Glenshaw Glass Co. v. Commissioner , 23 T.C. 1004 ( 1955 )

Glenshaw Glass Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent

Glenshaw Glass Co. v. Commissioner

Docket No. 36536

United States Tax Court

23 T.C. 1004; 1955 U.S. Tax Ct. LEXIS 228;

March 14, 1955, Filed

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">*228 Decision will be entered under rule 50.

Payment of royalties during base period because of patent injunction obtained against petitioner just prior to its base period, the fraudulent nature of which became manifest by close of base period, held to qualify petitioner for relief under section 722 (b) (5) of the Internal Revenue Code of 1939. Constructive average base period net income determined.

Sidney B. Gambill, Esq., Joseph D. Block, Esq., and Max Swiren, Esq., for the petitioner.

Albert J. O'Connor, Esq., for the respondent.

Arundell, Judge.

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ARUNDELL

">*1005 By this proceeding petitioner challenges respondent's disallowance of its claims under section 722 (b) (5) of the Internal Revenue Code of 1939 for relief from excess profits tax liabilities. The periods and the amounts of relief claimed are as follows: ">*229

Fiscal year ended
September 30	Amounts
1942	$ 66,872.83
1943	53,932.14
1944	53,932.30
1945	55,901.27

The testimony was taken before a commissioner of this Court whose Findings of Fact were duly served on the parties. After a consideration of the objections made to the commissioner's report by the respective parties, we make the following findings of fact.

FINDINGS OF FACT.

The stipulated facts are hereby found.

The petitioner is a Pennsylvania corporation organized in 1900 as a successor to a limited association formed in 1895. Its principal office and place of business is in Glenshaw, Pennsylvania. From the date of its incorporation to the present time, the petitioner has been continuously engaged in the manufacture of glass bottles and glass containers.

From the date of its incorporation to and including the calendar year 1933, petitioner kept its books of account and filed its Federal income tax returns on a calendar year basis. After the calendar year 1933, petitioner kept its books and filed its returns on the basis of a fiscal year ending September 30 (including the 9-month period ending September 30, 1934). At all times pertinent to this proceeding, ">*230 petitioner kept its books and filed its returns under an accrual method of accounting.

The petitioner's Federal income tax returns for the taxable years ended September 30, 1936, through September 30, 1945, were filed with the collector of internal revenue for the twenty-third collection district of Pennsylvania.

The petitioner's excess profits net income and net income before Federal taxes for the taxable years ended September 30, 1942, to September 30, 1945, inclusive, after giving effect to the decisions of this Court in Glenshaw Glass Co., Docket No. 6994, Memorandum ">*1006 Opinion of October 15, 1946, and Docket No. 15986, 13 T.C. 296, and without the application of section 722 of the Internal Revenue Code, are as follows:

Year ended September 30	net income	before Federal
		taxes
1942	$ 357,992.13	$ 378,987.54
1943	320,782.43	339,319.61
1944	338,605.10	356,830.10
1945	254,843.72	265,868.72

The petitioner's tax liabilities for the taxable years ended September 30, 1942, to September 30, 1945, inclusive, without the application of section 722 of the Internal Revenue Code, are as follows:

		Declared
Year ended September 30	Income tax	value	Excess profits
		excess-profits tax	tax
1942	$ 76,225.17		$ 121,693.11
1943	68,248.21		140,893.20
1944	70,732.54		159,904.58
1945	68,355.27		81,328.83

">*231 The above excess profits tax is before the computation of the applicable 10 per cent credits for post-war refund or debt retirement.

