*127 Decision will be entered for the respondent.
Petitioner, a screw machine parts manufacturer, experienced net operating losses for the fiscal period July 20, 1936, to June 30, 1937, and for the fiscal years ended June 30, 1938 and 1939. It showed a small profit for the fiscal year ended June 30, 1940. In 1939, it purchased machine tools capable of producing high precision parts. The increase in its sales during its last fiscal year, subsequent to the acquisition of the new machinery, was due to subcontracting work performed for aircraft companies. It claimed excess profits tax relief under section 722 (b) (4) for the fiscal years ended June 30, 1941, to June 30, 1944, inclusive. Held, even assuming petitioner established the existence of the qualifying factors for relief under that section, it did not show that its average base period net income was an inadequate standard of its normal earnings because of such qualifying factors.
*775 The petitioner challenges respondent's disallowance of its claims under section 722 (b) (4) of the Internal*128 Revenue Code of 1939 for relief from excess profits taxes. The periods and the amounts of relief claimed are as follows:
| Fiscal year ended | Amount |
| June 30, 1941 | $ 1,471.31 |
| June 30, 1942 | 19,240.35 |
| June 30, 1943 | 65,854.44 |
| June 30, 1944 | 30,092.22 |
The testimony was taken before a commissioner of this Court whose findings of fact were duly served on the parties. After consideration of the objections made to the commissioner's report by the respective parties, we make the following
FINDINGS OF FACT.
The stipulated facts are hereby found.
Petitioner, a manufacturer of screw machine parts, was incorporated July 20, 1936, under the laws of the State of New York, and commenced business on or about that date. It has its principal office in Brooklyn, New York. It keeps its books and files its income tax returns on the basis of fiscal years ending June 30.
Petitioner's excess profits credits computed on the invested capital basis for the years indicated were as follows:
| Excess profits | |
| Fiscal year ended | credit |
| June 30, 1941 | $ 2,630.22 |
| June 30, 1942 | 2,490.44 |
| June 30, 1943 | 4,452.09 |
| June 30, 1944 | 5,726.11 |
*776 The interest on borrowed capital included in excess*129 profits tax net income is as follows:
| Fiscal year ended | Interest |
| June 30, 1941 | $ 2,721.10 |
| June 30, 1942 | 1,172.22 |
| June 30, 1943 | 873.92 |
| June 30, 1944 | 461.34 |
Ignatius Nurkiewicz, petitioner's president, started a small screw machine parts shop in January 1920 as a partnership with his father and brother-in-law. The partnership operated under the name of Union Machine Company. Later it was operated by Ignatius as a sole proprietorship. It went into voluntary bankruptcy in 1932 because of heavy losses when customers suspended operations. Paul, a brother of Ignatius, worked for the business principally as a salesman from 1920, except for the period 1924 to 1927 when he operated a steamship ticket agency to close the estate of his father-in-law. Macy, the son of Ignatius, began working for the business in 1930 or 1931. Paul became treasurer and Macy secretary of petitioner.
Union Machine Company was succeeded by Union Automatic Production Co., Inc., a corporation organized in August 1932 to engage in the screw machine parts business. Macy, then 21 years of age, became president. His experience was not comparable to that of Ignatius who could not be president because *130 he had not been discharged from bankruptcy. Ignatius was the general manager of the business, Paul was also there as vice president in charge of sales and finances; and, as a practical matter, it made little difference who was president.
Union Automatic Production Co., Inc., was forced into involuntary bankruptcy because of its lack of credit and working capital. Thereafter, on July 20, 1936, petitioner was organized. Its principal officers from the date of its organization to June 30, 1940, were as follows:
| Lester Grossman | President 7/20/36 to 9/15/36 |
| Anna Grossman | Secretary 7/20/36 to 9/15/36 |
| Rose Seitzer | Treasurer 7/20/36 to 9/15/36 |
| Joseph Hittner | President on or about 9/15/36 to 11/21/36 |
| Albert W. Clurman | President on or about 11/21/36 to 2/11/37 |
| Abraham B. Hertz | President and Secretary 2/11/37 to 9/10/37 |
| Ignatius Nurkiewicz | President 9/10/37 to 6/30/40 |
| Paul Nurkiewicz | Treasurer 9/10/37 to 6/30/40 |
| Macy Nurkiewicz | Secretary 9/10/37 to 6/30/40 |
On September 10, 1937, Hertz resigned as a director.
