*88 Decision will be entered under Rule 50.
Although taxpayer commenced business in 1938, the 2-year push-back rule provided by section 722 (b) (4), I. R. C. 1939, is of no aid to it since it has failed to show by persuasive evidence that its business did not reach, by the end of the base period, the earning level which it would otherwise have attained with 2 additional years of experience. Nevertheless, petitioner is entitled to relief, because its average base period net income does not reflect the normal operation for the entire base period, and the relief provided by section 713 (f) does not fully correct the abnormality. Amount of relief under section 722 determined.
*1088 This proceeding involves claims for relief*89 under section 722 (b) (4), Internal Revenue Code of 1939, for the years 1940, 1941, and 1942. The claims for refund amount in the aggregate to $ 290,125.39. The Findings of Fact are based substantially upon the findings proposed by the Commissioner who heard the evidence, after taking into account the objections of the parties.
FINDINGS OF FACT.
1. Petitioner is a Delaware corporation with its principal office located at Ponca City, Oklahoma. Its returns for the taxable years involved, 1940, 1941, and 1942, were filed with the collector of internal revenue for the district of Oklahoma.
2. Petitioner was organized July 11, 1938, by Continental Oil Company, and others, for the purpose of constructing and operating an oil pipeline from what is known as the Lance Creek field, in Niobrara County, Wyoming, to Denver, Colorado. It had authorized capital stock of $ 500,000 of which $ 300,000 was issued for cash. Petitioner borrowed $ 1,500,000 on interest-bearing open account which was later converted to 6 per cent serial notes. Continental Oil Company acquired 55 per cent of the capital stock and serial notes.
3. Continental Oil Company operated an oil refinery at Denver, Colorado, *90 and was a large owner of oil leases in the Lance Creek field. Petitioner's other stockholders were C. U. Bay, the controlling stockholder of Bay Petroleum Corporation with refineries at Denver, Colorado, and Cheyenne, Wyoming, who acquired 20 per cent of petitioner's stock; Fred Goodstein, an oil producer in Colorado and Wyoming and a stockholder in Minnelusa Oil Corporation, who acquired 20 per cent; and Robins & Company, a brokerage firm at Bridgeport, Connecticut, which acquired 5 per cent.
4. The Lance Creek field was discovered in 1918. The first production was from what was known as the upper Sundance sand. By 1935 the deposits in this sand were nearly exhausted. In that year, however, the Ohio Oil Company completed a productive well in the field in a new sand known as the lower Sundance sand. In 1937 the same company completed another producing well in what is known as the Leo sand. Both of these sands yielded heavy production.
5. On November 13, 1937, the principal owners of the oil rights in the Lance Creek field, including Ohio Oil Company, Argo Oil Corporation, Continental Oil Company, Minnelusa Oil Corporation, and the Buck Creek Oil Company, entered into a so-called*91 unitization agreement for the Lance Creek area. In general, this agreement provided for control of the development and operation of the oil wells *1089 in the area under the direction of a committee to be appointed by the parties thereto. Two other supplemental agreements of a similar nature were entered into soon thereafter. These agreements remained in force and effect at all times here material.
6. Prior to 1935 the only pipeline out of the Lance Creek field was a 6-inch line owned by Illinois Pipe Line Company which ran to Lusk, Wyoming, a distance of about 17 1/2 miles, where it made connection with rail transportation. In 1936 this line was extended to Fort Laramie, Wyoming, a distance of approximately 48 miles, where it made connection with the pipeline of Stanolind Pipe Line Company.
7. In 1935 Continental Oil Company and Union Oil Company of California jointly constructed a 4-inch pipeline connecting the Lance Creek field with the rail transportation at Manville, Wyoming, a distance of approximately 19 miles. Later, in 1938, Continental Oil Company acquired Union Oil Company's interest in this line and removed it.
8. Petitioner's pipeline from Lance Creek to Denver, *92 Colorado, was put into operation in November 1938. It was what is known as a "trunk" line as distinguished from a "gathering" line. The total distance from Lance Creek to Denver is approximately 230 miles, to Fort Laramie 68 miles, and to Cheyenne 136 miles. A total of 253,773 barrels of crude oil was transported over petitioner's pipeline in November and December 1938, and 2,771,555 barrels in 1939. The total capacity of the line at the end of 1939 was about 12,000 barrels per day.
