21 T.C. 486">*487 The Commissioner disallowed petitioner's claims for relief from excess profits tax under sections 722 (a) and 722 (b) (4) of the Code for the fiscal years ended September 30, 1941 to 1945, inclusive. The excess profits taxes involved in this proceeding are in the amount of about $ 250,000.

The petitioner contends that it is entitled to have its excess profits taxes for the taxable years determined by using a constructive average base period net income of at least $ 320,000 in lieu of its actual average base period income of about $ 120,000. It contends that it qualifies for such relief under the provisions of section 722 (b) (4). The chief issue to be decided is whether the petitioner commenced business immediately1954 U.S. Tax Ct. LEXIS 312">*314 prior to the base period, and changed the character of its business during its base period.

FINDINGS OF FACT.

The stipulated facts are found. The stipulations and the annexed exhibits are incorporated herein by reference.

The petitioner's returns and claims for refund for the taxable years were filed with the collector for the district of Florida. The excess profits taxes were duly paid to the collector at Jacksonville, Florida.

The petitioner timely filed claims for refund of taxes paid on Form 843, and applications for relief under section 722 on Form 991, for the years in controversy. The Commissioner, in a combined notice of deficiency and notice, under section 732, of disallowance of claims for refund, made determinations of deficiencies in excess profits taxes for the fiscal years ended September 30, 1941, 1943, 1944, and 1945; he determined that there was an overassessment for the fiscal year ended September 30, 1942; and he rejected petitioner's applications for relief under section 722.

The parties have stipulated that the excess profits credits to which petitioner is entitled in each taxable year without the benefit of section 722 are as follows: 21 T.C. 486">*488

1954 U.S. Tax Ct. LEXIS 312">*315 The parties have stipulated that the above excess profits credits, computed without the benefit of section 722, are computed as follows:

1954 U.S. Tax Ct. LEXIS 312">*316 For the purposes of section 722, petitioner's base period years ended on the 30th of September in 1937, 1938, 1939, and 1940.

The petitioner (sometimes referred to as West Flagler Kennel Club) was incorporated under the laws of Florida on October 19, 1930, with its principal office in Miami. The petitioner was organized for the purpose of operating a greyhound racing track in Miami. During the years involved in this proceeding, petitioner's business, with minor exceptions, was still owned and operated by the parties who started it.

Petitioner keeps its books of account and files its Federal tax returns on an accrual basis. Petitioner's fiscal year is from October 1 to September 30.

On October 25, 1930, petitioner entered into an agreement with Dos Hermanos, Inc., for the rental of certain lands consisting of about 20 acres. This was a 5-year rental agreement, with an option to purchase, which provided in part that the lessee erect on said leased lands a dog racing plant. In accordance with the lease, petitioner erected, at a cost of about $ 83,000, a dog racing plant consisting of a grandstand, betting booths, kennels, racing strip, etc., preparatory 21 T.C. 486">*489 to the 1930-19311954 U.S. Tax Ct. LEXIS 312">*317 racing season. The racing plant occupied 5 or 6 acres, and the balance of the area constituted automobile parking space for patrons. Pursuant to the purchase option in the lease, the petitioner purchased the leased property on September 30, 1935.

Shortly after operations were started, an involuntary petition in bankruptcy was filed against petitioner. The track, during the bankruptcy proceedings, was placed in the hands of a receiver. During the racing seasons, 1931-1932 and 1932-1933, it was operated by the receiver under a rental agreement providing for payment to petitioner of a flat rental plus a percentage of mutuel play. Shortly after the close of the 1932-1933 season, a settlement was made with petitioner's creditors which resulted in all creditors being paid in full.

At the beginning of the 1933-1934 racing season petitioner began to operate the greyhound racing track business directly and has continued with these operations during all the years involved in this proceeding.

Greyhound racing began in the Miami area with the season 1924-1925 at Hialeah, near Miami city limits to the northwest. At first, the races ran in the day time, but with the season 1925-1926 there1954 U.S. Tax Ct. LEXIS 312">*318 was a change to night racing. This particular track discontinued racing during the season 1926-1927. The second greyhound track to operate in this area was the Biscayne Kennel Club, located on NE. 115th Street, between NE. 2d and 6th Avenues, in the extreme northwest corner of what is known as the Village of Miami Shores, some 9 miles from downtown Miami. The third dog track to operate in the Miami area was known as the Miami Beach Kennel Club and Arena. Its racing strip and grandstand were constructed in November 1928, and racing was conducted during the season 1928-1929. The present company, Miami Beach Kennel Club, Inc., was organized in December 1929 and has operated the track each season thereafter. This track is located at the southern limits of Miami Beach. The fourth track to begin operations in the Miami area was that of the petitioner. Petitioner's track is located at NW. 37th Avenue between NW. 3d and 7th Streets, adjacent to the western city limits. This locality was taken into the city in 1941. Petitioner's track is about 4 miles from downtown Miami and several blocks from Coral Gables. Petitioner's track was followed by a fifth, the Broward County Kennel 1954 U.S. Tax Ct. LEXIS 312">*319 Club, beginning with the season 1934-1935. This track is approximately 18 miles from West Flagler Street and NW. 1st Avenue, Miami, Florida, and known as the Hollywood track.

Prior to 1931 it was illegal to conduct a dog racing track in the State of Florida, but beginning with 1931 dog tracks were legalized by a law enacted by the State Legislature (Stat. 1931, ch. 550, sec. 550.08), provided that the maximum length of racing days for 21 T.C. 486">*490 dog racing in any 12-month period was to be 90 days from December 1 of one year to April 10 of the following year. Beginning in the year 1943 a number of changes were made in the dog racing season by the Florida State Legislature.

