Arkansas Motor Coaches, Ltd. v. Comm'r of Internal Revenue, Docket No. 32534.

Decision Date30 April 1957
Docket NumberDocket No. 32534.
Citation28 T.C. 282
PartiesARKANSAS MOTOR COACHES, LIMITED, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
CourtU.S. Tax Court

28 T.C. 282

ARKANSAS MOTOR COACHES, LIMITED, INC., PETITIONER,
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 32534.

Tax Court of the United States.

Filed April 30, 1957.


[28 T.C. 282]

Wentworth T. Durant, Esq., for the petitioner.

Douglas M. Moore, Esq., and Allen T. Akin, Esq., for the respondent.

Respondent allowed petitioner's claim in part for relief under section 722(b) (4), I.R.C. 1939. Throughout the base period it was involved in litigation regarding the granting of a certificate of convenience and necessity by the Interstate Commerce Commission, which it needed to operate. Although it was allowed to operate and those operations were not interfered with during the base period, it did not receive the certificate until 1940. It contends that the lack of a certificate was one of the prime causes of low base period earnings and that it is entitled to a reconstruction much greater than the Commissioner has granted in his deficiency notice, based on the assumption that it did have a certificate. Petitioner contends that under such construction its CABPNI for 1942 would be $68,188.86. Held, that even if we assume that petitioner had been granted the certificate of convenience and necessity prior to December 31, 1939, it would not have reached the level of earnings by December 31, 1939, for which it contends. Held, further, petitioner is entitled to a CABPNI somewhat higher than the Commissioner has determined. Petitioner's CABPNI to be used for 1942 determined to be $22,000.

This proceeding involves a redetermination of income tax and excess profits tax for the year 1942. The respondent has determined a deficiency in income tax of $10,107.57 and an overassessment in excess profits tax of $15,776.13. The statutory notice contained the following explanation:

After careful consideration of your application for relief, Form 991, it has been determined that you established the existence of a qualifying factor under section 722(b)(4) of the Internal Revenue Code, and therefore, were entitled to a constructive average base period net income in the amount of $15,472.00 for the taxable year ended December 31, 1942. Furthermore, it has been held that you were entitled to constructive average base period net incomes in the respective amounts of $13,997.33 and $14,964.32 for the taxable years ended December 31, 1940 and December 31, 1941, for the purpose of determining any unused excess profits credit carry-over from these years to the taxable year ended December 31, 1942. * * *

The Commissioner computed the constructive average base period net income (hereinafter referred to as CABPNI) of $15,472, which he has used for the taxable year 1942, as follows:

+-----------------------------------------------------------------------------+
                ¦Taxpayer's actual 1939 passenger revenue ¦$121,127.00¦
                +-----------------------------------------------------------------+-----------¦
                ¦Increased 7.6 per cent for first year ¦9,205.65 ¦
                +-----------------------------------------------------------------+-----------¦
                ¦ ¦130,332.65 ¦
                +-----------------------------------------------------------------+-----------¦
                ¦Increased 7.6 per cent for second year ¦9,905.28 ¦
                +-----------------------------------------------------------------+-----------¦
                ¦Constructive passenger revenue for 1939 ¦140,237.93 ¦
                +-----------------------------------------------------------------+-----------¦
                ¦Add: Taxpayer's 1939 “other revenue” ¦12,053.00 ¦
                +-----------------------------------------------------------------+-----------¦
                ¦Constructive gross revenue for 1939 ¦152,290.93 ¦
                +-----------------------------------------------------------------+-----------¦
                ¦Constructive net profit for 1939 at 10 1/2 per cent ($15,990.54 ¦ ¦
                +-----------------------------------------------------------------+-----------¦
                ¦rounded) ¦16,000.00 ¦
                +-----------------------------------------------------------------+-----------¦
                ¦Constructive average base period net income at 96.7 per cent of ¦15,472.00 ¦
                ¦1939 ¦ ¦
                +-----------------------------------------------------------------------------+
                
+-----------------------------------------------------------------------------+
                ¦Constructive passenger revenue for 1939 ¦$140,237.93¦
                +-----------------------------------------------------------------+-----------¦
                ¦Add: Taxpayer's 1939 “other revenue” ¦12,053.00 ¦
                +-----------------------------------------------------------------+-----------¦
                ¦Constructive gross revenue for 1939 ¦152,290.93 ¦
                +-----------------------------------------------------------------+-----------¦
                ¦Constructive net profit for 1939 at 10 1/2 per cent ($15,990.54 ¦ ¦
                +-----------------------------------------------------------------+-----------¦
                ¦rounded) ¦16,000.00 ¦
                +-----------------------------------------------------------------+-----------¦
                ¦Constructive average base period net income at 96.7 per cent of ¦15,472.00 ¦
                ¦1939 ¦ ¦
                +-----------------------------------------------------------------------------+
                

