Crane Co. of Minnesota v. Commissioner , 25 T.C. 727 ( 1956 )

Crane Company of Minnesota, Petitioner, v. Commissioner of Internal Revenue, Respondent

Crane Co. of Minnesota v. Commissioner

Docket No. 26262

United States Tax Court

25 T.C. 727; 1956 U.S. Tax Ct. LEXIS 297;

January 17, 1956, Filed

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Decision will be entered for the respondent.

Petitioner is engaged in the sale at wholesale of a wide variety of plumbing and heating supplies and equipment in a sales area comprising 4 States and parts of 3 other States. It claims relief from excess profits tax under the provisions of subsections (b) (2), (b) (3) (A), (b) (3) (B), and (b) (5) of section 722 of the 1939 Code. Held, petitioner has failed to establish the qualifying factors requisite to relief under any of the above subsections of section 722 (b).

George S. Stansell, Esq., John B. Chamberlain, Esq., and Leonard S. Schmitz, Esq., for the petitioner.

Charles D. Leist, Esq., and Arthur B. White, Esq., for the respondent.

Harron, Judge.

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HARRON

The taxable year involved is 1941. The Commissioner agrees that the petitioner is entitled to the benefit of an unused excess profits credit carryover or carryback, as the case may be, to the taxable year 1941. The years 1940 and 1942 are involved in the application of an unused excess profits credit carryover and carryback. The respondent has determined that the amount of excess profits tax for 1941 is $ 58,700.46, after giving effect to an unused excess profits credit carryover and carryback. If the petitioner's claim for relief from excess profits tax is sustained in this proceeding, then there is overpayment of excess profits tax for the year 1941 in the amount of $ 58,700.46. The petitioner has filed a claim for refund of excess profits tax which has been paid.

The petitioner filed application for relief from excess profits tax under section 722 of the 1939 Code for the year 1941. The petitioner's application for relief for the year 1941 was denied after consideration and review by the Excess Profits Tax Council. Thereafter, the Commissioner issued his notice of disallowance, determining that the petitioner was not entitled to any relief under section 722. The Commissioner determined that the petitioner did not qualify for relief under any of the provisions of section 722 which were relied upon by the petitioner, and that it had not established what would be a fair and just amount representing earnings to be used as a constructive average base period net income for the purpose of computing an excess profits tax based upon a comparison of normal earnings and earnings during the excess profits taxable year ended December 31, 1941.

The issues, in general, are whether the petitioner qualifies for relief under the provisions of either subsection (b) (2), (b) (3) (A), (b) (3) (B), or (b) (5) of section 722 of the 1939 Code, and, if the petitioner qualifies for relief under any subsection of section 722, whether the petitioner has established what would be a fair and just amount representing normal earnings to be used as a constructive average base period net income. The petitioner relies primarily upon the provisions of section 722 (b) (3) (A). The petitioner contends that throughout its history it has carried on a business through which it supplied certain types of building materials to the construction industry and that, therefore, at all times it was either a member of the construction industry, or, in the alternative, it was a member of an industry which was so closely related to and dependent economically upon the construction industry that its profits cycle was affected or controlled by the profits or volume cycle, or both, of the construction industry. The petitioner claims that it had a variant profit cycle.

The record in this proceeding is large; it includes 10 volumes of transcript and more than 240 exhibits. A few of the facts have been stipulated.

FINDINGS OF FACT.

The stipulated facts are found as facts. The stipulations are incorporated herein by this reference.

The petitioner filed its excess profits tax returns for the taxable years 1940, 1941, and 1942, with the collector of internal revenue for the district of Minnesota. The petitioner filed timely applications for relief under section 722 of the 1939 Code for the taxable years 1941 and 1942, on September 15, 1943. Petitioner did not file application for relief under section 722 or claim for refund with respect to the year 1940, and the statutory period within which such application or claim might be filed has expired.

The petitioner, a Minnesota corporation, was organized on December 15, 1892, under the name of Crane & Ordway Company. Its charter was renewed on December 15, 1922, and at that time its corporate name was changed to Crane Company of Minnesota. The petitioner maintains its principal office in St. Paul, Minnesota.

The petitioner is not and never has been engaged in any construction work. The petitioner's charter, both the original and the renewed charter, describes the scope of petitioner's authorized activities in the following way: "The general nature of its business shall be buying, selling and dealing in pipe, fittings, railway, mill, steam fittings and plumbers' supplies and similar commodities." The nature of petitioner's business operations and of the products it sells are described in more detail hereinafter. In general, petitioner's business operations during the taxable year, the base period years, and during all of the earlier years is and has been primarily the purchase and the resale at wholesale of plumbing and heating equipment and supplies manufactured by Crane Co. of Illinois and by other manufacturers. Petitioner is and always has been primarily a wholesale distributor and it has done very little manufacturing at any time and very little fabricating work. Such fabricating of materials as petitioner does is done in connection with its business of wholesale distribution.

Crane Co., the Illinois corporation, has its principal office in Chicago. It is referred to hereinafter as Crane of Illinois. It was organized in 1865. Crane of Illinois, at all times material, has been and is a manufacturer of a wide line of plumbing and heating materials and allied equipment, heating boilers, heating radiators, plumbing earthenware, plumbing enamelware, and bathroom fixtures such as lavatories, bathtubs, closets, closet tanks, sinks, laundry trays; various kinds of valves and fittings, steam specialties, and pipe fittings. Crane of Illinois, in 1932, operated 11 manufacturing plants. Crane of Illinois has various subsidiaries such as Crane-O'Fallon Co. of Colorado, Trenton Potteries Co. of New Jersey, and Crane Enamelware Co. of Tennessee; and it has a nationwide distributing organization with headquarters in New York, Birmingham, Cleveland, Chicago, Dallas, St. Paul, Denver, and San Francisco. Crane of Illinois, over the long period of its existence, has developed a national system for the distribution and sale of its own manufactured goods. It also has maintained a control purchasing department for the purchase of goods manufactured by others, called jobbed goods, which are sold by Crane's subsidiaries and branches.

In Poor's Industry and Investment Survey of July 5, 1939, the use of Crane products is described in the following way:

Crane's products are used in all major industries as well as for household, office building, hospital and industrial building purposes. Among the major industrial markets are public utilities, railroads, water works and steel, shipbuilding, oil, chemical, textile, paper and food products industries.

In a report to stockholders of Crane of Illinois for the year 1932, the market for the products of Crane of Illinois is described as falling into three large divisions, namely, industry, building construction, and replacements and remodeling; the market of "industry" is indicated by reference to steel mills, oil refineries, public service plants, packing houses, railroads, ships, waterworks, and any plant where water, air, gas, steam, or oil has to be conveyed and controlled; and the field of building construction is indicated by reference to residential construction, served by Crane's plumbing and heating division, and to construction by the Federal Government.

From 1892 until the end of 1922, petitioner's outstanding capital stock was owned 50 per cent by Lucius P. Ordway, and 50 per cent by Crane of Illinois. On December 31, 1922, Crane of Illinois acquired an additional .025 per cent of petitioner's stock. Thereafter, including 1939, Crane of Illinois owned 50.025 per cent, and the Ordway family owned 49.975 per cent of petitioner's stock.

Since 1910, petitioner's books of account have been kept on a calendar year basis. From 1892 to 1909, inclusive, petitioner's books were kept on the basis of a fiscal year ended on November 30. Accounting data set forth hereinafter is based on the accounting periods which existed in the respective years.

In its nationwide distribution and sales of its products, Crane of Illinois has established 8 regions, or sales territories. The petitioner's sales territory constitutes 1 of these regions.

The petitioner's sales territory, during all of the time which is material, has consisted of Minnesota, the northwest quarter of Wisconsin, the upper peninsula of Michigan, North Dakota, South Dakota, the northern third of Wyoming, and Montana. From 1906 to 1916, inclusive, petitioner also had a sales outlet in Winnipeg, Canada, and it made substantial sales in the Winnipeg area. The sales territory of the petitioner is principally an agricultural area, but in the States of Minnesota, South Dakota, and Montana there are industrial and mining enterprises.

During the base period years, and before, petitioner had 9 sales offices or branches in its sales territory, together with warehouses. The locations of the branches, the years of their operation, and the type of economy in the area served by each branch are set forth in the following table:

Table 1
State and cities	Periods of operation	Type of economy
Minnesota
St. Paul	1895-1939	Principally agricultural, some
		industrial.
Minneapolis	1895-1939	Principally agricultural, some
		industrial.
Duluth	1895-1897	Agricultural, industrial, and mining.
	1904-1939
Mankato	1925-1939	Almost entirely agricultural.
Hibbing	1925-1927	Principally industrial and mining;
		some limited agriculture.
Winona	1920-1932	Mostly agricultural; some industry.
North Dakota
Fargo	1904-1939	Almost entirely agricultural.
South Dakota
Aberdeen	1910-1939	Almost entirely agricultural.
Sioux Falls	1925-1939	Principally agricultural, some
		industry.
Watertown	1904-1910	Agricultural.
Montana
Great Falls	1911-1939	Principally agricultural; quite a bit
		of mining, some industrial associated
		with mining.
Billings	1925-1939	Principally agricultural, including
		cattle raising.
Butte	1911-1912	Principally mining and smelting.
Canada
Winnipeg	1906-1916	During years indicated, almost
		entirely agricultural.

The items sold by petitioner were purchased, almost entirely, from Crane of Illinois and its subsidiaries and affiliates, and from Crane's central purchasing department which did the buying of jobbed goods, i. e., goods manufactured by others. Hereinafter, the lines of goods sold by petitioner are designated Crane-manufactured goods (meaning made by Crane of Illinois), and jobbed goods (meaning made by others than Crane of Illinois).

The principal products which petitioner sold come under the following general descriptions; iron and steel pipe, valves, fittings and appliances for controlling and conveying water, oil, other liquids, steam, gases, and air; heating boilers, furnaces, heating radiators, heating appliances; plumbing appliances (meaning bathtubs, lavatories, water closets, sinks, and other earthenware and enamelware (enameled iron) products of similar use and type); plumbing brass and fixtures; and miscellaneous related goods. Petitioner sold a wide selection of the above classes of goods. In one of petitioner's catalogues it is stated that it handled about 20,000 articles manufactured by Crane of Illinois made of brass, iron, cast steel, ferro steel, and forged steel, and distributed pipe, and heating and plumbing materials. Petitioner sold iron and steel pipe having diameters ranging from one-eighth of an inch to 40 inches. In addition to the above types of goods, petitioner has sold, in each year since 1920, specialized equipment designed for use in creameries and dairies, but such sales have amounted to less than 5 per cent of all sales each year. For many years prior to 1930, petitioner sold windmills. A small percentage of petitioner's sales each year have consisted of such miscellaneous goods as pumps, refrigerators, water and irrigation systems and equipment, flag poles, humidifiers, auto washers, bar furniture and equipment, hose, plumbers' tools, bathroom accessories, clothes poles, belt lacers and lacings, flue brushes, and water softeners.

Petitioner destroyed its sales invoices after 3 years, but it retained other records which go as far back as 1899 from which large group classifications of goods sold by petitioner can be made. Exhibit 64 is incorporated herein by reference. From the retained records, petitioner's sales during 1899-1929 can be described in 3 groups; sales during 1930-1936 can be described in 5 groups; sales in 1937 and 1938, in 8 groups; and sales in 1939, in 10 groups, as the following schedules show:

1899-1929

1. Crane manufactured goods (general).

2. Steel pipe (not made by Crane).

3. Jobbed goods other than steel pipe (not made by Crane).

1930-1936

Crane manufactured goods:

(1) Plumbing consisting chiefly of earthenware and enamelware fixtures.

(2) Boilers and radiation.

(3) Other goods such as valves and fittings.

(4) Steel pipe (not made by Crane).

(5) Jobbed goods other than steel pipe (not made by Crane).

1937 and 1938

Crane manufactured goods:

(1) Valves and fittings.

(2) Plumbing brass.

(3) Plumbing earthenware.

(4) Plumbing enamelware.

(5) Heating boilers.

(6) Heating radiators.

(7) Steel pipe (not made by Crane).

(8) Jobbed goods other than steel pipe (not made by Crane).

1939

Crane manufactured goods:

(1), (2), (3), (4), (5), and (6) (same as above).

(7) Steel pipe (not made by Crane).

Jobbed goods other than steel pipe (not made by Crane):

(8) Jobbed plumbing.

(9) Jobbed heating.

(10) Jobbed miscellaneous.

Petitioner does not have records for all of the years it has carried on its business from which computations can be made of the dollar amounts of its sales of various classes of goods, but it has records for the years 1936-1939, inclusive, from which such computations can be made.

In 1936, petitioner's sales of Crane plumbing goods amounted to roughly $ 1,138,000; Crane boilers and radiation, $ 361,400; other Crane goods, $ 804,900; jobbed steel pipe, $ 708,400; and other jobbed goods, $ 1,618,500.