The petitioner's base period net income under the provisions of section 713 (income method) of the Internal Revenue Code and without application of section 722 of the Internal Revenue Code for each of the taxable years ended September 30, 1942, to September 30, 1945, inclusive, is as follows:

	Fiscal year (or years) ended
	Sept. 30, 1942	Sept. 30, 1943-
		1945, incl.
Sept. 30, 1937	$ 245,682.86	$ 245,682.86
Sept. 30, 1938	52,542.37	52,542.37
Sept. 30, 1939	173,379.94	173,379.94
Sept. 30, 1940	117,305.80	117,305.80
Base period aggregate	$ 588,910.97	$ 588,910.97
Increase under sec. 713 (e)		81,549.78
Total		$ 670,460.75
Base period average	$ 147,227.74	$ 167,615.19

Petitioner's total net earnings before Federal taxes for the 18-year period consisting of the taxable years 1923 to 1940, inclusive, were $ 1,396,012.55, an average of $ 77,556.25 per year. Petitioner's total base period earnings were $ 588,910.97, an average of $ 147,227.74 per year, without giving effect to the section 713 (e) adjustment. Petitioner's">*232 ">*1007 average earnings for the base period were 190 per cent of its average earnings for the 18-year period. The following is a schedule showing the petitioner's net sales, cost of goods sold, and net income before Federal income and excess profits taxes for the taxable years 1923 to 1940, inclusive:

			Net income before
Year	Net sales	Cost of sales	Federal taxes
$ 513,485.91	$ 414,913.39	$ 38,879.84
1924	483,450.58	343,544.58	72,454.66
1925	511,528.20	381,124.97	54,693.74
1926	571,520.34	435,488.67	80,760.62
1927	515,698.18	396,857.49	43,004.43
1928	461,376.15	370,446.24	30,694.36
1929	731,173.46	516,944.47	143,678.05
1930	688,828.33	542,561.59	11,814.87
1931	711,274.51	508,284.77	54,584.10
1932	469,920.00	354,666.06	4,976.72
1933	673,751.63	464,826.01	65,359.45
1955 U.S. Tax Ct. LEXIS 228">*233	692,414.69	550,464.59	15,086.25
1,099,892.20	888,728.17	3,714.78
1936	1,374,909.55	1,072,615.79	105,492.57
1937	1,908,865.07	1,377,232.13	288,009.42
1938	1,622,277.34	1,351,796.09	66,877.55
1939	1,912,698.81	1,492,160.77	172,953.39
1940	2,008,039.56	1,623,043.16	142,977.75

The following schedule shows a comparison of petitioner's sales and profits for the statutory base period and the periods 1926 through 1929, 1923 through 1936, and 1923 through 1940:

		Net income
Average	Net sales	before
		Federal taxes
Base period (1937-1940)	$ 1,862,970	$ 167,705
1926-1929	569,942	74,534
1923-1936	678,516	51,800
1923-1940	941,728	77,556

For some years prior to 1923, the petitioner was licensed by Howard Automatic Glass Feeder Company to use royalty-free Howard feeder machines in its manufacturing operations. Except with respect to the manufacture of milk bottles, the Howard license agreements were without restriction as to the type of glass containers that could be manufactured by the petitioner.

Early in 1923, Hartford-Empire Company, sometimes hereinafter referred to as Hartford, representing that it had acquired control of the Howard patents, induced the petitioner to cancel its royalty-free Howard license agreements and to enter into new license agreements with Hartford covering the use of both Howard and Hartford feeder machines.

The Hartford license agreements enumerated the glassware">*234 petitioner was permitted to manufacture on the payment of royalties, and ">*1008 prohibited the petitioner from using the feeders to manufacture a wide variety of glassware and containers, including tumblers, fruit jars, prescription and proprietary medicine-ware, milk and nursing bottles, and certain other items. A revision in 1929 permitted petitioner to manufacture bottles for citrate of magnesia, and a revision in 1931 permitted it to manufacture bottles for chocolate milk. From 1923 until 1931, petitioner used and operated only glass-feeding machines under such license agreements with Hartford. Each of the Hartford license agreements also contained a provision permitting its termination by petitioner upon the payment of a prescribed lump-sum minimum royalty. Pursuant to the license agreements, royalties were paid by petitioner to Hartford from 1923 through the taxable year 1931.

