*34 With respect to the claims for relief, decisions will be entered for the respondent. As to the deficiencies, decisions will be entered under Rule 50.
In 1939, after a survey of its operations, the petitioner, a motor freight carrier, formulated a "plan" for a change in some of its methods of operations, to the end that a more economical and efficient operation might result. The "plan" did not contemplate any change in petitioner's capacity for operation. Some steps in the "plan" were taken or started in 1939, but the major changes were made or concluded in 1940. So far as appears, the changes in petitioner's methods of operating made in the base period were such as would be made in the normal and ordinary course of a well run business. Held, that the petitioner has not shown that there was a change in the character of its business, within the meaning of section 722 (b) (4) of the Internal Revenue Code.
*842 The respondent determined deficiencies in income tax and excess profits tax of $ 217.86 and $ 5,067.66, respectively, against the petitioner for 1942, and a deficiency in excess profits tax of $ 9,811.18 for 1944. Also, he denied claims for relief under section 722 of the Internal Revenue Code for the years 1942, 1943, and 1944.
The parties are agreed upon adjustments with respect to the respondent's determination of deficiencies and will give effect thereto in their recomputations under Rule 50 of the Court's Rules of Practice. Petitioner's claim for relief under section 722 is to the effect that a change in the character of its business, within the meaning of subsection (b) (4), occurred during the base period, and that its excess profits tax for the years in question, computed without the benefit of section 722, results in an excessive and discriminatory tax.
FINDINGS OF FACT.
Part of the facts have been stipulated, and are found as stipulated.
The petitioner is *36 a corporation organized and existing under the laws of the State of New York, and has its principal office at 3-17 South West Street, Newburgh, New York. It filed its tax returns for the years in question with the collector of internal revenue for the 14th district of New York at Albany.
Petitioner's business was started in 1924, by John H. Lewis, who, as sole proprietor, operated under his own name until the business was incorporated on October 19, 1931, under the name of Newburgh Transfer and Storage Company. Prior to the taxable years involved herein, the name of the corporation was changed to Newburgh Transfer, Inc. At all times pertinent hereto, John H. Lewis was the president of petitioner and the owner of 87 1/2 per cent of its outstanding stock.
The petitioner is, and since its organization has been, a common carrier of freight by motor truck, hauling general commodities for hire and transporting such freight in and around Newburgh and the territory adjacent thereto, and to and from such points as Albany; Bridgeport, Connecticut; New York City and its environs; Newark and other cities in New Jersey; and Philadelphia, Pennsylvania.
Prior to 1935, the business of petitioner*37 was not subject to supervision, either interstate or intrastate. During 1935, Congress enacted *843 the Motor Carriers Act, which gave the Interstate Commerce Commission jurisdiction over motor carriers engaged in interstate commerce. Pursuant to the "grandfather" clause of that act, the petitioner in 1936 applied to and received from the Interstate Commerce Commission a Certificate of Public Convenience and Necessity to operate over its then established routes. In 1938, it applied for and received from the New York Public Service Commission a similar Certificate of Public Convenience and Necessity based upon the "grandfather" clause of the New York statute in respect of shipments of freight having their origins and final destinations in New York state. Prior to that time there was no regulation of motor truck transportation by the State of New York.
On April 1, 1936, the Interstate Commerce Commission required all carriers under its jurisdiction to file a schedule of rates, which schedules were available for the information of other carriers. Prior to that time, petitioner was not required by any regulation to publish its rates and it was not under the supervision of public*38 officials. Effective January 1, 1938, petitioner was required by the Interstate Commerce Commission to maintain a uniform system of accounts, comply with established regulations and to maintain detailed reports on shipments, including a driver's log.