The following schedule presents a breakdown of petitioner's sales in 1937, 1938, and 1939:

Table 2
	1937	Per cent	1938	Percent
Valves and fittings 1	$ 978,898	20	$ 814,564	20
Plumbing brass 1	216,716	5	180,563	4
Plumbing earthenware 1	219,446	5	203,267	5
Plumbing enamelware 1	235,250	5	239,429	6
Heating boilers 1	131,408	3	111,669	3
Heating radiators 1	120,414	2	93,626	2
Jobbed pipe	678,381	14	589,506	14
Jobbed goods	2,184,478	46	1,926,980	46
Jobbed plumbing
Jobbed heating
Jobbed misc
Total sales 2	$ 4,764,999	100	$ 4,159,604	100

Table 2
	1939	Per cent
Valves and fittings 1	$ 893,131	20
Plumbing brass 1	222,563	5
Plumbing earthenware 1	250,116	5
Plumbing enamelware 1	306,855	7
Heating boilers 1	109,749	2
Heating radiators 1	96,712	2
Jobbed pipe	569,058	13
Jobbed goods
Jobbed plumbing	1,287,826	28
Jobbed heating	593,167	13
Jobbed misc	229,417	5
Total sales 2	$ 4,558,594	100

The following schedule shows for 1939, the dollar amounts of petitioner's sales of goods in each of 5 classifications without reference to the manufacturers of the goods:

	Amounts	Percentage
Class	of sales	of total
		sales
1. Valves and fittings	$ 893,131	19.59
2. Steel pipe	569,058	12.49
3. Plumbing (including earthenware, enamelware, and
brass	2,067,360	45.35
4. Heating	799,628	17.54
5. Miscellaneous (including wrought iron pipe and
specialized creamery equipment)	229,417	5.03
Total sales 1	$ 4,558,594	100.00

The petitioner's records either are lacking or do not permit computations of the dollar amounts or the percentages of sales, each year, of goods according to the end use thereof by the purchasers. Furthermore, petitioner follows the policy of not disclosing the names or identities of its customers. However, petitioner's records for 1936-1939 provide information from which the compilations can be made of the general nature of the businesses of petitioner's customers and, to some extent, the dollar amounts of sales to customers according to the customer's business. Large percentages of petitioner's sales were made to plumbing and heating contractors which classification is an accepted trade designation which includes, for example, all master plumbers who are engaged in the work of installing, repairing, and maintaining plumbing and heating fixtures and equipment, as well as contractors who install, under subcontracts, plumbing and heating equipment in new buildings. The following schedule shows petitioner's customers, by business grouping, during 1936-1939, inclusive, and, where available, the dollar amounts of sales each year to the various groups of customers:

Table 3
Sales by Groups of Customers
Customer groups	1936	1937
(1) Plumbing and heating contractors	$ 2,356,627	$ 2,498,073
(2) Industrial	994,022	1,120,545
(3) Wholesalers	169,788	191,322
(4) Govts., Fed., State, mun	111,859	145,028
(5) Private	1	1
(6) Fabricators	1	1
(7) General contractors	1	1
(8) Hardware dealers	1	1
(9) Unclassified	1,270,843	1,097,446
	2 $ 4,903,139	2 $ 5,052,414

Table 3
Sales by Groups of Customers
Customer groups	1938	1939
(1) Plumbing and heating contractors	$ 2,344,330	$ 2,753,985
(2) Industrial	1,340,988	1,198,874
(3) Wholesalers	202,497	245,338
(4) Govts., Fed., State, mun	149,526	199,606
(5) Private	47,937	39,840
(6) Fabricators	28,479	23,685
(7) General contractors	33,153	59,709
(8) Hardware dealers	78,183	95,183
(9) Unclassified	166,133	164,149
	2 $ 4,391,226	2 $ 4,780,369

Based upon the foregoing table, the following schedule sets forth the percentage of petitioner's total sales in each year to each group of purchasers. (Petitioner's records were not kept prior to 1936 in such way as to show the amounts of sales each year to customers by classifications.)

Percentage Breakdown of Sales
Customers by groups	1936	1937	1938	1939
(1) Plumbing and heating contractors	48.06	49.44	53.39	57.61
(2) Industrial	20.27	22.18	30.54	25.08
(3) Wholesalers	3.46	3.79	4.61	5.13
(4) Governments	2.28	2.87	3.41	4.18
(5) Private institutions			1.09	0.83
(6) Fabricators			0.65	0.50
(7) General contractors			0.75	1.25
(8) Hardware dealers			1.78	1.99
(9) Unclassified	25.92	21.72	3.78	3.43

Large amounts of the goods sold by petitioner were purchased by contractors for installation in new construction of all types including new residences, apartments, schools, hospitals, university buildings, office buildings, power plants, county and city water and sewerage systems, store buildings, commercial buildings, meat packing plants, factories, irrigation systems, installations of wells, public buildings, oil and sugar refineries, an airport administration building, and public works constructed by State and Federal agencies.

Some of the goods sold by petitioner were used by the purchasers in connection with repairs, replacements, and maintenance in existing structures.

The uses made by some of petitioner's customers of goods which they purchased are not readily classified.

Where the uses of goods sold by petitioner were in industrial plants, the goods were sometimes used in connection with plant equipment which was used in manufacturing processes.

According to certain records of the petitioner which were maintained in 1938 and 1939, petitioner classified its customers in groups, as is shown in Exhibit 14, and as is shown in the following schedule. Exhibit 14 is incorporated herein by reference.

Table 4

Types of Accounts

A. Wholesalers.

B. Plumbing and heating contractors.

C. Classified "industrial" sales:

1. Food and kindred products.

2. Textiles.

3. Chemical.

4. Iron and steel (not incl. machinery).

5. Oil.

6. Gas.

7. Pulp and paper.

8. Railroad.

9. Shipbuilding.

10. Rubber.

11. Water supply and drainage.

12. Mining.

13. Machinery (excl. transp. equip.).

14. Lumber and forest products.

15. Electric light and power.

16. Automotive.

17. Laundries and dry cleaning estabs.

18. Well drillers.

19. Hotels.

20. Real estate and resorts.

21. Fire apparatus.

22. Florist.

23. Sheet metal works.

24. Tin and roofing.

25. Hatcheries.

26. Electric appliances.

27. Elevator and grain companies.

28. Electric companies and contractors.

29. Farms and farmers.

30. Tractor and impl. companies.

31. Dept. stores.

32. Coal docks.

33. Greenhouses.

34. Refrigeration companies.

35. Consumers.

D. Sales to Federal, State, and municipal governments.

E. Schools, colleges, hospitals, and other private institutions.

F. Fabricators.

G. General contractors.

H. Hardware dealers.

I. Unclassified.

The following table sets forth the capital stock, surplus, and the net worth of petitioner at the beginning of each year in the period 1899-1939:

Table 5
	Capital		Net
Year 1	stock	Surplus	worth
1899	$ 200,000	$ 67,942	$ 267,942
1900	200,000	93,116	293,116
1901	200,000	62,221	262,221
1902	200,000	64,457	264,457
1903	200,000	85,585	285,585
1904	200,000	92,055	292,055
1905	200,000	87,013	287,013
1906	200,000	99,159	299,159
1907	200,000	218,045	418,045
1908	400,000	100,685	500,685
1909	400,000	125,232	525,232
1910	800,000	23,557	823,557
1911	800,000	170,848	970,848
1912	800,000	335,053	1,135,053
1913	1,000,000	155,923	1,155,923
1914	1,000,000	282,781	1,282,781
1915	1,000,000	425,155	1,425,155
1916	1,500,000	589,217	2,089,217
1917	1,500,000	544,621	2,044,621
1918	1,500,000	631,987	2,131,987
1919	1,500,000	601,160	2,101,160
1920	1,500,000	699,469	2,199,469
1921	$ 2,000,000	$ 943,908	$ 2,943,908
1922	2,000,000	327,150	2,327,150
1923	2,000,000	327,207	2,327,207
1924	2,000,000	397,863	2,397,863
1925	2,000,000	315,856	2,315,856
1926	2,000,000	296,329	2,296,329
1927	2,000,000	387,083	2,387,083
1928	2,000,000	218,589	2,218,589
1929	2,000,000	178,024	2,178,024
1930	2,000,000	170,640	2,170,640
1931	2,000,000	24,341	2,024,341
1932	2,000,000	2,158	2,022,158
1933	2,000,000	(63,154)	1,936,845
1934	2,000,000	(70,104)	1,929,895
1935	2,000,000	(12,191)	1,987,808
1936	2,000,000	51,139	2,051,139
1937	2,000,000	136,741	2,136,741
1938	2,000,000	188,778	2,188,778
1939	2,000,000	160,917	2,160,917
Averages:
1922-1939	2,000,000	168,743	2,168,743
1936-1939	2,000,000	134,394	2,134,394

During the years 1899-1925, inclusive, petitioner borrowed capital from Crane of Illinois and from L. P. Ordway. Its total borrowed capital, and the amounts borrowed from Crane of Illinois and from L. P. Ordway, are set forth in the following table. During the years 1918-1939, inclusive (except 1923), the petitioner loaned funds to Crane of Illinois. From 1926 through 1939, petitioner did not borrow funds from either Crane of Illinois or L. P. Ordway, or from any other source; it loaned funds to Crane of Illinois as the following table shows. The following table shows, also, the ratios, in percentages, of the advances to Crane of Illinois to petitioner's net worth:

Table 6
				Advances to Crane Co.
	Borrowed capital			(Ill.)
Year
	Total	From	From L.P.		Ratio (per
	borrowed	Crane Co.	Ordway	Amount	cent) to net
	capital				worth
1899	$ 42,084	$ 17,648	$ 24,436
1900	191,044	94,822	96,222
1901	116,558	53,078	63,480
1902	220,150	171,496	48,654
1903	318,802	270,245	48,557
1904	397,696	333,380	64,316
1905	468,232	385,913	82,319
1906	667,426	626,928	40,498
1907	693,027	688,541	4,486
1908	701,562	645,272	56,290
1909	679,382	619,232	60,150
1910	724,928	724,928
1911	646,829	566,984	79,845
1912	717,249	684,166	33,083
1913	942,148	869,804	72,344
1914	833,287	759,314	73,973
1915	743,698	680,732	62,966
1916	695,252	618,487	76,765
1917	392,755	242,881	149,874
1918	112,970		112,970	$ 48,122	2.26
1919	29,179		29,179	360,401	17.15
1920	134,740		134,740	29,157	1.33
1921	187,047		187,047	14,328	.49
1922	103,453		103,453	44,210	1.90
1923	257,230	187,428	69,802
1924	100,059		100,059	158,899	6.63
1925	100,806		100,806	267,764	11.56
1926				172,479	7.51
1927				554,864	23.24
1928				733,133	33.05
1929				510,620	23.44
1930				389,371	17.94
1931				369,735	18.26
1932				375,065	18.73
1933				390,297	20.15
1934				218,725	11.33
1935				202,443	10.18
1936				262,176	12.78
1937				219,887	10.29
1938				394,789	18.04
1939				517,487	23.95

In the period 1899-1939, the petitioner received no tax-exempt income, either in the form of dividends from domestic corporations, or in the form of tax-exempt interest on Federal, State, or municipal bonds.