During all the periods last above mentioned, until September 10, 1937, Ignatius was general superintendent of petitioner's factory, Paul was sales promoter, and Macy was generally*131 engaged in the operation of the factory. They were performing practically as they had for the predecessor company. The corporate officers above named, other than the Nurkiewiczes, became officers to protect the interest *777 of friends and others who provided petitioner with working capital and credit. Petitioner's stock was assigned to those financing it during the time the interests represented by Hertz financed petitioner. Such officers had control of policies relating to financing and endeavored to see that the interests of those financing the company were protected. While Hertz was president he worked with the Nurkiewiczes to the end that all interested parties would benefit by the betterment of the business. The Nurkiewiczes always carried the responsibilities of the general manufacturing processes, subject to the overriding controls above mentioned. Hertz and the Nurkiewiczes frequently consulted on the operation of the business, and Hertz would have to approve expenditures for machinery or tools. Further financial reorganization took place, Hertz left, and business diminished, particularly that from larger corporations.
Ignatius was an excellent screw machine *132 parts technician and producer. His reputation was not so good as a businessman. The business had a good reputation for producing good screw machine products.
Petitioner's customers were primarily located in New York City during the base period years. Its competitors during those years were primarily located in New England, New Jersey, and New York State.
Petitioner's net income (or loss) for the periods indicated was as follows:
| Fiscal period ended June 30, 1937 | ($ 1,140) |
| Fiscal year ended June 30, 1938 | (3,428) |
| Fiscal year ended June 30, 1939 | (8,461) |
| Fiscal year ended June 30, 1940 | 3,462 |
Petitioner's balance sheets for the dates indicated set forth its cash, accounts receivable, and inventories, as follows:
| Cash | Accounts | Inventory | |
| receivable | |||
| June 30, 1937 | $ 4.75 | $ 10,941.82 | $ 7,276.10 |
| June 30, 1938 | 17.23 | 10,097.62 | 9,039.25 |
| June 30, 1939 | 118.88 | 16,719.09 | 14,088.03 |
| June 30, 1940 | 1,834.68 | 35,056.27 | 27,981.75 |
During this period petitioner was hypothecating its accounts receivable to factors.
The cost of machinery acquired by petitioner during its base period years was as follows:
| Fiscal period ended June 30, 1937 | $ 9,770.00 |
| Fiscal year ended June 30, 1938 | 127.50 |
| Fiscal year ended June 30, 1939 | 5,840.57 |
| Fiscal year ended June 30, 1940 | 6,880.87 |
*133 On a calendar year basis, the cost of machinery acquired by petitioner was as follows: *778
| July 1936 thru December 31, 1936 | $ 9,290.00 |
| 1937 | 480.00 |
| 1938 | 277.50 |
| 1939 | 8,848.12 |
The following is a list of screw machines, lathes, and a drill press acquired by petitioner during the calendar year 1939, showing the date of purchase, cost, and whether or not the machine could perform high precision work:
| High precision or | |||
| Date of purchase | Type machine | otherwise | Cost |
| Jan. 25, 1939 | #3 Gesholt geared head | ||
| turret lathe | High precision | $ 765.00 | |
| Mar. 18, 1939 | #2 Gesholt | High precision | 2,397.00 |
| Mar. 18, 1939 | #6-G Lathe | Very good | |
| Mar. 18, 1939 | Brown and Sharpe | High precision automatic | |
| screw machine #188 | |||
| Mar. 4, 1939 | #55 National Acme | High production -- not | |
| automatic screw machine | for high precision | 315.00 | |
| Mar. 25, 1939 | #2 Southworth hand screw | Precision -- not high | |
| machine | precision | 229.50 | |
| Apr. 4, 1939 | Williard geared head | ||
| lathe | High precision | 550.00 | |
| Apr. 4, 1939 | Warner Swasey hand screw | ||
| machine | Very accurate | 325.00 | |
| Oct. 28, 1939 | #2 4-Spindle Avey drill | ||
| press | High precision | 459.00 | |
| Dec. 21, 1939 | Brown Sharpe #00 machine | High precision | 310.00 |
| Total | $ 5,350.50 |
*134 The reproduction value of the foregoing machinery on the dates of purchase was substantially greater than the purchase price.