Petitioner had developed a pickup and delivery service whereby small shipments were picked up at their points of origin in New York City, were transferred at its terminal to larger trucks, and then hauled to Newburgh, where they were distributed to their respective destinations in the Newburgh area, generally after having been transferred to smaller trucks at petitioner's incoming terminal. Similarly, in the Newburgh area pickup trucks covered various routes daily, to the end that the freight shipments were brought in to petitioner's outgoing terminal and there transferred to trucks which would carry the freight to New York City, where they were distributed to their points of destination in the New York area. At times, shippers would have no freight when petitioner's trucks called on them. Sometimes the trucks would gather a full load, and at times, only part of a load. While there was no added charge for this daily pickup and delivery*39 service, as compared with items delivered at the terminal by the shippers, the service was maintained by petitioner in order to meet competition.
During the year 1937, petitioner's garage and about one-half of its trucking equipment were destroyed by fire. Steps were immediately taken to replace the destroyed units and service was continued with little interruption. Except for the fire interruption, two terminals were operated in Newburgh throughout the base period.
Petitioner's management felt that the ratio of its operating costs to its gross receipts was too high and that steps necessary for a more *844 efficient operation of the business should be taken. It was thought that one means of reducing costs would be through the promotion of larger shipments, and at or about January 1938, it adopted a policy for the New York City area of limiting its pickup service to shipments of 1,000 pounds minimum. This practice was only partially successful. It lost the business of some shippers, and petitioner continued to run its trucks in the metropolitan area, delivering and picking up freight. It continued similar operations in the Albany, Newark, and Philadelphia areas.
Thereafter*40 it was concluded that a study of its over-all operations should be made, and in June 1939 a traffic survey of its operations as a whole was instituted. As a result of the survey, it was decided to encourage and work for larger shipments generally and to discourage smaller shipments, and, in that connection, to reduce as rapidly as possible the daily pickup and delivery service. It was felt that if these aims could be accomplished petitioner's payroll could be greatly reduced in that there would not be so much handling of freight at the terminals and the office staff needed, as well as the number of freight handlers, would not be so large.
Another matter studied in the survey was the type of equipment used. The trend in the business was from the use of straight trucks to tractor-trailers. In 1939, most of petitioner's straight trucks were 5-ton trucks; two were 9-ton; one was 8-ton; one 7-ton; and one 6-ton. In addition, petitioner, at the end of 1939, had one 1-ton truck and one 1 1/2-ton truck. On the other hand, the capacity of trailers ranged generally from 10 to 15 tons. Petitioner had acquired some tractor-trailers as early as 1936. At the beginning of 1939, it had five*41 tractors and seven trailers. If larger shipments could be had in the place of the smaller shipments, economies could be effected by the increased use of trailers and the reduction in the use of the smaller straight trucks. For the same tonnage, fewer trips from terminal to terminal would be required.
After the survey was concluded, the petitioner began making changes in its method of operation, to realize on the economies indicated and to establish a more efficient operation. The major changes were made or effected in 1940, and 1941 was regarded by the management as the first full year of operations reflecting the results of those changes.
In 1939, and prior to the end of the base period, the petitioner began its solicitation of larger and heavier shipments to take the place of the more numerous small shipments. By the end of 1939, it had increased the number of its truck tractors from five to nine, and its trailers from seven to ten. The carrying capacity of the trailers ranged from 10 to 12 1/2 tons. It had decreased the number of its straight trucks from 16 to 15. With respect to the pickup service, the *845 small shippers were being urged to allow their shipments to*42 accumulate for two or three days, but daily pickups were continued where the shippers so requested them. The record does not show the extent to which this part of the program was accomplished during the base period.
Beginning November 1, 1939, sufficient additional space was rented at the New York City terminal to permit the spotting of a trailer there at all times. Under this system, an empty trailer was left at the terminal and shipments brought in for Newburgh were loaded directly on the trailer. Upon arrival of a tractor-trailer from Newburgh, the spotting trailer which had been receiving the shipments for Newburgh was hooked on to the tractor and with its load was taken back to Newburgh. The trailer which had arrived from Newburgh, when unloaded, would supply the receiving space for subsequent shipments of freight for Newburgh. Arrangements were also made to spot a trailer at the Sears & Roebuck warehouse in Newark. The petitioner was the first over-the-road carrier to spot a trailer in that location. The spotting of trailers was a normal development in the use of trailers by motor freight carriers.
