Decisions will be entered under Rule 50.
1. Petitioner held qualified for relief under section 722 (b) (4), Internal Revenue Code of 1939, because of a change in capacity for operation for which it was committed prior to January 1, 1940; and because of base period changes in products and in the ratio of nonborrowed capital to total capital.
2. Where original claim for relief for 1941 was based solely on a commitment for increased plant capacity under section 722 (b) (4) but where supplemental memoranda and amended claims based on other provisions of section 722 (b) (4) were filed after expiration of the time for filing a new claim for that year and were considered by the respondent, held, that questions raised in the supplemental memoranda and amended claims, including petitioner's claim for carryover or carryback of unused excess profits credit based on a constructive average base period net income, are properly before this Court.
*278 These consolidated proceedings involve excess profits taxes for 1941, 1942, and 1943 in the respective amounts of $ 33,543.72, $ 355,953.10, *44 and $ 295,605.51.
The petitioner claims excess profits tax relief under section 722 (b) (4) of the Internal Revenue Code of 1939 because of certain changes in its products, because of a commitment for an increase in its plant capacity entered into before January 1, 1940, and also a change in the ratio of nonborrowed capital to total capital. It also claimed relief under section 722 (b) (5) but it now concedes that it is not entitled to relief under that subsection.
A further issue relating to an income tax deficiency of $ 1,021.15 determined for 1946 has been conceded by petitioner.
The testimony was taken before a commissioner of this Court and his findings of fact were duly served on the parties. Objections thereto presented by counsel for the respective parties have been considered. We make the following findings of fact:
*279 FINDINGS OF FACT.
The stipulated facts are so found and are incorporated herein by this reference.
Petitioner is a manufacturer of hydraulic presses and accessories used in their operation. Its principal office and place of business is located at Mount Gilead, Ohio. It filed its returns for the years involved, 1941, 1942, and 1943, with the then collector of internal *45 revenue for the eleventh district of Ohio.
Petitioner was a pioneer in the manufacture of hydraulic presses and has always been a leader in that field. Upon its incorporation in 1887, petitioner took over a going business which had been operated for about 10 years. The earlier presses manufactured by petitioner's predecessor were used principally for making apple cider. Petitioner expanded the business and adapted its presses to various other uses.
Until about 1926 water was used as the medium for conveying the pressure in the hydraulic presses. In that year petitioner developed and put on the market a new type of hydraulic press using oil as a pressure medium. This was described as "Closed Circuit Fastraverse" press. At first petitioner purchased the pumps for these presses, but it had to design new types of controls. Later it developed and manufactured its own pumps.
The chief advantages of the oil-type, as distinguished from water-pressure-type, press were that it operated more efficiently, occupied less space, and was comprised in a single complete unit with motor and all controls mounted directly on the press frame. The water pressure type required a complicated system of *46 permanently installed pipes and large water tank and various controls, which rendered it unsuitable for many industrial uses.
Petitioner made improvements on its Fastraverse press from time to time and obtained patents for some of its basic features. The accuracy and speed of the presses were increased, and automatic or semiautomatic controls were installed.
The chief advantage of hydraulic over mechanical power for presses is that the former supplies, automatically, a constant flow of pressure directly in line with the work to be performed, at any desired force, depending on the size and speed of the power-generating motor, and for any desired period of time. The hydraulic press performed about the same work as the mechanical press but did it more efficiently and more economically.
In the development of its Fastraverse press, petitioner's officers recognized the opportunities of applying the principles of hydraulic engineering to the types of work commonly performed by mechanical presses in many of the industrial plants. They made a study of various *280 types of presses and other metal-forming machinery used in the plants of some of the mass production industries with the idea of adapting *47 the hydraulic press to those uses. By the beginning of the base period the hydraulic press had become well established and was rapidly gaining ascendency over the mechanical press, especially in the industrial plants.
The pump which petitioner purchased for its earlier presses was a radial-type pump known as the Hele-Shaw pump. It was manufactured by the American Engineering Company under a British license. It operated satisfactorily for the smaller presses but developed faults when used in the large-tonnage, high-pressure presses that petitioner soon developed.
About 1933 or 1934, petitioner developed a pump embodying the same basic principles as the Hele-Shaw pump but with certain mechanical improvements, such as the substitution of tapered roller bearings between the cylinder rotor and the valve pintle. These improvements eliminated the faults of the Hele-Shaw pump and proved satisfactory in the larger presses. The trend in the industry during and immediately prior to the base period was for the larger high-pressure presses. Petitioner's pumps were found to be adaptable to machine tools and other machinery as well as presses. There were over 200 of them in operation by petitioner's *48 customers in October 1935. At about the end of the base period, petitioner was the only hydraulic press manufacturer producing its own pumps.
In addition to its pump, the petitioner, during or just prior to the base period, developed and patented various accessories for its hydraulic pressure systems, such as generators, circuits, controls, and valves, which it sold to other manufacturers under the name "Hydro-Power." In March 1939, petitioner formed a subsidiary corporation, Hydro-Power Systems, Incorporated, with an office in Pittsburgh, Pennsylvania, to handle the sale of these products. This company remained dormant during 1939.
