Detroit Macoid Corp.
v.
Comm'r of Internal Revenue

Tax Court of the United States.Apr 19, 1955
24 T.C. 34 (U.S.T.C. 1955)
24 T.C. 34T.C.

Docket Nos. 20406 32325.

1955-04-19

DETROIT MACOID CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Robert G. Surridge, Esq., for the petitioner. A. J. Friedman, Esq., for the respondent.


Robert G. Surridge, Esq., for the petitioner. A. J. Friedman, Esq., for the respondent.

Petitioner's constructive average base period net income determined.

These proceedings involve claims for refund of excess profits taxes under section 722 of the Internal Revenue Code of 1939 for the taxable years ended June 30, 1941, June 30, 1944, and June 30, 1945. In 23 T.C. 382, we approved respondent's computation of constructive average base period net income. On petitioner's motion for rehearing and reconsideration, oral argument was had January 24, 1955. By leave of the Court the parties have filed revised computations of constructive average base period net income. Because of the exceptional circumstances the motion for reconsideration is hereby granted and the Findings of Fact and Opinion in this case are revised, as hereinafter appears. The previous report in this case, 23 T.C. 382, is hereby vacated and this report is approved in its place and stead.

FINDINGS OF FACT.

The stipulated facts are hereby found accordingly.

Petitioner, incorporated on July 6, 1934, as a Michigan corporation, has its principal office and place of business at Detroit, Michigan. It kept its books and filed its tax returns for all periods in question on an accrual basis, and on a fiscal year ending on June 30. All returns were filed with the collector of internal revenue at Detroit, Michigan.

Respondent has allowed petitioner relief under section 722 for the indicated years on the basis of the following constructive average base period net incomes:

+----------------------------------------+ ¦Fiscal year ended¦Constructive average ¦ +-----------------+----------------------¦ ¦June 30 ¦base period net income¦ +-----------------+----------------------¦ ¦1941 ¦$23,947.47 ¦ +-----------------+----------------------¦ ¦1942 ¦1 29,204.23 ¦ +-----------------+----------------------¦ ¦1943 ¦1 29,204.23 ¦ +-----------------+----------------------¦ ¦1944 ¦29,204.23 ¦ +-----------------+----------------------¦ ¦1945 ¦29,204.23 ¦ +----------------------------------------+

Respondent computed excess profits credits under the invested capital method pursuant to section 714 of the Internal Revenue Code of 1939, as follows:

+-------------------------+ ¦June 30, 1941 ¦$14,385.68¦ +--------------+----------¦ ¦June 30, 1942 ¦18,261.43 ¦ +--------------+----------¦ ¦June 30, 1943 ¦19,031.85 ¦ +--------------+----------¦ ¦June 30, 1944 ¦22,166.74 ¦ +--------------+----------¦ ¦June 30, 1945 ¦25,900.77 ¦ +--------------+----------¦ ¦June 30, 1946 ¦30,624.39 ¦ +-------------------------+

Petitioner's profits and losses for each fiscal year from its inception through the fiscal year ended June 30, 1940, as shown on its tax returns, were as follows:

+----------------------------------+ ¦Fiscal year ended¦ ¦ +-----------------+----------------¦ ¦June 30 ¦Profit (or loss)¦ +-----------------+----------------¦ ¦1935 ¦($394.26) ¦ +-----------------+----------------¦ ¦1936 ¦(25,151.44) ¦ +-----------------+----------------¦ ¦1937 ¦(1,094.48) ¦ +-----------------+----------------¦ ¦1938 ¦(12,864.67) ¦ +-----------------+----------------¦ ¦1939 ¦(34,862.02) ¦ +-----------------+----------------¦ ¦1940 ¦15,924.58 ¦ +----------------------------------+

Petitioner's dry extrusion of plastic strip was a process developed by it beginning in 1937. George Hendrie, then vice president of petitioner, a practical engineer, was responsible for this development on company time.

The experimental work was completed in the fall of 1938. Commercial production of interior trim strips for automobiles was begun by the fall of 1939. This extrusion of dry plastics, process and apparatus, on January 5, 1940, was the subject of an application for letters patent by Hendrie, which application was assigned to petitioner under its shop rights in the same year Hendrie was adjudicated a bankrupt. Patent issued thereon on September 1, 1942.

This continuous dry extrusion process was based on the adaptation of a rubber extrusion machine. Controlled heating and kneading by screws inside the mixing chamber reduced the dry thermoplastic material to a proper consistency for forcing through an orifice. Under controlled speed, the extruded material was taken away from the orifice and cooled to retain its shape. Experimentation also was necessary to ascertain the proper plastic raw material. The process eliminated the use of solvents which had theretofore presented many production problems in the extrusion method which had been used for years. In July 1940 Dow Chemical Company, which had a machine substantially like petitioner's machine, advertised relating to the extrusion of dry plastics as follows:

Dow is prepared to make extrusions of ETHOCEL (that being a trade name) and invites custom molders and manufacturers to learn more about this new plastic material * * *

The extruded plastic trim strip eliminated the defects of the plastic-coated metal strip which was being furnished by petitioner. There was a problem of shrinkage of the extruded strip which was rectified before the end of 1939.

