Wadley Co. v. Commissioner , 17 T.C. 269 ( 1951 )

The Wadley Company, Petitioner, v. Commissioner of Internal Revenue, Respondent

Wadley Co. v. Commissioner

Docket No. 26830

United States Tax Court

17 T.C. 269; 1951 U.S. Tax Ct. LEXIS 101;

September 14, 1951, Promulgated

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Decision will be entered for the respondent.

Petitioner is engaged in the poultry, egg, and creamery business. Held, the petitioner has failed to establish that its excess profits tax for the years 1941-1944, computed without the benefit of section 722, I. R. C., was excessive and discriminatory because of any of the factors set forth in subsections (b) (2), (b) (3) (B), and (b) (5).

Patrick J. Smith, Esq., Russell J. Ryan, Jr., Esq., and Perry E. O'Neal, Esq., for the petitioner.

Lester M. Ponder, Esq., for the respondent.

Raum, Judge.

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RAUM

In this proceeding the petitioner challenges the Commissioner's denial of its applications for relief with respect to its excess profits taxes for the calendar years 1941 to 1944, inclusive, filed under the provisions of section 22 of the Internal Revenue Code.

FINDINGS OF FACT.

Some of the facts were stipulated, and are incorporated herein by reference.

Petitioner, a corporation organized in 1913 under the laws of Indiana, has its principal place of business in Indianapolis. Its income and excess profits tax returns for the years in controversy were filed with the collector of internal revenue for the district of Indiana.

Petitioner is entitled to use the excess profits credit based on income, pursuant to section 713 of the Internal Revenue Code, but in the years 1943 and 1944 it used the invested capital method because that method allowed petitioner greater credits, without the benefit of section 722 of the Internal Revenue Code. Petitioner's excess profits credits computed without the benefit of section 722 were, under the income method, $ 71,037.20 for 1941 and $ 77,282.58 for 1942, and, under the invested capital method, $ 109,402.40 for 1943 and $ 82,360.34 for 1944.

The amounts of tax paid by petitioner for each of the years 1941 to 1944, inclusive, based on its returns, as finally adjusted by the Commissioner of Internal Revenue and agreed to by the petitioner, and without the benefit of section 722, were as follows:

		Excess profits
Year	Income tax	tax
1941	$ 33,136.04	$ 15,975.23
1942	33,645.52	233,664.02
1943	42,735.95	179,824.06
1944	36,776.92	300,538.40

The petitioner filed applications for relief under section 722 for the calendar years 1941-1944, inclusive, and thereafter filed claims for refund with respect to those years. The Commissioner determined that petitioner had failed to establish its right to the relief sought and denied the claims for refund.

The petitioner has been engaged since at least 1920 in the buying of live poultry ^{*104 Columbus, and Terre Haute). Petitioner procured all its poultry and eggs in Indiana and Illinois, within a radius of forty to fifty miles of each of its six plants. It did not have any standing arrangement with the farmer either as to production or sale by the farmer, and it determined the price at which it would purchase from the farmer after an analysis of terminal market quotations, supplies, and competitive conditions. Both the prices paid by petitioner and the prices it received might fluctuate from day to day.}

Petitioner did not normally sell live poultry. It killed and processed the poultry, and shipped it dressed. Ordinarily, the poultry did not remain with petitioner more than several weeks; and except for minor quantities (not exceeding about five per cent of the poultry handled by petitioner), it did not keep poultry in storage. The major source of petitioner's profits from poultry was its dealings in chickens, particularly the larger chickens, roasters. The eggs purchased by petitioner were ungraded. Those that were to be sold in the shell were candled and graded at its plants for quality (the highest grade being denominated as "extras" in the wholesale trade); other eggs were broken, packed in 30-pound cans, and frozen.

Eighty to ninety per cent of the eggs and poultry processed by petitioner were sold, during the base period and prior years, in New York City, Boston, Massachusetts, Newark and Elizabeth, New Jersey, Syracuse, New York, and Philadelphia, Pennsylvania, which are known to petitioner as the eastern market. The prices which petitioner received were based in most instances upon market quotations on the date of arrival. The greatest quantities of eggs were produced and processed between the latter part of February and the early part of June of each year. The supply of marketable chickens reached its peak during the months of September through December. There was less variation in the movement of fowl during the year.

Petitioner also conducted a creamery business; prior to 1931, it operated two creameries, one in Indianapolis and the other in Terre Haute. In 1931, petitioner transferred its interest in the Terre Haute creamery to a corporation, which had been organized to operate that creamery as well as another creamery not owned by petitioner; in exchange, petitioner received 40 per cent of the stock of the new corporation, and its profits from that portion of its creamery business were thereafter reflected as dividends received.

In the calendar years 1920 to and including 1939 the petitioner had sales, gross profits (sales less direct costs and overhead), and net income before taxes as follows:

	Sales including	Gross profit Net income
Year	storage, etc.		before tax
1920	$ 5,363,712.34	$ 177,546.95	$ 91,528.43
1921	4,531,846.83	158,661.82	91,136.09
1922	4,677,740.11	241,106.08	164,839.55
1923	5,570,246.42	185,052.98	108,329.74
1924	5,871,503.48	282,384.71	201,903.47
1925	6,066,029.12	267,216.34	170,420.36
1926	5,810,504.15	286,206.46	177,712.44
1927	6,476,340.55	378,348.11	255,292.30
1928	6,783,241.33	282,446.92	149,641.87
1929	7,266,286.40	326,870.43	239,424.36
1930	5,160,781.94	167,849.13	94,440.35
1931	3,733,399.26	181,083.48	108,168.79
1932	2,685,372.29	160,713.98	52,834.15
1933	2,870,382.11	222,203.40	128,983.26
1934	3,172,340.94	203,260.01	125,975.33
1935	3,968,944.60	199,211.95	119,715.98
1936	4,135,910.05	215,456.02	132,982.98
1937	3,996,860.30	178,247.23	92,792.09
1938	3,714,613.36	175,458.26	83,719.52
1939	3,359,514.17	131,795.84	51,276.09