The royalty payments and the restrictions upon its manufacturing operations led the petitioner to endeavor to free itself from the Hartford license agreements. In 1931, the license agreements covering the Howard feeders expired, and the petitioner took the position that those feeders, having been">*235 originally purchased by the petitioner, remained its property and could be retained and freely used upon the expiration of the license agreements. Accordingly, the petitioner embarked upon the manufacture of fruit jars through the use of those feeders in July 1931 and a 5-year contract for the sale of its fruit jar output was executed with the Samuel Mallinger Company in September of that year. This company was an established distributor. In December 1932 the royalty-free, unrestricted use of the Howard feeders by the petitioner was terminated as the result of litigation instituted by Hartford for that purpose, and petitioner entered into license agreements covering six Howard feeders, which called for royalty payments and carried restrictions on the type of goods which could be manufactured. In April 1933 a supplemental agreement between petitioner and Hartford-Empire was executed amending all then outstanding agreements to authorize petitioner to manufacture emerald green prescription-ware up to 50,000 gross annually.

In 1931 and in the forepart of 1932, the petitioner, the McKee Glass Co., George R. Haub, and others formed a corporation, the Shawkee Manufacturing Company, for">*236 the purpose of developing a new glass feeder. During that period, Haub developed and built in the petitioner's plant a new feeder, known as the Shawkee feeder. The petitioner received a nonexclusive license to use the Shawkee feeder free from the payment of any royalties and without any restrictions as to the type of ware that could be produced therewith. Petitioner invested $ 16,400 in Shawkee Manufacturing Company stock and incurred $ 11,670.15 installation costs in connection with the Shawkee feeder.

">*1009 In March and May 1932, the petitioner installed two Shawkee feeders, replacing two Howard (Hartford licensed) feeders. In April and May 1933, two additional Shawkee feeders were installed in the petitioner's plant. The Shawkee feeder proved to be an efficient, workable feeder comparable to those covered by the Hartford licenses. Petitioner did not adjust its prices by reason of the use of the royalty-free Shawkee feeders.

On May 31, 1933, Hartford filed suit against the petitioner, Shawkee Manufacturing Company, and others, in the United States District Court for the Western District of Pennsylvania, entitled Hartford-Empire Co. v. Shawkee Manufacturing Co.,">*237 Docket No. 2791. The complaint charged that the Shawkee feeder infringed the patent owned by Hartford. Relying on the decision in Hartford-Empire Co. v. Hazel-Atlas Glass Co., (C. A. 3) 59 F.2d 399, the District Court, on June 27, 1933, entered a preliminary injunction which restrained the defendants from selling Shawkee feeders, but did not apply to the continued use of Shawkee feeders by petitioner.

The United States Court of Appeals for the Third Circuit affirmed the order for the preliminary injunction. (68 F.2d 726) That court also relied upon its earlier decision in the Hazel-Atlas case, supra. Pursuant to the mandate of the Court of Appeals, the United States District Court for the Western District of Pennsylvania entered an order for a permanent injunction on October 19, 1934.

The permanent injunction entered on October 19, 1934, prohibited the petitioner and others from manufacturing, selling, and using the Shawkee feeders and directed an accounting to Hartford. The accounting resulted in a settlement by the parties in 1939 whereby petitioner paid Hartford $ 11,167.85. A final decree was thereupon">*238 entered.

On the date of the permanent injunction, October 19, 1934, the petitioner had seven royalty-free Shawkee feeders in operation and was manufacturing 65 per cent of its total production on these machines. It had by then dismantled five Hartford licensed feeders.

Petitioner had formulated a program to replace all of its Hartford licensed feeders with Shawkee feeders, and were it not for the permanent injunction, petitioner's plant would have been completely equipped with Shawkee feeders by the end of 1933.

Upon the issuance of the permanent injunction, the royalty-free Shawkee feeders were dismantled. In order to do business and comply with the injunction, it was necessary for the petitioner to reinstall the Hartford licensed feeders and pay royalties thereon to Hartford. On December 19, 1935, and October 8, 1936, petitioner entered into license agreements with Hartford covering the use of two additional feeders for an 8-year period. None of the royalties paid by petitioner ">*1010 to Hartford-Empire were attributable to any liability imposed by a judgment or decree.

