Gold Seal Liquors, Inc.
v.
Comm'r of Internal Revenue

Tax Court of the United States.May 28, 1957
28 T.C. 471 (U.S.T.C. 1957)
28 T.C. 471T.C.

Docket No. 35403.

1957-05-28

GOLD SEAL LIQUORS, INC., AND GOLD SEAL LIQUORS, INC., AS TRANSFEREE, AND ACQUIRING CORPORATION BY CONSOLIDATION OF GOLD SEAL LIQUORS, INC., AND FAMOUS LIQUORS, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Philip B. Heller, Esq., for the petitioner. David H. Nelson, Esq., and Julian L. Berman, Esq., for the respondent.


Philip B. Heller, Esq., for the petitioner. David H. Nelson, Esq., and Julian L. Berman, Esq., for the respondent.

Excess profits tax relief under section 722(b)(4) of the Internal Revenue Code of 1939 denied where the evidence failed to show an acceptable basis for reconstruction of base period earnings which would result in excess of those used by petitioner under the invested capital method.

This proceeding relates to Federal excess profits taxes paid for the fiscal years ended January 31, 1941, to January 31, 1946, inclusive. The only issue presented is whether petitioner's applications for relief from such excess profits taxes, under section 722(b)(4) of the Internal Revenue Code of 1939, were properly denied by the Commissioner.

FINDINGS OF FACT.

The stipulated facts have been so found and are incorporated herein by reference.

Petitioner, an Illinois corporation, was incorporated on January 31, 1942. It resulted from the consolidation of two other Illinois corporations: Famous Liquors, Inc., and Gold Seal Liquors Inc. While the latter had the same name as petitioner, it was an entirely separate entity. Hereinafter, petitioner will be referred to as Acquiring Gold Seal and its identically named component will be referred to as Component Gold Seal.

Component Gold Seal was incorporated under the laws of the State of Illinois on February 6, 1934, as Gold Seal Distillers, Inc. Its authorized capital was $20,000, of which $12,000 was initially subscribed and issued. On November 9, 1936, the name of Component Gold Seal was changed to Gold Seal Liquors, Inc. Component Gold Seal was engaged in both wholesale and retail sales of liquor until June 28, 1937, when it discontinued its retail operations.

Component Gold Seal amended its original charter to permit the following changes in its capital structure:

+--------------------------------+ ¦Date ¦From— ¦To— ¦ +--------------+---------+-------¦ ¦Oct. 25, 1935 ¦$20,000 ¦$50,000¦ +--------------+---------+-------¦ ¦Apr. 27, 1936 ¦50,000 ¦100,000¦ +--------------+---------+-------¦ ¦Nov. 9, 1936 ¦100,000 ¦150,000¦ +--------------------------------+

Component Gold Seal's capital and paid-in surplus changed on the respective dates hereinafter set forth:

+---------------------------------------------------+ ¦ ¦Capital stock ¦ ¦ ¦ +--------------+---------------+---------+----------¦ ¦Date ¦ ¦Paid-in ¦Total at ¦ +--------------+---------------+---------+----------¦ ¦ ¦From— ¦To— ¦surplus ¦date shown¦ +--------------+-------+-------+---------+----------¦ ¦Feb. 6, 1934 ¦ ¦$12,000¦ ¦$12,000.00¦ +--------------+-------+-------+---------+----------¦ ¦Sept. 30, 1934¦$12,000¦17,300 ¦$2,451.14¦19,751.14 ¦ +--------------+-------+-------+---------+----------¦ ¦Oct. 30, 1935 ¦17,300 ¦30,300 ¦2,451.14 ¦32,751.14 ¦ +--------------+-------+-------+---------+----------¦ ¦Jan. 31, 1936 ¦30,300 ¦44,900 ¦2,451.14 ¦47,351.14 ¦ +--------------+-------+-------+---------+----------¦ ¦Sept. 30, 1936¦44,900 ¦63,400 ¦9,112.99 ¦72,512.99 ¦ +--------------+-------+-------+---------+----------¦ ¦Jan. 5, 1937 ¦63,400 ¦65,300 ¦11,381.02¦76,681.02 ¦ +--------------+-------+-------+---------+----------¦ ¦Jan. 31, 1937 ¦65,300 ¦93,200 ¦22,331.77¦115,531.77¦ +--------------+-------+-------+---------+----------¦ ¦Mar. 30, 1938 ¦93,200 ¦110,700¦29,831.77¦140,531.77¦ +--------------+-------+-------+---------+----------¦ ¦July 31, 1940 ¦110,700¦150,000¦77,231.77¦227,231.77¦ +---------------------------------------------------+

In December 1939, $15,000 was donated to the capital of Component Gold Seal by stockholders.

Component Gold Seal at the time of its organization was located at 78 West Van Buren Street, Chicago, Illinois, and occupied approximately 2,500 square feet of space. There was a small stockroom and small office in those premises. In November 1935, Component Gold Seal moved all of its wholesale business operations from that location to 420-22-24 South Wells Street, Chicago, Illinois, which premises consisted of approximately 5,400 square feet of space. It retained the original premises at 78 West Van Buren Street, Chicago, Illinois, for its retail operations. During the years 1935 and 1936 additional space was acquired by Component Gold Seal for its wholesale business operations, and the area occupied was increased to approximately 16,000 square feet.

On June 26, 1937, the business of Englewood Wholesale Liquor Distributors, Inc., a competitive wholesale liquor distributor, operating in the city of Chicago, Illinois, was liquidated by Earl Clamage, its president. The sales volume of Englewood for its fiscal year ended October 31, 1936, approximated $1,044,000. Clamage arranged with Component Gold Seal to continue to service the customers of Englewood. On June 26, 1937, Clamage together with six salesmen and a portion of the office personnel of Englewood became employees of Component Gold Seal. On September 30, 1937, Clamage acquired 130 shares of the outstanding capital stock of Component Gold Seal and became its sales manager. Clamage left the employ of Component Gold Seal in January 1940.

By the middle of 1937, Component Gold Seal had outgrown its quarters at the Wells Street location. It needed more room for the proper warehousing of merchandise, for its offices, and for salesrooms. It also needed garage facilities.