In 1938 and 1939, and possibly in prior years, a goodly part of the pickup*43 and delivery service in the Newburgh area was by means of hired transportation. The petitioner would hire local truck operators to make pickups and deliveries. In those years, it also hired some tractor-trailers for the Newburgh-New York run. Hired transporation in those years amounted to approximately $ 7,000 in each year. It was the eventual aim of the petitioner to leave the local pickup and delivery service to such local truck operators, allowing such operators a proper ratable part of the terminal-to-terminal tariff on the shipments handled.
The contemplated increased use of tractor-trailers, as compared with straight trucks, would require additional tractor-trailer drivers and the petitioner, in 1939, assigned three of its tractor-trailer drivers to train new drivers. This training went on for a period of six to eight months, during which time "seven or eight drivers were trained." The starting date of this program does not appear of record.
In October of 1940, the petitioner eliminated one of its terminals in Newburgh, and thereafter handled both incoming and outgoing shipments through the remaining terminal. Through the elimination of one terminal, it was able to reduce*44 the number of terminal employees. This was particularly true of the platform men. There was also some reduction in the clerical force. At the time the second terminal was eliminated, the petitioner had 78 employees, as follows: 33 drivers, 2 helpers, 20 platform men, 6 mechanics, and 17 clerical employees. The number of employees during 1939, and possibly throughout the base period, was approximately the same. By June *846 30, 1941, the petitioner had reduced the number of its employees to 51. The services of 10 of the 20 platform men had been dispensed with.
The increased use of the tractor-trailers over straight trucks resulted in certain cost reductions, including the direct hauling costs and terminal expenses. On the other hand, there was an increase in some costs, including maintenance, depreciation, truck licenses, and interest on capital borrowed in connection with the acquisition of equipment.
The petitioner's "plan," beginning with the traffic study in June 1939, was aimed primarily at a reduction in operating expenses. No new application or applications to the Interstate Commerce Commission or the New York State Public Utilities Commission were required. While*45 it did reduce the number of trips its trucks made, in some instances, there was no abandonment of any existing routes or rights, and there was no acquisition of any new routes. Petitioner's tonnage hauled during the base period was normal.
The results of petitioner's operations for 1939, as shown by its annual report to the Interstate Commerce Commission, were as follows: 1
| Account | ||
| No. | Account Title | |
| 4000 | Operating Revenues | $ 210,842.32 |
| Operation and Maintenance Expenses | ||
| 4100 | Equipment Maintenance and Garage | 25,711.63 |
| 4200 | Transportation | 69,504.00 |
| 4300 | Terminal | 25,441.34 |
| 4400 | Sales, Tariff and Advertising | 1,292.29 |
| 4500 | Insurance and Safety | 19,501.70 |
| 4600 | Administrative and General | 35,779.77 |
| 177,230.73 | ||
| 5000 | Depreciation | 10,538.59 |
| 5200 | Operating Taxes and Licenses | 17,203.35 |
| 5300 | Operating rents | 1,806.65 |
| 5091 | Depreciation adjustment | |
| 29,548.59 | ||
| Total | 206,779.32 | |
| Net Operating Revenue | $ 4,063.00 |
*46 The results of petitioner's operations for 1940, as shown by its annual report to the Interstate Commerce Commission, were as follows: *847
| Account | ||
| No. | Account Title | |
| 3000 | Operating Revenues | $ 203,721.56 |
| 4000 | Operation and Maintenance Expenses | |
| Equipment Maintenance and Garage | 25,701.30 | |
| Transportation | 70,783.09 | |
| Terminal | 20,443.46 | |
| Sales, Tariff and Advertising | 1,825.43 | |
| Insurance and Safety | 8,955.24 | |
| Administrative and General | 37,698.16 | |
| 165,406.68 | ||
| 5000 | Depreciation | 13,039.80 |
| 5200 | Operating Taxes and Licenses | 18,156.07 |
| 5300 | Operating Rents | 1,748.15 |
| 32,944.02 | ||
| Total | 198,350.70 | |
| Net Operating Revenue | $ 5,370.86 |