In 1934, petitioner received a request from Douglas Aircraft Company, Inc., of Santa Monica, California, to design and build for it a 2,000-ton press to be used in manufacturing airplane parts. The press was to embody the so-called Guerin process of forming duralumin structural parts for airplanes. In the Guerin process, a rubber pad as much as 8 or 10 inches in thickness is embedded in the moving platen of the press. The sheet of duralumin or other structural material is laid on the bed of the press over preshaped forms or dies of the exact patterns *49 of the structural parts. These dies are made of inexpensive steel plate or composition materials with steel surface. When downward pressure is exerted by the press the dies are forced *281 up into the rubber pad and at a certain pressure point the structural metal is cut to the exact shape of the dies. Douglas had used one of petitioner's small capacity presses experimentally in developing the Guerin process.
The 2,000-ton press was completed and installed in the Douglas plant early in 1935. It operated satisfactorily, and in December 1935 Douglas gave petitioner an order for a still larger 5,000-ton press of the same design.
The 5,000-ton press was delivered to Douglas in December 1936 at a cost of $ 86,400. In 1939, petitioner built a similar press of 4,500 tons for Consolidated Aircraft Corporation at a cost of $ 72,700. Some of the heavy parts of both of these presses were built by subcontractors and shipped directly to the purchasers' plants.
During 1938, petitioner was offered a contract for building 3 additional 5,000-ton presses for export to Russia but due to lack of capacity and facilities for handling these large presses at its own plant it arranged to build the power units *50 and controls only and to have the framework and other heavy parts built by the Birdsboro Steel & Foundry Company of Birdsboro, Pennsylvania. The 3 power units and control systems were billed to the purchaser at $ 75,957.
The first use of petitioner's Fastraverse press by the automobile industry was to straighten malleable castings. This operation was performed by a single-action press such as petitioner then manufactured. This press was not suitable for deep metal drawing because it permitted the metal to crimp or wrinkle around the dies. About 1928 or 1929, petitioner developed and patented a double-action press capable of forming certain deep-drawn or pan-shaped parts. In this press there were two separate moving parts applying different degrees of pressure simultaneously. For instance, in one such type of press one of the pressure members gripped and held the metal blank around the die while the other drew it out to the desired shape. These presses were used for making such parts as automobile headlights, oil pans, and tops of automobile trunks.
During 1935 and 1936, petitioner developed a triple-action press on which patents were acquired in 1938. One of the outstanding features *51 of petitioner's triple-action press was that it permitted the use of the same dies that were being used with the mechanical presses. This, and the fact that it was capable of making deeper drawings than the double-action press, opened up a broader field for the use of hydraulic presses.
About 1931 petitioner became interested in the production of thermoplastics. It purchased in England, and brought to its plant *282 here, a hand-operated, thermoplastic press which had been developed by the Francis Shaw Company of England. This company also produced a hydraulic thermoplastic press which petitioner acquired a license to manufacture in this country.
There are two types of plastic materials, described as thermosetting and thermoplastic. The former, such as Bakelite, are pressed into forms under heat and are permitted to cool and harden in the forms. Once set, they cannot be reheated or reshaped. The thermoplastics are also molded under heat and pressure but they can be reheated and reshaped from time to time. Petitioner had been manufacturing presses for the production of thermosetting products long before the base period. A large and rapid expansion in the thermoplastic field began about *52 1934.
The petitioner began the manufacture and sale of thermoplastic injection molding presses in 1934. The number of units sold and their sales value during the years 1934 through 1939 were as follows:
| Year | Units | Sales value |
| 1934 | 2 | $ 4,577 |
| 1935 | 12 | 48,183 |
| 1936 | 27 | 153,032 |
| 1937 | 21 | 153,085 |
| 1938 | 10 | 137,585 |
| 1939 | 28 | 233,652 |
The total dollar value of thermoplastic products produced in the United States increased from approximately $ 2,000,000 in 1936 to $ 10,800,000 in 1939. The industry continued to grow after 1939. The estimated number of injection molding machines in operation in the United States in the years 1936 through 1939, and the dollar value of thermoplastic products produced in those years, were as follows:
| Injection | Dollar value | |
| Year | molding | thermoplastic |
| machines | products | |
| 1936 | 90 | $ 2,000,000 |
| 1937 | 180 | 5,400,000 |
| 1938 | 270 | 8,100,000 |
| 1939 | 360 | 10,800,000 |
The hydraulic injection molding presses developed by petitioner offered important advances in the manufacture of thermoplastics, and contributed materially to the growth of the industry.
Also, during 1939, petitioner developed and began manufacturing hydraulic presses for die-casting metals. These were similar in construction to the thermoplastic injection molding presses, *53 with slight changes required for handling metal instead of plastics. Also, in *283 1939, petitioner had in the development stage a press for metal forging for use in manufacturing steel.
