*29 Decision will be entered for the respondent.
Commissioner's denial of application for excess profits tax relief under section 722 sustained where the evidence fails to show that the excess profits tax complained of is excessive and discriminatory and that the average base period net income is an inadequate standard of normal earnings.
*1220 This proceeding is based upon the respondent's disallowance of petitioner's application for excess profits tax relief under section 722. The petitioner claims that it is entitled to recover the entire amount, $ 4,496.82, of excess profits tax paid for 1941.
FINDINGS OF FACT.
The petitioner is a corporation, organized under the laws of the State of Ohio on November 20, 1922, with its office and principal place of business in Cleveland. It began active operations on January 1, 1924. Petitioner's income and declared value excess profits tax return and its excess profits tax return for the calendar year 1941 were filed with the collector of internal revenue for the eighteenth district of Ohio, at Cleveland.
The excess profits tax for the calendar year 1941, as shown by the excess profits tax return filed, was $ 4,496.82. The petitioner was delinquent in filing such return and there was assessed thereon and paid by the petitioner a penalty of 25 percent, being the sum of $ 1,124.21.
*1221 In connection with an examination of its aforesaid returns for 1941 petitioner filed with the respondent a protest bearing date of December 30, 1942, in which*31 it claimed a constructive average base period net income under the provisions of section 722, as amended by the Revenue Act of 1942, for use in the determination of its excess profits credit for 1941. The claim represented that (1) petitioner was entitled to invoke the provisions of section 722 by reason of the existence of a price war in its industry resulting from the facts that the industry was highly competitive; that in the latter twenties there existed in the industry an excess of manufacturing capacity; and that in the early thirties mergers had taken place in the industry; and that (2) by reason of the fact that in 1936 the petitioner, which had previously sold through jobbers, began to sell direct to the ultimate user of petitioner's products, which change subjected petitioner to a "period of transition in which it operated under a severe handicap." The allegations in the claim with respect to the change are as follows:
When business conditions began to improve, the taxpayer found it was greatly handicapped due to the fact that on account of the depression many mergers had occurred in this particular type of industry, primarily for the purpose of increasing the size and *32 the line of the merging companes. The taxpayer found that the line manufactured by it was not sufficient to cover the requirements of its jobbers in full, and that such jobbers were inclined to represent manufacturers that could fill their entire requirements for cap screws and all types of bolts. The taxpayer had neither the capital nor the facilities to manufacture the large varieties of bolts handled by jobbers. Therefore, starting in 1936, the corporation began to market its product directly to the manufacturer who was the ultimate user of the same. Naturally, the taxpayer was unable to sell both to the jobbing trade and to the consumers who were the customers of the jobbers and, for that reason, it went through a period of transition in which it operated under a severe handicap.
With respect to the price war the allegations made in the claim contained in the protest were, in substance, as follows: Petitioner in 1929 entered into the manufacture of cap screws. In the fall of 1929 "a depression started and rapidly deepened, and in 1934 the taxpayer extended its line of manufacture to include various types of bolts in addition to cap screws." The manufacture of cap screws and*33 bolts is a quantity production business, the business is highly competitive, and the margin of profit is small. "The only reason that the taxpayer was able to weather the financial storm during the early years of the 30's was that there are always certain types of cap screws and bolts which are difficult to manufacture. This special work is not desired by the larger manufacturers, and it so happened that the taxpayer had men in its employ who were especially skilled. It was able to do enough of this type of work at a reasonable profit to keep going." Material and labor costs are the primary factors in this type of industry *1222 and volume must be sufficient to make overhead a small proportion of the total cost per thousand.
It was further stated in the claim that the price per thousand of taxpayer's products had reached in the current year (1942) approximately the price level in effect in 1934 and that, while material and labor costs were higher in the current year "it is admitted that a reasonable margin of profit can be made at the present time."