Petitioner in July 1936 gave its promissory note for $ 9,000 as the full purchase price of certain machinery which had been sold upon a mortgage foreclosure of petitioner's predecessor, Union Automatic Production Co., Inc. That machinery had been appraised in May 1936 as having a replacement cost (new) of $ 192,668.45, and a sound insurable value of $ 115,442.99. Petitioner acquired certain machinery in April 1941 at a cost of $ 2,890, which it sold before July 1, 1941, for $ 12,000.
The following is a list of high precision machinery and tools purchased by petitioner between January 1, 1940, and June 30, 1940:
| Date of purchase | Type machinery | Cost |
| Jan. 3, 1940 | Brown-Sharpe #00 | $ 1,693.20 |
| Brown-Sharpe #0 | ||
| Ames precision bench lathe | ||
| Jan. 4, 1940 | B & S hand screw machine #0 | 425.00 |
| Jan. 31, 1940 | Miscellaneous dial indicators | 193.53 |
| Total | $ 2,311.73 |
By a journal entry recorded on June 30, 1940, petitioner wrote up its machinery account by $ 99,212.37 from $ 22,659.68 as of April 1, *779 1940, to $ 121,872.05, in accordance with an *135 appraisal by Keystone Appraisal Corporation as of that date.
All of the machinery acquired between January 1, 1939, and June 30, 1940, was additional machinery and not for replacement purposes.
Regular machines cannot be used for high precision work, although high precision machines can be used for regular precision work. Some shops do both, and some do no high precision work because they lack the equipment. Some of petitioner's old machines could have done high precision work when they were new, and could have been rebuilt to do it, but the cost of rebuilding would have been more than the cost of acquiring secondhand machines.
Petitioner had 23 old Brown-Sharpe automatic screw machines during the entire base period, which in their then condition could not do the same kind of work done by the Brown-Sharpe automatic screw machine #188 purchased March 18, 1939. Prior to January 25, 1939, petitioner did not have any machine such as the #3 Gesholt geared head turret lathe which the corporation acquired on that date.
High precision work is generally more profitable than the routine accurate or precision work, such as petitioner had performed prior to obtaining the high precision machinery.
*136 Installation of high precision machines and the training of men to operate them in the period in question would take some time before the machines would operate efficiently.
The high precision machines were purchased in order to secure business from companies such as Sperry Gyroscope Company, Eclipse Aviation (Bendix), and Air Associates, which wished to place orders for high precision work. Petitioner did not buy high precision machines in 1937 and 1938 because it did not know whether it could obtain high precision work and because it was not financially in a position to do so.
The prices charged by petitioner for standard articles made in 1939 were the same as they were in 1938 and 1940. High precision work required higher priced men, more hours, and brought higher prices in 1939.
High precision work is made to specifications which permit of tolerances of less than one-thousandth of an inch. Precision parts can be interchanged. In the case of accurate parts, it is only necessary to make the two parts to fit. A precision part acceptable degree of tolerance described as a decimal would be .001. A high precision part acceptable degree of tolerance similarly described would be*137 .0001.