The following table shows petitioner's net sales, in dollars, of presses and other commodities, segregated according to the descriptions appearing in its catalogues, for the years 1934 to 1939, inclusive:
| 1934 | 1935 | 1936 | |
| (Cents omitted) | |||
| Presses: | |||
| Heavy duty power | $ 31,900 | ||
| Metal working | 146,025 | $ 166,289 | $ 415,627 |
| Chemical | 148,965 | 238,059 | 304,367 |
| Veneer | 18,250 | ||
| Rayon | 2,380 | 7,368 | 35,207 |
| Water pressure | |||
| Subtotal | $ 329,270 | $ 411,717 | $ 773,452 |
| Less: Transfers to cider presses | |||
| and power units | 1,140 | ||
| Subtotal | $ 329,270 | $ 411,717 | $ 772,312 |
| Cider | 4,056 | 6,540 | 11,770 |
| Total presses | $ 333,327 | $ 418,258 | $ 784,082 |
| Power units | $ 8,855 | $ 18,027 | $ 31,348 |
| Other items: | |||
| General HPM supplies | $ 46,975 | $ 48,710 | $ 59,046 |
| Valves | 16,368 | 14,370 | 21,597 |
| Fittings | 27,991 | 32,701 | 49,615 |
| Pumps | 14,168 | 12,319 | 11,921 |
| Accumulators | 1,885 | 5,558 | 10,791 |
| Hoists, cylinders, etc | 4,311 | 27,400 | 19,223 |
| Mt. Gilead filters & processing | |||
| Mt. Gilead supplies | 22,845 | 36,946 | 21,571 |
| Graders | 355 | 380 | |
| Sprayers | 15,987 | 36,055 | 265 |
| Total other items | $ 150,889 | $ 214,441 | $ 194,031 |
| Total sales | $ 493,071 | $ 650,727 | $ 1,009,463 |
| 1937 | 1938 | 1939 | |
| (Cents omitted) | |||
| Presses: | |||
| Heavy duty power | |||
| Metal working | $ 496,317 | $ 395,364 | $ 799,032 |
| Chemical | 337,107 | 236,556 | 323,068 |
| Veneer | |||
| Rayon | 131,440 | 195,965 | 204,560 |
| Water pressure | 9,003 | ||
| Subtotal | $ 964,865 | $ 827,885 | $ 1,335,664 |
| Less: Transfers to cider presses | |||
| and power units | 19,585 | ||
| Subtotal | $ 964,865 | $ 827,885 | $ 1,316,079 |
| Cider | 13,936 | 21,759 | 9,272 |
| Total presses | $ 978,802 | $ 849,645 | $ 1,325,352 |
| Power units | $ 40,776 | $ 111,875 | $ 44,595 |
| Other items: | |||
| General HPM supplies | $ 72,886 | $ 48,377 | $ 55,549 |
| Valves | 23,679 | 8,076 | 13,701 |
| Fittings | 46,471 | 17,961 | 12,801 |
| Pumps | 17,973 | 22,014 | 13,618 |
| Accumulators | 7,465 | 3,280 | |
| Hoists, cylinders, etc | 19,995 | 20,680 | 4,845 |
| Mt. Gilead filters & processing | 2,909 | ||
| Mt. Gilead supplies | 43,026 | 22,537 | 38,839 |
| Graders | |||
| Sprayers | |||
| Total other items | $ 231,498 | $ 142,927 | $ 142,263 |
| Total sales | $ 1,251,077 | $ 1,104,448 | $ 1,512,211 |
*54 Throughout the base period, petitioner was limited in its production by a lack of plant equipment and capacity. Its deliveries were generally several months behind orders. By the middle of 1939 it had accepted orders for practically all of its output for that year. This lag in deliveries caused losses and sometimes cancellations of orders. Plant facilities were increased from time to time and equipment was added as the business expanded. The net additions to property, plant, and equipment amounted to $ 26,899 in 1936; $ 51,523 in 1937; $ 36,047 in 1938; $ 100,701 in 1939; $ 574,098 in 1940; and $ 131,242 in 1941.
The need for additional plant capacity was discussed at directors' meetings from time to time during the base period. At a meeting of the board of directors held September 23, 1936, authorization was given for erecting a new separate department for the manufacture of pumps, valves, and power system controls. It was later decided, however, that the new building was not presently needed, due to the advantages gained by rearranging the factory and the addition of new equipment.
*284 During 1939, further study was made of plant expansion and a number of tool manufacturers were *55 consulted about furnishing the equipment that would be needed. Consultations were also held with investment bankers about the issuance of securities to finance the plant. It was estimated that additional capital of $ 780,000 would be needed.
In October 1939, petitioner's authorized and outstanding capital stock consisted of 3,200 preferred shares and 12,000 common shares of a par value of $ 50 each. At a meeting held October 24, 1939, petitioner's directors authorized a recapitalization and the sale of additional shares of its common and preferred stock. The new capital stock was to consist of 26,400 preferred shares of a par value of $ 25 each and 300,000 common shares of a par value of $ 5 each. The old shares were to be exchanged for the new shares at the rate of 2 for 1 for the preferred and 10 for 1 for the common shares.
On November 2, 1939, petitioner entered into an underwriting agreement with F. Eberstadt & Co., Inc., of New York, and Hawley, Huller & Co., of Cleveland, Ohio, investment bankers, for the sale to them of 20,000 preferred shares at $ 21.50 per share, and 40,000 common shares at $ 8.25 per share. This action was approved by the stockholders at a meeting held *56 December 5, 1939. A registration certificate was filed with the Securities and Exchange Commission on December 7, 1939. On December 15, 1939, the underwriters paid petitioner approximately $ 740,000 for the stock, after deduction of expenses of approximately $ 20,000.
Also, on December 15, 1939, petitioner entered into a contract with the Austin Company of Cleveland, Ohio, to design an addition to its plant. Such plans were prepared and submitted to petitioner January 16, 1940. It was found that additional land would be needed for a new building, which petitioner acquired, and on April 5, 1940, petitioner gave the Austin Company a contract for the construction of a new factory building. Later, on June 20, 1940, it gave the Austin Company a further contract for a new office building. Production operations were commenced in the new plant in September 1940.