The plastic-coated metal trim strip consisted of an inner metal ‘tacking’ strip inserted in an outer metal strip, the latter being spray coated on the outside with a thin coat of color plastic. It was not satisfactory because it peeled, checked, and faded. Projecting taps on the inner or tacking strip were used to hold the strip to the inner door panels on the automobiles. With the extruded plastic strip petitioner supplied all but the metal insert or about 70 per cent of the value of the total job as compared to about 30 per cent in connection with the sprayed plastic accouterment. For the plastic-coated metal trim strip, both the inner and the outer strips were supplied by Ford, which obtained them from the Herron-Zimmer Company; that company supplied only the inside tacking strip for the extruded plastic strip, and lost a large percentage of this type of business by the use of extruded strip. When producing the extruded strip, petitioner brought the metal interior tacking strip directly from Herron-Zimmer, and included its cost and cost of handling with the cost of the extruded plastic strip. The plastic-coated strips were used on all Ford cars and were all supplied by petitioner.

Petitioner's monthly profit and loss statements for the last half of the calendar year 1939 disclose the following:

+--------------------------------+ ¦ ¦Profit(or ¦Profit ¦ +---------+------------+---------¦ ¦1939 ¦loss) All ¦(or loss)¦ +---------+------------+---------¦ ¦ ¦products ¦Extrusion¦ +---------+------------+---------¦ ¦ ¦ ¦ ¦ +---------+------------+---------¦ ¦July ¦($2,974.29) ¦ ¦ +---------+------------+---------¦ ¦August ¦(7,906.37) ¦ ¦ +---------+------------+---------¦ ¦September¦(2,729.70) ¦($402.99)¦ +---------+------------+---------¦ ¦October ¦7,943.01 ¦942.45 ¦ +---------+------------+---------¦ ¦November ¦4,665.65 ¦354.35 ¦ +---------+------------+---------¦ ¦December ¦8,735.46 ¦1,534.76 ¦ +---------+------------+---------¦ ¦ ¦ ¦ ¦ +--------------------------------+

Extruded strip substantially increased and dominated petitioner's sales thereafter with resulting large operating profits.

Petitioner's comparative profit and loss statements for its fiscal years ended June 30, 1935, to June 30, 1940, inclusive, are as set forth in petitioner's Exhibit 2, which is incorporated in these findings by this reference.

Petitioner's comparative profit (or loss) as a percentage of net sales by products, as shown in its contemporaneous financial statements, for the periods indicated, was as follows:

+-----------------------------------------------------------------------------+ ¦1939 ¦Extruded¦Coated ¦Switches¦Injection ¦Bulk ¦Misc. ¦Total all ¦ ¦ ¦strip ¦hardware¦ ¦mouldings ¦solutions¦ ¦products ¦ +---------+--------+--------+--------+----------+---------+--------+----------¦ ¦September¦(60.94) ¦(12.13) ¦(66.17) ¦(33.97) ¦(16.72) ¦15.86 ¦(18.51) ¦ +---------+--------+--------+--------+----------+---------+--------+----------¦ ¦October ¦48.81 ¦28.37 ¦(62.08) ¦0.59 ¦35.71 ¦32.64 ¦22.35 ¦ +---------+--------+--------+--------+----------+---------+--------+----------¦ ¦November ¦16.85 ¦18.15 ¦ ¦0.51 ¦36.85 ¦(124.31)¦12.35 ¦ +---------+--------+--------+--------+----------+---------+--------+----------¦ ¦December ¦43.37 ¦32.04 ¦ ¦(12.48) ¦46.69 ¦(13.77) ¦21.98 ¦ +-----------------------------------------------------------------------------+

Petitioner's net sales, actual manufacturing profit, and operating profit, as shown on its contemporaneous financial statements, for the periods indicated, were as follows:

+--------------------------------------------------------------------+ ¦ ¦Extrusion ¦All other products ¦ +-------------------------------+----------------+-------------------¦ ¦ ¦Dollars¦Per cent¦Dollars ¦Per cent ¦ +-------------------------------+-------+--------+---------+---------¦ ¦Last 6 months, 1939 ¦ ¦ ¦ ¦ ¦ +-------------------------------+-------+--------+---------+---------¦ ¦Net sales ¦8,233 ¦100.0 ¦139,440 ¦100.0 ¦ +-------------------------------+-------+--------+---------+---------¦ ¦Actual manufacturing profit ¦3,274 ¦39.8 ¦31,200 ¦22.4 ¦ +-------------------------------+-------+--------+---------+---------¦ ¦Operating profit ¦2,408 ¦29.3 ¦4,792 ¦3.4 ¦ +-------------------------------+-------+--------+---------+---------¦ ¦Fiscal year ended June 30, 1940¦ ¦ ¦ ¦ ¦ +-------------------------------+-------+--------+---------+---------¦ ¦Net sales ¦27,651 ¦100.0 ¦295,484 ¦100.0 ¦ +-------------------------------+-------+--------+---------+---------¦ ¦Actual manufacturing profit ¦10,134 ¦36.7 ¦65,537 ¦22.2 ¦ +-------------------------------+-------+--------+---------+---------¦ ¦Operating profit ¦6,664 ¦24.1 ¦11,986 ¦4.1 ¦ +-------------------------------+-------+--------+---------+---------¦ ¦Fiscal year ended June 30, 1941¦ ¦ ¦ ¦ ¦ +-------------------------------+-------+--------+---------+---------¦ ¦Net sales ¦530,427¦100.0 ¦190,959 ¦100.0 ¦ +-------------------------------+-------+--------+---------+---------¦ ¦Actual manufacturing profit ¦216,108¦40.7 ¦1,692 ¦0.9 ¦ +-------------------------------+-------+--------+---------+---------¦ ¦Operating profit (loss) ¦163,357¦30.8 ¦(25,785) ¦(13.5) ¦ +--------------------------------------------------------------------+

Petitioner's sales of dry extruded strip initially and primarily were to Ford Motor Company for interior trim on the Lincoln car. The product, however, had other potential uses which were recognized in 1939, including use in furniture manufacturing. Petitioner's minor products sold to purchasers outside of the automobile industry included plastic dip solution for use by the manufacturers of toilet seats and mannikins, sampling for new developments in coating metal parts with plastic, extruded plastic strips for furniture, wire coating, cosmetic manufacturing, and costume jewelry.

There was a large growth in the use of petitioner's dry extrusion process of thermoplastics in the 10-year period following its development.

During the base period approximately 75 per cent of petitioner's sales was to Ford Motor Company. Some plastic products were sold by petitioner in small amounts to others than Ford in the automotive industry.

Petitioner's sales to Ford were on a net 25-day basis; its sales to others were on a net 30-day basis.

Generally, petitioner had no spare parts or replacement sales during the first 2 years it produced a particular product. Such sales began in the third or fourth year. Petitioner had no replacement or spare parts business on extruded strips in 1939, but in the base period it had such business on window regulator handles and interior hardware items which it had sold for more than 2 years.

Petitioner had close and friendly relations with people connected with the Ford Motor Company. Arthur Gardner, one of petitioner's original shareholders, a director, and its first president, was a close friend of Edsel Ford and was married to the daughter of the attorney who had incorporated the Ford Motor Company. Gardner made the original contacts with Ford Motor Company through Edsel Ford at the time petitioner had only an experimental laboratory and was being incorporated. At that time he interested Edsel Ford, Joe Stanton, who was in Ford purchasing, and Dr. McLeod, who was the Ford chief chemist, in petitioner's processes.

Petitioner's first products were interior hardware which were supplied by Ford and coated with plastic by a dipping process to match the interior trim of the automobiles. This was done first for the Ford car, and later for the Mercury and Lincoln. Petitioner had all of this type Ford Motor Company business.

Beginning in July 1937 petitioner supplied injection process moulded plastic knobs and escutcheons for automobile window and door regulators to Ford Motor Company. During 1937 and 1938 they were sold for 15 cents per car and were used on Ford cars exclusively and were later used on all Ford Motor Company automobiles. Petitioner was the sole supplier of the items during the base period. Ford was the only customer for petitioner's injection moulded items in the base period.

In 1937 petitioner found it could make plastic-coated interior trim strips by a spraying process. It made its first sales in October 1937 and the coated metal strip was used on all the 1938 and 1939 model Ford cars and not on Lincolns or Mercurys. The first Mercury was the 1939 model, brought out in October 1938. This type plastic strip was sold from October 1937 to August 1939. Its selling price averaged 46.5 cents for each Ford car produced in the model year 1937-1938. This selling price included the billing for the supporting metal strip furnished by Herron-zimmer Company, upon which petitioner made no profit.

The extruded strip was sold to Ford Motor Company for 3.5 per cent to 7 per cent more than the coated strip. It would have cost between 1.5 and 3 cents more per car to have used extruded strip in the Ford car. This difference would not have deterred its purchase by the Ford Motor Company of such an item. The selling price of extruded strip sold to the Ford Motor Company and used on Lincoln cars averaged $1.10 per car for the fiscal year ended June 30, 1940, and averaged $1.01 per car for the last 6 months of 1939. There was strong competition between cars of the price range of Ford. Henry Ford, Sr., would sometimes arbitrarily fix the sale price without reference to an analysis of cost.

