*191 Decision will be entered under Rule 50.
Petitioner, a corporation required to compute excess profits on the invested capital basis without the benefit of section 722, produced and sold, under an exclusive license, a product marketed under the name of Dex-O-Tex and had exclusive rights for the sale of chain ladders in limited territory. Licenses for production and sale of Dex-O-Tex were held by two other corporations from 1938 until 1942 when petitioner acquired the right. The prior licensees sustained operating losses in 1938, 1939, and 1940. Restrictions on the use of rubber, an ingredient of Dex-O-Tex, restricted normal operations of petitioner during the period of the war. It was not established that there was any market for chain ladders during the base period.
Held:
1. In determining whether the business of a corporation is of the class specified in section 722 (c) (2), all of its activities must be taken into account.
2. A corporation is entitled to further consideration of its claim for relief upon proof that it is within any one of the three conditions set forth in (1), (2), and (3) of section 722 (c).
3. Constructive average base period net income determined without*192 any allowance for sales of chain ladders.
*97 The Commissioner disallowed the applications filed by the petitioner for excess profits tax relief for the taxable period from March 16, 1942, to February 28, 1943, and the fiscal year ended February 29, 1944. The issue is whether petitioner is entitled to such relief under the provisions of section 722 (c) of the Code. The facts found are substantially in accordance with those found by the hearing Commissioner, which were based, in part, upon stipulations of the parties.
FINDINGS OF FACT.
1. The facts set forth in stipulations of the parties are found in accordance therewith.
2. The petitioner, a California corporation organized March 16, 1942, has its main*193 office and plant in Los Angeles, California, and filed its excess profits tax returns for the taxable years with the collector of internal revenue for the sixth district of California.
3. About 1930 to 1935, J. T. K. Crossfield developed in England a waterproof plastic by combining liquid rubber and a dehydrating or vulcanizing agent with an aggregate. Various materials such as cork, marble, etc., could be used as aggregates. The aggregates *98 selected depended upon the purpose for which the product was to be used. The product was noncorrosive, insulated against sound, heat and cold, did not crack or disintegrate, and was light in weight. It adhered perfectly to metal and other substances, and was applied in a cold state. It was first placed on the market in England under the trade name "Aranbee." Aranbee was used in England as early as 1936 in gymnasiums and tennis courts and in the London Zoo. As the result of experiments conducted by the builders during the early stages of construction of the passenger vessel Queen Mary, a ship of 80,000 tons, at Glasgow, Scotland, the product was selected as a deck covering and in 1936 about 35,000 square yards were used on the*194 vessel. The British Board of Trade approved the product both as a subdeck and as a deck without top covering, and it was thereafter extensively used by British shipbuilders for those purposes.
4. Rowan and Boden, Ltd., agents or licensees of Crossfield for the sale of the product, issued a circular in which it showed 1935-1936 contracts for 36 vessels upon which Aranbee was to be used. After the installation on the vessel Queen Mary, Aranbee was used in contracts for 10 other ships, a total of 86,100 square yards being used on the 11 ships. In addition, the licensee had orders on hand covering 25 additional ships, including another vessel of 80,000 tons, the total quantity of Aranbee on those orders being 119,300 square yards.
5. In 1938 the Surfacing Products Corporation, a corporation organized on December 3, 1937, acquired from Crossfield an exclusive United States license for the product, set up a plant in Brooklyn, New York, and registered the product under the trade name "Dex-O-Tex."
6. Dex-O-Tex is particularly useful for nonmarine purposes because it binds tightly to clean surfaces, affords secure footing, undergoes no physical change in changes of temperature, and *195 can be laid in various thicknesses. It is applied in a cold state. There is a place on every ship where Dex-O-Tex can be used and the amount usable on a ship depends upon its type. It affords protection to deck plates and weighs less than competing material. Dex-O-Tex is used primarily as an "underlayment" for other things, such as carpets, linoleum, and magnesite. It is used as deck covering in washrooms and in other sections of a ship where secure footing and plate protection is important, such as on the flying bridge or wheelhouse.
7. Materials placed on United States ships, including Dex-O-Tex, must meet specifications and qualifications prescribed by an agency of the Federal Government. The requirements are more strict in the United States than in England.