The claim contained a purported reconstruction of base period earnings with respect only to the allegations under section 722*34 (b) (2), on the basis of the average sale prices per thousand for petitioner's product which it obtained in 1934. The production of its base period year was priced in terms of gross dollar amounts of sales at the average price per thousand units obtained in 1934. The actual base period sales were then subtracted from the sales so reconstructed and an aggregate increase of reconstructed sales was obtained in the amount of $ 185,290.66. This figure was divided by four and an average figure of $ 46,322.66 was derived. This last figure was then denoted the constructive average base period net income.
On April 5, 1943, the petitioner filed with the respondent an application for relief (Form 991) under section 722 for the year 1941, in which claim was made for a refund of $ 4,496.82 representing the amount of excess profits tax shown due on petitioner's excess profits tax return for the calendar year 1941.
Petitioner, in the aforesaid application for relief (Form 991), checked off as reasons for relief section 722 (b) (2), (4), and (5). The date on which the change in character of its business occurred was given as 1936.
In all material respects the application for relief on Form 991*35 was identical with the claim for relief contained in the aforesaid protest and no additional information was contained therein.
The petitioner commenced business by manufacturing brake bands for the Model T Ford automobile. It subsequently expanded its line to cover the manufacture of other accessories for the same model automobile. Prior to 1929 the experience of petitioner in the cap screw industry was limited to doing certain finishing operations on cap screws, the blanks for which it purchased from other manufacturers.
In 1929 the petitioner discontinued the manufacture of brake bands and automotive accessories and commenced manufacturing hexhead cap screws. In furtherance of this change in operations it amended its articles of incorporation and increased its authorized capital stock. It sold additional stock and purchased additional manufacturing equipment for the manufacture of cap screws. In 1930 it confined its operations to the manufacture of hexhead cap screws. It sold its product through jobbers at standard list prices less published discounts, *1223 as was the custom in the industry, in competition with the large manufacturers.
By decree dated March 17, 1931, *36 in the United States District Court for the Southern District of New York, in Equity, No. 58-383, in a suit entitled "United States of America, Petitioner v. Bolt, Nut and Rivet Manufacturers Association, et al., Defendants," a final decree was entered in which agreements, plans, and operations to eliminate competition among manufacturers of bolts, nuts, or rivets and to maintain prices were declared illegal and in violation of the Sherman Antitrust Act and some forty-eight manufacturers of bolts, nuts, or rivets were enjoined from concertedly fixing, establishing, or maintaining prices at noncompetitive levels. The petitioner was not a defendant in that suit.
As a result of the decree referred to above there were many mergers and consolidations among manufacturers. By 1933 most of the large producers were making both cap screws and bolts and the two industries largely became one. These mergers enabled the larger producers to furnish a more complete line to the jobbers. There was keen competition among the manufacturers and methods of manufacture were improved by automatic machines, with the result that the selling price of the caps, screws, and bolts showed a continuous downward*37 trend.
The petitioner, a small operator, feeling the pressure of this competition, started as of the beginning of 1934 to extend its line to cover the manufacturing of set screws, flathead cap screws, industrial bolts, and stove bolts.
During the years 1933 and 1934 there was a machine developed by a local manufacturer which was known as the "boltmaker." This machine made a complete cap screw or bolt in one operation, whereas the machinery of the petitioner, as well as that of most manufacturers at that time, required five separate operations.
The boltmaker was manufactured by a large machinery manufacturer and sold by it to manufacturers of bolts and cap screws. It was an expensive machine. The petitioner did not have the capital to procure these bolt-making machines. It continued to use upsetting machines which required four or five operations for the manufacture of a cap screw or bolt.
Petitioner continued after 1934 to sell its standard products through jobbers in competition with other manufacturers, but at the same time it undertook to secure a larger volume of orders, directly from the industries which were to use them, for special bolts and screws not covered by the standard*38 lines put out by the other manufacturers. These "specials," as they were called, sometimes required special materials or special finishing work, or both. In 1935 the petitioner began to send representatives out to call on the other industries and solicit *1224 such orders. The specials comprised about 5 or 10 percent of the petitioner's output in 1935 and gradually increased to about 80 percent in 1941.
