*2352 Special assessment denied.
*103 Proceedings for the redetermination of deficiencies in income and profits taxes for the fiscal years and in the amounts as follows:
| Year ended November 30, 1919 | $25,305.68 |
| 1920 | 13,413.29 |
| 1921 | 7,926.16 |
| 1922 | 2,403.10 |
The only issue is whether petitioner comes within the provisions of section 327 of the Revenue Acts of 1918 and 1921 and is entitled to special assessment under section 328 of those Acts. Upon motion of counsel for respondent the proceedings were ordered consolidated for hearing.
*104 FINDINGS OF FACT.
Petitioner is a corporation, organized in 1905, and for a number of years has been engaged in operating under successive leases a race track known as "Pimlico," which is in the northwestern part of the City of Baltimore, Md. Leases under which petitioner has operated since 1911 provide for payment of rent by it as follows:
| Rent per year | |
| May 11, 1911 to May 10, 1913 | $13,500 |
| May 11, 1913 to May 31, 1916 | 15,000 |
| June 1, 1916 to May 31, 1921 | 20,000 |
| June 1, 1921 to May 31, 1924 | 24,000 |
| June 1, 1924 to May 31, 1939 | 27,000 |
*2353 When the lease granting the 15-year term from 1924 to 1939 was entered into petitioner paid the lessor a cash bonus of $16,500. Under the several leases petitioner was required to pay all state and county taxes and other public charges against the property, to insure in favor of the lessor all improvements in specified amounts, and to keep all improvements in good repair. The leases also provided that upon their termination all alterations, improvements, additions or repairs were to become the property of the lessor.
Sometime prior to 1913 petitioner began the use of pari-mutuel machines at Pimlico, and for a while bookmakers operated and machines were also used at the track. In 1913 petitioner abolished the bookmaking method of handling bets at the track and thereafter used only the pari-mutuel system. Petitioner was the first track operator to install the pari-mutuel machines in Maryland and was perhaps first in the use of them anywhere in the United States. Petitioner had no monopoly on the machines, which could be, and subsequently were, purchased and installed by operators of other tracks. Under the bookmaking method of operation, the bookmaker paid the petitioner certain*2354 sums, running as high as $300 per day according to the number of stations, for the privilege of operating at the track. Under the pari-mutuel system the track operator receives 5 per cent of the amount bet plus the "breakage," which is the uneven amounts calculated in units of tens.
Prior to 1920 petitioner paid to Baltimore County the sum of $3,000 per day during the season the track was operated. It paid no fee to the State.
In 1920 the General Assembly of Maryland enacted a law providing for the regulation of racing within the State. This statute, which was approved March 31, 1920, created the Maryland Racing Commission, which was given jurisdiction over all persons conducting meetings within the State "whereat horse racing shall be permitted for any stake, purse or reward," and prohibited such racing except under license issued by the Commission. The statute further *105 provided that except in the case of county fairs and agricultural exhibits no license should be issued for racing on any tracks unless races had been held thereon each year for the three years preceding the passage of the act, "the intent and purpose of this proviso being that no new or additional*2355 tracks or places for holding races shall be licensed or awarded dates for holding or conducting races." (§ 7.)
The effect of this proviso was to limit racing (except for fairs, etc.) to four one-mile tracks within the State, namely, "Havre de Grace," operated by the Harford Agricultural and Breeders Association; "Laurel," operated by the Maryland State Fair, Inc.; "Bowie," operated by the Southern Maryland Agricultural Association; and "Pimlico," operated by petitioner. The statute also limited the number of days on which races could be held on these tracks and provided for the payment of a "license fee of six thousand ($6,000) dollars for each day of any meeting * * *" and continued in force the $3,000 per day paid by petitioner to Baltimore County (§§ 7 and 8). The statute further imposed, "in addition to all other license fees * * * an additional license fee or tax of fifteen per cent of the net revenue." (§ 12.)
