*102 Decision will be entered for the respondent.
Held, petitioner is not entitled to relief under section 722 (b) (4), Internal Revenue Code, not having shown that it changed the character of its business during the base period by reason of a difference in the capacity for operation, as claimed, and not having established "what would be a fair and just amount representing normal earnings to be used as a constructive average base period net income," as required by section 722 (a) of the Code. Held, further, on the same grounds, petitioner is not entitled to relief under section 722 (b) (5) of the Code.
*286 Respondent disallowed petitioner's application for relief under section 722, Internal Revenue*103 Code, for the fiscal years ended July 31, 1942, July 31, 1943, July 31, 1945, and July 31, 1946. The amounts of excess profits taxes in controversy are as follows:
| Fiscal year | ||
| Docket No. | ended | Deficiency |
| July 31, 1942 | $ 26,391.17 | |
| 24264 | July 31, 1943 | 4,355.08 |
| July 31, 1945 | 49,139.35 | |
| 29612 | July 31, 1946 | 7,879.12 |
The sole question is whether petitioner is entitled to relief from excess profits taxes for the above years in the above amounts under sections 722 (b) (4) and (b) (5) of the Code. Other issues raised by the petition have been conceded by petitioner. The proceedings were consolidated for hearing.
A part of the facts were stipulated and are so found.
FINDINGS OF FACT.
Petitioner is a corporation with its general offices in Minneapolis, Minnesota. Its excess profits tax returns for the fiscal years ended July 31, 1942, July 31, 1943, July 31, 1945, and July 31, 1946, were filed with the collector of internal revenue for the district of Minnesota. Petitioner's books and records and Federal tax returns were prepared on the basis of the fiscal year ended July 31st, and its base period for the purpose of these proceedings covered the period from August*104 1, 1936, to July 31, 1940.
Petitioner was originally incorporated on November 30, 1916. Petitioner at all times referred to herein operated manufacturing *287 plants in Minneapolis, Minnesota (the headquarters plant), and Portland, Oregon.
During petitioner's base period it manufactured and/or sold to jobbers and distributors the following principal products:
| Galvanized pails | Milk stirrers |
| Galvanized tubs | Brooders |
| Wash boilers | Waterers and poultry founts |
| Gasoline and Kerosene cans | Electric heaters |
| Tractor funnels | Oil heaters |
| Coal hods | Feeders |
| Garbage cans | Compartment nests |
| Dairy pails | Hog feeding pans |
| Milk strainers | Dish pans |
| Cream cans | General airtight |
| Milk cans | Oval camp stove |
| Milk kettles | Cans |
| Milk pails | Sprayers |
| Strainer cloths | Tanks |
Most of petitioner's products were manufactured from sheet metal of 26 gauge or lighter. Its principal jobbers and distributors were located in the Middle West and West. In addition it sold some of its products to Sears Roebuck & Company and to Montgomery Ward & Company, both having national distribution.
Petitioner's gross sales, gross profits from sales, net income (or loss), prior to taxes, per returns for the fiscal years ended*105 July 31, 1937, through July 31, 1945, were as follows:
| Gross profit | Net income (or | ||
| Fiscal year ended July 31 | Gross sales | from sales | loss) before |
| taxes | |||
| 1937 | $ 1,053,127 | $ 160,749 | $ 41,734 |
| 1938 | 641,732 | 106,015 | (8,448) |
| 1939 | 817,414 | 133,101 | 20,074 |
| 1940 | 899,654 | 150,599 | 22,816 |
| Average base period (fiscal | |||
| years 1937-40) | 852,982 | 1 137,616 | 1 19,044 |
| 1941 | 1,131,610 | 189,150 | 29,942 |
| 1942 | 1,625,473 | 302,952 | 94,237 |
| 1943 | 1,623,478 | 192,943 | 42,961 |
| 1944 | 2,290,144 | 305,190 | 96,408 |
| 1945 | 1,833,726 | 356,206 | 146,058 |
Petitioner's excess profits net income for the base period years, as adjusted by the Commissioner and agreed to by petitioner, was as follows:
| Fiscal year ended July 31: | Amount |
| 1937 | $ 41,229.30 |
| 1938 | (8,797.84) |
| 1939 | 19,899.35 |
| 1940 | 22,815.75 |
| Average | $ 18,786.64 |
*288 Petitioner used the invested capital method under section 714 of the Internal Revenue Code in computing its excess profits tax for the taxable years here involved. Petitioner's excess profits credit computed under*106 the invested capital method for each of the taxable years and the equivalent thereof in terms of average base period net income (ABPNI) in respect to each such year, was as follows:
| Invested capital | Equivalent | |
| Fiscal year ended July 31 | credit | ABPNI |
| 1942 | $ 29,640.68 | $ 30,002.86 |
| 1943 | 31,593.81 | 32,283.00 |
| 1945 | 33,242.00 | 33,805.69 |
| 1946 | 35,211.15 | 35,992.04 |
Petitioner filed timely applications for relief, relying upon each of the subsections of section 722 (b) of the Code for the fiscal years ended July 31, 1942, 1943, 1945, and 1946. Its applications were duly considered and rejected by the Excess Profits Tax Council and by respondent, both determining that petitioner was not entitled to any relief under section 722 for any of the taxable years. Petitioner now concedes the non-applicability of subsections (b) (1), (b) (2), and (b) (3) of section 722, and claims relief solely under subsections (b) (4) or (b) (5) of section 722.