Charges to petitioner's accounts receivable ledger accounts for the periods indicated were as follows: *780
| Annual basis | ||||
| Invoice | Date of | |||
| Account name and address | number | first charge | 6-30-37 | 6-30-38 |
| Eclipse Aviation, Bendix, N. J. | 7465 | 12-15-39 | ||
| Bendix Aviation, 754 Lexington Ave., | ||||
| Brooklyn, N. Y. | 8226 | 3-13-40 | ||
| Bendix Aviation, 4700 Wissahickon | ||||
| Ave., Philadelphia, Pa. | 11567 | 3-10-41 | ||
| Sperry Gyroscope Co., Manhattan Bridge | ||||
| Plaza, Brooklyn, N. Y. | 7995 | 2-29-40 | ||
| Air Associates, Inc., Building 19, | ||||
| Roosevelt Field, Garden City, | ||||
| L. I., N. Y. | 4865 | 12-16-38 |
| Annual basis | ||||
| Account name and address | 6-30-39 | 6-30-40 | 6-30-41 | 6-30-42 |
| Eclipse Aviation, Bendix, N. J. | 56,659.96 | 94,561.24 | 11,860.58 | |
| Bendix Aviation, 754 Lexington Ave., | ||||
| Brooklyn, N. Y. | 2,383.48 | 13,710.08 | 9,116.67 | |
| Bendix Aviation, 4700 Wissahickon | ||||
| Ave., Philadelphia, Pa. | 43,257.48 | 84,858.98 | ||
| Sperry Gyroscope Co., Manhattan Bridge | ||||
| Plaza, Brooklyn, N. Y. | 4,663.47 | 46,531.75 | 322,644.46 | |
| Air Associates, Inc., Building 19, | ||||
| Roosevelt Field, Garden City, | ||||
| L. I., N. Y. | 4,534.62 | 4,900.63 | 29,973.91 | 29,416.00 |
| Quarterly basis | ||||
| Date of | 10-1-38 to | 1-1-39 to | 4-1-39 to | |
| Account name and address | first charge | 12-31-38 | 3-31-39 | 6-30-39 |
| Eclipse Aviation, Bendix, N. J. | 12-15-39 | |||
| Bendix Aviation, 754 Lexington | ||||
| Ave., Brooklyn, N. Y. | 3-13-40 | |||
| Bendix Aviation, 4700 Wissahickon | ||||
| Ave., Philadelphia, Pa. | 3-10-41 | |||
| Sperry Gyroscope Co., Manhattan | ||||
| Bridge Plaza, Brooklyn, N. Y. | 2-29-40 | |||
| Air Associates, Inc., Building 19, | ||||
| Roosevelt Field, Garden City, | ||||
| L. I., N. Y. | 12-16-38 | 69.50 | 357.69 | 4,107.43 |
| Quarterly basis | ||||
| 7-1-39 to | 10-1-39 to | 1-1-40 to | 4-1-40 to | |
| Account name and address | 9-30-39 | 12-31-39 | 3-31-40 | 6-30-40 |
| Eclipse Aviation, Bendix, N. J. | 2,706.20 | 23,304.02 | 30,649.7 | |
| Bendix Aviation, 754 Lexington | ||||
| Ave., Brooklyn, N. Y. | 89.42 | 2,294.0 | ||
| Bendix Aviation, 4700 Wissahickon | ||||
| Ave., Philadelphia, Pa. | ||||
| Sperry Gyroscope Co., Manhattan | ||||
| Bridge Plaza, Brooklyn, N. Y. | 982.94 | 3,680.5 | ||
| Air Associates, Inc., Building 19, | ||||
| Roosevelt Field, Garden City, | ||||
| L. I., N. Y. | 16.10 | 922.08 | 2,006.63 | 1,955.8 |
*781 In an affidavit dated July 24, 1941, and filed with the United States District Court for the Eastern District of New York for the purpose of seeking reconsideration by that court of a sentence of imprisonment imposed upon Paul shortly prior thereto, Ignatius stated that petitioner since the latter part of 1940 had obtained substantial orders from various governmental defense agencies and in addition had received a substantial amount of subcontracting work from concerns which in turn had contracts with governmental agencies. Among the concerns with which petitioner had such subcontracts he listed Eclipse Aviation Company, Bendix Aviation Company, *139 Air Associates Company, and Sperry Gyroscope Company, stating that petitioner was manufacturing parts used in the manufacture of planes for the first three such companies, and was manufacturing instrument parts used in planes and other defense machines for Sperry Gyroscope Company. The sum total of all the unfilled orders held by petitioner on the date of the affidavit directly from governmental agencies and from contractors was stated to be in excess of $ 500,000. It was noted that up until May 1940 the petitioner employed 40 employees, whereas as of the date of the affidavit it employed approximately 230 employees and was operating its plant 24 hours a day. In addition, the petitioner's average monthly production was stated to be less than $ 10,000 in the early months of 1940, whereas it was $ 70,000 at the time the affidavit was executed, and General McRoberts of the War Department was reported to have insisted that such production be stepped up as rapidly as possible to at least double the latter level.
