*118 Decision will be entered under Rule 50.
An acquiring corporation, a general automobile dealership, under the facts, held, entitled to include in its base period net income the income from the handling of installment notes which were received in payment for cars sold during the base period.
*895 This proceeding has been returned to us by mandate of the United States Court of Appeals for the Fifth Circuit, issued under its opinion of June 30, 1951, 190 F. 2d 115, reversing our prior opinion of February 28, 1950, 14 T. C. 290. The mandate directs:
* * * It is now here ordered, adjudged and decreed by this Court that the order *119 and decision of the Tax Court in this cause be, and it is hereby, reversed *896 and the cause is remanded to the said Tax Court for the determination of issues bearing on computation in accordance with the opinion of this Court.
The opinion of the Court of Appeals reads in part as follows:
In view, however, of the alternative claim of the commissioner, that if the taxpayer is held to be an "acquiring corporation" and entitled to compute its excess profits credits by the income method, the case should be remanded to the Tax Court for the determination of issues bearing on such computation, it will be so ordered.
Pursuant to mandate, we ordered the parties to submit computations showing the tax involved. The respondent then filed a "Motion for Consideration of Alternative Issue Pursuant to Mandate"; this motion was granted and the case was restored to the general calendar for hearing. In due course the hearing was held, a supplemental stipulation of facts was presented, and briefs were filed by the parties.
The alternative issue presented is whether the base period net income of the proprietorship should be reduced by reasonable salaries and also by finance net income for the*120 years 1936 and 1937 when A. C. Burton & Company as an "acquiring corporation" computes its average base period net income.
FINDINGS OF FACT.
All of the facts are stipulated and are so found.
During the base period years 1936 through 1939 A. C. Burton of Houston, Texas, was the owner and operator of a sole proprietorship in that city, operating under the trade name of A. C. Burton & Company. The business of the proprietorship was that of a general automobile dealership, dealing in new and used automobiles, operating in connection therewith a repair shop, and also handling installment paper acquired in the sales of automobiles.
On June 20, 1940, A. C. Burton & Company (hereinafter referred to as the petitioner) was incorporated. By July 1, 1940, it had acquired the assets of the proprietorship in such a manner as to bring the transfer within the provisions of section 740 (a) (1) (D), I. R. C.
The net income of the proprietorship during the years 1936 through 1939 was as follows:
| 1936 | $ 64,129.39 |
| 1937 | 49,205.17 |
| 1938 | Loss (21,570.39) |
| 1939 | 7,909.32 |
During 1936 the proprietorship sold 744 new cars and 939 used cars for an aggregate sales price of $ 968,989.45. During 1936*121 the notes received from the sale of new cars were sold with recourse to a bank in Houston. Notes received from the sale of used cars were carried by the proprietorship. The proprietorship received a finance gross *897 income of $ 30,668.15 of which $ 20,417.70 constituted net income from the handling of these automobile notes.
During 1937 the proprietorship sold 741 new cars and 1,343 used cars for an aggregate sales price of $ 1,138,727.96. In the first half of the year the notes received from the sale of used cars were sold to an acceptance corporation without recourse; in the second half the notes were discounted at the bank. Some of the new car notes were carried by the business and some were discounted at the bank. In 1937 the proprietorship received finance gross income of $ 15,954.92 of which $ 5,704.47 constituted net income from the handling of these notes.
During 1938 the proprietorship sold 529 new cars and 1,321 used cars for an aggregate sales price of $ 954,187.04. From February to August these notes were sold to a finance corporation without recourse. On October 14 Burton obtained a charter for the Burton Finance Company. During November and December the*122 proprietorship sold most of its notes to the Burton Finance Company. Gross income to the proprietorship from the handling of the notes in 1938 amounted to $ 1,545.79.
During 1939 the proprietorship sold 537 new cars and 1,114 used cars for an aggregate sales price of $ 935,813.25. Most of the notes received in connection with these sales were discounted without recourse with the Burton Finance Company. The gross finance income earned by the proprietorship during this year amounted to $ 2,559.82.
From January 1, 1940, to June 30, 1940, the proprietorship sold 287 new cars and 604 used cars for an aggregate sales price of $ 459,500.51. As in 1939, most of the notes received were discounted without recourse with the Burton Finance Company. The proprietorship's gross income during the period from the handling of these notes was $ 3,331.02.
