*273 Decisions will be entered for the respondent.
Held, because of the drought and, to a lesser extent, insect infestation and their effect on farm income and business generally in the State of Nebraska, petitioner's earnings were depressed during the base period years so that its average base period net income was an inadequate standard of normal earnings.
*605 These proceedings have been consolidated.
Docket No. 27725 involves a deficiency notice in which the Commissioner has determined deficiencies in petitioner's excess profits tax of $ 588.26 for the year 1942 and $ 5,497.89 for the year 1943. Also in the same deficiency notice he disallowed petitioner any relief under
Docket No. 27726 involves the taxable years 1944 and 1945. The Commissioner did not determine any deficiencies in petitioner's excess profits tax for those years but in his deficiency notice disallowed petitioner's claims for relief under
Petitioner does not contest the deficiencies in excess profits tax which the Commissioner determined for the years 1942 and 1943. It does claim refunds for each of the years 1942 to 1945, inclusive, under
The excess profits taxes paid by petitioner, the refunds claimed, and the deficiencies determined by respondent, are as follows:
| Year | Paid | Refunds | Deficiencies |
| claimed | proposed | ||
| 1942 | $ 1,945.07 | $ 1,945.07 | $ 588.26 |
| 1943 | 8,758.27 | 8,758.27 | 5,497.89 |
| 1944 | 8,413.51 | 7,213.08 | |
| 1945 | 8,130.30 | 6,848.07 |
*606 FINDINGS OF FACT.
Petitioner is a Nebraska corporation with its principal place of business located at Lincoln, Nebraska. Its returns for the taxable years involved, 1942 to 1945, inclusive, were filed with the collector of internal revenue at Omaha. The returns were made on an accrual basis for the calendar years.
Petitioner operates a wholesale paper and supplies business. During the base period years, 1936 to 1939, inclusive, it sold a general line of paper products, such as wrapping paper, paper bags, paper towels and cups, cartons, boxes, crepe papers, toilet tissue, stationery; party favors; light bulbs; kitchen utensils; matches; electric fans; wastebaskets; office supplies, such as*276 pens, pencils, rulers, erasers, ink, accounting papers, and the like; toys, such as tricycles, scooters, wagons, sleds, etc.; fireworks; brooms; sweeping compound; playing cards, etc.
For many years petitioner's president, C. F. Schwarz, was in active control of petitioner's business. He suffered a heart attack in 1933 and thereafter devoted only a small portion of his time to petitioner's affairs. He died in 1942. From 1933, and during the base period years, petitioner operated under the direction of Carl Meyer, who had been in the employment of petitioner for a number of years. He, too, died in 1942.
During his term of management Meyer made several changes in the business, including the gradual discontinuance of the sale of fireworks. This had accounted for a considerable portion of petitioner's business but there had been an increasing number of city ordinances banning fireworks and the business was considered too hazardous. This change was begun during the base period. By 1940 or 1941, the fireworks business had been completely closed out. To take the place of the fireworks, petitioner began the sale of toys and office supplies.
Petitioner's customers included such concerns*277 as hardware stores, variety stores, department stores, clothing stores, grocery stores, general merchandise stores, drug stores, laundries, cleaners, hatcheries, restaurants, and filling stations.
Petitioner's principal trade area covered most of the State of Nebraska, excluding some of the counties on the eastern and western borders, and a portion of Kansas.
Nebraska is essentially an agricultural State. While it has some manufacturing and other industries, its economy is based largely on the production and processing of farm products, the most important of which are cattle, hogs, corn, and wheat.
Beginning about 1934 and extending through petitioner's base period, Nebraska and other adjoining areas suffered a severe drought. *607 Average rainfall in Nebraska, over the period 1936 to 1939, inclusive, was less than 70 per cent of normal. Lack of moisture and severe heat at the critical stages of development caused an almost total crop failure of major crops in some of those years.
In addition to the drought there was also a serious infestation of grasshoppers in Nebraska during the base period years which added to the short production of most farm crops over large areas of*278 the State. This damage in the State of Nebraska alone was estimated by the United States Department of Agriculture at between 11 and 12 million dollars in each of the years 1936, 1937, and 1938.
