Austin Co. v. Commissioner

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

Austin Co. v. Commissioner

Docket No. 26835

United States Tax Court

22 T.C. 703; 1954 U.S. Tax Ct. LEXIS 149;

June 30, 1954, Filed. June 30, 1954, Filed

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">*149 Decision will be entered for the respondent.

Held, the excess profits tax computed without the benefit of section 722, Internal Revenue Code, has not been shown to result in an excessive and discriminatory tax because of the qualifying factors found in section 722 (b), Internal Revenue Code.

Thomas V. Koykka, Esq., Walker H. Nye, Esq., and George P. Bickford, Esq., for the petitioner.

Clarence Price, Esq., and Stanley Ozark, Esq., for the respondent.

Van Fossan, Judge.

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VAN FOSSAN

">*703 The petitioner filed applications for relief from excess profits tax under section 722 of the Internal Revenue Code. The respondent disallowed the petitioner's claims, whereupon petitioner filed in this Court its petition for review of that determination. The sole issue presented is whether the petitioner is entitled to">*150 relief from excess profits tax for the taxable years ended December 31, 1940 and 1941, under the provisions of section 722 (a) and (b), Internal Revenue Code.

FINDINGS OF FACT.

The facts stipulated are so found. Other facts are found from oral evidence and exhibits submitted at the hearing.

The petitioner is the Austin Company, incorporated in Ohio in 1904 with its principal office in Cleveland, Ohio. The returns for the periods here involved were filed with the collector of internal revenue for the eighteenth district of Ohio. The petitioner computed its excess profits tax upon the invested capital basis but it is entitled to use the excess profits credit based on income pursuant to section 713, Internal Revenue Code.

The petitioner, since its incorporation, has engaged in the construction business. The principal part of its business is and has been the engineering, designing, and constructing of factory and industrial buildings throughout the United States. It has also constructed commercial buildings such as stores, warehouses, office buildings, and other buildings. It has operated a steel fabricating plant. It has district offices in the cities of Cleveland, Detroit, Chicago, ">*151 New York, Seattle, Los Angeles, Oakland, and Houston.

The petitioner has carried on certain of its operations through subsidiaries, including the Austin Company of California, organized in California in 1921, and the Austin Company of Texas, organized under ">*704 the laws of Texas in 1923. These subsidiaries engaged in construction work similar to that of the petitioner. In 1937 both of these subsidiaries ceased operations and were dissolved. Their operations were taken over and have since been performed by the petitioner corporation.

The petitioner owned all of the stock of a subsidiary known as the Austin Realty Company. That corporation was originally organized under the name of the Pacific Properties Company by the petitioner in 1925, under the laws of Ohio. Its name was changed in 1925 to the Austin Finance Company and in 1933 this name was changed to the Austin Realty Company. The petitioner used this subsidiary to provide financing to owners of buildings for which petitioner had obtained a construction contract. The subsidiary acquired title to buildings from time to time through foreclosure or other means of recapture. Upon such acquisition, the subsidiary operated">*152 these properties pending an opportunity to sell. In December 1944 this subsidiary transferred all of its assets to the petitioner.

The petitioner corporation also owned all the stock of a subsidiary known as the Austin Securities Company organized in 1925 under the laws of California. This subsidiary also was used to provide financing for the owners of buildings upon which the petitioner had secured a construction contract. This subsidiary engaged in some other business and is still in existence.

The taxpayer at one time owned all of the stock of two other subsidiaries, the Carnegie Medical Building Company and the Upper Carnegie Building Company. Each was organized in 1938 under the laws of Ohio to take title to and operate certain properties in Cleveland, Ohio. Situated on these properties were office buildings which the petitioner had constructed in the late 1920's and early 1930's. The buildings were constructed for and were owned by the Owners Investment Company. The stockholders of this latter company consisted principally of officers and employees of the petitioner. The petitioner held mortgages and other evidences of indebtedness against these properties and upon default">*153 of these obligations the properties were acquired by the petitioner by foreclosure in November 1937. Following this foreclosure, the petitioner operated these buildings through the year 1938 and the properties were then taken over by the aforementioned subsidiaries on January 1, 1939. The petitioner sold its entire stockholdings in these subsidiaries in October 1944.