9. The first crude oil was transported by petitioner from the Lance Creek field on November 9, 1938. The following is a schedule of the barrels of oil transported by the petitioner by months for the 2 months of 1938 and all of 1939:
| 1938 | Total for month | Average daily |
| November | 70,018 | 2,334 |
| December | 183,755 | 5,927 |
| Total | 253,773 | |
| 1939 | ||
| January | 151,999 | 4,903 |
| February | 167,306 | 5,975 |
| March | 189,101 | 6,100 |
| April | 240,245 | 8,008 |
| May | 198,170 | 6,393 |
| June | 227,023 | 7,567 |
| July | 206,758 | 6,669 |
| August | 256,352 | 8,269 |
| September | 245,612 | 8,187 |
| October | 305,865 | 9,866 |
| November | 284,507 | 9,484 |
| December | 298,615 | 9,633 |
| Total | 2,771,555 |
*1090 10. Following is a schedule showing *93 the shipper, the consignee, the destination on petitioner's pipeline, and the number of barrels of oil transported by the petitioner from Lance Creek in 1938 and 1939:
| Shipper | Consignee | Destination | 1938 | 1939 |
| Continental Oil Co | Continental | Denver | 119,761.58 | 593,674.83 |
| Bay Petroleum Corp | Bay | Denver | 81,074.47 | 662,824.30 |
| The California Co | Bay | Denver | 108,629.99 | |
| Gordon Refining Co | Oriental | Denver | ||
| Oriental Refining Co | Oriental | Denver | 104,439.00 | |
| Perry Petroleum Co | Perry | Denver | 11,427.74 | 181,817.92 |
| Universal Refining Co | Universal | Denver 1 | 1 1,498.86 | |
| Continental Oil Co | Bay | Denver | 14,218.46 | |
| Total to Denver | 212,263.79 | 1,667,103.36 | ||
| Bay Petroleum Corp | Bay | Cheyenne | 41,509.56 | 441,892.94 |
| Frontier Refining Co | Frontier | Cheyenne | ||
| Gordon Refining Co | Frontier | Cheyenne | ||
| Minnelusa Oil Corp | Frontier | Cheyenne | 10,721.83 | |
| Standard Oil Co., | ||||
| Indiana | Frontier | Cheyenne | ||
| Carter Oil Co | Frontier | Cheyenne | ||
| Idaho Refining Co | Idaho | Cheyenne 1 | 179,253.90 | |
| Universal Refining Co | Universal | Cheyenne 1 | 575.81 | |
| Wasatch Refining Co | Wasatch | Cheyenne 1 | 57,976.43 | |
| Ohio Oil Co | Ohio | Cheyenne 1 | 84,403.20 | |
| Total to Cheyenne | 41,509.56 | 775,283.11 | ||
| Minnelusa Oil Corp | Minnelusa | Manville 1 | 81,143.89 | |
| Socony-Vacuum Oil Co | Socony-Vacuum | Manville 1 | 17,386.92 | |
| Total to Manville | 98,530.81 | |||
| Stanolind Oil and Gas | Stanolind Pipe | |||
| Co | Line | Ft. Laramie 1 | 65,527.12 | |
| Utah Oil Refining Co | Stanolind Pipe | |||
| Line | Ft Laramie 1 | 146,976.93 | ||
| Wasatch Refining Co | Stanolind Pipe | |||
| Line | Ft. Laramie 1 | 18,133.60 | ||
| Total to Ft. | ||||
| Laramie | 230,637.65 | |||
| Grand total | ||||
| deliveries | 253,773.35 | 2,771,554.93 |
11. The rates received by petitioner for pipeline transportation of oil from Lance Creek to the different destination points in 1938 and 1939 were as follows:
| Per bbl. | |
| Lance Creek field to Manville Loading Rack (25.93 mi.) | $ 0.125 |
| Lance Creek field to Fort Laramie, Wyoming (67.38 mi.) | 1 .07 |
| Lance Creek field to Cheyenne, Wyoming, and to Cheyenne Loading | |
| Rack (135.91 mi.) | .30 |
| Lance Creek field to Denver, Colorado (229.70 mi.) | .45 |
| Lance Creek field to Woods Cross, Utah (503.59 mi.) | 2 .07 |
| Lance Creek field to Salt Lake City, Utah (509.77 mi.) | 2 .07 |
12. The production*95 of crude oil at Lance Creek in the years 1935 through 1939, inclusive, was as follows: *1091
| Production | |
| Year | (1,000 bbls.) |
| 1935 | 735 |
| 1936 | 1,892 |
| 1937 | 4,247 |
| 1938 | 4,846 |
| 1939 | 6,884 |
The estimated oil reserves were 100,000,000 barrels at January 1, 1939, and 94,800,000 barrels at January 1, 1940. The estimated commercial productive life of the field was 25 years from January 1, 1939.