A substantial part of petitioner's sales during the fiscal year ended June 30, 1940, was attributable to war-influenced orders from countries other than the United States. *140 In 1939 or 1940 Sperry Gyroscope Company did not have sufficient facilities to fill all the war-influenced orders it was receiving and at that time was forced to subcontract more of its work. Petitioner had not received any of this work until that time. All the work done for Sperry by petitioner did not have a direct war-end use. At least by July 1938 the United States armed services was one of Sperry's principal customers. The nature of Sperry's business and its customers did not change much from peacetime to wartime except to increase in volume.
Eclipse Aviation and Pioneer Aviation combined in 1939 and moved to Teterboro, New Jersey, and thereafter they had a heavy influx of orders, particularly in 1940, and opened another plant in Philadelphia. It received large orders from Great Britain and France before war with Germany started in September 1939. It gave no orders to petitioner prior to December 15, 1939. It engaged in a very small percentage of civilian work as compared with war work.
Between June 30, 1939, and November 1, 1939, petitioner purchased *782 and installed two gas engines at a cost of $ 2,219.87, to be used in generating electricity. Their use resulted*141 in savings of about $ 200 per month.
Petitioner's profit and loss statements for periods indicated were as follows:
| Fiscal | ||||
| period | Fiscal | Fiscal | Fiscal | |
| 7/20/36 to | year ended | year ended | year ended | |
| 6/30/37 | 6/30/38 | 6/30/39 | 6/30/40 | |
| Sales | $ 101,323 | $ 93,658 | $ 111,174 | $ 175,199 |
| Cost of sales | $ 80,608 | $ 71,735 | $ 88,059 | $ 124,567 |
| Gross profit from sales | $ 20,715 | $ 21,923 | $ 23,115 | $ 50,632 |
| Other income | 7 | 8 | ||
| Total income | $ 20,715 | $ 21,923 | $ 23,122 | $ 50,640 |
| Deductions: | ||||
| Salaries | $ 8,202 | $ 1,054 | $ 1,159 | $ 1,435 |
| Interest and factoring | 3,302 | 5,965 | 8,605 | 10,893 |
| Officers' salaries | 4,255 | 9,666 | 9,663 | 19,500 |
| Taxes | 931 | 1,959 | 2,374 | 3,407 |
| Professional fees | 793 | 1,562 | 1,057 | 340 |
| Auto maintenance | 1,432 | 1,136 | 1,502 | 1,843 |
| Other deductions | 2,940 | 3,951 | 5,311 | 6,495 |
| Bad debts | 58 | 1,912 | 235 | |
| Commissions | 3,030 | |||
| Travel and entertainment and | ||||
| promotion | ||||
| Miscellaneous shipping expenses | ||||
| Telephone and telegraph | ||||
| Warehouse costs | ||||
| Contributions | ||||
| Payment to pension trust and | ||||
| expense | ||||
| Office supplies and expenses | ||||
| Subscriptions and advertising | ||||
| Miscellaneous selling expenses | ||||
| Total deductions | $ 21,855 | $ 25,351 | $ 31,583 | $ 47,178 |
| Net income before taxes | ($ 1,140) | ($ 3,428) | ($ 8,461) | $ 3,462 |
| Fiscal year | Fiscal year | Fiscal year | Fiscal year | |
| ended | ended | ended | ended | |
| 6/30/41 | 6/30/42 1 | 6/30/43 2 | 6/30/44 3, 4 | |
| Sales | $ 432,617 | $ 950,916 | $ 1,374,866 | $ 1,582,913 |
| Cost of sales | $ 352,177 | $ 740,774 | $ 967,012 | $ 1,212,092 |