The petitioner kept its books and made its returns upon a calendar year accrual basis. Its excess profits tax credit, computed on the ">*705 invested capital method and without regard to section 722, Internal Revenue Code, is:

Year	Invested capital credit
1940	$ 305,513.81
1941	408,048.17

The petitioner's net income (per revenue agent's reports) and as adjusted by the revenue agent for purposes of the section 722 claim; its excess profits net income including interest received upon mortgage notes and interest on advances to the Owners Investment Company, the Austin Realty Company, and the Austin Securities Company; the expenses so incurred but exclusive of interest on United States Government securities; an index based upon 1922-1939 average as 100; and the petitioner's adjusted net income after elimination">*154 of nonconstruction items are as follows:

		Net income per	Excess profits net income		Adjusted
		revenue agent's	(1922-1939=100)		net income,
	Net income	reports, as			exclusive of
Year	per revenue	adjusted by			nonconstruction
	agent's report	agent for sec.	Amount	Index	items
		722 claim
1920	$ 253,387.18	$ 263,143.09	$ 255,477.64	73.38	$ 255,477
1921	(83,284.66)	(98,407.12)	(99,473.55)	(28.57)	(99,473)
1922	(31,037.74)	(9,241.21)	(10,333.73)	(2.97)	(10,333)
1923	157,868.78	280,013.86	269,845.04	77.50	269,845
1924	829,931.98	794,624.16	816,436.24	234.49	816,436
1925	601,716.91	562,343.15	598,466.77	171.89	598,466
1926	449,076.07	441,011.98	442,087.27	126.97	441,909
1927	835,908.50	795,226.32	818,262.58	235.02	814,460
1928	483,790.49	453,208.87	468,846.22	134.66	430,038
1929	736,258.56	718,208.89	737,400.94	211.79	663,483
1930	613,159.55	537,509.63	597,322.65	171.56	532,508
1931	239,671.15	47,964.06	233,335.11	67.02	80,693
1932	(164,098.02)	(77,357.26)	19,772.45	5.68	(56,667)
1933	(31,515.10)	(83,102.53)	(4,839.55)	(1.39)	(68,205)
1934	11,722.30	(86,779.93)	(14,549.86)	(4.18)	(82,506)
1935	227,894.64	123,204.73	184,971.96	53.13	132,627
1936	302,129.52	246,440.60	283,926.95	81.55	249,021
1937	582,706.50	534,557.81	565,680.28	162.47	529,168
1938	53,517.93	(31,478.51)	(7,765.91)	(2.23)	(45,015)
1939	306,065.34	245,268.38	268,272.57	77.05	236,611

">*155 The average excess profits net income during the extended period 1922-1939 was $ 348,174.33. The 1936-1939 average excess profits net income was $ 277,528.47 or 79.71 per cent of the extended period average. The petitioner's average net income from its operations, exclusive of nonconstruction items, for the extended period 1922-1939 was $ 307,363. For the base period, its average net operating income was $ 242,446 or 78.88 per cent of the extended period average.

">*706 The petitioner's sales during these same years were as follows:

Year	Sales
1920	$ 15,672,691
1921	4,502,350
1922	4,560,682
1923	9,068,471
1924	11,242,906
1925	11,429,242
1926	15,491,515
1927	16,683,814
1928	16,319,325
1929	20,005,691
1930	$ 13,963,044
1931	7,256,549
1932	1,232,081
1933	1,479,264
1934	3,803,060
1935	6,261,579
1936	10,402,252
1937	17,772,322
1938	8,552,903
1939	11,322,838

The 1922-1939 annual sales average was $ 10,380,418. The 1936-1939 average was $ 12,012,579 per annum.