The amount of constructive average base period net income claimed by petitioner in its application for relief for the fiscal year ended July 31, 1942, was $ 101,533.67, and, for the other taxable years involved, $ 99,033.56. The amount of*107 constructive average base period net income now claimed by petitioner is $ 52,486.66.
Petitioner's application for relief for the fiscal year ended July 31, 1945, was signed by petitioner's president, M. T. Bentzen, who died October 12, 1950. In this application it was estimated that in the second year's experience of selling the new glass poultry fount, the total sales attributable thereto would be $ 150,000, with net profit of 30 per cent, or $ 45,000. It was also stated that the earnings of $ 45,000 would have been normal for years prior to the last year of the base period.
During the entire base period and prior thereto petitioner had manufactured and sold various sizes and styles of poultry drinking fountains or waterers (hereinafter designated founts). During the base period petitioner sold not less than 22 different sizes or styles of founts. Among those sold by petitioner during the entire base period and prior thereto was a 1-quart size fount having a base or pan made of galvanized, japanned and vitreous materials, to which *289 was attached a 1-quart Mason jar designed to hold the water. Another type sold by petitioner during the entire base period and prior thereto*108 was a fount having a glass base or pan to which a Mason jar was to be attached by metal clips. The last named type of fount was made to hold 1-gallon, 1-quart, 1-pint or any other size Mason jar having a "G" neck. The base or pan of both of these types of founts was manufactured by others and not by petitioner. All of the founts sold by petitioner during the base period, prior and subsequent thereto, were used for the same purpose, i. e., to provide water for poultry, and all of such founts had the same general construction, i. e., a base or pan in which the water flowed from a tank or jar containing the water.
In October and November 1939 petitioner negotiated with Hazel Atlas Glass Company for that company to manufacture for petitioner a 1-quart size fount having a base made of glass to which would be attached a 1-quart Mason jar. Negotiations for the manufacture by Hazel Atlas Glass Company were concluded in November 1939. Thereafter changes were made in the design of the glass base and the item was not produced for petitioner until the latter part of 1940, subsequent to July 31, 1940. There were no sales of this item by petitioner during its base period and none were manufactured*109 during the base period, and the fount was first sold by petitioner in September 1940.
Also, in October and November 1939 petitioner was assured by Oakes Manufacturing Company at Tipton, Indiana, one of the larger manufacturers of the glass fount with the metal clip, that that company would purchase the all-glass fount from petitioner when manufactured. Beginning September 1940 petitioner sold the all-glass fount to Oakes Manufacturing Company which had nationwide distribution, and to several of petitioner's regular distributors, including Montgomery Ward & Company, which had nationwide distribution.
Petitioner's practice with respect to the sales of the new glass base fount referred to above was to take orders for this item and forward such orders to Hazel Atlas Glass Company which shipped the founts to petitioner's customers. At no time did petitioner manufacture this item, nor did it acquire any machinery or equipment relating to this item, nor make any change in its plant in connection therewith.