Petitioner's average net profit before Federal income taxes during the base period years was higher than its average net profit during the period 1922-1939. Petitioner's average net profit before taxes during the base period years was $ 199,913, or 110.7 per cent of $ 180,560, its average net profit for the period 1922-1939. The period of petitioner's highest profits embraces the 5 years 1916-1920, inclusive. In these 5 years, petitioner's average net profit before taxes amounted to $ 733,885. In the period 1899-1939, omitting the years 1916-1920 (that is 1899-1915 and 1921-1939), petitioner's average net profit before taxes amounted to $ 177,682. Petitioner's average net profit before taxes in the period 1916-1920, $ 733,885, equaled 367.1 per cent of the average for the base period years, and 413.0 per cent of the average for the periods 1899-1915 and 1921-1939. The following table sets forth petitioner's profit or loss for each of the years 1899 to 1939, inclusive:

Table 7
	Petitioner's
	profit (or	Index
Year	loss) before	1922-1939
	Federal	Average=100
	income taxes
1899	$ 225,002	124.6
1900	112,870	62.5
1901	104,437	57.8
1902	121,128	67.1
1903	106,470	59.0
1904	74,961	41.5
1905	92,146	51.0
1906	118,885	65.8
1907	202,640	112.2
1908	124,547	69.0
1909	178,325	98.8
1910	307,291	170.2
1911	164,205	90.9
1912	250,870	138.9
1913	279,654	154.9
1914	270,076	149.6
1915	317,234	175.7
1916	770,820	426.9
1917	609,884	337.8
1918	572,982	317.3
1919	799,209	442.6
1920	916,530	507.6
1921	95,734	53.0
1922	186,915	103.5
1923	314,065	173.9
1924	138,233	76.6
1925	211,215	117.0
1926	$ 339,998	188.3
1927	271,857	150.6
1928	354,301	196.2
1929	388,777	215.3
1930	121,730	67.4
1931	46,679	25.9
1932	(63,159)	(35.0)
1933	(4,279)	(2.4)
1934	69,030	38.2
1935	75,067	41.6
1936	234,869	130.1
1937	244,423	135.4
1938	62,441	34.6
1939	257,920	142.8
Averages:
1922-1939	$ 180,560	100.0
1936-1939	199,913	110.7
1916-1920	733,885	406.4
1899-1939	245,511	136.0
1899-1939 (less
1916-1920)	177,682	98.4
1916-1920 compared to:
1936-1939		367.1
1899-1939 (less
1916-1920)		413.0
1899-1939		298.9

Petitioner's average net sales during the base period years amounted to $ 4,485,605, or 92.3 per cent of the average for the period 1922-1939. Petitioner's average net sales in the period 1922-1939 amounted to $ 4,857,500. Petitioner's annual net sales reached their height in the period 1916-1930. In each of these years, petitioner's sales exceeded $ 5,153,000, and within the period 1916-1930, annual sales exceeded $ 6,000,000 from 1919 to 1926, inclusive, with the exception of 1921. On the other hand, sales did not exceed $ 4,705,000 in any year prior to 1916 or after 1930. The following table sets forth petitioner's annual net sales for the period 1899-1939, and an index thereof based on an average of 100 for the years 1922-1939:

Table 8
		Index
		1922-1939
Year	Net sales	Average = 100
1899	$ 1,183,298	24.4
1900	1,120,360	23.1
1901	1,388,291	28.6
1902	1,664,665	34.3
1903	1,787,702	36.8
1904	1,668,579	34.4
1905	1,946,889	40.1
1906	2,357,168	48.5
1907	2,669,774	55.0
1908	2,399,961	49.4
1909	3,152,196	64.9
1910	4,082,058	84.0
1911	3,812,818	78.5
1912	4,350,373	89.6
1913	4,578,827	94.3
1914	4,519,168	93.0
1915	4,463,727	91.9
1916	5,769,773	118.8
1917	5,843,632	120.3
1918	5,317,868	109.5
1919	6,717,343	138.3
1920	8,239,292	169.6
1921	$ 5,275,949	108.6
1922	6,308,885	129.9
1923	6,762,667	139.2
1924	6,038,764	124.3
1925	6,477,829	133.4
1926	6,232,134	128.3
1927	5,393,860	111.0
1928	5,674,483	116.8
1929	5,939,553	122.3
1930	5,153,169	106.1
1931	4,067,710	83.7
1932	2,629,696	54.1
1933	2,186,544	45.0
1934	3,039,061	62.6
1935	3,588,221	73.9
1936	4,620,422	95.1
1937	4,704,547	96.9
1938	4,110,577	84.6
1939	4,506,875	92.8
Average:
1922-1939	4,857,500	100.0
1936-1939	4,485,605	92.3

The ratio of petitioner's average net income during the base period years, $ 199,913, to average net sales during the base period years, $ 4,485,605, was 4.45677 per cent. This base period ratio of net income to sales was 119.9 per cent of the ratio of 3.71714 for the period 1922-1939, when average net income and net sales amounted to $ 180,560 and $ 4,857,500, respectively. The ratio of petitioner's average net income during the base period years, $ 199,913, to average net worth during the base period years, $ 2,134,394, was 9.36627 per cent. This base period ratio of net income to net worth was 112.5 per cent of the ratio of 8.32556 for the period 1922-1939, when petitioner's average net worth was $ 2,168,743. The following table sets forth the ratios of petitioner's net income to net sales and to net worth for each of the years 1899-1939, together with indices based upon an average of 100 for the period 1922-1939:

Table 9 1
	Ratio of	Index	Ratio of	Index
Year	net income	1922-1939	net income	1922-1939
	to net sales	Average = 100	to net worth	Average = 100
1899	19.014	511.5	83.974	1008.6
1900	10.074	271.0	38.507	462.5
1901	7.523	202.4	39.828	478.4
1902	7.276	195.7	45.803	550.1
1903	5.956	160.2	37.281	447.8
1904	4.492	120.9	25.667	308.3
1905	4.733	127.3	32.105	385.6
1906	5.044	135.7	39.740	477.3
1907	7.590	204.2	48.473	582.2
1908	5.189	139.6	24.875	298.8
1909	5.657	152.2	33.952	407.8
1910	7.528	202.5	37.313	448.2
1911	4.307	115.9	16.914	203.1
1912	5.767	155.2	22.102	265.5
1913	6.107	164.3	24.193	290.6
1914	5.976	160.8	21.054	252.9
1915	7.107	191.2	22.260	267.4
1916	13.360	359.4	36.895	443.1
1917	10.436	280.8	29.828	358.3
1918	10.775	289.9	26.875	322.8
1919	11.898	320.1	38.037	456.8
1920	11.124	299.3	41.671	500.5
1921	1.814	48.8	3.252	39.1
1922	2.963	79.7	8.032	96.5
1923	4.644	124.9	13.495	162.1
1924	2.289	61.6	5.765	69.2
1925	3.261	87.7	9.120	109.5
1926	5.456	146.8	14.806	177.8
1927	5.040	135.6	11.389	136.8
1928	6.244	168.0	15.970	191.8
1929	6.546	176.1	17.850	214.4
1930	2.362	63.5	5.608	67.4
1931	1.147	30.9	2.306	27.7
1932	(2.402)	(64.6)	(3.155)	(37.9)
1933	(0.196)	(5.3)	(0.221)	(2.7)
1934	2.271	61.1	3.577	43.0
1935	2.092	56.3	3.776	45.4
1936	5.083	136.8	11.451	137.5
1937	5.195	139.8	11.439	137.4
1938	1.519	40.9	2.853	34.3
1939	5.723	154.0	11.936	143.4
Averages:
1922-1939	3.717	100.0	8.326	100.0
1936-1939	4.457	119.9	9.366	112.5

During the base period years, petitioner's average profit from business done in Montana amounted to $ 44,803, or 116.9 per cent of $ 38,338, the average profit during the period 1922-1939. Petitioner's average profit during the base period years in its sales territory other than Montana also exceeded its average profit during the period 1922-1939. Average profits in the base period years in this area amounted to $ 155,110, or 109.1 per cent of average profits during the period 1922-1939. The following table shows, for the years 1920-1939, petitioner's total profit (or loss) before Federal income taxes, and the respective portions of its total profit (or loss) derived from its business in Montana and from business done in the balance of its sales territory other than Montana.

Table 10
Petitioner's Profit (or Loss) Before Federal Income Taxes
		Index		Index	Total	Index
		1922-1939	Montana	1922-1939	less	1922-1939
Year	Total	Average=	only	Average=	Montana	Average=
		100		100		100
1920	$ 916,530	507.6	$ 101,492	264.7	$ 815,038	585.2
1921	95.734	53.0	(7,022)	(18.3)	102,756	73.7
1922	186,915	103.5	19,162	50.0	167,753	120.4
1923	314,065	173.9	24,458	63.8	289,607	214.4
1924	138,233	76.6	20,202	52.7	118,031	84.7
1925	211,215	117.0	11,587	30.2	199,628	143.3
1926	339,998	188.3	49,329	128.7	290,669	208.7
1927	271,857	150.6	66,611	173.7	205,246	147.4
1928	354,301	196.2	101,585	265.0	252,716	181.4
1929	388,777	215.3	95,314	248.6	293,463	210.7
1930	121,730	67.4	35,177	91.8	86,553	62.1
1931	46,679	25.9	22,087	57.6	24,592	17.7
1932	(63,159)	(35.0)	(12,061)	(31.5)	(51,098)	(36.7)
1933	(4,279)	(2.4)	8,493	22.2	(12,772)	(9.2)
1934	69,030	38.2	20,230	52.8	48,800	35.0
1935	75,067	41.6	48,696	127.0	26,371	18.9
1936	234,869	130.1	42,628	111.2	192,241	138.0
1937	244,423	135.4	74,923	195.4	169,500	121.7
1938	62,441	34.6	9,772	25.5	52,669	37.8
1939	257,920	142.8	51,891	135.4	206,029	147.9
Averages:
1922-1939	180,560	100.0	38,338	100.0	1 142,222	100.0
1936-1939	199,913	110.7	44,803	116.9	155,110	1 109.1

During the base period years, the average sales made by petitioner's branch offices in Montana considerably exceeded sales made by those offices in the period 1922-1939. Average sales in Montana (including sales made in Wyoming), during the base period years amounted to $ 752,778, or 125.03 per cent of $ 602,090, the average for the period 1922-1939. On the other hand, petitioner's average sales during the base period years in the balance of its sales territory amounted to $ 3,732,827, or only 87.7 per cent of $ 4,255,409, the average for the period 1922-1939. In petitioner's sales territory other than Montana, average sales in the base period years amounted to 86.74 per cent of the 1922-1939 average in Minnesota; 90.68 per cent in North Dakota; and 91.07 per cent in South Dakota. The following table shows, for the years 1922-1939, inclusive, petitioner's total annual sales and the annual sales in the 4 States in which petitioner maintained branch offices:

Table 11
	Total	Minnesota1	Montana 2	North	South
Year	sales			Dakota 3	Dakota 4
1922	$ 6,308,885	$ 4,628.057	$ 613,291	$ 608,675	$ 458,862
1923	6,762,667	5,074,105	604,916	630,303	453,343
1924	6,038,764	4,648,706	430,071	501,090	458,897
1925	6,477,829	4,612,214	472,786	686,307	706,540
1926	6,232,134	4,239,439	561,400	750,538	680,757
1927	5,393,860	3,556,295	619,176	635,944	582,445
1928	5,674,483	3,480,457	819,063	679,129	695,834
1929	5,939,553	3,671,579	913,028	648,486	706,460
1930	5,153,169	3,249,707	664,562	594,374	644,526
1931	4,067,710	2,632,587	516,114	364,970	554,039
1932	2,629,696	1,842,464	267,525	223,179	296,528
1933	2,186,544	1,441,506	243,350	206,576	295,112
1934	3,039,061	1,906,870	454,709	321,546	355,936
1935	3,588,221	2,170,433	646,535	386,012	385,241
1936	4,620,422	2,917,411	718,575	470,459	513,977
1937	4,704,547	2,951,025	814,042	453,414	486,066
1938	4,110,577	2,550,830	749,541	407,505	402,701
1939	4,506,875	2,839,959	728,956	495,084	442,876
Averages:
1936-1939	4,485,605	2,814,806	752,778	456,615	461,405
1922-1939	4,857,500	3,245,202	602,090	503,533	506,674
Per cent:
1936-1939 to
1922-1939	92.34	86.74	125.03	90.68	91.07

If the annual totals for petitioner's net sales are adjusted for fluctuations in the wholesale price index of metals and metal products, the adjusted figures show a rise from a low point in the years 1917 and 1918 to a high point in 1925, and a decline to a low point in 1933. In each of the years 1916 to 1920, inclusive, the adjusted figures for petitioner's net sales are lower than in any year during the period 1922 to 1930, inclusive. Petitioner's average net sales in the period 1916-1920, as adjusted, amounted to $ 4,675,056, or only 78.7 per cent of $ 5,940,508, the average for 1922-1930. On the other hand, petitioner's average taxable income in the period 1916-1920 was the highest in its history. During this period, petitioner's average taxable income amounted to $ 733,885, or 283.8 per cent of $ 258,566, the average for the period 1922-1930. Similarly, petitioner's average taxable income during the base period years, $ 199,913, was higher than $ 180,560, the average for 1922-1939, whereas petitioner's average net sales during the base period years, as adjusted, $ 4,824,066, were less than $ 5,069,104, the average for 1922-1939.

The following table shows, for the years 1900 to 1939, inclusive, petitioner's net sales, the wholesale price index for metals and metal products, petitioner's net sales as adjusted for fluctuations in the latter index, and petitioner's taxable income before Federal income tax.