The petitioner's equity invested capital, nonconstruction investments, and total assets were as follows:

	Equity	Nonconstruction	Total assets at
Year	invested	investments	beginning of
	capital		year
1920	$ 1,083,805.00
1921	1,312,814.20
1922	1,187,752.25		$ 1,665,190.57
1923	1,203,670.57		1,904,236.20
1924	1,393,102.27		1,750,547.95
1925	1,996,432.15		2,443,757.73
1926	2,598,118.90	$ 208,800.00	3,443,601.59
1927	2,904,312.34	300,847.55	4,491,263.24
1928	3,256,944.60	402,778.88	4,636,377.34
1929	3,597,263.05	1,744,111.70	6,337,881.50
1930	4,294,800.71	1,812,251.58	6,176,797.61
1931	4,512,056.94	1,300,916.51	5,913,125.10
1932	4,573,134.58	2,373,429.71	5,287,360.94
1933	4,331,836.88	2,430,457.46	4,400,210.80
1934	4,163,477.75	2,441,494.01	4,155,622.30
1935	4,049,472.12	2,537,706.16	4,158,882.97
1936	4,083,940.70	2,537,306.81	4,663,771.09
1937	4,220,613.34	2,618,463.61	5,392,432.40
1938	4,424,813.82	1,932,686.11	5,262,164.32
1939	4,381,049.11	2,179,271.73	4,944,348.88

">*156 Included within petitioner's equity invested capital and its total assets are the petitioner's investment in and advances to its subsidiaries, the Austin Realty Company and the Austin Securities Company, which engaged in financing construction projects on which the petitioner held contracts. Also included are advances to the Owners Investment Company which later took the form of a property investment when the petitioner foreclosed and obtained the Carnegie buildings from the Owners Investment Company to protect the advances which the petitioner had made in the construction of those buildings. Later the petitioner conveyed these buildings to subsidiaries. Upon elimination of nonconstruction investments from equity invested capital the assets available for construction are determined. The ratios ">*707 of petitioner's operating net income, excluding nonconstruction items, to assets available for construction, are as follows:

		Ratio of net
	Assets	income excluding
Year	available for	nonoperating
	construction	items to assets
		available for
		construction
1920	$ 1,083,805.00
1921	1,312,815.20
1922	1,187,752.25	(0.87)
1923	1,203,670.57	22.41
1924	1,393,102.27	58.69
1925	1,996,432.15	29.98
1926	2,389,318.90	18.50
1927	2,603,464.79	31.28
1928	2,854,165.72	15.01
1929	1,853,151.35	35.80
1930	$ 2,482,549.13	21.45
1931	3,211,140.43	2.51
1932	2,199,704.87	(2.58)
1933	1,901,379.42	(3.57)
1934	1,721,983.74	(4.79)
1935	1,511,765.96	8.77
1936	1,546,633.89	16.10
1937	1,602,149.73	33.02
1938	2,492,127.71	(1.81)
1939	2,201,777.38	10.75

">*157 The average annual assets available for construction for the extended period 1922-1939 was $ 2,031,237.24. The average for the base period years was $ 1,960,672.18. The average ratio of net income to assets available for construction during the extended period was 16.10 and for the base period 14.52.

The following table shows the index figures for the years 1920 through 1939 based upon the averages for the years 1922-1939 of industrial production, converted from figures published in Federal Reserve Bulletin, May 1945; the value of industrial construction determined from Construction and Construction Materials, Statistical Supplement, May 1950, United States Department of Commerce; and the value of industrial construction and construction of warehouses, office buildings, and loft buildings determined from the latter source:

Indices (Average 1922-1939=100).
			Industrial
			construction
			and
			construction
	Industrial	Industrial	of
Year	production	construction	warehouses,
	(Physical	(Physical	office buildings,
	volume)	volume)	and loft
			buildings
			(Physical
			volume)
1920	84.3	183.72	141.26
1921	65.2	125.72	113.48
1922	82.0	110.47	110.92
1923	98.9	115.95	110.61
1924	92.1	98.02	101.38
1925	101.1	111.84	118.11
1926	107.9	158.49	152.04
1927	106.7	151.74	150.01
1928	111.2	174.84	170.10
1929	123.6	206.89	212.86
1930	102.2	125.85	166.16
1931	84.3	58.72	82.26
1932	65.2	22.58	36.30
1933	77.5	55.51	43.21
1934	84.3	56.12	47.02
1935	97.8	46.14	42.37
1936	115.7	74.03	65.33
1937	127.0	117.55	93.58
1938	100.0	55.15	48.41
1939	122.5	60.09	49.35