The new plant was equipped to handle the heavy parts used in the larger presses. It greatly increased petitioner's operating efficiency and its production capacity. The old building was used for the manufacture of pumps, valves, controls, and injection molding machines.
Petitioner's net sales, cost of goods sold, gross profits, *57 and net taxable income, including gains or losses on the sale of fixed assets, as determined by the respondent, for the years 1921 to 1942, inclusive, were as follows: *285
| Cost of | Gross | Net | ||
| Year | Net sales | goods | profit | income |
| sold | on sales | (or loss) 1 | ||
| (Cents omitted) | ||||
| 1921 | $ 373,069 | $ 270,710 | $ 102,359 | ($ 33,237) |
| 1922 | 581,388 | 381,283 | 200,105 | 33,123 |
| 1923 | 709,701 | 500,028 | 209,673 | 29,685 |
| 1924 | 551,362 | 399,531 | 151,831 | (39,188) |
| 1925 | 624,521 | 413,120 | 211,401 | 19,568 |
| 1926 | 676,723 | 482,770 | 193,952 | (15,794) |
| 1927 | 558,375 | 373,837 | 184,537 | (28,859) |
| 1928 | 607,825 | 404,109 | 203,715 | 28,170 |
| 1929 | 756,442 | 515,817 | 240,624 | 51,737 |
| 1930 | 697,563 | 453,851 | 243,712 | 49,080 |
| 1931 | 434,956 | 268,034 | 166,922 | 1,332 |
| 1932 | 236,462 | 150,266 | 86,196 | (24,235 |
| 1933 | 280,439 | 182,734 | 97,704 | (16,543 |
| 1934 | 493,071 | 328,814 | 164,257 | 25,769) |
| 1935 | 650,727 | 418,615 | 232,112 | 51,014) |
| 1936 | 1,009,463 | 650,318 | 359,144 | 122,057 |
| 1937 | 1,251,077 | 775,941 | 475,135 | 177,368 |
| 1938 | 1,104,448 | 625,410 | 479,037 | 179,761 |
| 1939 | 1,512,211 | 829,025 | 683,186 | 355,554 |
| 1940 | 1,729,221 | 1,081,944 | 647,277 | 185,196 |
| 1941 | 2,997,625 | 1,756,320 | 1,241,304 | 512,773 |
| 1942 | 4,137,992 | 2,518,106 | 1,619,886 | 747,120 |
In December 1934 petitioner was asked to send representatives to the Navy Yard in Washington, D. C., to consult with authorities about modernizing the *58 Cartridge Case Shop. The hydraulic presses then in use at the Navy Yard were the old water-power types. Petitioner later received orders from the Navy Yard and also from the United States Army arsenals and other munition manufacturers on which the following sales were made:
| 1936 | 1937 | 1938 | 1939 | |
| U. S. Navy | $ 3,030 | $ 1,787 | $ 1,990 | $ 93,736 |
| Frankford Arsenal | 72,600 | 3,005 | ||
| Watertown Arsenal | 9,510 | |||
| Bridgeport Brass Co | 82,116 | |||
| Royal Dutch Arsenal (Holland) | 85,863 | |||
| Lindsay Arsenal (Canada) | 19,155 | |||
| Total | $ 3,030 | $ 11,297 | $ 74,590 | $ 283,875 |
In 1939, petitioner received orders amounting to $ 1,277,557.85 which it classified as follows:
| Classification "A" | Per cent | |
| H-P-M | $ 1,210,126.03 | 94.7 |
| Hydro-power | 61,161.32 | 4.81 |
| Mount Gilead | 6,270.50 | .49 |
| Total | $ 1,277,557.85 | |
| Classification "B" | ||
| Domestic | $ 885,236.55 | 69.3 |
| Export | 392,321.30 | 30.7 |
| Total | $ 1,277,557.85 | |
| Classification "C" | ||
| Injection molding | $ 207,028.00 | 26.4 |
| Armament | 514,563.00 | 40.2 |
*286 Petitioner's backlog of unfilled orders at the close of each of the years 1934 to 1939, inclusive, amounted to $ 27,685 in 1934; $ 95,431 in 1935; $ 399,268 in 1936; $ 578,455 in 1937; $ 831,380 in 1938; and $ 668,881 in 1939. Of the $ 668,881 of backlog orders at the end of 1939, $ 248,085 were for export, $ 88,148 for *59 Navy Yard and United States arsenals, and $ 30,426 for aircraft manufacturers.
The hydraulic press industry is not classified as a member of the machine tool industry although it is closely related to that industry. It is classified in the Standard Industrial Classification Manual as "Industry No. 3541 -- Metal Working Machinery (except machine tools)."
The comparative values of the United States production of machine tools and of metal-working machinery in the United States from 1929 through 1939 were as follows:
| Year | Machine tools | Metalworking | Total |
| machinery | |||
| (Thousands omitted) | |||
| 1929 | $ 147,316 | $ 92,358 | $ 239,674 |
| 1933 | 16,457 | 23,151 | 39,608 |
| 1935 | 64,515 | 80,346 | 144,861 |
| 1937 | 162,046 | 131,664 | 293,710 |
| 1939 | 166,649 | 107,709 | 274,358 |
Exports of machine tools increased from a 10-year low of approximately $ 4,388,000 in 1933 to $ 24,859,000 in 1936, and to approximately $ 79,765,000 in 1939. There was a corresponding increase in the exports of all metal-working machinery. The average of 1922-1939 exports was approximately $ 20,000,000 for machine tools and $ 37,000,000 for all other metal-working machinery against 1936-1939 averages of approximately $ 52,000,000 for machine tools and $ 82,000,000 for all other metal-working *60 machinery.
