8 T.C. 487">*487 The respondent determined a deficiency of 1947 U.S. Tax Ct. LEXIS 266">*267 $ 230.92 in the petitioner's income tax for the year 1941 and deficiencies of $ 1,165.36 and $ 1,723.16 in its excess profits taxes for the years 1941 and 1942, respectively. He also determined an overassessment of $ 271.76 in the petitioner's income tax for the year 1942.

The sole issue is whether or not, in computing its base period income for the determination of its excess profits credit for the years 1941 and 1942, the petitioner is entitled to eliminate as abnormal deductions, under section 711 (b) (1) (J), declared value excess profits taxes for the years 1937 and 1939 in the amounts of $ 212.05 and $ 1,090.52, respectively.

FINDINGS OF FACT.

The facts were stipulated. They are as follows:

The petitioner, Horton & Converse, is a corporation, organized and existing under the laws of the State of California, with its principal office in Los Angeles, California. The returns for the years 1941 and 1942 were filed with the collector of internal revenue for the sixth 8 T.C. 487">*488 collection district of California. The petitioner computed its excess profits credits for both taxable years 1941 and 1942 under section 713 of the Internal Revenue Code.

In the petitioner's income tax returns1947 U.S. Tax Ct. LEXIS 266">*268 for the base period years and certain prior years, deductions for declared value excess profits tax and capital stock tax were claimed and allowed as follows:

The deductions for declared value excess profits tax were shown as separate items in the petitioner's returns for all years in which such deductions occurred. In computing its excess profits credit in its excess profits tax returns for 1941 and 1942, the petitioner eliminated, under the provisions of section 711 (b) (1) (J) of the Internal Revenue Code, deductions for declared value excess profits tax as follows: In 1937, the total deduction of $ 212.05 was eliminated; in 1939, $ 1,024.26 out of a total deduction of $ 1,090.52 was eliminated.

The declared value excess profits tax paid for 1937 and 1939 was computed as follows:

1947 U.S. Tax Ct. LEXIS 266">*269 The declared value or adjusted declared value shown in the petitioner's capital stock tax returns for each of the years affecting the computation of declared value excess profits tax for the base period years was as follows:

The amount shown in the return for the year ended June 30, 1936, was the value of capital stock declared in that return. The amount of $ 309,171.03 shown in the return for the year ended June 30, 1937, was the adjusted declared value, based upon the value declared in the 1936 8 T.C. 487">*489 return with adjustment as provided by section 105 (f) of the Revenue Act of 1935, as amended by the Revenue Act of 1936. The amount of $ 500,000 shown in the return for the year ended June 30, 1938, was the value declared in that return. The amount of $ 518,576.42 shown in the return for the year ended June 30, 1939, was the adjusted declared value, based upon the $ 500,000 value declared in 1938, with adjustment as provided by section 1202 (b) (1) of the Internal Revenue Code as originally enacted. Under the law in effect in 1939, the petitioner had the privilege of declaring1947 U.S. Tax Ct. LEXIS 266">*270 a new value if it chose to do so in its return for that year, such value to be in excess of the adjusted declared value otherwise computed. The petitioner did not declare a new value in its return.

The capital stock tax deducted in the petitioner's returns for the base period years was computed as follows:

1936-Tax accrued July 1, 1936, $ 1.00 per thousand on adjusted declared value of $ 309,171.03 shown in the capital stock tax return for the year ended June 30, 1937.

1937-Estimated tax accrued July 1, 1937, based upon estimate of $ 325,000 declared value to be used in capital stock tax return for the year ended June 30, 1938.

1938-Tax accrued July 1, 1938, $ 1.00 per thousand on declared value of $ 518,576.42 shown in the capital stock tax return for the year ended June 30, 1939 ($ 518), plus $ 175 tax for the year ended June 30, 1938 in excess of the estimated amount deducted in the 1937 return (tax $ 500, estimate $ 325.)