The following is a statement of the total dollar sales, cost of sales and gross profit realized by petitioner on the sales of all poultry founts during the fiscal years ended July 31, *110 1937, to July 31, 1942, inclusive, except the new glass base poultry fount first sold in the fiscal year ended July 31, 1941: *290
| Description of fount | 7-31-37 | 7-31-38 | 7-31-39 |
| Galvanized pan types, 1-quart | |||
| size -- sales | $ 555.96 | $ 240.06 | $ 437.76 |
| Glass base with metal clips -- | |||
| sales | 513.30 | 666.00 | 732.60 |
| Galvanized pan types -- sizes | |||
| 1 to 8 gals. -- sales | 11,358.78 | 7,215.55 | 11,816.60 |
| Total fount sales 1 | $ 12,428.04 | $ 8,121.61 | $ 12,986.96 |
| 11,146.25 | 7,106.05 | 10,657.81 | |
| Cost of sales | |||
| Gross profit on founts 2 | $ 1,281.79 | $ 1,015.56 | $ 2,329.15 |
| Description of fount | 7-31-40 | 7-31-41 | 7-31-42 |
| Galvanized pan types, 1-quart | |||
| size -- sales | $ 1,161.54 | $ 838.56 | $ 55.35 |
| Glass base with metal clips -- | |||
| sales | 2,035.80 | ||
| Galvanized pan types -- sizes | |||
| 1 to 8 gals. -- sales | 32,252.20 | 54,407.79 | 52,481.83 |
| Total fount sales 1 | $ 35,449.54 | $ 55,246.35 | $ 52,537.18 |
| 26,783.22 | 41,425.07 | 38,646.57 | |
| Cost of sales | |||
| Gross profit on founts 2 | $ 8,666.32 | $ 13,821.28 | $ 13,890.61 |
Petitioner's*111 total unit sales, average unit sales price, total dollar sales, average unit cost price, total cost of sales and total gross profit from the sale of the new glass poultry fount in each of the fiscal years ended July 31, 1941, and July 31, 1942, were as follows:
| Fiscal years ended | ||
| Description | ||
| July 31, 1941 | July 31, 1942 | |
| Total unit sales | 1,307,780 | 2,893,824 |
| Average unit sales price 1 | $ 0.039 | $ 0.048 |
| Total dollar sales | 51,399.91 | 139,874.06 |
| Average unit cost price 1 | .0299 | .038 |
| Total cost of sales | 39,133.19 | 110,181.54 |
| Total gross profit | 12,266.72 | 29,692.52 |
| Per cent: gross profit to sales 1 | 23.87% | 21.23% |
OPINION.
Petitioner claimed relief under each of the subsections of section 722 (b) of the Internal Revenue Code. Respondent completely rejected such claims. Petitioner now concedes the nonapplicability of subsections (b) (1), (b) (2) and (b) (3) and claims relief solely under subsections (b) (4) or (b) (5) of section 722. Section 722 (b) (4) provides, in so far as material here, that the excess profits tax imposed "shall be considered to be excessive and discriminatory in the case of a taxpayer entitled*112 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 * * * the taxpayer * * * during * * * the base period * * * 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." It further provides that "the term 'change in the character of the business' includes * * * a difference in the capacity for production or operation" of the business and that "any change in the capacity for production or operation of the business consummated during any taxable year ending after *291 December 31, 1939, as a result of a course of action to which the taxpayer was committed prior to January 1, 1940, * * * shall be deemed to be a change on December 31, 1939, in the character of the business."
Petitioner contends that it is entitled to relief under this section by reason of the developing and marketing of an all-glass poultry drinking fount. Petitioner contends that though it did not sell the all-glass fount during the base period, the facts show that it was committed prior to January 1, *113 1940, to a course of action resulting in a change in its capacity for operation and that thus under the statute it must be deemed to have changed the character of its business on December 31, 1939. We do not agree. The Treasury Department Bulletin on section 722 explains the phrase "capacity for operation" as "intended to afford * * * the right to relief because of a change in character resulting from a difference in the physical capacity to do business." We do not think petitioner has shown that its "physical capacity" to do business was changed by the introduction of the all-glass fount or, if there was such a change, that petitioner was committed to it prior to January 1, 1940.
The facts show that petitioner began selling the all-glass fount in September 1940 and that sales of it amounted to $ 51,399.91 and $ 139,874.06, respectively, during the fiscal years ended July 31, 1941, and July 31, 1942. At the same time sales of founts other than the all-glass fount increased from a base period average of $ 17,246 annually to $ 55,246.35 and $ 52,537.18, respectively, in the fiscal years ended July 31, 1941, and July 31, 1942, and sales of all products increased from a base period*114 average of $ 852,982 annually to $ 1,131,610 and $ 1,625,473, respectively, in the fiscal years ended July 31, 1941, and July 31, 1942. These facts show that petitioner's sales of all founts and all products increased greatly under the impact of the war economy in the excess profits taxable years. Petitioner has not shown that any increase or expansion of its facilities occurring in the excess profits taxable years was not due to the favorable marketing conditions existing for all of its products in those years rather than to the introduction of the alleged new product, the all-glass fount.
Actually, petitioner's claim that the all-glass fount was not a mere technological improvement upon founts then in existence but something completely new and different seems unjustified. Petitioner had during the base period and prior thereto sold no less than 22 different styles of poultry founts, including one which was all glass except for the metal clips which held the Mason jar in place, changing its models as one of petitioner's witnesses described it, "like ladies' hats."