The race which is now run annually at Pimlico under the name of "The Preakness" was inaugurated in 1873, when the net value of the purse to the winner was about $1,000. Since 1915 the purse for this race has been increased each year, except 1920, and in 1928 the*2356 value to the winner was $60,025, plus the Woodlawn Vase, which was made by Tiffiany in 1860. Values to the winner in the Preakness prior to and following the complete installation of pari mutuels in 1913 were as follows:
| 1909 | $2,725 and $500 plate |
| 1910 | 2,800 and $500 cup |
| 1911 | 2,700 |
| 1912 | 1,450 |
| 1913 | 1,670 |
| 1914 | $1,355 |
| 1915 | 1,275 |
| 1916 | 1,380 |
| 1917 | 4,800 |
In the taxable years the purses to the winner of the Preakness, in addition to the Woodlawn Vase, were:
| 1919 | $24,500 |
| 1920 | 23,000 |
| 1921 | $43,000 |
| 1922 | 51,000 |
The purses were made up partly from entrance and starting fees and partly from amounts contributed by petitioner which it derives from the operation of the pari mutuels. Prior to the use of the pari mutuels the purses were made up partly from contributions from persons other than the petitioner.
The installation of the pari mutuels served greatly to increase petitioner's earning capacity, although they were not installed for that purpose. Had it not had the machines in the taxable years petitioner could not have operated on the large scale it did.
*106 Annual reports of the Maryland Racing Commission for the*2357 years ended November 30, 1920 and 1921, show the following statistics as to the petitioner's business:
| Fiscal year | Fiscal year | |
| 1920 | 1920 | |
| Revenue | $690,331.30 | $1,416,677.07 |
| Expenses | 452,410.76 | 1,087,912.12 |
| Net revenues before deducting | ||
| cost of new construction, | 237,920.54 | 328,764.95 |
| equipment and repairs | ||
| Cost of new construction, | 128,698.76 | 100,467.55 |
| equipment and repairs | ||
| Net revenues after | ||
| deducting cost of new | 109,221.78 | 228,297.40 |
| construction |
The item "Revenue" above includes the following income from the pari mutuels:
| Fiscal year 1920 | Fiscal year 1921 | |
| Commission | $418,193.80 | $819,493.55 |
| Breakage | 74,303.35 | 152,730.15 |
For the fiscal year ended November 30, 1921, respondent determined petitioner's net income to be $234,318.81 and computed invested capital in the amount of $773,142.69.
By reason of the location of the "Pimlico" track within the City of Baltimore it was readily accessible to a large number of people.
OPINION.
ARUNDELL: Petitioner claims it is entitled to assessment under section 328 of the Revenue Acts of 1918 and 1921 on the grounds, first, that its invested*2358 capital can not be determined and, second, that there existed abnormal conditions affecting its capital and income and resulting in an exceptional hardship.
As to the first ground, it has not been established that invested capital can not be determined. Apparently the respondent has determined the amount of invested capital for each of the years involved although for only one year, 1921, is the amount set forth in the deficiency notices attached to the petitions. A revenue agent's report, placed in evidence by the petitioner, covering the years 1916 to 1920, inclusive, contains the statement that:
A break in the continuity due to the loss of an intermediate ledger made it impossible to give a complete analysis of surplus from the incipiency of the corporation.
This statement does not establish that invested capital can not be determined. Surplus is only one element of invested capital and while, in order to establish the total amount of invested capital it is *107 perhaps necessary to ascertain the amount of surplus to be included, we do not perceive the necessity of setting up a complete analysis of surplus from the organization of a corporation, which in this case*2359 occurred some 13 years before the first of the taxable years involved. The further statement of the revenue agent that a fund resulting from uncashed pari-mutuel tickets could not be allocated to the different years is of little significance because of the lack of proof that this fund is a proper item to be included in invested capital. The agent also reports that it was difficult to determine the amounts attributable to repairs and to construction work and that probably some improvements were destroyed before being completely depreciated, but, in order to avoid any injustice in this respect, the agent says he pursued a "general, liberal, broad policy" and the report continues:
Extremely liberal maintenance charges were allowed that doubtless took care of this factor and a rate of depreciation fixed upon that not only would help in this direction, but, also, permit an inflation of invested capital and give a true representation of actual conditions.