Table 12 1
		Wholesale price
	Petitioner's	index, metals
Year	net	and metal
	sales	products 1926=100
1900	$ 1,120,360	98.0
1901	1,388,291	93.1
1902	1,664,665	91.0
1903	1,787,702	90.2
1904	1,668,579	79.9
1905	1,946,889	89.1
1906	2,357,168	102.4
1907	2,669,774	109.8
1908	2,399,961	86.3
1909	3,152,196	84.5
1910	4,082,058	85.2
1911	3,812,818	80.8
1912	4,350,373	89.5
1913	4,578,827	90.8
1914	4,519,168	80.2
1915	4,463,727	86.3
1916	5,769,773	116.5
1917	5,843,632	150.6
1918	5,317,868	136.5
1919	6,717,343	130.9
1920	8,239,292	149.4
1921	5,275,949	117.5
1922	6,308,885	102.9
1923	6,762,667	109.3
1924	6,038,764	106.3
1925	6,477,829	103.2
1926	6,232,134	100.0
1927	5,393,860	96.3
1928	5,674,483	97.0
1929	5,939,553	100.5
1930	5,153,169	92.1
1931	4,067,710	84.5
1932	2,629,696	80.2
1933	2,186,544	79.8
1934	3,039,061	86.9
1935	3,588,221	86.4
1936	4,620,422	87.0
1937	4,704,547	95.7
1938	4,110,577	95.7
1939	4,506,875	94.4
Averages:
1916-1920
1922-1930
1922-1939
1936-1939
Percentages:
1916-1920 to
1922-1930
1936-1939 to
1922-1939

Table 12 1
	Petitioner's net
	sales as	Petitioner's
	adjusted by metals	taxable income
	and metal	before Federal
	products wholesale	income tax
	price index
1900	$ 1,143,224	$ 112,870
1901	1,491,182	104,437
1902	1,829,302	121,128
1903	1,981,931	106,470
1904	2,088,334	74.961
1905	2,185,060	92,146
1906	2,301,921	118,885
1907	2,431,488	202,640
1908	2,780,951	124,547
1909	3,730,409	178,325
1910	4,791,147	307,291
1911	4,718,834	164,205
1912	4,860,751	250,870
1913	5,042,761	279,654
1914	5,634,872	270,076
1915	5,172,337	317,234
1916	4,952,594	770,820
1917	3,880,233	609,884
1918	3,895,873	572,982
1919	5,131,660	799,209
1920	5,514,921	916,530
1921	4,490,169	95,734
1922	6,131,083	186,915
1923	6,187,252	314,065
1924	5,680,869	138,233
1925	6,276,966	211,215
1926	6,232,134	339,998
1927	5,601,100	271,857
1928	5,849,982	354,301
1929	5,910,002	388,777
1930	5,595,188	121,730
1931	4,813,857	46,679
1932	3,278,922	(63,159)
1933	2,740,030	(4,279)
1934	3,497,193	69,030
1935	4,153,033	75,067
1936	5,310,830	234,869
1937	4,915,932	244,423
1938	4,295,273	62,441
1939	4,774,231	257,920
Averages
1916-1920	$ 4,675,056	$ 733,885
1922-1930	5,940,508	258,566
1922-1939	5,069,104	180,560
1936-1939	4,824,066	199,913
Percentages:
1916-1920 to
1922-1930	78.7	283.8
1936-1939 to
1922-1939	95.2	110.7

The Central Supply Association is a trade association of wholesalers of plumbing and heating equipment and supplies who sell the same general line of merchandise as the petitioner sells. Its membership consists of corporations, partnerships, and proprietorships located in more than 20 States in the central part of the United States. The area in which its members are located extends from Montana to New Mexico, south, from Tennessee to West Virginia, eastward, and from Pennsylvania to the Canadian border, northward. During the base period years the Central Supply Association had approximately 380 members.

In the years 1927 to 1930, inclusive, and 1934 to 1939, inclusive, the association collected information from its members pertaining to their operations. No data was collected for the years 1931, 1932, or 1933. The following table shows the number of members who reported information, the total net sales reported by such members, and the average net sales per reporting member for the periods 1927-1930 and 1934-1939:

	Number	Total net sales	Average
Year	of members	reported	net sales
	reporting		per reporting
			member
1927	134	$ 106,000,000	$ 791,000
1928	120	100,000,000	835,000
1929	157	132,000,000	843,000
1930	203	114,000,000	564,000
1934	164	36,000,000	218,000
1935	187	52,000,000	281,000
1936	152	56,000,000	366,000
1937	175	81,000,000	463,000
1938	183	68,000,000	372,000
1939	179	83,000,000	461,000

During the base period years, the average value of total construction contracts awarded in the Ninth Federal Reserve District, other than Montana, amounted to $ 96,244,000, or 99 per cent of $ 97,186,000, the average for 1922-1939. The average value of residential construction contracts awarded in this area during the base period years equaled 92.0 per cent of the average for 1922-1939, and the value of nonresidential construction 101.8 per cent of the 1922-1939 average. During the base period years, petitioner's average net sales in the same area (Minnesota, North Dakota, South Dakota, northwest Wisconsin, and the northern peninsula of Michigan) equaled $ 3,732,827, or 87.7 per cent of the 1922-1939 average. The following tables show, for the years 1919 to 1939, the total value of building construction contracts awarded in the Ninth Federal Reserve District, the portions thereof representing residential and nonresidential construction, the petitioner's total net sales in the same geographical area, and indices thereof in which the 1922-1939 average equals 100:

Table 13
Value of Building Construction Contracts Awarded in the Ninth Federal Reserve
District, Other Than Montana
Year	Total 1	Residential 1	Nonresidential 1	Petitioner's
				sales
1919	$ 91,676,000	$ 30,256,000	$ 61,420,000	$ 6,206,591
1920	109,978,000	25,358,000	84,620,000	7,565,186
1921	98,212,000	26,876,000	71,336,000	4,770,145
1922	93,651,000	29,980,000	63,671,000	5,695,594
1923	144,432,000	48,243,000	96,189,000	6,157,751
1924	102,387,000	39,592,000	62,795,000	5,608,693
1925	113,011,000	47,066,000	65,945,000	6,005,043
1926	123,678,000	45,798,000	77,880,000	5,670,734
1927	110,122,000	41,392,000	68,730,000	4,774,684
1928	110,876,000	39,878,000	70,998,000	4,855,420
1929	124,675,000	28,337,000	96,338,000	5,026,525
1930	117,495,000	21,932,000	95,563,000	4,488,607
1931	99,008,000	19,755,000	79,253,000	3,551,596
1932	60,465,000	8,055,000	52,410,000	2,362,171
1933	41,854,000	6,014,000	35,840,000	1,943,194
1934	55,859,000	4,719,000	51,140,000	2,584,352
1935	66,869,000	12,719,000	54,150,000	2,941,686
1936	91,969,000	19,174,000	72,795,000	3,901,847
1937	92,182,000	23,401,000	68,781,000	3,890,505
1938	96,283,000	25,854,000	70,429,000	3,361,036
1939	104,542,000	32,684,000	71,858,000	3,777,919
Average:
1936-1939	$ 96,244,000	$ 25,278,000	$ 70,966,000	$ 3,732,827
1922-1939	97,186,000	27,477,000	69,709,000	4,255,409

Indices:
1936-1939	99.0	92.0	101.8	87.7
1922-1929	100.0	100.0	100.0	100.0

Table 14
Indices-Value of Building Construction Contracts Awarded in the
Ninth Federal Reserve District, Other Than Montana
Year	Total contract	Residential	Nonresidential	Petitioner's
	index 1	index 1	index 1	sales index 1
1919	94.3	110.1	88.1	145.9
1920	113.2	92.3	121.4	177.8
1921	101.1	97.8	102.3	112.1
1922	96.4	109.1	91.3	133.8
1923	148.6	175.6	138.0	144.7
1924	105.4	144.1	90.1	131.8
1925	116.3	171.3	94.6	141.1
1926	127.3	166.7	111.7	133.3
1927	113.3	150.6	98.6	112.2
1928	114.1	145.1	101.8	114.1
1929	128.3	103.1	138.2	118.1
1930	120.9	79.8	137.1	105.5
1931	101.9	71.9	113.7	83.5
1932	62.2	29.3	75.2	55.5
1933	43.1	21.9	51.4	45.7
1934	57.5	17.2	73.4	60.7
1935	68.8	46.3	77.7	69.1
1936	94.6	69.8	104.4	91.7
1937	94.9	85.2	98.7	91.4
1938	99.1	94.1	101.0	79.0
1939	107.6	119.0	103.1	88.8

According to statistics prepared by the F. W. Dodge Corporation, the average value of construction contracts awarded in the States of Minnesota, North Dakota, and South Dakota during the base period years amounted to $ 76,090,000, or 101.8 per cent of $ 74,742,000, the average during the period 1922-1939. Petitioner's average net sales from its branch offices located in these 3 States during the base period years amounted to $ 3,732,827, or 87.7 per cent of the 1922-1939 average. In Minnesota, the average value of construction contracts awarded during the base period was 99.4 per cent of the 1922-1939 average; in North Dakota, 114 per cent; and in South Dakota, 107.6 per cent. Petitioner's average base period sales in Minnesota were 86.7 per cent of sales during the period 1922-1939; in North Dakota, 90.7 per cent; and in South Dakota 91.1 per cent. The following tables show, for the years 1922-1939, the value of construction contracts awarded and petitioner's sales in each of the States of Minnesota, North Dakota, and South Dakota, and the totals thereof, together with indices based on an average of 100 for the period 1922-1939:

Table 15
Minnesota
	Value of
Year	construction	Index	Petitioner's	Index
	contracts awarded		sales
1922	$ 67,073,000	113.8	$ 4,628,057	142.6
1923	103,955,000	176.4	5,074,105	156.4
1924	67,237,000	114.1	4,648,706	143.2
1925	77,529,000	131.6	4,612,214	142.1
1926	78,828,000	133.8	4,239,439	130.6
1927	62,171,000	105.5	3,556,295	109.6
1928	54,918,000	93.2	3,480,457	107.2
1929	63,052,000	107.0	3,671,579	113.1
1930	67,727,000	115.0	3,249,707	100.1
1931	57,140,000	97.0	2,632,587	81.1
1932	36,881,000	62.6	1,842,464	56.8
1933	25,315,000	43.0	1,441,506	44.4
1934	29,588,000	50.2	1,906,870	58.8
1935	34,757,000	59.0	2,170,433	66.9
1936	53,377,000	90.6	2,917,411	89.9
1937	54,739,000	92.9	2,951,025	90.9
1938	56,779,000	96.4	2,550,830	78.6
1939	69,446,000	117.9	2,839,959	87.5
Averages:
1922-1939	58,917,000	100.0	3,245,202	100.0
1936-1939	58,585,000	99.4	2,814,806	86.7

Table 16
North Dakota
	Value of
Year	construction	Index	Petitioner's	Index
	contracts awarded		sales
1922	$ 2,953,000	39.5	$ 608,675	120.9
1923	7,583,000	101.3	630,303	125.2
1924	4,108,000	54.9	501,090	99.5
1925	4,838,000	64.6	686,307	136.3
1926	9,062,000	121.1	750,538	149.1
1927	10,243,000	136.8	635,944	126.3
1928	10,412,000	139.1	679,129	134.9
1929	10,733,000	143.4	648,486	128.8
1930	8,837,000	118.1	594,374	118.0
1931	7,621,000	101.8	364,970	72.5
1932	7,620,000	101.8	223,179	44.3
1933	2,948,000	39.4	206,576	41.0
1934	6,918,000	92.4	321,546	63.9
1935	6,727,000	89.9	386,012	76.7
1936	10,626,000	142.0	470,459	93.4
1937	6,877,000	91.9	453,414	90.0
1938	8,258,000	110.3	407,505	80.9
1939	8,364,000	111.7	495,084	98.3
Averages:
1922-1939	7,485,000	100.0	503,533	100.0
1936-1939	8,531,000	114.0	456,615	90.7

Table 17
South Dakota
	Value of
Year	construction	Index	Petitioner's	Index
	contracts awarded		sales
1922	$ 6,003,000	72.0	$ 458,862	90.6
1923	11,459,000	137.4	453,343	89.5
1924	7,674,000	92.0	458,897	90.6
1925	9,709,000	116.4	706,540	139.4
1926	7,556,000	90.6	680,757	134.4
1927	8,712,000	104.5	582,445	115.0
1928	7,273,000	87.2	695,834	137.3
1929	9,467,000	113.5	706,460	139.4
1930	8,633,000	103.5	644,526	127.2
1931	10,768,000	129.1	554,039	109.3
1932	4,216,000	50.6	296,528	58.5
1933	6,258,000	75.0	295,112	58.2
1934	8,262,000	99.1	355,936	70.2
1935	8,237,000	98.8	385,241	76.0
1936	8,754,000	105.0	513,977	101.4
1937	9,498,000	113.9	486,066	95.9
1938	9,945,000	119.2	402,701	79.5
1939	7,696,000	92.3	442,876	87.4
Averages:
1922-1939	8,340,000	100.0	506,674	100.0
1939-1939	8,973,000	107.6	461,405	91.1

In dealing with comparisons of cyclical statistics, other than price data, a series of statistics pertaining to value may be reduced to a more comparable basis approximating volume by applying a price index to the value statistics. Application of an index of construction costs to the value of construction contracts awarded over a series of years would tend to eliminate fluctuations caused by fluctuations in construction costs, and the adjusted data would more closely approximate the volume of construction over the period of years.