On August 23, 1937, Component Gold Seal entered into an industrial lease covering the premises at 701-17 West Harrison Street, Chicago, Illinois, consisting of approximately 60,000 square feet of improved building space, for a term beginning September 1, 1937, and ending December 31, 1952. The lease contained an option to purchase for $40,000, provided the option was exercised prior to December 31, 1942. Component Gold Seal moved to its new location December 1, 1937, and on December 29, 1937, exercised the option to purchase the premises for $40,000.

The facilities occupied by Component Gold Seal from December 1, 1937, consisted of the 5-story office and warehouse building and basement, acquired pursuant to the foregoing option. It occupied during the base period, commencing December 1, 1937, the basement and the first 3 floors of the premises, aggregating approximately 40,000 square feet of space. The fourth and fifth floors, consisting of an additional 20,000 square feet, were leased to other tenants. The 40,000 square feet of space consisted of a general warehouse, a custom bonded warehouse, an area devoted to the accommodation of Lawrence Warehouse System, and general offices and salesrooms. The Lawrence Warehouse System is primarily a means of providing an enclosed area within the premises of a wholesaler where certain merchandise can be segregated from the general inventory into a section controlled entirely by representatives of the Lawrence Warehouse Company. When merchandise is moved into the enclosed area, the wholesaler receives a receipt from the Lawrence Warehouse Company, and this receipt can be pledged with a bank for the purpose of obtaining a loan on the merchandise. When the wholesaler removes any merchandise from the enclosed area, he is required to reduce the amount of his indebtedness to the bank by the amount he received as a loan when that merchandise was placed in the enclosed area.

Component Gold Seal expended $52,557.92 during its base period to improve the premises at 701-17 West Harrison Street, Chicago, Illinois, as follows:

+-----------------------------------------+ ¦Fiscal year ended January 31 ¦Amount ¦ +------------------------------+----------¦ ¦1938 ¦$50,776.42¦ +------------------------------+----------¦ ¦1939 ¦1,537.73 ¦ +------------------------------+----------¦ ¦1940 ¦243.77 ¦ +------------------------------+----------¦ ¦Total ¦$52,557.92¦ +-----------------------------------------+

At the Harrison Street location Component Gold Seal had certain facilities which it did not have at the Wells Street location, such as a loading dock, two freight elevators, approximately 5,000 square feet of office space, a garage, and chutes which were installed to convey merchandise from the upper floors to the main floor, and from the main floor to the basement. The warehouse facilities at Harrison Street were adequate to handle at least three times the 172,000 unit cases shipped to the trade during the year 1939.

During the base period Component Gold Seal sold Hiram Walker, Schenley, Seagram's, Calvert, Brown-Forman, Carstairs, and various other brands of whiskey produced by the major distilleries. One of these brands was Old Sunny Brook, which it purchased from Famous Liquors, Inc. It also sold Scotch whiskey, wines, brandies, and cordials. It dealt with case goods, and did not purchase bulk whiskey. Most of its sales were made in Cook County, Illinois, which includes the city of Chicago. It also did some business in Kane County. During the base period years it served approximately 3,000 accounts.

At the close of the calendar year 1939 Component Gold Seal had 77 persons in its employ, including a sales director, a sales manager, and 25 salesmen. The trade was serviced by having its salesmen call on its customers periodically. Some orders were received from customers by phone. The orders received were prepared for shipment and sent out on Component Gold Seal's own trucks, of which there were seven during the year 1939.

The following table shows the results of the operations of Component Gold Seal for the fiscal years ended January 31, 1935,to January 31, 1942, inclusive:

+-------------------------------------------------------------------------------------------------------------+ ¦ ¦ ¦Fiscal year ended January 31 ¦ ¦ +---------------------------+-----------+-------------------------------------------------------+-------------¦ ¦ ¦1935 ¦1936 ¦1937 ¦1938 ¦1939 ¦1940 ¦ +---------------------------+-----------+-------------+-------------+-------------+-------------+-------------¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +---------------------------+-----------+-------------+-------------+-------------+-------------+-------------¦ ¦Net sales: ¦ ¦ ¦ ¦ ¦ ¦ ¦ +---------------------------+-----------+-------------+-------------+-------------+-------------+-------------¦ ¦Wholesale ¦$721,613.48¦$1,247,386.89¦$2,051,262.27¦$2,872,450.06¦$2,666,567.05¦$3,086,529.36¦ +---------------------------+-----------+-------------+-------------+-------------+-------------+-------------¦ ¦Retail ¦118,775.91 ¦100,268.50 ¦77,441.79 ¦45,686.51 ¦ ¦ ¦ +---------------------------+-----------+-------------+-------------+-------------+-------------+-------------¦ ¦Total ¦840,389.39 ¦1,347,655.39 ¦2,128,704.06 ¦2,918,136.57 ¦2,666,567.05 ¦3,086,529.36 ¦ +---------------------------+-----------+-------------+-------------+-------------+-------------+-------------¦ ¦Cost of goods sold ¦767,604.96 ¦1,240,548.01 ¦1,941,978.92 ¦2,671,345.56 ¦2,453,024.79 ¦2,810,798.53 ¦ +---------------------------+-----------+-------------+-------------+-------------+-------------+-------------¦ ¦Gross profit ¦72,784.43 ¦107,107.38 ¦186,725.14 ¦246,791.01 ¦213,542.26 ¦275,730.83 ¦ +---------------------------+-----------+-------------+-------------+-------------+-------------+-------------¦ ¦Less: Sales, salaries, and ¦ ¦ ¦ ¦ ¦ ¦ ¦ +---------------------------+-----------+-------------+-------------+-------------+-------------+-------------¦ ¦commissions ¦4,062.99 ¦14,970.77 ¦36,841.18 ¦57,564.35 ¦58,684.08 ¦64,539.21 ¦ +---------------------------+-----------+-------------+-------------+-------------+-------------+-------------¦ ¦Gross profit after sales, ¦ ¦ ¦ ¦ ¦ ¦ ¦ +---------------------------+-----------+-------------+-------------+-------------+-------------+-------------¦ ¦salaries, and commissions ¦68,721.44 ¦92,136.61 ¦149,883.96 ¦189,226.66 ¦154,858.18 ¦211,191.62 ¦ +---------------------------+-----------+-------------+-------------+-------------+-------------+-------------¦ ¦Less: ¦ ¦ ¦ ¦ ¦ ¦ ¦ +---------------------------+-----------+-------------+-------------+-------------+-------------+-------------¦ ¦Officers' salaries ¦13,185.00 ¦18,155.00 ¦24,219.00 ¦19,965.82 ¦8,818.35 ¦14,357.50 ¦ +---------------------------+-----------+-------------+-------------+-------------+-------------+-------------¦ ¦Other executive salaries ¦10,340.00 ¦10,475.00 ¦14,230.00 ¦19,256.83 ¦6,271.50 ¦22,850.01 ¦ +---------------------------+-----------+-------------+-------------+-------------+-------------+-------------¦ ¦Other salaries and wages ¦7,853.87 ¦14,670.69 ¦30,339.87 ¦46,787.98 ¦44,361.13 ¦49,336.93 ¦ +---------------------------+-----------+-------------+-------------+-------------+-------------+-------------¦ ¦Rent ¦5,952.00 ¦7,500.00 ¦10,810.00 ¦8,340.00 ¦ ¦ ¦ +---------------------------+-----------+-------------+-------------+-------------+-------------+-------------¦ ¦Depreciation ¦1,314.52 ¦1,924.59 ¦2,397.53 ¦3,797.32 ¦5,611.79 ¦5,589.72 ¦ +---------------------------+-----------+-------------+-------------+-------------+-------------+-------------¦ ¦Advertising ¦2,576.72 ¦2,465.21 ¦1,687.97 ¦1,112.35 ¦466.96 ¦738.65 ¦ +---------------------------+-----------+-------------+-------------+-------------+-------------+-------------¦ ¦Insurance ¦1,060.62 ¦2,692.34 ¦4,044.01 ¦5,289.17 ¦6,906.67 ¦7,827.65 ¦ +---------------------------+-----------+-------------+-------------+-------------+-------------+-------------¦ ¦Sales promotion ¦995.80 ¦2,816.25 ¦7,282.74 ¦15,003.10 ¦13,756.47 ¦19,830.53 ¦ +---------------------------+-----------+-------------+-------------+-------------+-------------+-------------¦ ¦Other expenses ¦16,390.29 ¦21,833.06 ¦32,784.91 ¦49,512.63 ¦54,275.85 ¦67,469.02 ¦ +---------------------------+-----------+-------------+-------------+-------------+-------------+-------------¦ ¦Total ¦59,668.82 ¦82,432.14 ¦127,796.03 ¦169,065.20 ¦140,468.72 ¦188,000.01 ¦ +---------------------------+-----------+-------------+-------------+-------------+-------------+-------------¦ ¦Operating profit ¦9,052.62 ¦9,704.47 ¦22,087.93 ¦20,161.46 ¦14,389.46 ¦23,191.61 ¦ +---------------------------+-----------+-------------+-------------+-------------+-------------+-------------¦ ¦Add: ¦ ¦ ¦ ¦ ¦ ¦ ¦ +---------------------------+-----------+-------------+-------------+-------------+-------------+-------------¦ ¦Interest ¦6.34 ¦ ¦ ¦ ¦ ¦ ¦ +---------------------------+-----------+-------------+-------------+-------------+-------------+-------------¦ ¦Other income ¦ ¦255.86 ¦699.05 ¦ ¦466.86 ¦ ¦ +---------------------------+-----------+-------------+-------------+-------------+-------------+-------------¦ ¦Profit from— ¦ ¦ ¦ ¦ ¦ ¦ ¦ +---------------------------+-----------+-------------+-------------+-------------+-------------+-------------¦ ¦Sale of C/A ¦ ¦ ¦21.44 ¦ ¦ ¦ ¦ +---------------------------+-----------+-------------+-------------+-------------+-------------+-------------¦ ¦Rent ¦ ¦ ¦ ¦ ¦2,950.00 ¦4,425.00 ¦ +---------------------------+-----------+-------------+-------------+-------------+-------------+-------------¦ ¦Settlement of claim ¦ ¦ ¦ ¦ ¦ ¦ ¦ +---------------------------+-----------+-------------+-------------+-------------+-------------+-------------¦ ¦Net profit ¦9,058.96 ¦9,960.33 ¦22,808.42 ¦20,161.46 ¦17,806.32 ¦27,616.61 ¦ +-------------------------------------------------------------------------------------------------------------+

During and prior to the base period, Milton M. Friedman was middle western representative of a New York importing firm which had the United States distributorship for Martini and Rossi vermouth (sold as a nonalcoholic beverage during Prohibition), John Jamieson ryes, and several brands of port and sherry. As such representative he covered as many as 14 States, calling on the wholesale and retail trade. When National Prohibition was repealed, Friedman also became agent for certain Scotch whiskeys, Bardinay brandy, and Jamaica rums.

In March 1937, Friedman and two others began negotiating with National Distillers Products Corporation (hereinafter referred to as National) in New York to secure bulk whiskey (in barrels) with the right to bottle and distribute such whiskey under one or more of National's labels. On his return to Chicago, Friedman caused Famous Liquors, Inc. (hereinafter sometimes referred to as Famous), to be organized under Illinois law on April 13, 1937, for the purpose of engaging in the the wholesale liquor business. Friedman became its president.