">*158 ">*708 The base period average in terms of a percentage of the extended period 1922-1939 of the above mentioned types of construction is as follows:

	Base period as
	per cent of
Type of construction	extended period
Industrial construction	76.70
Industrial construction and construction of
warehouses, office buildings, and loft buildings	64.17

The following table shows the net income before taxes for the construction industry as annually reported by the Bureau of Internal Revenue in "Statistics of Income," Part II; and for all corporations as reported in Series A Data, Table I of IT-Mimeograph, Coll. No. 5807, January 10, 1945:

Indices (Average 1922-1939=100).
			Compiled net profit
	Net income of the		(or loss) of all
	construction industry		corporations
Year
	Amount		Amount
	(thousands	Index	(millions	Index
	of dollars)		of dollars)
1920	88,531	182.43	6,625	113.8
1921	18,883	38.91	1,156	19.8
1922	43,799	90.44	5,967	102.5
1923	75,041	154.75	7,634	131.1
1924	94,650	195.19	6,795	116.7
1925	121,952	251.49	9,316	160.0
1926	121,041	249.61	9,510	163.3
1927	137,270	283.08	8,669	148.8
1928	111,249	229.42	10,667	183.2
1929	121,980	251.55	11,870	203.8
1930	93,492	192.80	4,649	79.8
1931	(9,340)	(19.26)	(777)	(13.3)
1932	(92,717)	(191.20)	(3,829)	(65.7)
1933	(57,714)	(119.02)	(930)	(16.0)
1934	(29,620)	(61.08)	2,970	51.0
1935	(337)	(.69)	5,423	93.1
1936	36,831	75.95	7,771	133.4
1937	47,573	98.10	7,830	134.4
1938	25,148	51.86	4,131	70.9
1939	32,565	67.16	7,178	123.2

">*159 The excess profits net income of all corporations in millions of dollars as reported in Series B of Corporate Earnings in the United States, IT-Mimeograph, Coll. No. 5807, January 10, 1945, is as follows:

	Amount
Year	(millions)
1920	$ 5,873
1921	458
1922	4,770
1923	6,308
1924	5,363
1925	7,621
1926	7,504
1927	6,510
1928	8,227
1929	8,740
1930	$ 1,552
1931	(3,288)
1932	(5,643)
1933	(2,547)
1934	94
1935	1,696
1936	4,370
1937	4,407
1938	1,608
1939	4,509

">*709 The following table shows the value of industrial construction as reported in Construction and Construction Materials, Statistical Supplement, May 1950, United States Department of Commerce, page 6 for the years 1920-1939, and the net sales of the Austin Company as a percentage of the value of industrial construction:

		Net sales of
		the Austin
	Value of	Company as a
Year	industrial	per cent of the
	construction	industrial
		construction
		industry
1920	$ 1,099,000,000	1.42609
1921	574,000,000	0.78438
1922	467,000,000	0.97659
1923	459,000,000	1.65182
1924	460,000,000	2.44411
1925	513,000,000	2.22792
1926	727,000,000	2.13088
1927	696,000,000	2.39710
1928	802,000,000	2.03483
1929	949,000,000	2.10808
1930	$ 532,000,000	2.62463
1931	221,000,000	3.28351
1932	74,000,000	1.66497
1933	176,000,000	0.84049
1934	191,000,000	1.99113
1935	158,000,000	3.96302
1936	266,000,000	3.91062
1937	492,000,000	3.61226
1938	232,000,000	3.68660
1939	254,000,000	4.45781

">*160 The petitioner's sales averaged 2.55585 per cent of the value of industrial construction during the extended period 1922-1939 and 3.91657 per cent during the base period years.

On February 6, 1939, the petitioner corporation entered into an agreement with the Dow Chemical Company to perform the construction work of the latter corporation upon a continuing basis. The petioner was to be paid cost plus a percentage thereon. The agreement was to continue in effect until February 1, 1940, and thereafter until canceled by either party on 30 days' written notice. The agreement provided in part as follows:

The construction work shall be done as specified in the particular purchase order involved and as set forth in this agreement, provided, however, if the specifications of such purchase order are inconsistent with this agreement the specifications of such purchase order shall govern. While this agreement in no way obligates Dow to have Austin do all of its construction work, nevertheless, it is the intention of the parties hereto that Austin shall do a substantial portion of Dow's construction work during the life of this agreement.

