*204 Decision will be entered that petitioner is not entitled to relief under section 722 for the years in issue, and that there is a deficiency of $ 6,280.99 in petitioner's excess profits tax for 1945.
Denial of relief under section 722 sustained where petitioner failed to prove a change in the character of its business within section 722 (b) (4), and where it failed to establish that it would have realized substantially increased earnings if the events on which it relied had occurred 2 years earlier or that it was entitled to constructive earnings resulting in a larger excess profits tax credit than the credits it used under the invested capital method.
*241 The Commissioner disallowed in full petitioner's applications for excess profits tax relief, under section 722 of the Internal Revenue Code, for the calendar years 1942, 1943, 1944, and 1945. The issue is whether petitioner has a valid claim for excess profits tax relief under section 722 (b) (4) of the Internal Revenue Code.
By amended answer, the Commissioner asserted a deficiency of $ 6,280.99 in petitioner's excess profits tax liability for the calendar *242 year 1945. Petitioner and the Commissioner stipulated that "the Court should find that there is a deficiency of $ 6,280.99 in the petitioner's excess profits tax for the calendar year 1945 in the present proceeding in the event that the respondent's disallowance of the petitioner's application for relief under Section 722 with respect to said year is approved herein." 1
*206 FINDINGS OF FACT.
The parties entered into two stipulations of fact; the facts thus stipulated are found, and the stipulations and annexed exhibits are hereby incorporated into our findings of fact.
Petitioner is a corporation organized in 1914 under the laws of the State of Virginia, and has its place of business and principal office at Fredericksburg, Virginia. Petitioner prepared its Federal income and excess profits tax returns on the accrual basis and for calendar year periods, and filed those returns with the collector of internal revenue for the district of Virginia. At all times material hereto, petitioner was in the dairy and creamery business, in which it processed, bottled, and distributed fluid milk and cream, and manufactured and sold various other dairy products.
Petitioner's net income and excess profits net income for the calendar years 1936 through 1945, as stipulated, were as follows:
| Excess profits | ||
| Year | Net income | net income |
| 1936 | $ 138.78 | $ 138.78 |
| 1937 | 8,093.92 | 8,093.92 |
| 1938 | 995.63 | 995.63 |
| 1939 | 10,880.12 | 10,880.12 |
| 1940 | 23,268.19 | 20,353.62 |
| 1941 | 41,260.06 | 41,622.79 |
| 1942 | 26,296.79 | 27,550.29 |
| 1943 | 55,051.95 | 54,641.56 |
| 1944 | 60,128.33 | 60,570.59 |
| 1945 | 94,987.17 | 94,710.52 |
*207 *243 In computing its excess profits tax for the calendar years 1942 through 1945, the years in issue, petitioner was entitled to use the excess profits credit based on income during the base period. Instead, however, petitioner computed its excess profits credit for all the years in issue on the basis of its invested capital in those years, and its credits computed under the invested capital method were as follows: 2
| Year | Amount of credit |
| 1942 | $ 12,005.65 |
| 1943 | 11,878.04 |
| 1944 | 12,280.74 |
| 1945 | 13,233.07 |
Petitioner reported an excess profits tax liability of $ 9,289.84 for 1942, $ 30,610.03 for 1943, $ 35,406.89 for 1944, and $ 54,607.75 for 1945. These amounts were paid in full by petitioner, except that $ 3,540.69 of the excess profits tax for 1944 was abated.
On or about March 13, 1946, petitioner filed with*208 respondent, for the years in issue, applications for relief under section 722 of the Internal Revenue Code. These applications advanced the same claim for relief for all the years in issue, and claimed relief only under subsection (b) (4) of section 722. 3 Thereafter additional information was filed with respondent respecting these applications. By a notice dated November 18, 1948, respondent informed petitioner of the complete disallowance of its applications.
*209 During the base period, 1936 through 1939, petitioner's products included fluid milk and cream, buttermilk, condensed milk, bulk cream, ice cream mix, ice cream, and butter. Petitioner also sold other miscellaneous products, which constituted a relatively small part of its sales, such as powdered milk, which was a by-product and was used as animal feed, and certain farmers' supplies. Cottage cheese was made and sold by petitioner, but either not at all or only in an insignificant quantity until after the base period.
Bulk cream was "40 per cent cream" which petitioner produced from surplus milk which it had in excess of its other needs; 4 such milk was "separated" to the point where it was 40 per cent cream, and in this form was sold to the "ice cream trade." Bulk cream and *244 condensed milk were used in making ice cream mix, from which ice cream in turn was produced. Petitioner did "quite a big business" in the sale of ice cream mix and ice cream.