| Gross profit from sales | $ 80,440 | $ 210,142 | $ 407,854 | $ 370,821 |
| Other income | 9,618 | 5,201 | 9,878 | 7,879 |
| Total income | $ 90,058 | $ 215,343 | $ 417,732 | $ 378,700 |
| Deductions: | ||||
| Salaries | $ 5,399 | $ 33,310 | $ 64,607 | $ 77,357 |
| Interest and factoring | 25,198 | 12,858 | 3,798 | 1,018 |
| Officers' salaries | 19,500 | 39,432 | 57,055 | 57,375 |
| Taxes | 618 | 3,304 | 7,493 | 17,993 |
| Professional fees | 1,648 | 6,936 | 12,050 | 9,930 |
| Auto maintenance | 2,203 | 2,780 | 2,879 | 5,417 |
| Other deductions | 7,811 | 8,529 | 10,383 | 13,426 |
| Bad debts | 1,361 | 1,573 | 643 | |
| Commissions | 7,829 | 20,830 | 23,714 | 20,507 |
| Travel and entertainment | ||||
| and promotion | 1,730 | 9,638 | 20,836 | 20,198 |
| Miscellaneous shipping | ||||
| expenses | 1,226 | 4,234 | 3,658 | 10,951 |
| Telephone and telegraph | 3,364 | 5,138 | 5,450 | |
| Warehouse costs | 3,753 | |||
| Contributions | 5,255 | 5,446 | ||
| Payment to pension trust | ||||
| and expense | 19,866 | 15,250 | ||
| Office supplies and | ||||
| expenses | 4,710 | 4,538 | ||
| Subscriptions and | ||||
| advertising | 2,427 | 10,366 | ||
| Miscellaneous selling | ||||
| expenses | 2,287 | |||
| Total deductions | $ 74,523 | $ 150,541 | $ 246,799 | $ 275,222 |
| Net income before taxes | $ 15,535 | $ 64,802 | $ 170,933 | $ 103,478 |
*783 The value of products for the Census Category "Screw Machine Products and Wood Screws" for the United States and for the State of New York, for 1923-1939, biennially, is as follows (in thousand dollars):
| Year | United States | New York |
| 1923 | $ 52,946 | $ 1,277 |
| 1925 | 59,615 | 720 |
| 1927 | 60,020 | 1,994 |
| 1929 | 105,975 | 3,549 |
| 1931 | 43,698 | 2,070 |
| 1933 | 33,449 | 1,711 |
| 1935 | 63,029 | 3,054 |
| 1937 | 102,725 | 4,879 |
| 1939 | 82,807 | 4,637 |
The foregoing expressed as index numbers on a 1939 base is as follows (1939=100):
| Year | United States | New York |
| 1923 | 64 | 28 |
| 1925 | 72 | 16 |
| 1927 | 72 | 43 |
| 1929 | 128 | 77 |
| 1931 | 53 | 45 |
| 1933 | 40 | 37 |
| 1935 | 76 | 66 |
| 1937 | 124 | 105 |
| 1939 | 100 | 100 |
The Federal Reserve Indices of production*144 of "Durable Manufactures" on a 1935-1939 average equals 100, and on a 1939 base are as follows:
| Year | 1935-1939=100 | 1939=100 |
| 1923 | 103 | 94 |
| 1925 | 107 | 98 |
| 1927 | 107 | 98 |
| 1929 | 132 | 121 |
| 1931 | 67 | 61 |
| 1933 | 54 | 50 |
| 1935 | 83 | 76 |
| 1937 | 122 | 112 |
| 1939 | 109 | 100 |
*784 Petitioner's sales by months during its base period were as follows:
| 1936 | 1937 | 1938 | 1939 | 1940 | |
| January | $ 6,437 | $ 7,400 | $ 8,850 | $ 16,965 | |
| February | 7,730 | 7,458 | 9,081 | 11,288 | |
| March | 14,413 | 7,813 | 14,212 | 14,934 | |
| April | 12,437 | 11,204 | 16,833 | 20,475 | |
| May | 13,100 | 8,673 | 12,854 | 22,365 | |
| June | 11,457 | 10,103 | 10,011 | 22,941 | |
| Semiannual subtotal | $ 65,574 | $ 52,651 | $ 71,841 | $ 108,968 | |
| July | $ 2,016 | $ 5,833 | $ 6,376 | $ 9,292 | |
| August | 10,039 | 5,233 | 5,773 | 9,262 | |