The new extruded strip was tested and approved generally by Ford Motor Company engineers in 1939, and after it was put on the 1940 model Lincoln in the fall of 1939 no more coated strips were made by petitioner. The new extruded plastic strip was put on the entire Ford Motor Company 1941 line of Fords, Mercurys, and Lincolns beginning in the fall of 1940.

The specifications for parts for the various Ford Motor Company automobiles for a given model year were ‘frozen’ and orders placed for them in the summer or early fall of the preceding year. Changes were made only in unusual circumstances. At the time the particular model was ‘frozen’ the Ford Motor Company had to have tested the plans, and it had to know that its supplier could make the item and make the required quantities, and the price for it. Ford started some drawings for the extruded strip for the 1940 Lincoln Zephyr model on July 14, 1939, and revised them on August 30, 1939.

There was sufficient interest in the extruded plastic strip evidenced by men employed by the Ford Motor Company, such as design and engineering men, to lead petitioner and petitioner's supplier of metal strips to believe that petitioner could have obtained the order to place the extruded plastic strip on 1940 model Ford Motor Company cars if petitioner could have produced it. Kruke, in his capacity as a Ford official in charge of styling, told Hendrie in 1939 that the Ford Motor Company wanted the strip for its entire 1940 line. To justify the expenditures being made in development work by petitioner, Hendrie asked Kruke to come to petitioner's plant and speak with Gould and also to ask Edsel Ford to speak with Gardner. All the Ford Motor Company people with whom petitioner's witnesses recalled having worked on the introduction of the extruded strip on Ford Motor Company cars are now dead. W. A. Stewart, who purchased tacking strip, and J. A. Reid, the head purchasing man for parts for car interiors, were alive and lived in the Detroit area at the time of the hearing.

Ford procurement policy in 1939, as it related to interiors, normally would have been for the purchasing department to buy what the engineers specified, in the absence of known difficulties with the supplier or too high a cost. Henry Ford, Edsel Ford, and the top management of Ford Motor Company, prior to 1940, were plastic-minded and very much interested in the use of plastics in the production of their automobiles. Sometimes the top officers of the Ford Motor Company vetoed recommendations for the use of new and improved parts.

The Ford Motor Company continued the use of mechanical brakes on its cars for years after other automobiles had shifted to the use of hydraulic brakes. With one possible exception, for many years and up until the Model A was produced in 1928, the Ford Motor Company did not paint its Ford cars any color except black, even though other automobiles were produced in different colors and shades. Ford continued the use of across-the-frame springs until after the death of Henry Ford, Sr., in 1949, although other cars used suspension springs from early in 1930. And Ford did not adopt balloon tires until long after other cars had them.

Henry Ford, Sr., had detailed knowledge of these items. The introduction of such new features was dependent upon Henry Ford, Sr., agreeing to it. He ‘was somewhat opinionated.’ He was not at any time concerned in reaching his conclusion as to whether to introduce a new item exclusively by the availability of that item.

Ford would have used petitioner's extruded strip for its entire line during the base period had it been available.

In the middle of 1939 when the designs for Ford Motor Company 1940 models were frozen, petitioner's extruded plastic strip was a newly developed product, and petitioner did not then have enough equipment to enable it to produce enough strip for all Ford car production in the fall of 1939, and petitioner so advised the Ford Motor Company. The early tests of the product during 1939 disclosed a shrinkage problem which had to be cured before the strip was acceptable. Help was sought from the firms supplying the raw materials, and a cure was effected.

Extrusion machines were available prior to 1939. Petitioner first made its own adaptations on a second-hand machine and later ordered its first specially engineered machine for extruding plastic. It took several months from placing the order for the machines before delivery took place, after which about a week was necessary to install the machines, together with other equipment such as dies, conveyors, and heating units, which also had to be ordered and installed. Less time was required to make the machines when the manufacturer had had the experience in making them. Machines were shipped from National Rubber Machinery Company, Akron, Ohio, to petitioner as follows:

+-----------------------------------------+ ¦ ¦ ¦Size ¦ ¦Invoice¦ +--+------+--------+--------------+-------¦ ¦ ¦Number¦(inches)¦Date shipped ¦amount ¦ +--+------+--------+--------------+-------¦ ¦1 ¦ ¦2 1/2 ¦July 31, 1939 ¦$1,440 ¦ +--+------+--------+--------------+-------¦ ¦2 ¦2494 ¦3 1/2 ¦Apr. 3, 1940 ¦2,478 ¦ +--+------+--------+--------------+-------¦ ¦3 ¦2509 ¦2 1/2 ¦June 27, 1940 ¦1,465 ¦ +--+------+--------+--------------+-------¦ ¦4 ¦2531 ¦2 1/2 ¦July 3, 1940 ¦1,880 ¦ +--+------+--------+--------------+-------¦ ¦5 ¦2567 ¦2 1/2 ¦Sept. 21, 1940¦1,480 ¦ +--+------+--------+--------------+-------¦ ¦6 ¦2585 ¦2 1/2 ¦Nov. 18, 1940 ¦2,350 ¦ +--+------+--------+--------------+-------¦ ¦7 ¦2662 ¦2 1/2 ¦Apr. 17, 1941 ¦1,880 ¦ +--+------+--------+--------------+-------¦ ¦8 ¦2663 ¦2 1/2 ¦Apr. 17, 1941 ¦1,880 ¦ +--+------+--------+--------------+-------¦ ¦9 ¦ ¦2 1/2 ¦May 29, 1941 ¦1,880 ¦ +--+------+--------+--------------+-------¦ ¦10¦2701 ¦2 1/2 ¦July 8, 1941 ¦1,880 ¦ +--+------+--------+--------------+-------¦ ¦11¦2786 ¦2 1/2 ¦Nov. 29, 1941 ¦3,065 ¦ +-----------------------------------------+