1939-Estimated tax accrued July 1, 1939, representing $ 1.00 per thousand on estimated value of $ 800,000 to be declared in the capital stock tax return for the year ended June 30, 1940.

The petitioner's gross income and its net income for declared value excess1947 U.S. Tax Ct. LEXIS 266">*271 profits tax, and its gross sales and cost of sales, as shown in its returns for the base period years, were as follows:

The following amounts were deducted as taxes in the petitioner's returns, exclusive of sales taxes for which it was reimbursed by its customers:

8 T.C. 487">*490 The total amount deducted each year included property taxes, franchise taxes, pay roll taxes, and miscellaneous other taxes in minor amounts.

The claimed abnormality or excess in declared value excess profits tax is not a consequence of a change at any time1947 U.S. Tax Ct. LEXIS 266">*272 in the type, manner of operation, size or condition of the business engaged in by the taxpayer unless a change in the volume of the petitioner's business may be deemed by the Court as a matter of law to be a change in type, manner of operation, size or condition of its business. The petitioner had no deduction for declared value excess profits tax in either of the taxable years 1941 or 1942.

In his notice of deficiency the Commissioner denied the petitioner's claims for adjustment for abnormal deductions of declared value excess profits taxes for the years 1937 and 1939 in the sums of $ 212.05 and $ 1,024.26, respectively.

OPINION.

The question here presented is whether or not deductions of $ 212.05 and $ 1,090.52 for declared value excess profits taxes paid in the years 1937 and 1939, respectively, should be excluded as abnormal deductions in computing the petitioner's base period income for the purpose of determining its excess profits credit under the provisions of section 711 (b) (1) (J). ¹

1947 U.S. Tax Ct. LEXIS 266">*273 The petitioner contends that the deductions were in excess of 125 per cent of the deductions of the same class for the four previous taxable years and that they constituted a "class" separate from the other taxes, such as capital stock, property, franchise, pay roll, and miscellaneous taxes, and were abnormal in character. It further asserts that the abnormality was not in consequence of an increase in its gross 8 T.C. 487">*491 income in its base period or of a decrease in the amount of some other deduction in the base period or of a change at any time in the type, manner of operation, or condition of its business.

The respondent bases his action on the ground that the disallowance of the contested eliminations is prohibited by the provision of subsections (b) (1) (K) (ii) and (b) (1) (K) (iii). ²

1947 U.S. Tax Ct. LEXIS 266">*274 The method of computing excess profits credit is established by section 713 and need not be set forth here. The point at issue is the proper adjustment to normal tax net income as provided in section 711. The petitioner claims that subsection (b) (1) (J) provides the adjustments sought by it. The respondent contends (1) that a deduction for declared value excess profits tax does not, in and of itself, constitute a separate class of deduction for taxes (subsection (b) (1) (J) (ii), and (2) that the deductions for declared value excess profits taxes in 1937 and 1939 were the consequence of the decrease of another deduction (capital stock tax) in the base period (subsection (b) (1) (K) (ii)).

The respondent further argues that the petitioner has not sustained the burden of proving that the declared value excess profits tax deductions were not in consequence of an increase in gross income in the petitioner's base period. We give our attention to this proposition first. In William Leveen Corporation, 3 T.C. 593, we have discussed both the difficulty and the necessity of the petitioner's establishing this negative fact. See Consolidated Motor Lines, Inc., 6 T.C. 1066.1947 U.S. Tax Ct. LEXIS 266">*275 In the case at bar the facts establish a steady increase in gross income. The petitioner has not demonstrated the required lack of relationship between this increase in gross income and the tax in controversy (subsection (b) (1) (K) (ii)). It has attempted to substitute argument for fact. Proof of fact is required by the statute. The proof being deficient and petitioner's argument being unconvincing, the respondent must be sustained.

The above holding is dispositive of the case and makes unnecessary the consideration of the other arguments advanced by either party.

Decision will be entered for the respondent.