Excess of assets over liabilities | $ 2,550,000 |
| Excess of current assets over current liabilities | 6,000,000 |
| Excess of assets over liabilities (excluding liabilities | |
| subordinate to petitioner's claims) | 8,000,000 |
*185 Petitioner's tax return for the calendar year 1940 disclosed an excess profits net income for the calendar year 1940 in the amount of $ 172,313.28. Its excess profits credit, based upon its average base period net income, was in the amount of $ 170,596.08. Its excess profits tax for 1940 was $ 1,311.75.
Petitioner filed application for relief under section 722 of the Internal Revenue Code. It seeks to increase its average base period net income by $ 50,000, so as to give it a constructive average base period net income of $ 220,596.08. If petitioner's request for relief were granted, it would have no excess profits tax for 1940.
In the statement attached to the statutory notice under section 732, respondent stated as follows with respect to petitioner's claim for refund:
It is held that you have not established that the tax computed under Subchapter E of Chapter 2 of the Internal Revenue Code, without the benefit of Section 722 of the Code, results in an excessive and discriminatory tax within the provisions of Section 722 (a) or (b) of the Code. Furthermore, you have not established what would be a fair and just amount representing normal earnings to be used as a constructive*186 average base period net income for the purposes of an excess profits tax based upon a comparison of normal earnings and earnings during the excess-profits tax year ending December 31, 1940.
OPINION.
Petitioner argues that it is entitled to relief under section 722 (a) and (b) (5) because its tax computed without the benefit of section 722 results in an excessive and discriminatory tax. It claims that its standard of normal earnings was $ 300,000 per year, as established by the lease it entered into in 1920 with its lessee, and that the difference between the rental of $ 300,000 and $ 250,000 received by it *947 under the terms of the agreement of 1935 with its lessee "measured the inadequacy" of its income for the base period years.
Petitioner states that the factor which qualifies it for relief provided by section 722 was the "duress of circumstances which compelled" it to modify its leasing agreement in 1935 so that its income from the U-shaped property involved was reduced by $ 50,000 annually. These circumstances, petitioner states, were the effects of the general depression:
* * * which had, in 1932 and 1933, caused them [the Gimbel group] a loss of approximately eight*187 million dollars, or thereabouts, and that their sales had dropped * * * to such a figure * * * that they had to have relief to keep in business, * * * and, therefore, we must give them relief in order to prevent a collapse * * *.
As pointed out above, petitioner gave concessions to Saks & Co., beginning in 1932 and continuing through 1935. In 1935 representatives of the Gimbel group came to petitioner with a proposition the result of which is set forth in detail in our findings. The proposal generally provided that petitioner purchase from the Gimbel group lot No. 617 for $ 1,000,000 and that it reduce the rental on the U-shaped property by $ 50,000 for 4 1/2 years beginning January 1, 1936. Such proposal was made to petitioner so that the Gimbel group, including petitioner's lessee, Saks & Co., could reduce its funded debt, thereby cutting down its fixed charges and permitting the organization to survive the effects of the general depression. If petitioner had not agreed to the terms set forth by the representatives of the Gimbel group, that organization, including petitioner's lessee, would have been faced with bankruptcy. We are thus confronted with the question, Is a taxpayer*188 whose income in the base period was affected only by the general depression and in like manner to other taxpayers in comparable businesses and whose profit or income cycle has not been shown to be materially different from that of business generally during the period involved, entitled to relief under section 722 (b) (5)? We believe the question must be answered in the negative.
Section 722 (b) (5), which is the only section other than section 722 (a) which petitioner seeks to invoke, was intended to provide relief for taxpayers who were unable to meet the specific tests laid down in subsections (b) (1), (2), (3) and (4). It provides as follows:
SEC. 722. GENERAL RELIEF -- CONSTRUCTIVE AVERAGE BASE PERIOD NET INCOME.
* * * *
(b) Taxpayers Using Average Earnings Method. -- The tax computed under this subchapter (without the benefit of this section) shall be considered to be excessive and discriminatory in the case of a taxpayer entitled to use the excess *948 profits credit based on income pursuant to section 713, if its average base period net income is an inadequate standard of normal earnings because --
* * * *
(5) of any other factor affecting the taxpayer's business which*189 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. [Italics supplied.]
In a committee report discussing section 722 (b) (5) it is stated that a taxpayer may be entitled to relief under subsection (b) (5) "if it can satisfy the Commissioner or the Relief Court that its claim is consistent with the principles underlying the specific tests [as set forth in subsections (b) (1), (2), (3) and (4)]." H. Rept. 2333, 77th Cong., 2d sess., p. 21; see also pp. 24 and 146; S. Rept. 1631, 77th Cong., 2d sess., pp. 36 and 202. We think that to give the relief which petitioner requests would be inconsistent with subsection (b) (3), which provides as follows:
(3) the business of the taxpayer was depressed in the base period by reason of conditions generally prevailing in an industry of which the taxpayer was a member, subjecting such taxpayer to
(A) a profits cycle differing materially in length and amplitude from the general business*190 cycle, or
(B) sporadic and intermittent periods of high production and profits, and such periods are inadequately represented in the base period.
See also subsection (b) (2).
In Senate Report 1631, supra, p. 36, it is stated that to be entitled to any relief under section 722 the taxpayer must show "(3) Depression due to a profits cycle differing from the general business cycle." The petitioner has not shown in this proceeding that its business cycle differed materially in length and amplitude from the general business cycle; in fact, the effect of the depression which petitioner claims qualifies it for section 722 relief was permanent and characteristic of business in general during the period involved. Hence, since we believe that to grant the relief which petitioner here seeks would be inconsistent with the principles of section 722 (b), we must conclude that it is not entitled to any relief under section 722.
In its argument that its claim for relief under section 722 (b) (5) is not inconsistent with the specific tests set forth in subsection (b) (3), petitioner stated that subsection (b) (3) "obviously [has] nothing to do with petitioner." That is the extent of its argument*191 on this point and, in view of the above, we can find no merit in that conclusion.
Petitioner states, in addition, in answer to the argument that the general depression is not a qualifying factor for section 722 relief, that:
*949 * * * we were not subjected to the business depression except indirectly or secondarily through our tenant; it was not our business, but his [sic] sales (or rather his parent corporation's sales) that were cut in half by the depression. The depression did not reduce our reserved rent, but only the tenant's capacity to continue paying it. * * *
If we should follow petitioner's reasoning to its logical conclusion, it could be said that petitioner's lessee, or the entire Gimbel group of which it was a member, was not affected directly by the depression, but only indirectly to the extent that its customers were unable to trade with Saks Fifth Avenue, or any of the other stores comprising the group. We can find no merit in petitioner's contention.
Petitioner further attempts to bolster its position by citing out of context a statement from Philadelphia, Germantown & Norristown R. R. Co., 6 T. C. 789, 798, as follows: *192 "The 'standard of normal earnings' for a period of 999 years from December 1, 1870, was actually established by the lease executed in 1870. * * *" Petitioner offers that statement in support of its contention that the standard of normal earnings in the instant case was established by the lease entered into in 1920. That case, however, supports our conclusion here, for in the instant proceeding there was a new agreement entered into between petitioner and its lessee in 1935, which established the standard of normal earnings for the base period years.
In view of the above, therefore, we hold that petitioner is not entitled to any relief under section 722 (b) of the Internal Revenue Code, and, since it has not shown that the tax computed without the benefit of section 722 was excessive and discriminatory within any of the provisions of section 722 (b), it is not entitled to any relief under section 722 (a) of the code.
It follows that respondent's determination must be sustained.
Decision will be entered for respondent.