*210 During and prior to the base period years, the bulk of petitioner's retail customers was in Fredericksburg. During those years, petitioner did not serve retail customers at the city of Colonial Beach, Virginia, although thereafter its retail business did spread to that city. During the base period years, and as early as 1930, petitioner also sold its products at Quantico, Virginia; at first petitioner sold only at wholesale to the post exchange and other organizations located at the service base at Quantico, but at some time prior to the beginning of the base period petitioner also began retail sales to families of married men stationed at that base. Most of petitioner's sales of ice cream were made at Fredericksburg, Colonial Beach, and Quantico, Virginia, and along U. S. Highway No. 1. Petitioner's sales at the Quantico base were not the only sales made by petitioner to institutions during the base period.
Prior to the base period, petitioner had no competition at all in the sale of pasteurized milk in the Fredericksburg area. There were, prior to the base period, farmers who produced and sold raw milk at retail. Towards the end of 1937, petitioner began to bottle and sell*211 raw milk. Petitioner had considerable competition in the sale of ice cream at wholesale.
The first time a competitor appeared in the Fredericksburg area in the sale of pasteurized milk was in the latter part of 1936 or the early part of 1937. That competitor was a dairy operated by a man named Pearson. Pearson continued operation until the latter part of 1937, when he sold out to a milk producer, who operated the business for about six months and then sold it to E. G. Mason (hereinafter referred to as "Mason"). Mason had been selling milk in that area for many years. During Mason's operation, the business used the name "Hollybrook Dairy."
Mason ran into financial difficulties in operating Hollybrook Dairy. Thereafter he and petitioner entered into a written "agreement of sale," dated February 9, 1939, in which, in consideration of $ 2,000 in cash and assumption of certain obligations by petitioner, Mason sold and conveyed to petitioner certain described equipment, and "the business and all equipment, supplies, accessories and inventories necessary to the operation of the business and the good will and the trade name 'Hollybrook Dairy." It was also provided in the agreement that*212 "the vendor, E. G. Mason, shall not engage in either the retail or wholesale business of selling milk in the City of Fredericksburg, Town of Quantico, or the City of Colonial Beach, Va., in any capacity for *245 a period of five years from the date of this agreement, save and except to a duly licensed milk distributor."
After Mason ceased operating Hollybrook Dairy, most of its customers were acquired by petitioner. Petitioner used some, but not all, of the equipment it acquired from Hollybrook Dairy; thus, it used delivery trucks which were included in that equipment.
Petitioner's operations during the base period years are reflected in the following statement showing petitioner's net income as finally determined for Federal income tax purposes for those years, together with related items of receipts and expenditures:
| 1936 | 1937 | |
| Net sales | $ 455,162.92 | $ 508,389.67 |
| Cost of goods produced and sold: Cost | ||
| of ingredients | 268,323.62 | 295,367.14 |
| Processing and delivery: | ||
| Services and supplies | 27,651.71 | 34,409.46 |
| Salaries and wages | 70,379.02 | 72,150.59 |
| Depreciation | 18,592.78 | 19,634.63 |
| Repairs and maintenance | 11,786.55 | 8,821.27 |
| All other | 20,315.89 | 25,719.02 |
| Total processing and delivery | $ 148,725.95 | $ 160,734.97 |
| Overhead expenses: | ||
| Salaries | $ 22,328.71 | $ 20,716.27 |
| Advertising | 6,662.50 | 7,808.88 |
| All other | 8,983.36 | 12,668.49 |
| Total overhead expenses | $ 37,974.57 | $ 41,193.64 |
| Total cost of goods produced and sold | $ 455,024.14 | $ 497,295.75 |
| Net operating profit | $ 138.78 | $ 11,093.92 |
| Adjustments: | ||
| Payment of accident claim | (3,000.00) | |
| Profit from sale of soda fountain | ||
| Capital stock tax expense | ||
| Taxable net income | $ 138.78 | $ 8,093.92 |
| 1938 | 1939 | |
| Net sales | $ 462,662.93 | $ 548,784.13 |
| Cost of goods produced and sold: Cost | ||
| of ingredients | 257,587.61 | 290,372.55 |
| Processing and delivery: | ||
| Services and supplies | 30,240.81 | 35,516.91 |
| Salaries and wages | 79,299.06 | 106,816.04 |
| Depreciation | 19,842.88 | 20,598.80 |
| Repairs and maintenance | 12,509.15 | 8,363.35 |
| All other | 26,440.93 | 25,505.59 |
| Total processing and delivery | $ 168,332.83 | $ 196,800.69 |
| Overhead expenses: | ||
| Salaries | $ 19,039.68 | $ 29,089.38 |
| Advertising | 5,465.49 | 5,921.63 |
| All other | 11,837.01 | 15,836.76 |
| Total overhead expenses | $ 36,342.18 | $ 50,847.77 |
| Total cost of goods produced and sold | $ 462,262.62 | $ 538,021.01 |
| Net operating profit | $ 400.31 | $ 10,773.12 |
| Adjustments: | ||
| Payment of accident claim | ||
| Profit from sale of soda fountain | 702.32 | |
| Capital stock tax expense | (107.00) | 107.00 |
| Taxable net income | $ 995.63 | $ 10,880.12 |
The increase in petitioner's earnings from 1936 to 1937 was due in part to an increase in prices at which petitioner sold its products.