The usual method of operation in the construction">*161 industry and for the taxpayer was to negotiate separately for individual contracts. Under the "Dow contract," authorizations were issued for the construction desired. The petitioner had entered into a previous continuing construction arrangement with Continental Can Company, Inc., in June 1935. That agreement provided in part as follows:

This agreement shall expire two years from date of its acceptance, but at your request and with our approval it may be extended for a further period of two years. * * *

* * * *

">*710 This in no way obligates you for all of your work and if it is necessary or advisable or advantageous for you to purchase this service elsewhere, it will not affect our proposition. However, it is the intent that the substantial portion of work shall be awarded to us, provided you have the work to do.

This agreement provided for percentage fees for each contract which would be reduced in amount according to the volume of the work. After entering into an agreement with the petitioner, the Dow Chemical Company very largely disbanded the construction force it had maintained to perform its work in the past.

The petitioner timely filed its excess profits tax">*162 return for the years 1940 and 1941 showing excess profits tax due in the respective sums of $ 672,413.16 and $ 2,332,640.40. The taxpayer filed its application for relief under section 722 for the year 1940 on or about September 15, 1943, requesting a reduction in tax of $ 234,880.45. It also filed its application for relief for the year 1941 on or about the same date, requesting that its tax be reduced in the amount of $ 259,353.71. In May 1947 the petitioner filed its claims for refund with respect to the years 1940 and 1941.

The petitioner's business was not depressed in the base period because of conditions generally prevailing in its industry subjecting the petitioner to a profits cycle differing materially in length and amplitude from the general business cycle nor was it subjected to sporadic and intermittent periods of high production and profits which were inadequately represented in the base period. The taxpayer did not, either during or immediately prior to the base period years, change the character of its business. The taxpayer's business was not affected by any other factor which may be considered as resulting in an inadequate standard of normal earnings during ">*163 the base period so as to entitle it to relief under the provisions of section 722 (b) (5), Internal Revenue Code. The petitioner's excess profits taxes for the years 1940 and 1941 computed without the benefit of section 722 are not excessive and discriminatory so as to entitle the petitioner to relief.

OPINION.

The petitioner seeks relief from excess profits taxes for the years 1940 and 1941 under the provisions of section 722 of the Internal Revenue Code.

To achieve its objective, the taxpayer must establish that the excess profits tax computed without the benefit of section 722, Internal Revenue Code, is excessive and discriminatory and it must further establish a fair and just amount representing normal earnings to be used as a constructive average base period net income. The petitioner initially relies upon the provisions of subsection 722 (b) (3) (A), which sets forth the proposition that the excess profits tax shall be considered ">*711 excessive and discriminatory if the taxpayer demonstrates that its average base period net income is an inadequate standard of normal earnings because its business was depressed in the base period by reason of conditions generally prevailing">*164 in its industry, subjecting the taxpayer to a profits cycle differing materially in length and amplitude from the general business cycle. The burden is thus placed upon the petitioner under this subsection to prove at the outset that its business was depressed during the base period because of the factor cited. A comparison of the taxpayer's earnings over the period 1922-1939 with its earnings during the base period manifests the existence of a depression in the taxpayer's business during the years 1936-1939.

The taxpayer's excess profits net income, exclusive of Government bond interest and income from the operation of the Carnegie buildings for the base period, averaged 79.71 per cent of the average for the extended period of 1922-1939. Included within the figures relating to the petitioner's excess profits net income is interest received upon advances made to the Austin Realty Company and the Austin Securities Company. These advances were made as an integral and necessary step in the petitioner's effort to obtain and carry out construction contracts. Income from the petitioner's subsidiaries is not included in the determination of the taxpayer's excess profits net income, ">*165 but the interest received from these subsidiaries on legitimate and necessary loans must be included in the amount determined as the excess profits net income of the petitioner. Similar treatment must be accorded to the interest received upon advances to the Owners Investment Company inasmuch as these loans were made in the process of the construction by the petitioner of the Carnegie buildings. However, even if the petitioner's income from sources other than what can be strictly construed as construction activity is eliminated from the determination of the petitioner's income during these years, the average for the extended period is $ 307,363 and for the base period $ 242,446, or 78.88 per cent of the average for 1922-1939. A similar result is obtained from the examination of the ratio of income arising solely from construction activity to the value of assets available for construction, exclusive of all nonconstruction investment. This comparison reveals that the average ratio for the period 1922-1939 was 16.10 per cent whereas the base period average ratio was 14.52 per cent. Upon any measurement of the petitioner's income, it is evident that its construction business was depressed">*166 to some extent during the base period.

