*249 Decision will be entered that petitioner is not entitled to excess profits tax relief pursuant to section 722 of the Internal Revenue Code.
Petitioner claimed relief for excess profits taxes for the taxable years 1941 to 1946, inclusive, under section 722 (b) (4), Internal Revenue Code, because of a change in the character of its business in its base period. Held, petitioner having failed to establish that its average base period net income is an inadequate standard of normal earnings because of the change, or that its tax computed without the benefit of section 722 results in an excessive and discriminatory tax, or, what would be a fair and just amount representing normal earnings to be used as a constructive average base period net income, it is not entitled to relief.
*1484 These consolidated proceedings involve claims for refund under section 722 of the Internal Revenue Code for the fiscal years ended June 30, 1941, 1942, 1943, 1944, 1945, and 1946. All the claims for relief were denied by the respondent.
FINDINGS OF FACT.
Petitioner is a Kentucky corporation and since its organization in 1918 has been engaged in the wholesale grocery business. During the periods involved, petitioner kept its books and filed its tax returns on the accrual basis and by fiscal years ended June 30. Petitioner's principal place of business was at Hazard, Kentucky, and during the period January 1, 1936, to April 15, 1940, it operated wholesale grocery stores at Hazard and Jackson, Kentucky, with a branch warehouse at Beattyville, Kentucky.
Petitioner's stores at Hazard and Jackson were located in the coal area of Kentucky, but both stores did some business outside the coal fields. The business was erratic. Petitioner had accumulated a surplus and ready capital; it had management ability available which had to be given responsibility in order to retain personnel; *251 and, since its business was dominated by the coal business, petitioner, in 1939, decided to acquire another store outside the coal area. It investigated the Carter Grocery Company at Somerset, Kentucky, the Arnold-Hamilton concern at Richmond, Kentucky, and the Rucker store at Lawrenceburg, Kentucky. After some investigation of the Lawrenceburg area, petitioner became interested in acquiring the Rucker store. H. C. Powell made an investigation of the Lawrenceburg area and rendered an oral report to petitioner's officers. H. C. Powell was to have charge of the store if acquired by petitioner, but *1485 late in 1939 he became ill and had an operation and the purchase of the store was postponed. Later on, J. A. Powell, a brother, made a more thorough investigation and rendered a written report to petitioner. On March 15, 1940, petitioner obtained an option to purchase the Rucker store, and on April 15, 1940, exercised the option and acquired the complete assets of the Rucker Wholesale Grocery Co. J. A. Powell was then placed in charge. The investigation showed that the Rucker store was doing a gross business of about $ 20,000 per month. The territory served by the Rucker*252 store contained a population of 70,000, and petitioner's officers felt that the store was not doing the business it should. Petitioner's treasurer, B. A. Morton, who had been in the grocery business for 40 years, and S. H. Powell, petitioner's president, who had been in the business since 1918, acted as a policy committee for petitioner. Petitioner was not interested in a store that could do only $ 30,000 gross business per month, as it could not make any money, and would not be interested in a store that would gross much less than $ 40,000 per month. Morton expressed the opinion that petitioner could increase the volume of sales of the Rucker store very materially, and that it was reasonable to expect to make the same profit as the average of the two stores operated by petitioner at Hazard and Jackson, Kentucky.
The total annual dollar volume of gross sales, the net profit and the percentage of net profit to sales for petitioner's store at Hazard, Kentucky, for the period from June 30, 1935, through June 30, 1940, were as follows:
| Per cent of | |||
| Fiscal year ended June 30 | Gross sales | Net profit | net profit |
| to sales | |||
| 1936 | $ 567,550.80 | $ 27,091.56 | 4.8 |
| 1937 | 568,480.62 | 25,241.44 | 4.44 |
| 1938 | 513,166.50 | 14,645.33 | 2.85 |
| 1939 | 477,820.00 | 15,911.35 | 3.33 |
| 1940 | 478,168.06 | 20,977.70 | 4.39 |
*253 The total annual dollar volume of gross sales, net profit and the percentage of net profit to sales, for petitioner's store at Jackson, Kentucky, for the period from June 30, 1935, through June 30, 1940, were as follows:
| Per cent of | |||
| Fiscal year ended June 30 | Gross sales | Net profit | net profit |
| to sales | |||
| 1936 | $ 401,791.01 | $ 15,544.18 | 3.9 |
| 1937 | 410,654.87 | 16,125.15 | 3.93 |
| 1938 | 368,203.24 | 10,354.11 | 2.81 |
| 1939 | 384,918.54 | 16,922.55 | 4.40 |
| 1940 | 364,198.33 | 6,742.37 | 1.85 |
Note: The above figures were shown on a joint exhibit.