All notes held by the proprietorship on June 30, 1940, including $ 10,694.44 in notes acquired that day from the Burton Finance Company, were transferred by the proprietorship to petitioner corporation in connection with the transfer of the proprietorship's other assets.
The handling of automobile installment paper in the years 1936 and 1937 was*123 part and parcel of the general automobile business owned and operated by Burton in those years, and not a separate business as alleged by respondent. The proprietorship income gained from the handling of these notes in 1936 and 1937 was part of the aggregate income received from the general automobile dealership prior to the transfer of the business to the petitioner in 1940.
*898 OPINION.
The United States Court of Appeals for the Fifth Circuit determined in A. C. Burton & Co. v. Commissioner, 115">190 F. 2d 115, reversing 14 T. C. 290, that A. C. Burton & Company, the petitioner herein, which had acquired substantially all of the properties of a sole proprietorship, was an "acquiring corporation" within the provisions of section 740 (a) (1) (D) of the Code. This determination was contrary to the contention of the respondent and to our prior opinion. Respondent, however, alternatively contended on brief that if petitioner was an acquiring corporation the base period net income of the proprietorship should be reduced by the reasonable salaries for the base period, and also by the finance net income for the years 1936*124 and 1937. These alternative contentions are before us now.
Section 35.742-1, Regulations 112, provides that a reasonable salary to the sole proprietor for personal services rendered shall be allowed, and further that this is a necessary adjustment in computing the excess profits net income for the base period years. It has been stipulated that $ 750 per month was a reasonable salary for Burton during the years 1936 through 1939. This amount shall be used as an adjustment in computing excess profits net income for the base period years. Inasmuch as the parties do not now contest this issue, further discussion will be superfluous.
The parties are not in agreement, however, with the treatment of finance net income for the years 1936 and 1937. Therefore, we shall now consider this issue which we found unnecessary to consider under our prior holding.
The gist of respondent's contention on this issue was that Burton during 1936 and 1937 was in the finance business as well as the automobile business, and that petitioner as an "acquiring corporation" did not acquire, in the transaction which took place on July 1, 1940, the finance business of the proprietorship. Respondent concludes*125 that this finance business was acquired by the Burton Finance Company when it was organized on October 14, 1938. Therefore, the finance income for 1936 and 1937 should be excluded from the net income of the proprietorship in computing petitioner's excess profits credit under section 742.
On the other hand, petitioner contends that the handling of installment paper was not a separate business but rather an integral part of the general automobile dealership, and as such the finance income for the years 1936 and 1937 should be included when computing its average base period net income.
An acquiring corporation under section 742 may use the earning experience of its predecessor in computing its excess profits credit. *899 However, we fail to see a requirement in section 742 of the Code or its corresponding regulations that would compel a corporation to compute its average base period net income on a departmental basis. This is what the respondent would require of the petitioner. While respondent cites no precedent for an exclusion of the finance income, we should give serious weight to his argument if the net income in controversy had been derived from an activity wholly unrelated*126 to the business of a dealer in automobiles.
However, this is not the present situation. The business of petitioner in 1940 was a general automobile dealership. The business of the proprietorship during the base period years was the same automobile dealership. Installment paper in varying amounts was handled by both forms of business. Finance income was not independent income but rather depended entirely upon automobile sales under some deferred payment plan.
It was in the normal course of trade that the proprietorship acquired installment notes in payment for cars just as it acquired used cars traded in for new cars. Whether it held the notes and derived a profit from finance charges and interest or sold the notes at a discount to procure ready cash was a matter of business discretion. It was not a matter of operating a separate finance business. The finance income was properly part of proprietorship income just as income from the sale of used cars or income from maintenance and repair was proprietorship income and includible in computing base period net income. There was never a time during the base period when the proprietorship did not receive some finance income. The *127 value of notes held varied and sharply decreased after 1937, but it is equally true that petitioner held notes in 1940 after it acquired the business. We perceive no reason for eliminating the finance net income for the years 1936 and 1937 when computing base period net income. On the issue concerning the finance income herein involved we sustain petitioner's contention.
Decision will be entered under Rule 50.