The results of petitioner's operations for 1941, as shown by its annual report to the Interstate Commerce Commission, were as follows:
| Account | ||
| No. | Account Title | |
| 4000 | Operating Revenues | $ 200,842.68 |
| Operation and Maintenance Expenses | ||
| 4100 | Equipment Maintenance and Garage | 27,123.57 |
| 4200 | Transportation | 60,469.22 |
| 4300 | Terminal | 13,596.80 |
| 4400 | Sales, Tariff and Advertising | 1,610.03 |
| 4500 | Insurance and Safety | 13,937.17 |
| 4600 | Administrative and General | 42,268.58 |
| 159,005.37 | ||
| 5000 | Depreciation | 11,837.26 |
| 5200 | Operating Taxes and Licenses | 13,069.76 |
| 5300 | Operating Rents | 1,383.42 |
| 5091 | Depreciation Adjustment | (3,066.57) |
| 23,223.87 | ||
| Total | 182,229.24 | |
| Net Operating Revenue | $ 18,613.44 |
*47 During the base period, and at all times pertinent hereto, the petitioner was what is known in Interstate Commerce Commission terminology as a Class 1 carrier, a carrier with revenue in excess of $ 100,000 a year from the hauling of freight. At least 85 per cent of its operations was in what is known as the Middle Atlantic region. The list of Class 1 motor carriers, as shown in the Interstate Commerce *848 Commission, Bureau of Statistics, Statistics of Motor Carriers, in the year ended December 31, 1939, was typical of the Class 1 carriers that operated in the Middle Atlantic region. They were doing primarily an over-the-road intercity haul. The seven motor truck companies on the list that were incorporated companies throughout the base period were Arrow Carrier Corporation, Baltimore Transfer, Davidson, Horlocher, Moran, Pyramid, and York Motor. They all are among the leaders of the industry and are well operated companies.
The petitioner was a member of the Middle Atlantic Motor Carriers Conference, through which the members' routes and rates were filed with the Interstate Commerce Commission. Because of the various rates charged by the respective members, the Tariff*48 Bureau of the association adopted the rail rates at the time, in order to have uniformity with respect to rates generally. It was about 1938 or 1939, when the Interstate Commerce Commission put into effect a minimum rate order. The seven incorporated Class 1 motor carriers of the Middle Atlantic region listed in the Interstate Commerce Commission Bureau of Statistics report were engaged predominantly in the hauling of general freight in intercity service. From their income tax returns, the following table of statistics was determined for the seven Class 1 motor carriers for the base period years:
| Ratios: Compiled net profit (or loss) less tax-exempt income to | ||||
| gross receipts | ||||
| Corporation 1 | 1936 | 1937 | 1938 | 1939 |
| A | 6.14 | 3.27 | 4.16 | 9.52 |
| B | 1.42 | (5.09) | (0.07) | 9.74 |
| C | 0.19 | (2.90) | 0.28 | (0.83) |
| D | 1.47 | 1.54 | 3.85 | 5.26 |
| E | 5.35 | 2.53 | 2.82 | 1.57 |
| F | 1.83 | 1.29 | 0.05 | 2.59 |
| G | 1.31 | (0.24) | (0.50) | 1.61 |
| Total (averaged) | 2.36 | 0.01 | 1.44 | 4.39 |
Average, 1936-39 2.17
The financial and operating statistics of all Class 1 motor carriers (using largest number reporting) for*49 the years 1937 to 1939 for the Middle Atlantic region show the following:
| Total | Total | Net | ||
| Year | Number of | operating | operating | operating |
| carriers | revenues | expenses | revenue | |
| 1939 | 179 | $ 56,696,337 | $ 54,551,717 | $ 2,144,620 |
| 1938 | 135 | 36,438,945 | 35,815,902 | 623,043 |
| 1937 | 101 | 33,921,161 | 34,061,204 | 140,043 |
| Tons of | Operating | ||
| Year | Vehicle miles | revenue | ratio |
| freight | (per cent) | ||
| 1939 | 205,020,811 | 11,319,664 | 96.2 |
| 1938 | 133,637,479 | 6,739,190 | 98.2 |
| 1937 | 105,902,092 | 7,294,502 | 100.4 |
*849 Petitioner's excess profits net income during the base period years was as follows:
| For the fiscal year ending October 31, 1937 | $ (727.63) |
| For the fiscal year ending October 31, 1938 | 2,670.55 |
| For the two months period ending December 31,1938 | 387.84 |
| For the calendar year 1939 | 4,937.02 |
The petitioner's average base period net income computed with the benefits of section 713 (f) of the Internal Revenue Code was $ 4,937.08.