The amount of gross profit (sales less direct costs) realized by the various departments of petitioner's business during the years 1924 to 1939, inclusive, was as follows:

Year	Poultry	Eggs	Creamery
1924	$ 250,609.76	$ 121,023.18	$ 43,968.59
1925	237,310.09	91,830.34	35,652.50
1926	213,869.10	106,496.51	50,672.62
1927	260,729.63	149,511.20	35,862.35
1928	208,195.62	61,536.71	72,252.59
1929	271,177.41	83,548.25	34,191.39
1930	195,400.00	20,291.05	10,650.41
1931	152,722.55	29,093.83	26,174.22
1932	108,795.42	47,494.27	14,499.37
1933	143,295.70	95,701.44	22,298.73
1934	155,924.31	55,685.82	28,363.27
1935	183,348.59	24,375.64	19,955.52
1936	197,943.65	50,545.29	22,952.18
1937	165,984.85	30,130.28	36,135.80
1938	165,099.09	33,590.73	34,636.31
1939	121,919.18	31,085.93	25,344.05

Year	Storage	Dividends	Miscellaneous
		received
1924			$ 15,555.60
1925			6,730.33
1926	$ 6,869.26		8,418.10
1927	16,110.12		4,375.16
1928	22,059.31		903.54
1929	24,540.62	$ 6,430.00	26,724.35
1930	29,169.58		22,404.72
1931	34,918.72	15,000.00	27,399.27
1932	24,789.87	6,000.00	(1,663.77)
1933	22,743.84	16,000.00	6,224.73
1934	27,928.13	12,000.00	24,230.21
1935	23,866.34	12,000.00	21,309.15
1936	20,458.45	12,000.00	5,391.01
1937	26,380.01	16,000.00	14,006.57
1938	22,339.83	14,000.00	10,170.56
1939	23,680.62	12,000.00	18,075.53

The dividends received by the petitioner during the years 1931 to 1939, inclusive, were paid exclusively by the corporation to which it had transferred the Terre Haute creamery.

The founder of petitioner's business was Scott Wadley who, until his death in 1934, was petitioner's president and general manager. The change in management in 1934 brought about by Scott Wadley's death was not responsible for such decline in earnings as may have occurred during the base period, 1936-1939. Neither the type of business done, the method of doing business, nor the policies of petitioner were substantially changed during any of the years 1936 to and including 1939.

The following table shows the units of poultry and eggs handled by the petitioner, and the average gross profit per pound and per dozen, respectively, realized by it during the years 1924 to 1939, inclusive:

	Poultry		Eggs
Year
	Units handled	Average gross	Units handled	Average gross
	(thousand	profit per	(thousand	profit per
	pounds)	pound (cents)	dozens)	dozen (cents)
1924	10,400	2.4	4,987	2.4
1925	9,365	2.5	5,600	1.6
1926	10,127	2.1	5,850	1.8
1927	11,562	2.3	6,816	2.2
1928	11,979	1.7	6,465	1.0
1929	12,819	2.2	6,026	1.4
1930	11,212	1.7	5,844	0.3
1931	10,154	1.5	5,880	0.5
1932	10,497	1.0	5,784	1.0
1933	12,338	1.2	6,048	1.6
1934	12,144	1.3	4,599	1.2
1935	12,111	1.5	4,856	0.5
1936	13,421	1.5	4,383	1.2
1937	11,391	1.5	4,272	0.7
1938	11,803	1.4	4,555	0.7
1939	12,535	1.0	4,186	0.7

The following table shows the live cost to petitioner of chickens and fowl (delivered to plant) on the 15th of each month of the years 1936 to 1939, inclusive:

	Chickens (cents per pound)				Fowl (cents per pound)
Month
	1936	1937	1938	1939	1936	1937	1938	1939
Jan	18.64	13.64	20.21	15.62	18.40	15.64	20.29	15.92
Feb	19.21	13.82	18.81	15.17	19.40	15.19	16.59	15.97
Mar	18.56	15.19	17.01	15.56	18.90	16.75	17.33	16.39
Apr	20.17	20.00	21.89	17.77	19.23	17.22	18.35	15.50
May	22.46	21.06	22.18	16.76	17.82	15.27	17.50	14.65
June	21.60	19.01	18.30	17.24	16.05	14.59	16.61	12 89
July	16.65	18.35	16.61	16.78	15.01	15.52	15.78	13.39
Aug	16.00	21.26	14.43	13.72	15.34	18.15	14.85	12.88
Sept	15.23	21.68	14.31	15.03	15.29	19.66	15.74	14.82
Oct	13.56	20.88	13.54	12.57	14.70	19.63	14.45	11.87
Nov	13.54	20.11	13.94	13.20	14.44	18.60	14.54	12.56
Dec	12.72	19.75	14.06	12.22	13.64	18.56	14.32	12.17

The following table shows the highest quotation in New York on dressed chickens and fowl on the 15th day of each month of the years 1936 to 1939, inclusive:

	Chickens (cents per pound)				Fowl (cents per pound)
Month
	1936	1937	1938	1939	1936	1937	1938	1939
Jan	28	23	27	23	26 1/2	23	26	23
Feb					25 1/2	21 1/2	23	21 1/2
Mar					25 1/2	23 1/2	24	23
Apr					27	25	26	22 1/2
May	30	25	28		25	22	25	19 1/2
June	33 1/2	25	25		23	22 1/2	23	19 1/2
July	30	28	29	22	24	25	22 1/2	21
Aug	30	30	26	22	24	26 1/2	23 1/2	19
Sept	30 1/2	29 1/2	24	23	26	27	24	22
Oct	24	31	21	19	23 1/2	27	23	19
Nov	24 1/2	27 1/2	22 1/2	20	23	25	23	20
Dec	22 1/2	27	23	19	22	25 1/2	23	19

The following schedule shows the monthly average of the highest daily New York wholesale prices for fresh killed, western roasters (October to December) and fowl (September to December) for the years 1925 to 1939, inclusive, as well as the spreads between such prices and farm chicken prices in Indiana in those years:

	Roasters (cents per pound)
					Spread
					between
					roaster
Year				Oct.-	prices in
	Oct.	Nov.	Dec.	Dec.	New York
				avg.	and farm
					chicken
					prices in
					Indiana
1925	36.0	37.4	37.4	17.8
1926	36.9	35.2	35.8	36.0	16.3
1927	38.4	35.6	36.6	36.9	17.9
1928	41.3	38.9	38.0	39.4	16.9
1929	29.5	29.7	30.2	9.8
1930	26.2	26.5	26.0	26.2	9.9
1931	24.1	24.0	21.0	23.0	8.9
1932	16.6	16.7	15.3	16.2	6.8
1933	16.0	15.8	16.0	15.9	7.6
1934	20.0	20.3	21.0	20.4	8.6
1935	23.7	24.2	25.1	24.3	8.2
1936	20.9	20.6	19.7	20.4	7.4
1937	27.5	27.5	27.2	27.4	9.7
1938	20.2	21.2	20.1	6.7
1939	18.0	18.5	18.0	18.2	6.0

	Fowl (cents per pound)
						Spread
						between
						fowl prices
Year					Sept.-	in New
	Sept.	Oct.	Nov.	Dec.	Dec.	York and
					avg.	farm chicken
						prices in
						Indiana
1925	35.5	33.1	34.3	34.7	14.9
1926	34.5	34.3	34.7	34.1	34.4	14.4
1927	31.0	32.2	31.9	30.7	31.4	12.4
1928	35.0	34.0	34.0	33.9	34.2	11.5
1929	33.8	33.5	34.6	34.5	13.4
1930	30.4	29.2	27.8	27.0	28.6	11.8
1931	27.5	26.2	26.5	23.8	26.0	11.3
1932	21.5	19.0	19.1	17.7	19.3	9.4
1933	17.2	16.0	15.1	15.6	16.0	7.4
1934	21.0	19.6	19.5	19.1	19.8	7.6
1935	26.2	25.3	25.0	26.1	25.6	9.6
1936	24.7	23.4	23.4	22.2	23.4	10.0
1937	27.0	27.0	25.4	25.4	26.2	8.4
1938	23.9	22.7	23.2	22.8	23.2	9.6
1939	19.3	19.7	18.8	19.7	7.1

During the 1930's there was a decline in the importance of roasters, which was evidenced by a decline in the over-all production of roasters and the beginning of a swing away from heavy-type chickens to the smaller sizes. The declining importance of roasters was a factor in narrowing the spread between roaster prices in New York and farm chicken prices in Indiana. Another factor was the growing competition from poultry produced in areas nearer New York, particularly Delaware, Maryland, and Virginia, known as the Del-Mar-Va area. Beginning in the mid-1920's there came into being in the Del-Mar-Va region the so-called commercial broiler industry, which, in the mid and late 1930's, became an increasingly significant factor in the entire poultry industry. The term "broiler" in this connection is used loosely, and refers to birds of all sizes raised in the area exclusively for meat purposes, including birds of the fryer and roaster size. New York was the principal market for broilers produced in the Del-Mar-Va area, and those broilers were generally brought into New York by trucks, predominantly in live form. To the extent that transportation costs were lower by reason of a shorter distance to market, broilers from the Del-Mar-Va region enjoyed a competitive advantage over poultry originating in Indiana or Illinois.

The following schedule shows the receipts of dressed poultry at New York from Indiana, West North Central IndianaWest North CentralYearThousandPerThousandPerpoundscentpoundscent192515,2158.963,42537.3192612,9186.792,58748.0192711,5856.287,48446.5192811,6246.095,03648.9192911,4795.898,13949.8193013,6376.8102,77251.219319,6714.4110,51450.519328,3684.3101,48351.919337,3053.3131,24958.819346,4803.2126,17361.819357,7134.489,06350.619368,3553.9112,55953.119378,2714.0106,48451.519384,6422.2104,44149.919394,4321.9114,14849.0

			Total from
	Del-Mar-Va		all States
Year
	Thousand	Per	Thousand
	pounds	cent	pounds
1925	3,011	1.8	170,257
1926	3,260	1.7	192,895
1927	3,043	1.6	188,117
1928	2,557	1.3	194,376
1929	1.1	197,057
1930	1 1,869	.9	200,885
1931	1,074	.5	218,911
1932	842	.4	195,445
1933	937	.4	223,094
1934	532	.3	204,067
1935	1,709	1.0	175,881
1936	3,247	1.5	212,097
1937	3,660	1.8	206,603
1938	7,187	3.4	209,147
1939	18,236	7.8	232,919