Aside from the State of Florida, which legalized dog racing in 1931, the Commonwealth of Massachusetts was the only other state which permitted dog racing during the years involved in this proceeding. The Massachusetts law was enacted in 1935.

When the petitioner was organized in October 1930 it adopted, as a matter of convenience, the fiscal year ended September 30 so that it could start its inception by showing a full year of operations. Such fiscal year was never subsequently changed since the question of whether1954 U.S. Tax Ct. LEXIS 312">*320 it represented a proper fiscal year never arose. During the base period, the racing season started in December and always ended on or before April 10. Petitioner has never earned any income after April 10 in any year.

In the Miami, Florida, area since 1931 all greyhound racing, including the racing at the petitioner's track, has been conducted at night, commencing normally at 8:30 p. m. At petitioner's track 10 to 12 races, at approximately 20-minute intervals, were usually conducted each night during the racing seasons 1933-1934 to 1939-1940, inclusive. Eight greyhounds participated in each race. The participating greyhounds are thoroughbred dogs registered with the American Kennel Club or the National Coursing Association. Under Florida law only thoroughbred greyhounds are permitted to race. Before each race the greyhounds, each wearing a blanket bearing a number and distinguishing colors, are paraded in front of the grandstands so that they may be viewed by the patrons. Petitioner's racing track is an oval one-fourth of a mile in length and the races are usually five-sixteenths or three-eighths of a mile in length. An artificial rabbit operated around the track by electricity1954 U.S. Tax Ct. LEXIS 312">*321 is employed as a lure to induce the greyhounds to race. When the rabbit is about 20 or 30 feet in front of the starting box, the doors of the starting box automatically open simultaneously and the greyhounds give chase to the rabbit as it moves around the track.

At petitioner's track, as originally constructed, spectators viewed the races from the grandstand and from a cemented ramp area in front of the grandstand. The grandstand provides seats for approximately 3,000 spectators, including seats in boxes along the front of the grandstand located at a level some 8 or 10 feet above the ground level. The ramp area is located between the front of the grandstand and the edge of the track, and extends for some distance eastward along the track near the finish line of the races. Spectators stand in the ramp area to view the races. Several thousand spectators could be accommodated on the ramp area. During the 20-minute intervals between races 21 T.C. 486">*491 patrons desiring to place wagers retire to the so-called "betting-shed" areas where parimutuel wagering windows are located. Prior to the 1937-1938 season, petitioner maintained 42 wagering windows, all of which were located in the area1954 U.S. Tax Ct. LEXIS 312">*322 directly beneath the grandstand, behind the ramp, on the ground level. Patrons customarily congregated in the betting-shed areas to discuss the merits of various greyhounds, study the odds, and to place their wagers. In order to make a wager on the next scheduled race during the evening, it is necessary for each patron to line up at the appropriate parimutuel window and buy a ticket on the greyhound on which he wishes to bet. All wagers on the next scheduled race must be made in the 20-minute interval between the close of the preceding race and the ringing of a bell which indicates the start of the next scheduled race.

All wagering on the Florida greyhound races is conducted under the parimutuel system, which is the system also used at horse racing tracks. Winning tickets consist of those held on greyhounds running first, second, and third in each race. The parimutuel system is operated under the supervision of the Florida Racing Commission (Fla. Stat. Ann., sec. 550.02). During the base period years and prior thereto the State of Florida received 3 per cent of the total mutuel "play" -- i. e., 3 per cent of the total amount wagered on each race. Each greyhound track is entitled1954 U.S. Tax Ct. LEXIS 312">*323 to retain for itself 12 per cent of the total mutuel play. The 12 per cent commission retained by the track operators is figured on the total amount wagered on each race during each racing night of the season. The balance of each mutuel pool is divided and distributed among holders of the winning tickets, except that prior to and during the petitioner's base period years the Florida tracks were entitled to retain the "breaks," or odd pennies, remaining after division of the pool among the holders of the winning tickets. The "breaks" arise by reason of the fact that it is customary under the parimutuel system to pay off winning $ 2 tickets in multiples of 20 cents instead of paying their value to the penny. The payments on winning tickets are computed by dividing the total amount wagered by the number of winning tickets and deducting from that quotient the pennies necessary to reduce it to the next lower even multiple of twenty. For example, a $ 2 winning ticket may result in a share of the mutuel pool equal to $ 6.73, but the winner will be paid only $ 6.60, the next lower multiple of twenty. During the base period the "breaks" retained by the petitioner and other Florida greyhound1954 U.S. Tax Ct. LEXIS 312">*324 tracks amounted to about 1 per cent of the total mutuel play.

Petitioner's gross income during all years involved in this proceeding was derived principally from three sources:

(a) Percentage of total mutuel "play" and "breaks," as described above.

(b) Admissions to the track and box seats.

(c) Concessions.

21 T.C. 486">*492 Of these three sources of gross income, the percentage of mutuel "play" and the "breaks" is the largest, accounting for more than 90 per cent of petitioner's gross income during its base period.

In 1934, 1937, 1938, and 1939, the petitioner had various things done to improve the facilities and operation of its dog race track, as follows:

(1) In 1934, petitioner installed a glass starting box, or boxes, electrically illuminated, to take the place of the customary wooden starting box. The glass boxes were improved in 1935 and 1936, and in 1938 a hydraulic lift was installed. The function of a glass starting box is described hereinafter.