Petitioner's records on its production and sales during the base period were incomplete at the time of the trial herein. They failed to show, in*214 dollar amounts, petitioner's sales of its individual products throughout the base period years.
Petitioner had a substantial volume of cash sales in its distribution of milk, buttermilk, cream, butter, and ice cream. Its sales of 40 per cent cream and of powdered milk were almost entirely credit or charge sales.
For 1938 and 1939, petitioner made cash sales 5 of $ 158,351.53 and $ 198,771.87 respectively. No breakdown was established of the various products over which these cash sales were spread in those years. For the same years, petitioner made the following charge sales: 5*246
| 1938 | 1939 | |
| Milk | $ 71,908.96 | $ 126,303.04 |
| Buttermilk | 3,205.89 | 4,768.13 |
| Condensed milk | 42,996.85 | 41,353.92 |
| Cream | 50,210.62 | 29,360.87 |
| Butter | 26,472.20 | 30,215.43 |
| Ice cream mix | 1 7,172.09 | 18,138.81 |
| Ice cream | 100,694.46 | 98,307.43 |
| Powdered milk | 4,230.29 | 3,184.28 |
| All others | 4,491.06 | 4,936.05 |
| Total | 311,382.42 | 2 356,567.96 |
*215 Petitioner had a total of three ice cream routes in operation throughout each of the years 1937, 1938, and 1939. The following table shows petitioner's retail and wholesale milk routes in operation during those years:
| Retail Milk Routes | Wholesale Milk Routes | |||||
| Month | ||||||
| 1937 | 1938 | 1939 | 1937 | 1938 | 1939 | |
| January | 7 | 7 | 8 | 2 | 3 | 3 |
| February | 8 | 8 | 13 | 2 | 3 | 4 |
| March | 8 | 8 | 10 | 2 | 3 | 4 |
| April | 7 | 8 | 10 | 2 | 3 | 4 |
| May | 7 | 8 | 10 | 2 | 3 | 4 |
| June | 8 | 8 | 10 | 2 | 3 | 4 |
| July | 8 | 8 | 10 | 2 | 3 | 4 |
| August | 8 | 8 | 10 | 2 | 3 | 4 |
| September | 8 | 8 | 10 | 2 | 3 | 4 |
| October | 8 | 8 | 10 | 2 | 3 | 4 |
| November | 8 | 8 | 10 | 2 | 3 | 4 |
| December | 7 | 8 | 10 | 2 | 3 | 4 |
The increase in petitioner's retail milk routes from 8, in January 1939, to 13, in February 1939, was due to an acquisition of routes which formerly had been operated by Hollybrook Dairy. The decrease in the number of retail milk routes to 10 in March 1939, was due to a consolidation of routes and not to a loss of business.
The population of Fredericksburg increased from 6,819 in 1930 to 10,666 in 1940. Part of this increase was due to normal growth, and part was due to annexation of about 500 acres by Fredericksburg in 1939. The increase in Fredericksburg's*216 population due to this territorial expansion did not add to petitioner's potential customers, since the annexed territory was already being tapped by petitioner.