13. In 1938, at the time petitioner decided to put in its pipeline, there were inadequate facilities for transporting the Lance Creek field production of crude oil. The rates for the combined pipeline and rail transportation were prohibitively high in a competitive crude oil market; they amounted to 76 cents per barrel from Lance Creek to Denver. There were some shipments by truck, but these rates were also high.
14. Some of the refineries in the Rocky Mountain area, particularly those at Denver, were unable to obtain sufficient crude oil at favorable prices in 1938 and were operating at less than capacity. The daily rated capacity of petitioner's 9 principal refinery customers, as of December 31, was 11,250 barrels in 1936; 16,250 in 1937; 18,050 in 1938; and 20,450 in 1939. The*96 crude petroleum refineries in the entire United States operated at 78 per cent of capacity in 1936; 83 per cent in 1937; 78 per cent in 1938; and 82 per cent in 1939.
15. According to reports of the American Petroleum Institute, the daily production of crude oil at Lance Creek was 2,650 barrels in January 1936 and 27,300 barrels in December 1939.
16. Petitioner's total investment in pipeline property was $ 1,850,093 at December 31, 1938, and $ 1,871,807.62 at December 31, 1939. Its net income, as adjusted by revenue agents' reports, was $ 39,143.04 in 1938, and $ 665,754.56 in 1939.
17. The per-barrel oil revenue of trunk pipelines for both crude oil and refined products in the United States for the years 1937 to 1939, inclusive, as compared with that of the petitioner, was as follows:
| United States | |||
| Trunk line barrel | Revenue per 1,000- | ||
| Year | miles (1,000) | Revenue trunk lines | barrel mile |
| 1937 | 303,016,367 | $ 186,028,366 | $ 0.61 |
| 1938 | 286,786,930 | 176,055,167 | .61 |
| 1939 | 289,610,174 | 163,761,874 | .56 |
| Petitioner | |||
| 1938 | 54,391 | 112,755 | 2.07 |
| 1939 | 506,149 | 1,011,242 | 2.00 |
*1092 18. Following is a schedule of the investment in carrier property, the net income, *97 and the ratio of net income to property value of Continental Pipe Line Company, Stanolind Pipe Line Company, Illinois Pipe Line Company, and Rocky Mountain Pipe Line Company (petitioner), for the years 1936 to 1939, inclusive:
| Investment | Ratio of net | ||
| Year | in carrier | Net income | income to |
| property | property | ||
| value | |||
| Continental Pipe Line Company | |||
| 1936 | $ 7,364,650 | $ 163,974 | 2.22 |
| 1937 | 7,901,791 | 175,912 | 2.23 |
| 1938 | 7,859,648 | 196,745 | 2.50 |
| 1939 | 9,122,052 | 221,393 | 2.43 |
| Stanolind Pipe Line Company | |||
| 1936 | $ 89,570,335 | $ 10,028,188 | 11.96 |
| 1937 | 91,204,020 | 9,979,726 | 10.94 |
| 1938 | 89,560,455 | 7,488,225 | 8.36 |
| 1939 | 88,953,482 | 7,155,387 | 8.04 |
| Illinois Pipe Line Company | |||
| 1936 | $ 38,659,630 | $ 2,422,653 | 6.27 |
| 1937 | 38,586,393 | 3,025,609 | 7.84 |
| 1938 | 38,802,690 | 2,607,054 | 6.72 |
| 1939 | 41,072,281 | 4,100,109 | 9.98 |
| Rocky Mountain Pipe Line Company | |||
| 1939 | $ 1,971,119 | $ 542,060 | 27.50 |
19. The petitioner's excess profits net income, computed under section 713 (f) of the Internal Revenue Code of 1939, and resulting excess profits credit, is as follows:
| Base period | Base period | |
| net income | net income | |
| under 1940 Act, | under 1941 Act, | |
| year 1940 | year 1941 | |
| 1936 (8 per cent invested capital) | $ 93,597.36 | $ 93,597.36 |
| 1937 (8 per cent invested capital) | 93,597.36 | 93,597.36 |
| 1938 Actual from July 11, 1938 | 39,143.04 | 88,121.42 |
| (8 per cent invested capital) | 48,978.38 | |
| 1938 Less Federal income taxes | (7,437.18) | |
| 1939 Net income | 665,754.56 | 689,471.18 |
| 1939 Less Federal income taxes | (117,493.37) | |
| Total | $ 816,140.15 | $ 964,787.32 |
| Average 1/4 | 204,035.04 | 241,196.83 |
| Excess Profits Net Income Allowed Under Section 713 (f) | ||
| Aggregate net income 1938 and 1939 | $ 628,945.43 | $ 777,592.60 |
