Case Name: Victory Glass, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent
Court: United States Tax Court
Jurisdiction: United States
Decision Date: 1951-09-21
Citations: 17 T.C. 381
Docket Number: Docket No. 8800
Parties: Victory Glass, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
Judges: 
Reporter: Reports of the Tax Court of the United States
Volume: 17
Pages: 381–393

Head Matter:
Victory Glass, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
Docket No. 8800.
Promulgated September 21, 1951.
Sidney B. Garribill, Esq., for the petitioner.
A. W. Dickinson, Esq., and Arthur N. Mindling, Esq., for the respondent.

Opinion:
OPINION.
Murdock, Judge:
The petitioner claims that the assets acquired through the foreclosure sale had a fair market value of $107,590.78 and the excess of that amount over $38,163.38, or $69,427.40, also should be included in equity invested capital, being property paid in as paid-in surplus or as a contribution to capital, and should be considered as a part of the basis of the assets for the purpose of computing depreciation. It advances no logical reason for regarding the $69,427.40 as a part of its basis for depreciation. The basis of property owned by a taxpayer is the cost of the property to the taxpayer, with exceptions as set forth in section 113 (a) which are not applicable here. The cost of the property in question was $38,163.38, consisting of preferred stock worth $31,200 and $6,963.38 of liabilities assumed, as both parties now agree.
The petitioner argues vaguely that it is entitled to use some trans-feror's basis. The evidence does not disclose any transferor which had a basis of $107,590.78 for the property or any transaction in which a transferor's basis in excess of $38,163.38 could be passed on to the petitioner under any provision of the Internal-Revenue Code. The petitioner mentions section 113 (a) (8) (B) which provides that the basis of property acquired by a corporation as paid-in surplus or as a contribution to capital shall be the same as it would be in the hands of the transferor, increased by gain or decreased by loss recognized to the transferor on the transfer. The property was transferred to the petitioner by the first mortgage bondholders of the Victory Glass Company, as an integral part of the plan which they alone could not have carried out. They had no basis for the property in excess of $38,163.38 and had no gain on the transfer of the property to the petitioner. The stockholders, creditors, and second mortgage bondholders of Victory Glass Company, to whom the petitioner points as possible transferors, never owned the property, never had any basis for it, and never transferred it to the petitioner. They were forced out by the need for new money which they were unwilling or unable to supply. The Victory Glass Company never transferred the property to the petitioner but lost it through a foreclosure sale to the first mortgage bondholders and deducted, as a loss on that sale, the difference between its basis and $38,163.38. Thus, even assuming that the property might have come in as paid-in surplus or as a capital contribution, nevertheless, the basis would not exceed $38,163.38. Cases cited require no discussion since the facts in the present case do not bring it within them. The petitioner fails to set forth step by step any sound theory, with provisions of the Internal Revenue Code to support each step, giving it a basis in excess of $38,163.38, and the Court knows of no such theory which the facts of record would support.
The petitioner concedes that decision of the equity invested capital issue is unnecessary if it is granted relief under section 722. However, the above holding that the assets had a basis of $38,163.38 decides the equity invested capital issue against the petitioner since section 718 (a) (2), upon which the petitioner relies, provides that property paid in shall be included in equity invested capital at its basis to the taxpayer. Thus, even though it was contributed by someone, still it would go in at $38,163.38, the amount conceded by the Commissioner. Consideration of the estoppel issue raised by the Commissioner becomes immaterial since the Court does not hold against the Commissioner on either of the points involved therein.
The petitioner made a proper application for relief under section 722 (b) (4). It claims that it commenced business and changed the character of its business during the base period. The changes in character listed in the application were "changes in the operation and/or management," "diiferences in products and/or services rendered," and "differences in the capacity for production and/or operation."' The petitioner had a plan of operation and a certain management when it started to operate on February 1, 1937, and there is no suggestion in the record of any change in either through December 31. 1939. It planned to produce certain lines and it merely carried out that intention during the base period. There was no change in that. It purchased a new tank, new lehrs, and other equipment, all costing substantial amounts, which may have increased its capacity for production during the base period. But that question is of no great importance since obviously this petitioner commenced business on February 1, 1937, as the respondent recognizes, and that fact is sufficient'to satisfy one requirement of section 722 (b) (4). The fact that Victory Glass Company was engaged in a similar, or even the same, kind of business does not change the fact that the petitioner commenced business during the base period, for its business was not that of the petitioner and, as the respondent states in his brief: "The company was new; the predecessor had been a failure. The new owners of the common stock were making their first venture in the glass business; The new owners, the common stockholders, knew that their business, to succeed, would have to differ from that of the former company.
The record shows that the average base period net income of the petitioner for 2 years and 11 months of operation does not reflect the normal operation for the entire base period. It shows also that sales and profits would have been greater at the end of 1939 if the petitioner had commenced business 2 years prior to February 1, 1937. The only substantial difficulty presented is to determine what its earnings probably would have been by the end of the base period if the petitioner had commenced business on February 1, 1935, and what is a fair and just amount to be used as constructive average base period net income.
Where, as here, the Code authorizes a departure from actual earning figures, it calls for a prediction and an estimate of what earnings would have been under assumed circumstances, an approximation where an absolute is not available and not expected.
Each taxpayer seeking relief should make its proof as clear and convincing as possible to obtain the full benefit granted by the law. Perhaps this petitioner could have offered more and better proof in support of its application. Still, the Commissioner has a regulation which provides that relief is in order where a business is commenced during the base period and shows steady growth to the end of that period and it is difficult to understand how he could fail to grant some relief in a case like this. Regulations 112, section 35.722-3 (d).
The petitioner called two C. P. A.'s as witnesses. One had made a complicated computation and a graph to project future sales from a trend supposedly shown by actual sales for the 2 years and 11 months of the base period. His method might be ideal, yet the record is weak in evidence to show the reliability of such a method as applied in this case. The other, with no experience in or special knowledge of the petitioner's business, attempted to show what its earnings would have been for 1939 had sales been 15 per cent greater. His testimony supplies no fact. Argument from existing evidence would be as persuasive without his testimony as with it. The ability of these witnesses to make the mathematical computations is not questioned. More helpful is the uncontradicted testimony of a director, the principal common stockholder, that sales would have been at least 20 per cent greater by the end of 1939 had the business been commenced 2 years earlier, supported, as it was, by other evidence. that the business was still growing at the end of 1939. He also testified that costs declined relatively as production increased and as hand work was replaced by machines. The parties stipulated statistical data from which normal earnings for prior years might be estimated from constructive 1939 earnings. Some such method, subject to error as it probably is, must be used and has been used by the Court in arriving at the "fair and just amount to be used as constructive average base period net income."
The parties have not argued the matter of an unused excess profits credit carry-over from 1940 to 1941 and the Court expresses no opinion as to that issue.
Reviewed by the Special Division.
Decision will be entered tmder Rule 50.