The adverse effects of the drought in Nebraska and neighboring States were intensified by the fact that the drought followed a prolonged economic depression, due to low prices for farm commodities and other factors, which began in the early 1930's. These results are reflected in the following statistics relating to "cash receipts from farm marketings" in the State of Nebraska which were compiled by the United States Department of Agriculture:
| Total | |||||
| Year | Cattle | Hogs | Corn | Wheat | livestock |
| and crops | |||||
| 1,000 dollars | |||||
| 1924 | 114,881 | 109,981 | 56,897 | 50,370 | 421,087 |
| 1925 | 121,455 | 141,226 | 42,958 | 47,411 | 444,867 |
| 1926 | 130,683 | 135,306 | 28,783 | 40,987 | 434,244 |
| 1927 | 107,046 | 113,212 | 23,881 | 74,815 | 418,364 |
| 1928 | 138,851 | 121,314 | 61,177 | 55,494 | 484,618 |
| 1929 | 138,316 | 136,824 | 40,645 | 54,941 | 489,102 |
| 1930 | 119,019 | 118,172 | 39,094 | 32,412 | 408,392 |
| 1931 | 90,729 | 79,287 | 18,463 | 20,715 | 279,142 |
| 1932 | 57,506 | 43,426 | 7,736 | 8,368 | 166,669 |
| 1933 | 57,628 | 43,253 | 21,826 | 16,035 | 193,353 |
| 1934 | 78,802 | 53,644 | 16,767 | 13,816 | 227,176 |
| 1935 | 72,216 | 40,185 | 1,690 | 25,204 | 209,398 |
| 1936 | 92,841 | 68,838 | 5,935 | 34,011 | 281,020 |
| 1937 | 91,876 | 39,190 | 2,893 | 39,690 | 250,783 |
| 1938 | 72,603 | 32,436 | 9,507 | 22,312 | 200,521 |
| 1939 | 78,850 | 36,701 | 17,882 | 24,441 | 221,494 |
*279 The totals shown in the last column above include other lesser livestock and livestock products such as dairy products, sheep, poultry, etc., and other lesser crops such as potatoes, beets, oats, hay, etc., not shown separately in the table, but do not show Government payments to farmers, shown below.
The loss of farm production and farm income affected all types of business throughout the drought-stricken area, particularly those which depended largely on farm trade.
As a result of the short production of feed crops during the drought period there was a reduction in the quantity and quality of marketable cattle and hogs. Large quantities of feeds were brought in from other States at additional costs to the farmers, and much of the livestock *608 was sold in poor condition at distress prices. Because of these extra costs of production there was a proportionately greater reduction in farm net income and purchasing power than there was in gross income.
The farmers of Nebraska, in most instances, exhausted their cash reserves as well as their credit and their spending was reduced to bare necessities. Their houses and farm equipment of all types suffered from lack of repairs *280 and proper maintenance. Government and State agencies instituted various relief programs. The Farm Security Administration made many loans, and in some instances outright grants, to distressed farm families. The Farm Service Administration assisted in working out minimum cost subsistence recipes and budgets. The Agricultural Extension Service of the University of Nebraska organized instruction courses for farm families in repairing, and in some instances making, their own household necessities and personal clothing. Sewing centers were established where overalls, dresses, and other articles, even toys, were made and distributed free to needy families. Altogether, about 4 million garments and as many other articles were made and distributed free to Nebraska families. At the beginning of 1938, over 200,000 persons, approximately 15 per cent of the total population of Nebraska, were on some form of relief.
The distress conditions described above prevailed not only among the farm families but also in the urban areas, and particularly in the small towns which largely depended upon farm income. The following table shows the total income payments and the per capita income payments*281 to individuals in Nebraska and in the United States as a whole over the period 1929 to 1939, inclusive, as published by the United States Department of Commerce:
| (Millions of dollars) | (Dollars) Per capita | |||
| Total income payments | income payments | |||
| Year | ||||
| U. S. | Nebraska | U. S. | Nebraska | |
| 1929 | 82,617 | 764 | 680 | 557 |
| 1930 | 73,325 | 749 | 596 | 544 |
| 1931 | 61,971 | 578 | 500 | 421 |
| 1932 | 47,432 | 344 | 380 | 251 |
| 1933 | 46,273 | 374 | 368 | 275 |
| 1934 | 53,038 | 378 | 420 | 279 |
| 1935 | 58,558 | 476 | 460 | 353 |
