*248 Decision will be entered for the respondent.
The petitioner, a handkerchief manufacturer, filed claims for relief under section 722 (b) (1) and ( 2) of the Internal Revenue Code and for the refund of excess profits taxes paid for its taxable years ended June 30, 1942, and June 30, 1943. The petitioner, in making its returns for the years mentioned, and the respondent, in making his determination with respect thereto, computed the petitioner's excess profits credit on the basis of invested capital. Aside from its claims under section 722, the petitioner does not question the correctness of the respondent's determination. Assuming, without deciding, that the events upon which the petitioner relies for relief under section 722 were such as would qualify it for such relief, it is held that the petitioner has not shown or established what would be a fair and just amount representing normal earnings to be used as a constructive average base period net income for the purpose of computing an excess profits credit other than or in excess of that already computed and determined without the benefit of section 722.
*249 *793 This proceeding is based on the rejection by the respondent of the petitioner's claims for relief under section 722 of the Internal Revenue Code for the 6-month period ended June 30, 1942, and for the fiscal year ended June 30, 1943. As presented for decision here, the claims are now limited to the grounds specified in section 722 (b)(1) and (b)(2), and on the basis thereof, the petitioner seeks a refund of $ 1,280.43 in excess profits tax for the period ended June 30, 1942, and $ 20,089.04 in excess profits tax for the fiscal year ended June 30, 1943.
FINDINGS OF FACT.
Much of the facts have been stipulated and are found as stipulated. The petitioner is a North Carolina corporation, with its principal office in Charlotte, North Carolina. It filed*250 its returns for the years involved with the collector of internal revenue for North Carolina.
The petitioner was originally organized in 1916, under the laws of Vermont, for the purpose of engaging in the business of manufacturing staple handkerchiefs. In 1925 it moved its plant to Charlotte, North Carolina, where its operations have been carried on since that time. It was reorganized under the laws of North Carolina on July 1, 1942.
The petitioner's founder, and until his death in May 1934, its general manager and principal stockholder, was R. W. Eldridge.
Soon after locating in Charlotte, the petitioner, through Eldridge, was able to establish a line of credit with the Charlotte banks. Eldridge induced a number of Charlotte businessmen to invest in the company.
R. W. Eldridge was the sole executive of the petitioner from its inception until the time of his death. His brother, L. C. Eldridge, was plant superintendent, but knew only the production end of the business and worked entirely under the direction of R. W. Eldridge. The office force consisted of a bookkeeper, a billing and pay roll clerk, and a stenographer-secretary. At a meeting of its board of directors, held on *251 May 5, 1934, L. C. Eldridge was elected president and treasurer, to fill the vacancy created by the death of his brother R. W. Eldridge.
The authorized capital stock of the petitioner at the date of Eldridge's death was 850 shares of Seven Per Cent Cumulative preferred stock and 1,400 shares of common stock, both classes of stock having a par value of $ 100 per share. The shares of stock, shown by the corporate records as being issued and fully paid at May 19, 1934, consisted of 767 shares of preferred stock and 957 shares of common stock, of which, however, 250 shares of preferred stock, representing $ 25,000, and 160 shares of common stock, representing *794 $ 16,000, were carried on the corporate books as treasury stock. The common stock, other than treasury stock, was held on that date, as follows:
| Number of | ||
| Stockholder | shares | Amount |
| L. C. and Lois Eldridge | 82 | $ 8,200 |
| W. O. McMullen | 1 | 100 |
| W. O. McMullen | 1 | 100 |
| W. O. McMullen | 1 | 100 |
| P. J. O'Connel | 1 | 100 |
| Moffet W. Eldridge | 10 | 1,000 |
| R. W. Eldridge (Estate) | 620 | 62,000 |
| L. C. Eldridge | 8 | 800 |
| W. J. and Jessie Eldridge | 73 | 7,300 |
| Total | 797 | $ 79,700 |
The 517 shares of preferred stock -- being *252 the issued shares of such stock exclusive of the 250 shares of such stock carried as treasury stock -- stood in the names of nineteen individuals and concerns. W. J. and Jessie Eldridge with 100 shares of preferred stock were the only record owners of both common and preferred shares.
With the approval of the court having jurisdiction over the administrator of the R. W. Eldridge estate, the 620 shares of common stock owned by Eldridge at the date of his death were sold on May 24, 1937, to Eldridge's widow for $ 36.
On May 20, 1934, the creditors of the petitioner took over the management and operation of the business under a creditor's agreement. The business was thereafter operated primarily for the purpose of paying the amounts owing to creditors. In the course of such operations petitioner's inventories were substantially liquidated or consumed. The creditors were paid by December of 1934, and at or about that time they relinquished control of petitioner.