The petitioner's gross receipts, officers' salaries, and net income, as shown by its income tax returns (cents omitted), as adjusted by the respondent and agreed to by the petitioner, were:
| Gross | Officers' | Net | |
| Fiscal year ended | receipts | salaries | income |
| Oct. 31, 1932 | $ 29,542 | $ 3,900 | $ (1,845) |
| Oct. 31, 1933 | 44,911 | 3,900 | (4,527) |
| Oct. 31, 1934 | Not available | ||
| Oct. 31, 1935 | 97,570 | 3,900 | 289 |
| Oct. 31, 1936 | 141,563 | 4,145 | (308) |
| Oct. 31, 1937 | 163,979 | 4,150 | (727) |
| Oct. 31, 1938 | 180,387 | 3,990 | 2,670 |
| Nov. 1, 1938 to Dec. 31, 1938 | 34,172 | 675 | 387 |
| Calendar year 1939 | 209,496 | * 9,880 | 4,937 |
All income and excess profits tax returns for the taxable years involved herein were filed on or before the due dates, without extensions.
The paid-in capital of the petitioner at all times throughout the base period, as shown on its income tax returns, as adjusted by the respondent and agreed to by the petitioner, was $ 17,331.34.
There were deficits in the surplus accounts in varying amounts at all times throughout the base period.
For the taxable year 1942, the petitioner's excess profits credit based on income was $ 5,497.07, computed as follows:
| Average base period net income, per section 713 (f) | $ 4,690.17 |
| Net capital addition | 806.90 |
| Excess profits credit based on income | $ 5,497.07 |
Petitioner's excess profits credit based on invested capital for the year 1942 was not computed, but it is agreed that if it had been computed, it would have been less than $ 5,497.07.
For the taxable year 1943, the petitioner's excess profits credit*51 based on income was $ 6,170.17, computed as follows:
| Average base period net income, per section 713 (f) | $ 4,690.17 |
| Net capital addition | 1,480.00 |
| Excess profits credit based on income | $ 6,170.17 |
*850 Petitioner's excess profits credit for 1943 computed on the invested capital method was $ 5,951.17.
Petitioner's excess profits credit for the taxable year 1944 computed on the invested capital method was $ 6,696.83. Its excess profits credit computed on the income method was not determined, but if it had been computed, it would have been $ 6,170.17, computed as follows:
| Average base period net income, per section 713 (f) | $ 4,690.17 |
| Net capital addition | 1,480.00 |
| Excess profits credit based on income | $ 6,170.17 |
The petitioner's "plan," developed or evolved following the over-all survey of its traffic operations in 1939, was for a change in some of its methods of operation, to the end that a more economical and efficient operation would result. It was not intended to effect a change in the petitioner's capacity for production or operation.
OPINION.
The petitioner rests its case on the proposition that its excess profits taxes for the years in question, computed*52 without the benefit of section 722 of the Internal Revenue Code, were excessive, because it changed the character of its business within the purview of subsection (b) (4) of section 722, 2 and by reason thereof, its average base period net income was an inadequate standard of normal earnings *851 for the base period. In the petitions herein, claim was also made that due to the circumstances attendant upon the advent of Federal regulation of interstate motor freight operations which required, among other things, the publication by operators of their rates, the motor freight industry was depressed during the base period due to a temporary economic event unusual in the industry, and by reason thereof, petitioner was entitled to relief under subsection (b) (2) of section 722. This latter claim was not pressed at the trial and has been abandoned.