The following table shows, for the years 1921-1939, the F. W. Dodge Corporation statistics for the value of construction contracts awarded in Montana, North Dakota, and South Dakota; for the years 1919-1939, the Federal Reserve System statistics for the value of construction contracts awarded in the Ninth Federal Reserve District other than Montana; for the years 1919-1939, the Department of Commerce composite index of construction costs, in which construction costs for 1939 are indexed at 100; and the F. W. Dodge and Federal Reserve System statistics, as modified by the composite construction cost index.

Table 18
		Value of construction
		contract awards
				Composite
				index of
				construction
Year		(Col. A)	(Col. B) Federal	costs
		Dodge	Reserve	(1939
		statistics for	statistics for	costs=
		Minn.,	9th Fed.	100) 1
		N. D.,	Reserve District
		and S. D.	(other than
			Montana)
1919		$ 91,676,000	106.0
1920		109,978,000	133.9
1921		$ 81,532,000	98,212,000	108.9
1922		76,029,000	93,651,000	97.7
1923		122,997,000	144,432,000	107.1
1924		79,019,000	102,387,000	106.2
1925		92,076,000	113,011,000	104.8
1926		95,446,000	123,678,000	105.2
1927		81,126,000	110,122,000	104.4
1928		72,603,000	110,876,000	104.5
1929		83,252,000	124,675,000	106.7
1930		85,197,000	117,495,000	102.4
1931		75,529,000	99,008,000	93.8
1932		48,717,000	60,465,000	81.1
1933		34,521,000	41,854,000	87.1
1934		44,768,000	55,859,000	94.4
1935		49,721,000	66,869,000	90.8
1936		72,757,000	91,969,000	92.8
1937		71,114,000	92,182,000	100.9
1938		74,982,000	96,283,000	99.7
1939		85,506,000	104,542,000	100.0
Averages:
	1936-1939	76,090,000	96,244,000
	1922-1939	74,742,000	97,186,000
	1919-1933		102,768,000
	1921-1933	79,080,000
Percentages:
	1936-1939 to 1922-1939	101.8	99.0
	1936-1939 to 1919-1933		93.7
	1936-1939 to 1921-1939	96.2

Table 18
		Value of construction
		contract awards
		adjusted by index of
		construction costs
Year
			Federal
		Dodge	Reserve
		statistics	statistics
		(Col. A)	(Col. B)
1919		$ 86,487,000
1920		82,134,000
1921		$ 74,869,000	90,185,000
1922		77,819,000	95,856,000
1923		114,843,000	134,857,000
1924		74,406,000	96,410,000
1925		87,859,000	107,835,000
1926		90,728,000	117,565,000
1927		77,707,000	105,481,000
1928		69,477,000	106,101,000
1929		78,024,000	116,846,000
1930		83,200,000	114,741,000
1931		80,521,000	105,552,000
1932		60,070,000	74,556,000
1933		39,634,000	48,053,000
1934		47,424,000	59,173,000
1935		54,759,000	73,644,000
1936		78,402,000	99,105,000
1937		70,480,000	91,360,000
1938		75,208,000	96,573,000
1939		85,506,000	104,542,000
Averages:
	1936-1939	79,399,000	97,895,000
	1922-1939	74,782,000	97,125,000
	1919-1933		98,844,000
	1921-1933	77,627,000
Percentages:
	1936-1939 to 1922-1939	106.2	100.8
	1936-1939 to 1919-1933		99.0
	1936-1939 to 1921-1939	102.3

The following table shows the petitioner's net sales and the gross income of all corporations filing returns in the States of Minnesota, Montana, North Dakota, and South Dakota, for each of the years 1916-1939:

Table 19
			Gross income
	Petitioner's		of corps in
Year	net sales 1	Index 2	Minn., Mont.,	Index 2
			N. Dak., and
			S. Dak.
1916	$ 5,769,773	118.8	$ 990,000,000	34.3
1917	5,843,632	120.3	2,937,000,000	101.8
1918	5,317,868	109.5	2,715,000,000	94.1
1919	6,717,343	138.3	2,766,000,000	95.8
1920	8,239,292	169.6	3,344,000,000	115.9
1921	5,275,949	108.6	2,533,000,000	87.8
1922	6,308,885	129.9	2,900,000,000	100.5
1923	6,762,667	139.2	2,939,000,000	101.8
1924	6,038,764	124.3	3,175,000,000	110.0
1925	6,477,829	133.4	3,302,000,000	114.4
1926	6,232,134	128.3	3,302,000,000	114.4
1927	5,393,860	111.0	3,460,000,000	119.9
1928	5,674,483	116.8	3,616,000,000	125.3
1929	5,939,553	122.3	3,573,000,000	123.8
1930	5,153,169	106.1	3,080,000,000	106.7
1931	4,067,710	83.7	2,374,000,000	82.3
1932	2,629,696	54.1	1,790,000,000	62.0
1933	2,186,544	45.0	1,922,000,000	66.6
1934	3,039,061	62.6	2,364,000,000	81.9
1935	3,588,221	73.9	2,632,000,000	91.2
1936	4,620,422	95.1	3,040,000,000	105.3
1937	4,704,547	96.9	3,038,000,000	105.3
1938	4,110,577	84.6	2,631,000,000	91.2
1939	4,506,875	92.8	2,816,000,000	97.6
Averages:
1922-1939	4,857,500	100.0	2,886,000,000	100.0
1936-1939	4,485,605	92.3	2,881,000,000	99.8

The petitioner's net sales (other than sales in Montana and Wyoming) constituted a smaller percentage of the value of construction contracts awarded in the Ninth Federal Reserve District (other than Montana) during the base period than during the period 1922-1939. Petitioner's net sales amounted to 4.3786 per cent of the value of construction contracts awarded in the period 1922-1939, and to only 88.58 per cent of that amount, or 3.8785 per cent, during the base period years.

The petitioner's total net sales constituted a smaller percentage of the gross income reported by all corporations filing returns in Minnesota, Montana, South Dakota, and North Dakota, during the base period than during the period 1922-1939. Petitioner's net sales amounted to .168313 per cent of the gross income reported by these corporations in the period 1922-1929, and to only 92.5 per cent of that amount, or .155696 per cent, during the base period years.

The following table, derived from the foregoing tables, sets forth the ratio of petitioner's net sales (other than sales in Montana and Wyoming) to the value of construction contracts awarded in the Ninth Federal Reserve District (other than Montana), for the years 1919-1939, and the ratio of petitioner's total net sales to the gross income reported by all corporations filing returns in Minnesota, Montana, South Dakota, and North Dakota, for the years 1916-1939, inclusive:

Table 20
	Petitioner's net
	sales (other	Petitioner's net
	than Montana)	sales as percentage
	as percentage	of total gross
	of the value of	income reported
Year	construction	by all corporations
	contracts	filing
	awarded in	returns in
	Ninth Federal	Minn., Mont.,
	Reserve	S. D., and
	District (other	N. D. 1
	than Montana) 1
1916		0.5828
1917		0.1990
1918		0.1959
1919	6.77	0.2429
1920	6.88	0.2464
1921	4.86	0.2083
1922	6.08	0.2175
1923	4.26	0.2301
1924	5.48	0.1902
1925	5.31	0.1962
1926	4.59	0.1887
1927	4.34	0.1559
1928	4.38	0.1569
1929	4.03	0.1662
1930	3.82	0.1673
1931	3.59	0.1713
1932	3.91	0.1469
1933	4.64	0.1138
1934	4.63	0.1286
1935	4.40	0.1363
1936	4.24	0.1520
1937	4.22	0.1549
1938	3.49	0.1562
1939	3.61	0.1600
Averages:
1922-1939	4.3786	0.168313
1936-1939	3.8785	0.155696
Percentage:
1936-1939 to
1922-1939	88.58	92.50

According to a study prepared by John R. Riggleman, an expert economist, there was substantially less construction in 65 cities in the United States⁵ during the base period years than during the period 1922-1939 or any other period after 1900 except 1917-1920 and the period immediately preceding the base period years. The Riggleman data is expressed as building permit values per capita, in terms of 1913 dollars. It was derived by reducing the total annual building permit values in the 65 cities to a per capita basis, and converting the resulting dollar per capita figure to an equivalent to 1913 dollars per capita, by use of a special index of building costs. The following table shows, for the years 1900-1939, the value of building permits per capita, expressed in 1913 dollars, for the 65 cities included in the Riggleman study:

Table 21 1
	Value of
	building	Index 1922-1939
	permits
Year	per capita	Average
	in 1913	=100
	dollars 1
1900	$ 21.73	86.4
1901	30.60	121.7
1902	30.10	119.7
1903	29.62	117.8
1904	33.35	132.6
1905	41.88	166.5
1906	41.65	165.6
1907	35.45	141.0
1908	31.73	126.2
1909	44.48	176.9
1910	38.86	154.5
1911	37.77	150.2
1912	41.00	163.0
1913	33.02	131.3
1914	29.47	117.2
1915	29.51	117.3
1916	31.19	124.0
1917	15.87	63.1
1918	7.68	30.5
1919	17.67	70.3
1920	15.26	60.7
1921	24.37	96.9
1922	$ 39.24	156.0
1923	42.01	167.0
1924	42.39	168.5
1925	49.89	198.4
1926	46.33	184.2
1927	40.18	159.8
1928	38.04	151.3
1929	33.43	132.9
1930	19.95	79.3
1931	17.01	67.6
1932	7.37	29.3
1933	6.07	24.1
1934	5.34	21.2
1935	9.42	37.5
1936	13.94	55.4
1937	13.41	53.3
1938	13.39	53.2
1939	15.37	61.1
Averages:
1936-1939	14.03	55.8
1922-1939	25.15	100.0

During the base period years, the average value of new construction in the United States (other than local transit, military and naval, highway, miscellaneous public service, conservation and development, and certain other public construction) and maintenance and repair work (other than local transit and highway repairs, and repairs by the Corps of Engineers), was less than the average value during the period 1922-1939. The average value of this construction and maintenance work during the period 1922-1939 was $ 8,759,000,000. During the base period years, the average value was $ 7,420,000,000, or only 84.7 per cent of the 1922-1939 average. The following table shows, for the years 1915 to 1939, inclusive, the annual value of construction and maintenance work in the United States, together with an index thereof in which the 1922-1939 average equals 100.

Table 22
	Value of	Index 1922-1939
Year	construction	Average
	work 1	=100
1915	$ 4,161,000,000	47.5
1916	4,829,000,000	55.1
1917	4,999,000,000	57.1
1918	4,960,000,000	56.6
1919	6,728,000,000	76.8
1920	8,154,000,000	93.1
1921	7,057,000,000	80.6
1922	8,742,000,000	99.8
1923	10,727,000,000	122.5
1924	11,695,000,000	133.5
1925	12,692,000,000	144.9
1926	13,521,000,000	154.4
1927	13,340,000,000	152.3
1928	12,973,000,000	148.1
1929	$ 12,255,000,000	139.9
1930	9,563,000,000	109.2
1931	6,786,000,000	77.5
1932	3,891,000,000	44.4
1933	3,138,000,000	35.8
1934	4,036,000,000	46.1
1935	4,621,000,000	52.8
1936	6,575,000,000	75.1
1937	7,525,000,000	85.9
1938	7,128,000,000	81.4
1939	8,452,000,000	96.5
Averages:
1936-1939	$ 7,420,000,000	84.7
1922-1939	8,759,000,000	100.0

During the base period years, the average net profit, less tax-exempt income, of all corporations filing returns in the 4 States of Minnesota, North Dakota, South Dakota, and Montana, was higher than the average for the period 1922-1939. The average compiled net profit, less tax-exempt income, for all corporations filing returns in the 4 States during the base period years was $ 39,225,000, or 108.5 per cent of $ 36,155,000, the average for 1922-1939. The following table shows, for the years 1918 to 1939, inclusive, the compiled net profit (or loss), less tax-exempt income, for all corporations filing returns in Minnesota, North Dakota, South Dakota, and Montana.