Live fowl originating in Illinois and Indiana commanded a premium price in the New York market, largely because fowl grown in those two states were of heavier grade and of the barred rock variety which was in demand in the live fowl markets. However, there was nothing unusual or unique about this demand for live fowl originating in Illinois and Indiana during the base period, 1936-1939, that did not exist in other years outside the base period. Receipts of live poultry at New York from Indiana and Illinois, as well as from the entire United States, in terms of freight cars unloaded, during the years 1930-1937 were as follows:

			Total -- Indiana	Total for
Year	Indiana	Illinois	and Illinois	United States
1930	1,168	1,174	2,342	10,677
1931	942	978	1,920	10,152
1932	1,051	851	1,902	9,126
1933	1,092	1,234	2,326	8,150
1934	981	1,128	2,109	7,641
1935	782	1,191	1,973	5,387
1936	776	887	1,663	4,210
1937	954	688	1,642	3,709

The foregoing table does not reflect receipts of poultry by truck in New York, particularly from nearby areas and the Del-Mar-Va region. Beginning in 1934, the demand for live fowl in New York was in part satisfied by the commercial broiler production.

The number of chickens, in millions of head, produced in Indiana and Illinois during the years 1924-1939 is shown in the following table:

Year	Indiana	Illinois	Total
1924	27	36	63
1925	29	36	65
1926	30	38	68
1927	31	38	69
1928	28	37	65
1929	30	39	69
1930	31	37	68
1931	28	36	64
1932	31	38	69
1933	32	38	70
1934	26	32	58
1935	28	35	63
1936	30	36	66
1937	23	30	53
1938	25	31	56
1939	26	31	57

The following table shows chicken and commercial broiler production in the United States, 1920-1939, in millions of pounds:

	Farm	Commercial
Year	chickens	broilers Total
1920	1,954		1,954
1921	2,111		2,111
1922	2,222		2,222
1923	2,319		2,319
1924	2,306		2,306
1925	2,379		2,379
1926	2,506		2,506
1927	2,608		2,608
1928	2,393		2,393
1929	2,596		2,596
1930	2,643		2,643
1931	2,457		2,457
1932	2,576		2,576
1933	2,616		2,616
1934	2,215	102	2,317
1935	2,313	129	2,442
1936	2,531	159	2,690
1937	2,146	204	2,350
1938	2,292	247	2,539
1939	2,441	300	2,741

During the years 1920 to 1939 the amount of poultry in storage steadily increased during the last three or four months of each year and the high point was usually reached in the early part of January. Thereafter there was a steady decline to the low point which was reached and maintained in the months of July, August, and September. The high and low amounts of dressed poultry in storage in the United States during the years 1920 to 1939, inclusive, in millions of pounds was as follows:

Year	High	Low
1920	92	21
1921	81	20
1922	104	26
1923	122	33
1924	99	33
1925	138	44
1926	111	36
1927	145	40
1928	118	40
1929 110	41
1930	142	43
1931	105	32
1932	117	30
1933	112	38
1934	124	41
1935	132	35
1936 1	107	42
1937	188	62
1938	124	53
1939	139	63

The following schedule shows the New York City wholesale egg prices for extras and producer prices in Indiana during the months March to June and September to December of the years 1925 to 1939, inclusive:

[Cents per dozen]
	Indiana		New York -- Extras
Year
	Avg. price	Avg. price	Avg. price	Avg. price
	Mar.-June	Sept.-Dec.	Mar.-June	Sept.-Dec.
1925	24.0	40.5	1926	25.0	40.0	32.6	54.1
1927	18.5	37.5	27.0	50.8
1928	24.2	36.2	31.6	45.8
1929	25.2	40.5	51.7
1930	19.0	26.0	26.4	35.6
1931	14.7	21.8	20.7	31.0
1932	9.2	23.1	29.0
1933	9.1	19.7	14.9	24.2
1934	12.8	23.4	18.2	28.2
1935	19.6	27.3	24.9	30.2
1936	17.0	27.2	22.4	32.2
1937	18.0	24.5	23.4	27.1
1938	15.7	25.2	20.9	30.4
1939	13.5	20.0	18.1	25.0

[Cents per dozen]
	Spread between New
	York and Indiana
Year
	Mar.-June	Sept.-Dec.
1925	9.9	14.6
1926	7.6	14.1
1927	8.5	13.3
1928	7.4	9.6
1929	7.4	11.2
1930	7.4	9.6
1931	6.0	9.2
1932	6.1	5.9
1933	5.8	4.5
1934	5.4	4.8
1935	5.3	2.9
1936	5.4	5.0
1937	5.4	2.6
1938	5.2	5.2
1939	4.6	5.0

The petitioner's average base period net income is not an inadequate standard of normal earnings because its business was depressed in the base period because of temporary economic circumstances unusual in the case of the petitioner, or because the industry of which it was a member was depressed by reason of temporary economic events unusual in the case of that industry.

The petitioner's average base period net income is not an inadequate standard of normal earnings because its business was depressed during the base period by reason of conditions generally prevailing in the industry of which it is a member, subjecting the petitioner to sporadic and intermittent periods of high production and profits, which periods are not adequately represented in the base period.

The petitioner's average base period net income is not an inadequate standard of normal earnings because of any other factor affecting its business, which would afford relief not inconsistent with the principles underlying subsection (b) of section 722 of the Internal Revenue Code.