| September | 6,122 | 7,707 | 5,145 | 9,262 | |
| October | 5,438 | 8,895 | 5,251 | 12,087 | |
| November | 5,546 | 7,669 | 8,468 | 12,542 | |
| December | 6,518 | 7,116 | 9,578 | 15,497 | |
| Semiannual subtotal | $ 35,679 | $ 42,453 | $ 40,591 | $ 67,942 | |
| Totals for years | $ 35,679 | $ 108,027 | $ 93,242 | $ 139,783 |
Petitioner's average base period net income reflected its normal operations for its entire base period, and is not an inadequate standard of normal *145 earnings. Petitioner reached, by the end of its base period, the level of earnings which it would have reached if it had commenced business or made the alleged changes in the character of its business 2 years before it did so. Its excess profits taxes for the taxable periods here involved are not excessive and discriminatory.
OPINION.
The petitioner claims a constructive average base period net income of $ 24,573 under section 722 (b) (4) of the Internal Revenue Code of 1939. Even if we assume that (1) petitioner commenced business on July 20, 1936, during its base period, (2) that it changed the character of its business on September 10, 1937, when those who had been financing the business were supplanted and their surveillance ceased, and (3) that it changed the character of its business, its product, and its capacity during the period January 25, 1939, to May 31, 1940, by the acquisition of new machines for high precision and other work, we are unable to grant relief under the facts of this case.
It is now well established that the existence of the "qualifying factors" does not of itself give rise to relief but is only the initial step. In addition, the change must be substantial*146 and a causal connection must exist between the "qualifying factors" and an increased level of earnings. See M. W. Zack Metal Co., 22 T. C. 349, 352 (1954); Pratt & Letchworth Co., 21 T. C. 999 (1954); Lamport Co., 17 T. C. 1079, 1084 (1951); Farmers Creamery Co. of Fredericksburg, Va., 18 T. C. 241, 254 (1952); Wisconsin Farmer Co., 14 T. C. 1021 (1950). In the case at bar, a consideration of petitioner's profit and loss history, as shown in the findings, leaves it in a most vulnerable position with regard *785 to its claims by reason of its commencement of business on July 20, 1936, and its change in management on September 10, 1937. It discloses the following:
| Fiscal period ended June 30, 1937 | ($ 1,140) |
| Fiscal year ended June 30, 1938 | (3,428) |
| Fiscal year ended June 30, 1939 | (8,461) |
| Fiscal year ended June 30, 1940 | 3,462 |
From this it is apparent that these factors worked no improvement in its earnings. There is no satisfactory showing that if these changes were to make a favorable difference they would not have*147 done so within a comparatively short time. And there is nothing which leads us to believe that the slightly more favorable showing which petitioner attained by the end of its base period bore any relation to these factors, or that its level of earnings at that time would have been any greater had either of these factors been initiated 2 years earlier. See M. W. Zack Metal Co., supra.