Some of the cap screws and bolts which petitioner manufactured had one or more holes drilled through the heads or shanks so that they could be wired together to prevent them from working loose. The drilling was a difficult operation and sometimes cost as much as all of the other operations combined. Petitioner's president developed a machine which greatly facilitated the drilling work and reduced the cost of drilling operations to about 30 percent of the original cost for some types. An application for a patent on this machine was filed in 1938. The first machine of this type was constructed and used by the petitioner in 1939. Three more machines were built by petitioner and put into operation in 1940 or 1941. The use of this machine was not licensed and it is used only*39 by the petitioner.
Petitioner's entire production for the years 1930 to 1942, inclusive, and the average yearly selling price of each of the products manufactured were as follows:
| Pieces manufactured | |||||
| Year | |||||
| HH cap | FH cap | Industrial | |||
| screws | Set screws | screws | bolts | Stove bolts | |
| 1930 | 1,520,804 | ||||
| 1931 | 1,710,938 | ||||
| 1932 | 1,594,433 | ||||
| 1933 | 4,844,409 | ||||
| 1934 | 3,809,126 | 531,439 | 98,350 | 672,249 | 1,529,910 |
| 1935 | 3,017,920 | 349,063 | 55,204 | 3,370,977 | 8,355,580 |
| 1936 | 4,778,588 | 462,533 | 43,753 | 5,033,359 | 6,286,257 |
| 1937 | 3,691,512 | 331,240 | 33,364 | 10,958,100 | 6,888,325 |
| 1938 | 3,132,263 | 121,363 | 46,813 | 5,858,224 | 2,830,900 |
| 1939 | 2,740,475 | 166,743 | 20,519 | 10,315,500 | 8,549,000 |
| 1940 | 3,514,594 | 243,703 | 9,457,414 | 9,649,308 | |
| 1941 | 6,760,095 | 643,998 | 26,256,751 | 12,702,893 | |
| 1942 (10 mos.) | 5,081,751 | 236,833 | 26,776,088 | 10,451,801 |
| Average price per M received | |||||
| Year | |||||
| HH cap | FH cap | Industrial | Stove bolts | ||
| screws | Set screws | screws | bolts | ||
| 1930 | $ 11.82 | ||||
| 1931 | 10.83 | ||||
| 1932 | 10.43 | ||||
| 1933 | 9.54 | ||||
| 1934 | 10.25 | $ 10.32 | $ 29.10 | $ 13.21 | $ 2.43 |
| 1935 | 10.15 | 9.61 | 26.94 | 9.28 | 2.40 |
| 1936 | 9.70 | 11.34 | 35.11 | 10.39 | 2.40 |
| 1937 | 10.97 | 14.00 | 14.00 | 7.93 | 2.65 |
| 1938 | 5.89 | 7.16 | 20.08 | 8.31 | 2.15 |
| 1939 | 6.30 | 10.85 | 22.40 | 8.31 | 1.90 |
| 1940 | 6.71 | 8.51 | 8.22 | 1.92 | |
| 1941 | 7.59 | 10.65 | 8.06 | 2.74 | |
| 1942 (10 mos.) | 9.92 | 12.89 | 8.53 | 2.41 |
*40 The "Industrial bolts" column covers mostly specials, but it also covers some standards that were sold directly to the industries. Likewise, some of the other columns cover a few specials.