OPINION.

It is true that petitioner's average base period net income was lower than its average net income for preceding years; but that fact alone does not entitle it to relief under section 722. Trunz, Inc., 15 T. C. 99, 103. It must go further and show that it comes within one of the provisions of section 722, and petitioner does contend that its average base period net income is an inadequate standard of normal earnings by reason of one or more of the factors set forth in subsections (b) (2), (b) (3) (B), and (b) (5). Pertinent provisions of section 722 are set forth in the margin. *120 In petitioner's original applications under section 722 it sought relief under (b) (2) and (b) (5); it urged that the "extremely heavy stock of dressed poultry in storage in December, 1936, resulted in a depressed market at the end of 1936 and materially affected the size of the poultry crop produced in 1937, 1938 and to a lesser extent in 1939" and stated that profits in the industry of which it was a member "are governed to a large extent by the crop of chickens raised and marketed each year, and to a lesser extent to [sic] the quality of dressed poultry which is held over in cold storage from one year to the next." In an amended application it also sought relief under subsection (b) (3) (B), stating that the industry of which it was a member was affected by sporadic poultry production by farmers and poultry growers which was characterized by a sharp drop in production after one or two years of increased production, that the general tendency was for its profits to be up in years of increased production and down in years of reduced production, and that the periods of sporadic profits were inadequately represented in the base period years.

To prevail under section 722 (b) (2) it is incumbent upon petitioner to prove that its business or the business of the industry of which it was a member was depressed during the base period; that the depression of the business was caused by a temporary economic circumstance; and that this circumstance was "unusual in the case of the taxpayer" or of its industry. See Regulations 112, Lamar Creamery Co., 8 T. C. 928, 938.

Petitioner does not contend that there were any temporary economic circumstances in relation to its non-poultry business that rendered (b) (2) applicable. It focuses solely upon its operations in poultry as a basis for relief under (b) (2).

However, there is grave doubt upon this record as to the soundness of petitioner's indispensable major premise, namely, that the reduction in its total net earnings during the base period was attributable to a decline in profits in its poultry department during the base period. Thus, although petitioner's average annual net income for the base period ($ 90,192.67) was less than its average annual net income for the 10-year period ending 1939 ($ 99,088.85), 6

The situation is brought even more sharply into focus by contrasting two of the base period years, 1937 and 1938, with two earlier years, 1933 and 1934. Petitioner's gross profits from poultry in 1937 and 1938 were $ 165,984.85 and $ 165,099.09, respectively, whereas its gross profits from poultry in 1933 and 1934 were only $ 143,295.70 and $ 155,924.31, respectively. But, in 1933 and 1934, petitioner's total net income ($ 128,983.26 and $ 125,975.33, respectively) was substantially higher than its total net income in 1937 and 1938 ($ 92,792.09 and $ 83,719.52, respectively). *124 the decrease in the base period net income was attributable primarily or even in major part to petitioner's poultry business. The decrease may well have been due to one or more reasons extraneous to the poultry business. Indeed, the evidence suggests that shrinkage of profits in the egg business -- not urged as a basis for relief under section 722 -- contributed in substantial measure to the decline in petitioner's net income. *125 We do not say that no part of the decrease in net earnings was chargeable to petitioner's poultry business. Thus, the year 1939 shows a decline both in petitioner's gross profits from poultry and in its total net income. Undoubtedly, some part of the reduction in petitioner's 1939 net income was attributable to the poultry business. But the base period is not to be divided into separate segments; it is a unitary period, and when that period is taken as a whole we are still left in doubt as to whether the poultry business was responsible for at least a major portion of the decrease in petitioner's net income for the entire period. The burden of proof was on the petitioner, and that burden has not been discharged. Certainly, it has not established, as it must, what adjustments should be made in its earnings by reason of the alleged depression in its poultry business during the base period, in order to arrive at "a fair and just amount representing normal earnings to be used as a constructive average base period net income." Section 722 (a).

Although, for the foregoing reason, we might well conclude this portion of our opinion relating to (b) (2) at this point, we nevertheless pause to consider petitioner's contention that two temporary and unusual factors depressed its poultry business in the base period, one forcing up its procurement cost and the other depressing the sale price of its product.

It argues that its procurement cost was forced up because live fowl from Indiana and Illinois commanded premium prices in New York and, although petitioner sold its poultry dressed, it was nevertheless compelled to pay higher prices to farmers for its poultry in order to meet the pressure of "live buying" in the Indiana-Illinois area for the New York market. We think that contention must fail, not only because petitioner is precluded from raising the issue, but also because it has not furnished satisfactory proof that its business was in fact depressed to any substantial extent in any of the four base years by reason of such "live buying."

Neither in its original nor in its amended claims for relief under section 722 did petitioner anywhere raise the point or submit facts to establish that its procurement costs were forced up by reason of the "live buying" pressure in the Indiana-Illinois area. In the circumstances, the point is not open to petitioner here. As was made clear in Blum Folding Paper Box Co., 4 T. C. 795, 799:

The scheme of the statute is that applications for relief under section 722 are to be presented in full to the Commissioner, who handles them administratively and passes upon them in the first instance in an effort to settle them without suit. This means that the applications must set forth not only the grounds for relief, but also a statement of the facts which the Commissioner is to consider in support of the reasons given. Additions are made by amendments before the claim is acted upon by the Commissioner. The Tax Court merely reviews his final determination. See sec. 732 (a), I. R. C. The taxpayer may not, as here, file a superficial claim, leaving the Commissioner in ignorance of the possible factual support for the claim, and then, after the resulting disallowance, come forward for the first time with the supporting statement of facts. That information is not a part of the application and consideration of it is beyond the scope of review by the Tax Court.