After December 1940 the petitioner decided to and did in fact discontinue all further payments of feeder">*239 royalties to Hartford. The last of such royalties were paid December 15, 1940, for November 1940 production. This decision was the result of information disclosed in antitrust proceedings instituted on December 11, 1939, against Hartford by the United States in which the Supreme Court of the United States ultimately held that Hartford had violated the Federal antitrust laws. (46 F. Supp. 541">46 F. Supp. 541; 323 U.S. 386">323 U.S. 386; 324 U.S. 570">324 U.S. 570) Hartford-Empire thereupon filed an action for royalties against petitioner in 1941 in which petitioner filed an answer and a counterclaim for the return of certain royalties, Hartford-Empire's motion to strike petitioner's counterclaim was denied, and no further proceedings were had in that case prior to the settlement hereinafter set forth.

Based upon documents uncovered in the Government antitrust action, petitioner in 1941 instituted proceedings against Hartford to set aside the above-mentioned permanent injunction which had been entered on October 19, 1934. Petitioner charged that the judgment entered in 1932 in Hartford-Empire Co. v. Hazel-Atlas Glass Co., supra,">*240 had been secured through Hartford-Empire's fraud, and that the Hazel-Atlas judgment was fraudulently employed to secure the permanent injunction against the petitioner in 1934. The litigation went to the Supreme Court of the United States and that Court ordered both the judgment against Hazel-Atlas and the permanent injunction against the petitioner set aside upon the ground that they had both been fraudulently obtained. Petitioner was given leave to bring appropriate proceedings for restitution and damages. (322 U.S. 238">322 U.S. 238; 322 U.S. 271">322 U.S. 271)

Such proceedings for restitution and damages of $ 3,000,000 were brought and culminated in an opinion by the United States Court of Appeals for the Third Circuit in Hartford-Empire Co. v. Shawkee Manufacturing Co., 163 F.2d 474 (1947), in which that court, inter alia, called for testimony as to the specific amounts of the royalties to be refunded. The case was remanded for further proceedings in conformity with the opinion of the Court of Appeals, and thereafter and prior to the expiration of the period for the filing of a petition for certiorari in the">*241 Supreme Court of the United States, in settlement of all litigation then pending between them, Hartford paid petitioner the sum of $ 813,358.24 on December 23, 1947. Concurrently therewith, Hartford paid petitioner the sum of $ 48,000 which petitioner immediately returned to Hartford in consideration of the license for Hartford and Howard feeders, dated December 22, 1947.

">*1011 The feeder royalties paid by petitioner to Hartford during the period from 1923 to 1940, inclusive, together with this data converted to a basis of a fiscal year, were as follows:

		Fiscal year
	Calendar year	ended
		September 30
1923	$ 10,496.40	1924	15,131.55	1
1925	14,692.87	1
1926	16,430.61	1
1927	14,738.36	1
1928	14,327.26	1
1929	23,139.61	1
1930	21,356.32	1
1931	9,911.88	1
1932	21,160.55	1
1933	20,137.50	1
1934	20,029.06	1
1935	37,270.21	1
1936	54,496.41	$ 51,324.08
1937	71,459.93	69,314.76
1938	58,143.50	60,330.53
1939	75,165.52	72,799.49
1940	77,847.29	78,356.59
October 1940		8,047.79
November 1940		7,348.87

The royalties were computed on the basis of units and weights of the glassware produced by the">*242 licensed feeders.

The injunction which Hartford obtained against the petitioner in 1934 was the only fraudulently obtained decree or judgment of any sort that had been entered against the petitioner during its entire existence. The royalties paid by petitioner to Hartford subsequent to the 1934 injunction were the only royalties which petitioner had ever paid to anyone as the result of a fraudulently obtained decree.

During its base period, petitioner's shipments of glassware amounted only to approximately 1 per cent of the total industry shipments. There were substantial producers of glass containers which did not pay royalties to Hartford-Empire.

The reimposition of the royalty burden upon petitioner following the entry of the permanent injunction in 1934 was not reflected in increased prices. Petitioner's average price per gross was less during each of the base period years than it was in 1933 and 1934 when petitioner was using royalty-free Shawkee feeders.