The petitioner claimed and has been allowed the benefits of section 713 (f) of the Internal Revenue Code of 1939, under the so-called growth formula. Its arithmetical average excess profits net income for the base period is $ 206,927.83 for 1940 under 1941 law for purposes of carryover of unused excess profits credit; $ 206,927.83 under the law applicable to the year 1941; and $ 208,140.08 under the law applicable to 1942 and 1943. Under section 713 (f), the averages are $ 323,235.26 for 1940 for carryover purposes; $ 323,235.26 for 1941; and $ 325,872.01 for each of the years 1942 and 1943.
Petitioner's excess profits credits, based on section 713 of the Internal Revenue Code of 1939 (95 per cent of averages under section *287 713 (f), minus net capital reductions of $ 1,329.40 for 1940, $ 3,128.03 for 1941, $ 5,496.04 for 1942, and $ 8,437.71 for 1943), excess profits tax liability as determined by respondent, and the overpayments of excess profits tax claimed by petitioner for each of the taxable years involved are as follows:
| Year | Excess profits | Excess profits | Overpayments |
| credits | tax liability | claimed | |
| 1940 | 1*61 $ 305,743.60 | ||
| 1941 | 303,945.47 | $ 33,543.72 | $ 33,543.72 |
| 1942 | 304,082.37 | 355,953.10 | 355,953.10 |
| 1943 | 301,140.70 | 232,100.99 | 295,605.51 |
The following table shows petitioner's average borrowed capital, average equity invested capital, average invested capital, and interest paid on borrowed capital, for each of the base period years:
| Borrowed | Equity | Invested | Interest paid | |
| Year | capital | invested | capital | on borrowed |
| capital | capital | |||
| 1936 | $ 59,537 | $ 895,457 | $ 954,994 | $ 3,201.23 |
| 1937 | 55,319 | 952,932 | 1,008,251 | 3,997.64 |
| 1938 | 35,816 | 1,021,442 | 1,057,258 | 4,126.09 |
| 1939 | 1,206,049 | 1,206,049 | None |
Petitioner's 1940 and 1941 excess profits tax returns were filed March 15, 1941, and March 16, 1942, respectively. In the 1941 return the petitioner claimed and was allowed an unused excess profits credit carryover from 1940 computed without regard to section 722. Applications for excess profits tax relief on Form 991 were filed for 1940 and 1941, both on September 15, 1943. The claim for 1940 contained a schedule showing an unused excess profits credit carryover, after application of section 722, of $ 413,700.09. This amount was also claimed by petitioner in an amended claim for 1941 filed June 26, 1950, on Form 991. A claim was filed on Form 991 for the year 1942 on June 15, 1943. The 1941 claim included by reference all the information contained *62 in the 1942 claim. A claim on Form 991 was timely filed for 1943.
The original claims for 1941, 1942, and 1943 were all based exclusively on the commitment for a change in plant capacity under section 722 (b) (4). In a supplemental memorandum filed February 19, 1951, for the years 1940 through 1945, the petitioner, for the first time, claimed that "immediately prior to and during the base period" it made changes in the character of its products within the purview of section 722 and was passing through an initial development period during the base period years with respect to those changes. In a further supplemental memorandum filed on May 15, 1951, for the years 1940 through 1945, the petitioner urged as grounds for relief *288 under section 722 (b) (4) a difference in products or services furnished; a change in capacity for production or operation; a change in management; and a difference in the ratio of nonborrowed capital to total capital. On October 19, 1951, petitioner filed on Form 991 amended applications for relief for the years 1941, 1942, and 1943, based on the additional grounds set forth in the supplemental memorandum of May 15, 1951, and in addition thereto claimed the *63 benefit of carryovers and carrybacks of unused excess profits tax credits for all of those years. The formalizing of the additional grounds for relief by the filing of claims on Form 991 was done at the suggestion of the Excess Profits Tax Council.
Following is a list of the original and amended applications for relief under section 722 on Form 991, the related claims for refund on Form 843, and the supplemental memoranda filed by the petitioner for the years 1940 through 1945:
| Nature of document | Filed on |
| Form 991, Application for the year 1940 | Sept. 15, 1943 |
| Form 991, Application for the year 1941 | Sept. 15, 1943 |
| Form 991, Application for the year 1942 | June 15, 1943 |
| Form 991, Application for the year 1943 | Mar. 15, 1944 |
| Form 843, Claim for refund for the year 1942 | Mar. 12, 1945 |
| Form 843, Claim for refund for the year 1943 | Mar. 12, 1945 |
| Form 843, Claim for refund for the year 1942 | Apr. 15, 1947 |
| Form 843, Claim for refund for the year 1943 | Apr. 15, 1947 |
| Supplement A to Form 991 for the years 1940-1943 | July 16, 1948 |
| Form 991, Amended application for the year 1941 | June 26, 1950 |
| Form 991, Amended application for the year 1942 | June 26, 1950 |
| Form 991, Amended application for the year 1943 | June 26, 1950 |
| Supplemental memorandum for the years 1940-1945 | Feb. 19, 1951 |
| Supplemental memorandum for the years 1940-1945 | May 15, 1951 |
| Form 991, Second amendment for the year 1941 | Oct. 19, 1951 |
| Form 991, Second amendment for the year 1942 | Oct. 19, 1951 |
| Form 991, Second amendment for the year 1943 | Oct. 19, 1951 |
*64 For the year 1941, the time within which a new claim could be filed expired on June 30, 1946. All of the above applications for relief and amendments thereto were given careful consideration by respondent and were rejected in their entirety on the ground that the respondent determined that petitioner had not established its right to the relief requested in such applications and amendments thereto. A statutory notice of such disallowance was mailed to petitioner on August 11, 1952, in accordance with the provision of section 732 of the Internal Revenue Code of 1939.