(2) In 1937, petitioner remodeled its grandstand, in ways which are described hereinafter; resurfaced its track, erected a wire fence along the race track course in front of the grandstand; and installed a new neon light sign above the1954 U.S. Tax Ct. LEXIS 312">*325 entrance to the premises, and otherwise improved the appearance of the entrance. The expenditures for these works were as follows:

(3) In 1938, petitioner installed at its track, at a cost of about $ 3,000, an electrically operated camera to record by photograph the finish of each race. Petitioner was the first dog race track in Florida to install photo finish cameras. The photo finish pictures were printed in 1 minute and prints were displayed at various locations in the grandstand and betting sheds.

(4) In 1939, petitioner installed an electrically operated odds board. It also installed and put in operation a heating system in the grandstand at a cost of $ 12,914.38.

Petitioner was the first of the Florida dog race tracks to install a heating system in a grandstand. The installation was completed by December 10, 1939. The heating system has operated successfully. It can maintain a temperature of from 70 to 75 degrees in the grandstand area -- an open-air structure -- when the out-of-doors temperature is as low as 50 degrees.

The electrically1954 U.S. Tax Ct. LEXIS 312">*326 operated odds board replaced a manually operated, detailed, odds board which petitioner had installed in about 1933 at the beginning of its racing operations, and a "morning-line odds board." The new, electrically operated odds board not only displayed the morning odds (estimated probable wagering odds on each participating greyhound) and the changes in odds during the progress of the wagering on each race, but also displayed very quickly the results 21 T.C. 486">*493 of each race and the parimutuel payoff prices. The immediate flashing of the results of each race and of approximate odds facilitated the distribution of the mutuel pools, and also encouraged and expedited the placing of bets.

Before petitioner installed electrically illuminated glass starting boxes in 1934, it used an unilluminated, wooden starting box at the beginning of each race, as other greyhound race tracks do. Petitioner acquired the patent on the glass box at the time of its installation and is the only greyhound track in the country which uses a glass starting box. A glass starting box, constructed with a steel frame enclosed by glass and weighing 3,000 pounds, is about 10 feet long. It contains a separate stall1954 U.S. Tax Ct. LEXIS 312">*327 for each greyhound participating in a race. A door in the front of the box is opened automatically so that all of the greyhounds are released at once. Electric illumination of a glass box enables those watching a race to see the greyhounds in their stalls, to observe the release of the greyhounds, and to see that each has an equal start in a race.

The petitioner's remodeling of its grandstand and betting shed in 1937 comprised the following changes, additions, and improvements:

(a) As originally constructed, the north 16 feet by 200 feet of the area under the grandstand was used as the mutuels plant, office, and a ladies' room and men's room. In the remodeling, the housing enclosing this area was demolished and a 1-story structure, 20 feet by 200 feet, was constructed immediately back of and adjoining the grandstand to house the new mutuels plant, office, a men's room, and a room for use of concessionaires. This change increased the so-called betting shed by 3,200 square feet and permitted the installation of 6 new betting windows in the area formerly utilized as a ladies' room.

(b) At about the 18-foot level in the grandstand, two ramps (designated as "bridge" on the plan) were1954 U.S. Tax Ct. LEXIS 312">*328 cut, leading to a platform, a so-called "mezzanine," 16 feet by 200 feet. About 50 feet by 16 feet of the west end was utilized as a ladies' lounge and toilet. Directly in the center of this area, and on top of the 1-story structure housing the ground floor mutuels plant, there was constructed a shed approximately 40 feet wide, in which were placed 12 new betting windows for use of such patrons as frequented the mezzanine. The cutting of these ramps reduced the seating capacity of the grandstand by approximately 56 seats.

(c) The remodeled grandstand was enlarged by 4,000 square feet (20' x 200') in the new, so-called, mutuels plant. This made available an area of 3,200 square feet (16' x 200') in what is known as the betting-shed (former mutuel plant) under the grandstand and on the ground level. By utilizing the open area between the ground and underside of the grandstand, there was added an additional 3,200 21 T.C. 486">*494 square feet in what is called the mezzanine. Of this area about 800 square feet (50' x 16') is utilized as a ladies' lounge and toilet.

After the remodeling, there were 18 new betting windows, 6 on the ground level and 12 on the mezzanine, providing a total of1954 U.S. Tax Ct. LEXIS 312">*329 60 wagering windows.

At the same time that the grandstand was remodeled in 1937, the petitioner laid out an area where refreshments, cocktails, and food could be served to about 1,000 patrons, which is called a patio garden. This is located between the front of the grandstand and the track. Tables and chairs were provided. Patrons could view the races from this area. Before the arrangement of the patio was provided, there had not been a place west of the grandstand for spectators.

The enlargement of the betting-shed area by 3,200 square feet, in back of and adjoining the grandstand, almost doubled the area used by patrons for placing their bets. The construction of the so-called mezzanine floor 18 feet above the ground, connected with the grandstand by 2 ramps, where 12 new betting windows were installed, added another 2,400 square feet of space for patrons desiring to place bets.

In the last year of the petitioner's base period there were 4 consecutive days when the minimum temperature in Miami was below 40 degrees, as follows:

1954 U.S. Tax Ct. LEXIS 312">*330 Before the above dates January 18, 1940, was the first evening when the mean temperature was as high as 70 degrees. Comparison of the decrease in attendance at the tracks of petitioner, Miami Beach, Biscayne, and Hollywood on the nights of January 25, 26, 27, and 29 from the attendance at each track on the night of January 18 shows that attendance decreased 51 per cent at the Miami Beach and Biscayne tracks, and 56 per cent at the Hollywood track, whereas it decreased only 30 per cent at petitioner's track. Also, the petitioner's decrease in mutuel play was 12 per cent whereas, at the other three tracks, the decrease in mutuel play was from 36 to 44 per cent.