8. The stockholders of the Surfacing Products Corporation were of the opinion that only a small amount of effort would be necessary *99 to obtain the approval of the Federal Government for marine use of Dex-O-Tex and the primary activity of the corporation until it ceased activity on January 9, 1939, was to obtain such authorization. It made no sales of Dex-O-Tex prior to July 1, 1938, and only one marine sale thereafter*196 which was to the United States Maritime Commission for use on some of the ships of the Dollar Line.
9. In 1938, Harold K. Patch, an engineer, conducted an investigation to determine for investors how Dex-O-Tex was being received in the United States and whether the product had a chance of being accepted in the United States as it seemed to him that it had been in England.
10. The Surfacing Products Corporation sold its business to the Crossfield Products Corporation, a newly organized California corporation, which began business January 9, 1939. The corporation's name was changed on two occasions and will hereinafter be referred to as the Crossfield-Barker Co. Patch was general manager, but was not a stockholder of Crossfield-Barker Co.
11. The condensed balance sheets of the Surfacing Products Corporation and Crossfield-Barker Co. as of January 9, 1939, were as follows:
| Surfacing Products | Crossfield- | |
| Corp. | Barker Co. | |
| ASSETS | ||
| Cash | $ 127,75 | $ 127.75 |
| Accounts receivable | 11,944.54 | 11,944.54 |
| Formulas and processes | 16,396.04 | |
| Inventories | 2,233.96 | 2,571.31 |
| Capital assets | 3,624.42 | 3,874.68 |
| Deferred charges | 562.65 | 157.75 |
| Organization expense | 1,757.21 | |
| Total | $ 36,646.57 | $ 18,676.03 |
| LIABILITIES | ||
| Notes payable | $ 5,100.00 | $ 6,250.00 |
| Accounts payable | 385.19 | 1,213.19 |
| Inter office account | 987.86 | |
| Accrued taxes | 47.92 | |
| Accrued royalties | 304.07 | |
| Accrued salaries | 500.00 | 500.00 |
| Advances -- J. T. K. Crossfield | 3,500.00 | |
| Deficit | (13,374.40) | |
| Capital stock | 43,000.00 | 6,908.77 |
| Total | $ 36,646.57 | $ 18,676.03 |
*197 12. Crossfield-Barker Co. conducted operations of manufacturing and selling Dex-O-Tex at two locations, Brooklyn, New York, and Los Angeles, California. In 1939 it obtained a contract for use of Dex-O-Tex on the America, the largest passenger ship ever built in the United States. Although it was not equipped to apply the product where the ship was being constructed at Newport News, Virginia, it agreed for the contract price of $ 44,759.57 to supply and apply the material as a top flooring in the post office of the ship and as an underlayment for tile on other parts, and to supply and lay ceramic tile on *100 the underlayment so as to supervise and insure proper application. The following costs were incurred in performing the contract, with a resulting loss of $ 1,444.66:
| Direct material | $ 6,516.00 |
| Direct labor | 5,646.34 |
| Subcontractor 1 | 24,668.25 |
| Freight 2 | 1,646.59 |
| Overhead | 4,113.45 |
| Other expenses | 3,613.60 |
13. Dex-O-Tex had not received general approval at the time it was installed aboard the America. The installation was made on the vessel under a special permit*198 and in areas considered to be the most crucial. There were other areas of the ship where the product could have been used, principally as an underlayment. Natural rubber was used in producing the Dex-O-Tex installed on the ship. When the product is used as an underlayment for hard tile or magnesite, it will not emit smoke through the covering. After performing the work on the America, the policy of the Crossfield-Barker Co. was to manufacture and sell Dex-O-Tex only and not apply it. Petitioner adopted and carried out the same policy. Experiments were conducted by the Crossfield-Barker Co. during 1939 and 1940 with different aggregates in Dex-O-Tex for use in marine and other construction.