The respondent urges that the petitioner's business was not depressed during the base period because its annual average sales were higher during those years than in the extended period of 1922-1939. Sales, although indicative, are not the sole criterion in the determination of ">*712 whether the petitioner's business was depressed. A. B. Frank Co., 19 T.C. 174. Examination of the petitioner's sales record against the background of its increased competitive business, as evidenced by the figures relating to the petitioner's sales as a percentage of the value of total industrial construction, demonstrates that the increase in average sales was not proportionate to the improvement in its competitive standing. During the extended period, the petitioner did 2.55585 per cent of such business whereas during the base period it performed almost 4 per cent of the industrial construction. Upon the evidence presented, we are of the opinion that the petitioner has proved that petitioner's business was depressed during the base period.

The petitioner must also prove that it is a member of an industry and that its business">*167 was depressed by reason of conditions generally prevailing in that industry subjecting it to a profits cycle differing materially both in length and amplitude from the general business cycle. Pabst Air Conditioning Corporation, 14 T.C. 427. The facts disclose that petitioner was a leading member in the construction industry. It built factories, office buildings, warehouses, and other commercial and industrial buildings. That the construction industry was depressed during the base period as compared to the extended period, is evidenced by the averages of the indices for those periods. The expert economic witnesses called by the parties herein, although disagreeing on the methods of measuring cycles, were in agreement that industrial production is the correct measure of the cycle of general business to be employed in a comparison with the construction industry. To determine the cyclical pattern of the petitioner's industry, figures were submitted by the taxpayer with regard to the value of new private construction, nonresidential construction, general industrial construction, and industrial construction including warehouse, office buildings, and ">*168 loft construction. These figures were converted to reflect physical volume in order to establish a competitive basis with the indices of industrial production.

We do not concur, however, in the taxpayer's view that the representative indices submitted establish a variant profits cycle for the taxpayer's industry. Nor do we concur that the figures relating to the petitioner demonstrate a variant profits cycle for it.

The indices of industrial production representing the general business cycle applicable to this type of industry reveal a pattern or series of rising and falling trends over periods of three to six years. Troughs occurred in 1921, 1924, 1927, 1932, and 1938. The highest peak was reached in 1929. The petitioner contends that this series of upward and downward trends represents the general business cycle. If this be accepted, it becomes evident upon examination that the petitioner and its industry follow very similar patterns or cycles. ">*713 Upon turning to the indices of industrial construction, largely representing construction of factories, and the indices of industrial construction and construction of warehouses, offices, and loft buildings, which were submitted">*169 by the petitioner, we find, if any pattern or cycle appears, one which is closely parallel to that of general business. The indices of industrial construction and those of industrial, warehouse, office, and loft construction are chosen for comparison because they most nearly represent the petitioner's industry. The index figures submitted by the petitioner with respect to new private construction, which exclude only public construction, maintenance, and repairs, and the indices of nonresidential construction, which further exclude residential building, are of little value for our purposes because they cover too broad a field. The petitioner, although not restricting its activities, engaged principally in industrial and commercial building and it is these statistics which must be used in any proper comparison.

