Decision will be entered for the respondent.
Petitioner, in 1924, leased the Hotel Fontenelle to Interstate for a period of 30 years at an annual rental of $ 80,000. The agreed rental was paid until 1931. Beginning in 1932, the hotel became unprofitable to the lessee because of the general business depression and because of increased competition from a new hotel erected in Omaha. Between 1932 and 1936, the petitioner accepted reduced rentals ranging from $ 56,000 to $ 76,000 per annum and the lessee made some improvements on the property. In 1936, an agreement was entered into whereby the petitioner agreed to accept as annual rental $ 60,000 for 1937 and 1938, $ 65,000 for 1939, 1940, and 1941, and $ 70,000 for 1942 and 1943, and at the end of the 7-year period the original rental of $ 80,000 was to be resumed. The lessee on its part agreed to expend $ 150,000 on improvements in the 18 months beginning July 1, 1936. Petitioner seeks excess profits tax relief contending that the 1936 contract is a qualifying factor under section 722(b)(5), 1939 Code, and that normal earnings should be based on the $ 80,000 annual rental provided for in the 1924 original agreement. Held , for *228 the respondent. The record does not establish the $ 80,000 to be petitioner's normal earnings during the base period and the contract was not a factor entitling it to relief under section 722 (a) and (b)(5).
*1072 The Commissioner has denied the petitioner's claims for refund of excess profits taxes for the years 1942 to 1945, inclusive, under section 722, I.R.C. 1939. 1 The statutory notice of denial is dated September 13, 1955. In its petition, petitioner by appropriate assignments of error contests the action taken by the Commissioner.
The questions raised by the pleadings are whether the petitioner is entitled to excess profits tax relief under section 722 (a) and (b) (5) and whether the petitioner's claim for relief for the year 1942 is barred by the statute of limitations.
FINDINGS OF FACT.
Some of the facts have been stipulated; they are incorporated herein by this reference.
Petitioner, Douglas Hotel Company, a Nebraska corporation with its principal office in Omaha, filed *229 its corporation income, declared value excess-profits, and excess profits tax returns for the years 1942, 1943, 1944, and 1945 with the then collector of internal revenue for Nebraska.
*1073 Issue 1. Section 722(b) (5).
Petitioner was organized in 1913 by a group of Omaha businessmen pursuant to a movement started somewhat as a civic enterprise in 1912. Petitioner's purpose was to promote and build a hotel. The hotel was completed and opened on February 27, 1915, and was called the Hotel Fontenelle, hereinafter referred to as the Fontenelle. The cost to petitioner of the hotel building, including plumbing and machinery, was $ 928,616.38 and, exclusive of plumbing and machinery, was $ 651,545.21. The petitioner secured a mortgage loan of $ 400,000 from Metropolitan Life Insurance Co. on January 6, 1915. The amount of the mortgage was reduced to $ 350,000 by December 1923 and to $ 260,000 by December 31, 1939.
The petitioner itself has never operated the hotel; it has leased it to an operating company. Its income has consisted at all times of the rentals which it received from its lessee and small amounts of interest and dividends from minor investments. The Fontenelle was leased beginning *230 March 1, 1915, to Interstate Hotel Co., hereinafter referred to as Interstate, for 20 years at an annual rental of $ 70,200.
In December 1923, all of petitioner's stock was sold to Rome Miller for $ 1,100,000. Miller took over the management of the petitioner on January 1, 1924. On January 2, 1924, a new lease with Interstate was entered into for a period of 30 years at an annual rental of $ 80,000, and the old lease was canceled. The new lease provided that the lessee should keep the leased premises "in good repair, order, and condition whatever may be the nature of said repairs, structural or otherwise, ordinary or extraordinary, or from whatever cause the same may arise" and, further, that the lessee could make alterations and improvements as it saw fit except that if the cost exceeded $ 25,000 the lessee should submit detailed plans and specifications to the lessor. Under the new lease the petitioner received the annual rental of $ 80,000 from 1924 to 1931, inclusive.