Cf. Monarch Cap Screw Manufacturing Co., 5 T. C. 1220, 1229.

What was said in the Blum Folding Paper Box Co. case applies with even greater force here; for petitioner neither presented the facts to the Commissioner in this connection, nor did it even raise the point superficially. It is particularly important in section 722 cases that the issues and facts upon the basis of which petitioner seeks relief be presented in the first instance to the Commissioner. The facts in such cases are likely to be complex, and interaction of elusive economic forces must frequently be taken into account. The Bureau of Internal Revenue is equipped with staffs of investigators and economists, and the statute contemplates that such matters will be considered initially at the administrative level, where they may conceivably be disposed of without the need for litigation.

In any event, we think that petitioner has failed to establish facts in relation to the "live buying" issues that would entitle it to relief. In the first place, the testimony with respect to that issue related almost exclusively to "fowl" rather than to poultry generally. The testimony was that Indiana and Illinois "fowl" commanded premium prices in New York. There was no showing as to what percentage of petitioner's poultry business involved the purchase and sale of fowl. In fact, it was stated that the major source of its profits from poultry was its dealings in chickens, particularly roasters. To what extent any pressure on the "fowl" market would be felt in the prices to be paid for chickens was a subject on which petitioner presented no evidence. Moreover, whatever may have been the situation in relation to the pressures alleged to have been created by the New York demand for Indiana and Illinois fowl, there would be no basis for relief under subsection (b) (2), because there was nothing "temporary" or unusual about such condition. Witnesses, both for the taxpayer and the Government, were unequivocal in stating that there was nothing unusual about the demand for live poultry during the base period that made it any different from such demand outside the base period. Finally, the evidence is far from clear that petitioner in fact did pay higher prices for its poultry during the base period, and indeed the figures for 1939, petitioner's poorest year, indicate that the prices which it paid were, on the whole, lower than in previous years.

Nor has petitioner proved that there were any factors in the base period of a temporary or unusual character within the scope of (b) (2) which were responsible for diminution of its earnings from poultry by depressing the prices that it received for its product. The only factor relied upon by petitioner as having a depressing effect upon its selling prices is the high national storage of dressed poultry during the base years. The evidence indicates that the amount of dressed poultry in storage in the United States during the years 1920 to 1939, inclusive, showed a steady increase during the last three or four months of each year and usually reached the annual high point in the early part of January, then steadily declined to the low point which was reached and maintained in the months of July, August, and September. The only difference in the base period years was that the amount of dressed poultry in storage in 1936 climbed to record proportions in the latter part of that year so that at the beginning of 1937 there were 188,000,000 pounds in storage, which was the highest point reached in any of the years 1920 to 1939, inclusive, and the low point reached in September and October of 1937 was not as low as it had been in prior years even though a greater amount was removed from storage during the first 9 months of that year than had been removed in any prior or subsequent year. The high points in January of 1938 and 1939 appear to have been normal when compared to prior years, with the exception of 1937, but the low points in these 2 years were higher than the average of prior years.

We think that the evidence as to storage, even if otherwise within the scope of (b) (2), is far from clear in establishing the reason for any reduction in earnings which petitioner may have suffered. The peak storage year was 1937. Yet petitioner's worst year in the base period in terms of total net income as well as gross income from poultry was 1939. Moreover, even as to 1937, while the New York quotations on dressed chickens and fowl appear to have been generally lower in the months of January to July than they were in the corresponding months of 1936, 1938, and 1939, such quotations from July to December, 1937, particularly toward the end of the year (the period when the greatest amount of chickens are sold) were generally higher than they were in corresponding months of the years 1936, 1938, and 1939. In the circumstances, we are unable to find that the storage of dressed poultry during the base period was a substantial factor in any decline of petitioner's earnings due to a reduction in the prices that it obtained for its poultry.

Indeed, the evidence indicates that there were economic forces other than high storage, or removal of large amounts from storage, that exerted pressure toward a reduction in prices and a narrowing of the margin of profit, particularly during the last of the four base years. For example, the late 1930's witnessed the sharply increasing competition from poultry coming into the consuming market from the Del-Mar-Va area. Nothing in the evidence suggests that such condition was temporary; it reflected the normal interplay of economic forces due to the rapid growth of a new and strong competing industry on the east coast, and such competition surely could not qualify as a "temporary economic circumstance" within the meaning of (b) (2). Cf. Lamar Creamery Co., 8 T. C. 928, 939; Harlan Bourbon & Wine Co., 14 T. C. 97, 104-106. We conclude that petitioner has failed to make out a case for relief under (b) (2).

Petitioner contends that it is also entitled to relief under the provisions of section 722 (b) (3) (B).

We think that there has been a complete failure of proof of these allegations. Thus, as shown by the chart, p. 276, supra, there has been remarkably little variation in the production of chickens in the United States during the 20-year period ending 1939. Similarly there has not been any wide variation in the amount of poultry handled by petitioner itself over the years; and to the extent that there was variation it is noteworthy that petitioner handled a greater amount of poultry during the base years than during any other consecutive 4-year period going back to 1924. See chart, p. 273, supra.