*1225 The following table shows petitioner's total gross sales for the years 1924 to 1942, inclusive, the total number of pieces sold, the average selling price per thousand, and the net profits:
| Total pieces | Average price | Net profit | ||
| Year | Total sales | sold | per M | |
| 1924 | $ 62,880.62 | 1 | $ 4,584.49 | |
| 1925 | 88,757.80 | 1 | 4,408.64 | |
| 1926 | 48,642.61 | 1 | 1,031.67 | |
| 1927 | 61,415.60 | 1 | 31.09 | |
| 1928 | 58,421.77 | 1 | 1,402.53 | |
| 1929 | 35,172.06 | 1 | (4,584.67) | |
| 1930 | 23,324.23 | 1,520,804 | $ 15.33 | (6,439.65) |
| 1931 | 24,214.07 | 1,710,938 | 14.15 | (1,255.98) |
| 1932 | 21,652.87 | 1,594,433 | 13.58 | 139.34 |
| 1933 | 59,117.57 | 4,844,409 | 12.20 | 1,008.17 |
| 1934 | 65,193.35 | 6,640,413 | 9.82 | 1,109.79 |
| 1935 | 90,646.17 | 15,993,244 | 5.67 | 844.28 |
| 1936 | 128,073.74 | 18,687,150 | 6.85 | 4,103.64 |
| 1937 | 148,129.13 | 21,899,541 | 6.76 | 3,450.48 |
| 1938 | 82,044.47 | 11,989,563 | 6.84 | 1,983.42 |
| 1939 | 121,842.16 | 21,792,237 | 5.59 | 3,050.68 |
| 1940 | 124,950.58 | 22,865,019 | 5.47 | 3,238.21 |
| 1941 | 308,333.49 | 46,363,737 | 6.65 | 20,998.99 |
| 1942 (10 mo.) | 308,927.37 | 42,554,473 | 7.26 |
Also, in the years 1930 to 1942, inclusive, petitioner's sales of miscellaneous nuts were as follows:
| 1930 | $ 5,851.41 |
| 1931 | 5,892.08 |
| 1932 | 5,370.55 |
| 1933 | 14,498.97 |
| 1934 | 6,004.80 |
| 1935 | 7,621.70 |
| 1936 | 9,740.74 |
| 1937 | $ 6,762.90 |
| 1938 | 4,623.88 |
| 1939 | 3,331.30 |
| 1940 | 3,858.44 |
| 1941 | 4,598.72 |
| 1942 (10 mos.) | 1,796.72 |
Petitioner's average annual profit in the base period was $ 3,248.68, or about 500 percent of its average earnings in its entire history as a manufacturer of screws and bolts (i. e., since 1930), except for its wartime experience. Earnings in every year of the base period were larger than those in any year from 1930 through 1935.
Pursuant to petitioner's request for relief under section 722, before the application for relief was disallowed, a conference was held by the Technical Staff of the Bureau with representatives of the petitioner on January 12, 1944.
On April 18, 1944, the respondent sent petitioner a deficiency notice for 1941 in which he determined an overassessment of $ 435.20 in income tax, a deficiency of $ 143.06 in declared value excess profits tax, and a deficiency of $ 15.25 in excess*42 profits tax, plus an additional penalty thereon of $ 3.81. In the deficiency notice the respondent also denied in full petitioner's claim for relief under section 722, stating:
Your claim for relief under Section 722 of the Internal Revenue Code, as amended, in which a refund or credit of excess-profits tax in the amount of $ 4,496.82 is claimed for 1941, has been disallowed because you have failed to *1226 establish that the tax computed under Subchapter E of the Internal Revenue Code, as amended, without regard to the benefits of Section 722, results in an excessive and discriminatory tax.
OPINION.
Our only question in this proceeding is whether the respondent erred in disallowing petitioner's application for excess profits tax relief under section 722. The pertinent provisions of the statute are as follows:
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 *43 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. 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 that, in the cases described in the last sentence of section 722 (b) (4) and in section 722 (c), regard shall be had to the change in the character of the business under section 722 (b) (4) or the nature of the taxpayer and the character of its business under section 722 (c) to the extent necessary to establish the normal earnings to be used as the constructive average base period net income.
(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*44 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 --
* * * *
(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.
* * * *
(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*45 in the operation or management of the business, a difference in the products or services furnished, a difference in the capacity for production or operattion, a difference *1227 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. * * *
(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.