Table 23
	Net profit (or
	loss), less
	tax-exempt income,
Year	for all	Index 1922-1939
	corporations in	Average
	Minn., N. D.,	=100
	S. D., and
	Mont. 1
1918	$ 170,941,000	472.8
1919	206,607,000	571.4
1920	127,247,000	351.9
1921	(18,450,000)	(51.0)
1922	59,192,000	163.7
1923	75,462,000	208.7
1924	72,385,000	200.2
1925	110,091,000	304.5
1926	107,670,000	297.8
1927	89,394,000	247.3
1928	142,931,000	395.3
1929	123,313,000	341.1
1930	21,962,000	60.7
1931	($ 70,159,000)	(194.1)
1932	(133,976,000)	(370.6)
1933	(69,978,000)	(193.5)
1934	(39,312,000)	(108.7)
1935	4,922,000	13.6
1936	2 52,827,000	146.1
1937	2 36,396,000	100.7
1938	2 13,420,000	37.1
1939	2 54,257,000	150.1
Averages:
1922-1939	36,155,000	100.0
1936-1939	39,225,000	108.5

In the base period years, the compiled net profit, less tax-exempt income, for all corporations filing returns in the United States was higher than the average for the period 1922-1939. The average compiled net profit, less tax-exempt income, for all corporations during the base period years was $ 3,724,000,000, or 108.4 per cent of $ 3,434,000,000, the average for 1922-1939. The following table shows, for the years 1918 to 1939, inclusive, the compiled net profit (or loss), less tax-exempt income, for all corporations filing returns in the United States.

Table 24
	All corporations
	compiled profit	Index 1922-1939
Year	(or loss) less	Average=
	tax-exempt	100
	income
1918	$ 7,672,000,000	223.4
1919	8,416,000,000	245.1
1920	5,873,000,000	171.0
1921	458,000,000	13.3
1922	4,770,000,000	138.9
1923	6,308,000,000	183.7
1924	5,363,000,000	156.2
1925	7,621,000,000	221.9
1926	7,504,000,000	218.5
1927	6,510,000,000	189.6
1928	8,227,000,000	239.6
1929	8,740,000,000	254.5
1930	1,552,000,000	45.2
1931	($ 3,288,000,000)	(95.7)
1932	(5,643,000,000)	(164.3)
1933	(2,547,000,000)	(74.2)
1934	94,000,000	2.7
1935	1,696,000,000	49.4
1936	4,370,000,000	127.3
1937	4,407,000,000	128.3
1938	1,608,000,000	46.8
1939	4,509,000,000	131.3
Averages:
1922-1939	$ 3,434,000,000	100.0
1936-1939	3,724,000,000	108.4

During the base period years, the average compiled net profit, less tax-exempt income, for all corporations in the construction industries, was less than the average for the period 1922-1939. The average compiled net profit, less tax-exempt income, during the period 1922-1939 was $ 39,080,000. During the base period years, the average was $ 36,099,000, or only 92.4 per cent of the 1922-1939 average. The following schedule shows, for the years 1920-1939, inclusive, the compiled net profit (or loss), less tax-exempt income, for all corporations in the construction industries.

Table 25 1
	Compiled net profit (or loss)
	less tax-exempt income
Year		Indices
	Amount	1922-1939
		Average=
		100
1920	$ 85,343,000	218.4
1921	15,828,000	40.5
1922	39,196,000	100.3
1923	69,195,000	177.1
1924	90,694,000	232.1
1925	113,145,000	289.5
1926	108,948,000	278.8
1927	111,743,000	285.9
1928	99,537,000	254.7
1929	108,310,000	277.1
1930	68,060,000	174.2
1931	(30,348,000)	(77.7)
1932	($ 110,369,000)	(282.4)
1933	(67,808,000)	(173.5)
1934	(34,787,000)	(89.0)
1935	(6,477,000)	(16.6)
1936	28,780,000	73.6
1937	40,824,000	104.5
1938	28,706,000	73.5
1939	46,087,000	117.9
Averages:
1936-1939	$ 36,099,000	92.4
1922-1939	39,080,000	100.0

The following table shows, for the years 1918-1939, the indices for petitioner's net income before taxes, and for the compiled profit (or loss), less tax-exempt income, of all corporations filing returns in the United States; all corporations filing returns in the States of Minnesota, North Dakota, South Dakota, and Montana; and all corporations in the construction industries in the United States. In each index, the 1922-1939 average equals 100.

Table 26 1
		Compiled net profit (or loss) less
		tax-exempt income
	Petitioner's		All
Year	net profit	All	corporations in	All
	(or loss)	corporations in	Minn.,	corporations in
		the United	Mont.,	construction
		States	N. D., and	industries
			S. D.
1918	317.3	223.4	472.8	2 304.5
1919	442.6	245.1	571.4	2 362.0
1920	507.6	171.0	351.9	218.4
1921	53.0	13.3	(51.0)	40.5
1922	103.5	138.9	163.7	100.3
1923	173.9	183.7	208.7	177.1
1924	76.6	156.2	200.2	232.1
1925	117.0	221.9	304.5	289.5
1926	188.3	218.5	297.8	278.8
1927	150.6	189.6	247.3	285.9
1928	196.2	239.6	395.3	254.7
1929	215.3	254.5	341.1	277.1
1930	67.4	45.2	60.7	174.2
1931	25.9	(95.7)	(194.1)	(77.7)
1932	(35.0)	(164.3)	(370.6)	(282.4)
1933	(2.4)	(74.2)	(193.5)	(173.5)
1934	38.2	2.7	(108.7)	(89.0)
1935	41.6	49.4	13.6	(16.6)
1936	130.1	127.3	146.1	73.6
1937	135.4	128.3	100.7	104.5
1938	34.6	46.8	37.1	73.5
1939	142.8	131.3	150.1	117.9
Averages:
1922-1939	100.0	100.0	100.0	100.0
1936-1939	110.7	108.4	108.5	92.4

Petitioner's average earnings during the base period years were less than its average earnings in the period 1918-1933. During the based period years, the average compiled net profit, less tax-exempt income, of all corporations in the United States, and of all corporations in the States of Minnesota, Montana, North Dakota, and South Dakota, also was less than the 1918-1933 average. The following table, which is derived from tables set forth above, shows for the base period years and for the period 1918-1933, petitioner's average profit before Federal income taxes, and the average compiled net profit, less tax-exempt income, of all corporations in the United States and of all corporations filing returns in Minnesota, Montana, North Dakota, and South Dakota:

Table 27 1
		Compiled net profit, less
		tax-exempt income
	Petitioner's
Period	net profit
	before taxes	All corporations	Corporations
		in	in Minn.,
		United States	Mont., N. D.,
			and S. D.
1936-1939	$ 199,913	$ 3,724,000,000	$ 39,225,000
1918-1933	293,174	4,221,000,000	63,415,000
Indices:
1936-1939	68.2	88.2	61.9
1918-1933	100.0	100.0	100.0

From the entire record the following findings are made:

The average value of construction contract awards in petitioner's sales area for the base period years, as shown by the Federal Reserve Board statistics, was 99 per cent of the average of the same for the period 1922-1939, and was 101.8 per cent of the average for the period 1922-1939, according to the statistics of the F. W. Dodge Corporation. The average of the value of construction contract awards in petitioner's sales area, adjusted by use of the composite construction cost index, was somewhat higher for the base period years than was the average for the period 1922-1939. The average value of construction contract awards in petitioner's area for the base period years, using the Federal Reserve Board figures and making adjustments by use of the composite construction cost index, was 100.8 per cent of the adjusted average for 1922-1939; and the average value for the base period years, using the F. W. Dodge figures and making adjustment by use of the composite construction cost index, was 106.2 per cent of the adjusted average for 1922-1939. Therefore, it is concluded that the average value of construction contract awards in petitioner's sales area in the base period years was approximately equal to the average value during the period 1922-1939 of construction contract awards in petitioner's sales area.

The lengths of the movements of petitioner's profits, and their turning points, during the years 1922-1929, excepting the year 1926, are about the same as (if not identical with) the trends of profits (less tax-exempt income) of all corporations in the United States. The indices of both rose steadily from low points in 1921 through 1923; both declined in 1924; both rose steadily through 1926; both declined in 1927; both rose through 1929; after 1929, both indices fell sharply to low points in 1932; thereafter both rose steadily through 1937; both declined in 1938; and both rose in 1939. Also, both indices reached high points in 1923, 1929 (their highest), 1937, and 1939; and both indices fell to low points in 1924, 1927, 1932 (their lowest), and 1938. Accordingly, the pattern of petitioner's profits during the period 1922-1939 was closely similar to the pattern of the profits (less tax-exempt income) of all corporations in the United States during the same period, with the exception of 1926 in which year petitioner's profits increased and profits of all corporations decreased slightly.

Comparison of the trend of petitioner's profits during the period 1922-1939 with the trend of the profits (less tax-exempt income) of all corporations filing income tax returns in the 4 States, Minnesota, Montana, North Dakota, and South Dakota, shows the following: Both indices show a decline in 1924 for 1 year. The profits of all corporations in the 4-State area entered downward phases in 1926, 1929, and 1937, whereas petitioner's profits entered downward phases 1 year later, in each instance, namely, in 1927, 1930, and 1938, so that the duration of the decline of petitioner's profits was 1 year shorter than the decline of the profits of all corporations in the area in these three instances. However, in each instance of a decline, both indices reached low points and began recovery in the same years, namely, in 1924, 1927, 1932 (the year of the greatest depression in both indices), and 1938. Furthermore, each index shows the same general trend; both rise from low points in 1921 to very high levels in 1928 or 1929, after a decline in 1924; then both follow a pronounced decline to 1932 followed by gradual recovery to 1936 (to 1937 in the case of petitioner); followed by a downturn thereafter, and a sharp recovery in 1939. Accordingly, the pattern of petitioner's profits during the period 1922-1939 was closely similar to the pattern of the profits (less tax-exempt income) of all corporations filing returns in the 4-State area during the same period.

The petitioner's profits cycle in the period 1922-1939 did not differ materially in length from the profits cycle of all corporations either in the United States or in petitioner's sales area in the same period.

The average amount of petitioner's profits before Federal income taxes for the period 1922-1939 was $ 180,560; the average amount of petitioner's profits before Federal income taxes for the base period years was $ 199,913, which amount is 110.7 per cent of $ 180,560. The average amount of the profits (less tax-exempt income) of all corporations in the United States for the period 1922-1939 was $ 3,434,000,000. The average amount of the profits (less tax-exempt income) of all corporations for the base period years was $ 3,724,000,000 which amount is 108.4 per cent of $ 3,434,000,000. The amount of the average profits (less tax-exempt income) of all corporations in the 4 States, Minnesota, Montana, North Dakota, and South Dakota, for the period 1922-1939 was $ 36,155,000. The amount of the average profits (less tax-exempt income) of all corporations in the 4-State area during the base period years was $ 39,225,000, which amount is 108.5 per cent of $ 36,155,000. Accordingly, the level of the average profits of the petitioner for the base period years was approximately the same as the level of the average profits, for the base period years, of both "all corporations in the United States," and "all corporations in the 4-State area," when, in each instance, comparison is made of the average amount of base period profits with the average amount of profits for the period 1922-1939.

A comparison of average profits for the base period with average profits for the period 1918-1933, in the cases of the petitioner, of all corporations in the United States, and of all corporations in petitioner's sales area shows that, in each case, the average profits for the period 1918-1933 was higher than average profits for the base period. This is demonstrated by the following:

	Average	Average	Ratio of
	amount of	amount of	base period
	profits 1	profits 1 base	to
	1918-1933	period	1918-1933
All U. S. corps	$ 4,221,000,000	$ 3,724,000,000	88.2
Corps. in pet's. area	63,415,000	39,225,000	61.9
Petitioner	293,174	199,913	68.2

The petitioner is entitled to use the excess profits credit based upon income under the provisions of section 713 of the 1939 Code. Petitioner's excess profits net income for the base period years was as follows:

Year		Excess profits net income
1936		$ 234,393.59
1937		244,039.30
1938		62,441.22
1939		257,920.01
	Total	$ 798,794.12
	Arithmetic average	199,698.53

These amounts are subject to adjustment for income taxes paid in order to determine the amount of excess profits net income to be used in computing the excess profits credit for 1940 based on the income method.

For the purposes of section 713, petitioner's average base period net income (ABPNI) and excess profits credit for each of the years 1940, 1941, and 1942, as computed under the statutory provisions applicable to each of these years, is as follows:

	Average base
	period net	Excess profits
Year	income (ABPNI)	credit
1940	$ 162,852.95	$ 154,710.30
1941	199,698.53	189,713.60
1942	230,110.28	218,604.77

The invested capital credit for each of the years 1940, 1941, and 1942, to which petitioner was entitled under sections 712 and 714 of the Code, and the equivalent of the invested capital credit in terms of average base period net income, are as follows:

	Invested capital	Equivalent
Year	credit	ABPNI
1940	$ 170,306.09	$ 179,269.56
1941	177,522.42	186,865.70
1942	187,527.64	197,398.46

The petitioner has been allowed the following excess profits credits in the final determination of its excess profits tax liability for the years 1940, 1941, and 1942, such determination having been made without regard to the application of section 722:

Year	Excess profits credit
1940	$ 170,306.09	(invested capital method)
1941	189,713.60	(income method)
1942	218,604.77	(income method)

In addition, in the final determination of its excess profits tax for 1941 (without regard to the applicability of section 722), the petitioner has been allowed an unused excess profits credit adjustment of $ 119,629.34 resulting from an unused excess profits credit carryback in that amount from 1942.