| 1936 | 68,000 | 534 | 531 | 399 |
| 1937 | 72,211 | 549 | 561 | 412 |
| 1938 | 66,045 | 509 | 509 | 384 |
| 1939 | 70,601 | 523 | 539 | 397 |
Cash farm income from marketings of crops and livestock and Government payments, including all cash agricultural payments, such as rentals, price supports, conservation, parities, etc., for the State of Nebraska, over the period 1924 to 1939, inclusive, were as follows: *609
| Thousands of dollars | |||
| Year | Cash farm | ||
| Total crops | Government | income and | |
| and | payments | Government | |
| livestock | payments | ||
| 1924 | 421,087 | 421,087 | |
| 1925 | 444,867 | 444,867 | |
| 1926 | 434,244 | 434,244 | |
| 1927 | 418,364 | 418,364 | |
| 1928 | 484,618 | 484,618 | |
| 1929 | 489,102 | 489,102 | |
| 1930 | 408,392 | 408,392 | |
| 1931 | 279,142 | 279,142 | |
| 1932 | 166,669 | 166,669 | |
| 1933 | 193,353 | 1,011 | 194,364 |
| 1934 | 227,176 | 23,496 | 250,672 |
| 1935 | 209,398 | 33,125 | 242,523 |
| 1936 | 281,020 | 17,293 | 298,313 |
| 1937 | 250,783 | 17,468 | 268,251 |
| 1938 | 200,521 | 15,371 | 215,892 |
| 1939 | 221,494 | 28,078 | 249,572 |
*282 In relation to the 1924-1929 average, the percentages of land values over the period 1930 to 1939, and of forced sales and related defaults on purchases of farms in the State of Nebraska and the United States as a whole were as follows:
| Land values | Forced sales and | |||
| related defaults | ||||
| Year | ||||
| U. S. | Nebraska | U. S. | Nebraska | |
| 1930 | 94 | 93 | 20.8 | 17.0 |
| 1931 | 87 | 88 | 26.1 | 24.4 |
| 1932 | 73 | 74 | 41.7 | 39.0 |
| 1933 | 60 | 57 | 54.1 | 63.9 |
| 1934 | 62 | 60 | 39.1 | 51.0 |
| 1935 | 65 | 60 | 28.3 | 45.0 |
| 1936 | 67 | 60 | 26.2 | 44.4 |
| 1937 | 70 | 60 | 22.4 | 42.4 |
| 1938 | 70 | 57 | 17.4 | 38.9 |
| 1939 | 69 | 54 | 17.0 | 39.9 |
The population of Nebraska dropped from approximately 1,378,000 persons in 1930 to approximately 1,316,000 in 1940. About 35 per cent of the 1930 and the 1940 population was urban.
For the years 1922 to 1939, the petitioner's gross sales and net profit or loss were as follows:
| Year | Sales | Net income |
| (or loss) | ||
| 1922 | $ 424,754.80 | $ 5,042.33 |
| 1923 | 465,818.60 | 5,818.97 |
| 1924 | 475,171.11 | 9,354.43 |
| 1925 | 522,618.91 | 8,568.36 |
| 1926 | 556,253.00 | 8,780.54 |
| 1927 | 567,274.57 | 4,776.76 |
| 1928 | 502,117.67 | 4,056.32 |
| 1929 | 479,239.68 | 10,350.28 |
| 1930 | 485,225.45 | 5,863.75 |
| 1931 | $ 405,545.41 | ($ 9,455.73) |
| 1932 | 318,755.76 | (20,298.09) |
| 1933 | 286,219.64 | 1,713.06 |
| 1934 | 333,421.40 | 4,474.92 |
| 1935 | 334,332.76 | 2,511.70 |
| 1936 | 344,032.86 | 2,894.42 |
| 1937 | 355,478.53 | 2,616.37 |
| 1938 | 318,904.94 | (680.82) |
| 1939 | 358,689.94 | 3,639.20 |
*283 *610 In its returns for the years 1942 to 1945, inclusive, petitioner computed its excess profits credit under the invested capital method. Its excess profits credit as so computed and excess profits net income are as follows:
| Year | Excess profits | Excess profits |
| net income | credit | |
| 1942 | $ 17,162.68 | $ 7,760.99 |
| 1943 | 29,492.73 | 7,198.48 |
| 1944 | 27,592.05 | 7,751.69 |
| 1945 | 28,118.15 | 8,609.02 |
Petitioner is entitled to the use of the income method of computing its excess profits credit. Its excess profits net income, or loss, for each of the base period years was as follows:
| Excess profits | ||
| Year | net income | |
| 1936 | $ 2,894.42 | |
| 1937 | 2,616.37 | |
| 1938 | (680.82) | |
| 1939 | 3,639.20 | |
| Total | 8,469.17 | |
| Average | 2,117.28 |
Because of the drought and, to a lesser extent, insect infestation and their effect on farm income and business generally in the State of Nebraska, petitioner's earnings were depressed during the base period years so that its average base period net income was an inadequate standard of normal earnings.
The excess profits tax paid by petitioner for the years in issue was not excessive or discriminatory. Petitioner was not entitled to a constructive*284 average base period net income large enough to produce a credit greater than any of the invested capital credits used by petitioner and allowed by respondent. Petitioner was not entitled to a constructive average base period net income large enough to result in a lower excess profits tax for any of the years in issue than the excess profits tax actually paid by petitioner for those years.
OPINION.