The petitioner's average base period net income is an inadequate standard of normal earnings because of a change in the capacity for production and operation in 1940 for which the petitioner was committed prior to January 1, 1940, because of a difference in the products which the petitioner manufactured and sold, and because of a difference in the ratio of nonborrowed capital to total capital.
*289 A fair and just amount representing normal earnings to be used by petitioner as a constructive average base period net income for the years 1941, 1942, and 1943 is $ 432,440. For the year 1940, for carryover purposes, the constructive *65 average base period net income, after the application of the variable credit rule, is $ 282,100, which is less than petitioner's average base period net income for carryover purposes under section 713 (f) of the 1939 Code.
OPINION.
The petitioner claims relief under section 722 (b) (4), Internal Revenue Code of 1939, because of changes in its products, an increase in its capacity for production or operation for which it was committed prior to January 1, 1940, and a change in the ratio of nonborrowed capital to total capital.
As to the changes in products, the petitioner claims that during or just prior to the base period it developed and began manufacturing several new products, including the hydropower radial pump, pressure generators, valves, controls, and other accessories, Guerin process presses, triple-action hydraulic presses, thermoplastic injection molding presses, and metal die-casting presses.
Some of the products in question, such as the radial pump and the thermoplastic injection molding presses, were new products in the petitioner's business while others were merely improvements in the products already being manufactured, or adaptations of them to different uses. The petitioner's *66 principal product, during the base period and for a number of prior years, was hydraulic presses. The petitioner was one of the pioneers in this field. Improvements were made from time to time in the design and construction of these presses and their uses were broadened to meet the requirements of new and expanding industries. Basically, however, they remained the same product which the petitioner began manufacturing in 1926 when it developed the oil pressure, closed-circuit press. There was, we think, no single change in design or improvement in these presses of such far-reaching effect as to constitute a change in the character of the business. See Wisconsin Farmer Co., 1021">14 T. C. 1021; Avey Drilling Machine Co., 16 T. C. 1281; Pelton & Crane Co., 20 T.C. 967">20 T. C. 967.
The radial pump which petitioner began manufacturing sometime prior to the base period was one of its more important accessories. It was of the same basic design as the Hele-Shaw pump which the petitioner had been purchasing for installation in its presses before it began manufacturing its own pumps. Petitioner's pump embodied some improvements over the Hele-Shaw pump, such as the substitution of tapered Timken roller bearings. *67 We do not know just when the petitioner began selling these pumps. The evidence is that it had always manufactured and sold pumps of some type, also controls, *290 valves, and such accessories. Its sales of pumps amounted to $ 14,168 in 1934. The evidence does not show that there was any substantial development of the petitioner's pump after the beginning of the base period. Neither does the evidence show that petitioner would have been able to produce and sell during the base period any more presses, particularly of the heavy type for which these pumps were said to be essential, if its pump had been developed 2 years earlier than it was.
The injection molding presses, both for plastics and metals, which the petitioner began manufacturing in 1939, were new and different products for the petitioner, and their manufacture and sale in the base period may be accepted as having established a difference in the petitioner's products.
A more important change in the character of the petitioner's business was the commitment for plant expansion. The evidence clearly shows that prior to January 1, 1940, the petitioner was committed to a course of action calling for the construction of an addition *68 to its plant. As early as 1936 the petitioner's management recognized the need for additional space and equipment and the opportunities for expanding the business. In September 1936 the directors authorized the construction of a plant addition to handle pumps, valves, and controls at a cost of $ 20,000, but this was postponed, after a rearrangement of the plant and the installation of some new equipment. The lack of space and facilities for construction of heavy presses was seriously hindering the growth of the business. It was for this reason that the petitioner "farmed out" the heavy construction on several of the large presses for which it furnished the power units in 1938 and 1939.
During 1939 the petitioner decided on a large-scale addition to its plant. Funds for that purpose, $ 740,000, were raised by the sale, through investment bankers, of additional shares of capital stock. On December 15, 1939, a construction firm was engaged to design a new factory building, and early in 1940 a contract for the building was executed. The new plant addition was put into operation in September 1940. It was especially equipped to handle the heavy machines, such as the large presses, while *69 the old section of the plant was used to manufacture small presses, pumps, valves, and other lighter products. It was designed to give the petitioner approximately twice its base period productive capacity. We are satisfied that the addition to the plant was made pursuant to a course of action to which petitioner was committed prior to January 1, 1940, within the meaning of section 722 (b) (4). See Studio Theatre, Inc., 18 T. C. 548; Springfield Tablet Manufacturing Co., 22 T.C. 35">22 T. C. 35.