During its base period years 1937, 1938, 1939, and 1940, the total amounts paid by petitioner in purses to winners of nightly races were 2.98 per cent, 3.05 per cent, 2.88 per cent, and 2.54 per cent, respectively, of mutuel plays. In the fiscal years 1939 and 1940, pursuant to a contract with the association of greyhound owners, the purses ranged from $ 1,100 to a maximum of $ 1,500, effecting savings to petitioner of $ 3,892 and $ 19,802, respectively.

21 T.C. 486">*495 Petitioner inaugurated, in 1935, stake races at its track 1954 U.S. Tax Ct. LEXIS 312">*331 during the 1935-1936 racing season, and it was the first Florida track to have stake races. In each stake race, added prize money is offered for distribution among the greyhounds finishing first, second, third, and sometimes fourth. The stake prizes were in addition to the regular purses offered for the winners of each nightly race. The stake races and the added prize money paid by petitioner during its fiscal years 1937-1940, inclusive, its base period years, were as follows:

The above added prize money was not paid in its entirety by the petitioner. To participate in any of these races dog owners had to post an entrance fee, which became a part of the stake purse. In the case of the nursery stake, in the early years the track matched the amount of entrance fees; in the last 2 years of the base period the track contributed or donated $ 500 in lieu of matching funds. Derby stake purses consisted of the entrance fees plus the regular purse for the particular race on the evening's program. Futurity stake purses1954 U.S. Tax Ct. LEXIS 312">*332 were made up of entrance fees plus $ 1,000 contributed by the track.

During the fiscal years ending in 1934-1940, petitioner paid advertising expenses in the following amounts:

During the fiscal years ended September 30, 1939, 1940, and 1941, this petitioner, in common with other tracks in the Miami area, issued passes for free admission to its track. Holders of these passes were required to pay a 10-cent tax only, instead of paying the full admission price of 25 cents which included the 10 cent tax. These passes were distributed throughout the Miami area where they were placed in hotels, drugstores, and such other places where the public could procure them conveniently. This practice was not followed in the fiscal years prior to the year ended September 30, 1939, and for the seasons following the fiscal year ended September 30, 1941, the Florida Racing Commission ordered the practice discontinued.

The following schedule shows petitioner's gross and net income for its fiscal years 1931-1940: 21 T.C. 486">*496

Petitioner's assets, liabilities, and capital at the close of 1931, its first fiscal year of business; at the close of 1934, the first fiscal year it 21 T.C. 486">*497 operated its track itself; at the close of its fiscal year ending in 1936, the last pre-base year; and at the close of its fiscal year ending in 1940, its last base period year, were as follows: 1954 U.S. Tax Ct. LEXIS 312">*335

Petitioner's annual net income, as shown by its profit and loss statements set forth above, for its fiscal years ending on September 30 in the years 1931-1940, inclusive, was as follows:

There were 7 greyhound race tracks in Florida in operation during the years 1933-1940, in addition to the 4 greyhound tracks in the greater Miami area, i. e., petitioner, Miami Beach, Biscayne, and Hollywood. The 7 other tracks were Clay County, Jacksonville, Palm Beach, St. Petersburg, Sanford-Orlando, 1954 U.S. Tax Ct. LEXIS 312">*336 West Florida, and Sarasota.

As has been set forth before, the 4 greyhound tracks in the greater Miami area have the following relative locations: The petitioner is located about 4 miles from downtown Miami, and several blocks from Coral Gables. Hollywood is located about 17 miles from the city of Miami. Biscayne is located about 9 miles from downtown Miami. The Miami Beach track is located on the lower end of the city of Miami Beach across Biscayne Bay, and across from the city of Miami.

In the Thirteenth Annual Report of the Florida Racing Commission it is stated that "Racing in Florida is primarily an attraction for out-of-state visitors who contribute most of the revenue."

The following schedule, for the years 1932-1940, inclusive, shows the racing seasons, attendance, and mutuel play at the 4 greyhound tracks in greater Miami, respectively: 21 T.C. 486">*498

Source: Annual Reports Florida Racing Commission -- Stip. par. 31.

The following schedule, for the years 1932-1940, inclusive, shows total attendance and mutuel play at the 4 greyhound tracks in the greater Miami area, and the total attendance and mutuel play for all greyhound tracks in Florida: 21 T.C. 486">*499

Source: Stip. par. 31, Annual Reports of the Florida Racing Commission.

The following schedule shows the nightly average attendance at the 4 tracks in the Miami area during the 4 racing seasons 1936-37 to 1939-40, inclusive:

Exhibit 4-D, Mutuel Play and Attendance, West Flagler, for the period December 1936 to and including April 10, 1940, is incorporated herein by reference. The nightly attendance at petitioner's track during the 4 racing seasons December 1936 through April 1940, ranged from under 2,000 to under or slightly over 3,000 persons on a large percentage of evenings. During the 3 racing seasons from December 1937 through April 1940, attendance reached around 4,000 21 T.C. 486">*500 on only 31 nights; it reached around 5,000 on only 5 nights; it reached1954 U.S. Tax Ct. LEXIS 312">*339 around 6,000 on only 1 night; it never reached 7,000; and it reached around 8,000 on only 2 nights.

The following schedule for the racing seasons 1933-34 through 1939-40 gives, for purposes of comparison, the total, annual mutuel play (in thousands of dollars) of all greyhound tracks in Florida and of the three tracks in the Miami area, excluding petitioner, and of petitioner's track:

The following schedule shows monthly bank deposit debits to deposit accounts (except interbank accounts), in thousands of dollars, for Miami, Florida, during the years 1935-1940, inclusive:

1954 U.S. Tax Ct. LEXIS 312">*340 The following schedule shows income payments to individuals in the State of Florida and index numbers thereof based on 1936-1939 average, for the years 1932-1940, inclusive: 21 T.C. 486">*501

Source: Exhibit L.