[28 T.C. 283]

The petitioner, in its petition, alleges that the respondent's determination of taxes is based upon the following error:

Failure to allow Constructive Average Base Period Net Income to Petitioner in the amount of $59,486.70 to be used in lieu of petitioner's average base period net income in determining petitioner's excess profits tax for the year 1942 and for the purpose of determining the excess profits tax carry-over from the years 1940 and 1941, pursuant to the provisions of Section 722 of the Internal Revenue Code in accordance with the claim for Refund for the year 1942, filed September 3, 1943 by petitioner on Form 991.

In its brief the petitioner contends for a CABPNI of $68,188.86.

The question involved, therefore, is, has the petitioner established that ‘a fair and just amount representing normal earnings to be used as a CABPNI for purposes of an excess profits tax’ is in excess of the amount determined by the Commissioner.

FINDINGS OF FACT.

A stipulation of facts has been filed and is incorporated herein by reference.

Arkansas Motor Coaches, Limited, Inc. (hereinafter called petitioner), is a corporation organized under the laws of the State of Arkansas, having its principal place of business at Little Rock. It filed its income and excess profits tax returns for the years 1940, 1941, and 1942 with the then collector of internal revenue at Little Rock, Arkansas. These returns were prepared upon the accrual basis of accounting.

History of Operation and Operating Certificates.

A partnership or joint venture known as Arkansas Motor Coaches, Ltd., which was the predecessor of petitioner, commenced operation as a passenger bus carrier between Memphis and Little Rock on or before September 16, 1935, and between Little Rock and Texarkana on or before September 17, 1935. Raymond Rebsamen (hereinafter referred to as Rebsamen), a wealthy and successful businessman of Little Rock, financed its operation. Its franchises, certificates, and permits were obtained in the name of Milton D. Leeper (hereinafter referred to as Leeper), doing business as Arkansas Motor Coaches, Ltd. Franchises, certificates, and permits obtained in the name of Leeper were as follows:

[28 T.C. 284]

1. Interstate permit from the State of Tennessee dated September 16, 1935, authorizing operations as an interstate carrier in and out of Memphis, Tennessee, from West Memphis, Arkansas.

2. Letter from the Railroad Commission of the State of Texas dated October 3, 1935, advising that no Texas permit was required to operate out of a terminal located on the Texas side of Texarkana.

3. Interstate permit from the State of Arkansas dated October 8, 1935, authorizing operations as an interstate carrier between Texarkana and Memphis over U.S. Highway 67 from Texarkana to Arkadelphia, thence over Arkansas Highway 7 to Hot Springs, thence over U.S. Highway 70 to Little Rock and Memphis, Tennessee, a total distance of 315 miles.

4. Intrastate permit from State of Arkansas dated February 13, 1936, authorizing intrastate service between Texarkana and West Memphis, Arkansas, via Hot Springs and Little Rock, serving all intermediate points.

These franchises, certificates, and permits enabled petitioner and/or its predecessor to operate along the 315-mile route between Memphis and Texarkana.

Section 206 of the Motor Carrier Act of 1935,1 required motor carriers operating in interstate commerce to secure a certificate of convenience and necessity from the Interstate Commerce Commission (hereinafter referred to as the I.C.C.) which enforced the Act. Carriers in operation on June 1, 1935, could obtain a certificate' without further proof of convenience and necessity under the ‘grandfather’ clause. The Act also, in effect, provided that carriers which began operations after June 1, 1935, but prior to October 15, 1935, if they filed an application for a certificate in time, could continue to operate until the I.C.C. ordered otherwise. Petitioner's predecessor fell within this latter category.

On January 17, 1936, Leeper filed an application with the I.C.C. for a certificate of public convenience and necessity as an interstate carrier over the route on which the partnership or joint venture was operating from Texarkana to Memphis. Leeper's application to the I.C.C. for a certificate of public convenience and necessity as an interstate carrier was opposed by the Missouri Pacific Railroad Company, the Missouri Pacific Transportation Company (hereinafter sometimes referred to as Missouri Pacific), Southwestern Greyhound Lines, Inc., and Dixie Greyhound Lines, Inc.

The petitioner was organized for the purpose of operating passenger buses in intrastate and interstate commerce between Texarkana and Memphis. Its authorized capital stock was 100 shares. Rebsamen and his family subscribed to 51 shares. Leeper subscribed to 49 shares.

[28 T.C. 285]

Petitioner's corporate charter was issued on November 15, 1935; however, it did not commence business until March 14, 1937...

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