The Virginia Department of Agriculture published a bulletin which was entitled "Virginia Farm Statistics" and which related to the production and consumption of fluid milk and certain milk products in the State of Virginia. The following information appeared in that bulletin: *247
| Total production on | Milk sold to plants, dealers, etc., | ||||
| farms | at wholesale | ||||
| Year | Quantity | Value of | |||
| Milk | Butterfat | sold | Price per | sales | |
| (million | (million | (million | 100 lbs. | (thousand | |
| pounds) | pounds) | pounds) | (dollars) | dollars) | |
| 1929 | 1,356 | 56 | 246 | 3.40 | 8,364 |
| 1930 | 1,234 | 51 | 219 | 3.25 | 7,118 |
| 1931 | 1,324 | 54 | 229 | 2.85 | 6,526 |
| 1932 | 1,309 | 54 | 201 | 2.40 | 4,824 |
| 1933 | 1,304 | 53 | 201 | 2.20 | 4,422 |
| 1934 | 1,332 | 55 | 231 | 2.35 | 5,428 |
| 1935 | 1,362 | 56 | 271 | 2.40 | 6,504 |
| 1936 | 1,334 | 55 | 286 | 2.45 | 7,007 |
| 1937 | 1,397 | 57 | 310 | 2.75 | 8,525 |
| 1938 | 1,436 | 59 | 353 | 2.50 | 8,825 |
| 1939 | 1,431 | 59 | 360 | 2.45 | 8,820 |
The following table shows the quantity of milk delivered to manufacturing plants in Virginia*217 during the base period years:
| Year | Pounds of milk |
| 1936 | 44,987,000 |
| 1937 | 55,879,000 |
| 1938 | 85,216,000 |
| 1939 | 76,725,000 |
The following table shows fresh fluid milk consumption in Virginia during the base period years (data in million pounds):
| Consumed | Consumed | ||||
| in cities | Retailed by | in farm | Total | Percentage | |
| Year | (wholesale | farmers | household | consumed | of 1939 |
| receipts) | |||||
| 1936 | 241 | 102 | 323 | 666 | 92 |
| 1937 | 254 | 110 | 347 | 711 | 98 |
| 1938 | 268 | 102 | 345 | 715 | 99 |
| 1939 | 283 | 96 | 343 | 722 | 100 |
Much more Virginia milk was consumed outside that state than was brought into it from other states. Nearly two-thirds of the market milk produced in northern Virginia was sold in Washington, D. C., and considerable milk produced in Virginia was sold to North Carolina markets.
Prior to 1938, petitioner had two buildings at Fredericksburg. One was a brick garage, large enough to house 18 to 20 trucks. At the other building petitioner carried on its manufacturing operations and its office work; both its plant and its office were located in this building. In 1938, petitioner had about nine persons in its office.
Acting as its own contractor, petitioner constructed two*218 additional buildings at Fredericksburg, at a cost to it of $ 15,539.47 in 1938 and $ 708.91 in 1939. One of these buildings was a warehouse, which cost about $ 2,000, and was about 30 feet wide and about 80 feet long. The warehouse was not refrigerated. The other building was an *248 office building, which cost about $ 13,000; it consisted of two stories, and its dimensions were about 50 x 40 feet. Construction of both these buildings was completed in September 1938, and both buildings were available for use by petitioner at about that time.
Although the warehouse relieved congestion, it did not materially affect petitioner's operations or increase its productive capacity. In the warehouse petitioner stored supplies and ingredients used in its operations, such as ice cream boxes, ice cream cones, cartons, cups, and sugar. Milk and milk products were not stored in the warehouse, with the exception of some occasional powdered milk. The supplies stored in the warehouse were formerly kept elsewhere on petitioner's premises.
Petitioner used only a portion of the office building for its office work. The second floor of the office building was rented to a broadcasting station; *219 and a room on the second floor was sometimes used for meetings of petitioner's employees. The front portion of the first floor of the office building was used as a retail sales room; this retail sales room occupied an area of about 38 x 8 feet. There was also a stairway and a passageway on the first floor. Only the remainder of the first floor was used by petitioner for its office work, housing its office personnel and office furniture and equipment. The office building was not used for storage purposes.
Transfer of petitioner's office work from the old building, where it carried on its manufacturing operations, to the office building did not substantially alter petitioner's capacity for production or operation.
In December 1939, petitioner's plant was not a modern plant and was substantially less efficient than the plants of other dairies. Petitioner did not have the proper building or the proper equipment for a modern plant. The condition of petitioner's building and equipment did not prevent it from "turning out a good product."
After the warehouse and office building were constructed, petitioner rearranged some machinery at its plant. This rearrangement did not significantly*220 affect the plant's productive capacity. In 1939, it purchased machinery and equipment costing $ 10,297.09, and most of this machinery and equipment was used in addition to, rather than in replacement of, machinery and equipment then on hand.
It was a common practice, at least during the years 1932 through 1939, for petitioner's stockholders to consider at their annual meetings the adequacy of petitioner's existing facilities for the ensuing year. It had been petitioner's practice, over many years prior to 1939, from time to time to make additions to its machinery and equipment in fairly substantial amounts. At various times prior to 1939, petitioner made some additions to the building in which its plant was located, *249 made structural changes within the building, and made additions to its machinery and equipment.
