Before HASTINGS, Chief Judge, and SCHNACKENBERG and KNOCH, Circuit Judges.
SCHNACKENBERG, Circuit Judge.
Pure Transportation Company, an Ohio corporation, petitioner (sometimes called Transportation), appeals from a decision of the Tax Court of the United States, which ordered and decided that petitioner is not entitled to relief from excess profits taxes for the taxable years 1943, 1944 and 1945, under the provisions of 26 U.S.C.A. § 722, Internal Revenue Code of 1939.
Wabash Pipe Line Company (hereinafter called Wabash) was organized on August 6, 1937. It operated solely in southeastern Illinois. From October 15, 1937 until June 30, 1941, when it merged with petitioner, Wabash operated independently thereof.
As a part of its brief herein, petitioner submits a summary of argument, which we set forth below:
Petitioner Is Entitled As A Matter Of Law To Compute Its Constructive Average Base Period Net Income By Adding The Constructive Average Base Period Net Income Of Wabash To Its Own Actual Average Base Period Net Income.
By virtue of the merger in 1941 of Wabash and Transportation, Petitioner paid an excess profits tax for 1943, 1944 and 1945 (computed without regard to section 722), whereas in the absence of a merger neither Wabash nor Transportation would have incurred any excess profits tax. Though Wabash qualified under both sections 722(b)(2) and 722(b)(4) for a reconstruction of its ABPNI,*fn1 Transportation could not so qualify and must therefore utilize its actual ABPNI. Petitioner determined its CABPNI*fn2 by adding the CABPNI of Wabash to the actual ABPNI of Transportation. The validity of this method of reconstruction has been recognized and approved by Respondent and by the Tax Court. However the basis for the Court's decision that Petitioner had failed to sustain its burden of proof was its rejection of this hitherto accepted method of reconstruction. Petitioner submits that in so doing the Tax Court erred as a matter of law.
Basis of Section 722 Relief.
Petitioner is entitled to use a CABPNI (1) because during the base years the business of Wabash was depressed as a result of a temporary and unusual circumstance, (2) and because of the commencement and change of capacity of Wabash's operations during the base period which did not reach a normal level of earnings by the close of the base period.
A. Petitioner Qualifies for Relief Under Section 722(b)(2).
During the latter months of 1938 and all of 1939, Wabash's net income was 60 per cent of its 1938 net income, though its costs remained constant and its throughput increased 20 per cent.This depression was caused by a substantial reduction in Wabash's share of the transportation tariff imposed by the Interstate Commerce Commission, brought about by a practical monopoly exercised over Wabash's oil. All of the trunk lines with which Wabash connected, except Illinois, stopped operations in the latter part of 1938, leaving Wabash but a single outlet to its markets in the East. Illinois then demanded that Wabash reduce its tariff rate more than 60 per cent. The monopoly held by Illinois was both temporary and unusual in the experience of Wabash, lasting but two years. However, as a result of the monopolistic control exerted by Illinois, Wabash's earnings suffered a severe depression before the entry of competing lines ...