Section 722 is a general relief measure. Its purpose is to "afford relief in meritorious cases to corporations which bear an excessive tax burden because of an abnormally low excess profits credit." (Senate Finance Committee, Rept. No. 1631, 77th Cong., 2d sess.).
The plan of the statute is to bring about an increase, in such cases, in the statutory excess profits credit. The excess profits tax is*46 computed on the statutory "adjusted excess-profits net income" (sec. 710 (a) and (b)) The adjusted excess profits net income is the "excess profits net income" as defined in section 711, minus the specific exemption provided for in section 710 (b) (1) and the excess profits credit provided for in section 712 (section 710 (b) (2)). Under section 712 (a) domestic corporations which were in existence before January 1, 1940, are entitled to an excess profits credit based either on income (section 713) or on invested capital (section 714), whichever results in the lesser tax. The credit based on income is 95 percent of the "average base period net income," with certain adjustments for capital additions and reductions (section 713 (a) (1) (A), (B), (C)). Ordinarily the "base period" covers the years 1936 to 1939, inclusive, as to corporations in existence for that period (section 713 (b) (1) (A)). Thus, the relief afforded by section 722 is gained through a "reconstruction" of, or increase in, average base period net income, and a consequent increase in the excess profits credit.
Section 722 substantially as it is now constituted became a part of the Internal Revenue Code with the enactment*47 of the Revenue Act of 1942. It first appeared in "token" form in section 201 of the Second Revenue Act of 1940 as a part of the Excess Profits Tax Act of 1940. It was enacted in more complete form by an amendment appearing in the Revenue Act of 1941 (sec. 6, Excess Profits Amendments of 1941), and was further amended by section 202 of the Revenue Act of 1941. section 222 of the Revenue Act of 1942, Public Law No. 21, approved March 31, 1943, Public Law No. 201, approved December 17, 1943, and section 206 (a) of the Revenue Act of 1943.
The benefits of section 722 are made available only where a taxpayer establishes that the excess profits tax complained of is "excessive and discriminatory," as those terms are defined in the statute, and further establishes what would be a fair and just standard of normal earnings for the base period.
*1228 While the statute carries its own definition of "excessive and discriminatory" it does not define the term "an inadequate standard of normal earnings." The word "normal" is susceptible of different, or varying meanings. Webster's New International Dictionary defines it as meaning:
According to, constituting, or not deviating from, an established*48 norm, rule, or principle; conformed to a type, standard, or regular form; performing the proper functions; not abnormal; regular; natural; analogical.
Still the question might arise as to whether the "normal earnings" referred to in the statute are those of the particular taxpayer or those of the industry as a whole. In relation to its context we think that the whole phrase of "an inadequate standard of normal earnings" refers to a standard or measure of earnings which falls below that established over a reasonable length of time and under normal conditions by the taxpayer or by other taxpayers engaged in the same or a similar business under comparable conditions. It is such a standard as would result in "an abnormally low excess profits credit." Senate Finance Committee Report, supra.
We first consider the question of whether the petitioner has proved itself entitled to relief under section 722 (b) (2), upon which the petitioner places its chief reliance. That subsection is applicable if "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*49 such taxpayer was a member was depressed by reason of temporary economic events unusual in the case of such industry." Petitioner contends that its business was depressed in the years of the base period because of the low prices which it received for its products. Petitioner's profit and loss statements show that its profits in each of the base period years exceeded those of any prior year since 1925. There were operating losses in 1929, 1930, and 1931 and a profit of only $ 139.34 in 1932. The profits were over $ 4,000 in 1936, the first base period year, over $ 3,000 in each of the years 1937 and 1939, and approximately $ 2,000 in 1938. Petitioner's average profits for the four base period years were substantially greater than its average profits for its entire existence up to 1941. The losses in 1929, 1930, and 1931, and the small profit in 1932, may be attributed to the complete change in the nature of petitioner's business from the manufacture of brake bands to the manufacture of cap screws, which occurred in 1929. Apparently petitioner had fully recovered from the effects of the change by 1936, when it had earnings comparable to those of 1924 and 1925, its best years prior*50 to the taxable year 1941.