Examination of the indices of industrial construction and industrial, warehouse, office, and loft construction, in comparison to the index of general business, reveals that both clearly followed the trends and fluctuations of general business during the years submitted. Troughs were reached in all three in 1924, followed by a rise through 1926 and a decline again in 1927. ">*170 A further increase to a peak occurred in 1928 and 1929 for all three sets of indices which was followed by a decline to a trough in 1932. With the one exception of the year 1935, for the indices of petitioner's industry, all three indices continued a rising trend to 1937 before turning down in 1938 and increasing again in 1939. The lengths of any cyclical pattern demonstrated are strikingly similar upon the evidence submitted by the taxpayer. Although some differences in amplitude may be reflected upon study of the indices, it must be borne in mind that the statutory provision requires a cycle differing materially in length as well as in amplitude from the general business cycle. Avey Drilling Machine Co., 16 T.C. 1281. No such material variance is shown here and it follows that petitioner's depressed business could not have been caused by conditions generally prevailing in its industry subjecting the taxpayer to a profits cycle differing materially in length and amplitude as is required under the statute.

The petitioner argues that fluctuations of minor degree in a subject matter as narrow as one industry must be discounted in making comparisons">*171 with a wide statistical universe where offsetting factors cancel each other out. The taxpayer thus argues that its industry experienced only one cycle and part of another during the years 1922-1939. Although the observation that minor fluctuations should be discounted may be conceded, it does not aid the taxpayer in the present instance. ">*714 The indices submitted by it for its industry show increases and decreases of considerable size which cannot be glossed over consistently with the taxpayer's view that general business experienced four cycles during this same period. A decline of more than 17 points in industrial construction in 1924 and a decrease in that year of more than 9 points in industrial, warehouse, office, and loft construction occurred at the same time that the indices of general business reflected a decline of over 6 points. Similarly in 1927, the industrial production index dropped slightly more than 1 point while the industrial construction index declined almost 7 points and the factory, warehouse, office, and loft construction index declined more than 2 points. In such instances of marked change in trend, the argument is unavailing that the indices representing">*172 the petitioner's industry did not undergo a significant change when compared to those of industrial production.

Other evidence, including much offered by the taxpayer, substantiates the conclusion reached above. A comparison of the net income of the construction industry and of all corporations demonstrates that the petitioner's industry closely followed the trends and fluctuations manifested by all corporations. Declines were suffered in net income of the construction industry in 1926 and by all corporations in 1927. After 1928, when the petitioner's industry again suffered a decline, both sets of indices followed the same pattern, going up together to the peak of 1929 and down to the trough of 1932. Following an upswing in 1933, peaks were reached by both in 1937 followed by a decline in 1938 and recovery in 1939. We are unable to find any variance, which might be designated as material, in the length of any cyclical pattern which is otherwise evidenced.

It is our conclusion that the taxpayer has not demonstrated a profits cycle of its own differing materially in length and amplitude from the general business cycle. The figures submitted with respect to the petitioner's sales">*173 for use in comparison with the value of industrial construction demonstrate that the Austin Company followed a pattern similar to that of its industry. Declines were suffered in industrial construction in 1924 and 1927 while the taxpayer's sales decreased in 1928. Both indices manifested a rising trend in 1929 followed by another decline in 1930 which continued through 1932 before initiating an upward turn in 1933. This rise continued for the petitioner's sales until 1938. Industrial construction fell off in one year, 1935, before continuing its rise until 1938 when both indices declined and then recovered in 1939. With minor variations, it is evident that the taxpayer followed its industry in the length of any cycle manifested. The industry, as we have seen, followed the pattern of general business as to the periods of cyclical behavior. Further evidence of the similarity of the petitioner's pattern with that of its industry is shown by the comparison of the petitioner's net income (per revenue agent's ">*715 reports) with the net income of the construction industry. Decreases occurred in the petitioner's net income in 1925 and 1926 and for its industry in the latter year. ">*174 Another decline occurred for both in 1928 and a downward trend was entered by both in 1930 which continued for both through 1933. An upward swing occurred in 1934 which endured until 1938 followed by a rise again in 1939.