By December 12, 1939, petitioner prepared a drawing of extruded plastic trim strips for fall 1940 production of 1941 Mercurys. Petitioner ultimately made deliveries of the type represented in the drawings. It had improved features over the strips made for the 1940 Lincoln, and eventually came into standard use. Petitioner sometimes began production of items for the Ford Motor Company and made delivery before it received the formal purchase order from Ford.

Petitioner had no war work until 1942 or 1943. There was no shortage of metal in 1939 or 1940 that would have motivated the Ford Motor Company to change from metal to extruded plastic trim strip. There was no increase in petitioner's selling prices, which had already been fixed for the current model year, in the last 6 months of 1939.

When petitioner started business in July 1934 it occupied 5 to 6 thousand square feet of space on the second floor of a building, and 3 months later took an additional 15 thousand square feet on the lower floor. In 1937 petitioner moved to its present plant containing about 30 thousand square feet of space. It rented the property until February 1, 1939, when it purchased it. An additional 10 thousand square feet of space was completed in the spring of 1941, on land owned by petitioner, under plans made during petitioner's last base period fiscal year ended June 30, 1940.

Petitioner's physical inventory of raw materials in its plant on June 30, 1939, was $13,631.34, after which time its monthly sales were averaging about $30,000 per month.

Petitioner's sales, by products, for its fiscal years ended June 30, 1935, through June 30, 1941, were as follows:

+-----------------------------------------------------------------------------+ ¦Fiscal year ¦Coated, ¦ ¦Coated ¦Extruded ¦ ¦ ¦ ¦ended June 30 ¦excluding ¦Mouldings¦strips ¦strips ¦Misc. ¦Total ¦ ¦ ¦strips ¦ ¦ ¦ ¦ ¦ ¦ +---------------+---------------+---------+--------+---------+-------+--------¦ ¦1935 ¦$150,004 ¦ ¦ ¦ ¦ ¦$150,004¦ +---------------+---------------+---------+--------+---------+-------+--------¦ ¦1936 ¦325,699 ¦ ¦ ¦ ¦ ¦325,699 ¦ +---------------+---------------+---------+--------+---------+-------+--------¦ ¦1937 ¦181,303 ¦ ¦ ¦ ¦$11,040¦192,343 ¦ +---------------+---------------+---------+--------+---------+-------+--------¦ ¦1938 ¦129,934 ¦$63,852 ¦$70,559 ¦ ¦15,912 ¦280,257 ¦ +---------------+---------------+---------+--------+---------+-------+--------¦ ¦1939 ¦185,440 ¦90,289 ¦37,323 ¦ ¦18,231 ¦331,283 ¦ +---------------+---------------+---------+--------+---------+-------+--------¦ ¦1940 ¦195,431 ¦83,068 ¦1,072 ¦$27,650 ¦15,914 ¦323,135 ¦ +---------------+---------------+---------+--------+---------+-------+--------¦ ¦1941 ¦93,443 ¦78,363 ¦ ¦530,425 ¦19,152 ¦721,383 ¦ +-----------------------------------------------------------------------------+

Ford Motor Company passenger car production, by make (Lincoln, Mercury, Ford), by months, for the calendar years 1936 through 1941, was as follows:

+--------------------------------------------------+ ¦ ¦Lincoln and Lincoln Zephyr ¦ +---------+----------------------------------------¦ ¦Month ¦1936 ¦1937 ¦1938 ¦1939 ¦1940 ¦1941 ¦ +---------+-----+------+------+------+------+------¦ ¦January ¦(1 )¦3,620 ¦2,612 ¦2,520 ¦3,203 ¦2,767 ¦ +---------+-----+------+------+------+------+------¦ ¦February ¦(1 )¦3,265 ¦2,278 ¦2,104 ¦3,214 ¦2,397 ¦ +---------+-----+------+------+------+------+------¦ ¦March ¦(1 )¦3,515 ¦2,190 ¦2,782 ¦2,795 ¦1,630 ¦ +---------+-----+------+------+------+------+------¦ ¦April ¦(1 )¦3,410 ¦2,115 ¦2,710 ¦3,252 ¦1,253 ¦ +---------+-----+------+------+------+------+------¦ ¦May ¦(1 )¦3,400 ¦1,530 ¦1,190 ¦2,361 ¦2,212 ¦ +---------+-----+------+------+------+------+------¦ ¦June ¦(1 )¦3,736 ¦1,387 ¦1,185 ¦2,103 ¦2,087 ¦ +---------+-----+------+------+------+------+------¦ ¦July ¦(1 )¦3,470 ¦851 ¦884 ¦(2 ) ¦300 ¦ +---------+-----+------+------+------+------+------¦ ¦August ¦(1 )¦2,131 ¦(2 ) ¦(2 ) ¦50 ¦(2 ) ¦ +---------+-----+------+------+------+------+------¦ ¦September¦(1 )¦1,760 ¦70 ¦385 ¦1,645 ¦1,069 ¦ +---------+-----+------+------+------+------+------¦ ¦October ¦(1 )¦677 ¦1,492 ¦2,120 ¦3,757 ¦1,769 ¦ +---------+-----+------+------+------+------+------¦ ¦November ¦(1 )¦2,001 ¦2,381 ¦2,690 ¦2,698 ¦1,510 ¦ +---------+-----+------+------+------+------+------¦ ¦December ¦(1 )¦3,660 ¦2,816 ¦2,995 ¦2,300 ¦1,307 ¦ +---------+-----+------+------+------+------+------¦ ¦Total ¦(1 )¦34,645¦19,722¦21,565¦27,378¦18,301¦ +--------------------------------------------------+ Separate Lincoln figures not available, included in Ford car production.FN2 Closed.

being an increase of $37,428 over petitioner's actual average base period loss of $8,224. Petitioner contends alternatively for constructive average base period net incomes of $89,570.17, $99,080.85, or $107,349.10.
Respondent's position is that Henry Ford, Sr., had the final word in the operation of his company and it is not shown he would have sanctioned the use of a higher priced decorative strip on the entire Ford lines— Fords, Mercurys, and Lincolns— during the base period.
It is established as a fact that in 1939 officials of the Ford Company advised petitioner that it would use the extruded strip on the entire Ford line if petitioner was in a position to produce in such quantities. Petitioner, however, had to limit itself to production for the Lincoln car only. It is further established that Ford would have used the strip during the entire base period had it been available. We know that Ford was plastic-minded, and, although it would have been possible for Henry Ford, Sr., to have vetoed the use of this extruded strip, the probability of such action was not sufficiently strong to cause us to conclude that he would have done so. At the time it was actually introduced, there was an acceptance of the use of the extruded strip by the more directly concerned officials. We dismiss the conjecture advanced by respondent that, under the circumstances, Henry Ford, Sr., would have resisted the introduction of an item as comparatively insignificant as the strip in question. Our problem thus resolves itself to a proper reconstruction of petitioner's constructive average base period net income in the light of this enlarged use for the extruded strip.
Elaborate reconstructions have been submitted by the respective parties, none of which are deemed free from fault or not subject to valid criticism.
Petitioner first started producing the new extruded strip in the fall of 1939 and from that time on supplied it for use on the Lincoln car. We have found as a fact that had petitioner had its product available earlier it would have sold the product for all passenger cars produced by Ford. We think it apparent that had petitioner made the extruded strip 2 years before it did so during 1939 it would have supplied the Ford production of approximately 734,000 Fords and Mercurys and 21,000 Lincolns. The extruded strip used on the Lincoln sold for $1.01 per car during 1939. The Ford was a lower priced car and the strip for it would have sold for about 48 cents per car. The Ford-Mercury additional production would thus have caused sales of approximately $352,000. The Lincoln sales would have been about $21,000. How this additional production would have been reflected in increased income is somewhat more difficult to appraise. We know that during the last 6 months of the calendar year 1939 the new extrusion operation which was primarily for the Lincoln car was shown in petitioner's financial reports prepared at that time as resulting in an operating profit of 29.3 per cent of net sales. These financial reports and balance sheets which are the source of such information were regularly and contemporaneously prepared by cost accountants to aid petitioner's executives. However, because of intangible factors, we are deterred, on appraisal of the entire record, from making a direct application of the figure derived from these reports in order to ascertain the level of earnings at which petitioner would arrive by the end of its base period under the push-back rule.
Petitioner has also reflected in its base period reconstructions the injection moulding of plastic knobs and escutcheons which it began manufacturing for Ford in 1937. As to this phase of the case we believe petitioner has failed to make a satisfactory showing of the crucial fact that sales of the injection mouldings resulted in a profitable operation, with increased level of earnings directly attributable to such a change. See Permold Co., 21 T.C. 759, 769, and Huguet Fabrics Corporation, 19 T.C. 535.
In our judgment, upon a consideration of the entire record, including petitioner's history of losses on its other operations and the possibility of decreased percentage of profits on the increased production, the level of earnings which petitioner would have reached at the end of its base period would be $60,000.
The parties, on briefs, are in implicit agreement that the reconstruction should be related to the base period production of the Ford Motor Company.
An application of such an index leads us to conclude that, as indicated in our findings, petitioner is entitled to a constructive average base period net income of $60,000. It is only happenstance that this computed figure is sufficiently close to the level of earnings at the end of petitioner's base period that we are constrained to determine the constructive average base period net income in the same amount.
The constructive average base period net income to be used for the fiscal year ended June 30, 1941, is subject, by reason of variation in the provisions of the applicable law, to a different mathematical computation. It may be determined with the computations of the decisions.
Reviewed by the Special Division.
Decisions will be entered under Rule 50. 1.Adjusted for the fiscal year ended June 30, 1941, by reason of a difference in computation caused by the difference of the applicable law. -------- Notes:
1
For carry-over purposes only.

