*7 Decision will be entered for the respondent.
Held, on the facts, that the petitioner has not shown a reconstruction of average base period net income in any amount larger than the figure allowed under section 713 (f), Internal Revenue Code, and is therefore not entitled to relief under section 722 (b) (4) because of change in character of business.
*1042 This proceeding involves petitioner's claims for refund under section 722 of the Internal Revenue Code of corporation excess profits taxes for the fiscal years ending November 30, 1942, and November 30, 1943. The only issue for our determination is whether the petitioner is*8 entitled to relief from excess profits taxes for these years under section 722 (b) (4) of the Internal Revenue Code.
This proceeding was submitted on a stipulation of facts and oral and documentary evidence. The stipulated facts are so found and are incorporated herein by this reference. They may be epitomized as follows, along with facts that are found from the oral and documentary evidence.
FINDINGS OF FACT.
Petitioner is a Missouri corporation with its principal office at St. Louis, Missouri. Prior to 1941 its books and records were kept on the calendar year basis but on November 30, 1941, its books were closed and thereafter petitioner has kept its books and records and filed its returns on the basis of a fiscal year ending November 30 in each year. Petitioner filed its Federal tax returns for the fiscal years here in question with the collector of internal revenue for the first district of Missouri.
Claims for refund of excess profits taxes paid were filed as follows: For the fiscal year ending November 30, 1942, $ 7,208.52; for the fiscal year ending November 30, 1943, $ 32,377.06.
Prior to June 1936 petitioner was engaged in the business of jobbing women's shoes. It had about 2,000 accounts in 1937. About the middle of 1936 a plan for branding the*9 shoes with a trade name and selling them exclusively to one account in a town was discussed among petitioner's officers and employees. Later, a contest was arranged to select a trade name for a line of women's shoes. In the competition the *1043 name "Jolene" was selected and in the fall of 1936 the name and line were advertised to the trade. Petitioner opened an office in Hollywood, California, and received from there suggestions for styles of shoes. It advertised the connection between its shoe styles and the film capital. Petitioner's shoes branded "Jolene" were first advertised nationally in December 1937. During 1937 petitioner introduced a method of transacting its business known as "the Jolene Plan." This was a merchandising plan whereby retailers would concentrate exclusively on the sale of the Jolene line, in a particular price range. Petitioner in turn offered to provide national advertising, help prepare window displays and give them preferred shipments (faster shipping than if the retailers did not come into the Jolene Plan). Petitioner did not require any written agreement requiring its operators to sell Jolene shoes exclusively.
Petitioner sought young men*10 under 38 years of age to go into the retail shoe business. Petitioner asked that they have at least $ 1,500 for purchase of an inventory, but was willing to accept some operators with $ 1,000 for that purpose. In late 1937 and during 1938 and 1939 petitioner procured some Jolene departments in various locations.
Petitioner never kept any record showing sales of shoes to Jolene Plan accounts, separately from sales to other accounts. The claim for refund states, inter alia, that a period of at least 5 to 10 years is required under normal conditions to create consumer demand for a branded commodity such as shoes.
Petitioner's actual sales and total profit for the base period years were as follows:
| Year | Sales | Total profit |
| 1936 | $ 1,116,793.63 | $ 14,219.75 |
| 1937 | 1,072,815.64 | 3,186.88 |
| 1938 | 1,636,077.46 | 40,184.41 |
| 1939 | 1,984,506.85 | 25,951.70 |
The average total profit was 1.438 per cent of average sales, during 1936-1939, inclusive.
Petitioner's average base period net income for the years here in question calculated in accordance with section 713 (f) of the Internal Revenue Code is $ 40,184.41.
OPINION.
The petitioner seeks relief from excess profits taxes under section*11 722 (b) (4) of the Internal Revenue Code. In its application for relief, filed with the Commissioner, petitioner contends *1044 that there were changes in the management of the business and in the character of the business and increases in the capacity for production. At the hearing and on brief petitioner narrows its position to merely a change in the character of the business. It contends that on January 1, 1936, it was an ordinary shoe jobber and that since that time, i. e., "By the end of 1937 the Jolene Plan was in effect and the character of petitioner's business had changed."
Considering the conclusion to which we have come, as set forth below, we find it unnecesary to pass upon the question as to whether, as respondent contends, petitioner's theory and evidence are not within the claim for refund, or whether there was in fact a change in the character of petitioner's business for, as the text of the statute shows, the petitioner must not only demonstrate, on its theory, that there was a change in the character of the business but must also demonstrate that "the average base period net income does not reflect the normal operation for the entire base period of the*12 business." East Texas Motor Freight Lines, 7 T.C. 579">7 T. C. 579. Under the language of section 722 (a) relief is given only to the taxpayer who "establishes * * * what would be a fair and just amount representing normal earnings to be used as a constructive average base period net income * * *." Singer Bros., Inc., 15 T. C. 683. It is stipulated that petitioner's average base period net income computed under section 713 (f) is $ 40,184.41.
The petitioner must reconstruct an average base period net income of more than $ 40,184.41, otherwise it would not be shown that its "average base period net income does not reflect the normal operation for the entire base period of the business."