Some comparisons or contrasts between the petitioner's financial and business condition when the creditors took control and when control was relinquished are shown by the balance sheets at May 19, 1934, and December 31, 1934. *253 Exclusive of capital stock, petitioner's liabilities at May 19, 1934, were shown as current liabilities of $ 117,778.74. Surplus was listed at a deficit figure of $ 20,904.32, and net worth appeared to be $ 110,495.68. Certain contingent liabilities in the total amount of $ 146,358.03 were listed, but were not carried into the balance sheet proper. They were described as shipments held at mills, with an amount designated as contingent loss thereon, and future commitments, with an amount shown as contingent loss thereon. At December 31, 1934, the petitioner's liabilities, exclusive of capital stock, as shown by its balance sheet, were current liabilities in the amount of $ 3,480, and consisted of taxes payable, *795 pay roll, and expenses. Surplus was listed at a deficit figure of $ 38,398.64 and net worth was shown as $ 93,001.36. Certain contingent liabilities in the amount of $ 24,106.03 were listed, but were not carried into the balance sheet proper. As in the case of the balance sheet of May 19, 1934, they were described as shipments held at mill, with an amount designated as contingent loss thereon, and future commitments and a contingent loss thereon. On the May*254 19, 1934, balance sheet, current assets were shown at a total of $ 181,974.96, and consisted of cash on hand and on deposit, $ 2,025.42; accounts receivable from customers, less reserve for doubtful accounts, $ 31,678.01; inventories, consisting of unfinished goods unpledged, raw materials, packing materials and finished goods pledged, $ 148,271.54. On the balance sheet at December 31, 1934, current assets were shown at $ 56,904.95, and consisted of cash on hand and on deposit, $ 22,054.91; accounts receivable from customers, less reserve for doubtful accounts, $ 11,972.67; inventories, consisting of finished goods, raw materials and packing materials, $ 22,377.37; and deposits on orders, $ 500.
On December 1, 1934, L. E. Elliott was employed as general manager of the petitioner. He had been engaged theretofore in the handkerchief business in New York, but was unknown in Charlotte. He was elected vice president of the petitioner on January 1, 1935, and later became its president.
Although, on January 1, 1935, the petitioner was practically out of debt, its inventories were depleted and needed credit was lacking. Elliott was able to establish a line of credit with the Federal Reserve*255 Bank in Richmond, Virginia, provided a Charlotte bank could be induced to participate. After further negotiation, a line of credit amounting to $ 50,000 was established, 32.5 per cent with the American Trust Company of Charlotte and 62.5 per cent with the Federal Reserve Bank in Richmond. Under this credit agreement the money was to be borrowed in lots of $ 10,000. Four such lots were borrowed. The fifth $ 10,000, which was applied for in September of 1935, was refused, the refusal being based on the losses sustained by the petitioner during the first 6 months of its operations in 1935. From some undisclosed date after June 30, 1938, and through 1939, the petitioner did its credit financing with the Manufacturers Finance Company of Baltimore. With that company, the petitioner's notes payable at December 31, 1938, amounted to $ 8,114.87, and at December 31, 1939, $ 7,060.09. Under its arrangement there, the petitioner borrowed on its accounts receivable and on such borrowings it paid interest at the rate of one-thirtieth of one per cent per day, so long as the loan was outstanding. The rate of interest payable on bank loans had been 6 per cent.
*796 At December 31 of the*256 years 1927 through 1939, the petitioner's notes payable to banks were as follows:
| Total notes | |
| December 31 | payable |
| 1927 | $ 66,000.00 |
| 1928 | 60,000.00 |
| 1929 | 40,000.00 |
| 1930 | 35,000.00 |
| 1931 | 65,000.00 |
| 1932 | 65,000.00 |
| 1933 | 40,000.00 |
| 1934 * | None |
| 1935 * | 30,000.00 |
| 1936 * | 30,000.00 |
| 1937 * | 35,002.18 |
| 1938 * | None |
| 1939 * | None |
At the time of the death of R. W. Eldridge, in May of 1934, the price of cloth such as *257 was used by the petitioner was less than the petitioner had paid for its existing inventory. The petitioner was also committed at that time to cloth manufacturers for the purchase of cloth at the prior high prices. Of the losses sustained by the petitioner in 1934, approximately $ 8,000 to $ 9,000 was attributable to the loss sustained on its inventory of cloth on hand at the time of Eldridge's death and on purchases made under commitments to take cloth at the prior high prices. In other instances petitioner did not complete the purchases to which it was committed but satisfied its obligations by making payment to manufacturers of the margin between the price at which it was committed for the goods not taken and the going price for such goods. In 1935 a $ 4,500 claim of that character was settled for $ 2,250.