In April 1937, 900 shares of no-par-value common stock (out of a total authorized capital of 21,000 shares) of Famous were issued for a stated value of $18,000. Later the following changes were made in its capital structure:

+-----------------------------------------+ ¦ ¦Outstanding capital stock ¦ +-------------+---------------------------¦ ¦Date ¦From— ¦To— ¦ +-------------+---------------+-----------¦ ¦Apr. 30, 1938¦$18,000 ¦$39,000 ¦ +-------------+---------------+-----------¦ ¦Apr. 25, 1939¦39,000 ¦48,000 ¦ +-------------+---------------+-----------¦ ¦Apr. 30, 1940¦48,000 ¦60,000 ¦ +-----------------------------------------+

National and Famous entered into several agreements dated June 17, 1937, September 30, 1937, and July 14, 1938, covering the purchase of Kentucky bourbon whiskeys in barrels to be bottled under the brand name of Old Sunny Brook at not less than 93 proof. The exclusive right was granted Famous to distribute whiskey bottled under this brand name in the State of Illinois. The number of barrels of Old Sunny Brook acquired by Famous, and the number bottled during the years 1937, 1938, 1939, and the period December 31, 1939, to January 30, 1940, under the above-mentioned agreements were as follows:

+-----------------------------------------------+ ¦ ¦Barrels ¦Barrels¦ +------------------------------+--------+-------¦ ¦ ¦acquired¦bottled¦ +------------------------------+--------+-------¦ ¦ ¦ ¦ ¦ +------------------------------+--------+-------¦ ¦1937 ¦4,053 ¦923 ¦ +------------------------------+--------+-------¦ ¦1938 ¦4,256 ¦2,470 ¦ +------------------------------+--------+-------¦ ¦1939 ¦4,933 ¦2,447 ¦ +------------------------------+--------+-------¦ ¦Dec. 31, 1939 to Jan. 31, 1949¦ ¦223 ¦ +------------------------------+--------+-------¦ ¦ ¦ ¦ ¦ +-----------------------------------------------+

The inventory of Kentucky bourbon whiskeys owned by Famous and available for bottling under the Old Sunny Brook label on the dates listed below and its original cost were as follows:

+---------------------------------+ ¦Date ¦No. of ¦Original ¦ +-------------+-------+-----------¦ ¦ ¦barrels¦cost ¦ +-------------+-------+-----------¦ ¦June 30, 1937¦2,106 ¦$291,190.49¦ +-------------+-------+-----------¦ ¦Dec. 31, 1937¦3,130 ¦327,844.71 ¦ +-------------+-------+-----------¦ ¦Dec. 31, 1938¦4,916 ¦309,951.96 ¦ +-------------+-------+-----------¦ ¦Dec. 31, 1939¦7,402 ¦411,430.89 ¦ +-------------+-------+-----------¦ ¦Jan. 31, 1940¦7,179 ¦396,674.77 ¦ +---------------------------------+

In addition to the Old Sunny Brook contracts, National and Famous entered into agreements granting Famous the exclusive right to distribute whiskey bottled under the brand names of Shenandoah and Chicken Cock in the States of Illinois, Missouri, Kentucky, Iowa, and Colorado. The Shenandoah and Chicken Cock labels were relatively unknown and their contribution to the development of Famous was insignificant.

In addition to National's labels acquired under the above-mentioned contracts, Famous handled the distribution of Lanson champagne. Friedman retained his personal agency for the lines handled by the New York importing house previously referred to.

Famous maintained an office at 308 West Washington Street, Chicago, Illinois. The bulk whiskey was bottled for it by National and shipped in cases to the Wakem & McLaughlin warehouse in Chicago for the account of Famous. Wakem & McLaughlin charged 10 cents a case for the first month of storage and 5 cents a month thereafter. Independent cartage companies were used for the delivery of merchandise to the customers of Famous.

The delivery costs of Famous during its base period years were as follows:

+--------------------------------------+ ¦Fiscal year ended April 30 ¦Amount ¦ +----------------------------+---------¦ ¦1938 ¦$5,542.26¦ +----------------------------+---------¦ ¦1939 ¦8,723.02 ¦ +----------------------------+---------¦ ¦1940 ¦19,659.13¦ +--------------------------------------+

In the fiscal year ended April 30, 1940, no delivery charges were incurred for the period from January 31, 1940, to April 30, 1940, for the reason that these facilities were furnished by Component Gold Seal.

Because of the limited facilities of Famous, its sales were limited to the sale of full cases. The warehouse did not have any facilities for splitting cases into less than full case lots, and Famous did not engage in that type of business.

By January 31, 1940, Famous had eight salesmen who were thoroughly trained in the type of business which it conducted, calling on both the wholesale and retail trade. The average salesman was able to handle approximately 150 accounts. Famous attempted to develop the Chicago market primarily and its salesmen concentrated on the sale of Old Sunny Brook within the Chicago metropolitan area. A very small percentage of Famous's total sales was made outside of this area in Du Page County and Kane County, illinois.

The background of bulk whiskey contracts such as Famous had with National was as follows:

At the end of Prohibition, National and its components owned approximately 350 brand names of which not more than 20 brands were put in commerce. The 20 brands consisted of those which had been sold during Prohibition as medicinal whiskeys as well as some that were not sold during Prohibition. Old Sunny Brook, Old Hermitage, Hill and Hill, Bond and Lillard, Old McBrayer, and Hannah Mills were brand names for 7-year-old, bottled-in-bond whiskey which National put in commerce immediately after repeal of Prohibition in case units, viz: in cases of 12, 24, or 48 bottles (depending on the bottle size).

During the years 1934 and 1935 there was a trend among distributors for widespread handling of numerous brands, representing all distillers, without promotion of any particular brand, and the relationship between distillers and wholesalers was rather chaotic from the standpoint of distribution of brands.

In the Chicago area alone, there were approximately 9,000 retail liquor dealers and 150 wholesale liquor dealers during the base period. The wholesale liquor business was keenly competitive during that time, and large discounts were being given to secure business. All of the wholesalers could call on any of the retailers in the Chicago area. There were no legal restrictions on the number of retailers which could be licensed in any given area during the base period. Retail liquor licenses were freely issued to such establishments as groceries, drugstores, etc.

It is characteristic of the liquor business that per capita consumption of whiskey in an area does not vary significantly from year to year merely because of the introduction of new brands. The effect of this on the liquor industry is that if one brand has gains, it must be at the sacrifice of another or others because the total amount that can be sold will not change appreciably.

It was to overcome the effect on National of the wholesalers' practice of not promoting any specific brand that National conceived its bulk-sale/exclusive-label, or ‘contract brand’ arrangements. It was thought that this new system of selling whiskey, because it offered a wholesaler the exclusive rights to distribute specific brands in a given territory, would encourage promotion of the National brand in question in preference to other brands. It further helped National because it created an opportunity to sell its whiskey in advance of what its planned sales might otherwise be. To the extent that such sales in bulk could be made, National had the added advantage of shifting its inventory burden to the wholesaler.