As a further qualification for relief, the stipulated facts show that for each of the base period years there was a decrease in borrowed capital, an increase in equity invested capital, and an increase in total capital. As a consequence, there was a reduction in the interest paid *291 on borrowed capital from an average of about $ 4,000 in 1936, 1937, and 1938 to zero in 1939. This constitutes a qualification for relief as "a difference in the ratio of nonborrowed capital to total capital," under section 722 (b) (4).
Petitioner has submitted a reconstruction of its average base period net income in which it contends for a constructive average base period net income of $ 796,358. This reconstruction is *70 based upon all the qualifying factors contended for in petitioner's various applications for relief and amendments thereto, the principal qualifying factor being the commitment for increased capacity set forth in the original application prior to the various amendments. In applying the push-back rule, petitioner assumes that with a 100 per cent increase in plant capacity at the close of 1937, it would have practically doubled its sales by the end of the base period and would have obtained a constructive 1939 sales volume of at least $ 2,830,000 as compared with its actual 1939 sales set out in our findings of $ 1,512,211.
It is the respondent's position that although the commitment for the plant addition resulted in a substantial increase in plant capacity, the lack of productive capacity in the base period was not a factor which limited the petitioner's earnings to any appreciable extent, and that the evidence does not show that the petitioner would have attained any substantially higher level of earnings by the end of the base period if the plant addition had been put into use 2 years previously.
The evidence is, however, that during most of the base period the petitioner was handicapped *71 for lack of space and facilities. This caused delays in fulfilling orders and the loss of new orders. Petitioner's management realized early in the base period that with the expansion of heavy industries and changes in manufacturing methods there would be a growing demand for its products. Subsequent events proved the soundness of that prediction.
After the new plant addition was put into operation, petitioner's sales increased from $ 1,512,211 in 1939 to approximately $ 3,000,000 in 1941, and its net profits from $ 355,554 in 1939 to $ 512,773 in 1941. The upward trend continued in 1942. However, this increase in earnings cannot be ascribed entirely to plant expansion and the changes in petitioner's products, and we cannot assume, in applying the push-back rule, that a similar increase would have resulted by the end of 1939 if the changes had taken place at the close of 1937. In the sale of its products the petitioner was somewhat dependent upon the progress of several other large industries in which its products were used. This was particularly true of the heavy-type presses which were designed and built only at the request of and under the specifications of the purchaser. *72 There was not the rapid expansion in those industries in 1938 and 1939 that there was in the later years; *292 for instance, the estimated number of injection molding machines used in manufacturing thermoplastics increased from 270 in 1938 to 360 in 1939, but by the end of 1941 had increased to 900. Industrial production in the United States, as reported by the United States Department of Commerce, remained fairly stable during the base period years except for a temporary setback in 1938.
We do not think there is any merit in respondent's contention that the plant expansion was made primarily to meet the growing demands of industry in the preparation for war and should therefore be disregarded as a relief factor. The evidence is to the effect that petitioner's products for the most part were developed for use in peacetime industries. The war situation at the end of the base period was a matter of concern to most industries, especially those engaged in the production of heavy-type machines, but prospectively petitioner's business was affected only as were general business conditions.
We cannot find on the evidence that, with the additional plant capacity in 1938 and 1939 which it had *73 after 1940, petitioner's sales and net profits in those years, or at the close of 1939, would have been approximately twice what they actually were. However, we are convinced that with the use of the additional plant capacity in 1938 and 1939 the petitioner would have reached a substantially higher level of earnings, attributable to the increased capacity, by the end of 1939.
Making what we think is a proper allowance for the change in capacity and for the other qualifying changes referred to above, we have determined that a fair and just amount representing normal earnings to be used as a constructive average base period net income for the years 1941, 1942, and 1943 is $ 432,440.
In an amended pleading, the respondent alleges that in the event this Court should find that petitioner is entitled to use a constructive average base period net income, then this Court must apply the variable credit rule to any such constructive average base period net income for the years 1940 and 1941. As to the application of such a rule, see Nutrena Mills, Inc., 26 T. C. 1096, and Bergstrom Paper Co., 26 T. C. 1167 and cases cited therein.
Since production operations did not commence in the new plant *74 until September 1940, it is obvious that the variable credit rule would have to be applied in determining the constructive average base period net income for 1940 and petitioner so concedes in its brief. See also Bulletin on Section 722, pps. 122 and 123. In applying the rule, however, we find that the constructive average base period net income for 1940 for carryover purposes is less than petitioner's average base period net income under section 713 (f). It follows that regardless of respondent's further contention regarding the timeliness of the claim, petitioner is not entitled to any carryover to 1941 *293 of any unused excess profits credit from 1940 based on a constructive average base period net income. This, of course, does not affect petitioner's right to any carryover from 1940 to 1941 of any unused excess profits credit based upon its average base period net income under section 713 of the 1939 Code. As to the year 1941, we think petitioner is correct in contending that the variable credit rule should not apply for the reason that during 1941 substantially the entire committed-for capacity was utilized by petitioner.
Respondent further contends that for the year 1941 petitioner *75 is not entitled to relief on any ground other than that based on the commitment for increased capacity, because that was the only qualifying factor relied upon in any claim filed within the time prescribed by statute, and that petitioner is not entitled to any carryover or carryback of unused excess profits credit because no claim therefor was made until after the expiration of the statute of limitations for filing such claims.
The timeliness of the original claim for relief under section 722 (b) (4) for the year 1941 is not questioned by respondent. His position is that petitioner is now limited to the relief based on the commitment for increased capacity as specified in the original claim without regard to the amended claims encompassing the other section 722 (b) (4) changes which were filed after the statute of limitations for such claims had expired.