+------------------------------------------------+ ¦ ¦Mercury 1 ¦ +---------+--------------------------------------¦ ¦Month ¦1936¦1937¦1938 ¦1939 ¦1940 ¦1941 ¦ +---------+----+----+------+------+------+-------¦ ¦January ¦ ¦ ¦ ¦8,758 ¦10,822¦13,290 ¦ +---------+----+----+------+------+------+-------¦ ¦February ¦ ¦ ¦ ¦8,604 ¦9,668 ¦12,100 ¦ +---------+----+----+------+------+------+-------¦ ¦March ¦ ¦ ¦ ¦8,326 ¦9,660 ¦12,537 ¦ +---------+----+----+------+------+------+-------¦ ¦April ¦ ¦ ¦ ¦7,481 ¦8,902 ¦7,988 ¦ +---------+----+----+------+------+------+-------¦ ¦May ¦ ¦ ¦ ¦7,860 ¦7,650 ¦12,232 ¦ +---------+----+----+------+------+------+-------¦ ¦June ¦ ¦ ¦ ¦6,950 ¦5,929 ¦11,081 ¦ +---------+----+----+------+------+------+-------¦ ¦July ¦ ¦ ¦ ¦6,950 ¦5,877 ¦10,387 ¦ +---------+----+----+------+------+------+-------¦ ¦August ¦ ¦ ¦ ¦3,080 ¦494 ¦3,369 ¦ +---------+----+----+------+------+------+-------¦ ¦September¦ ¦ ¦ ¦2,330 ¦3,340 ¦1,211 ¦ +---------+----+----+------+------+------+-------¦ ¦October ¦ ¦ ¦2,120 ¦7,990 ¦9,420 ¦7,653 ¦ +---------+----+----+------+------+------+-------¦ ¦November ¦ ¦ ¦7,284 ¦9,800 ¦11,770¦7,216 ¦ +---------+----+----+------+------+------+-------¦ ¦December ¦ ¦ ¦9,278 ¦11,106¦9,940 ¦5,244 ¦ +---------+----+----+------+------+------+-------¦ ¦Total ¦ ¦ ¦18,682¦89,235¦93,472¦104,301¦ +------------------------------------------------+ 1None made until October 1938.

Estimated Total Ford Passenger Cars

NOTE: Separate figures were not available on Ford cars alone. The following figures were computed from various acceptable published figures:

+--------------------------------------------------------------+ ¦Month ¦1936 1 ¦1937 ¦1938 ¦1939 ¦1940 ¦1941 ¦ +---------+--------+-------+-------+-------+-----------+-------¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +---------+--------+-------+-------+-------+-----------+-------¦ ¦January ¦81,200 ¦109,400¦67,400 ¦56,100 ¦73,200 ¦81,700 ¦ +---------+--------+-------+-------+-------+-----------+-------¦ ¦February ¦71,000 ¦87,700 ¦49,100 ¦49,600 ¦62,400 ¦77,700 ¦ +---------+--------+-------+-------+-------+-----------+-------¦ ¦March ¦103,100 ¦116,100¦27,900 ¦66,000 ¦62,700 ¦83,000 ¦ +---------+--------+-------+-------+-------+-----------+-------¦ ¦April ¦108,600 ¦106,200¦46,200 ¦61,500 ¦57,800 ¦29,500 ¦ +---------+--------+-------+-------+-------+-----------+-------¦ ¦May ¦92,700 ¦98,500 ¦43,000 ¦57,200 ¦55,500 ¦92,400 ¦ +---------+--------+-------+-------+-------+-----------+-------¦ ¦June ¦91,500 ¦97,000 ¦39,000 ¦54,000 ¦46,700 ¦85,900 ¦ +---------+--------+-------+-------+-------+-----------+-------¦ ¦July ¦97,100 ¦36,500 ¦31,900 ¦48,500 ¦43,500 ¦83,100 ¦ +---------+--------+-------+-------+-------+-----------+-------¦ ¦August ¦55,200 ¦75,900 ¦25,800 ¦20,200 ¦2 (1,400)¦46,300 ¦ +---------+--------+-------+-------+-------+-----------+-------¦ ¦September¦78,700 ¦38,400 ¦6,300 ¦6,800 ¦29,800 ¦15,000 ¦ +---------+--------+-------+-------+-------+-----------+-------¦ ¦October ¦6,900 ¦1,100 ¦7,900 ¦56,300 ¦70,200 ¦55,500 ¦ +---------+--------+-------+-------+-------+-----------+-------¦ ¦November ¦56,300 ¦12,800 ¦46,900 ¦68,000 ¦75,300 ¦51,400 ¦ +---------+--------+-------+-------+-------+-----------+-------¦ ¦December ¦112,600 ¦126,900¦69,300 ¦73,900 ¦70,600 ¦47,800 ¦ +---------+--------+-------+-------+-------+-----------+-------¦ ¦Total ¦954,900 ¦906,500¦460,700¦618,100¦646,500 ¦749,000¦ +---------+--------+-------+-------+-------+-----------+-------¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +--------------------------------------------------------------+ 1Includes Lincolns in 1936 only.FN2 Considered to be zero.