To what extent the respondent followed the agent's report in determining the deficiencies for the years 1919 and 1920 is not shown, but apparently he adopted an even more liberal policy, as the deficiencies determined are considerably*2360 less than those reported by the agent.
Petitioner argues that its inability to establish the cost of the parimutual machines demonstrates the fact that invested capital can not be determined. About all the evidence on this point is the testimony of the one witness that the machines were "very expensive." This is a relative term and we have no means of knowing what comparative basis the witness had in mind when he used it. That which to one person's view is "very expensive" may not appear so to another. Moreover, we do not know how the respondent reated the cost of the machines. Neither the revenue agent's report nor the deficiency letters show whether or not any sum was included in invested capital as the cost of the machines. The only reference to the machines that we find in the agent's report for the taxable years is in a schedule showing adjustments of income for the fiscal year 1919, wherein the agent disallowed a claimed expense deduction of $6,540 for pari-mutuel machines and stated that he had capitalized it.
Further, we are not satisfied that petitioner is unable to establish the cost of the pari mutuels. The agent's report speaks of the "the loss of an intermediate*2361 ledger." A ledger is a secondary record and its loss does not establish the nonexistence of primary records from which cost might be determined.
*108 * * * A taxpayer should be held to a reasonable diligence in determining his invested capital, and it is only after a showing of reasonable diligence and the resulting inability then to establish his invested capital that the relief provisions will be applied on this account. . See, also, .
Under petitioner's second ground for asking special assessment, namely, abnormalities affecting capital and income, several claims are made. It is argued that by the installation of the pari mutuels petitioner acquired an intangible asset of substantial value in that it thereby counteracted the antagonism that was growing against racing under the bookmaking system, it was better able to serve the public, it could and did pay larger purses, and greatly increased its income. This intangible, it is said, is excluded from invested capital. As pointed out above, we do not know what items the respondent has excluded from invested capital. But*2362 even assuming that no amount has been included on account of the alleged valuable intangible, we are not satisfied that this results in an abnormality. We know that as a result of the change in the betting system petitioner's income increased and that it increased the size of the purses. But in this we fail to see any abnormality. It appears rather that the change from the bookmaking to the pari-mutual system was merely "the application of good business judgment" as in , where the adoption of a particular method of marketing proved to be more economical than other means that it might have used.
We see nothing abnormal in the fact that petitioner operated the Pimlico track under leases, the consideration for which was apparently agreed upon in arm's-length negotiations. There is some argument on the fact that under the leases, improvements which petitioner placed on the property at its expense became the property of the lessor. This is not an abnormal condition; it is a customary provision of real property leases. Moreover, we find upon reference to the revenue agent's report that for the years 1919 and 1920 he increased*2363 invested capital by the respective amounts of $57,222.45 and $129,691.94 for improvements.
Whether a monoply created by law would result in such an abnormality as to allow special assessment need not be considered. The law enacted in 1920, to which petitioner points as giving it a statutory protection from competition within a certain area, allows three other one-mile tracks to operate within the State of Maryland, and in addition thereto permits races to be conducted at county fairs and agricultural exhibits.
The mere fact that petitioner's profits were high in the taxable years does not entitled it to special assessment, as section 327(d) provides that it, *109 shall not apply to any case (1) in which the tax * * * is high merely because the corporation earned within the taxable year a high rate of profit upon a normal invested capital * * *.
Whether petitioner had a "normal invested capital" in the taxable years is not shown. In fact only for one year, namely, 1921, do we know the amount of its invested capital, and that we have found from the respondent's deficiency notice. In that year petitioner's income, as determined by respondent, was about 30 per cent of*2364 its invested capital. While this on its face appears to be a rather high return, we do not know whether the invested capital upon which it was earned was a normal or abnormal amount in the business in which petitioner was engaged.
Judgment will be entered for the respondent.