The amended claims on Form 991 were filed at the suggestion of the Excess Profits Tax Council at a conference with petitioner's representatives. They were considered by the Council and by the respondent in their determination of the merits of the petitioner's claims for relief, and the petitioner was so notified by the Excess Profits *76 Tax Council and by the respondent.
There can be no question but that the respondent was fully apprised of petitioner's reliance in its claims for relief for the year 1941 as well as for the other years involved, upon a change in products and a change in the ratio of nonborrowed capital to total capital, as well as the commitment for a change in capacity. These are all defined as changes in the character of the business in section 722 (b) (4) on which the petitioner's original and amended claims were predicated. It is shown, too, that extensive facts pertaining to all of these changes were submitted to the representatives of the Government and were carefully considered by them.
In these circumstances, we think that petitioner is entitled to whatever constructive average base period net income may be attributed to the section 722 (b) (4) changes set out in the amended claims for 1941. The respondent, however, in an amended answer filed on March 9, 1954, alleges petitioner is not entitled to relief on any ground other than that based on the commitment for increased capacity and cites *294 his regulations in support of his position. 1*78 This stand is taken in spite of the fact that respondent's *77 Excess Profits Tax Council and respondent both carefully considered the amended claims and the facts and information in support thereof in reaching their determination. As we read the cases, respondent's position under the facts here present is untenable.
In Martin Weiner Corp., 26 T. C. 128, we held, on the authority of six United States Supreme Court decisions, 2 that although a claim for refund may be denied if it does not conform with the formal requirements contained in respondent's regulations, "those regulatory requirements can be waived by respondent." The grounds which gave rise to the $ 4,646.45 refund in the Weiner case were not presented in the original claim nor were they ever presented in any amended claim. The matter which gave rise to the $ 4,646.45 refund was discovered by the respondent while considering the merits of the original claim. No objection to the petitioner's right to receive the $ 4,646.45 refund was made until respondent filed an amended answer after the proceedings reached this Court. Then for the first time he contended that petitioner should be denied the refund on the *79 ground that in accordance with respondent's regulations petitioner had not amended its original claim by setting out specifically such so-called standard issue grounds and that it was then too late to do so by reason of the statute of limitations. This Court held that the Commissioner had waived his regulatory requirements and that the refund should be allowed.
We think the instant case is stronger for the petitioner than was the Weiner case, for here petitioner, acting upon respondent's suggestion, filed the amendments to the original timely claim. In the statutory notice, the respondent specifically stated that careful consideration was given to the original claim and to each of the amendments filed in support thereof. We hold that under the circumstances of this *295 case the respondent has waived the regulatory requirements upon which he now relies. Martin Weiner Corp., supra, and United States v. Memphis Cotton Oil Co., 288 U.S. 62">288 U.S. 62. *80 The case of Brown Paper Mill Co., 23 T.C. 47">23 T. C. 47, cited by respondent in support of his present position, did not deal with a question of waiver and we think it is distinguishable on its facts. We, therefore, hold that the matters raised in the amended claims are properly before the Court.
It may be noted in passing that the respondent in his answer filed in Docket No. 45261 "alleges that petitioner has claimed the benefit of section 710 (a) (5) of the Internal Revenue Code and thereunder deferred the payment of excess profits taxes for the taxable years ended December 31, 1942 and 1943, in the respective amounts of $ 94,300.55 and $ 111,677.84, which amounts respondent now claims as deficiencies herein." This is a matter that should be disposed of in the computations to be made under Rule 50. See paragraphs 40 and 41 of the stipulation of facts.
Reviewed by the Special Division.
Decisions will be entered under Rule 50.
Footnotes
1. Includes gains or losses on sales of fixed assets.↩
1. For carryover purposes.
1. Regs. 109, sec. 30.722-5 (a), as amended by T. D. 5393 (1944 C. B. 415, 417) and T. D. 5483 (1945 C. B. 277):
* * * the application on Form 991 * * * must set forth in detail and under oath each ground under section 722 upon which the claim for relief is based, and facts sufficient to apprise the Commissioner of the exact basis thereof. It is incumbent upon the taxpayer to prepare a true and complete claim and to substantiate it by clear and convincing evidence of all the facts necessary to establish the claim for relief; failure to do so will result in the disallowance of the claim. * * * New grounds or additional facts not contained in the original application shall be presented as an amendment to the original application for the taxable year. * * * No new grounds presented by the taxpayer after the period of time for filing a claim for credit or refund prescribed by section 322, and no new grounds or additional facts presented after the disallowance, in whole or in part, of the application for relief and the claim for refund based thereon, will be considered↩ in determining whether the taxpayer is entitled to relief or the amount of the constructive average base period net income to be used in computing such relief for the taxable year. [Emphasis supplied.]
2. Tucker v. Alexander, 275 U.S. 228">275 U.S. 228; United States v. Memphis Cotton Oil Co., 288 U.S. 62">288 U.S. 62; United States v. Humble Oil & Refining Co. (C. A. 5), 69 F. 2d 214; United States v. Garbutt Oil Co., 302 U.S. 528">302 U.S. 528; United States v. Kales, 314 U.S. 186">314 U.S. 186; Angelus Milling Co. v. Commissioner, 325 U.S. 293">325 U.S. 293↩.