Petitioner was prevented by the Hartford license agreements from continuing its fruit jar business. Petitioner had manufactured fruit jars from July 1931 to the entry of the fraudulent injunction in October 1934. Its fruit">*243 jar sales had increased from $ 30,000 in 1931 to $ 71,000 in 1934. There was an active demand for fruit jars during the base period. Petitioner had plant capacity for the manufacture of an increased volume of fruit jars. In its claims for refund filed with respondent, petitioner made no claim based upon the discontinuance ">*1012 of its manufacture of fruit jars. When restrictions were removed by Hartford on the type of production petitioner and other licensees could undertake under their license agreements, petitioner neither then nor thereafter manufactured fruit jars.

Petitioner is a well managed, efficiently operated company. Its rate of growth during the period from 1928 to 1940 was above the industry average and it was also ahead of the industry during the same period with respect to the ratio of its operations to its capacity.

There was a conspiracy between Hartford-Empire and other manufacturers of glass containers which violated the antitrust laws. This conspiracy began prior to and extended beyond petitioner's base period. Hartford-Empire and Owens-Illinois were original members of the conspiracy, and were joined by Hazel-Atlas in 1932, after it was defeated in">*244 patent litigation by Hartford-Empire and then by Ball Brothers in March of 1933. The purpose and effect of the conspiracy was to restrict production of glass containers by license agreements limiting the kind and quantity of the product, and by restricting newcomers to the industry by refusing to license them. The purpose of the conspiracy was also to stabilize prices at a level high enough to permit Hartford to charge royalties satisfactory to it, and to safeguard Owens-Illinois from any price competition. Prices were established by price leadership of one of the conspirators and controlled by threats of the loss of licenses. The conspiracy also included a general division of the market. Only about 4 per cent of the total production of glass containers during the base period was on machines not owned or licensed by Hartford-Empire and Owens, and of the 3 or 4 companies constituting the 4 per cent, 2 were being prosecuted by Hartford. The conspiracy and its effects were responsible for artificially high and noncompetitive prices in the glass container industry during the periods here pertinent.

Prior to and during the petitioner's base period, there was existing over-capacity">*245 in the glass container manufacturing industry.

Petitioner and the rest of the glass container industry treated the Hartford royalties as a cost of production, and considered them in that light in setting prices. Petitioner treated the Hartford royalties as a part of the cost of goods sold in its tax returns for the base period years.

In Glenshaw Glass Co., 13 T.C. 296, it was found that for many years prior to 1943 the salaries of petitioner's executive officers were low. In 1942, the petitioner adopted an incentive plan under which a per cent of net profits of the company, after deduction of computed return on capital stock, was paid as a bonus to the executive officers.

Petitioner's sales of fruit jars during the period beginning July 1931 and ending September 30, 1934, were as follows: ">*1013

July 1-Dec. 31, 1931	$ 30,002.32
1932	19,471.93
1933	41,532.96
Jan. 1-Sept. 30, 1934	71,335.38

Other new lines developed by petitioner in the 1930's included beer and liquor bottles. Sales of these were as follows:

Year	Beer	Liquor
1933	$ 75,038	None
1934	34,415	$ 62,964
1935	6,375	209,019
1936	22,069	257,707
1937	1,386	222,436
1938	4,001	203,153
1939	37,465	247,304

">*246 Petitioner's net profit before Federal taxes for the base period averaged approximately 9 per cent of net sales. Petitioner's gross profits for the base period were as follows:

	Fiscal years ending September 30
					Average
	1937	1938	1939	1940
Net sales	$ 1,908,865	$ 1,622,277	$ 1,912,699	$ 2,008,040	$ 1,862,970
Gross profit per
return	632,117	426,472	537,406	530,002	531,499
Less:
Depreciation	33,213	45,440	46,104	48,024
Repairs	39,801	80,277	41,483	66,646
Salaries	19,000	23,750	23,000	23,000
Total
reallocated	$ 92,014	$ 149,467	$ 110,587	$ 137,670
Gross profit per
books	$ 540,103	$ 277,005	$ 426,819	$ 392,331	$ 409,064
Gross profit in
percentage of
net sales:
Per return	33.1	26.3	28.1	26.4	28.5
Per books	28.3	17.1	22.3	19.5	22.0

Petitioner's excess profits base period net income is an inadequate standard of normal earnings under the provisions of section 722 (b) (5) of the Internal Revenue Code of 1939.