Interstate, the lessee of the Fontenelle, was a wholly owned subsidiary of the Eppley Hotels Company, hereinafter referred to as Eppley Hotels, which owned 7 hotels and all of the stock of 11 other corporations, *231 which either owned or leased real estate and hotel buildings and operated hotels. In 1932, Eppley Hotels became financially unable to meet the interest requirements on its first mortgage bonds. As of June 18, 1932, it had outstanding first mortgage bonds in the amount of $ 2,050,000. On that date three voting trustees took charge of the corporation under the terms of a bondholders' protective agreement, which provided that they remain in charge until the outstanding bonds had been reduced to $ 1,300,000, but in any event only until July 1, 1937. On June 30, 1934, Eppley Hotels filed in the United States District Court an application for *1074 partial reorganization under section 77B of the Bankruptcy Act. At that time $ 1,800,000 of bonds remained outstanding. The master in bankruptcy found that its inability to meet its interest requirements was due to the general business depression. On January 26, 1935, a final order was entered approving a plan of reorganization. Under the plan the old bonds, which bore 6 1/2 per cent interest, were retired and new bonds in the amount of $ 1,800,000 were issued, the new bonds to bear interest at 3 per cent from July 1, 1935, to June 1, 1940, and *232 5 per cent thereafter until maturity, July 1, 1951. The voting trust agreement was to remain in full force and effect until terminated under its provisions. On September 2, 1936, an agreement was executed providing for continuation of the voting trust until July 1, 1940. The voting trustees consisted of Eugene C. Eppley, president and majority stockholder of Eppley Hotels, and two others. Eppley remained in control of the operations of Eppley Hotels, subject only to the restrictions that neither the Eppley Hotels nor any of its subsidiary companies could incur any obligations or make capital expenditures in amounts in excess of $ 7,500 without the prior approval of the voting trustees and should not acquire any new hotel properties without approval of the voting trustees. The voting trust agreement was terminated in 1940.
In the early 1930's the Fontenelle was becoming an unprofitable operation. No major improvements had been made in a number of years and there was increased competition from the Paxton Hotel, a large commercial hotel which was completed around 1930. Because of these factors and also because of the general business depression which affected Eppley Hotels, Interstate *233 was having trouble paying its rent under the lease. Beginning in 1932, the petitioner and Interstate entered into a number of temporary contracts which provided that the petitioner accept reduced rentals and Interstate make a stipulated amount of improvements. Pursuant to these agreements the petitioner received the following rentals for the years 1932 to 1936:
| Year | Amount |
| 1932 | $ 75,999.93 |
| 1933 | 57,999.97 |
| 1934 | 56,000.00 |
| 1935 | 57,500.00 |
| 1936 | 65,916.33 |
On May 29, 1936, Miller, as president of petitioner, sent the following letter to Eppley, as president of Interstate, and on June 29, 1936, Eppley agreed to its terms:
As the official representative of the Douglas Hotel Company, the lessor of said property, you have submitted numerous memoranda, and we have had many conferences relative to adjustments of future rental under the existing lease of the Fontenelle Hotel, but we have arrived at no conclusion.
*1075 I have considered your statements of the absolute necessity of the rehabilitation and improvements necessary to place the Fontenelle Hotel in condition and to maintain so that it may properly compete as a first class A hotel.
You have asked the Douglas Hotel Company to contribute toward these improvements, *234 and in this regard the lessor is willing to assist in a material manner together with the lessee, providing the terms of the original lease dated, January 2nd, 1924, are in no way changed, altered, or modified, excepting in the matter of a reduction in the rental to be paid, and then only in the event that the terms and conditions hereof are fulfilled.
The Douglas Hotel Company is willing to accept as the cash rental for the Fontenelle Hotel the sum of Sixty Thousand ($ 60,000.00) Dollars per year for the years 1937 and 1938 and Sixty-five Thousand ($ 65,000.00) Dollars per year for the years 1939, 1940, and 1941, and Seventy Thousand ($ 70,000.00) Dollars per year for the years 1942 and 1943, payable monthly during each of said years, you, of course, to pay taxes and insurance and otherwise maintain and keep up the property as in the said original lease specified.
These concessions, however, in the cash rental are contingent upon your improving the Fontenelle Hotel property to at least the sum of One Hundred Fifty Thousand ($ 150,000.00) Dollars over and above the usual maintenance, upkeep, and repairs provided in the original lease.
This One Hundred Fifty Thousand ($ 150,000.00) Dollars *235 need not be expended by you immediately, but shall begin on or before July 1st, 1936, and shall continue over a period of eighteen (18) months thereafter.
Some of such improvements shall be started on or before July 1st, 1936, and shall be completed during the balance of the year 1936.