Petitioner apparently recognizes its inability to prove that there were sporadic and intermittent periods of high production and profits, and now contends in its brief merely that there were sporadic and intermittent periods of high profits alone that were inadequately represented in the base period. But we cannot eliminate the statutory requirement of "high production." The provisions of (b) (3) (B) are applicable only in the case of "sporadic and intermittent periods of high production and profits." There is no basis whatever for ignoring the "high production" requirement.

Moreover, even if attention is directed solely to profits, we think that petitioner has not established the existence of sporadic and intermittent periods of high profits that are inadequately represented in the base period. Its net income for 1936, the first year of the base period, was higher than in any other year during the 10-year period ending 1939. It is true that there were several years of considerably higher profits during the 1920's. But we are satisfied that the experience in those boom years was not fairly representative of normal earnings, and unless such peaks as did occur in the 1920's could reasonably be expected to recur they have no place in a reconstruction of base period income on the ground that they are inadequately represented in the base period. And, in view of the diminishing spread between poultry prices in New York and the farm prices in Indiana and Illinois, it is apparent that petitioner was settling down to a lower normal level of profits in the 1930's, so that its experience in several of the boom years in the 1920's would be out of place in determining whether its base period income was depressed in relation to normal earnings.

Petitioner's final contention is that there are other factors affecting its business which may reasonably be considered as resulting in an inadequate standard of normal earnings during the base period within the general provisions of section 722 (b) (5). However, it has presented no facts in support of this claim, and since it has not even identified such "other factors," we must hold that it is not entitled to relief under section 722 (b) (5).

Decision will be entered for the respondent.

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Footnotes

• 1. The term "poultry" comprehends three general classes of birds: (1) "chickens", young birds generally under six months, either male or female, which are divided into three categories known as "broilers", "fryers", and "roasters", in accordance with their weight, broilers being the lightest and roasters the heaviest; (2) "fowl", which are female birds of laying age; and (3) other types of poultry, such as cockerels, turkeys, ducks, and geese.↩

• 1. The "gross profit" in this table is based upon sales less direct costs and↩ overhead. However, in the next table the "gross profit" shown for each department is based on sales less direct costs only. The method of allocating plant overhead expense to each department on petitioner's books varied in different years; accordingly, the overhead expense has been added back to the "gross profit" of each department in the next table in order to show a clearer picture of the revenue attributed to each department.

• 1. Chickens, roasters -- boxes Oct. 1925-Dec. 1928↩

• 3. Chickens -- 4 lbs Oct. 1929-Dec. 1937↩

• 5. Chickens -- boxes 48-54 lbs Oct. 1938-Dec. 1939↩

• 2. Fowl -- boxes Sept. 1925-Dec. 1928↩

• 4. Fowl -- 5 lbs Sept. 1929-Dec. 1938↩

• 6. Fowl -- boxes 60-65 lbs Sept. 1939-Dec. 1939↩

• 2. West North Central region includes Minnesota, North and South Dakota, Iowa, Missouri, Nebraska, and Kansas.↩

• 1. Delaware receipts not available.↩

• 1. The figures for broiler production prior to 1934 are included in the column headed "farm chickens."↩

• 1. For 1929 and 1936 the seasonal high (Jan. 1) has been substituted for the actual tabular high, because the tabular high occurred in December, near the beginning of the new season.↩

• 1. Regular Packed Extras -- March-June 1925.↩

• 2. Fresh Gathered Extras -- September 1925-December 1928.↩

• 3. Mixed Colors Extras -- March 1929-December 1931.↩

• 4. Mixed Colors Standards -- March 1932-December 1939.↩

• 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 * * *.

  (b) Taxpayers Using Average Earnings Method. -- The tax computed under this subchapter (without the benefit of this section) shall be considered to be excessive and discriminatory in the case of a taxpayer entitled to use the excess profits credit based on income pursuant to section 713, if its average base period net income is an inadequate standard of normal earnings because --

  * * * *

  (2) the business of the taxpayer was depressed in the base period because of temporary economic circumstances unusual in the case of such taxpayer or because of the fact that an industry of which such taxpayer was a member was depressed by reason of temporary economic events unusual in the case of such industry.

  (3) the business of the taxpayer was depressed in the base period by reason of conditions generally prevailing in an industry of which the taxpayer was a member, subjecting such taxpayer to

  * * * *

  (B) sporadic and intermittent periods of high production and profits, and such periods are inadequately represented in the base period,

  * * * *

  (5) of any other factor affecting the taxpayer's business which may reasonably be considered as resulting in an inadequate standard of normal earnings during the base period and the application of this section to the taxpayer would not be inconsistent with the principles underlying the provisions of this subsection, and with the conditions and limitations enumerated therein.

  * * * *↩

• 4. Regulations 112, section 35.722-3:

  (b) Business depression in base period on account of temporary economic circumstances. -- If the taxpayer establishes that its business was depressed in the base period because of temporary economic circumstances unusual in the case of such taxpayer or because of the fact that an industry of which the taxpayer was a member was depressed by reason of temporary economic circumstances unusual in the case of such industry, the average base period net income of the taxpayer shall be considered to be an inadequate standard of normal earnings. For the purposes of this subsection a business shall be considered to be depressed if it realized low earnings or operating losses which resulted from such factors as a low volume of output of products or services, from a low volume of sales, from high manufacturing costs, from low sales price, or from a combination of such factors.