*1486 On December 6, 1943, the Lawrenceburg store was completely destroyed by fire and was not rebuilt.
Petitioner paid excess profits taxes for the fiscal years ended June 30, 1941, to 1946, inclusive, in the following amounts:
| Fiscal year | |
| ended June 30 | Amount |
| 1941 | $ 518.97 |
| 1942 | 14,591.90 |
| 1943 | 58,151.99 |
| 1944 | 85,467.77 |
| 1945 | 65,904.92 |
| 1946 | 32,545.93 |
Applications for relief under section 722 (b) (4) and (5) of the Code and claims for refund based thereon with respect to the fiscal years ended June 30, 1941 to 1946, inclusive, were duly filed in the respective amounts as follows:
| Fiscal year | |
| ended June 30 | Amount |
| 1941 | $ 518.97 |
| 1942 | 5,962.68 |
| 1943 | 6,844.10 |
| 1944 | 7,814.64 |
| 1945 | 8,834.91 |
| 1946 | 4,453.71 |
*254 In each of its applications for relief filed with respect to the fiscal years ended June 30, 1941 to 1946, inclusive, petitioner claimed a constructive average base period net income for use in computing excess profits tax in the amount of $ 37,674.61.
During its base period petitioner changed the character of its business by the acquisition of new facilities.
Petitioner has not shown 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.
OPINION.
Petitioner contests the respondent's disallowance of its claims for relief for the fiscal years ended June 30, 1941 to 1946, inclusive, under section 722 (b) (4) of the Internal Revenue Code. Petitioner originally claimed relief under (b) (5), but concedes on brief that it is not entitled to relief under that subsection.
The respondent's disallowance was based on the ground that petitioner was not committed to a change in the character of its business prior to January 1, 1940, and was, therefore, not entitled to relief. A large part *255 of the evidence and considerable argument presented in the briefs of the respective parties are devoted to the commitment *1487 issue. Since it is conceded that petitioner acquired on April 15, 1940, and within its base period, a new unit, the fact as to whether there was a commitment is unimportant in view of our decision in the case of Wisconsin Farmer Co., 14 T. C. 1021, wherein we held that eligibility for relief under section 722 (b) (4) is initially established by the fact that the change in the character of the business occurred in the taxpayer's base period. (See also E. P. C. Ruling 45, September 19, 1950.) We have, therefore, found as a fact that petitioner changed the character of its business in its actual base period.
The establishment of eligibility for relief is but one of the factors to be considered. To obtain relief petitioner must also establish what would be a fair and just amount representing normal earnings to be used as a constructive base period net income for the purposes of an excess profits tax based on a comparison of normal earnings and earnings during an excess profits tax period.
In its applications for relief, petitioner*256 claimed the amount of $ 37,674.61 as its constructive average base period net income for computing its excess profits tax. On brief filed herein, it claims the amount of $ 41,804.89 computed as follows: Petitioner determined from the stipulated figures shown in our findings of fact for the fiscal years ended June 30, 1936, to June 30, 1940, that the gross sales of the Hazard and Jackson stores were $ 3,629,097.86 and the net income $ 119,716.85 for the base period years 1936 to 1939, inclusive, resulting in a percentage of net profit to gross sales of .032988. It then applies such percentage to the assumed gross sales of the Lawrenceburg store of $ 30,000 per month for the 48 months of the base period years, or gross sales of $ 1,440,000, arriving at the figure of $ 47,502.72. This latter amount is then added to the figure $ 119,716.85, the so-called actual base period net income, resulting in a total reconstructed base period net income of $ 167,219.57, which amount divided by 4 equals the sum of $ 41,804.89. This latter amount petitioner contends is its reconstructed average base period net income.
The only evidence to support the assumed gross sales of the Lawrenceburg store*257 of $ 30,000 per month is the opinions expressed by two of petitioner's officers. Their testimony, in substance, is to the effect that the former owner of the Lawrenceburg store was doing a gross business of $ 20,000 per month, and that they felt under their management the gross sales of $ 20,000 could be doubled. There is no factual evidence to show that at the time of the purchase of the Lawrenceburg store it was doing a gross business of $ 20,000 monthly. Nor is there any evidence as to what the Lawrenceburg store was earning in the base period years. J. A. Powell, who made an investigation of that store prior to its purchase and who rendered a written report to petitioner's officers, did not testify in these proceedings, nor was the report which he rendered offered in evidence.