14. Petitioner was organized with a capital of $ 1,000 cash paid in for 1,000 shares of stock at $ 1 per share. It acquired the exclusive American rights to the Crossfield formula process and trade name Dex-O-Tex for a lump sum of $ 9,642.67, payable in annual installments of 14 1/2 per cent of net earnings, but not less than $ 2,500, and after payment of $ 9,642.67, a permanent royalty of 8 per cent of annual net earnings after taxes. Petitioner also acquired all of the tangible assets*199 of the Crossfield-Barker Co., except inventories, for $ 50,733.42, subject to certain liabilities, payment to be made in annual installments of specified percentages of net profits. Petitioner agreed to purchase the inventories of $ 44,220.09 as needed, to be paid for as the petitioner itself received payment for the final product in which the materials used were incorporated, but not later than 120 days from the date such supplies were withdrawn from the warehouse by petitioner.
15. Patch was primarily responsible for organizing petitioner and acquired 285 shares of its stock. In 1942 the two other stockholders of petitioner held a like number of shares. Thereafter, Patch acquired 50 additional shares. Petitioner has never had more than eight stockholders. Patch has at all times since the organization of petitioner been its president and general manager.
*101 16. Petitioner's business during the taxable years was the manufacture and sale of Dex-O-Tex under the exclusive license held by Crossfield-Barker Co., and commencing in December 1942, the sale, in territory on the west coast, of chain ladders manufactured by the American Chain Ladder Co. The ladders were used in *200 shipyards, including navy yards. Sales were to be made at prices fixed by the manufacturer, of which petitioner was entitled to receive a specified amount on shipments made direct from the factory to the customer. It was entitled to a commission on orders placed directly with the manufacturer for shipment in territory assigned to petitioner. Petitioner had the privilege of buying ladders in carload lots at specified prices to enable it to make sales out of stock in its warehouse.
17. In the beginning natural rubber was used entirely in the production of Dex-O-Tex, and until sometime in 1939 natural rubber latex was available in sufficient quantities to meet the requirements of petitioner's predecessors. The prices of spot rubber during the years 1936 to 1939, inclusive, were 16.41, 19.39, 14.64, and 17.57 cents per pound, respectively.
18. Research in the field of synthetic rubber produced a rubber-like material known as neoprene, which had many of the qualities and uses of rubber. The price of neoprene was $ 1.05 per pound when it was placed on the market in 1933. In 1935 and 1940 the production and prices were 500 tons and 75 cents and 2,000 tons and 65 cents per pound, respectively. *201 The product was not produced on a commercial basis until 1941. The production of neoprene from 1941 to 1944, inclusive, was as follows:
| Year | Long tons |
| 1941 | 1 4,463 |
| 1942 | 6,833 |
| 1943 | 26,205 |
| 1944 | 46,243 |
19. In 1942 petitioner started to conduct experiments on the use of neoprene as a substitute for natural rubber in the production of Dex-O-Tex. Because of demand the manufacturer of neoprene was required to allocate its production of the product during the war. Only a small amount of neoprene was available to petitioner during 1942 to 1946, inclusive, for land use, and a priority certificate was necessary to obtain it for use by the Navy. During the years 1943, 1944, and part of 1945 petitioner used a combination of natural rubber and neoprene in the manufacture of Dex-O-Tex. The proportion of neoprene was increased and by September 1945 petitioner used only neoprene in producing the product. Dex-O-Tex produced with use *102 of neoprene has greater fire-resisting qualities than when natural or synthetic rubber is used in the formula. Since 1945 petitioner has used neoprene and some synthetic rubber in Dex-O-Tex. Neoprene was used exclusively*202 in Dex-O-Tex sold in 1947 to 1950, inclusive, for marine use, practically all of which was used as underlay material. Government restrictions on the use, and increased cost of natural rubber, have practically prohibited the use of the material in the production of Dex-O-Tex.
20. Prior to August 24, 1942, a blanket order was issued to all manufacturers of rubber products to discontinue the use of natural rubber they had in stock until a determination was made of the use to which it should be put. On August 24, 1942, the War Production Board imposed restrictions on the use of rubber, which thereafter prevented all uses of Dex-O-Tex made with natural rubber as a deck covering, except for repairs. The use of rubber in Dex-O-Tex for use as a coating for balsa wood floats and life saving equipment continued to be authorized. It could not be used in Dex-O-Tex for use on nonmarine construction. The order restricted petitioner in promoting sales of Dex-O-Tex requiring the use of natural rubber.
