*236 Decision will be entered for the respondent.
Petitioner, a California corporation, was engaged after the base period in the construction of aircraft assembly jigs on a subcontracting basis. Petitioner filed claims for relief under sections 722 (a) and 722 (c) (2), (3), for the taxable years 1942 and 1943. Held, petitioner is not entitled to any relief.
*690 In his notice of deficiency, respondent determined excess profits tax deficiencies for the calendar years 1942 and 1943 in the amounts of $ 5,981.83 and $ 2,618.14, respectively, and a deficiency in income tax for the year 1942 of $ 52.21. In the same notice petitioner's applications for relief and claims for refund of excess profits tax under section 722 (c) (2) and section 722 (c) (3) of the Internal Revenue Code were denied. The only issue which is involved is whether petitioner is entitled to refunds of $ 26,068.40 for 1942 and $ 47,022.66 for 1943. These amounts represent the amounts actually paid by petitioner for those years. Petitioner abandoned the other issue it raised in the pleadings.
Some of the facts were stipulated.
FINDINGS OF FACT.
The stipulated facts are so found and are incorporated herein.
Petitioner, a California corporation, was organized on April 2, 1941. Its principal place of business during the taxable years was Los *691 Angeles, California. Federal tax returns were filed with the collector of internal revenue for the sixth district of California, Los Angeles, California.
From the time of its organization until *238 May 31, 1944, petitioner manufactured aircraft assembly jigs (an important part of tooling for aircraft production) for aircraft factories in southern California. Petitioner's organizers and principal stockholders were Everett J. Gray (hereinafter referred to as Gray), who became petitioner's general manager, and Harvey C. Lemke (hereinafter referred to as Lemke), who became its factory manager or shop superintendent. From June 1, 1944, until some time in July 1945 the business was continued as a partnership, Crowncraft Engineering Company, by Gray and Lemke.
Aircraft assembly jigs are frames used for assembly or sub-assembly of component parts of an airplane. They are usually large structures, the size varying with the particular part of the airplane which is to be assembled with it. The jigs are all custom made, which means there is no repetitive type of work involved. Duplication of the jigs is required when somewhere between 50 and 100 planes of a particular model are required. But even then it is a custom process to build the duplicate. On the jig framework, which is usually welded pipe, smaller pieces are welded or bolted. Great precision is required to allow exact coordination*239 with the adjoining sections of the plane, and to allow interchangeability between similar sectional assemblies. Jigs are required even where very few planes of a particular model are to be produced, but the greater the number the more detailed will be the jigs.
While the manufacture of aircraft assembly jigs is considered part of aircraft tooling, it is not to be confused with various other types of tooling in aircraft construction, such as machine tools, dies and small jigs and fixtures used in machine parts. Special skills and training are required in manufacturing the jigs. While an aircraft assembly jig builder must have the same basic training as other tool makers, additional and different training and skills are required, such as a broad knowledge of the airplane itself and its construction.
Aircraft assembly jig manufacture is primarily a manual rather than a machine type operation. Machinery and equipment which would be needed for an aircraft assembly jig plant employing 10 to 40 productive employees would be about $ 250 to $ 400 per man, as compared with $ 1,500 to $ 2,000 per jig builder in a plant manufacturing machine fixtures and jigs.
Petitioner was organized largely*240 from Gray's efforts. Gray had had a number of years of successful experience in management, particularly in the field of institutional management and operation. He also had done graduate work at the University of California majoring *692 in economics and personnel problems. He desired to go into a business where he could make use of his abilities. After consulting with certain officials of aircraft companies, he determined to go into the manufacture of aircraft assembly jigs since this was one of the most general bottlenecks then occurring in aircraft tooling. He decided on such a business even though cautioned against doing so by the same aircraft officials. They felt that work of this type was very difficult because of the precision required and aircraft manufacturers were hesitant about subcontracting it.
Gray made inquiries to discover which men were the most qualified in construction of assembly jigs. Of those recommended, he selected Lemke and after some discussion with him in the Fall of 1940 or the Spring of 1941, Lemke agreed to go into business with Gray. Friends of Gray agreed to put up $ 10,000 for the corporate organization.