Petitioner has failed to set up such reconstruction and to make the necessary showing. Its proposed reconstruction, based on a "projection" of its operations for 2 years, is derived from its claim that it would have had at least 300 exclusive Jolene Plan accounts, that they would have minimum average annual purchases of $ 10,000 per account, or a total average annual sales of $ 3,000,000, and that average earnings would be 3, 3 1/2, or 4 per cent, as*13 expressed in the opinion of Tober, petitioner's president. By this theory, petitioner claims a reconstructed average base period net income in the amount of $ 70,659.10.
Petitioner, in the first place, fails to prove that it would have had 300 exclusive Jolene Plan accounts by "projecting" its operations for 2 years because of the alleged change of character of the business. Petitioner relies on Exhibit 8 1 to prove that it acquired two new *1045 Jolene Plan accounts in 1937, ten in 1938, and 137 in 1939, and from this premise contends that 300 is the minimum average for the base period. 2 The exhibit fails so to demonstrate. Under the evidence of Boersig, the petitioner's secretary, the list, Exhibit 8, was a "list of dealers that we had -- particularly the dealers we opened up in the year 1939"; also, with reference to the list, asked "Were they all Jolene operators" he answered "No they weren't. We opened up the account, at this time figuring we could make an exclusive Jolene account out of them." The list is, thus, not one of the exclusive Jolene Plan accounts, but a mere list of dealers, with hope or expectation on petitioner's part in that regard. It is thus seen*14 as no basis for the petitioner's contention. On the basis of the record before us we are unable to determine the number of Jolene Plan accounts petitioner had during the base period years, and in the absence of such information it becomes impossible to arrive at any figure for "projecting" its operations. On its own theory, petitioner's basis of reconstruction fails altogether because of such failure of proof.
Also, with reference to petitioner's claim that a Jolene Plan account would purchase some $ 10,000 worth of shoes per annum: Petitioner contends, and the evidence shows, that no record was ever kept of sales to Jolene Plan accounts, *15 separately from general accounts, and petitioner argues: "Without a separation of accounts it has been necessary to estimate constructive sales by a projection of sales prior to 1939." Petitioner therefore offered the evidence of Tober that a Jolene Plan account should purchase as a minimum $ 10,000 to $ 15,000 worth of shoes a year. It is not proved that any or the average Jolene Plan account during the base period purchased $ 10,000 worth of shoes per annum. Petitioner's application for relief filed with the Commissioner stated that under normal conditions it would take from 5 to 10 years to create consumer demand for a branded commodity, such as shoes. Yet, petitioner made no effort to prove that Jolene shoes were of such unusual quality that they would require a shorter time to be accepted on the market. The proof as a whole fails to demonstrate that even if the change had occurred two years earlier, the sales would have been in the large amounts contended for.
As to the rate of earnings from Jolene Plan accounts: Petitioner, on brief, states that $ 70,659.10, the amount of profit claimed on the reconstructed sales, is low. We have evidence as to the anticipated profit, *16 measured in terms of percentage of sales, in the testimony of *1046 Tober where he stated that he "wouldn't consider the operation profitable unless it earned between 3, 3 1/2 or 4 per cent." Such testimony does not prove the average profits from the new Jolene Plan accounts. Moreover, Tober's testimony is not consistent with other evidence. The average base period actual net income was 1.438 per cent of sales, and despite Tober's statement about profit of 3 to 4 per cent, Boersig, on whose opinion and evidence petitioner relied, testified also that percentage-wise the profit would "probably be a little bit less" if more business was done -- as petitioner, in effect, contends would have been the case if the change had occurred two years earlier. Asked to explain why the profit would be a little bit less he noted that they paid more for shoes. All this testimony is consistent with Tober's answer: "No question about that. The costs were tremendous * * *" in answer to a question, in effect, whether the cost of servicing the Jolene accounts was drawing in more overhead, getting more expensive as the plan took hold -- though he added, in substance, that with the same costs they*17 could service 1,000 accounts as well as 100. Boersig testified to the effect that he never estimated or computed any normal or fair percentage of income in proportion to sales -- referring to the proposed constructive income from Jolene Plan accounts.
With the evidence showing that the figure 137, as to 1939 (upon which petitioner, as above seen, largely relies to indicate the 300 or more Jolene Plan accounts under the push-back rule) is not a figure other than one including other accounts; with the evidence showing the actual average profit on all accounts in the base period to be 1.438 per cent of sales, as against the 3 to 4 per cent profit figure used in petitioner's attempted reconstruction, and the indication that profit would be less in the earlier years considering the initial cost of the new plan, and with only a hope of high sales under such plan, it is clear, in our opinion, that the petitioner has not proven a reconstructed average base period net income greater than the amount allowed under section 713 (f).
Under all of the evidence, we hold that petitioner has failed to show a reconstruction of an average base period net income greater than the $ 40,184.41 of which *18 it has the benefit under section 713 (f), Internal Revenue Code; therefore has not shown itself entitled to relief under section 722 (b) (4).
Decision will be entered for the respondent.
Footnotes
1. Exhibit 8 is a mere list of names and addresses, two listed under 1937, 10 under 1938, and 137 under 1939, with dates opposite those (except 5) listed under 1939.↩
2. Though petitioner suggests that the evidence indicates five additional exclusive Jolene accounts, the evidence doth not bear out the idea. In any event, the addition does not alter the theory, or the conclusion.↩