But even if we label the all-glass fount a "new" product, it was not a product which was sold during the base period*115 and, in fact, changes *292 in its design occurred subsequent to the base period. All that had occurred prior to the close of the base period was that one glass manufacturer, Hazel Atlas Glass Company, had agreed to manufacture for petitioner an all-glass base fount and another glass manufacturer, Oakes Manufacturing Company, with nationwide distribution from whom petitioner had formerly purchased, had assured petitioner that it would distribute the all-glass fount when manufactured. We fail to see how petitioner was committed in any way to a change in its own physical capacity for operation by these assurances of what one glass manufacturer would manufacture for it and another glass manufacturer would sell for it. Petitioner has not shown that the facilities of both these glass manufactures and others were not available to it throughout the base period.
Furthermore, petitioner's contention that it established nationwide distribution with the sale of the all-glass fount to the Oakes Manufacturing Company is controverted by the fact that petitioner had sold products to Sears Roebuck & Company and Montgomery Ward & Company, both having national distribution, prior to the close*116 of the base period. Moreover, Montgomery Ward & Company bought the glass fount from petitioner after the close of the base period; so it is apparent that petitioner was able to obtain nationwide distribution for that product without the "commitment" to Oakes Manufacturing Company.
Finally, even if we were to assume arguendo the existence of a qualifying factor under section 722 (b) (4), it would still be our conclusion that petitioner is not entitled to relief under that section, for failure to establish "what would be a fair and just amount representing normal earnings to be used as a constructive average base period net income," as required by section 722 (a), I. R. C. Petitioner, having used the invested capital method of computing its excess profits tax credit, must show a constructive average base period net income which will result in an excess profits credit greater than that computed on the basis of invested capital and allowed by the respondent. Monarch Manufacturing Co., 15 T.C. 442">15 T. C. 442.
Petitioner filed an application for relief in respect to at least one of the excess profits taxable years which was signed by its president, M. T. Bentzen*117 (since deceased). In this application it was estimated, under the 2 year push-back prescribed by section 722 (b) (4), that petitioner would by the end of the base period have reached total sales of the all-glass fount of $ 150,000. One of petitioner's witnesses stated that M. T. Bentzen "was very acute on sales matters and quite an expert on poultry stuff" and that his judgment of sales possibilities of the new fount was partly based upon a favorable reaction of one potential distributor, the Oakes Manufacturing Company. Petitioner also contends that an estimate of $ 150,000 in sales of the new *293 fount is to some extent supported by the fact that in the taxable year ended July 31, 1942, petitioner had total sales therefrom of $ 139,874.06.
However, there appears no warrant in the record for concluding that petitioner, given a 2 year push-back under section 722 (b) (4) would have had sales of $ 150,000 from the new fount in the second year of its operations in respect thereto. Furthermore, any attempt to support the estimate by reference to the sales actually realized in the fiscal year ended July 31, 1942, is in violation of the statutory prohibition contained in section*118 722 (a) regarding post-1939 data. Also, sales of approximately $ 139,000 under the war economy hardly support an estimate of $ 150,000 under base period conditions.
Having arbitrarily chosen a gross sales figure of $ 150,000, petitioner then arbitrarily determined that it would have had a net profit ratio of 30 per cent of gross sales, and, accordingly, indicated that the net earnings attributable to the new glass poultry fount in the last base period year would be $ 45,000. It is to be noted that petitioner earned an average gross profit ratio on all fount sales in the base period of only 19.27 per cent and on total sales of all products in the base period of only 16.13 per cent. Its average net profit ratio on total sales of all products in the base period was only 2.23 per cent.
Having, as we have indicated, arbitrarily reached the net profit figure of $ 45,000 on sales of the new glass poultry fount in the last base period year, petitioner then arbitrarily stated that such earnings would have likewise "been normal for years prior thereto," i. e., that the amount of $ 45,000 would represent the average net profit attributable to this source for the entire base period. *119 Such an assumption, that the same amount of net profit would be earned in each year of the base period as would be realized in the last year, is contrary to accepted principles. Lamar Creamery Co., 8 T.C. 928">8 T. C. 928, 942, 943; Treasury Department Bulletin on section 722, part V (II) (B) (3) (b) (vi).
We conclude from the above that, even conceding what we do not concede -- the existence of a qualifying factor under section 722 (b) (4) -- nevertheless petitioner has wholly failed to establish a fair and just figure to be used as a constructive average base period net income, and is accordingly not entitled to relief under section 722 (b) (4).
Though petitioner claims relief under section 722 (b) (5), it fails to claim at any point in these proceedings any other qualifying factor than that already claimed under section 722 (b) (4). In such case it is unnecessary for us to consider petitioner's eligibility for relief under section 722 (b) (5). Roy Campbell, Wise & Wright, Inc., 15 T. C. 894; Wisconsin Farmer Co., 1021">14 T. C. 1021.
Decision will be entered for the respondent.