Some of such improvements for 1936 shall include the replacing of the elevator doors in the passenger elevators in the building with noiseless, modern elevator doors and automatic leveling devices; the installation of Yale or Corbin locks on all guest rooms; the rebuilding of the Douglas Street entrance with new steps as originally constructed, and a new revolving entrance door; a new and modern lighting system in the main lobby, with such decorations therein as will constitute a renewal and rehabilitation of the said lobby, and also with new and modern lobby furniture; the air conditioning of the Ball Room and the four (4) private dining rooms to the south thereof on the Mezzanine Floor; the air conditioning of the Palm Room and the main dining room; the reconstruction of a proper ventilating system for the laundry so the fumes from the laundry will be carried away from the building in a satisfactory *236 manner; the installation of at least twenty-five (25) new showers.
During the year 1937 there shall be a modernization of what is known as the "Indian Grill", tailor shop, drug store, and the downstairs lobby with such air conditioning, new furniture and equipment, and other rehabilitation and modernization so as to provide renewed and adequate bar and dining rooms, and cocktail rooms in keeping with a first class hostelry. In this regard, permanent fixtures, booths, bar and bar equipment may be included in the total gross expenditure of One Hundred Fifty Thousand ($ 150,000.00) Dollars to be made during said period of time.
It appears that in the halls throughout the house improvements should be started as well as in the rooms when required of modern paneling, and in the event you install such improvements in the rooms or halls, including any new lighting facilities in the halls, such expense may become a part of the One Hundred Fifty Thousand ($ 150,000.00) Dollars to be expended.
There may be included within said One Hundred Fifty [Thousand] ($ 150,000.00) Dollars the expense which you may incur in the rebuilding or rehabilitation *1076 of rooms on the eleventh floor or any other rooms *237 throughout the house that are required to be rebuilt and modernized, and providing the same is done within eighteen (18) months from July 1st, 1936, above specified.
A representative to be chosen by the Douglas Hotel Company shall have access at all reasonable times to the original invoices and other records you may have in order to verify the status of the account in reference to the improvements being made.
At the end of 1936 and each six months thereafter you shall furnish the lessor with a statement of receipts and expenditures of the Fontenelle Hotel for the private use of the lessor.
* * * *
At the end of the seven (7) year period, the rental in the original lease provided shall again become operative, and in the event of your failure to pay the rental herein provided during the seven (7) year period, or otherwise fail to carry out the terms hereof, or the terms of the original lease specified, then the cash rental of Eighty Thousand ($ 80,000.00) Dollars per year shall immediately become in full force and effect, and the past concessions in rental shall become due and payable, to the end that in order for you to obtain the full advantages of the concessions in the rental hereinabove *238 given, it will be necessary for you to fulfill the terms hereof as well as the terms of the original lease provided.
You are, of course, to fulfill each and every other condition set forth in the original lease, and in the event that you do so and fulfill this agreement, and fulfill the conditions for payment and improvements as herein set forth as well as fulfilling the other conditions herein set forth, then the difference between the rental provided in the original lease and the lesser sums herein provided shall abate; but in the event of default in the conditions of the original lease or the terms hereof or in the event of any receivership bankruptcy, or assignment for the benefit of creditors of the lessee, or of any company or of any person firm or corporation controlling it, then the difference in the reduced rental up to the full amount provided in the original lease and the abatements herein and heretofore given in rentals shall then become due and payable.
Pursuant to the agreement of June 29, 1936, set out in detail above, petitioner received the following rentals from Interstate:
| Year | Amount |
| 1937 | $ 60,583.33 |
| 1938 | 60,000.00 |
| 1939 | 64,583.26 |
| 1940 | 65,000.00 |
| 1941 | 65,000.00 |
| 1942 | 69,583.33 |
| 1943 | 75,833.29 |
| 1944 | 80,000.00 |
| 1945 | 80,000.00 |
Interstate *239 abided by the agreement and made substantial expenditures for equipment and improvements which exceeded the amounts agreed upon in the contract.
In Douglas Hotel Co., Docket No. 4252 (decided 14 T.C. 1136">14 T.C. 1136 (1950)), the petitioner (who is also the petitioner herein) in an amendment to its petition filed December 9, 1946, stated (in relation to a claim under section 722 which was dismissed for lack of jurisdiction):
This reduction of the average earnings during said four-year period [1936-1939] was due to the very unusual, abnormal, and extraordinary situation of *1077 the taxpayer's being required in the year 1933 to adjust its thirty-year lease to prevent bankruptcy of its tenant, and for a period beginning in 1933 to reduce the rental from $ 80,000 to $ 57,999.97 and then gradually return to the $ 80,000 figure in the year 1944. * * *
Eppley Hotels obtained rental concessions similar to those involved herein from the lessors of several other hotel properties.