Petitioner's constructive average base period net income is $ 195,000.

OPINION.

Immediately prior to October 1934, petitioner was manufacturing glass containers by means of a Shawkee">*247 feeder. That feeder had been developed by petitioner and others in the glass industry in an effort to be relieved from the domination of Hartford-Empire patents and the payment of royalties under these patents. Petitioner was in the process of replacing all of its royalty-paying equipment with royalty-free Shawkee feeders. In October 1934, Hartford-Empire was successful in obtaining an injunction against petitioner in the Federal court, prohibiting its use of its Shawkee ">*1014 feeders. Petitioner thereupon dismantled the Shawkee feeders and reconverted its plant to equipment on which it was required to pay royalties to Hartford-Empire. It continued to pay such royalties throughout its base period. In December 1940, and just after the close of petitioner's base period, petitioner ceased to pay these royalties, because facts had developed in antitrust litigation brought by the United States against Hartford-Empire in December of 1939, which disclosed that Hartford-Empire had successfully established, defended, and sustained its patent position by means of fraud. In ensuing litigation, it was held that the 1934 injunction against petitioner had been obtained by Hartford-Empire's">*248 fraud and that petitioner was entitled to recover damages.

Petitioner claims that this situation demonstrates that its base period net income was an inadequate standard of normal earnings to the extent of the amount of royalties paid during those years. Petitioner filed its claims for refund on the ground that it was entitled to relief from excess profits tax under the provisions of section 722 (b) (5). That is the only section upon which petitioner relies.

As we said in Clinton Carpet Co., 14 T.C. 581, section 722 (b) (5) of the statute was enacted by Congress "to make the statute flexible enough to take care of 'unpredictable' abnormal cases and it confidently expected the provisions to be intelligently and sympathetically administered. Ways and Means Committee Report, No. 146, 77th Cong., 1st sess., p. 2." What section 722 (b) (5) of the statute requires is that petitioner establish that:

(b) * * * its average base period net income is an inadequate standard of normal earnings because --

* * * *

(5) of any other factor ^{1955 U.S. Tax Ct. LEXIS 228">*249 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.}

We believe that petitioner has shown such to be the case here. Petitioner's base period payment of royalties under a decree obtained by Hartford-Empire's fraud was the required factor causing an inadequate standard of normal earnings. It was a marked event, happening just prior to petitioner's base period. Without this occurrence, there can be no doubt that petitioner would not have paid these royalties. It certainly cannot be said by any proper measure that in such circumstances its base period earnings could be other than an inadequate standard of normal earnings. See Ainsworth Manufacturing Corporation, 23 T.C. 372, and cf. Edgewater Steel Co., 23 T.C. 613.">*250

">*1015 Nor do we discern any inconsistency between granting relief to petitioner under section 722 (b) (5) and the principles underlying the other provisions of this subsection. ^{section 722 (b), and claim was made under section 722 (b) (5) with the thought that (b) (5) was an equitable "catch-all" to include cases in which such inadequacies were found to exist. See Granite Construction Co., 19 T.C. 163. Petitioner cannot qualify under any of the other subsections of section 722 (b) and its relief can only be supported by section 722 (b) (5). As we have indicated, we think it clear that the payment of the royalties during the base period, flowing from the fact that just prior to its base period petitioner was enjoined by means of the fraudulent representations of Hartford-Empire and precluded from using its royalty-free Shawkee feeders, is such an "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," as set forth in section 722 (b)1955 U.S. Tax Ct. LEXIS 228">*251 (5). It might be that fraud should always be regarded as unusual and abnormal, but we also know here that never before had petitioner had a fraudulent injunction against it. The fact that this injunction, induced as it was by fraud, occurred just prior to and was an adverse factor influencing petitioner's entire base period serves to distinguish the case at bar from Alexandria Amusement Corporation, 16 T.C. 446. Fraud permeated the entire period, and disrupted petitioner's standard of normal base period earnings ab initio. That the last payments of royalties were made for 2 months next following the close of petitioner's base period seems to us to serve to establish the existence of the fraud during the period which petitioner had been long endeavoring to confirm and which had been made manifest in the antitrust trial which began in December 1939. These peculiar circumstances serve to distinguish this case from Telfair Stockton & Co., 21 T.C. 239, and Clinton Carpet Co., supra.Moreover, in those cases the factors for which adjustment was sought arose from normal business arrangements. ">*252}