The premises in which the petitioner's business was located were occupied under a lease calling for an annual rental of $ 8,750. For a period of approximately 2 years prior to the death of R. W. Eldridge, the petitioner had not paid the full amount of the rental called for by the lease. Those connected with the corporation had been of the *797 opinion that a reduction*258 in the rental for the period in question had been agreed upon between Eldridge and the lessor. After Eldridge's death, however, the lessor took the position that the full lease rental had been continuously in force and that $ 4,800 of back rent was owing for the period from June 1932 to May 31, 1934. As the result of negotiations by Elliott the old lease was canceled and a new lease was made for 5 years beginning January 1, 1935. The new lease covered the same property at an annual rental of $ 4,800 and relieved petitioner of its obligations both current and delinquent under the old lease. 1
During its operations under Eldridge a major portion of petitioner's sales had been to chain stores such as Woolworth, Kress, Kresge, *259 Montgomery Ward, and Sears Roebuck. The net on sales to chain stores as compared with sales to other customers is "equal or better." Sales to others are made through brokers who usually receive a commission of 5 per cent while the terms to such customers are usually on a basis of 3 per cent. In order to sell to chain stores, however, it is necessary to maintain a larger inventory of finished goods than would be required otherwise since the chain stores strive to catch the right moment for the purchase of large lots at the lowest price. Unless the manufacturer can maintain an adequate inventory to meet that situation it is left to such smaller sales as may be made under what is known as "current listings." During his tenure as manager Elliott has not considered it desirable to build the sales to chain stores to the level they reached under Eldridge. He has striven to restrict such sales to not over 50 per cent of production.
Petitioner's total sales, its sales to chain stores between 1930 and 1939 (except for 1934 and 1935 2 for which complete figures are not available), and the percentage of chain store sales to total sales were as follows:
| Sales to Chain-Organizations | |||
| Year | Total sales | ||
| Amount | Percentage | ||
| 1930 | $ 788,804 | $ 456,428 | 57.86 |
| 1931 | 695,583 | 423.177 | 60.84 |
| 1932 | 544,427 | 384.795 | 70.68 |
| 1933 | 479,473 | 313,772 | 65.44 |
| 1936 | 333,450 | 111,302 | 33.38 |
| 1937 | 243,337 | 101,441 | 41.69 |
| 1938 | 213,228 | 99,545 | 46.68 |
| 1939 | 291,040 | 141,544 | 48.64 |
*798 The production of handkerchiefs in the United States, as shown by the reports of the United States Department of Commerce, in its 1939 Yearbook, for the odd years beginning with 1927 and ending with 1939, was as follows:
| Value | ||
| per | ||
| Year | Value | dozen |
| 1927 | $ 31,558,220 | |
| 1929 | 29,553,777 | |
| 1931 | 18,797,952 | |
| 1933 | 14,923,566 | |
| 1935 | 18,443,340 | |
| 1937 | 19,719,912 | $ .5846 |
| 1939 | 21,601,163 | .6113 |
The imports of handkerchiefs into the United States from all sources and those from Japan, as shown by the Department of Commerce Yearbook for 1939, for the years 1931 through 1939, were as follows:
| From all sources | From Japan | |||
| Year | ||||
| Dozen | Value | Dozen | Value | |
| 1931-1935 | 1,830,000 | $ 261,000 | ||
| 1931 | 1,350 | |||
| 1932 | 870 | |||
| 1933 | 11,828 | $ 1,369 | ||
| 1934 | 791,876 | 80,140 | ||
| 1935 | 2,738,434 | 254,178 | ||
| 1936 | 5,165,000 | 686,000 | 4,595,198 | 395,216 |
| 1937 | 3,247,000 | 667,000 | 2,561,000 | 275,000 |
| 1938 | 1,866,000 | 437,000 | 1,336,000 | 137,000 |
| 1939 | 2,737,000 | 483,000 | 2,236,000 | 187,000 |
*261 In 1934 and 1935 the United States imported from Japan increasing quantities of certain cloths of simple manufacture which formerly had been supplied almost exclusively from domestic sources. As a result, the United States Tariff Commission was directed by the Senate, in March 1935, to investigate the differences in cost of production of countable cotton cloth in the United States and abroad. This investigation demonstrated that with respect to the cloth falling within certain yarn numbers the costs (including transportation and other delivery charges to the principal market in the United States) of representative producers in the United States exceeded corresponding costs of producers in Japan (as evidenced by invoice values) by more than the amount of the duty. The President accordingly issued a proclamation, effective June 20, 1936, increasing the duties of the classes of cotton fabric which were imported principally from Japan. The proclamation applied to cloths of average yarn numbers 31 to 50, when bleached, printed, dyed, or colored. Of these classes, the bleached represented the bulk of the imports. On bleached cloth the basic ad valorem rate was increased from 13 percent*262 to 18 1/2 percent, and on printed, dyed, or colored cloth it was increased from 16 percent to 22 1/2 percent; on both classes the increment in the ad valorem rate for each yarn number was advanced from 0.35 percent to 0.50 percent. These changes represented an increase in the duty ranging from 41 to 43 percent of the previous rates. The classes of cloths to which they applied were used chiefly in making women's inexpensive nightgowns, underwear, *799 and handkerchiefs; they constituted 52 percent of the total square yards of cotton cloth imported in 1935.