Expenditures for machinery and equipment purchased by petitioner during the years 1924 through 1939, and for building additions and improvements made by petitioner during the same years, were as follows:
| Cost of | Cost of building | |
| Year | machinery and | additions |
| equipment | and improvements | |
| purchased | ||
| 1924 | $ 10,011.04 | $ 7,241.98 |
| 1925 | 4,001.20 | 6,625.22 |
| 1926 | 3,151.25 | |
| 1927 | 5,155.69 | 4,114.24 |
| 1928 | 7,400.49 | 8,468.63 |
| 1929 | 8,727.42 | |
| 1930 | 9,252.44 | 4,192.03 |
| 1931 | 8,378.74 | |
| 1932 | 8,156.33 | |
| 1933 | 3,388.19 | |
| 1934 | 3,270.85 | |
| 1935 | 5,112.15 | 4,116.42 |
| 1936 | 1 11,071.77 | 163.66 |
| 1937 | 1,661.20 | |
| 1938 | 2,204.50 | 15,539.47 |
| 1939 | 10,297.09 | 708.91 |
The machinery and equipment purchased by petitioner in 1939 was as follows:
| Month | ||
| Item | Recorded | Cost |
| Vat | February | $ 330.00 |
| Vat | February | 237.58 |
| Filter | February | 260.00 |
| Reddiwhip machine | February | 63.00 |
| Case truck | February | 93.00 |
| Lathe | March | 129.00 |
| Bottle filler | March | 1,902.50 |
| Can steamer | April | 19.00 |
| Wash tank | April | 22.50 |
| No. 3 boiler | April | 95.00 |
| Viscoliyer gauge | April | 28.70 |
| Whey strainer | May | 3.03 |
| Fruit feeder | May | 921.50 |
| Air conditioner | May | 1,203.22 |
| 400 gallon spray pasteurizer S6 | June | 1,041.00 |
| Milk room coils | June | 72.83 |
| Fire extinguisher | June | 50.40 |
| 1 1/2 ton hoist | June | 115.24 |
| Motor | July | 20.00 |
| Vat with agitator | August | 400.00 |
| Can washer | August | 400.00 |
| Brick molds | September | 30.00 |
| Ammonia distiller | September | 108.00 |
| Sterilizer | September | 18.00 |
| Bottle filler | October | 1,140.65 |
| 400 gallon spray pasteurizer | November | 1,432.94 |
| Filter | December | 160.00 |
| Total | $ 10,297.09 |
Petitioner could have constructed the warehouse and the office building prior to the time it did so in 1938. Similarly, the new machinery purchased by petitioner in 1939 could have been*222 acquired earlier. At *250 least throughout the base period, petitioner had the funds to construct those buildings and to acquire that machinery, and there were no circumstances which prevented it from doing so. The land, on which the office building was erected, had been owned by petitioner since about 1928. Petitioner did not construct those buildings earlier and it did not acquire that machinery earlier because it did not consider those buildings and that machinery to be needed theretofore from the standpoint of its business.
There was not a substantial increase in the productive capacity of petitioner's plant either in 1938 or 1939. The additions, alterations, and rearrangement made by petitioner in 1938 and 1939, with respect to its buildings and machinery and equipment, were in keeping with its policy theretofore in force for many years and with its regular business operations. Petitioner did not change the character of its business either during or immediately prior to the base period.
Insufficient productive capacity was not a factor which limited or restricted petitioner's sales during the base period to any appreciable extent. Petitioner did not, to any appreciable*223 extent, lose sales during the base period because of insufficient productive capacity.
If the additions, alterations and rearrangement of 1938 and 1939 had been made 2 years earlier, the business of petitioner would not have reached a higher earning level by the end of the base period than it in fact attained by that time.
OPINION.
Applications for excess profits tax relief under section 722 of the Internal Revenue Code, 6 based on a "push-back" claim *251 within subsection (b) (4) thereof, were filed by petitioner for the calendar years 1942 through 1945. Respondent denied these applications, and, on the record before us, we think his determination must be sustained, not only because petitioner has failed to prove a change in the character of its business within (b) (4), but also because it has not shown that its excess profits tax is excessive and discriminatory or that it is entitled to excess profits credits which are greater than those in fact used by it.
*224 Petitioner was in the dairy business at Fredericksburg, Virginia, processing milk and manufacturing a variety of dairy products which it sold at retail and wholesale. Prior to 1938, petitioner's plant and office were located in the same building, to which we refer as the "old building." There it carried on both its manufacturing operations and its office work, and that building was also used for some storage purposes. In 1938 it completed construction of two additional buildings, a warehouse and an office building. Petitioner asserts that at about the same time it rearranged machinery and equipment in the old building; and in 1939 it bought additional machinery and equipment for the plant in the old building.