21. Products such as Dex-O-Tex have a more extensive market for marine use during peacetime than during war periods. During the war the limited supplies of natural and synthetic rubber required*203 the use of Dex-O-Tex for purposes more critical than deck covers. During peacetime there is need for material such as Dex-O-Tex on battleships at wet places inboard and as an underlayment for linoleum. No topside deck coverings were installed on cargo and combat vessels during the war. Material such as Dex-O-Tex is not used as a deck covering on combat vessels during wartime or as underlayment for linoleum because of the extra weight and fire hazard. For the same reason it is the policy of the Navy to remove such material from a ship when preparing it for combat duty. Sales of Dex-O-Tex for coating life floats ceased at the end of the war.
22. The tonnage of merchant vessels launched in the United Kingdom from 1935 to 1938, inclusive, and in the United States from 1935 to 1939, inclusive, was as follows:
| United | United States | |
| Year | Kingdom | |
| 1935 | 499,011 | 32,607 |
| 1936 | 856,259 | 111,885 |
| 1937 | 920,822 | 239,445 |
| 1938 | 764,307 | 201,251 |
| 1939 | 351,437 |
*103 23. Practically all of the sales effort of petitioner is devoted to having engineers and architects specify Dex-O-Tex in construction plans. It exerted more effort than its predecessors to promote sales for nonmarine*204 use. The sales of petitioner and its predecessors during periods to February 28, 1946, were as follows:
| Dex-O-Tex | |||||
| Marine sales | |||||
| Period | Land sales | Total | Chain ladder | ||
| Life floats | Other | ||||
| 12/3/37-1/9/39 | $ 13,687.78 | $ 3,546.17 | $ 17,233.95 | ||
| 1/9/39-12/31/39 | $ 949.28 | 33,871.01 | 13,548.22 | 48,368.51 | |
| 1940 | 5,669.40 | 15,433.14 | 5,516.19 | 26,618.73 | |
| 1941 | 35,854.65 | 81,220.32 | 14,089.10 | 131,164.07 | |
| 1/1/42-3/25/42 | 30,888.25 | 33,357.24 | 328.40 | 64,573.89 | |
| 3/25/42-2/28/43 | 103,966.19 | 70,905.85 | 391.88 | 175,263.92 | $ 26,950.00 |
| 3/1/43-3/29/44 | 192,926.98 | 6,471.03 | 762.76 | 200,160.77 | 141,546.15 |
| 3/1/44-2/28/45 | 93,877.34 | 40,827.15 | 4,675.66 | 139,380.15 | 18,811.95 |
| 3/1/45-2/28/46 | 46,003.85 | 6,468.22 | 42,819.96 | 95,292.03 | 16,634.50 |
24. All of the sales of Dex-O-Tex in 1941 for life floats resulted from demands of the war. Of the sales of $ 81,220.32 of Dex-O-Tex in that year for other marine use, sales in the amount of $ 35,941.94 were not the result of war demand. Of the remaining marine sales in 1941, $ 16,143.51 was installed on British cargo vessels constructed at Richmond, California, the authorization for the use of the material having been *205 granted as the result of a request made by the British Purchasing Commission, and an undisclosed amount was applied on the battleship Iowa without special authority while the vessel was under construction. The Dex-O-Tex placed on the Iowa was removed early in 1942 to reduce weight and eliminate inflammable material on the decks during combat service of the ship. Most of the land sales made to the United States Navy in 1941, amounting to about $ 9,500, was used for rehabilitating buildings in navy yards. The sales of Dex-O-Tex in 1942 and thereafter until the termination of the war resulted from demand caused by the war.
25. Restrictions upon the use and limited supplies of natural and synthetic rubber since the close of the war have prevented unlimited consumption of the products for general use. The condition tended to decrease petitioner's production and restricted the sale of Dex-O-Tex. Development of synthetic resin elastomers since the war to compete with Dex-O-Tex decreased sales and profits of petitioner, particularly in connection with nonmarine use of Dex-O-Tex.