The evidence as a whole fails to make any strong showing that petitioner's business was depressed to any great extent during any of the base period years.
*1229 The mere fact that base period profits were not large would not necessarily mean that the business was depressed. Particularly would this be true where, as in the instant case, large profits were not customary in the taxpayer's history. The situation might be different if the taxpayer had greatly expanded its business or made substantial capital outlays from which a proportionately larger return of profits might reasonably have been expected. But those are not the facts here.
The petitioner's claim for relief under subsection (b) (2), as presented to the respondent in its claim on Form 991, was on the ground that its profits during the base period years were affected by a price war. The petitioner did not in such claim, or at any time thereafter, furnish respondent with any computation or evidence relating to a reconstruction of base period net income with respect to any factor or reason for relief other than the alleged price war.
In Blum Folding Paper Box Co., 4 T. C. 795,*51 we stated:
The scheme of the statute is that applications for relief under section 722 are to be presented in full to the Commissioner, who handles them administratively and passes upon them in the first instance in an effort to settle them without suit. This means that the applications must set forth not only the grounds for relief, but also a statement of the facts which the Commissioner is to consider in support of the reasons given. Additions are made by amendments before the claim is acted upon by the Commissioner. The Tax Court merely reviews his final determination. See sec. 732 (a), I. R. C. The taxpayer may not, as here, file a superficial claim, leaving the Commissioner in ignorance of the possible factual support for the claim, and then, after the resulting disallowance, come forward for the first time with the supporting statement of facts. That information is not a part of the application and consideration of it is beyond the scope of review by the Tax Court.
Since the function of the Tax Court in cases arising under section 722 is to review the respondent's determination upon the facts presented to him, it is apparent that only evidence to support those facts is*52 germane to the appeal presented to us. Any evidence directed toward proving other facts is inadmissible.
The principal facts alleged in the claim on Form 991, and those upon which petitioner seems to have relied in its application to the respondent for relief are: (1) That the manufacture of cap screws and bolts is a highly competitive business and one in which the margin of profits is small; (2) that because of the depression in the early thirties there were many mergers in the industry which resulted in increasing the quantity and "line" of the output of the merging companies; (3) that at about that time a "completely chaotic condition developed in the industry which resulted in a price war"; (4) that petitioner had neither the capital nor the facilities to compete with the large manufacturers of standard cap screws and bolts; (5) that petitioner was able "to weather the financial storm" only because it *1230 obtained sufficient "special work," which the big manufacturers did not want, to make a reasonable profit; (6) that beginning about 1936 petitioner began to market its products by selling them directly to the manufacturers who were to use them rather than through jobbers; *53 (7) that except for the year 1938 petitioner's output in the number of pieces manufactured for the years 1936 to 1939 was normal; (8) that "the taxpayer's financial difficulties during the base calendar years 1936 to 1939 were not due to lack of sales, but to the price war that existed in the industry"; and (9) that the prices prevailing in the year 1934 were "normal" and that petitioner's average base period income for the years 1936 to 1939, inclusive, should be recomputed by applying the 1934 prices to the sales made in those years. A computation such as that proposed, based on 1934 prices, was submitted with the memorandum and showed reconstructed average yearly earnings for the base period years of $ 46,322.66.
The figures furnished by petitioner show that the first sharp decline in the average price of its products occurred in 1934, when it dropped from $ 12.20 per thousand in 1933 to $ 9.82 per thousand in 1934. In 1935 there was a further decline to $ 5.67. In 1936, the first base period year, it was $ 6.85; in 1937, $ 6.76; in 1938, $ 6.84; and in 1939, $ 5.59. Thus for a period of nine years, from 1934 to 1942, inclusive, the average price for all products was approximately*54 $ 6.77 per thousand, while for the four base period years it was $ 6.51 per thousand, a difference of only 26 cents per thousand. The base period average price was larger than the average price for 1940, $ 5.47, and was only 14 cents below the average price for the taxable year 1941, when petitioner's profits on which the excess profits tax now complained of was levied amounted to approximately $ 21,000. For the years 1935 to 1942, inclusive, the average price of industrial bolts, which comprised most of the specials, was $ 8.63 per thousand, while for the base period it was $ 8.73 per thousand. Even in 1942 the allower average was only $ 7.26 per thousand.