When the petitioner's profits are compared with those of all corporations, it is apparent that, like its industry, it followed the general business pattern rather closely. The taxpayer's net income (per revenue agent's reports) declined in 1925 and 1926 from a rising trend in the early 1920's. The net profits of all corporations declined in 1924 and again in 1927 -- the petitioner suffering another decrease in profits in 1928. Both reached a peak in 1929 and then entered into a declining trend in profits continuing until 1932 before rising again until 1938 when another decline occurred. Recovery was made by both in the following year. Similarly, comparison of the petitioner's excess profits net income with that of all corporations reveals a likeness in the length of any cyclical periods which might be demonstrated. Both the petitioner and all corporations followed an increasing trend after 1922 which lasted until 1924 for all corporations and until 1925 for">*175 the petitioner. The excess profits net income for all corporations declined again in 1927, the petitioner suffering a decrease in 1928. Again both reached peaks in 1929 and entered into a period of decline in 1930 which continued for the taxpayer through 1934 and for all corporations through 1932 until an upward turn was taken in 1933. This upward trend continued for both until 1938 followed by a recovery again in 1939. Although some variations may exist in the exact years when a change in profits trend occurred, the length of cyclical pattern, if there be such in the present instance, is very similar. Upon the several bases of comparison, we are unable to find that the petitioner corporation or its industry experienced a profits cycle differing materially in length from that of general business. The principal requirement of variance is precluded under any view of cyclical behavior when the subjects of comparison follow each other so closely in trend and fluctuations. We must conclude, therefore, that the taxpayer was not depressed during the base period because of conditions generally prevailing in its industry subjecting the petitioner to a variant profits cycle. The depression">*176 was, therefore, not caused by the factors stated in subsection (b) (3) (A) of the statute and relief cannot be granted upon that basis.

The petitioner's application included an alternative ground for relief under section 722 (b) (3) (B) on the basis of sporadic profits. No argument is made on this point and the evidence presented does not establish a basis for such relief.

">*716 We turn then to petitioner's second principal ground for relief, that the contract entered into with the Dow Chemical Company in February 1939, constituted a change in the character of its business, entitling it to relief under the provisions of section 722 (b) (4). The Dow continuing construction agreement granted the petitioner the opportunity to obtain construction work over a period of years without the necessity of negotiating and bidding for each particular job. The agreement offered the petitioner a profit on the construction work without the risk of sustaining losses on the project and also enabled the petitioner to form close relations with the customer. The Dow Chemical Company, relying on the contract, disbanded most of its own construction force which had performed its work in the past.

">*177 Although the advantages presented by this contract to the taxpayer were no doubt of helpful importance, we are of the opinion that they do not constitute a change as is envisaged by section 722 (b) (4). The contract provided for a change in the petitioner's method of obtaining business with respect to one customer only. The petitioner did not alter the type of work it had performed in the past nor did it enlarge its capacity or effect a change in its management. A new and advantageous method of securing its business did not alter the character of the business carried on by the Austin Company. Its method of operation was changed only with respect to obtaining certain business, not with the method of performing its work. To qualify, the change must be substantial and not be such as might occur in normal and ordinary course. Newburgh Transfer, Inc., 17 T.C. 841. The contract may have represented a significant change to the Dow Chemical Company which disbanded its construction force but the taxpayer did not undergo a similar alteration. In our opinion, the change, if it can be so designated, was insufficient to warrant inclusion within the meaning">*178 of the provisions of section 722 (b) (4). The cases cited by petitioner, Packer Publishing Co., 17 T.C. 882, and Wisconsin Farmer Co., 14 T.C. 1021, differ basically from the present factual situation and are not controlling authority to the contrary.

If it be assumed that a sufficient change in the method of operation occurred, it is noteworthy that a similar event transpired prior to the base period upon the entrance into the contract with Continental Can Company in 1935. No argument is made for relief on the ground that a statutory change occurred in 1935. We conclude that the petitioner does not qualify for relief under the provisions of section 722 (b) (4).

One further contention is voiced by the petitioner to the effect that if the taxpayer is not entitled to relief under the provisions of section 722 (b) (3) or (b) (4), relief should be granted under the "any other factor provision" of section 722 (b) (5). It is sufficient to say in this regard that relief cannot be granted upon a combination of ">*717 factors previously examined and held insufficient under other provisions of section 722. General Metalware Co., 17 T.C. 286;">*179 Granite Construction Co., 19 T.C. 163.

Failure to establish that the tax computed without the benefit of section 722 is excessive and discriminatory obviates the necessity of determining what would be a fair and just amount representing normal earnings to be used as a constructive average base period net income.

Reviewed by the Special Division.

Decision will be entered for the respondent.