*104 26. The predecessors of petitioner had the following net income or net loss:
| Dec. 3, 1937 | Jan. 9, 1939 | ||
| to | to | 1940 | |
| Jan. 9, 1939 | Dec. 31, 1939 | ||
| Sales -- Dex-O-Tex | $ 17,182.85 | $ 48,368.51 | $ 26,618.73 |
| Costs | 13,325.30 | 36,806.88 | 24,390.77 |
| Income from Dex-O-Tex | 3,857.55 | 11,561.63 | 2,227.96 |
| Expenses | 17,231.95 | 39,099.98 | 36,152.27 |
| Net income (Loss) | ($ 13,374.40) | ($ 27,538.35) | ($ 33,924.31) |
| Jan. 1, 1942 | ||
| 1941 | to | |
| Mar. 16, 1942 | ||
| Sales -- Dex-O-Tex | $ 131,164.07 | $ 64,573.89 |
| Costs | 78,075.75 | 38,743.86 |
| Income from Dex-O-Tex | 53,088.32 | 25,830.03 |
| Expenses | 45,746.48 | 10,506.58 |
| Net income (Loss) | $ 7,341.84 | $ 15,323.45 |
27. The operating profits or losses of petitioner during fiscal years to February 28, 1946, were as follows:
| Mar. 16, 1942 | Year ended | Year ended | Year ended | |
| Income | to | Feb. 29, 1944 | Feb. 28, 1945 | Feb. 28, 1946 |
| Feb. 28, 1943 | ||||
| Chain ladder sales | $ 2,762.88 | $ 13,216.08 | $ 1,881.20 | $ 1,663.45 |
| Chain ladder | ||||
| commissions | 6,001.83 | 13,748.22 | 10,837.25 | 10,804.91 |
| Dex-O-Tex 1 | 73,291.13 | 73,950.00 | 56,010.12 | 39,505.44 |
| Other income | 512.42 | 2,900.94 | 339.60 | 203.67 |
| Total | 82,568.26 | 103,815.24 | 69,068.17 | 52,117.47 |
| Expenses | 2 64,916.31 | 3 59,010.37 | 66,393.18 | 63,885.24 |
| Net income (Loss) | $ 17,651.95 | $ 44,804.87 | $ 2,674.99 | ($ 11,707.77) |
Sales of chain ladders ceased at the close of petitioner's*207 fiscal year 1946. It had some commission income from such sales made during the next 3 years.
28. The assets and liabilities of petitioner on March 26, 1942, and at the close of the taxable years, were as follows:
| Mar. 26, 1942 | Feb. 28, 1943 | Feb. 29, 1944 | |
| ASSETS | |||
| Cash | $ 17,479.97 | $ 10,299.33 | $ 62,580.36 |
| Accounts receivable | 24,254.42 | 46,510.40 | 4,068.66 |
| Inventories | 44,220.09 | 26,947.45 | 15,341.86 |
| Plant and equipment | 6,273.49 | 7,259.78 | 7,509.50 |
| Other assets | 2,725.54 | 2,010.00 | 2,539.50 |
| Licensing agreement | 9,642.67 | 7,142.67 | 4,642.67 |
| Total assets | 104,596.18 | 100,169.63 | 96,682.55 |
| LIABILITIES | |||
| Accounts payable | 5,475.17 | 24,465.24 | 1,704.20 |
| Accrued liabilities | 5,896.47 | 17,332.22 | 32,550.74 |
| Unpaid purchase price | 93,224.54 | 49,004.45 | 41,441.97 |
| Earned surplus | 8,367.72 | 19,985.64 | |
| Capital stock | 1,000.00 | 1,000.00 | |
| Total liabilities | $ 104,596.18 | $ 100,169.63 | $ 96,682.35 |
29. The applications for relief and claims for refund filed by the petitioner claimed relief under subsections (c) (1), (c) (2), and *105 (c) (3) of section 722 of the Code, and refund of all excess profits taxes paid during the taxable years as follows:
| Mar. 16, 1942 to Feb. 28, 1943 | 1 $ 10,145.68 |
| Year ended Feb. 29, 1944 | 2 18,414.30 |
In the applications for relief petitioner claimed the amount of $ 39,370.35 as a fair and just amount representing normal earnings to be used as constructive average base period net income.