*1488 Petitioner's treasurer testified that petitioner could not make any money on a store with gross sales of only $ 30,000 per month. He testified, "When a house gets as low as $ 30,000 you can't make any profit in your [sic] opinion," and, further on, "If I had thought we would do $ 30,000 we wouldn't have touched it because we know we can't make any money on a house that does $ 30,000 worth*258 of business. We just wouldn't touch it." Despite this testimony that petitioner could not have made any money on monthly gross sales of $ 30,000, we are asked to determine a reconstructed base period net income on the basis of $ 30,000 average monthly gross sales at the average ratio of net profit to gross sales of petitioner's other two stores. There is no factual data to support the opinion expressed by the treasurer that the Lawrenceburg store would earn the average earned by the two other stores during petitioner's base period. He stated that his opinion was based on his 40 years' experience in the grocery business.
In the case of Pabst Air Conditioning Corporation, 14 T. C. 427, we said, at page 436:
Though opinion evidence has been used in general on this subject, East Texas Motor Freight Lines, 7 T. C. 579, it is apparent that it must have basis in the evidence, 7- Up Fort Worth Co., 8 T. C. 52. Therein, much as in this case, an interested officer of the petitioner expressed the opinion that if the petitioner had been organized two years earlier the volume of sales would have been*259 a certain figure. We said that the record did not support such opinion and quoted Arden-Rayshine Co., 43 B. T. A. 314, that "the establishment of an ultimate fact requires something more than a mere statement of the conclusion of the fact sought to be proved." * * *
We think the above quotation is particularly appropriate here. Since the change in the character of business constituting a 722 (b) factor is the acquisition of another unit in a different locality in which petitioner had no prior experience, the opinion of the witness, unsupported by factual evidence that the additional unit would do a gross business double that done by the former owner and would earn the average of petitioner's other two stores, is insufficient evidence on which to predicate an ultimate finding of a reconstructed average base period net income.
Petitioner, in determining the base period net income of its two stores at Hazard and Jackson, Kentucky, has taken the gross sales and net profits for the fiscal years 1935 to 1940, inclusive, as set forth in our findings, and halved them. Such a method we think does not set forth accurately the gross sales and net income for *260 the base period years. The only 6-month figures on sales and net income of the Hazard and Jackson stores in evidence are contained in schedules attached to the returns for the fiscal years ended June 30, 1936 and June 30, 1939. Examination of these actual 6-month figures indicate a variance from the figures resulting from the method used *1489 by petitioner. There is no schedule in evidence showing the actual figures for the last 6 months of 1939. Therefore the petitioner's base period net income can not be accurately determined. Petitioner has not shown that the Lawrenceburg store could have operated at a profit under normal operating conditions as existed in the base period.
Petitioner argues that its tax returns for the years subsequent to January 1, 1940, show that the Lawrenceburg store did eventually average gross sales of approximately $ 40,000, as supporting the opinion expressed by petitioner's officers. Such data may not be taken into consideration. Section 722 (a) provides that in determining what would be a fair and just amount representing normal earnings to be used as a constructive average base period net income, no regard shall be had to events or conditions*261 existing after December 31, 1939, with certain exceptions not here applicable. Dyer Engineer's, Inc., 10 T.C. 1265">10 T. C. 1265.
Petitioner argues that it is the duty of this Court to determine the constructive average base period net income. This is true where the evidence is sufficient to permit such a determination. We think that petitioner has clearly failed to present factual data upon which to predicate a proper constructive average base period net income. We have, therefore, found as an ultimate fact that petitioner has not established what would be a fair and just amount representing normal earnings to be used as a constructive average base period net income. The establishment of this requirement is essential to the granting of any relief. We therefore conclude that petitioner has not sustained its right to relief under section 722 of the Code in the excess profits tax years in question.
Having determined that petitioner has not established a right to any relief under section 722 of the Code, it is unnecessary for us to determine the effect of the destruction by fire of the additional unit subsequent to petitioner's base period years.
Decision will*262 be entered that petitioner is not entitled to excess profits tax relief pursuant to section 722 of the Internal Revenue Code.