Petitioner contends that the two new buildings and the additions to and rearrangement of its machinery and equipment worked a change in the character of its business, in that its capacity for production was "enormously" expanded, and that it therefore qualifies for relief under (b) (4). Petitioner asserts that, in performing its office work at the old building and in using it for storage, there resulted a shortage of space for its manufacturing activities, 7 and that shortage*225 is alleged to have been serious enough to have limited its productive capacity. The new buildings are asserted to have made possible a release of space in the old building, sufficient to permit an expansion and rearrangement in machinery and equipment to an extent which materially raised petitioner's productive capacity.
Examination of the "changes" made, and of the circumstances preceding and following them, compels us to conclude that they were not great enough to create a change in the character of the business within the meaning of (b) (4). After the warehouse was constructed, *252 there were stored in it such supplies as cartons, boxes, sugar, and ice cream cones, and possibly some powdered milk. The warehouse was not equipped for the storage of fluid milk or most of petitioner's*226 milk products, and the evidence fails to show that the limited purpose fulfilled by the warehouse could not have been satisfied at the old building without substantial adverse effect on petitioner's production. Petitioner has not established the extent of its storage facilities prior to erection of the warehouse, and it is not clear that the necessary storage space was not available either at the old building or elsewhere on petitioner's premises. While the warehouse may have relieved congestion at the old plant, we have before us nothing to show that such congestion was a limiting factor in relation to petitioner's production.
Similarly, although the office work at the old building may have made some inconvenient inroads on available space, we cannot say that it was in fact a limiting factor with respect to petitioner's productive capacity. Moreover, the newly constructed office building is deceptive as a measure of the space required for that work and the degree to which it may have interfered with petitioner's manufacturing operations. Although the office building had two stories, one of these was not used by petitioner at all but was rented out, and only a portion of the other*227 story was used for its office work. In the past petitioner, as part of its normal operation, had added to or altered the old building in response to its needs, and if, instead of erecting an office building much too large for its requirements, it had simply made an addition to the old building adequate to accommodate its office operations, it could hardly be said that such an addition would have transformed the character of petitioner's business.
Besides the two buildings, petitioner relies on a "rearrangement" and an increase in its machinery and equipment. The evidence fails to disclose what this "rearrangement" was, and we are unable to tell what was rearranged or how it was done. There is here a failure of proof. To the extent that an inference can be drawn from the "changes" that are claimed to have made the "rearrangement" possible, we are unable to say that either storage or office work at the old building had been a serious obstacle to earlier rearrangement of the machinery and equipment, and we are not convinced that any substantial rearrangement took place merely as a result of the construction of the new buildings.
So far as the purchase of new machinery in 1939 is *228 concerned, the record fails to establish that the character of petitioner's business changed on that account. Here too the proof was incomplete. While the record identifies the machinery acquired in 1939, there is no concrete evidence as to the contribution to petitioner's productive capacity *253 which could be expected or actually was achieved as a result of these purchases. Petitioner, as part of its regular policy and normal practice, had made purchases of machinery and equipment during the course of many years prior to 1939, just as it had also made building additions and improvements; and while the amounts spent varied from year to year, the expenditures in 1939 for machinery and equipment by comparison were not so great or so distinctive in dollar amount as to show a change in the character of the business. In 1939 petitioner spent $ 10,297.09 on such additions; in 1924, 1928, 1929, 1930, 1931, 1932, and 1936 it spent respectively $ 10,011.04, $ 7,400.49, $ 8,727.42, $ 9,252.44, $ 8,378.74, $ 8,156.33, and $ 11,071.77. Petitioner has failed to show, furthermore, that there was any essential qualitative difference between these earlier purchases and the ones made in*229 1939. Other than identification of a purchase of a boiler and stoker for $ 6,000 in 1936, there is a paucity of proof as to the nature of the machinery and equipment bought in the years prior to 1939, or that many of those prior purchases were not for additions to petitioner's plant rather than in replacement of retired or withdrawn machinery and equipment. On the record as a whole, we are unable to say that the machinery and equipment purchases on which petitioner relies created a change in the character of its business.