If a wholesaler purchased bulk whiskey from National and had this whiskey bottled by National, and if he fully followed the markup suggested by National, he could expect an advantage of about $1.50 per case over what he might have realized if he had bought the same whiskey in case lots.

National, however, did not exercise any control over the prices which the wholesaler could charge and the latter would not necessarily take the markup which National suggested. The wholesaler put his own price on the merchandise.

During the base period it was customary for National and its franchised wholesalers to sponsor ‘deals' for the retailers. The wholesaler would offer to the retailing trade a special discount on the contract brand for a limited period (generally 5 to 30 days). National would absorb half of the discount by issuing a credit memorandum to the wholesaler. The result of such a deal was to diminish or wipe out (depending on the amount of discount) the extra profit per case which the wholesaler might expect to get under a bulk whiskey contract. While the deal could be availed of only for a limited period by the retailers, there was no restriction on how much they could purchase during the deal period, and they were encouraged to purchase as much as possible, even a 2-year supply. When Famous had a deal, it would be offered to all retailers. Deals were made for the purpose of getting customers to buy the product in larger quantities. Famous had some deals on its ‘contract brands' during the base period. One form of deal was to make up a combination case, consisting of 9 bottles of 93 proof and 3 bottles of 100 proof (bottled-in-bond) whiskey, and sell it for the price of a case of 93 proof.

In practice, the bulk contracts worked as follows: National sold warehouse certificates, for barrels of whiskey, to its selected wholesalers for which the wholesaler gave a promissory note. National retained the certificates as collateral and the wholesaler executed a power of attorney, in favor of National, to deal with the retained certificates. Under the contract of sale, the wholesaler was required to pay for costs of bottling, labels, insurance, taxes, storage, handling, and advertising. While the promissory notes bore due dates, the wholesaler did not actually pay the note at that time. Rather, he paid for the whiskey as he ordered it withdrawn and bottled, the payment being applied to reduce the note account.

The following shows the profit realized or loss sustained by Famous for each of its fiscal years ended April 30, 1938, 1939, and 1940:

+------------------------------------------------------------------------------------------+ ¦ ¦ ¦ ¦ ¦Fiscal year ended April 30 ¦ +------------------+-----------------------+-----------------------------------------------¦ ¦ ¦1938 ¦1939 ¦1940 ¦ +------------------+-----------------------+-----------------------+-----------------------¦ ¦Gross sales ¦ ¦$553,796.35¦ ¦$686,421.43¦ ¦ ¦ +------------------+-----------+-----------+-----------+-----------+-----------+-----------¦ ¦Less: Returns and ¦ ¦ ¦ ¦ ¦ ¦ ¦ +------------------+-----------+-----------+-----------+-----------+-----------+-----------¦ ¦allowances ¦ ¦10,420.42 ¦ ¦5,641.07 ¦ ¦ ¦ +------------------+-----------+-----------+-----------+-----------+-----------+-----------¦ ¦Net sales ¦ ¦$543,375.93¦ ¦$680,780.36¦ ¦1 ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦$812,017.30¦ +------------------+-----------+-----------+-----------+-----------+-----------+-----------¦ ¦Cost of goods ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦sold: ¦ ¦ ¦ ¦ ¦ ¦ ¦ +------------------+-----------+-----------+-----------+-----------+-----------+-----------¦ ¦Inventory, ¦ ¦ ¦$21,020.37 ¦ ¦$50,190.52 ¦ ¦ ¦beginning ¦ ¦ ¦ ¦ ¦ ¦ ¦ +------------------+-----------+-----------+-----------+-----------+-----------+-----------¦ ¦Material purchases¦$470,706.26¦ ¦601,582.26 ¦ ¦764,663.45 ¦ ¦ +------------------+-----------+-----------+-----------+-----------+-----------+-----------¦ ¦ ¦$470,706.26¦ ¦$622,602.63¦ ¦$814,853.97¦ ¦ +------------------+-----------+-----------+-----------+-----------+-----------+-----------¦ ¦Inventory, ending ¦21,020.37 ¦449,685.89 ¦50,190.52 ¦572,412.11 ¦83,877.34 ¦730,976.63 ¦ +------------------+-----------+-----------+-----------+-----------+-----------+-----------¦ ¦Gross profit ¦ ¦$93,690.04 ¦ ¦$108,368.25¦ ¦$81,040.67 ¦ +------------------+-----------+-----------+-----------+-----------+-----------+-----------¦ ¦Deductions: ¦ ¦ ¦ ¦ ¦ ¦ ¦ +------------------+-----------+-----------+-----------+-----------+-----------+-----------¦ ¦Officers' salaries¦$17,500.00 ¦ ¦$20,250.00 ¦ ¦$15,300.00 ¦ ¦ +------------------+-----------+-----------+-----------+-----------+-----------+-----------¦ ¦Salaries and wages¦23,100.45 ¦ ¦20,379.04 ¦ ¦19,204.44 ¦ ¦ +------------------+-----------+-----------+-----------+-----------+-----------+-----------¦ ¦Rent ¦825.90 ¦ ¦1,164.09 ¦ ¦1,333.14 ¦ ¦ +------------------+-----------+-----------+-----------+-----------+-----------+-----------¦ ¦Bad debts ¦233.55 ¦ ¦608.45 ¦ ¦1,500.26 ¦ ¦ +------------------+-----------+-----------+-----------+-----------+-----------+-----------¦ ¦Interest ¦11,587.71 ¦ ¦14,225.51 ¦ ¦630.63 ¦ ¦ +------------------+-----------+-----------+-----------+-----------+-----------+-----------¦ ¦Taxes ¦2,867.41 ¦ ¦3,285.75 ¦ ¦2,393.52 ¦ ¦ +------------------+-----------+-----------+-----------+-----------+-----------+-----------¦ ¦Contributions ¦ ¦ ¦284.95 ¦ ¦ ¦ ¦ +------------------+-----------+-----------+-----------+-----------+-----------+-----------¦ ¦Depreciation ¦70.93 ¦ ¦87.19 ¦ ¦385.86 ¦ ¦ +------------------+-----------+-----------+-----------+-----------+-----------+-----------¦ ¦Advertising ¦2,469.91 ¦ ¦2,685.54 ¦ ¦6,109.35 ¦ ¦ +------------------+-----------+-----------+-----------+-----------+-----------+-----------¦ ¦Delivery ¦5,542.26 ¦ ¦8,723.02 ¦ ¦19,659.13 ¦ ¦ +------------------+-----------+-----------+-----------+-----------+-----------+-----------¦ ¦Insurance ¦2,693.38 ¦ ¦6,457.03 ¦ ¦ ¦ ¦ +------------------+-----------+-----------+-----------+-----------+-----------+-----------¦ ¦Licenses and ¦487.50 ¦ ¦285.00 ¦ ¦275.00 ¦ ¦ ¦permits ¦ ¦ ¦ ¦ ¦ ¦ ¦ +------------------+-----------+-----------+-----------+-----------+-----------+-----------¦ ¦Office and ¦550.96 ¦ ¦1,545.06 ¦ ¦905.65 ¦ ¦ ¦miscellaneous ¦ ¦ ¦ ¦ ¦ ¦ ¦ +------------------+-----------+-----------+-----------+-----------+-----------+-----------¦ ¦Sales expense ¦5,796.61 ¦ ¦13,910.78 ¦ ¦11,881.33 ¦ ¦ +------------------+-----------+-----------+-----------+-----------+-----------+-----------¦ ¦Telephone and ¦1,049.26 ¦ ¦981.55 ¦ ¦758.87 ¦ ¦ ¦telegraph ¦ ¦ ¦ ¦ ¦ ¦ ¦ +------------------+-----------+-----------+-----------+-----------+-----------+-----------¦ ¦Traveling ¦1,421.16 ¦ ¦1,915.33 ¦ ¦1,446.85 ¦ ¦ +------------------+-----------+-----------+-----------+-----------+-----------+-----------¦ ¦Legal and ¦1,240.00 ¦ ¦336.67 ¦ ¦ ¦ ¦ ¦accounting ¦ ¦ ¦ ¦ ¦ ¦ ¦ +------------------+-----------+-----------+-----------+-----------+-----------+-----------¦ ¦Embezzlement ¦ ¦ ¦868.73 ¦ ¦ ¦ ¦ +------------------+-----------+-----------+-----------+-----------+-----------+-----------¦ ¦Entertainment ¦ ¦ ¦764.55 ¦ ¦1,264.83 ¦ ¦ +------------------+-----------+-----------+-----------+-----------+-----------+-----------¦ ¦Bonuses ¦ ¦ ¦1,820.00 ¦ ¦ ¦ ¦ +------------------+-----------+-----------+-----------+-----------+-----------+-----------¦ ¦ ¦ ¦77,436.99 ¦ ¦100,578.24 ¦ ¦83,048.86 ¦ +------------------+-----------+-----------+-----------+-----------+-----------+-----------¦ ¦Operating income ¦ ¦ ¦ ¦ ¦ ¦ ¦ +------------------+-----------+-----------+-----------+-----------+-----------+-----------¦ ¦(or loss) ¦ ¦$16,253.05 ¦ ¦$7,790.01 ¦ ¦($2,008.19)¦ +------------------+-----------+-----------+-----------+-----------+-----------+-----------¦ ¦Other income: ¦ ¦ ¦ ¦ ¦ ¦ ¦ +------------------+-----------+-----------+-----------+-----------+-----------+-----------¦ ¦Interest ¦ ¦ ¦ ¦50.57 ¦ ¦ ¦ +------------------+-----------+-----------+-----------+-----------+-----------+-----------¦ ¦Insurance ¦ ¦ ¦ ¦ ¦ ¦295.86 ¦ +------------------+-----------+-----------+-----------+-----------+-----------+-----------¦ ¦Adjustment of ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦prior ¦ ¦ ¦ ¦ ¦ ¦ ¦ +------------------+-----------+-----------+-----------+-----------+-----------+-----------¦ ¦operations ¦ ¦ ¦ ¦ ¦ ¦7,007.20 ¦ +------------------+-----------+-----------+-----------+-----------+-----------+-----------¦ ¦Net profit ¦ ¦$16,253.05 ¦ ¦$7,840.58 ¦ ¦$5,294.87 ¦ +------------------------------------------------------------------------------------------+

In addition to the Old Sunny Brook label which Famous was authorized to use, there were three other National bulk-contract brands being sold in the Chicago area (by other wholesalers): Hill and Hill, Bond and Lillard, and Old McBrayer. Old Sunny Brook was an immediately recognized and strongly accepted brand in the area, and was easy to sell.

National was not satisfied with the volume of sales of Old Sunny Brook in the Chicago trade area in 1939, and urged that some change should be made as to the increase of capital and the increase of sales organization.

Toward the latter part of 1939, Friedman began discussions with Component Gold Seal about combining the two operations. At the end of January 1940, Friedman and his eight salesmen moved to the Component Gold Seal premises. The last January paycheck of these people was issued by Gold Seal.

On invoices dated January 31, 1940, Famous sold whiskey to Component Gold Seal, allowing a wholesaler's discount. Similarly Famous sold whiskey to Component Gold Seal on February 1, 1940. The February 1 invoices were billed at cost. On February 28, 1940, the prices on the January 31 invoices were adjusted downward to cost. These sales represented inventory of Famous at January 31, 1940, which was taken over by Component Gold Seal. This inventory consisted of the following:

+-----------------------------------------------------------------------------+ ¦1,550 5/¦cases Old Sunny Brook, representing bottled in bond and 4-year old ¦ ¦12 ¦93-proof merchandise ¦ +--------+--------------------------------------------------------------------¦ ¦136 ¦cases Chicken Cock ¦ +--------+--------------------------------------------------------------------¦ ¦166 ¦cases Bourbon DeLuxe ¦ +--------+--------------------------------------------------------------------¦ ¦ ¦ ¦ +--------+--------------------------------------------------------------------¦ ¦1,852 5/¦total number of cases ¦ ¦12 ¦ ¦ +-----------------------------------------------------------------------------+

This represented a normal inventory as of the close of business January 31, 1940. Except for this inventory of approximately 103 barrels (1,550 5/12 cases— 15 cases per barrel), all of the bottlings of Old Sunny Brook were sold in the base period of Famous. There was a definite relationship between the number of cases bottled each month and the number of sales of cases each month.