Imports of cotton cloth from Japan depended on the price of cotton cloth in the United States and to a lesser extent on the rate of duty. They were especially large in June 1936, in anticipation of the higher duties which became effective in the latter part of that month. They decreased sharply in the following month, but, later, with the advance in the price of cotton cloth in the United States, they increased again until, from February to April 1937, they exceeded the previous peak. Subsequently both United States prices and imports from Japan (except for a brief period at the end of 1939) were at a lower level, and in*263 July 1941 imports from that country were virtually precluded by regulations adopted in the United States. 3
The imports of cotton piece goods into the United States from Japan for the years 1936 through 1939, as shown by the 1939 Yearbook of the Department of Commerce, were as follows:
| Year | Square yards | Value |
| 1936 | 88,581,000 | $ 4,611,000 |
| 1937 | 138,433,000 | 7,107,000 |
| 1938 | 18,024,000 | 830,000 |
| 1939 | 89,343,000 | 3,129,000 |
The Japanese cloth used in the manufacture of handkerchiefs was not of the same quality as handkerchief cloth made in the United States. It sold at a lower price. Some of the manufacturers purchased such cloth, but did not show that the*264 handkerchiefs produced were made from Japanese cloth and much of the trade did not know that fact. Many small operators doing business in New York would buy a few bales of Japanese goods, send them over to contractors in New Jersey, and have the material made up into handkerchiefs. In this way, the handkerchief manufacturers faced added competition. The petitioner's method of operations did not permit it to purchase Japanese cloth to any substantial extent. It had an arrangement whereby it bought grey goods which it invoiced to Pacific Mills for finishing. It was not invoiced for the goods by Pacific Mills until the finished product left the finishing plant. It then was allowed discount terms "two percent ten days, sixty days extra [which] means pay all net in seventy days, or anticipating on the basis of ten percent if paid before." Most of the funds the petitioner had available for the purchase of cloth was used in the manner outlined. The petitioner had earned discounts on purchases of $ 3,770.06 for 1936; $ 2,558.28 for 1937; $ 2,041.59 for 1938; and $ 4,006.46 for 1939. Under this program, the petitioner had very little money available for the purchase of Japanese cloth. *265 It did purchase some small lots of Japanese cloth, *800 which it manufactured into handkerchiefs. These handkerchiefs, when sold, were shown as having been manufactured from Japanese cloth. Some firms did not handle products made from Japanese goods, J. C. Penney Company being one of those firms.
The petitioner's net profit or loss, its percentage of profits to sales, and its percentage of expenses to sales, for the years 1927 through 1939, were as follows:
| Percentage of | Percentage | ||
| Year | Net profit | net profits | of expenses |
| or loss | to sales | to sales | |
| 1927 | $ 23,638.00 | 3.4 | 9.4 |
| 1928 | 7,638.00 | 1.1 | 6.7 |
| 1929 | 21,448.00 | 2.4 | 5.8 |
| 1930 | 17,911.00 | 2.3 | 7.3 |
| 1931 | 5,877.00 | 0.9 | 7.5 |
| 1932 | (14,759.00) | (2.8) | 7.1 |
| 1933 | 9,945.00 | 2.1 | 7.7 |
| 1934 | (33,885.00) | (8.4) | 10.2 |
| 1935 | (17,507.00) | (8.2) | 10.1 |
| 1936 | 1,864.00 | 0.6 | 8.6 |
| 1937 | (7,944.92) | (3.3) | 10. |
| 1938 | (2,985.00) | (1.4) | 9.5 |
| 1939 | 163.00 | 6.1 |
The petitioner's production in dozens of handkerchiefs produced and its costs per dozen, for the years 1928 through 1939, were as follows:
| Dozens | Cost per | |
| Year | produced | dozen |
| 1928 | 1,830,437 | $ .3327 |
| 1929 | 2,705,625 | .3172 |
| 1930 | 2,329,860 | .2978 |
| 1931 | 2,397,943 | .2779 |
| 1932 | 2,099,988 | .2423 |
| 1933 | 1,735,368 | .2500 |
| 1934 | 1,017,614 | .3511 |
| 1935 | 674,484 | .3270 |
| 1936 | 1,011,328 | .3032 |
| 1937 | 801,860 | .2927 |
| 1938 | 712,438 | .2582 |
| 1939 | 968,283 | .2722 |
*266 The petitioner's current assets, current liabilities and net working capital for the years 1927 through 1939, were as follows:
| Current | Current | Net working | |
| Year | assets | liabilities | capital |
| 1927 | $ 200,087.90 | $ 96,287.73 | $ 103,800.17 |
| 1928 | 189,637.29 | 84,936.31 | 104,700.98 |
| 1929 | 192,305.82 | 58,112.70 | 134,193.12 |
| 1930 | 174,848.43 | 54,982.55 | 119,865.88 |
| 1931 | 242,104.06 | 116,587.68 | 125,516.38 |
| 1932 | 189,577.36 | 87,725.26 | 101,852.10 |
| 1933 | 169,717.86 | 63,185.27 | 106,532.59 |
| 1934 | 56,904.95 | 3,480.00 | 53,424.95 |
| 1935 | 80,238.05 | 35,024.86 | 45,213.19 |
| 1936 | 88,071.36 | 39,978.63 | 48,092.73 |
| 1937 | 91,606.57 | 50,729.49 | 40,877.08 |
| 1938 | 69,903.48 | 34,002.44 | 35,901.04 |
| 1939 | 63,801.46 | 26,132.69 | 37,668.77 |
*801 An analysis of the petitioner's base period operations is shown as follows:
| 1936 | 1937 | 1938 | 1939 | |
| NET SALES | $ 333,450.90 | $ 243,337.33 | $ 213,228.53 | $ 291,040.25 |
| COST OF SALES: | ||||
| Materials | 228,084.15 | 171,927.68 | 144,750.67 | 201,762.01 |
| Direct labor | 50,274.39 | 33,627.70 | 29,321.21 | 42,242.98 |
| Manufacturing overhead | 24,364.26 | 20,065.33 | 21,864.13 | 23,287.53 |
| Total cost | 302,722.80 | 225,620.71 | 195,936.01 | 267,292.52 |
| Gross profit | 30,728.10 | 16,716.62 | 17,292.52 | 23,747.73 |
| Selling expenses | 8,836.45 | 7,463.52 | 5,514.08 | 7,180.21 |
| Administrative expenses | 14,416.88 | 12,412.34 | 10,133.93 | 12,660.11 |
| Other income and | ||||
| deductions (net) | 5,509.92 | 4,785.68 | 4,630.32 | 3,708.13 |
| Total expenses | 28,763.25 | 24,661.54 | 20,278.33 | 23,548.45 |
| NET PROFIT OR LOSS | 1,964.85 | (7,944.92) | (2,985.81) | 199.28 |
*267 A large part of the loss sustained by the petitioner during the year 1937 resulted from a decline in the price of cloth. This decline started with a break in the cotton market during August and September of 1937. The inventory on hand at the time of the break had been accumulated in anticipation of a possible rise in prices and of a volume of fall business, which, in the end, fell short of expectations. The break in price necessitated a downward valuation of inventories, to give effect to the reduced market price of cloth. During 1937 and until the break in the market, the petitioner was maintaining a fair margin of profit, even though at a reduced volume of sales. It had a net profit at June 30 of $ 3,379.67, and at September 30, before any devaluation of inventories, of $ 2,796.20.
The total average annual sales of 6 handkerchief manufacturing companies in the United States, other than the petitioner, for the years 1927 through 1933 amounted to $ 5,147,244, which amount represented approximately 21.7 per cent of the average annual production of handkerchiefs in the United States during such years. The total sales of the same 6 companies during each of the base period years*268 and the percentage thereof to total average annual sales of the companies during the years 1927 through 1933 were as follows:
| Total sales | Percentage of average | |
| Year | (6 companies) | annual sales 1927-1933 |
| 1936 | $ 6,248,235 | 121.390 |
| 1937 | 5,915,054 | 114.917 |
| 1938 | 5,414,628 | 105,195 |
| 1939 | 5,780,606 | 112,305 |
The total average annual net income of these 6 companies during the years 1927 through 1933 was approximately $ 114,000. The total net income of these same 6 companies during each of the base period years, the percentage thereof to the total average annual net income of the 6 companies for the years 1927 through 1933 and the percentage *802 of net income for each base period year to total sales of these companies for those years were as follows:
| Percentage | Percentage | ||
| Total net | of average | of total | |
| Year | income or | annual net | sales for current |
| loss (6 companies) | income 1927- | year | |
| 1933 | |||
| 1936 | $ 157,481 | 138.141 | 2.520 |
| 1937 | (6,958) | (6.104) | (0.118) |
| 1938 | 6,175 | 5.417 | 0.114 |
| 1939 | 125,130 | 109.763 | 2.165 |
The total average annual working capital of the 6 companies during the years 1927 through 1933 amounted to approximately $ *269 2,093,000. The total working capital of the same 6 corporations during each of the base period years and the percentage thereof to the average annual working capital of the corporations for the period 1927 through 1933 were as follows:
| Percentage of average | ||
| Total working capital | annual working capital | |
| Year | (6 companies) | 1927-1933 |
| 1936 | $ 2,287,547 | 109.295 |
| 1937 | 2,235,681 | 106.817 |
| 1938 | 2,313,333 | 110.527 |
| 1939 | 2,266,457 | 108.288 |
As shown by the Statistics of Income of the Bureau of Internal Revenue for each of the years 1927 through 1939, the sales made by taxpayers engaged in the production of "Textiles, not elsewhere classified" 4 and the percentage thereof to sales made in 1927 by such taxpayers, were as follows:
| Textiles -- | ||
| not elsewhere | ||
| Year | classified | Index |
| 1927 | $ 1,571,000,000 | 100.00 |
| 1928 | 1,463,000,000 | 93.12 |
| 1929 | 1,659,000,000 | 105.60 |
| 1930 | 1,206,000,000 | 76.77 |
| 1931 | 938,000,000 | 59.71 |
| 1932 | 680,000,000 | 43.28 |
| 1933 | 830,000,000 | 52.83 |
| Average | 1,192,000,000 | 75.88 |
| 1934 | 947,000,000 | 60.27 |
| 1935 | 1,221,000,000 | 77.72 |
| Average | 1,084,000,000 | 69.00 |
| 1936 | 1,522,000,000 | 96.88 |
| 1937 | 1,517,000,000 | 96.56 |
| 1938 | 1,354,000,000 | 86.19 |
| 1939 | 1,596,000,000 | 101.59 |
| Average | $ 1,497,000,000 | 95.16 |
*803 Using 1927 as the index year, as in the tables above, the value of handkerchiefs produced in the United States, as shown by the Department of Commerce Yearbook for 1939, for the odd years 1927 through 1939 and the percentage thereof to 1927 production were as follows:
| Value of | ||
| handkerchiefs | ||
| Year | produced | Index |
| 1927 | $ 31,558,000 | 100. |
| 1929 | 29,554,000 | 93.64 |
| 1931 | 19,798,000 | 59.57 |
| 1933 | 14,923,000 | 47.29 |
| Average | 27,208,000 | 86.21 |
| 1935 | 18,443,000 | 58.44 |
| Average | 18,443,000 | 58.44 |
| 1937 | 19,720,000 | 62.49 |
| 1939 | 21,601,000 | 68.45 |
| Average | $ 20,660,000 | 65.47 |
*271 Also using 1927 as the index year, the petitioner's sales for the years 1927 through 1939 and the percentage thereof to its 1927 sales were as follows:
| R. W. Eldridge | ||
| Company | ||
| Year | sales * | Index |
| 1927 | $ 703,000 | 100. |
| 1928 | 661,000 | 94.03 |
| 1929 | 920,000 | 130.87 |
| 1930 | 789,000 | 112.23 |
| 1931 | 696,000 | 99. |
| 1932 | 544,000 | 77.38 |
| 1933 | 479,000 | 68.13 |
| Average | 684,000 | 97.30 |
| 1934 | 402,000 | 57.18 |
| 1935 | 214,000 | 30.44 |
| Average | 308,000 | 43.81 |
| 1936 | 333,000 | 47.37 |
| 1937 | 243,000 | 34.57 |
| 1938 | 213,000 | 30.30 |
| 1939 | 291,000 | 41.39 |
| Average | $ 270,000 | 38.41 |
*804 The petitioner's percentage of average net profit to sales for the period 1927 through 1933 was 1.5 per cent. For the period 1936 through 1939, it sustained an average net loss of $ 2,090 per year. The percentage of such loss to annual average sales was 8 per cent. In the case of the producers of "Textiles, not elsewhere classified," as described above, the percentage of average net profits to average sales for the period 1927 through 1933 was .64 per cent. For the period 1936 through 1939, the percentage of average net profits*272 to average annual sales was 1.76 per cent.
As computed by the respondent, under section 714 of the Internal Revenue Code, the petitioner's excess profits credit for the 6-month period ended June 30, 1942, was $ 11,088.45, and for the fiscal year ended June 30, 1943, $ 9,571.44
OPINION.
The petitioner, a domestic corporation, was organized prior to January 1, 1940, and under section 712 of the Internal Revenue Code, was privileged to have its excess profits credit computed under whichever of sections 713 or 714 would result in the lesser tax. Admittedly, a computation of the petitioner's excess profits credit under section 714, on the basis of invested capital, would result in the lesser tax, and it was on that basis that the said credit was computed by the petitioner in filing its returns, and on the same basis that the respondent made his determination. There is no suggestion or contention that, absent the applicability of section 722 of the Code, the excess profits credit should have been computed on the basis of base period net income.