Petitioner did not begin business immediately1954 U.S. Tax Ct. LEXIS 312">*341 prior to the base period.

Petitioner's business reached a normal level of earnings by the end of the base period.

Beginning in 1934 and extending through 1939, petitioner consistently improved the facilities and operations of its greyhound race track by installing an electrically illuminated glass starting box (or boxes), by remodeling its grandstand, by increasing the number of betting windows, by making the general facilities for patrons better, by resurfacing its track, by erecting a wire fence and a new neon sign, by installing an electrically operated camera, an odds board, and a heating system in its grandstand; and by inaugurating stake races, and by working out a revised basis for its payments of purses to be paid winners of nightly races. Considered singly, or as a whole, these efforts and undertakings of petitioner did not constitute a change in the character of petitioner's business either during or immediately prior to the base period; they did not constitute a change in the operation or management of the business. The remodeling of the grandstand facilities in 1937, the resurfacing of the track, and the erection of a fence and sign were routine improvements.

Petitioner's1954 U.S. Tax Ct. LEXIS 312">*342 initial period of developing its racing track business and of establishing itself in the greyhound racing business of the Miami area was completed by the beginning of the base period. The normal level of earnings attributable to the commencement of its business was reached by the beginning of the base period. 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. Petitioner did not commence its business immediately prior to the base period within the meaning of section 722 (b) (4).

Petitioner's actual average base period net income as determined by respondent does not constitute an inadequate standard of its normal 21 T.C. 486">*502 earnings for any of the base period years within the meaning of section 722. Petitioner is not entitled to excess profits tax relief under section 722.

OPINION.

Petitioner contends that its average base period net income is an inadequate standard of normal earnings because, it alleges, it commenced business and changed the character of its business immediately prior to and during the base period1954 U.S. Tax Ct. LEXIS 312">*343 within the meaning of section 722 (b) (4) of the Internal Revenue Code. Petitioner claims that it qualifies for relief from excess profits tax under section 722, and that by use of the so-called "push-back" rule, its constructive average base period net income amounts to at least $ 315,000.

The taxable years involved are the fiscal years ending on September 30 in 1941, 1942, 1943, 1944, and 1945.

The pleadings present questions under sections 722 (a) and 722 (b) (4), only. At the trial of this proceeding, the petitioner abandoned an alternative issue which was raised originally in the petition under sections 722 (b) (5) and 713 (f) (7).

The first question to be decided is whether the petitioner commenced business immediately prior to the base period. The evidence shows that petitioner was organized in 1930, and in that year it leased 20 acres of land upon which it constructed a racing course and the customary spectator facilities. The property was at first rented to lessees who conducted a greyhound racing track. During the 1931-32 and 1932-33 seasons, the property was in the hands of a receiver, but shortly after the close of the 1932-33 season, the receiver was discharged. 1954 U.S. Tax Ct. LEXIS 312">*344 Starting with the 1933-34 racing season, petitioner has operated its track continuously. The petitioner operated its racing track business during its fiscal year which began on October 1, 1933. Since the petitioner's first base period year began on October 1, 1936, it is evident that the petitioner was engaged in the business of operating a greyhound racing track during 3 fiscal years (from October 1, 1933, to September 30, 1936) before the first fiscal year of its base period. Petitioner did not commence business immediately prior to the base period. See Monarch Cap Screw & Manufacturing Co., 5 T.C. 1220, 1231, wherein it was held that a change in business in 1934 was not "immediately prior to the base period"; Acme Breweries, 14 T.C. 1034, 1055, where it was held that a change in the character of business in 1933 was not within the scope of subsection (b) (4); A. B. Frank Co., 19 T.C. 174, 181.

However, petitioner argues that the meaning of the provision in subsection (b) (4), "immediately prior to the base period," permits consideration of the "time lag" which may be encountered 1954 U.S. Tax Ct. LEXIS 312">*345 between the commencement of a business and the time when a normal level of 21 T.C. 486">*503 earnings is reached, and that satisfaction of the condition set forth in the statutory provision is not dependent upon the particular year in which a business begins. In advancing this argument, petitioner cites section 35.722-3 (d) of Regulations 112 ¹ which is quoted in the margin. Petitioner contends, in particular, that if its business was not fully developed and its earnings had not reached their full normal level prior to the base period, then it qualifies under the "commencement of business" rule in subsection (b) (4). Petitioner contends, further, that it had not reached its full normal earning level even by the end of the base period. Petitioner, under this issue, relies heavily upon Del Mar Turf Club, 16 T.C. 749.

1954 U.S. Tax Ct. LEXIS 312">*346 We have considered petitioner's contentions having due regard for the regulation cited, and, also, for the further amplification of the regulation in Bulletin on Section 722 of the Internal Revenue Code issued by the Commissioner on November 1, 1944. ² But upon consideration of the entire record in this proceeding we cannot sustain petitioner's contentions. The evidence leads us to conclude that petitioner had established its business in the greyhound racing industry of greater Miami by the beginning of its base period. Certain facts should be brought forward which bear upon our conclusion. It has been stipulated that daylight greyhound racing began in the Miami area in 1924, and evening racing began in 1926. At some time between 1926 and 1928, the Biscayne Kennel Club began the operations of its track; in 1928 the Miami Beach Kennel Club began operating its track; petitioner's lessees began operation of its track in 1930, and petitioner took over operations in 1933; and Hollywood started 21 T.C. 486">*504 its operations in 1934. Greyhound racing was illegal until 1931. Its legalization is some indication that, as a business, it gained a strong enough foothold before 1931 to survive1954 U.S. Tax Ct. LEXIS 312">*347 the period of its illegal existence. But, aside from such inference, we are impressed by the indisputable fact that during the 4 racing seasons beginning in 1932 up to the 1936 season, the petitioner, Miami Beach, and Biscayne, all attained a normal level of operations as is shown by the table set forth in the Findings of Fact which shows attendance and mutuel play. Petitioner's record of attendance and mutuel play before its base period, if not better than that of Biscayne, compared favorably, as it also did with Miami Beach.