These facts do not indicate that the prices which obtained during the base period were depressed because of temporary circumstances unusual in the case of the petitioner or the industry. They indicate rather that the prices of the base period were permanent, and reflected not only the strong competition which prevailed in the industry, but also the improvements in the methods of manufacture and the general progress of the industry. This conclusion is borne out by the testimony of petitioner's president that the price war in*55 the industry obtained in years prior to 1936, but that 1936 was the worst year and that the business was always highly competitive, especially so after 1929, and also by the statement made in petitioner's claim that the industry was a highly competitive one and that the margin of profit was small.
*1231 The introduction of the boltmaker machine and of the drilling machine developed by petitioner were in no sense temporary circumstances. They marked permanent improvements in the methods of manufacture and contributed to the downward trend of prices.
Petitioner claims that it is entitled to relief under section 722 (b) (4) because of the changes which it made in the methods of operation and distribution and in the type of product.
The provisions of section 722 (b) (4), upon which petitioner relies, are those quoted above. Did the petitioner, in the language of the statute, either during or immediately prior to the base period, 1936 to 1939, inclusive, commence business or change the character of the business? It, of course, did not commence business. It completely changed the character of its business in 1929, when it changed from the manufacture of brake bands to the manufacture*56 of cap screws, but that was long before the base period. The evidence is that prior to and during the base period petitioner was gradually increasing its production of "specials." Its production records show that until 1934 it manufactured nothing but hexhead cap screws and that in 1934 it began producing set screws flathead cap screws, stove bolts, and industrial bolts; that it produced approximately 670,000 industrial bolts in 1934, 3,370,000 in 1935, and 5,033,000 in 1936. In the meantime, however, there was no substantial decrease in the manufacture of cap screws, the 1933 and the 1936 production both being in excess of 4,000,000.
Even if the increase in the type or quantities of articles manufactured may be considered a change in the character of the business, as defined in the statute, such change took place in 1934 and not during or immediately prior to the base period.
It was in 1933 or 1934 that petitioner first began to solicit orders directly from the industries which were to use its products, whereas it had previously sold most of them through jobbers. That change came about gradually and extended into the base period years. Also, petitioner developed and began using*57 the drilling machine in 1939. While one or the other, or both, of these circumstances may have constituted a change in the character of the business within the meaning of the statute, there is still the requirement under subsection (b) (4) that "the average base period net income does not reflect the normal operation for the entire base period of the business," as well as the general requirement common to all of the subsections under section 722 (b) that "the average base period net income is an inadequate standard of normal earnings."
The average base period net income was $ 3,147.06. There was no great disparity in the net earnings of the base period years. They amounted to $ 4,103.64 in 1936, $ 3,450.48 in 1937, $ 1,983.42 in 1938, and *1232 $ 3,050.68 in 1939. As pointed out above, the operations for the base period, as compared with those of both prior and subsequent years, were reasonably within the realm of normalcy, as established by the experience of the petitioner. There is no evidence before us as to the earnings of the industry as a whole. We think that the evidence fails to show that petitioner is entitled to relief under section 722 (b) (4).
As to petitioner's*58 claim under subsection (b) (5), little needs to be said. That is a "catch-all" section intended to cover all other circumstances that may have adversely affected the base period net income. No facts were presented to the respondent in support of the petitioner's claim for relief under subsection (b) (5). The claim for relief under that subsection therefore is not properly before us. Blum Folding Paper Box Co., supra.
Reviewed by the Special Division.
Decision will be entered for the respondent.
Footnotes
1. Prior to Jan. 1, 1930, no cap screws and bolts manufactured.↩