*53 The provisions of subsection (b) (4), relied on, are to the effect that the tax computed without the benefit of section 722 shall be considered to be excessive and discriminatory if the taxpayer's average base period net income is an inadequate standard of normal earnings because "the taxpayer, either during or immediately prior to the base period, * * * 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." It is provided that the term "change in the character of the business" includes several specified changes or differences, among which are (1) "a change in the operation or management of the business," (2) "a difference in the products or services furnished," and (3) "a difference in the capacity for production or operation." In the last sentence of the subsection, provision is made that "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, * * * shall be deemed to be a change on December 31, 1939, *54 in the character of the business."
The petitioner makes no claim that the changes upon which it relies to bring it within subsection (b) (4) were made and concluded either during or immediately prior to the base period. But rather, its allegation is that it "was committed to a course of action during the base period which was consummated during a taxable year and after December 31, 1939, as a result of which there was a change in the operation of the business." And while there is no allegation that there was any change in petitioner's "capacity for production or operation," it is nevertheless argued that a "plan" for "a change in the operation of the business" having been formulated in the base period and consummated after December 31, 1939, the change was such that by reason of the last sentence of subsection (b) (4), the change must be deemed to have been a change on December 31, 1939.
We agree with the respondent that "capacity" is the dominating word both in the expression "a difference in the capacity for production or operation" and in the concluding sentence of subsection (b) (4) that "Any change in the capacity for production or operation" to *852 which a taxpayer was*55 committed in the base period and which was consummated after the base period, is to be deemed a change in the character of the business on December 31, 1939, and that the said provisions may not, within reason, be construed, in so far as they relate to operation, as if they read "difference in [for] operation" and "any change in [for] operation." The contention of the petitioner, if allowed, would in our opinion result in a strained, rather than a plain and obvious, construction of the provisions in question. If such had been the intention of Congress, we do not believe it would have coupled a change "in operation" with a change "in management" in the first category of events declared to be included in its general and comprehensive category of "change in the character of the business." Furthermore, we do not believe that Congress would have lifted for use in the last sentence of subsection (b) (4) the full and unchanged phraseology "capacity for production or operation" if with respect to operation it had intended the provision to read "change in operation." Such a reading of the phrase when referring to operation would not only ignore the presence and impact of the word "capacity," *56 but also would change the word "for" used by Congress to the word "in."
Accordingly, it is our conclusion that petitioner, as a basis for its claim under subsection (b) (4), is limited to the change or changes "in the operation" of its business which actually occurred during or immediately prior to the base period. See and compare East Texas Motor Freight Lines, 7 T. C. 579, where the taxpayer did change its "capacity * * * for operation" by the acquisition of new and additional routes. Furthermore, if the petitioner is to prevail, it must appear that the change or changes in operations which did occur in or immediately prior to the base period were substantial, and not changes which would occur in normal and ordinary course. Avey Drilling Machinery Co., 16 T. C. 1281; Suburban Transportation System, 14 T. C. 823; Stonhard Co., 13 T. C. 790; and Lamar Creamery Co., 8 T.C. 928">8 T. C. 928.
The changes upon which petitioner puts chief reliance were changes primarily designed to effect operating economies and, if we understand them correctly, *57 were the stressing and soliciting of larger and heavier shipments, as contrasted with small shipments, and the devising of more economical methods of performing the necessary pickup and delivery service, particularly with respect to the smaller shipments; the replacement to some degree of straight trucks with tractor-trailers; and the elimination of one of its Newburgh terminals, with an attendant reduction in its staff of employees.