1954 U.S. Tax Ct. LEXIS 312">*348 From all of the evidence before us, we have found that petitioner's initial period of developing its racing track business and of establishing itself in the greyhound racing business of the Miami area was completed by the beginning of the base period, that the normal level of earnings attributable to the commencement of its business was reached by the beginning of the base period, and that it did not commence its business immediately prior to the base period within the meaning of section 722 (b) (4).

Del Mar Turf Club, supra, is distinguishable upon its particular facts. In that case, the taxpayer commenced business in 1937, during the base period, and the evidence established that "it did not reach by the end of the base period the earning level that would have been reached by the end of the base period if the business had commenced in 1935 instead of 1937." We cannot reach that conclusion in this case. 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 1954 U.S. Tax Ct. LEXIS 312">*349 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.

Petitioner contends, further, that it changed the character of its business immediately prior to the base period. It attributes the alleged change of character to the installation of electrically illuminated glass starting boxes, the erection of a "detail" board, the practice of posting immediately odds and the amounts of wagering on the board, the use of "lock-out" kennels before races, and the inauguration of stake races. Petitioner asserts that these things constituted operating changes and that they brought about a large increase in pari-mutuel wagering and in net income. Petitioner argues, in connection with this contention, that when it commenced to operate its track in 1933, the public lacked confidence in the integrity of greyhound 21 T.C. 486">*505 racing operations, and suspected track operators of engaging in questionable practices.

The evidence does not satisfy us that such attitude existed in the minds of the public to such a degree that the items relied upon by 1954 U.S. Tax Ct. LEXIS 312">*350 petitioner constituted making a change in the character of its business. Furthermore, nothing in the record before us, establishes that the precise items relied upon -- starting boxes, odds board, stake races, and so forth -- were not essentially part of the character of the greyhound racing business. The items listed above were improvements as well as part and parcel of the business. Regarded as improvements, they served to make petitioner's operations better, more attractive, and more stimulating. But they were not of such substantial character and importance as to constitute changes in operation which brought about a change in the character of the business within subsection (b) (4). See Regs. 112, sec. 35.722-3 (d); Wisconsin Farmer Co., 14 T.C. 1021, 1028; Farmers Creamery Co. of Fredericksburg, Va., 18 T.C. 241, 250-254; Studio Theatre Inc., 18 T.C. 548, 569. We do not understand petitioner to mean that it had been guilty of questionable practices before it put in glass starting boxes, "lock-out" kennels, odds boards, and so forth, and that it thereby changed the "character" 1954 U.S. Tax Ct. LEXIS 312">*351 of its business. It is held that petitioner did not change the character of its business immediately prior to the base period.

Petitioner argues with more force that during the base period it made changes in the operation and capacity of its business which constitute a change in the character of its business. In support of this contention, petitioner asserts that the remodeling of the grandstand in 1937, the remodeling of the betting shed, the installation of 18 additional betting windows, and the arrangement of the patio represented changes in capacity; and that the installation of the heating plant in the grandstand in 1939, the installation of the electrically operated photofinish camera in 1938 and of the electrically operated odds board, and the adoption of a new system of making payments of nightly purses which brought about savings in petitioner's expenses were changes in the operation of the business. Petitioner contends that all of these items brought about substantial increases in its level of earnings in the base period.

The record in this case is fairly lengthy and includes detailed schedules. We have carefully examined all of the record. We emerge from all of the1954 U.S. Tax Ct. LEXIS 312">*352 analysis of all of the evidence unable to find that the changes, which give petitioner the grounds for its claim that it qualifies for excess profits tax relief under section 722 (b) (4), directly resulted in an increase of normal earnings which is not adequately reflected by its average base period net income. We pointed 21 T.C. 486">*506 out in Wisconsin Farmer Co., supra, p. 1029, that for the purpose of section 722 (b) (4), a change in the operation of a business must be one

that has such a definite and far-reaching effect upon the taxpayer's earning capacity that its actual base period earnings no longer constitute an adequate standard of normal earnings and that results in the tax imposed on that basis being excessive and discriminatory. But this does not mean that a routine change or one which may reasonably be expected to come about in the course of normal business operations meets the test of the statute.