The petitioner has paid excess profits tax in the net amount of $ 58,700.45 for the year 1941, and in the net amount of $ 1,150.53 for 1940. For the year 1942, the petitioner incurred no excess profits tax liability and paid no excess profits tax. The petitioner has not filed any application for relief under section 722 or any claim for refund of excess profits tax for the year 1940, and the statutory period in which such application or claim might be filed, or such refund might be made, expired several years before the petition was filed in this proceeding. However, the petitioner duly filed an application for relief under section 722 for the year 1941, in which it claimed relief under sections 722(b)(2), 722(b)(3)(A) and (B), and 722(b)(5) of the Code and also claimed the benefit of a carryover from 1940 and a carryback from 1942, properly computed under the provisions of section 722. On October 3, 1949, the respondent issued his notice of disallowance, determining that petitioner was not entitled to any relief under section 722 of the Code.

The petitioner does not meet the qualifying requirements of subsections (b)(2), (b)(3)(A), (b)(3)(B), or (b)(5) of section 722 of the Code, and it is not entitled to use a constructive average base period net income for the purpose of computing its excess profits tax.

OPINION.

The petitioner claims relief from excess profits tax under the provisions of Code sections 722(a) and 722(b)(2), (b)(3) (A), (b)(3)(B), and (b)(5).

The claim in this proceeding is for relief from excess profits tax for 1941. The years 1940 and 1942 are also involved because petitioner claims unused constructive excess profits credit carryover and carryback.

Petitioner's chief contention is that it meets all of the qualifying factors set forth in section 722 (b)(3)(A). Petitioner contends also that it qualifies for relief under subsections (b) (3) (B), (b) (2), and (b)(5).

On the basis of the facts found we conclude that petitioner does not meet any of the qualifying requirements of subsections (b) (3) (A), (b) (3) (B), (b) (2), or (b) (5), and is not entitled to use a constructive average base period net income for the purpose of computing its excess profits tax.

At the outset, it is concluded that petitioner's claim for relief under section 722 (b)(5) must be denied because it is not based on "any other factor" than those to which subsections (b) (2), (b) (3) (A), and (b)(3)(B) are specifically directed. Clermont Groves, Inc., 17 T. C. 1616; Gulf Coast Broadcasting Co., 24 T.C. 1094">24 T. C. 1094.

The petitioner has made computations designed to show a constructive average base period net income. We have not included in the findings the facts upon which petitioner relies in making its computations, and we do not give consideration to petitioner's contentions in support of its computations because of our conclusion that petitioner has not shown that it qualifies for relief under the requirements of section 722(b).

We need consider, therefore, only whether the petitioner qualifies for relief under subsections (b) (2), (b) (3) (A), and (b) (3) (B) of section 722. The provisions of section 722 which are involved under the remaining contentions of the petitioner appear in the margin. ⁶ Applicable also are various provisions of Regulations 109 and of the Treasury Department's Bulletin on Section 722, Excess Profits Tax Relief, hereinafter referred to as the Bulletin.

The petitioner contends that its business was depressed in the base period. It claims that it meets the requirement in section 722 (b) (2), namely, that the depression was because of the fact that an industry of which it was a member was depressed by reason of temporary economic events unusual in the case of such industry. Petitioner also contends, under section 722 (b) (3), that its business was depressed in the base period by reason of conditions generally prevailing in an industry of which it was a member subjecting petitioner either to (A) a profits cycle differing materially in length and amplitude from the general business cycle, or (B) to sporadic and intermittent periods of high production and profits which periods were inadequately represented in the base period.

The petitioner has undertaken to establish that it meets all of the above qualifying factors although petitioner relies in the alternative upon the provisions set forth above of (b) (2), (b) (3) (A), and (b) (3) (B). In attempting to meet the requisites of (b) (2) and (b) (3), the petitioner presented a vast amount of economic data relating to the nationwide construction industry of which it claims it is a member; and, in rebuttal, the respondent presented a substantial amount of economic data relating to the record of profits of all corporations in the United States as well as all corporations carrying on business within petitioner's sales area. There is in the record before us a great quantity of expert testimony, statistical tables and charts, and exhibits. The record contains a great deal of data which is overlapping and which is pertinent to consideration of the questions arising under both (b) (2) and (b) (3). This is because under both (b) (2) and (b) (3) a taxpayer must establish the identity of an industry of which it is a member as well as that the taxpayer's business was depressed in the base period. At the outset, it is noted also that the nature of the provisions of subsection (b) (3) (A) necessitates consideration of periods of years other than the base period years. Likewise, determination of the question of whether there is depression in the base period requires comparison with prior years; and comparison of cycles involves consideration of facts and factors over a longer period than the base period. Part IV (B) of the Bulletin.

Since we are confronted with having to analyze the proof with respect to petitioner's contentions that it meets various qualifying factors, it is convenient, if not necessary, to consider the evidence relating to qualifying factors, such as, for example, base period depression, petitioner's industry, conditions in the industry, and the comparison of cycles, rather than to consider the evidence adduced under each of the subsections of section 722 (b) on which petitioner relies. See Waldorf System, Inc., 252">21 T. C. 252, 267, 268, 269, 270, where this approach was followed.

Industry.

The parties are in sharp disagreement over the question involving determination of the industry of which petitioner is a member. Briefly, petitioner contends that it is either a member of the construction industry (nationwide in scope), or of an industry, wholesalers of plumbing and heating supplies and equipment, which is closely related to and economically dependent upon the construction industry. On brief petitioner states its contentions in the following way:

At all times the petitioner was a member of the construction industry, being a member of the sub-division thereof embracing wholesalers of plumbing and heating supplies and equipment; or, in the alternative, petitioner was a member of an industry embracing some or all of the wholesalers of plumbing and heating supplies and equipment, either in the entire United States, or in its general geographic portion thereof, which industry was so closely related to and dependent economically upon the construction industry that its profit cycle was affected and controlled by the profit or volume cycle, or both, of the construction industry.

Petitioner also argues that, at least, it is --

so dependent upon and subject to and controlled by the same economic influences as is the construction industry (using this term in the sense of contractors and others actually doing installation and construction work) that its volume and profits cycle is influenced and controlled by the volume and profits cycle of the construction industry.

Respondent contends that petitioner is a member of an industry in the area within which petitioner made sales which is engaged in the wholesale distribution of broadly diversified lines of plumbing and heating equipment and supplies. In advancing this argument, respondent admits that to the extent that petitioner made sales to those engaged in actual construction, it was to a limited extent related to the construction industry. Respondent points out that because of the diversity of the line of products which petitioner sells, it appears to fall into several subindustry classifications according to the classifications of industries in both the Census of Manufacturers and the Census of Wholesalers, and that the diversified line of goods sold by petitioner includes materials which are used not only in new construction but also in repairs, replacements, maintenance, plant equipment, and manufacturing processes.

The statute does not define industry. In Part I (F) of the Bulletin, the concept of "industry" is discussed as follows:

In most general terms an "industry" comprises a group of business concerns sufficiently homogeneous in nature of production or operation, type of product or service furnished, and type of customers, so as to be subject to roughly the same external economic circumstances affecting their prices, volume and profits. Stated otherwise, an industry will generally consist of all of the producers which compete with each other in selling essentially the same products or services in the same market. * * *

Regulations 109, section 30.722-2 (b) (8), states as follows:

(8) For the purposes of section 722 and of section 30.722-3 (b) and (c), no exclusive definition of the concept "industry" can be constructed. In general an industry may be said to include a group of enterprises engaged in producing or marketing the same or similar products or services under analogous conditions which are essentially different from those encountered by other enterprises. The mere similarity of product and marketing methods, however, is not enough of itself to comprehend taxpayers satisfying such conditions within the same industry. Factors such as geographical location, character and location of markets, availability and character of raw material supply, and other conditions under which operations are carried on must be considered. Regard may be had to trade custom and practice in determining whether a group of enterprises constitutes an industry.

In Pabst Air Conditioning Corporation, 14 T. C. 427, 438, we expressed the view that these concepts of industry are sound. Under the facts of this case, these concepts do not permit the industry which embraces wholesale distributors of plumbing and heating supplies and equipment to be regarded as the same as the general construction industry or the building and construction industry. Paraphrasing our reasoning in Pabst Air Conditioning Corporation, supra, it seems plain that the construction industry (or the building and construction industry) and the industry of wholesale distributors of plumbing and heating supplies and equipment do not "compete with each other in selling essentially the same products or services in the same market."

The petitioner has failed to establish that its business was closely associated with the building and construction industry and that the largest part of its sales was used in new construction.

Petitioner did not maintain records over a long period of years showing the end uses made of the goods it distributed. Such records as petitioner maintained show that its customers were engaged in various businesses which indicates various end uses of the goods sold by petitioner. Furthermore, petitioner was unable to produce satisfactory statistics about concerns comparable to petitioner in its sales area. The record does not establish that wholesale distributors of plumbing and heating supplies and equipment compete with the entire construction, or building and construction industry, or with the building and construction industry within petitioner's sales region.

The record contains no substantial evidence upon which reliable comparison can be made with petitioner. Petitioner attempted to obtain evidence about the sales data of plumbing and heating wholesalers through the records of a trade association, Central Supply Association, but such factual material as petitioner was able to obtain is limited to the years 1927-1930, and 1934-1939; it is fragmentary; and it relates to concerns which operated outside of petitioner's sales region in 20 States.

Petitioner's sales area is restricted to the 4 States, Montana, Minnesota, North and South Dakota, and to portions of Wyoming, Michigan, and Wisconsin. Upon the entire record, it is concluded that the industry of which petitioner is a member comprises wholesale distributors of plumbing and heating equipment and supplies who operate in the same region and markets as petitioner operates; i. e., wholesalers of essentially the same products and services as petitioner sells, operating in the same market as petitioner. In determining whether petitioner meets the requirements of subsections (b) (2) and (b) (3) (A) and (B), we shall consider, therefore, the industry of which petitioner is a member as is concluded above.

Base Period Depression.

Petitioner's average net profit during the base period years exceeded its average net profit over the long period 1922-1939. During the base period years, average earnings were $ 199,913, or 110.7 per cent of $ 180,560, the 1922-1939 average. The petitioner was well established in its businesses prior to the base period and was not in a developmental stage during the base period. Cf. Ainsworth Manufacturing Corporation, 23 T. C. 372, 376. It is concluded that petitioner's business was not depressed during the base period years. Foskett & Bishop Co., 16 T. C. 456, 462; Industrial Yarn Corporation, 16 T. C. 681, 689; Granite Construction Co., 163">19 T. C. 163, 170-171; A. B. Frank Co., 19 T. C. 174, 181; Pratt & Letchworth Co., 21 T. C. 999, 1005;Edgewater Steel Co., 23 T. C. 613, 626-627.

The petitioner contends that its base period earnings were depressed when comparison is made with its average earnings during the period 1918-1933. It is true that petitioner's average base period earnings were below the 1918-1933 average. However, we have held that the fact that average base period earnings were not as large as the average for a prior period does not necessarily mean that a taxpayer's business was depressed during the base period. See Toledo Stove & Range Co., 1125">16 T. C. 1125, 1130; Harlan Bourbon & Wine Co., 14 T.C. 97">14 T. C. 97, 104. On the basis of the entire record, we are satisfied that the petitioner's average profit in the period 1922-1939 is a more appropriate standard by which to measure petitioner's base period earnings for depression than petitioner's average profit in the period 1918-1933. The period 1918-1933 includes the years 1918, 1919, and 1920, which the evidence establishes were years of abnormally high profits due to the influence on the economy of the first World War. Also, petitioner underwent a substantial change in the nature of its business during the early twenties, when it changed from a debtor corporation using borrowed capital to a creditor corporation lending a substantial portion of its net worth to Crane of Illinois. (See Table 6.) Of equal significance is the fact that average profits during the base period years were lower than the 1918-1933 average not only in petitioner's case, but also in the case of all corporations in the United States and all corporations in petitioner's sales area. (See Table 27.) Inasmuch as the base period years have been determined by Congress to constitute a period of normal profits for general corporate business, the fact that petitioner's base period earnings, like those of all corporations, were below the 1918-1933 average does not establish that petitioner's earnings were depressed during the base period years. Upon the basis of the entire record, we must reject petitioner's contention that its business was depressed during the base period years.

Depression in Petitioner's Industry.

The petitioner has failed to establish that the industry of which it was a member, wholesalers of plumbing and heating supplies and equipment competing with petitioner in petitioner's sales area, was depressed during the base period. The petitioner was unable to produce any evidence pertaining to its competitors. Nevertheless, petitioner cannot be excused from its burden of proving a fact essential to its contentions. El Campo Rice Milling Co., 13 T. C. 775, 786, 788.