30. In disallowing the applications for relief respondent determined that no amount of constructive average base period net income was allowable and that petitioner's excess profits tax liability was $ 10,145.68 for the period ended February 28, 1943, and $ 18,414.30 for the fiscal year ended February 29, 1944, in connection with which he computed and allowed excess profits credits based on invested capital pursuant to section 714 of the Code, of $ 1,652.36 and $ 2,162.25, respectively, exclusive of excess profits credit carry-back from the fiscal year ended February 28, 1946. The credits are based upon equity invested capital of $ 720.14 and $ 8,148.52 and 50 per cent of borrowed capital, amounting to $ 19,934.32 and $ 18,879.61 for the respective taxable periods. Petitioner's excess profits tax credit without the benefit of relief under the provisions of section 722 is an amount based on invested*209 capital. It qualifies for relief under the provisions of subsections (c) (1) and (c) (3) of section 722 of the Code.
31. The income, expressed in millions, of corporations in the United States during base period years, as compiled by the Bureau of Internal Revenue from returns of all active corporations, was as follows:
| All Corporations in All Industries | |||
| Year | Gross income | Net income | Per cent |
| 1936 | $ 132,277,933 | $ 7,326,217 | 5.5 |
| 1937 | 141,967,076 | 6,545,871 | 4.6 |
| 1938 | 119,995,841 | 3,672,881 | 3.1 |
| 1939 | 132,878,224 | 6,734,565 | 5.1 |
| All Corporations in Construction | |||
| Year | Gross income | Net income | Per cent |
| 1936 | $ 2,012,507 | $ 36,831 | 1.8 |
| 1937 | 2,461.902 | 47,573 | 1.9 |
| 1938 | 1,963,478 | 25,148 | 1.3 |
| 1939 | 2,249,631 | 32,565 | 1.4 |
32. The excess profits credits allowed by the respondent based on invested capital are inadequate standards for determining excess profits for the taxable years, and the amount of $ 5,000 is a fair and just amount representing normal earnings to be used as a constructive *106 average base period net income for the computation of petitioner's excess profits tax for such years.
OPINION.
The petitioner was organized in 1942 and was required to*210 compute its excess profits tax credit based on invested capital. Section 712 (a), Internal Revenue Code. Petitioner alleged that the credit so computed was an inadequate standard for determining excess profits because of the existence of factors set forth in section 722 (c) (1), (2), and (3) of the Code. 1 The parties stipulated that petitioner meets the requirements of (1) and (3).
*211 To establish eligibility under (2), petitioner relies entirely upon the branch of its business from the operation of which it realized commissions on sales of chain ladders shipped directly from the factory to the customer within its territory. Aside from such activity, petitioner's business consisted of sales of chain ladders out of its own stock and Dex-O-Tex. The statute requires that all of the activities of a taxpayer be considered in determining whether capital is an important income-producing factor of a classification of which it is a member. Regardless of the misconception of petitioner as to the proof required to come within subsection (c) (2), qualification under any one of the provisions of (c) is sufficient to entitle a taxpayer to full benefit by proper proof of other provisions of section 722. Tin Processing Corporation, 16 T. C. 713, 722; Regs. 112, sec. 35.722-4; Bulletin on Section 722, p. 130.
Where one or more qualifying factors exist under (c), the tax computed without the benefit of section 722 is considered to be excessive and discriminatory if the credit based on invested capital is an inadequate standard for determining excess*212 profits. Counsel were in agreement at the hearing that the real difference between them was whether petitioner was entitled to an amount for constructive average base period net income which would result in a credit in excess of the amount computed by the invested capital method and allowed by the respondent.
*107 The burden of petitioner was to establish a constructive average base period net income sufficient in amount to result in credits in excess of the credits of $ 1,652.36 and $ 2,162.25 allowed by the respondent for the respective taxable periods based on invested capital.