Somewhat similar considerations are dispositive of petitioner's claim based on a change to a high precision product and change in its capacity by the acquisition of new machines, including those capable of doing high precision work. As to these contentions, petitioner's position has additional vulnerability by reason of the fact that a substantial part of the sales which might be said to have arisen from the acquisition of this new equipment was caused by and attributable to war-influenced orders from countries other than the United States. We are convinced from the record here that the success by the end of petitioner's base period which might appear to have stemmed from petitioner's acquisition of the new equipment was derived from orders or subcontracts from companies*148 directly engaged in what was patently production brought about by a war economy, and, for the most part, having a war-end use. That there was no comparable demand for petitioner's products prior thereto goes far to confirm the conclusion that war conditions were primarily responsible for the marked improvement which occurred in petitioner's business 1 at the end of the base period. It, therefore, appears to us that petitioner cannot rightfully lay claim to an advantage from the change of product or capacity, and that such increased earnings as it did experience were primarily war-induced and not attributable to such change.
As with the previously considered factors, we are satisfied that even if petitioner had acquired the precision and other*149 machines 2 years earlier than it did, it would not have had any higher level of earnings at the end of its base period because of such acquisition. Except for the war business, we do not believe that the base period demand for *786 petitioner's products would have exceeded what it actually experienced. The testimony of Ignatius, petitioner's president, regarding potential base-period business, aside from that which we conclude was war-induced, lacks conviction, is contradictory, and in part is an admission that prior to the war activity there was no justification for petitioner to acquire precision machinery. In Pabst Air Conditioning Corporation, 14 T. C. 427, 436, 437 (1950), we said:
Though opinion evidence has been used in general on this subject, East Texas Motor Freight Lines, 7 T.C. 579">7 T. C. 579, it is apparent that it must have basis in the evidence, 7- Up Fort Worth Co., 8 T.C. 52">8 T. C. 52. Therein, much as in this case, an interested officer of the petitioner expressed the opinion that if the petitioner had been organized two years earlier the volume of sales would have been a certain figure. *150 We said that the record did not support such opinion and quoted Arden-Rayshine Co., 43 B. T. A. 314, that "the establishment of an ultimate fact requires something more than a mere statement of the conclusion of the fact sought to be proved." * * *
In view of the foregoing and, after a careful consideration of the entire record, we must say as we said in Jackson-Raymond Co., 23 T. C. 826 (1955):
Notwithstanding the resourceful and diligent efforts of petitioner's counsel to combat it, we cannot escape the conviction that petitioner's business gained the success it did largely because of war conditions, * * *. Compare Crowncraft, Inc., 16 T. C. 690; Fezandie & Sperrle, Inc., 5 T.C. 1185">5 T. C. 1185.
Petitioner's claim for relief is therefore denied.
Reviewed by the Special Division.
Decision will be entered for the respondent.
Footnotes
1. Before additional allowance of $ 404.36 for amortization per proclamation ending emergency period September 29, 1945.↩
2. Before additional allowance of $ 3,628.78 for amortization per proclamation ending emergency period September 29, 1945.↩
3. Before additional allowance of $ 19,125.24 for amortization per proclamation ending emergency period September 29, 1945.↩
4. Before disallowance of $ 956.26 representing excess contributions under 5% rule.↩
1. A comparison of petitioner's sales in the calendar year 1939 or its fiscal year ended June 30, 1940, with its previous history disclosed some improvement, but even such improved sales reflected little or no profit until the impact of the unmistakable war-influenced orders.↩