After January 31, 1940 (the end of Component Gold Seal's base period), all sales by Famous to Component Gold Seal were at cost plus an ‘override’ of 35 cents per case.

A special meeting of the board of directors of Famous was held on April 10, 1940. Among the stated purposes of this meeting was ‘the declaration of additional compensation of the officers of the corporation commensurate with the value of their services and to formally consider the application of merger which had heretofore been pending with GOLD SEAL LIQUORS, INC., an Illinois corporation.’ The following resolutions were adopted:

BE IT RESOLVED that GERSHEN FEIN is hereby elected to the office of secretary of this corporation to fill the vacancy created by the resignation of JEANNETTE SCHWARTZ.

WHEREAS, MILTON M. FRIEDMAN, president, and SAMUEL H. POKRASS, vice-president, have heretofore rendered valuable services for and on behalf of this company, and whereas the compensation heretofore received by said persons is wholly inadequate for the valuable services rendered,

IT IS HEREBY RESOLVED that the compensation of the officers for the year ending the 30th day of April, 1940, shall be as follows:

MILTON M. FRIEDMAN $9,500.00

SAMUEL H. POKRASS $4,000.00

WHEREAS, the present stockholders of this company have indicated their desire to acquire additional capital stock and to provide additional working capital for the company and further to facilitate the conclusion of the arrangements now pending with GOLD SEAL LIQUORS, INC.,

IT IS HEREBY RESOLVED that the present stockholders shall be permitted to acquire SIX HUNDRED (600) shares of the unissued common stock of this company at the declared value of TWENTY DOLLARS ($20.00) per share.

The chairman then informed the directors that a great deal of work had been done for the purpose of working out an arrangement whereby stockholders of FAMOUS LIQUORS, INC., would exchange their holdings for a number of shares of GOLD SEAL LIQUORS, INC., stock, pursuant to a Plan of Reorganization which had not as yet been formally set forth. The Chairman also informed the directors that the entire selling organization of the FAMOUS LIQUORS, INC., had heretofore been absorbed by GOLD SEAL LIQUORS, INC., and that it was appropriate at this time to ratify that act and also to entitle the officers of that company to formally conclude the reorganization program. Whereupon, on motion duly made and seconded the following resolutions were unanimously adopted:

RESOLVED that the action taken heretofore by the officers of this corporation in connection with the development of a Plan of Reorganization with GOLD SEAL LIQUORS, INC., is hereby ratified.

BE IT FURTHER RESOLVED that the president and secretary of this corporation are hereby authorized to negotiate and to approve an arrangement whereby all of the outstanding stock of FAMOUS LIQUORS, INC., an Illinois corporation, may be exchanged for stock of GOLD SEAL LIQUORS, INC., upon such terms and conditions which the said officers may determine, it being understood that the stockholders of this corporation shall assign all of their stock to FAMOUS LIQUORS, INC., and FAMOUS LIQUORS, INC., will deliver an equivalent number of shares of said stock to GOLD SEAL LIQUORS, INC., and that GOLD SEAL LIQUORS, INC., will in exchange therefor, turn over to said FAMOUS LIQUORS, INC., a sufficient number of shares, based upon the respective book values at the close of business on the 31st day of January, 1940. FAMOUS LIQUORS, INC., will then distribute the shares of GOLD SEAL LIQUORS, INC., stock to its respective shareholders in the exact proportion required by their holdings at the time of said exchange.

The chairman then advised the board that a formal Plan of Reorganization was in the process of completion and that said plan would become a part of the records of this corporation and would be available for ratification at a future date.

On June 3, 1940, Friedman was elected president and director of Component Gold Seal.

On July 31, 1940, a written ‘Plan of Reorganization of Gold Seal Liquors, Inc., and Famous Liquors, Inc., Illinois Corporations' was signed by Friedman as president of Famous and by Friedman as president of Component Gold Seal whereby Component Gold Seal issued its stock to Famous's stockholders in exchange for their stock in Famous, pro rata, based upon a January 31, 1940, valuation.

Monthly sales of Famous for the period shown were as follows, dividend as between Component Gold Seal and all others (cents omitted):