Lemke became petitioner's plant*241 superintendent and subsequently its factory manager. He had completed an apprenticeship as a tool and die maker in 1933. In 1935, he came to California and thereafter worked with aircraft parts manufacturers until January 1939; after that he worked with various aircraft companies as a tool maker. In May 1940, he went to Boeing Aircraft, at Seattle, Washington, as foreman of the tool and jig department. He returned to California in the Summer of 1940 to work with Vega Airplane Company, a subsidiary of Lockheed, where, at the time of petitioner's organization, he was in charge of the major assembly jig department. He was a competent tool man and had established a reputation in southern California as to skill in aircraft assembly jig construction.
At the time of petitioner's organization in 1941, there were no businesses in southern California which manufactured aircraft assembly jigs exclusively. During the taxable years several organizations other than petitioner, excluding the aircraft manufacturers themselves, produced aircraft assembly jigs as subcontractors. Only two, besides petitioner, were engaged exclusively in that work.
Lemke obtained men well qualified in aircraft*242 assembly jig building. The petitioner not only had skilled builders but also was equipped to plan and design the jigs, as well as to build them. This technical skill of petitioner's employees, coupled with the excellent management of Gray and numerous controls which he established, made petitioner an efficient organization.
Petitioner's first contract for aircraft assembly jigs in 1941 was from Timm Aircraft Company, which was a new manufacturer and was not prepared to do it own tooling. During the taxable years petitioner made aircraft assembly jigs for Douglas Aircraft Company, Inc., Northrup Aircraft Company, Inc., North American Aviation, *693 Inc., Ryan Aeronautical Company, Timm Aircraft Company, Cessna, Boeing Aircraft Company (only for subcontractors in the Los Angeles area), Chrysler Motors Corporation, Avion, Consolidated Vultee Aircraft Corporation, Goodyear, and others. There was no showing by petitioner as to the amount of work done for each.
Petitioner's profit and loss statement for the period April 2 to December 31, 1941, for the years 1942 and 1943, and for the period January 1, to May 31, 1944, shows a gross profit and a net profit or loss as follows:
| Apr. 2 to Dec. | Jan. 1 to Dec. | Jan. 1 to Dec. | Jan. 1 to May | |
| 31, 1941 | 31, 1942 | 31, 1943 | 31, 1944 | |
| Gross profit | $ 2,588.73 | $ 117,598.09 | $ 163,496.33 | $ 70,033.34 |
| Net profit | ||||
| or (loss) | (4,447.19) | 47,074.89 | 71,032.76 | 5,013.89 |
*243 Petitioner's surplus at the end of each of the years from 1941 to 1944 was as follows:
| December 31, 1941 | ($ 5,385.63) |
| December 31, 1942 | 10,349.64 |
| December 31, 1943 | 27,165.24 |
| May 31, 1944 | 32,329.40 |
Petitioner began business in a rented building with approximately 8,000 square feet. From time to time as the need arose, it expanded its working space by obtaining adjoining vacant lots and putting them under canvas. Most of the machinery and equipment it purchased was second hand. Obtaining business at the outset was difficult. Aircraft manufacturers believed that, due to the exacting skill required in construction of the assembly jigs, the work could not be done outside their own organizations.
The National Aircraft Equipment Company, which later was known as the Kinney Company, was organized in 1940. Its primary business was the operation of a large machine shop and the manufacture of tools, jigs and parts. In addition, it had a department for the manufacture of aircraft assembly jigs. Its first orders for aircraft assembly jigs were received in the early part of 1942. This department was operated for the duration of the war only. In fact, all the organizations, *244 including petitioner, which, during the war years manufactured aircraft assembly jigs, had by 1946 either gone into other fields of manufacture or gone out of business.
Petitioner's sales for the year 1942 were approximately 71 times its net worth at the beginning of the year, and approximately 26 times its average net worth for the entire year. Its sales for 1943 were 29 times its net worth at the beginning of the year and approximately 20 times its average net worth for the entire year. The following table shows for the taxable years petitioner's invested capital, excess *694 profits credit, and excess profits net income before and after renegotiation:
| Excess profits | ||
| Invested capital | credit | |
| 1942 | $ 23,408.90 | $ 1,872.75 |
| 1943 | 28,710.01 | 2,296.80 |
| Excess profits net income | ||
| Before renegotiation | After renegotiation | |
| 1942 | $ 73,178.85 | $ 43,178.85 |
| 1943 | 71,774.87 | (1) |
Thus, petitioner's excess profits net income for 1942 was, after renegotiation, about 184 per cent of its invested capital for that year and its excess profits net income for 1943 was approximately 250 per cent of its invested capital for that year.