Petitioner insists that the combined effect of all these "changes" was a substantial increase in the productive capacity of its plant. Although we have discussed the pertinent "changes" individually, we believe that taken together their effect on petitioner's productive capacity was not significantly greater. We have been unable to find that those "changes" either separately or in combination were great enough to create an appreciable difference in petitioner's productive capacity. And aside from any inferences we may draw from the "changes" themselves, little remains in the record as a possible source of support for petitioner's claim. It introduced no evidence*230 whatever in quantitative terms, based on some acceptable standard of measurement, as to the productive capacity of the plant before and after the "changes" were made, and it has failed to show in this manner that actually its productive capacity was affected to a substantial extent. Such evidence can reasonably be assumed to have been available to petitioner, and the omission in its proof in this regard may properly be taken to signify a lack of merit in its position. Cf. Wichita Terminal Elevator Co., 6 T. C. 1158, 1165, affd. (C. A. 10) 162 F.2d 513">162 F. 2d 513. It offered only the general testimony of two witnesses associated with it, who could hardly be said to have been disinterested, and who merely asserted in general terms that a state of congestion in the old building interfered with production and that the "changes" brought about a substantial increase in petitioner's productive capacity. *254 Those "changes," one of them added, "permitted, I would say, to double the capacity with the same personnel, permitted us to double it," without stating what the capacity may have been before or after it was "doubled." General opinions*231 of this sort carry little weight in the absence of an adequate factual foundation. Cf. Powell-Hackney Grocery Co., 17 T. C. 1484, 1488; Pabst Air Conditioning Corporation, 14 T. C. 427, 436-437.
Taking the events on which petitioner relies either singly or in the aggregate, we think it has failed to prove that they caused a substantial alteration in the character of its business. It certainly cannot be said on this record that "the nature of the operations of the business affected by the change is * * * essentially different after the change from the nature of such operations prior to the change." Regulations 112, sec. 35.722-3 (d). Cf. Clermont Groves, Inc., 17 T. C. 1616, 1621-1622; Newburgh Transfer, Inc., 17 T.C. 841">17 T. C. 841, 852; Wisconsin Farmer Co., 1021">14 T. C. 1021, 1028. Petitioner has not shown that it comes within (b) (4) or any of the other categories described in section 722 (b), and it must be held ineligible for the relief it seeks.
Moreover, even if we were to agree that petitioner changed the character of its business *232 through an increase in productive capacity, we would feel constrained to approve respondent's determination. More than just a change in the character of a business must be shown in order to become entitled to relief under section 722. Petitioner must also show that "because" of such qualifying change its average base period net income is an inadequate standard of normal earnings, and that it is entitled to excess profits tax credits, based on a reconstruction of its base period earnings, which are larger than the credits it used. And in order to receive the benefit of the 2-year "push-back" of (b) (4), it must show that the business did not reach by the end of the base period the earning level which it would have reached if the change had been made 2 years before it actually was made. We think that the evidence is insufficient to establish compliance with these requirements.
Petitioner contends that insufficient productive capacity during the base period, prior to the "changes" of 1938 and 1939, caused it to lose sales which it otherwise was able to make, and therefore reduced its earnings during that portion of the base period. As to the remainder of the base period, with respect*233 to which no complaint is made about productive capacity, petitioner contends that some time was required before it fully could realize the beneficial effect of the "changes," and that their impact on its earnings had not been completely felt by the end of the base period. As a result, petitioner asserts, its level of earnings by the end of the base period would have *255 been higher if the "changes" had been made 2 years earlier, and that it is therefore entitled to a "push-back" under (b) (4). Its claim to relief thus rests on a claimed increase in sales caused by an alleged increase in productive capacity; increased sales would provide increased revenues and, petitioner also asserts, would make possible lower unit costs of processing and delivery.
The record is wholly inadequate, however, to show that during any of the base period years petitioner's productive capacity was a factor which to any extent limited its sales. There is no evidence at all as to customers whose purchases may have been lost because of insufficient productive capacity, or of the amounts of the sales lost for this reason. In support of its claim that sales were lost through lack of productive capacity, *234 petitioner introduced in evidence only general testimony by the two interested witnesses who also testified about the "changes" which had been made. One of these witnesses was employed by petitioner to supervise installation and maintenance of its plant and equipment, and none of his duties were in any way concerned with petitioner's sales; he plainly was not qualified to express an informed opinion as to its sales. The other witness, an officer of petitioner, admitted that no retail sales had been lost because of lack of productive capacity, but asserted only that there had been a loss in wholesale customers and then only in the sale of condensed milk and ice cream mix. That witness, when asked, was unable to remember the names of any wholesale customers to whom petitioner sold ice cream mix in 1939 but not in prior years, and no facts were provided as to sales of either of these items claimed to have been lost. The testimony in this connection consisted only of general declarations unaccompanied by proof of relevant particulars, and, as we have noted, such general evidence is lacking in weight and persuasion. Cf. Powell-Hackney Grocery Co. and Pabst Air Conditioning Corporation,*235 supra. For many years petitioner had adhered to a policy of periodically reviewing its needs in plant and equipment, and of taking steps to satisfy its requirements. We cannot find that it did not take timely action on this occasion. We think it clear that petitioner has failed to prove that it could have improved its earnings, either during the years of the base period or in the level it attained by the end of the base period, through an increase in its productive capacity prior to the time that the "changes" actually were made, or that its earnings suffered because the "changes" were not made sooner. Cf. National Grinding Wheel Co., 8 T.C. 1278">8 T. C. 1278.