Petitioner requests us to find constructive average base period net income of $ 32,785.14. No useful purpose would be served by a detailed discussion of the method used by the petitioner in arriving at the amount. Proof was made that of total sales of $ 131,164.07 of Dex-O-Tex in 1941, $ 35,941.95 for marine purposes was nonwar demand. For reconstruction purposes, petitioner first includes in sales not resulting from economic conditions flowing from the war effort all of the 1941 sales of the product for land use and about 53 per cent of the sales for marine use. It assumes, without supporting *213 evidence, that all land sales and 53 per cent of the marine sales of the material in 1940 were not the result of demands of the war. The figures so reached for 1941 are then used as 1937 sales and by assuming a certain percentage of increases in sales in 1938 and 1939 over the preceding year, total sales of $ 231,065.29 are determined for 1939. Using the gross income of all corporations as a basis, the sales thus reached are then reduced to $ 229,101.23, to which a profit of 10 per cent, asserted to be reasonable, is applied to compute average income of $ 22,910.12 during the entire base period from sales of Dex-O-Tex. The remainder of the amount of income claimed by petitioner, or $ 9,875.02, is for commissions on chain ladders and was reached by averaging commissions actually received during the taxable years.
The exclusive license for the sale of chain ladders in territory on the west coast was not obtained until December 1942. Sales from stock, for undisclosed reasons, ceased after the close of the fiscal year 1946 but some commissions were earned during the next 3 years. The history of sales indicates that they were war-induced In the absence of any proof that the ladders*214 had a peacetime demand, we are not warranted in assuming that petitioner would have had profitable sales of the product during the base period if it had been in business during that time. Moreover, the use of actual post-1939 earnings violates the prohibition in section 722 (a) on the use of such data for reconstruction purposes. Wisconsin Farmer Co., 1021">14 T. C. 1021, 1031; General Metalware Co., 17 T. C. 286, 293; Danco Co., 14 T. C. 276, 288. Accordingly, no reason appears for including chain ladder sales in further consideration of petitioner's claim.
The method proposed by the petitioner to establish normal earnings from sales of Dex-O-Tex for reconstruction purposes is unacceptable.
While under section 722 (a) post-1939 events may be considered to the extent necessary to determine the nature of a section 722 (c) taxpayer *108 and the character of its business, the provision does not sanction the use of actual sales after December 31, 1939, in the manner employed by petitioner. Danco Co., supra, 288; Danco Co., 17 T. C. 1493. The computation assumes*215 factual conditions having no support in the evidence, among which are the amounts used for nonwar-induced sales, figures apparently used to reflect operations not influenced by the war economy, assumptions that such sales for 1941 are representative of what the sales would have been in 1937 if petitioner had been in business during that year and that sales in 1938 and 1939 would have increased by fixed percentages determined, in part, by an assumption flowing from an assumed condition, and the rate of income applied to sales.
Testimony of petitioner's president and general manager, an interested witness, that if petitioner had commenced business on December 31, 1937, sales of Dex-O-Tex in 1939 would have been $ 400,000 or $ 500,000 with a resulting profit of between $ 80,000 and $ 100,000 is obviously a gross exaggeration of what reasonably could have been expected and adds little, if anything, to the solution of the problem presented to us. 7- Up Fort Worth Co., 8 T. C. 52, 63; Industrial Supplies, Inc., 18 T.C. 1067">18 T. C. 1067.
The respondent's position here is that petitioner has failed to establish normal base period earnings*216 of an amount sufficient to result in credits in excess of the amounts allowed by him under the invested capital method. He contends that without evidence of sales and profits for any period of the industry in which petitioner would fall and comparable businesses, probable earnings petitioner would have had must be found in the financial results of operations of its predecessors and its own experience. He then points out that the predecessor corporations sustained net operating losses of about $ 67,500 to the close of 1941 and asserts that there is no evidence to warrant an assumption that petitioner could have made a better financial showing. Respondent regards the sales actually made in 1939 for marine use as a reasonable estimate of sales petitioner would have made and that sales for land use would not have been more than about $ 4,000 in excess of actual sales.
