Victory Glass, Inc. v. Commissioner , 17 T.C. 381 ( 1951 )

Disney, J.

Jdissenting: Though the petitioner, as basis for its qualification to seek relief under section 722 (b) (4), urged that it commenced business on February 1,1937, and changed the character of its business, and adduced evidence in support of both contentions, the majority opinion appears to be that there was no change in character of business (except possibly in increase in capacity for production), and that none was necessary since the petitioner commenced business on February 1, 1937. It is stated that “The fact that Victory Glass Company [the old 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 * *

In my opinion, the majority errs in concluding that petitioner commenced business within the base period, within the intendment of section 722 (b) (4) of the Code. Petitioner was actually incorporated during such period, about January 29,1937. But does this mean that it commenced business within the language of section 722 (b) (4) ? Obviously incorporation is not equivalent to commencing business because business might not have been commenced until some time thereafter. In order to determine the meaning of the expression “the taxpayer * * * commenced business” regard must be had to the entire statutory scheme involved in section 722 and the excess profits tax law. The excess profits tax was laid upon “excess profits” which, roughly speaking, and as far as here pertinent, are determined by subtracting from the actual profits 95 per cent of the average profits for the base period years. In the case of a taxpayer with the normal experience during the base period years this is the general manner of computation. Some taxpayers, however, contend that they did not have the usual experience and, so far as we are here concerned, rely upon section 722 to so demonstrate. The essential general question therefore is: How to determine whether the experience is normal or abnormal during the base period years. It seems obvious that if the business involved has been in existence throughout the base period years, its profits throughout that period offer logically a prima facie showing of what is the profit norm for the base period. In short, we appear to be required to look at the business and not the taxpayer, and the mere fact that the taxpayer was incorporated some time during or immediately prior to the base period is material only so far as the fact of such incorporation may tend to indicate that its business experience is not normal because starting anew requires time to arrive at a normal status in the business; whereas the same would not be true of business already established.

Though it is true that the statute says “* * * the taxpayer commenced business * * *,” it also refers to the “normal operation * * * of the business” and not “normal operation * * * of the corporation” (emphasis added); and the expression is “commenced business” not “commenced existence.” Immediately thereafter we three times find further reference to “the business.” In Eveready Loan Co., 2 T. C. 1035, construing section 712 (a), we held that corporation being “in existence” did not mean the same as conducting of business. Though section 712 (a) is a part of the excess profits law, it is significant that Congress did not, in section 722 (b) (4), say “in existence” as it did in section 712 (a). This suggests that Congress did not in section 722 (b) (4) intend that new corporate existence alone gives right to proceed further toward relief under section 722. On this point, in the Treasury Bulletin on section 722, pages 32-33, we note:

* * * The words “commenced business’’ do not bave the same meaning as “in existence.” Ordinarily, a corporation commences business when it starts the business operations for which it was organized; it comes into existence on the date of its incorporation.

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* * * Mere organizational activities such as incorporation or the issuance of capital stock are not sufficient. It is necessary that the activities of a corporation be advanced to the extent necessary to establish clearly the nature of its regular business operations so that construction of its base period net income can be made without recourse to its post-1939 experience. * * *

A new corporation might well purchase or otherwise acquire outright a business which has had normal operation for many years and continued so to operate throughout the base period. There seems to me no logic in any appeal by such a corporation for relief under section 722 merely because as a corporate entity it is new during the base period year; for its business has an established norm. It would appear that such a corporation, in order to have any appeal under section 722 (b), would have to show change in the character of its business. There was here a new corporation, but an old business. The corporation though new had resulted from the financial condition of the old one, and was followed by the sale of some of its assets to the petitioner, and the donation (in the theory of the petitioner) to the petitioner of the value of certain property transferred to the petitioner as a contribution to capital. There was practically no change in the name and none in management. No break in the continuity of operations appears, between old corporation, receivership, and petitioner. In my opinion, the business here involved did not commence either during or immediately prior to the base period within the statutory phrase. It had commenced long before. It was continued without change in character throughout the base period years. In my view, this situation is not such as to justify relief under section 722 (b) (4) within any reasonable or even sympathetic interpretation of the statute. I realize that under the record before us petitioner was not “an acquiring corporation” within the language of section 740, from the old corporation; and I think that is immaterial. Section 740, as appears on its face, covers certain carefully delineated situations. It does not purport to define, limit or interpret the language “commenced business” in section 722 (b) (4). The inquiry here is not touched by section 740. In my opinion, petitioner here is not shown to have “commenced business” and certainly did not commence “the business” with which section 722 (b) (4) is concerned and which four times it mentions, merely because, though actually taking over and continuing an existing business, its corporate existence commenced within the base period. It commenced, but it did not commence any business, for the business had already been commenced. For purposes of this statute I can not believe that “commenced business” means continuing an established business by a new corporation. I would, therefore, deny relief to the petitioner for failure to qualify under section 722 (b) (4) as a corporation commencing or changing the character of business, and I, therefore, respectfully dissent.