base period," we have omitted all the computations called for under the first five paragraphs of section 713 (f)): The actual average base period net income of $75,324.52 for each of the fiscal years ended June 30, 1942 and 1943, was determined in the same manner as for the previous fiscal year, except that the adjustment for "Income taxes" was eliminated, due to the above mentioned repeal of section 711 (b) (1) (A). Briefly, the amount is arrived at as follows: Net income for fiscal year ended June 30, 1940. $75, 776. 02 5, 837. 32 Actual average base period net income for fiscal year 1942 and fiscal year 1943___. 75, 324, 52 Petitioner's operating gross income, operating expenses, and operating net income for the fiscal years ending June 30, 1937, to June 30, 1943, inclusive, were as follows: Petitioner's operating gross incomes for the fiscal years ended June 30, 1938, 1939, and 1940, are broken down into quarter periods as follows: During the base period petitioner changed the character of its business and as a result thereof its average base period net income does not reflect the normal operation for the entire base period of the business. Petitioner's business did not reach, by the end of the base period, the earning level which it would have reached if the above mentioned change had occurred two years earlier. Petitioner's average base period net income is an inadequate standard of normal earnings. Petitioner's excess profits tax for the fiscal years ended June 30, 1941, 1942, and 1943, computed without the benefit of section 722 results in an excessive and discriminatory tax. Petitioner's constructive average base period net income for the fiscal years ended June 30, 1942 and 1943, is the amount of $86,292.17. For the fiscal year ended June 30, 1941, it is the same, except for adjustments for income taxes as hereinafter explained in the opinion. OPINION. BLACK, Judge: The question presented is whether petitioner is entitled to any relief from excess profits tax for the fiscal years ended June 30, 1941, 1942, and 1943, under the provisions of section 722 of the Internal Revenue Code, as amended, and, if so, the amount thereof. The material provisions of section 722 are in the margin.1 The applicable regulations for the fiscal years ended June 30, 1941 and 1942, are found in Regulations 109, as amended by T. D. 5264, 1943 C. B. 761, and T. D. 5415, 1944 C. B. 404. The applicable regulations for the fiscal year ended June 30, 1943, are found in Regulations 112, as amended by T. D. 5415. 1 SEC. 722. GENERAL RELIEF-CONSTRUCTIVE AVERAGE BASE PERIOD NET INCOME. (a) GENERAL RULE.-In any case in which the taxpayer establishes that the tax computed under this subchapter (without the benefit of this section) results in an excessive and discriminatory tax and establishes what would be a fair and just amount representing normal earnings to be used as a constructive average base period net income for the purposes of an excess profits tax based upon a comparison of normal earnings and earnings during an excess profits tax period, the tax shall be determined by using such constructive average base period net income in lieu of the average base period net income otherwise Under the statute petitioner must establish (1) that the tax computed without the benefit of section 722 results in an excessive and discriminatory tax and (2) a fair and just amount representing normal earnings to be used as a constructive average base period net income. If petitioner establishes these two requirements, then the tax shall be determined by using such constructive average base period net income in lieu of the actual average base period net income otherwise determined under the statute. In determining (2) no regard shall be had to events or conditions affecting petitioner, the industry of which it is a member, or taxpayers generally occurring or existing after December 31, 1939, with certain exceptions not material here. We shall first consider whether petitioner has established (1) above. It is conceded that petitioner is entitled to use the excess profits credit based on income pursuant to section 713. Therefore, the tax shall be considered to be excessive and discriminatory if petitioner's actual average base period net incomes of $61,292.49 for the fiscal year 1941 and $75,324.52 for each of the fiscal years 1942 and 1943 are an inadequate standard of normal earnings because of the existence of such determined under this subchapter. In determining such constructive average base period net income, no regard shall be had to events or conditions affecting the taxpayer, the industry of which it is a member, or taxpayers generally occurring or existing after December 31, 1939, except (b) TAXPAYERS USING AVERAGE EARNINGS METHOD.-The tax computed under this subchapter (without the benefit of this section) shall be considered to be excessive and discriminatory in the case of a taxpayer entitled to use the excess profits credit based on income pursuant to section 713, if its average base period net income is an inadequate standard of normal earnings because (4) the taxpayer, either during or immediately prior to the base period, commenced business or changed the character of the business and the average base period net income does not reflect the normal operation for the entire base period of the business. If the business of the taxpayer did not reach, by the end of the base period, the earning level which it would have reached if the taxpayer had commenced business or made the change in the character of the business two years before it did so, it shall be deemed to have commenced the business or made the change at such earlier time. For the purposes of this subparagraph, the term "change in the character of the business" includes a change in the operation or management of the business, a difference in the products or services furnished, a difference in the capacity for production or operation, a difference in the ratio of nonborrowed capital to total capital, and the acquisition before January 1, 1940, of all or part of the assets of a competitor, with the result that the competition of such competitor was eliminated or diminished. * or (5) of any other factor affecting the taxpayer's business which may reasonably be considered as resulting in an inadequate standard of normal earnings during the base period and the application of this section to the taxpayer would not be inconsistent with the principles underlying the provisions of this subsection, and with the conditions and limitations enumerated therein. (d) APPLICATION FOR RELIEF UNDER THIS SECTION.