The product sold by petitioner was developed in England during the early thirties and by 1936 was being used in that country quite extensively for marine purposes. The original licensee in the United States devoted most of its efforts to the problem of obtaining the approval of the Federal Government for marine use of*217 the material. Such approval was not received prior to 1939 and it does not appear whether it was ever obtained. The difficulties encountered in creating a market for the material in this country is indicated by the single sale made by the original licensee during the year it was in existence. Sales tripled in 1939 under the management of the second assignee *109 of the license and part of its loss is attributable to the unprofitable installation work on the S. S. America. The sales during the taxable years were for war work and were so limited, primarily because of restrictions placed upon the use of natural rubber, the foundation ingredient of the product. That there was sale for the product without the influence of a war economy is established by the evidence. Short supply and governmental restrictions on the use of natural rubber during actual war years restricted normal operations of petitioner's business. Conditions created by the war, instead of accelerating sales, hampered normal progress of the business.
The regulations recognize that a section 722 (c) taxpayer is entitled to the benefit of a development period and that the normal base period years may not *218 be a normal period for some classes of business. Regs. 112, sec. 35.722-4.
Rejection of the reconstruction proposed by petitioner does not prevent the allowance of some relief if warranted by the record and within the provisions contained in section 722 (a). The statute does not require that the amount determined be mathematically accurate. Danco Co., 17 T.C. 1493">17 T. C. 1493. The nature of the question requires some estimate of earnings on assumed circumstances, and practical judgment. Victory Glass, Inc., 17 T. C. 381; Superior Valve & Fittings Co., 18 T.C. 931">18 T. C. 931. The statutory direction is only the determination of a fair and just amount to be used as a constructive average base period net income in connection with which we may take into account the nature of petitioner and the character of its business.
The problem with which we are confronted requires an assumption that the taxpayer was carrying on during the base period the activities it was conducting during the taxable years, adjusted, of course, for any difference of conditions, and the results it would have had during the assumed period may*219 not in all cases be reflected in the operations of predecessors engaged in the sale of the same product. The broad terms used by Congress in authorizing consideration of post-1939 events to determine the nature of a 722 (c) taxpayer and the character of its business contemplates that its general business policies be taken into account. The regulations properly recognize that the experience of a predecessor of the business is only a factor to be considered. Sec. 35.722-4.
The selling activities of the first licensee of Dex-O-Tex were devoted almost exclusively to marine use of the product. Petitioner's policy was to promote sales for land use and petitioner devoted more of its effort in that market than its predecessors. Respondent recognizes that if petitioner had been conducting its business in 1939, sales for land use in that year would have exceeded the actual sales of its predecessor although he contends the excess would not have been more than $ 4,000. The estimate is too conservative.
*110 Land sales actually increased about 400 per cent in 1939 over 1938 without the benefit of a special plan to promote sales in that field. Until some time in 1939, natural rubber*220 was available in quantities sufficient for all requirements in the production of Dex-O-Tex. It appears evident to us that if petitioner had been in business during the entire base period its sales of Dex-O-Tex for land use would have reached a volume sufficiently in excess of actual sales of its predecessor to result in a return of income from such operations.
From a consideration of the nature and character of the business of petitioner, related to the base period, its administrative policies in comparison with those of its predecessors during that time, potential demand for Dex-O-Tex, availability of the basic ingredient for producing its product, the experience of its predecessors, adjusted to the management of petitioner under other policies, and other factors present in the evidence, we conclude that $ 5,000 is a fair and just amount to be used as constructive average base period net income.
Reviewed by the Special Division.
Decision will be entered under Rule 50.
Footnotes
1. Supplying and installing ceramic tile.↩
2. $ 718.87 applicable to subcontractor.↩
1. Estimated.↩
1. Manufacturing labor costs were $ 5,285.39, $ 3,796.03, $ 3,219.89 and $ 2,472.93, respectively.↩
2. Includes renegotiation of $ 7,000 and royalties of $ 5,858.24.↩
3. Includes royalties of $ 5,976.77.↩
1. Less a post-war refund credit of $ 1,014.57.↩
2. Less a post-war refund credit of $ 18.94.↩
1. 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 --
(1) the business of the taxpayer is of a class in which intangible assets not includible in invested capital under section 718 make important contributions to income,
(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.↩