| Aggregate net income 1936 and 1937 | 187,194.72 | 187,194.72 |
| Excess | $ 441,750.71 | $ 590,397.88 |
| 12/24ths of excess | $ 220,875.35 | $ 295,198.94 |
| Add net income 1938 and 1939 | 628,945.43 | 777,592.60 |
| Total | $ 849,820.78 | $ 1,072,791.54 |
| 12/24ths of total | 424,910.39 | 536,395.77 |
| Excess profits net income for credit | ||
| purposes | 424,910.39 | 536,395.77 |
| Excess profits credit (95 per cent) | 403,664.78 | 509,575.98 |
*98 20. Petitioner's excess profits net income, its carryback of excess profits credit, and the excess profits tax paid, computed without the *1093 benefits of section 722, for the years 1940 to 1945, inclusive, are as follows:
| Excess profits | Carryback | Excess profits | |
| Year | tax net income | unused EPT | tax paid |
| credit | |||
| 1940 | 1 $ 676,168.14 | $ 99,511.52 | |
| 1941 | 902,440.85 | $ 22,664.43 | 179,860.24 |
| (from 1943) | |||
| 1942 | 550,420.46 | 22,568.38 | 10,753.63 |
| (from 1944) | |||
| 1943 | 486.911,56 | ||
| 1944 | 487,007.61 | ||
| 1945 | 593,598.93 | 252,228.88 | |
| (from 1946) | |||
| Total | $ 3,696,547.55 | $ 290,125.39 |
21. Petitioner filed claim for relief under section 722 for the years 1940, 1941, and 1942, in which it claimed refund of all of the excess profits tax paid for those years.
22. The stipulated facts to the extent not set out above are incorporated herein by reference.
23. Petitioner's average base period net income, as determined by respondent, is an inadequate standard of normal earnings. A fair and just amount representing normal earnings to be used as a constructive average base period net income is an amount equal to $ 40,000*99 more than petitioner's average base period net income otherwise determined without the benefit of section 722, Internal Revenue Code of 1939, and with proper adjustment for such addition with respect to the year 1940 pursuant to section 711 (b) (1) (A).
OPINION.
Respondent's position is that while the petitioner commenced business during the base period it is not entitled to the relief sought, or any excess profits tax relief, because a reconstruction of base period net income, on the evidence of record, would not produce excess profits credit equal to that allowed by respondent under section 713 (f), the so-called growth formula. Petitioner's average base period net income, computed under section 713 (e), is $ 204,035.04 for 1940 (under the Revenue Act of 1940), and $ 241,196.83 for the years 1941 and 1942 (under the 1941 Act). Petitioner's average base period net income, computed under section 713 (f), is $ 424,910.37 for 1940, and $ 536,395.77 for the other years. The computation under section 713 (f) results in increases in petitioner's average base period net income of $ 220,875.35 for 1940, and $ 295,198.94 for the years 1941 and 1942. The relief claimed by the petitioner*100 is based on an average base period net income of $ 803,185.87 for 1940 and $ 961,899.25 for 1941 and 1942.
*1094 The petitioner has submitted a proposed reconstruction based on the operation of its pipeline at full rated capacity of 12,000 barrels of oil per day, which it contends it would have reached by the end of 1939 if it had commenced business 2 years earlier than it did. This volume is allocated to the several different outlet points on the line according to petitioner's actual 1939 experience and gross revenue computed at the established rates for each of such points. Operating costs were estimated on the basis of petitioner's actual 1938-1939 experience, with certain adjustments for the increased production.
Respondent offers several objections to petitioner's proposed reconstruction of base period earnings. He contends that there was not sufficient production at the Lance Creek field during the base period to supply petitioner with enough crude oil to operate its pipeline at full capacity and that petitioner had reached a level of normal earnings by the end of the base period.