In concluding that the present situation qualifies under section 722 (b) (5), there has been no disposition on our part to approach the problem as a matter of broad equitable principles. That is not the purpose of section 722 (b) (5) or, indeed, of section 722 itself. It is because we believe this situation fits the conditions required by the statute in section 722 (a) and (b) that we have deemed it as qualifying ">*1016 Cf. Constitution Publishing Co., 23 T.C. 19, and Alexandria Amusement Corporation, supra.

Respondent vigorously contends that in any event petitioner's constructive average base period ">*253 net income should not be computed, as petitioner would have it, by directly increasing its profits for each of the base period years by the amount of royalty paid during those years, with a resulting constructive average base period net income of $ 217,428,08. Respondent's position is that the Hartford-Empire's control over the glass container industry was such that it was only because of it that extremely favorable prices existed which permitted the members of the industry, including petitioner, to sell their products at a price sufficient to pass the royalty on to the consumer and to make a profit for themselves. In other words, respondent contends that without Hartford-Empire's control the price structures would be so adversely affected that petitioner would lose the benefit of the elimination of the royalty payment.

While there is some force to respondent's argument, nevertheless, it seems to us that this control of the industry by Hartford-Empire does not mean that petitioner would not have been able to reap some benefit had it been released from the payment of royalties during the base period year. It has been established that petitioner and others in the glass container industry">*254 for years made strong efforts to be relieved of royalty payments to Hartford-Empire. It is difficult to believe that if the release from such payments would not be reflected advantageously in their incomes these glass manufacturers would choose to fight Hartford-Empire.

Respondent urges, alternatively, that in any event there would be some diminution of the benefit stemming from the base period release of royalty payment by reason of the elimination of the mark-up on the item of royalties which petitioner had included in its cost of goods sold, as well as additional depreciation on the newly installed Shawkee feeder, increased Pennsylvania income tax on the augmented income, and increases in officers' salaries which had been found in an early proceeding in this Court (13 T.C. 296) to have been "low" prior to 1943. On the other hand, petitioner would offset such adjustments by its claim that the Hartford-Empire control had eliminated a glass fruit jar business in which it alleges to have had increasingly valuable prospects. As to the latter, it might be noted in passing that when petitioner was free to do so it never resumed the glass fruit jar business.

">*255 The weighing of conjectural matter is always difficult, but the difficulty does not eliminate the necessity for doing so. Considering the entire record, adjudging and evaluating the many aspects of the complete economic picture, we have concluded, as our ultimate fact indicates, ">*1017 that petitioner is entitled to use a constructive average base period net income of $ 195,000.

Reviewed by the Special Division.

Decision will be entered under Rule 50.

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Footnotes

• 1. Calendar years 1923-1933.↩

• 2. Nine-month period ended Sept. 30, 1934.↩

• 3. Fiscal years ended Sept. 30, 1935-1940.↩

• 1. Not available.↩

• 1. I. e., other than the factors set forth in other subsections of sec. 722 (b)↩ of the statute.

• 2. Nor is there an inconsistency between petitioner's present seeking of sec. 722 (b) (5) relief and the conclusion in Glenshaw Glass Co., 13 T.C. 296↩, that the base period royalty payments were not abnormal under sec. 711 (b) (1) (H) because they were not attributable to a "decree" under that provision of the statute.