The following schedule reflects the income and expenses of the petitioner for the years 1935 to 1939, inclusive:
| 1935 | 1936 | 1937 | |
| Gross income: | |||
| Rent | $ 57,500.00 | $ 65,916.63 | $ 60,583.33 |
| Other | 322.50 | ||
| Total | 57,500.00 | 66,239.13 | 60,583.33 |
| Total deductions | 47,926.22 | 54,561.91 | 52,429.17 |
| Net income per return | 9,573.78 | 11,677.22 | 8,154.16 |
| Revenue agent's adjustment 1 | 12,107.00 | 15,806.73 | 16,133.00 |
| Corrected net income | 21,680.78 | 27,483.95 | 24,287.16 |
| Dividend adjustment | |||
| Excess profits net income | 27,483.95 | 24,287.16 |
| 1938 | 1939 | |
| Gross income: | ||
| Rent | $ 60,000.00 | $ 64,583.26 |
| Other | 681.84 | 1,184.02 |
| Total | 60,681.84 | 65,767.28 |
| Total deductions | 54,568.75 | 50,644.87 |
| Net income per return | 6,113.09 | 15,122.41 |
| Revenue agent's adjustment 1 | 17,166.92 | 5,103.40 |
| Corrected net income | 2 23,282.01 | 20,225.81 |
| Dividend adjustment | 101.46 | 155.10 |
| Excess profits net income | 23,180.55 | 20,070.71 |
Petitioner's average base period net income (hereinafter referred to as ABPNI) is $ 23,755.59 ($ 27,483.95 + $ 24,287.16 + $ 23,180.55 + $ 20,070.71 / 4) and 95 per cent thereof is $ 22,567.81.
Petitioner was entitled to use the income method, but used the invested capital method in computing its excess profits tax credit since the latter method resulted in a lesser tax.
Petitioner's excess profits tax credit for the taxable years 1942 to 1945, inclusive, computed under the invested capital credit method, is as follows:
| Year | Amount |
| 1942 | $ 30,143.09 |
| 1943 | 29,457.13 |
| 1944 | 29,881.15 |
| 1945 | 30,514.29 |
Petitioner's excess profits tax liability for each of the years 1942 to 1945, inclusive, as determined by the respondent without the application of section 722 is as follows:
| Year | Amount |
| 1942 | 1 $ 4,895.44 |
| 1943 | 1 11,777.33 |
| 1944 | 4,906.83 |
| 1945 | 10,519.36 |
The petitioner's ABPNI is not an inadequate standard of normal earnings because of its contract of June 29, 1936, with Interstate.
*1078 *241 Issue 2. Statute of Limitations -- 1942.
Petitioner filed its corporation income, declared value excess-profits, and excess profits tax returns for the year 1942 with the then collector of internal revenue for Nebraska on March 8, 1943. The amount of excess profits tax assessed for the year 1942 was $ 4,895.44 and the interest assessed thereon was $ 2,135.87. The amount of tax was reduced by a postwar credit of $ 489.54. The remaining tax and interest were disposed of by credits in the amounts of $ 3,028.15 and $ 3,513.62. These credits were dated March 4, 1952, on the certificate of assessments and payments (Form 899). These credits were made pursuant to a certificate of overassessments, Schedule IT A 176532 which was signed by C. A. O'Malley, Collector of Internal Revenue, District of Nebraska, on March 4, 1952.
Petitioner's application for relief under section 722 of the 1939 Code (Form 991) was filed on May 10, 1954. Notice of disallowance of the claim for refund asserted in the Form 991 was sent to petitioner by the Commissioner on September 13, 1955.
In a former Tax Court proceeding (Docket No. 4252), 14 T.C. 1136">14 T.C. 1136 (1950), involving deficiencies in excess profits taxes for *242 the year 1942, the principal question involved petitioner's invested capital credit. In the alternative, the petitioner claimed relief under section 722 in the petition filed March 13, 1944, and in an amendment thereto filed December 9, 1946. The Commissioner on February 3, 1947, moved to dismiss the petition and amendment thereto insofar as they related to claim for relief under section 722 because of lack of jurisdiction. The respondent's motion was granted on March 26, 1947.
OPINION.
Petitioner claims excess profits tax relief for the years 1942 to 1945, inclusive, relying on section 722 (a) and (b) (5). To qualify for relief under section 722(b)(5) petitioner must show that --
(b) * * * its average base period net income is an inadequate standard of normal earnings because --
* * * *
(5) of any other factor [i.e., other than those enumerated in 722(b) (1), (2), (3), (4)] affecting * * * [its] 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 * * * [it] would not be inconsistent with the principles underlying the provisions of this subsection, [722(b)] and with the conditions *243 and limitations enumerated therein.