The evidence is that at the end of 1939 there were ample oil reserves in the Lance Creek*101 field and that the refineries which petitioner's pipeline served had sufficient capacity to handle all of the oil petitioner could transport. However, the volume of petitioner's business depended, we think, on two principal factors, the production at Lance Creek and the demands of the refineries for crude oil. Undoubtedly, these factors depended to a great extent on the prevailing prices for crude oil and refined oil products. We do not know what these prices were during the base period years. There is no question that the producers and the refineries were capable of stepping up production to meet the demands on the industry whenever prices for oil products were favorable.
As we see it, the chief objection to petitioner's proposed reconstruction of average base period net income is the assumption that it would have been operating at full rated capacity of 12,000 barrels per day by the end of 1939 if it had begun business 2 years earlier than it did. The number of barrels transported by petitioner in December 1939, after 14 months of operation, averaged 9,633 barrels per day. There had been ample time for the Lance Creek production to reflect whatever increase was to result from*102 the additional transportation facilities made available by petitioner's pipeline, particularly since the principal refineries served by petitioner were controlled by petitioner's stockholders. With substantially the same capacity, petitioner's volume of business increased from a daily average of 4,903 barrels in January 1939 to 9,633 barrels in December of that year. Over the same period, the estimated daily average production of the Lance Creek field increased from 12,960 barrels to 28,890 barrels. The percentage of total production transported by petitioner remained about the same throughout 1939, about 40 per cent. Lance Creek production reached *1095 a peak of 9,234,058 barrels in 1940, of which petitioner transported 4,276,930 barrels.
It is not shown what portion, if any, of the increase in the Lance Creek production was due to the additional transportation facilities furnished by petitioner's pipeline or at what rate production would have increased if petitioner's pipeline had been available 2 years earlier. Petitioner was tied in, through ownership of its stock, both with some of the principal Lance Creek producers and the refineries. Production was controlled by*103 the principal producers under their unitization agreement. We are not persuaded by petitioner's argument that if its pipeline had been put into operation 2 years earlier the refineries which it served would have increased their capacity.
Except for the opinion testimony of petitioner's former president, who was also a retired vice president of Continental Oil Company, and other interested witnesses for petitioner, there is little support for petitioner's contention that it would have been operating at the capacity rate of 12,000 barrels per day if it had begun operations 2 years earlier than it did. We conclude on the basis of the evidence that petitioner's pipeline had reached its full development and had attained a permanent competitive position in relation to Lance Creek production by the end of 1939, and that it would not have attained a higher level of earnings at the end of the base period even if it had commenced operations 2 years earlier. We reject petitioner's contention that with 2 years of additional experience it would have operated at the rate of 12,000 barrels a day. Accordingly, the push-back rule is of no aid to petitioner here.
However, we are convinced on this*104 record that petitioner's average base period net income is an inadequate standard of normal earnings, and that relief is therefore nevertheless appropriate. Cf. Suburban Transportation System, 14 T.C. 823">14 T. C. 823, 829. To be sure, petitioner's situation was substantially ameliorated by section 713 (f), but we think that there has not been complete correction of the abnormality. Cf. Southern California Edison Co., 19 T. C. 935, 1000-1001.
The problem of reconstruction is a difficult one, and we do not accept the one offered by petitioner in view of its fallacious assumption as to a level of operation based on 12,000 barrels a day. Using our best judgment on the entire record, and taking into account, among other factors, the potential Lance Creek production and the probable demands of the refineries which petitioner served (and which were in substantial measure controlled by the principal stockholders of petitioner), we have concluded that a fair and just amount representing normal earnings to be used for computing petitioner's excess profits credit is an amount equal to $ 40,000 more than petitioner's average base period net*105 income otherwise determined without the *1096 benefit of section 722, Internal Revenue Code of 1939, and with proper adjustment for such addition with respect to the year 1940 pursuant to section 711 (b) (1) (A).
Reviewed by the Special Division.
Decision will be enterd under Rule 50.
Footnotes
1. Not terminated.↩
1. Connection was made at this point with Stanolind Pipe Line Company's pipeline and the 7 cents represents petitioner's portion under joint tariffs with Stanolind Pipe Line Company. Total tariffs from Lance Creek to Sugar Creek, Missouri (698.75 miles), and from Lance Creek to Whiting, Indiana (1,120.96 miles), were respectively 24 cents and 34.5 cents per bbl. of which petitioner's portion was 7 cents per bbl.↩
2. Joint tariff with Stanolind Pipe Line Company and Utah Refining Company. Total tariff was 74 cents per bbl. of which petitioner's portion was 7 cents per bbl.↩
1. After deduction of income tax $ 213,621.51.↩