In the instant case petitioner claims refunds of excess profits taxes paid for 4 years. These years are 1942, 1943, 1944, and 1945. The amounts of refunds which petitioner claims for each of the years in question have been stated in our preliminary statement.
In its returns for the years 1942 to 1945, inclusive, petitioner computed its excess profits credits under the invested capital method. Its excess profits credits as so computed for the respective taxable years were as follows: *611
| Year | Amount |
| 1942 | $ 7,760.99 |
| 1943 | 7,198.48 |
| 1944 | 7,751.69 |
| 1945 | 8,609.02 |
These excess profits credits were considerably in excess of those which petitioner would have received had it based its excess profits credit on its average base period net income.
The petitioner contends, however, *285 that its business was depressed during the base period years by the prolonged drought which prevailed over its trade area; that because of such depression its base period earnings are not an adequate measure of its normal earnings; that the drought was of sufficient severity and duration to constitute a "qualifying factor" under the provisions of
As noted both by the regulations and decisions of this Court, the reconstruction of normal earnings must be related to the causative force which would make a tax computed without the benefit of
(b) Rules for determination. -- The determination of the constructive average base period net income must depend in each instance upon the facts and circumstances presented by the taxpayer and upon the provisions of
In its brief petitioner argues for several*286 methods of reconstruction based upon evidence in the record and asserts that after a study and consideration of these reconstructions we should find that its constructive average base period net income was not less than $ 15,000.
Respondent argues first of all that petitioner is not entitled to any relief under
If, however, the Court, contrary to respondent's position, should hold that such burden of proof has been met, it is further submitted that any reconstruction of petitioner's base period earnings will not exceed its credit based on invested capital.
As to respondent's contention that petitioner has not met its burden of proof to show a qualifying factor for relief under
However, it is not sufficient for petitioner merely to prove grounds for relief. It must go further and show facts which will be sufficient to establish a constructive average base period net income which, when used in a computation of its excess profits tax credit, will result in a lesser tax than by computing the credit by the use of the invested capital method. In
Although petitioner was entitled to compute its excess profits tax credits on the basis of earnings during the base period, it chose instead to compute its credits on the basis of its invested capital during the taxable years, because the invested capital method resulted in considerably higher*288 credits. In such circumstances, to be entitled to relief under
Has petitioner met its burden of proof to show a constructive average base period net income which will entitle it to a larger credit than it has received by use of a credit based on invested capital? We do not think it has met its burden of proof. There is much evidence in the record consisting of exhibits and oral testimony bearing upon this question of petitioner's constructive average base period net income. From this evidence petitioner argues for several methods of reconstruction which it designates as A, B, C, D, E, F, G, and H. The constructive average base period net incomes arrived at by petitioner by the use of these respective methods are as follows:
| Constructive | |
| average | |
| base period | |
| Method | net income |
| A | $ 14,680.80 |
| B | 15,342.09 |
| C | 15,020.79 |
| D | 14,339.74 |
| E | $ 12,884.69 |
| F | 24,725.10 |
| G | 16,853.88 |
| H | 13,331.37 |
Manifestly, it would make this opinion much too long to undertake a detailed discussion*289 of petitioner's respective methods of reconstruction. It is sufficient to say that we think each of these methods results in a constructive average base period net income which is too high to represent normal earnings. Based on these reconstructions, we think petitioner's contention that we should find a constructive average base period net income of at least $ 15,000 is altogether unrealistic. It would be entirely out of line with any of its past earning experience. *613 We are, therefore, unable to accept as correct any one of the computations urged by petitioner, even the smallest one of $ 12,884.69.
Respondent, on his part, claims that under no reconstruction justified by the evidence in the record is petitioner entitled to a constructive average base period net income greater than $ 6,253 and that this amount would result in no relief to petitioner because it would be less than the excess profits credits which petitioner has already received under the invested capital method.
We think, when all the facts are considered, there is strong support for respondent's contention that no reasonable reconstruction would yield petitioner a constructive average base period net income*290 greater than $ 6,253. Certainly, when we consider petitioner's sales and earning experience over the period of years extending from 1922 to the beginning of the base period years, we are well convinced that no reasonable reconstruction will yield a figure of constructive average base period net income higher than $ 7,000. It seems to us that would be the outside limit. Therefore, we conclude that even with an adjustment of petitioner's gross sales to the highest point justified by the evidence, and a computation of net profits in any manner compatible with its actual experience, the reconstructed average base period net income would not result in an excess profits credit as great as that allowed to petitioner under the invested capital method.
We conclude, therefore, that there was no error in respondent's disallowance of petitioner's claim for relief under
Reviewed by the Special Division.
Decisions will be entered for the respondent.