*245 Aircraft tooling occurs after the engineering department has designed a plane and before the production department can begin full production of the model. At times, this results in certain "peak loads" in the construction of aircraft assembly jigs when a new model is being manufactured. This often causes a problem in regard to skilled aircraft assembly jig workmen since, during an active tooling program, less skilled employees from the production department might have to be utilized; and, once the jigs have been constructed, the aircraft manufacturer might either be forced to reduce the number of jig builders in its employ or else put them in other positions until the need for jigs again arises. Aircraft manufacturers have always maintained their own tooling departments in which they have done their own tooling so far as possible; and this was especially true with respect to assembly jig construction during the base period. At times, this necessitated expansion in order to fulfil their production schedules and a subsequent contraction when the urgent tooling had been completed. It is only when tooling capacities cannot keep abreast of production schedules that any consideration*246 would be given to subcontracting a part of the tooling. The only types of tooling subcontracted during the years 1936 through 1939 were such items as castings, forgings, rivet sets, patterns, etc. No assembly jig work (with one minor exception) was subcontracted during the base period years, and even in 1940, when Gray approached various aircraft officials, he was told that the policy was not to subcontract any jig building outside of the factory.
During prewar years aircraft manufacturing was under fixed-price contracts. While the aircraft industry, even during the base period years, was constantly growing, profit on production or sale of aircraft was speculative. Business was highly competitive, and cost was the paramount factor about which manufacturers were concerned, although meeting schedules was also important.
*695 During the war years the speed of production was the chief factor. Aircraft manufacturers operated primarily under cost-plus-fixed-fee contracts with the United States Government and, therefore, speed and not cost was the main concern of the manufacturers.
On May 31, 1944, all of petitioner's assets were delivered to Lemke and Gray who thereafter operated*247 as a partnership, known as Crowncraft Engineering Company, conducting the business which, prior to that time, had been conducted by petitioner. The partnership was terminated in July 1945, with the termination of its contracts following cancellation of aircraft contracts by the United States Government.
Applications for relief under provisions of section 722 (c) (2) and 722 (c) (3) for the taxable years 1942 and 1943 were duly filed by petitioner. Respondent disallowed in full petitioner's applications for relief.
Petitioner is not entitled to any relief from its excess profits tax liabilities for the taxable years 1942 and 1943 under any of the provisions of section 722 (c) of the Internal Revenue Code.
OPINION.
Since petitioner was organized after December 31, 1939, it may only use the invested capital method in computing its credit for excess profits tax purposes. See section 712 (a) of the Code. 1 Petitioner recognizing this, asks for relief under section 722 (c) (2) and 722 (c) (3) of the Code. 2*249 In order to qualify for relief under section 722 (c) a taxpayer must not only prove that it is qualified *696 for relief under one of the provisions of such subsection, but*248 must also show a fair and just amount representing normal earnings for use as a constructive average base period net income within the requirements of section 722 (a). 3 Establishment of one of the factors without the other is ineffectual for obtaining relief. Danco Co., 14 T. C. 276 (1950).
*250 It is unnecessary in the instant case to determine whether the petitioner has sufficiently met the requirements necessary under section 722 (c), since it has failed to prove that it would have made a profit, or even remained in business, during the base period years. It has therefore failed to establish a fair and just amount representing normal earnings for use as a constructive average base period net income as required by section 722 (a).
While any relief under section 722 must be based upon assumptions, due to the very nature of the relief afforded, it is still incumbent upon the party requesting such relief to establish some basis upon which such assumptions can be grounded. If every step of the way is shrouded with doubts as to its value, or indeed its plausibility, a serious question is immediately raised as to whether any relief is justified. In this case we have been asked to assume too much. No evidence has been offered to establish just how much time or money was actually expended during the base period years in aircraft assembly jig tooling. All that we have been given is the testimony based on records of one aircraft manufacturer of southern California. And even*251 in this instance, results were not based on actual figures, but on assumptions of an individual, unsubstantiated in any respect. We have been asked to assume that for every million dollars of net sales 40,000 hours have gone into aircraft tooling, that 40 per cent of the tooling hours was for assembly jig construction, that a man would put in 166 2/3 productive working hours a month, and further assumptions based upon these. Then we are requested to apply these figures to the actual sales of southern California aircraft manufacturers *697 during the base period years. While such a procedure might not be unreasonable where some substantiation could be given to such figures, in the instant case there is none.