On the whole, we must conclude that the items relied upon were improvements and phases in the operation of the racing track which were reasonably expected to be made in the course of normal and good business operations. The "changes" in question1954 U.S. Tax Ct. LEXIS 312">*353 were not great enough to create a change in the character of business within the meaning of subsection (b) (4), whether considered separately or collectively. We reach that conclusion after considering the circumstances preceding and following the "changes." The petitioner relies heavily, in its contentions, upon all of the improvements which were made in 1937, consisting of remodeling of the grandstand and betting-shed area, the arrangement of a patio, the erection of a wire fence along the course in front of the grandstand, and the addition of 12 betting windows; and upon the improvements made in 1938 -- the installation of the heating system in the grandstand and of the photofinish camera; and upon the erection in 1939 of the electrically operated odds board. Some of these "changes" are said to constitute major changes in capacity. The validity of the petitioner's theory can be tested by examination of the records of nightly attendance at petitioner's track before and after all of these improvements were made. Such examination does not support petitioner's theory about a "change" in the capacity of its business. For example: Petitioner's grandstand, as originally constructed, 1954 U.S. Tax Ct. LEXIS 312">*354 provided seats for about 3,000 people. There is nothing in the record to negate the presumption that there were areas on the ground in front of or near the grandstand, along the track, where more than 1,000 spectators could view the races. During the 1935-36 season, before the grandstand and related remodeling work was done, the total attendance at petitioner's track was 179,878. The record does not provide the breakdown of this total to show nightly attendance. But we do have tables showing nightly attendance during the seasons of the base period years, and these show that after the remodeling work was done nightly attendance averaged 2,743 in the 1936-37 season; 2,875 in the 1937-38 season; 3,095 in the 1938-39 season; and 3,577 in the 1939-40 season. Also, that the nightly attendance throughout the base period years ranged from under 2,000 to under or slightly over 3,000 on a large percentage of evenings; that during the three racing seasons in the base period -- December of 1937 to April of 1940, following 21 T.C. 486">*507 the remodeling, comprising 260 nights -- there were only 2 nights when attendance reached the very highest level of a little over 8,000 persons; that during the1954 U.S. Tax Ct. LEXIS 312">*355 season of 1936-37 before the remodeling, attendance was around 8,000 on only 1 night; that from December 27, 1937, to April 10, 1940, after the remodeling, attendance reached 4,000 and slightly more on only 31 nights; it reached 5,000 and slightly over on only 5 nights; it reached around 6,000 on only 1 night; and it never reached 7,000. That is to say, after the remodeling, attendance records tended to range around the 2,000 and 3,000 mark, sometimes falling under 2,000. Petitioner's argument that the increase in the number of wagering windows and spectator areas represented a major increase in capacity amounting to a change in the character of its business breaks down greatly upon the above checking against actual attendance records. Also, we conclude that the "changes" did not represent any substantial change in operations.

Another test reveals the weakness of petitioner's contention. Respondent points out correctly, that the evidence shows that a comparison of the 1936-37 season with the 1937-38 season shows that both petitioner and the Miami Beach track "captured" a larger portion of the Miami area greyhound racing patronage in the latter season; the increase for each track1954 U.S. Tax Ct. LEXIS 312">*356 was substantially the same, an increase of 1.71 per cent for the petitioner, and an increase of 1.59 per cent for Miami Beach. Thus it does not appear that the increase in petitioner's business in the 1937-38 season was due primarily to the 1937 remodeling work. Furthermore, during the 1938-39 season, on the basis of figures for the season's mutuel play, petitioner lost more business than the other three tracks in the area. Illustrative of this are the following figures for the 1938-39 season:

The total mutuel play receipts of Hollywood, in the 1938-39 season increased by $ 155,189 over the preceding season. Of course, the year 1938 was one of a general business recession. Nevertheless, petitioner's theory is that its remodeling work was of such importance as to represent a change in the character of its business which profoundly bettered its earnings, and, therefore, it is not amiss to subject the theory to the critical test which the season of 1938-39 affords. Also, if its theory is sound it would seem to follow that petitioner would have captured a larger portion of the area1954 U.S. Tax Ct. LEXIS 312">*357 dog racing patronage after making the "changes" than it actually did.

The "changes" cited by petitioner were essentially those which might normally be made to maintain petitioner's competitive position 21 T.C. 486">*508 in the Miami area dog racing business. We have held that "changes" which merely maintain a taxpayer's competitive position in an industry are not changes in the character of a business within the meaning of section 722 (b) (4). Avey Drilling Machine Co., 16 T.C. 1281, 1298. In that case we said, "A change in character, within the intent of the statute, must be a substantial departure from the preexisting nature of the business [p. 1298]." Our conclusion is, upon all of the evidence, that petitioner did not make "changes" which come within the above rule.

Petitioner's claims fail, also, because it has not established that the "changes" in question resulted in the required increase in its earnings or earnings capacity. Petitioner has not shown that as a direct result of the "changes" the level of normal earnings was increased materially over what such level would have been had the change not been made. Such must be shown in order to obtain1954 U.S. Tax Ct. LEXIS 312">*358 the benefit of section 722 (b) (4). See Roy Campbell, Wise & Wright, Inc., 15 T.C. 894, 900. Respondent has introduced in evidence, material showing the upward trend of economic prosperity in Florida, some of which is included in the Findings of Fact. With the upward trend of business activity in Florida during the years 1935-1940, a correlation of the mutuel play at all of the tracks in the Miami area as well as at each of the four tracks, including petitioner's, can be made. We agree with the respondent that with the exception of the season 1938-1939, the upward trend of mutuel play follows the upward trend of general business activity with very close correlation. We must give considerable weight to this factor. It indicates clearly that the upward trend of petitioner's business during the base period can be attributed largely to improved economic conditions. The same apparently can be said for the upward trend of the business of the other three tracks in the Miami area. It follows that the "changes" upon which petitioner relies cannot be said to have been the direct cause of the upward trend of its earnings.

Consideration has been given to1954 U.S. Tax Ct. LEXIS 312">*359 East Texas Motor Freight Lines, 7 T.C. 579; 7- Up Fort Worth Co., 8 T.C. 52; and Lamar Creamery Co., 8 T.C. 928. On their facts, those cases are distinguishable.

It is held that petitioner is not entitled to relief under section 722 (b) (4).

Respondent's Motion to file Amended Answer.