+---------------------------------------------------------+ ¦ ¦Estimated total production all Ford Motor ¦ ¦ ¦Company ¦ +---------+-----------------------------------------------¦ ¦ ¦passenger automobiles ¦ +---------+-----------------------------------------------¦ ¦Month ¦1936 ¦1937 ¦1938 ¦1939 ¦1940 ¦1941 ¦ +---------+-------+-------+-------+-------+-------+-------¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +---------+-------+-------+-------+-------+-------+-------¦ ¦January ¦81,200 ¦113,000¦70,000 ¦67,400 ¦87,300 ¦97,800 ¦ +---------+-------+-------+-------+-------+-------+-------¦ ¦February ¦71,000 ¦91,000 ¦51,400 ¦60,300 ¦75,300 ¦92,200 ¦ +---------+-------+-------+-------+-------+-------+-------¦ ¦March ¦103,100¦119,600¦30,100 ¦77,100 ¦75,200 ¦97,100 ¦ +---------+-------+-------+-------+-------+-------+-------¦ ¦April ¦108,600¦109,600¦48,300 ¦71,700 ¦70,000 ¦38,800 ¦ +---------+-------+-------+-------+-------+-------+-------¦ ¦May ¦92,700 ¦101,900¦44,500 ¦66,300 ¦65,600 ¦106,800¦ +---------+-------+-------+-------+-------+-------+-------¦ ¦June ¦91,500 ¦100,700¦40,400 ¦62,200 ¦54,700 ¦99,100 ¦ +---------+-------+-------+-------+-------+-------+-------¦ ¦July ¦97,100 ¦40,000 ¦32,800 ¦56,500 ¦49,400 ¦93,800 ¦ +---------+-------+-------+-------+-------+-------+-------¦ ¦August ¦55,200 ¦78,000 ¦25,800 ¦23,300 ¦600 ¦49,700 ¦ +---------+-------+-------+-------+-------+-------+-------¦ ¦September¦78,700 ¦40,200 ¦6,400 ¦9,600 ¦34,700 ¦28,200 ¦ +---------+-------+-------+-------+-------+-------+-------¦ ¦October ¦6,900 ¦2,100 ¦11,500 ¦66,400 ¦83,400 ¦65,000 ¦ +---------+-------+-------+-------+-------+-------+-------¦ ¦November ¦56,300 ¦14,800 ¦56,600 ¦80,500 ¦89,800 ¦60,100 ¦ +---------+-------+-------+-------+-------+-------+-------¦ ¦December ¦112,600¦130,600¦81,400 ¦88,000 ¦82,800 ¦54,300 ¦ +---------+-------+-------+-------+-------+-------+-------¦ ¦Total ¦954,900¦941,500¦499,000¦728,900¦867,400¦871,600¦ +---------+-------+-------+-------+-------+-------+-------¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +---------------------------------------------------------+

Petitioner's average base period net income as computed by respondent is an inadequate standard of normal earnings because of the profitable introduction of the extruded plastic strip during the base period. Petitioner's business did not reach, by the end of the base period, the earning level which it would have reached if it had produced the extruded strip 2 years before it did so.

A fair and just amount representing petitioner's normal earnings to be used as its constructive average base period net income is $60,000.

OPINION.

VAN FOSSAN, Judge:

In the opinion reported at 23 T.C. 382, we concluded that petitioner had not demonstrated that it was entitled to a greater credit than that allowed by respondent. On reconsideration we now conclude that petitioner has established its right to a larger constructive average base period net income.

In acting upon petitioner's claims for refund, respondent concluded that petitioner's extruded plastic strip constituted a new product which was profitable to the petitioner, and determined that petitioner was entitled to a constructive average base period net income of $29,204.23,