Petitioner also has failed to establish that the construction industry in its sales area, of which it claims to be a member, was depressed during the base period years. The evidence shows that construction activity in petitioner's sales area was at approximately the same level as, or above, average construction activity in the same area during the period 1922-1939. The F. W. Dodge Corporation and Federal Reserve Board statistics show that the average value of construction contract awards in petitioner's sales area for the base period years was 101.8 per cent and 99 per cent, respectively, of the 1922-1939 average value of construction contract awards, and that the average volume of construction contract awards in petitioner's sales area during the base period years was 106.2 per cent and 100.8 per cent, respectively, of the average volume during the period 1922-1939.

It is concluded that petitioner has not established that the industry of which it was a member was depressed during the base period years. Petitioner has also failed to establish that its business was depressed during the base period years. Accordingly, it is held that petitioner fails to qualify for relief under the provisions of section 722 (b) (2).

Conditions in Petitioner's Industry.

Under section 722 (b) (3), the petitioner must establish that its business was depressed during the base period years by reason of conditions generally prevailing in its industry. It has been pointed out, above, that petitioner has failed to establish that its business was depressed during the base period years. Petitioner has also failed to establish that conditions generally prevailed in its industry which exerted a depressing effect in petitioner's business. The record before us contains no statistics relating to the business of wholesalers of plumbing and heating supplies and equipment in petitioner's sales area, and we are unable to determine what conditions prevailed in that industry during the base period years. One of petitioner's witnesses testified generally that business conditions among plumbing and heating wholesalers in petitioner's sales area were poor during the base period years because of the lack of construction activity in that area. However, this testimony is in conflict with the evidence relating to construction activity in petitioner's sales area during the base period years. This evidence, which is discussed above, establishes that construction activity in petitioner's sales area was not depressed during the base period. On this state of the record, we cannot find that conditions generally prevailed among plumbing and heating wholesalers in petitioner's sales area, or in the construction industry in petitioner's sales area, which might have depressed petitioner's business during the base period years. It is concluded that petitioner's business was not depressed during the base period years by reason of conditions generally prevailing in an industry of which it was a member.

Variant Profits Cycle.

Cycles can be regarded as including four phases, which may be designated as prosperity, decline, depression (or recession, if slight), and improvement or recovery. Each of these phases changes gradually into the next phase. ⁷

The meaning of the terms "length" and "amplitude" are not in dispute. For the purposes of this proceeding, we accept the definitions contained in the Bulletin on Section 722, Part IV (B):

The length of the cycle is the period of time between corresponding stages of two successive cycles. The amplitude of the cycle refers to the violence of fluctuation and is measured by the vertical distance between high and low stages.

The evidence shows that the pattern of petitioner's profits during the period 1922 to 1939 was decidedly similar to the pattern of the profits, less tax-exempt income, of all corporations in the United States. The only point of divergence between the two profits patterns occurred in 1926, when general corporate profits fell slightly whereas petitioner's earnings increased. Apart from 1926, the lengths of the movements and the turning points in both series of earnings data are the same. It is concluded that the movements in petitioner's profits pattern did not vary materially in length from the movements in the profits pattern of all corporations in the United States. To the extent that the upturns and downswings in both series of profits can be segregated into cyclical patterns, the lengths of the movements in both profits cycles are virtually identical.

It is true that the profits pattern for all corporations in the United States experienced a greater amplitude than did petitioner's profits. However, under the statute, petitioner must prove a material variance in both length and amplitude. Avey Drilling Machine Co., 16 T. C. 1281, 1296. It is concluded that petitioner has failed to establish that its profits cycle varied materially in length and in amplitude from the profits cycle of all corporations in the United States.

Petitioner's profits pattern also is decidedly similar to the profits pattern of all corporations filing returns in the principal part of its sales area, namely, in Minnesota, Montana, North Dakota, and South Dakota. As set forth in the findings, the only difference noted is that in three instances in which both series of profits indices experienced a decline in profits, the duration of decline in petitioner's profits was 1 year shorter than the period of decline for all corporations in its sales area. However, even in these instances, both series of profits indices reached troughs and entered recovery phases at the same time. Apart from this difference, both series of indices demonstrate the same upward and downward movements. It is concluded that the pattern of petitioner's profits does not vary materially in length and amplitude from the profits pattern of corporations in its sales area.

The differences noted above between the profits indices of petitioner and of all corporations in its sales area are quite different from those which appeared in Waldorf System, Inc., supra, where the taxpayer was held to have been subject to a variant profits cycle. In that proceeding, the taxpayer's earnings reached their peak in 1930. Earnings in 1931, although slightly below those of 1930, were well above average and higher than earnings in any other year in the entire period 1923-1939, with the exception of 1930. The taxpayer's earnings did not fall sharply until 1932, and reached their trough in 1934, with 1935 as the first year of upturn. Thus, the taxpayer demonstrated that both the depression and recovery of its profits lagged 1 or 2 years behind the profits of all corporations. Furthermore, the taxpayer's earnings did not experience any measure of recovery subsequent to the trough in 1934. Its earnings had reached a temporary high point in 1936, but thereafter fell again to a point where earnings during the period 1937 to 1939 were lower than in the prior low period of 1933 to 1935. Unlike the taxpayer in Waldorf System, Inc., supra, petitioner's profits did not experience a lag in the timing of its recoveries from downturns, in comparison either with all corporations in the United States, or with the corporations in its sales area. Also, petitioner's base period profits, measured quantitatively, did not fail to recover from the low period of 1931-1933, as was the case in the Waldorf System case.

The record does not support petitioner's contention that it experienced complete profits cycles, measured trough to trough, in the periods 1918-1933 and 1900-1918. Under petitioner's contention, the year 1918 would be a trough year in both alleged cycles. Yet, the evidence shows that petitioner's profits in 1918 were far greater than its average profits during either alleged cycle. Petitioner's profits in 1918 were 195 per cent of average profits during the period 1918-1933 and 227.8 per cent of average profits during the period 1900-1918. Also, average profits for the 2 years 1919 and 1920 amounted to 292 per cent of the 1918-1933 average, although earnings in these 2 years would have been below the average for 1918-1933 if 1918 was a trough year. Similarly, average profits for the 2 years 1916 and 1917 amounted to 274.4 per cent of the 1900-1918 average, although earnings in these 2 years would have been below the 1900-1918 average if 1918 was a trough year. Petitioner's contention that it experienced variant profits cycles, measured trough to trough, in the periods 1918-1933 and 1900-1918, must be rejected. It is concluded that petitioner was not subject to a profits cycle which differed materially in length and amplitude from the general business cycle, within the meaning of section 722 (b) (3) (A). It is held that the petitioner fails to qualify for relief under section 722 (b) (3) (A).

Sporadic Periods of High Profits.

The provisions of section 722 (b) (3) (B), relating to "sporadic and intermittent periods of high production and profits," are intended to apply in the case of a taxpayer experiencing prosperous years at irregular and unpredictable intervals, and having an earnings experience which cannot be segregated into cyclical patterns. ⁸ It has been pointed out above that petitioner's earnings experience can be segregated into the same profits cycles as the profits of all corporations in the United States and the profits of all corporations in petitioner's sales area. It is held that petitioner does not qualify for relief under the provisions of section 722(b)(3)(B).

Under all the facts and circumstances of this case, it is concluded that petitioner's average base period net income is not an inadequate standard of normal earnings for the petitioner.

Reviewed by the Special Division.

Decision will be entered for the respondent.

---

Footnotes

• 1. Manufactured by Crane of Ill.↩

• 2. The total sales figures represent sales before adjustment for sales discounts of $ 57,825 in 1936; $ 60,451 in 1937; $ 49,026 in 1938; and $ 51,718 in 1939. The parties have stipulated that petitioner's net sales for the years 1936-1939 were $ 4,620,422, $ 4,704,547, $ 4,110,577, and $ 4,506,875, respectively.↩

• 1. The figure for total sales represents sales before adjustment for sales discounts of $ 51,718. The parties have stipulated that petitioner's net sales for 1939 amounted to $ 4,506,875.↩

• 1. Records not available.↩

• 2. The figures set forth in Table 3 are taken from Exhibit 15, and apparently represent petitioner's gross sales. The parties have stipulated that petitioner's net sales amounted to $ 4,620,422 in 1936; $ 4,704,547 in 1937; $ 4,110,577 in 1938; and $ 4,506,875 in 1939.↩

• 1. The years 1899 to 1909 are fiscal years ended November 30. The year 1910 represents a 13-month period ended December 31, 1910. The balance of the years indicated are calendar years.↩

• 1. From Tables 5, 7, and 8.↩

• 1. Figure corrected. Compare with Exhibit ZZ.↩

• 1. St. Paul, Minneapolis, Duluth, Mankato, 1895-1939; Winona, 1920-1932; Hibbing, 1922-1927.↩

• 2. Great Falls and Billings; includes sales in Wyoming.↩

• 3. Fargo.↩

• 4. Aberdeen, 1910-1939; Sioux Falls, 1924-1939.↩

• 1. Sources: See Exhibits 119 and K.↩

• 1. Source: Board of Governors of the Federal Reserve System, Division of Research and Statistics. Exhibit WW.↩

• 1. 1922-1939 average=100.↩

• 1. Source: U. S. Department of Commerce, "Construction and Construction Materials," Statistical Supplement, May 1950, p. 34. Ex. 12.↩

• 1. Source: Exhibit 89.↩

• 2. 1922-1939=100.↩

• 1. From Tables 13 and 19.↩

• 5. The 65 cities are: New York, Boston, Washington, Milwaukee, Philadelphia, Indianapolis, Baltimore, Kansas City (Mo.), St. Paul, St. Louis, Denver, Chicago, Colorado Springs, Detroit, San Francisco, Louisville, Minneapolis, New Orleans, Portland (Oregon), Providence, Newark, Pittsburgh, Bridgeport, Fall River, Omaha, Cincinnati, Salt Lake City, Worcester, Cleveland, Seattle, Duluth, Los Angeles, Albany, Buffalo, Syracuse, Memphis, Galveston, Atlanta, Hartford, Tampa, Des Moines, Rochester, Toledo, Birmingham, Cambridge, Columbus, Dayton, Grand Rapids, Houston, Jacksonville, Jersey City, Kansas City (Kansas), Lowell, Nashville, New Bedford, New Haven, Oakland, Peoria, Reading, Richmond, St. Joseph, San Diego, Scranton, Spokane, and Tacoma.↩

• 1. Source: Exhibit 126.↩

• 1. New construction less local transit, military and naval, highways, miscellaneous public service enterprises, conservation and development, and "All Other Public"; maintenance and repairs less local transit, highways, and Corps of Engineers. Source: U. S. Department of Commerce, "Construction and Building Materials," Statistical Supplement, May 1951. Exhibit 134.L↩

• 1. Figures from Exhibit KK.↩

• 2. These figures are estimates. For 1936 and subsequent years, taxable net income must be reduced by the amount of taxable dividends received from domestic corporations, in order to make the data for these years comparable with the data for years prior to 1936. Although the amount of these items for all corporations filing returns in the years 1936-1939 is known, the amount is unknown with respect to corporations filing returns in the 4 States listed above. Accordingly, the taxable net income for the corporations in the 4 States has been reduced to determine compiled profit less tax-exempt income by the same percentages as these items for all corporations bore to the taxable net income of all corporations: 1936, 40.4 per cent; 1937, 40.1 per cent; 1938, 56.2 per cent; and 1939, 33.1 per cent.↩

• 1. Source: Exhibit X.↩

• 1. From Tables 7, 23, 24, and 25.↩

• 2. Source: Statistical Abstract of the United States; Exhibit 47.↩

• 1. From Tables 7, 23, and 24.↩

• 1. For all corporations, and for corporations in petitioner's area, "profits" means profit less tax-exempt income. For petitioner, "profits" means profit before Federal income taxes.↩

• 6. SEC. 722. GENERAL RELIEF -- CONSTRUCTIVE AVERAGE BASE PERIOD NET INCOME.

  (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

  (A) a profits cycle differing materially in length and amplitude from the general business cycle, or

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

• 7. Riggleman and Frisbee, Business Statistics (3d ed., 1951), 332, 334.↩

• 8. Regs. 109. Sec. 30.722-3. Determination of Excessive and Discriminatory Tax; Taxpayer Entitled to Excess Profits Credit Based on Income. --

  (c) Business depression in base period because of variant profits cycle or sporadic and inadequately represented profits periods. --

  * * * *

  (2) Sporadic profits inadequately represented in the base period↩. -- The characteristic distinguishing the type of case described in section 722 (b) (3) (B) from that in section 722 (b) (3) (A) is that in the latter case the taxpayer has an earnings experience which can be segregated into definite cycles, whereas in the former case (the type of case described in this paragraph) no such cyclical segregation can be made. 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 juxta-position 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.