Although petitioner was entitled to compute its excess profits tax credits on the basis of earnings during the base period, it chose instead to compute its credits on the basis of its invested capital during the taxable years, because the invested capital method resulted in considerably higher credits. In such circumstances, to be entitled to *256 relief under section 722, the taxpayer must show that, based on constructive earnings during the base period, it is entitled to credits even higher than*236 its invested capital credits. Cf. Green Spring Dairy, Inc., 18 T. C. 217, 237; Lamport Co., 1079">17 T. C. 1079, 1084-1085; General Metalware Co., 17 T. C. 286, 292; Blaisdell Pencil Co., 1469">16 T. C. 1469, 1484; Stonhard Co., 13 T. C. 790, 799. Accordingly, even if its earnings had suffered to some extent because of insufficient productive capacity, there is no convincing showing on this record that the resulting loss was so great as to entitle petitioner to constructive earnings large enough to produce credits greater than its invested capital credits.
In accordance with our holding and in conformity with the stipulation of the parties,
Decision will be entered that petitioner is not entitled to relief under section 722 for the years in issue, and that there is a deficiency of $ 6,280.99 in petitioner's excess profits tax for 1945.
Reviewed by the Special Division.
Footnotes
1. The parties further stipulated in this connection that this Court's decision in Farmers Creamery Co. of Fredericksburg, Va., Docket No. 20716 (14 T. C. 879) --
treated $ 6,280.99 of the petitioner's excess profits tax liability as determined without the benefit of Section 722 for the calendar year 1945 to be nonassessable until after the final disposition of the petitioner's application for relief under section 722 by virtue of the privilege of deferment provided for in section 710 (a) (5) of the Internal Revenue Code and the petitioner's action in claiming the benefit of such deferment provision on its original excess profits tax return for the calendar year 1945. * * * In the event that the Court should find that the petitioner's applications for relief under section 722 are allowable in whole or in part with respect to any of the calendar years 1942 to 1945, inclusive, the decision to be entered herein should recite that petitioner's correct excess profits tax liability as determined without the application of section 722 is the amount shown in the following schedule:
↩
Liability before application Year of section 722 1942 $ 9,490.18 1943 30,588.45 1944 32,737.82 1945 61,741.32 2. The listed amounts represent credits computed in accordance with the decision of this Court in Farmers Creamery Co. of Fredericksburg, Va., 14 T. C. 879↩.
3. It was claimed in part, in reference to (b) (4), that there had been a change in petitioner's capacity for production or operation consummated during a taxable year ending after December 31, 1939, as a result of a course of action to which the taxpayer was committed prior to January 1, 1940. Claim to relief on the ground of such "commitment" was expressly abandoned by petitioner at the trial herein.
Neither in its application to the Commissioner nor at the trial herein did petitioner claim relief on the basis of elimination in 1939 of a competitor, Hollybrook Dairy, the facts as to which are found hereinafter.↩
4. This surplus milk was also known as "Class 3" milk. There were also "Class 1" milk, which included milk processed and sold as bottled milk, and "Class 2" milk, which included milk processed and sold as fluid cream.↩
5. These cash and charge sales were gross sales. They were reduced by sales returns and allowances, discounts, and freight charges, resulting in net sales for these years in the amounts shown in petitioner's income statement above.↩
1. For 1938, this figure includes sales of eggnog as well.↩
2. There were, in addition, in 1939 "Other Unallocated Sales" of $ 50.25. It is not clear whether these were cash or charge sales.↩
1. Of this amount, $ 6,000 represents the cost of a boiler and stoker.↩
6. 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. 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 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 --
* * * *
(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 a 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 in the operation or management of the business, a difference in the products or services furnished, a difference in the capacity for production or operation, * * *.↩
7. Petitioner does not claim, and it has made no attempt in this proceeding to prove, that it experienced a shortage in storage space which precluded it from keeping materials and supplies it needed in its manufacturing operations.↩