-The taxpayer shall compute its tax, file its return, and pay the tax shown on its return under this subchapter without the application of this section, except as provided in section 710 (a) (5). The benefits of this section shall not be allowed unless the taxpayer within the period of time prescribed by section 322 and subject to the limitation as to amount of credit or refund prescribed in such section makes application therefor in accordance with regulations prescribed by the Commissioner with the approval of the Secretary. factors as are mentioned in subparagraphs (4) and (5) of subsection . (b) of section 722. No facts were presented to the respondent in support of petitioner's claim for relief under subparagraph (5) of section 722 (b). Therefore, petitioner's claim for relief under subparagraph (5) of section 722 (b) is not properly before us. Blum Folding Paper Box Co., 4 T. C. 795; Monarch Cap Screw & Manufacturing Co., 5 T. C. 1220. This leaves for our consideration whether petitioner has established the existence of such factors as are mentioned in subparagraph (4) of section 722 (b). Petitioner's claim before the respondent was specifically grounded upon section 722 (b) (4), and its contentions here are likewise specifically grounded upon the same section. We think the evidence before us clearly proves that "during the base period" petitioner "changed the character" of its business. Prior to the acquisition of the three new routes from Dallas to Fort Worth, from Texarkana to Memphis, and from Memphis to St. Louis, petitioner was predominantly an intrastate carrier. Thereafter its business was that of an interstate carrier, as well as an intrastate carrier. These acquisitions not only added approximately 600 miles of additional territory to be served by petitioner, but opened up an entirely new type of operation, namely, the straight load or key point operation as distinguished from the old interchange or joint haul operation. Under this new type of operation petitioner was able to haul more freight at a considerably lesser cost per ton of freight hauled. This resulted in larger profits for petitioner. We think that these changes can reasonably be regarded as "a change in the operation * of the business, a difference in the * * services furnished, [and] a difference in the capacity for * as those terms are used in section 722 (b) (4), as follows: ** * operation" For the purposes of this subparagraph, the term "change in the character of the business" includes a change in the operation or management of the business, a difference in the products or services furnished, a difference in the capacity for production or operation * * The term "change in the character of the business" may include other situations than those specifically mentioned in the statute, but since we are satisfied that petitioner has shown that at least three of the situations there mentioned are present here, we think it follows that petitioner has shown that during the base period it changed the character of its business, and we have so found as one of our ultimate facts. It is not enough for petitioner to establish merely that during the base period it changed the character of its business. It must also establish that "the average base period net income does not reflect the normal operation for the entire base period of the business." As set out in our findings, the actual "average base period net income" for the fiscal year ended June 30, 1941, is $61,292.49, and for each of the fiscal years ended June 30, 1942 and 1943, it is $75,324.52. As a preliminary step in determining the average base period net income, it is necessary first to determine the "excess profits net income" for each of the base period years under section 711 (b). Due to the repeal of section 711 (b) (1) (A), effective with respect to taxable years beginning after December 31, 1940, the "excess profits net income" for each of the base period years is greater for the last two fiscal years here involved than it is for the fiscal year ended June 30, 1941. As set out in our findings, the excess profits net income determined under section 711 (b) for each of the base period years to be considered for each of the excess profits tax taxable years here involved is as follows: If petitioner's actual average base period net income had been determined under section 713 (e), it would have amounted to $30,978.78 for the fiscal year ended June 30, 1941, and $37,860.30 for each of the next two fiscal years. But, since petitioner's aggregate excess profits net income for the last half of its base period is greater than such aggregate for the first half, petitioner is entitled under section 713 (d) to have its average base period net income determined under section 713 (f). The result of the computation under section 713 (f) is that the actual average base period net income is eleven-twelfths of petitioner's excess profits net income for the fiscal year ended June 30, 1940, plus one-twelfth of petitioner's excess profits net income for the fiscal year ended June 30, 1939, which amounts to $61,292.49 for the fiscal year ended June 30, 1941, and $75,324.52 for each of the two following fiscal years. The respondent contends, therefore, that, since petitioner's actual average base period net income is not the general average of petitioner's excess profits net income for the four base period years, but is substantially (over 97.8 per cent) the excess profits net income for the last year in the base period, which was petitioner's best year in the base period and was subsequent to the acquisition of the three new routes, such actual average base period net income must be considered as reflecting the normal operations of the changed busi |