Respondent belatedly filed a motion asking leave to file an amendment to his answer to make claim for deficiencies in excess profits tax for the taxable years ending in 1941, 1942, and 1945 in the amounts of $ 48.84, $ 685.32, and $ 11,355.91, respectively; and asserting overpayments in excess profits tax for the fiscal years of 1943 and 1944 in 21 T.C. 486">*509 the amounts of $ 1,528.56 and $ 924.36, respectively. The motion was filed 7 months after the trial of this proceeding, and 4 months after petitioner's principal brief was filed. If the respondent's motion is granted, the amended answer will raise a new and controverted "standard issue" relating to the correct excess profits credits under section 713 of the Code for the taxable years 1941 through 1945. The respondent's position now is that he made errors1954 U.S. Tax Ct. LEXIS 312">*360 in his original determinations of the excess profits credit. As is shown hereinafter, the proposed amended answer is not based upon a statutory notice issued under section 272.

Petitioner objects to the motion. It contends that the motion and the proposed amendment to the answer are untimely; that the proposed amendment to the answer is not, as the respondent contends, merely an amendment to the answer to conform to the proof, but is an effort belatedly to raise a new "standard issue" under section 713 which will require further trial; and that the Court lacks jurisdiction to consider a "standard issue." Petitioner relies upon Commissioner v. Erie Forge Co., 167 F.2d 71, with respect to untimeliness, and Mutual Lumber Co., 16 T.C. 370, with respect to jurisdiction.

In this proceeding the elements are present upon which we must hold that we lack jurisdiction to consider a "standard issue," if we apply here the views expressed in Mutual Lumber Co., supra. The immediate reason for respondent's filing his motion to amend his answer was the decision on November 16, 1951, of H. Fendrich, Inc. v. Commissioner, 192 F.2d 916,1954 U.S. Tax Ct. LEXIS 312">*361 and he urges us to follow the Fendrich case on the question of jurisdiction and to abandon the views expressed in Mutual Lumber Co., supra. But we have recently stated that we are not convinced that we erred in the Mutual Lumber Co. case and we followed that case in Martin Weiner Corp., 21 T.C. 470. Accordingly, we conclude that we do not have jurisdiction in this proceeding to consider a "standard issue," and we, therefore, shall deny, by separate order, respondent's motion to file amendment to his answer.

The notice which gave rise to this proceeding was issued pursuant to the provisions of section 732 of the Code and is a notice of disallowance of petitioner's applications for relief under section 722. It is not in part a notice of deficiency issued under section 272; that is to say, it is not a combined notice of deficiency under section 272 and disallowance of relief under section 722. Cf. Martin Weiner Corp., supra.In the Weiner case the notice was issued in accordance with the provisions of both sections 272 and 732. Prior to the issuance of the notice which gave rise1954 U.S. Tax Ct. LEXIS 312">*362 to this proceeding, the petitioner executed a waiver of restrictions provided in section 272 (a), consenting to the assessment and collection of deficiencies in excess profits tax for 21 T.C. 486">*510 the fiscal years of 1941, 1943, 1944, and 1945, and the Commissioner issued a certificate of overassessment of excess profits tax for the fiscal year of 1942. The only issue pleaded and tried in this proceeding is the claim for excess profits tax relief under section 722. That issue is the only one over which we have jurisdiction. The respondent by his motion to amend his answer does substantially what the petitioner did in the Mutual Lumber Co. case, supra, see page 371, by filing a motion at the hearing of that case. In Mutual Lumber Co., supra, p. 373, we said:

no issue arising under the general provisions of Subchapter E could properly be in issue in a case before the Tax Court based upon the denial of a claim for relief under Section 722.

Our jurisdiction in this proceeding is based upon a notice denying relief under section 722, and is given by the provisions of section 732. As we noted in Mutual Lumber Co., supra,1954 U.S. Tax Ct. LEXIS 312">*363 sections 272 (a) (1) and 732 give separate jurisdictions. Cf. Ideal Packing Co., 9 T.C. 346. We have no jurisdiction to determine the excess profits tax liability under the general provisions of subchapter E, where the notice issued by the Commissioner was one of rejection of petitions for section 722 relief and was issued under section 732. Mutual Lumber Co., supra, pp. 372, 373.

We agree with the petitioner that the proposed amendment to the answer is not one to conform to the proof. It is true that the proposed deficiencies and overassessments set forth therein are based upon a stipulation filed in this proceeding but the petitioner entered into the stipulation for reasons which are exclusively related to the issue which was presented by the petition, the claim for relief under section 722. If respondent's motion to amend his answer were granted, a new "standard issue," a disputed issue, arising under section 713, would be raised requiring further trial. That result would represent the untimely presentation of a new issue if we have jurisdiction in this case to consider a "standard issue," which we believe we do1954 U.S. Tax Ct. LEXIS 312">*364 not have.

The respondent's motion is untimely and must be denied for that further reason. When this proceeding was tried, 7 months before the filing of the respondent's motion to amend his answer, the parties were in agreement that no "standard issues" had been raised or could be raised. Respondent did not at that time move to amend his answer even though before, and at the beginning of, the trial he had knowledge of all facts which are recited in the proposed amendment to his answer. The trial did not produce any new facts or the evidence which apparently is the basis for the proposed amendment to the answer. Briefs were due seriatim, petitioner's principal brief being due first. Petitioner's brief was filed about 4 months before the motion in 21 T.C. 486">*511 question was filed. Respondent has the burden of proof under the issue which would be raised if an amendment to the answer were filed. The proposed amendment to the answer does not set forth the matters which the respondent would have to establish under his burden of proof. The record made upon the trial of this proceeding does not, as far as can be ascertained, contain evidence which obviates the necessity for further1954 U.S. Tax Ct. LEXIS 312">*365 trial. The proposed amended answer is not simply an amendment of respondent's pleading to conform to the proof. The motion clearly is untimely. Commissioner v. Erie Forge Co., supra;Simms v. Andrew, 118 F.2d 803.

Reviewed as to section 722 by the Special Division.

Decision will be entered that petitioner is not entitled to relief under section 722.