1. Mere incorporation of a long-established business immediately prior to the base period without any showing of any change of control or ownership of the enterprise is not a ground for relief under section 722(b)(4), I.R.C. 1939. Victory Glass, Inc., 17 T.C. 381, distinguished. 2.
petitioner did establish sufficient facts for us to determine that it is entitled to some relief. As we explained in Victory Glass, Inc., 17 T.C. 381: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.
26 U.S.C. (1952 Ed.) § 113(a)(1). Cf. Thomas Watson, 8 T.C. 569; Victory Glass, Inc., 17 T.C. 381. When Lizette Owen acquired this stock, its fair market value was substantially $127,766 per share, the amount for which it had been purchased just a few months earlier.
Here the bonds, which plaintiff contends were exchanged for the preferred stock, had the same market value as the preferred stock. It is true as plaintiff argues, that bonds can constitute property paid in for stock, Victory Glass Inc., v. Commissioner, 11 T.C. 656 and 17 T.C. 381; Walsh Holyoke Steam Boiler Works, Inc., v. Commissioner, 1 Cir., 160 F.2d 185. But whether one considers the fair market value of the stock at the time of issuance, or the value of the bonds as the property paid in, the result is the same, $70 for $100 par or face value.
The petitioner qualifies for relief under section 722(b)(4) since it commenced business during the base period on March 14, 1937, and since the respondent has recognized that its ABPNI is an inadequate standard of normal earnings. Cf. Victory Glass, Inc., 17 T.C. 381 (1951). Throughout the base period, the petitioner and its predecessor, which commenced business on September 16, 1935, were engaged as intrastate and interstate carriers of passengers by bus between Memphis and Texarkana via Little Rock and Hot Springs, a distance of 315 miles.
The evidence is that in the reorganization under which petitioner was incorporated new capital was brought into the business and there were substantial changes in the common stock ownership and management. Cf. Bardons & Oliver, Inc., 25 T.C. 504 (1955); Victory Glass, Inc., 17 T.C. 381 (1951). Respondent maintains, however, that the average base period net income sufficient to produce excess profits credits as great as those which have been allowed to petitioner under the invested capital method.
The determination of what is a fair and just amount to be used as a constructive average base period net income calls for a prediction and an estimate of what earnings would have been under assumed conditions, an approximation where an absolute is not available and not expected. Victory Glass, Inc., 17 T. C. 381, 388. The problem requires the use of some imagination and practical judgment.
Rather, we have found, upon the entire record, that petitioner's earnings attained a level during the base period which would not have been greater if petitioner had commenced the operation of its business at some time before the time in 1933 when such operations began. Victory Glass Co., 17 T.C. 381, 387, also is distinguishable upon its facts. In that case, the taxpayer, also, began business in 1937, during the base period.
The petitioner has satisfied the requirements of section 722(b)(4). Victory Glass, Inc., 17 T.C. 381. We have further concluded and found as an ultimate fact that the petitioner's excess profits tax for the years involved, computed without the benefit of section 722, is excessive and discriminatory.
The nature of the question requires some estimate of earnings on assumed circumstances, and practical judgment. Victory Glass, Inc., 17 T.C. 381; Superior Valve & Fittings Co., 18 T.C. 931. The statutory direction is only the determination of a fair and just amount to be used as a constructive average base period net income in connection with which we may take into account the nature of petitioner and the character of its business.