Court Opinion

ID: 4475788
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:11:41.862128+00
Date Added: 2024-06-11T15:04:19.957316
License: Public Domain

Black, J., dissenting: I disagree with the majority opinion of the Special Division in one important respect. In a 722 case, like any other case which comes before the Tax Court for decision, the burden of proof is upon the petitioner. What does this burden of proof require in a case such as we have here? In East Texas Motor Freight Lines, 7 T. C. 579, we said: Under tlie statute petitioner must establish (1) that the tax computed without the benefit of section 722 results in an excessive and discriminatory tax and (2) a fair and just amount representing normal earnings to be used as a constructive average base period net income. If petitioner establishes these two requirements, then the tax shall be determined by using such constructive average base period net income in lieu of the actual average base period net income otherwise determined under the statute. * * * To the same effect is Lamar Creamery Co., 8 T. C. 928. Has petitioner met its burden of proof in establishing the two foregoing requirements to secure relief under section 722 ? I think it has as to requirement (1). The majority opinion has a finding of fact which reads: “The petitioner commenced business on February 1, 1937.” That finding is amply supported by other facts stated in the Findings of Fact and I agree to it. That finding of fact establishes petitioner’s ground for relief under section 722 (b) (4), I. ft. C. But the establishment of a taxpayer’s ground for relief gets him nowhere unless he is further able to establish “what would be a fair and just amount representing normal earnings to be used as a constructive average base period net income for the purposes of the excess profits tax based upon a comparison of normal earnings and earnings during an excess profits tax period.” See section 722- (a), I. It. C. I do not think petitioner has met its burden of proof as to requirement (2) stated in the statute and recognized in East Texas Motor Freight Lines and Lamar Creamery Co. cases, both supra. It is true that the majority opinion has two findings of fact which read as follows: If the petitioner had commenced business 2 years before it did so, it would have reached by the end of the base period an earning level of about $19,000 annually. $18,000 would be a fair and just amount representing normal earnings to be used as a constructive average base period net income for the purposes of an excess profits tax based upon a comparison of normal earnings and earnings during an excess profits tax period, to-wit, the year 1941. I find no supporting facts in the Findings of Fact which justify the two ultimate findings referred to above. Petitioner’s actual excess profits net income for the year 1939 as shown by the Findings of Fact was $7,081.67. I see no findings of fact which would justify the finding of the majority that petitioner’s earning level at the end of 1939 would have been “about $19,000” instead of this $7,081.67 if it had commenced business 2 years before it did so. I am not at all convinced tbat such would have been the case. The majority opinion refers to Regulations 112, section 35.722-3 (d). That regulation reads in part as follows: The fact that income for the entire base period is to be reconstructed upon the basis of the level of normal operations actually attained during the base period or upon the basis of the level of normal operations which would have been reached had the business been commenced or changed two years earlier, does not necessarily mean that the highest level of earnings actually or constructively reached during the base period is to be ascribed to the entire base period. The earning level of business usually is fluctuating rather than constant. Normal earnings to be attributed to the taxpayer for the base period must follow such pattern. In determining such normal earnings regard may be had to the earnings cycle during the base period of other taxpayers engaged in similar businesses, of other members of an industry of which the taxpayer was a member, of such industry as a whole, and to relationships existing between the taxpayer’s production, costs, sales, and profits during its years of normal operations and similar factors in the case of such other taxpayers or industry. It seems to me that to support the two ultimate findings of fact which I have copied above, the majority opinion would have to make findings of fact along the lines of those which we made in Lamar Creamery Co., supra, in the concluding paragraphs of our Findings of Fact in that case. Such findings of fact as should be made here in these respects should, of course, be suitable to petitioner’s particular line of business. In the absence of such findings, how am I to know that “if the petitioner had commenced business 2 years before it did so, it would have reached by the end of the base period an earning level of about $19,000 annually”? Or how am I to know that “$18,000 would be a fair and just amount representing normal earnings to be used as a constructive average base period net income for the purposes of an excess profits tax based upon a comparison of normal earnings and earnings during an excess profits tax period, to-wit, the year 1941” ? There is nothing in the Findings of Fact prepared as a basis for the majority opinion which satisfies me that petitioner has met its burden of proof in these respects. I, therefore, respectfully record my dissent.