The elimination of one of the Newburgh terminals and the reduction in the number of employees did not take place until after the base period, and under our application of the statute, as above construed, was not a change in the character of petitioner's business, "either during *853 or immediately prior to the base period," as must have been the case if subsection (b) (4) is to apply. Claussner Hosiery Co., 16 T. C. 1335. The question remaining then is whether the things done during the base period in the solicitation of larger shipments, as contrasted with small shipments, the steps taken to effect economies in the pickup and delivery service, the acquisition of four additional tractors and three additional trailers, *58 and the training or the beginning of the training of seven or eight additional tractor-trailer drivers were "changes in the operation" of petitioner's business of the character and magnitude contemplated by the said subsection.
In our opinion, they were not. The increased use of tractor-trailers, according to the evidence and as we have found the fact to be, was a normal development in the operation of a motor freight business such as that in which the petitioner was engaged. We have already held in Suburban Transportation System, supra, that "The mere addition of new and improved equipment to replace that in use or to meet expanding business is not a change such as contemplated by section 722 (b) (4)." Furthermore, the effecting of economies such as those instituted and carried out during the base period in connection with the handling of the smaller shipments, the stressing and soliciting of the more profitable larger shipments, the effecting of economies in and a more efficient handling of pickups and deliveries would, in our opinion, be a perfectly normal occurrence in the operation of any such business if reasonably well run. And the evidence*59 is that petitioner's business was well run. We find nothing in the statute, its legislative history, or the regulations promulgated thereunder, which supplies a basis for any conclusion that Congress had in mind such a normal change or development in its enactment of said subsection (b) (4).
It is true, as shown by the record, that percentage-wise the changes effected, including those after the close of the base period, did result in a substantial increase in petitioner's net profits which, if that should be a proper test, might be regarded as indicating that the changes in petitioner's business were substantial, and, being substantial, were such as to fall within the purview of the changes covered by subsection (b) (4). If, however, the applicability of the statute be examined from that angle, it seems perfectly clear that on the basis of actual experience the increased profits were in greater part traceable to the elimination of the second Newburgh terminal in 1940 and the accompanying reduction in petitioner's staff of employees. As petitioner has suggested in its proposed findings of fact, 1941 was regarded as the first full year of operation reflecting the results of the changes*60 in operation contemplated under the "plan" formulated in 1939. The record shows, and we have found as a fact, that tonnage-wise the freight handled during the base period was normal. The record also shows, and the petitioner admits, that petitioner's operations, so far as freight hauled *854 and operating revenues therefrom were concerned, were comparable for the years 1939, 1940, and 1941, and while it is true, as shown by the annual reports made by petitioner to the Interstate Commerce Commission for the years 1939, 1940, and 1941, that the net operating revenues increased from $ 4,063 in 1939, to $ 5,370.86 in 1940 and $ 18,613.44 in 1941, the breakdown of the item Operation and Maintenance Expenses indicates that this increase resulted substantially from the elimination of the second Newburgh terminal and the attendant reduction in personnel, and that the ratio of reduction in transportation costs was substantially less. Furthermore, there is no way of knowing just how much of the economies eventually effected which bore directly on transportation costs occurred in the base period, since the annual reports referred to show an increase for 1940 over 1939, rather than a *61 reduction or saving.
Accordingly, it is our conclusion that petitioner's claims for relief under section 722 (b) (4), supra, were not well taken and must be rejected.
With respect to the claims for relief, decisions will be entered for the respondent. As to the deficiencies, decisions will be entered under Rule 50.
Footnotes
1. The accounting records and reports required of motor carriers by the Interstate Commerce Commission differ in many respects from ordinary accounting practices, and net operating revenue is not the equivalent of net income before taxes.↩
1. Letters used in order that corporations not be identified.↩
*. On the original return for 1939, filed on Mar. 21, 1940, officers' salaries were listed as $ 13,716. The amount was changed to $ 9,880 on a subsequent amended return, filed Nov. 19, 1940. Neither return was audited by the respondent.↩
2. SEC. 722. GENERAL RELIEF -- CONSTRUCTIVE AVERAGE BASE PERIOD NET INCOME.
* * * *
(b) Taxpayers Using Average Earnings Method. -- The tax computed under this subsection (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 purpose 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 of 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, or 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; * * * 17 T. C.↩