It is the claim of the petitioner that it is entitled to the benefits of section 722 of the Internal Revenue Code, 5 in that otherwise its excess*273 *805 profits tax for the years before us was excessive and discriminatory, by reason of the occurrence of events within the meaning of subsections (b) (1) and (2). To bring the case within subsection (b) (1), it is argued that the death of R. W. Eldridge was an event unusual and peculiar in the experience of the petitioner; that it occurred immediately prior to the base period and that, by reason thereof, petitioner's base period normal output or operation was diminished. With respect to subsection (b) (2), it is claimed that the business of both the petitioner and the handkerchief industry was depressed in the base period by temporary circumstances and events unusual to them, the unusual temporary economic circumstances in the case of the petitioner being its credit difficulties following the death of R. W. Eldridge and in the case of the industry, Japanese competition.
*274 Under the statute, a taxpayer is entitled to the benefit of section 722, provided it establishes that its tax, computed without the benefit of that section, "results in an excessive and discriminatory tax," and by subsection (b), it is provided that the tax computed without the benefit of section 722 "shall be considered to be excessive and discriminatory," if its actual average base period net income is an inadequate standard of normal earnings because of the happening of certain described events, including those set forth in subsections (b) (1) and (2). It must also prove or establish "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 the taxpayer's earnings during the particular excess profits tax period or periods. Inasmuch, however, as the comparison to be made of normal earnings for the base period with the earnings for the excess profits tax period is made through the use or application of the excess profits credit computed on the basis of the "constructive average base period net income," it actually profits*275 the taxpayer not at all to show events and circumstances, under section 722, whereby the tax computed without the benefit of section 722 "shall be considered to be excessive and discriminatory," unless it proves or establishes a "constructive average base period net income" sufficient to produce an excess profits credit greater than that already computed without the benefit of section 722.
Whether or not the events upon which the petitioner relies were such as to qualify it for relief under section 722 (b) (1) and (2), we find it unnecessary to decide, since, in our opinion, the petitioner has failed to establish "what would be a fair and just amount representing normal earnings to be used as [its] constructive average base period net income," or that such "fair and just amount," if established, would result in an excess profits credit any larger, if as large, than that already allowed under section 714, without the benefit of section 722.
*806 For the purpose of showing the "amount representing normal earnings to be used as constructive average base period net income," under section 722, the petitioner rests its case entirely on the proposition that a comparison of the 1927 *276 to 1933 sales and profits experience of taxpayers covered under "Textiles, not elsewhere classified," in the Bureau of Internal Revenue's Statistics of Income, with the 1936 to 1939 experience of such taxpayers, will produce a factor which, when applied to its own sales and profits experience for 1927 to 1933, will reflect what would have been normal sales and profits for the base period, absent the events which it claims bring it within the scope of section 722 (b)(1) and (2).
A major difficulty with the proposition stated is that it is supported of record by very little, if anything, more than the statement of the proposition itself. There is no indication or showing that the grouping under the heading "Textiles, not elsewhere classified" in the Statistics of Income of the Bureau of Internal Revenue was occasioned by any substantial resemblance of the various finished products or the markets or uses therefor. Rather, it appears that the grouping was a "catch-all" for the summing up of the income and facts relating thereto of the producers of a "hodge-podge" of items involving textiles, to greater or lesser degrees, in their composition and manufacture. And, in the main, the information*277 appearing of record as to items in the classification is not by way of proof or evidence, but such as may be gathered by statements of counsel in colloquy between themselves and between them and the Court, and, in a few instances, from recitations of matter preliminary to questions asked a witness, which witness was the petitioner's accountant, who, rather obviously, was not too well informed in the matter himself.
So far as may be determined from the sources outlined above, the products covered by the grouping or classification "Textiles, not elsewhere classified" included such items as cord, hemp, rope, twine; felt goods, but not including felt hats; fur goods, but not including furtrimmed; leather goods; hospital and surgical supplies, including absorbent sheeting, adhesive tape, antiseptic gauze, elastic surgical supplies, et cetera; linen and flax goods; and other textiles not including clothing, such as artificial leather, artificial textiles, asbestos textiles, awning materials, banners; bedding, representing bedspreads, blankets, comforts, mattresses; bunting, burlap, curled hair, elastic goods, embroidery, flags, hair cloth, handkerchiefs, laces, lacings, oakum, packing, *278 quilted lining, sail cloth, shade cloth, thread, tents, trimmings, veilings, waste, woven belting, yarns; and examining, dyeing, refinishing, rubberizing, sponging, or waterproofing textiles. The *807 category also appeared to include horse blankets, belts, badges, auto tire and seat covers, mattress protectors, slip covers, shower curtains, carpet linings, and textile bags. In the category "Other Apparel" in 1938 and 1939 were such items as gloves and mittens, combinations of cloth and leather, handkerchiefs, suspenders and garters, robes, lounging garments and dressing gowns, raincoats and other waterproof garments, except oiled, clothing, leather and sheeplined, pleating, stitching, tucking, and embroidery, stamped art goods and art needlework, not made in textile mills, miscellaneous apparel not elsewhere classified, housefurnishings, hassocks and cushions. Because of changes in 1938 and 1939 resulting from the appearance in the statistics of items covered under the category "Other Apparel," the petitioner's accountant made certain adjustments in the 1938 and 1939 figures to bring them in harmony with the statistics for the prior years. He was unable to state or explain, *279 from the witness stand, what or how far reaching those adjustments were.