In addition, an even more basic doubt exists; namely, would the petitioner have been successful financially if it had gone into business during the base period years? Aircraft manufacturers were of the opinion that construction of aircraft assembly jigs was one aspect of aircraft production which could not be subcontracted successfully. They so advised Gray when he discussed the problem with them. Petitioner argues that despite this opposition, had it started business*252 during the base period years, its skill and efficiency in construction of the assembly jigs would have overcome such opposition and it would have been successful in obtaining contracts for construction of an amount representing a skimming off of the peak loads experienced by aircraft manufacturers. Since various manufacturers would have their peak loads at different times there would be sufficient business to make petitioner a success. While theoretically such a possibility might have existed, petitioner has failed to convince us that a business engaged exclusively in the construction of aircraft assembly jigs would have been a financial success. A primary factor in the hesitancy of aircraft manufacturers to subcontract jig construction was an economic one. Petitioner would have had to operate so economically that it would have been cheaper for manufacturers to subcontract and allow petitioner its margin of profit than to do the work themselves. Testimony by an official of North American Aviation, Inc., was to the effect that any subcontracting which they did was negligible during the base period; and, on the basis of the record in this case, there is no assurance that the policy*253 of North American was different from that of other southern California aircraft manufacturers. Petitioner's witnesses who testified to the availability of work for subcontracting during the base period years were technical men, and not persons in a position to decide subcontracting policy matters. Respondent's witnesses were persons of authority who testified that it was not the policy of aircraft manufacturers to subcontract assembly jig construction during the base period.
It was only after the occurrence of the war emergency and the emphasis on speed of production (with many cost-plus-fixed-fee contracts awarded aircraft companies by the United States Government) that subcontracting of jig construction was done on any large scale. And as soon as the contracts of the aircraft manufacturers and the United States Government were terminated by the United States such subcontracts were cancelled. By the end of 1946 no one was in the business of constructing assembly jigs exclusively on subcontract from aircraft manufacturers.
*698 Such facts raise a very strong inference that a business such as petitioner's was successful merely because of the war time emergency. It grew up*254 with the war, was successful because of the war, and ceased with the ending of hostilities. Excess profits taxes were imposed not only to raise revenue, but to take the "excess profits out of war." Petitioner's excess profits are exactly the type of profits such taxing provisions were intended to cover. Fezandie & Sperrle, Inc., 5 T. C. 1185 (1945). Petitioner has failed to show any facts which could be used to establish a fair and normal profit during the base period years to form a framework for reconstruction of a base period net income under section 722 (a).
Decision will be entered for the respondent.
Footnotes
1. No renegotiation.↩
1. SEC. 712. EXCESS PROFITS CREDIT -- ALLOWANCE.
(a) Domestic Corporations. -- In the case of a domestic corporation which was in existence before January 1, 1940, the excess profits credit for any taxable year shall be an amount computed under section 713 or section 714, whichever amount results in the lesser tax under this subchapter for the taxable year for which the tax under this subchapter is being computed. In the case of all other domestic corporations the excess profits credit for any taxable year shall be an amount computed under section 714. (For allowance of excess profits credit in case of certain reorganizations of corporations, see section 741.)↩
2. SEC. 722. GENERAL RELIEF -- CONSTRUCTIVE AVERAGE BASE PERIOD NET INCOME.
* * * *
(c) Invested Capital Corporations, Etc. -- 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, not entitled to use the excess profits credit based on income pursuant to section 713, if the excess profits credit based on invested capital is an inadequate standard for determining excess profits, because --
* * * *
(2) the business of the taxpayer is of a class in which capital is not an important income-producing factor, or
(3) the invested capital of the taxpayer is abnormally low. In such case for the purposes of this subchapter, such taxpayer shall be considered to be entitled to use the excess profits credit based on income, using the constructive average base period net income determined under subsection (a). For the purposes of section 713 (g) and section 743, the beginning of the taxpayer's first taxable year under this subchapter shall be considered to be that date after which capital additions and capital reductions were not taken into account for the purposes of this subsection.↩
3. 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.