The factor relied on by petitioner under (b)(5) is a "contract" entered into June 29, 1936, the circumstances and details of which are fully set out in our Findings of Fact and need not be repeated here.
*1079 Petitioner contends that the lease contract which was entered into with Interstate on January 2, 1924, after Miller became the owner of its stock, sets its normal gross income at $ 80,000 for the next 30 years and that the amended contract of June 29, 1936, calling for the reduced rentals was the "factor" causing it to have an inadequate standard of normal earnings for the base period, 1936-1939.
We are unable to agree with petitioner's contention that it is entitled to relief under section 722(b)(5).
We think the instant case is controlled in principle by George Kemp Real Estate Co., 12 T.C. 943 (1949), where the taxpayer, a lessor, reduced the rentals due under a long-term lease for the period 1932 to 1940 because the lessee was faced with bankruptcy on account of the general business depression. The taxpayer sought qualification for relief under section 722(b)(5) but we held that to grant such relief would be inconsistent with the provisions of 722(b)(3) *244 allowing relief in cases where the taxpayer's profits cycle differs materially from the general business cycle, since practically all taxpayers were affected by the general business depression.
Petitioner seeks to distinguish George Kemp Real Estate Co., supra, and argues that it is not controlling here. Petitioner argues that in the instant case it was not only experiencing difficulty in collecting its $ 80,000 a year rent because of the general depression which prevailed for several years, but also because a new and more modern hotel, the Paxton, had been erected in Omaha and was getting the business. Petitioner argues that because the Fontenelle needed modernizing it was not able to compete successfully with the Paxton. We assume this was true; we have no reason to doubt it in light of the oral testimony at the hearing. Yet we do not think these circumstances add anything to really distinguish this case from George Kemp Real Estate Co., supra.
Competition is a normal experience in our economy. In Lamar Creamery Co., 8 T.C. 928">8 T.C. 928, the taxpayer was claiming relief under section 722 (b)(2). It claimed that the Carnation Milk Company, a large milk-processing concern, had erected *245 a milk plant in its territory and that this competition caused temporary depression in its earnings so as to qualify the taxpayer for relief under section 722(b)(2). We denied this contention and in doing so said:
It is true that when Carnation opened its plant at Sulphur Springs it paid more for milk than petitioner and other milk companies in that territory had been paying and as a result thereof petitioner had to pay more for its milk thereafter. But can such competition be considered as a temporary economic circumstance unusual in the case of petitioner or of the industry of which petitioner was a member? We do not think it can be so considered. Competition is present in almost any business. Instead of it being something unusual, it is quite common. It is of the very essence of our capitalistic system. * * *
*1080 True it probably is that competition of the Paxton Hotel forced modernization of the Fontenelle, but we do not think this fact qualifies petitioner for relief under section 722(b)(5).
In its original petition petitioner claimed relief under (b)(2) as well as (b)(5). At the hearing petitioner abandoned its claim for relief under (b)(2) and in its brief relies only on (b)(5). *246 This, of course, it had a right to do but for reasons we have already stated we do not think petitioner's reduction of the rents in 1936 as a result of its agreement with the lessee qualifies it for relief under section 722(b)(5).
In George Kemp Real Estate Co., supra, after speaking of our decision in Philadelphia, Germantown & Norristown R.R. Co., 6 T.C. 789">6 T.C. 789, we said:
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.
So say we in the instant case, except that the agreement here was entered into between the lessor and the lessee in June 1936 instead of in 1935 as in the George Kemp Real Estate Co. case but so far as we can see that makes no difference. We so hold.
Because petitioner has not shown that its excess profits tax computed without the benefit of section 722 is excessive and discriminatory, petitioner is not entitled to an excess profits tax credit greater than the one computed under section 714, and we hold that respondent properly disallowed petitioner's claim for relief under section 722(b)(5).
It *247 is, therefore, unnecessary to discuss Issue 2 regarding the statute of limitations for 1942.
Reviewed by the Special Division.
Decision will be entered for the respondent.
Footnotes
1. All section references are to the Internal Revenue Code of 1939, as amended.↩
1. Adjustment includes for each of the years 1935-1938 the disallowance of $ 12,452 of the $ 26,883.43 depreciation claimed.↩
2. The total is $ 2 in excess of sum of the included amounts. This discrepancy is unexplained.↩
1. Before adjustment for postwar credit.↩