Without some further showing, we have no way of knowing whether the trend in production, sales, and profits of such items of cord, hemp, rope, twine, asbestos textiles, awning materials, bedspreads, blankets, mattresses, burlap, hair cloth, oakum, sail cloth, shade cloth, tents, woven belting, horse blankets, auto tire and seat covers, shower curtains, carpet linings, suspenders, garters, dressing gowns, raincoats, hassocks, cushions, and many of the other items listed, would give the slightest indication of the trend in the production, sales, and profits in the handkerchief industry, whether the events upon which the petitioner places its reliance for section 722 relief be present or absent. We do not even know whether they are in accord or discord with business trends generally for the periods considered. In short, assuming that the events relied upon by the petitioner were such as would qualify it for relief under section 722, the petitioner has not, in our opinion, shown or established "what would be a fair and just amount representing normal earnings to be used as a constructive average base period net*280 income" for the purpose of computing an excess profits credit other than or in excess of that already computed and determined without the benefit of section 722. It accordingly follows that the respondent must be sustained in his disallowance of the petitioner's claims herein. Monarch Manufacturing Co., 15 T. C. 442; Trunz, Inc., 15 T. C. 99; Stonhard Co., 13 T. C. 790; Karsten Catering Co., 13 T. C. 645; and Irwin B. Schwabe Co., 12 T.C. 606">12 T. C. 606.
Reviewed by the Special Division.
Decision will be entered for the respondent.
Footnotes
*. At May 19, 1934, shortly after the death of Eldridge, the petitioner's notes payable to the banks amounted to $ 70,508, of which $ 50,000 was on open notes endorsed by Eldridge, and $ 20,538 on notes secured by warehouse receipts. Thereafter, for as long as petitioner borrowed from banks, its notes were secured by chattel mortgages on equipment and inventories and up to $ 20,000 by accounts receivable. At June 30, 1938, notes to banks amounted to $ 33,965.97, secured by accounts receivable, warehouse receipts covering finished goods and a chattel mortgage on equipment. At December 31, 1938 and 1939, the petitioner's credit financing was done by pledging its accounts receivable with the Manufacturers Finance Company of Baltimore, as shown above.↩
1. It was Elliott's opinion that the annual rental of $ 4,800 agreed to was $ 1,200 more than the rent then being paid in that vicinity for comparable property and that $ 1,200 of each $ 4,800 called for was in satisfaction of the amount by which petitioner was delinquent under the old lease.↩
2. For the first 3 months of 1934 petitioner's sales to chain stores were $ 65,352.43. For the remainder of 1934 and for 1935 no figures are available. When Elliott came with petitioner in December of 1934 no sales were then being made to chain stores.↩
3. The 2 paragraphs quoted represent stipulated excerpts from the report of the United States Tariff Commission, entitled "Cotton Cloth," prepared in response to requests from the Committee on Finance of the United States Senate, and the Committee on Ways and Means of the House of Representatives, the report being No. 27 -- War Changes in Industry Series.↩
4. For the years 1938 and 1939, there were some changes in or additions to the items included in the statistics mentioned. For those years the designation "Other Apparel" appears. It is not clear of record, however, whether the designation of the entire group was changed from "Textiles, not elsewhere classified" to "Other Apparel," or whether certain items designated "Other Apparel" were merely added in with the items appearing under the designation "Textiles, not elsewhere classified." For 1938 and 1939 the sales shown in the above table are not as shown in the Internal Revenue Bureau's Statistics of Income, but are the result of adjustments by petitioner's accountant, the scope and exact basis of which are not shown.↩
*. The sales by years are here shown in round numbers at the nearest 1,000 dollars.↩
5. 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 determined under this subchapter. * * *
(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 --
(1) in one or more taxable years in the base period normal production, output, or operation was interrupted or diminished because of the occurrence, either immediately prior to, or during the base period, of events unusual and peculiar in the experience of such taxpayer.
(2) the business of the taxpayer was depressed in the base period because of temporary economic circumstances unusual in the case of such taxpayer or because of the fact that an industry of which such taxpayer was a member was depressed by reason of temporary economic events unusual in the case of such industry, * * *↩