  Only those economic circumstances which were temporary in the sense that they had little perceptible effect upon the long run prospects of a business, and which affected the taxpayer alone or an industry of which it was a member as distinguished from those economic events which were of a chronic or continuing character or which affected business in general, may furnish a basis for a claim for relief under section 722 (b) (2). An economic circumstance is temporary depending upon the character and nature of such circumstances rather than upon the mere length of time of its existence. Thus, the income of a declining business or industry which was depressed throughout the base period because of economic conditions of a chronic and continuing character which may be expected to depress the earnings of such business for an indefinite period is not an inadequate standard of normal earnings under section 722 (b) (2). * * *

  High costs of production because of high costs of material, labor, capital, or other elements of production, low selling price of the finished product, low volume of sales due to a low demand for such product or the taxpayer's output, or other ordinary economic hazards to which business in general is subject and which have the effect temporarily of depressing income are ordinarily not sufficiently unusual economic circumstances to constitute income an inadequate standard of normal earnings under section 722 (b) (2)↩. Such circumstances are to be expected during any period of normal earnings and are presumed to have been offset by counterbalancing economic circumstances causing higher than average profits in other years in the base period. Consequently, the presence of unfavorable economic factors during the base period years of a taxpayer is not unusual when the presence of such factors is usual in the case of an industry of which the taxpayer is a member, or if such industry is depressed, in the case of business in general for such years. Nevertheless unusual and temporary economic circumstances reflected in one or more of such factors may depress the business of the taxpayer substantially beyond the extent to which other members of an industry of which the taxpayer is a member are affected, or may depress the industry (including the taxpayer) substantially beyond the extent to which other industries are affected. In such case the presence of such circumstances is an adequate reason for establishing that actual average base period net income is an inadequate standard of normal earnings. However, the mere fact that the business of the taxpayer or of an industry of which it is a member, as the case may be, fluctuates widely under the impact of economic events or is operated at a lower level of earnings than other members of such industry or other industries, as the case may be, and thus is depressed to a greater degree by unfavorable economic conditions than such other members or industries does not of itself indicate that average base period net income is an inadequate standard of normal earnings. * * *

• 5. Computed from table, p. 272, supra↩.

• 6. Computed from table, p. 272, supra↩.

• 7. A similar contrast is shown by comparing the base period with the preceding 4-year period. Thus, although petitioner's average net income for the 4-year period 1932-1935 ($ 106,877.16) exceeded its average net income for the 4-year period 1936-1939 ($ 90,192.67), its average gross profits from poultry for the 1932-1935 period ($ 147,841.00) was less than its average gross profits from poultry for the base period ($ 162,736.69).↩

• 8. Petitioner's gross profits in eggs in 1933 and 1934 were $ 95,701.44 and $ 55,685.82, respectively, as against gross profits in eggs in 1937 and 1938 in the respective amounts of $ 30,130.28 and $ 33,590.73. Thus, although petitioner's gross profits from poultry were higher in 1937 and 1938 than in 1933 and 1934, its gross profits from eggs were markedly lower in 1937 and 1938 than in 1933 and 1934. We are satisfied that the reduction in gross profits from eggs was a significant factor in the decline of petitioner's net income. Similarly, whereas the average annual gross profits from poultry for the base period exceeded the average annual gross profits from poultry for the 10-year period 1930-1939, inclusive, the average annual gross profits from eggs for the base period ($ 36,338.06) was less than the average annual gross profits from eggs for the 10-year period 1930-1939, inclusive ($ 41,799.43).↩

• 9. Regulations 112, section 35.722-3, contain the following pertinent provisions with reference to section 722 (b) (3) (B):

  (2) Sporadic profits inadequately represented in the base period. -- * * * In case the taxpayer is subjected to intermittent periods of high production and profits, the prosperous years of the taxpayer will occur at irregular and unpredictable intervals, and may depend upon fortuitous combinations of advantageous circumstances, as for example the juxtaposition of a good crop and a good market. If the base period of the taxpayer does not include these prosperous years, its earnings during such period will not be an adequate measurement of average normal earnings.

  Proof that a year of high production and profits did not occur during the base period is not of itself sufficient to establish that the base period did not represent a period of normal earnings. The actual average base period net income computed under section 713 (d) may approximate either the average earnings of periods of normal earnings, which include years of very high profits as well as years of low profits, or the average earnings for the entire experience of the taxpayer. Consequently it must be established not only that the base period did not include one or more years of high profits irregularly experienced by the taxpayer but also that the level of earnings for periods of average normal earnings which include such years or the level of earnings for the entire period in which the taxpayer was in existence is substantially higher than the level of earnings during the base period. Since the concept of normal earnings does not contemplate a fixed and inflexible amount but envisions a level of earnings which represents normal earning capacity of a business, the mere fact that actual average base period net income is less than an amount which might be determined by reference to some period claimed to represent normal earnings or by reference to an average of earnings over the entire economic life of a business does not establish that such average base period net income is an inadequate standard of normal earnings.

  A taxpayer which claims to be a member of an industry in which conditions prevail which subject the taxpayer to sporadic and intermittent periods of high production and profits must establish that business depression was encountered during the base period because of such conditions. It must also establish that such conditions were not peculiar to it alone in the base period but were also present in the case of such industry.

  A taxpayer does not establish eligibility for relief under section 722 (b) (3) (B) merely by showing that annual periods of high profits have occurred irregularly in the past experience of the taxpayer. Such periods of high earnings may have resulted from windfall profits or from unusual circumstances befalling the taxpayer, or an industry of which it is a member, and not as the result of normal conditions under which the taxpayer's usual operations are carried on. Only in case high earnings which have occurred in prior years are directly attributable to factors normal in the case of the taxpayer and of an industry of which it is a member, may such high periods of production and profits be considered grounds for relief under section 722 (b) (3) (B)↩.