+-----------------------------------------------------------------+ ¦Sales to— ¦ ¦ ¦ ¦ +-------------------------------------+---------+--------+--------¦ ¦ ¦ ¦ ¦Total ¦ +-------------------------------------+---------+--------+--------¦ ¦ ¦Component¦Others ¦ ¦ +-------------------------------------+---------+--------+--------¦ ¦ ¦Gold Seal¦ ¦ ¦ +-------------------------------------+---------+--------+--------¦ ¦Fiscal year ended Apr. 30, 1938: ¦ ¦ ¦ ¦ +-------------------------------------+---------+--------+--------¦ ¦May 1937 ¦$3,460 ¦$47,056 ¦$50,516 ¦ +-------------------------------------+---------+--------+--------¦ ¦June 1937 ¦2,441 ¦27,470 ¦29,911 ¦ +-------------------------------------+---------+--------+--------¦ ¦July 1937 ¦4,560 ¦27,850 ¦32,410 ¦ +-------------------------------------+---------+--------+--------¦ ¦August 1937 ¦2,141 ¦26,743 ¦28,884 ¦ +-------------------------------------+---------+--------+--------¦ ¦September 1937 ¦5,307 ¦24,337 ¦29,644 ¦ +-------------------------------------+---------+--------+--------¦ ¦October 1937 ¦4,260 ¦37,822 ¦42,082 ¦ +-------------------------------------+---------+--------+--------¦ ¦November 1937 ¦3,250 ¦42,356 ¦45,606 ¦ +-------------------------------------+---------+--------+--------¦ ¦December 1937 ¦7,403 ¦49,982 ¦57,385 ¦ +-------------------------------------+---------+--------+--------¦ ¦January 1938 ¦3,091 ¦48,856 ¦51,947 ¦ +-------------------------------------+---------+--------+--------¦ ¦February 1938 ¦3,145 ¦17,299 ¦20,444 ¦ +-------------------------------------+---------+--------+--------¦ ¦March 1938 ¦8,780 ¦109,612 ¦118,392 ¦ +-------------------------------------+---------+--------+--------¦ ¦April 1938 ¦3,955 ¦32,201 ¦36,156 ¦ +-------------------------------------+---------+--------+--------¦ ¦Total ¦$51,793 ¦$491,584¦$543,377¦ +-------------------------------------+---------+--------+--------¦ ¦Fiscal year ended Apr. 30, 1939: ¦ ¦ ¦ ¦ +-------------------------------------+---------+--------+--------¦ ¦May 1938 ¦$3,382 ¦$34,157 ¦$37,539 ¦ +-------------------------------------+---------+--------+--------¦ ¦June 1938 ¦5,016 ¦107,853 ¦112,869 ¦ +-------------------------------------+---------+--------+--------¦ ¦July 1938 ¦2,803 ¦21,013 ¦23,816 ¦ +-------------------------------------+---------+--------+--------¦ ¦August 1938 ¦859 ¦27,107 ¦27,966 ¦ +-------------------------------------+---------+--------+--------¦ ¦September 1938 ¦3,279 ¦45,577 ¦48,856 ¦ +-------------------------------------+---------+--------+--------¦ ¦October 1938 ¦4,459 ¦61,770 ¦66,229 ¦ +-------------------------------------+---------+--------+--------¦ ¦November 1938 ¦3,035 ¦53,887 ¦56,922 ¦ +-------------------------------------+---------+--------+--------¦ ¦December 1938 ¦4,798 ¦65,550 ¦70,348 ¦ +-------------------------------------+---------+--------+--------¦ ¦January 1939 ¦3,952 ¦64,412 ¦68,364 ¦ +-------------------------------------+---------+--------+--------¦ ¦February 1939 ¦628 ¦81,576 ¦82,204 ¦ +-------------------------------------+---------+--------+--------¦ ¦March 1939 ¦1,476 ¦38,735 ¦40,211 ¦ +-------------------------------------+---------+--------+--------¦ ¦April 1939 ¦890 ¦44,565 ¦45,455 ¦ +-------------------------------------+---------+--------+--------¦ ¦Total ¦$34,577 ¦$646,202¦$680,779¦ +-------------------------------------+---------+--------+--------¦ ¦Fiscal year ended Apr. 30, 1940: ¦ ¦ ¦ ¦ +-------------------------------------+---------+--------+--------¦ ¦May 1939 ¦$2,174 ¦$51,449 ¦$53,623 ¦ +-------------------------------------+---------+--------+--------¦ ¦June 1939 ¦1,497 ¦35,689 ¦37,186 ¦ +-------------------------------------+---------+--------+--------¦ ¦July 1939 ¦(900) ¦57,194 ¦56,204 ¦ +-------------------------------------+---------+--------+--------¦ ¦August 1939 ¦435 ¦49,230 ¦49,665 ¦ +-------------------------------------+---------+--------+--------¦ ¦September 1939 ¦4,244 ¦55,107 ¦59,351 ¦ +-------------------------------------+---------+--------+--------¦ ¦October 1939 ¦812 ¦57,093 ¦57,905 ¦ +-------------------------------------+---------+--------+--------¦ ¦November 1939 ¦891 ¦89,828 ¦90,719 ¦ +-------------------------------------+---------+--------+--------¦ ¦December 1939 ¦2,719 ¦95,197 ¦97,916 ¦ +-------------------------------------+---------+--------+--------¦ ¦January 1940 ¦18,295 ¦76,621 ¦94,916 ¦ +-------------------------------------+---------+--------+--------¦ ¦February 1940 ¦70,950 ¦8,996 ¦79,946 ¦ +-------------------------------------+---------+--------+--------¦ ¦March 1940 ¦83,842 ¦ ¦83,842 ¦ +-------------------------------------+---------+--------+--------¦ ¦April 1940 ¦50,744 ¦ ¦50,744 ¦ +-------------------------------------+---------+--------+--------¦ ¦Total ¦$235,613 ¦$576,404¦$812,017¦ +-------------------------------------+---------+--------+--------¦ ¦Period May 1, 1940, to Jan. 31, 1941:¦ ¦ ¦ ¦ +-------------------------------------+---------+--------+--------¦ ¦May 1940 ¦$57,091 ¦ ¦$57,091 ¦ +-------------------------------------+---------+--------+--------¦ ¦June 1940 ¦97,138 ¦$1,762 ¦98,900 ¦ +-------------------------------------+---------+--------+--------¦ ¦July 1940 ¦38,909 ¦6,000 ¦44,909 ¦ +-------------------------------------+---------+--------+--------¦ ¦August 1940 ¦4,724 ¦ ¦4,724 ¦ +-------------------------------------+---------+--------+--------¦ ¦September 1940 ¦114,958 ¦6,057 ¦121,015 ¦ +-------------------------------------+---------+--------+--------¦ ¦October 1940 ¦47,509 ¦524 ¦48,033 ¦ +-------------------------------------+---------+--------+--------¦ ¦November 1940 ¦89,541 ¦ ¦89,541 ¦ +-------------------------------------+---------+--------+--------¦ ¦December 1940 ¦124,706 ¦10,080 ¦134,786 ¦ +-------------------------------------+---------+--------+--------¦ ¦January 1941 ¦30,605 ¦7,622 ¦38,227 ¦ +-------------------------------------+---------+--------+--------¦ ¦Total ¦$605,181 ¦$32,045 ¦$637,226¦ +-----------------------------------------------------------------+

Apparent per capita consumption of distilled spirits in Illinois in wine gallons was as follows:

+-------------------------------+ ¦Year ¦Per capita consumption ¦ +------+------------------------¦ ¦1934 ¦0.84 ¦ +------+------------------------¦ ¦1935 ¦1.08 ¦ +------+------------------------¦ ¦1936 ¦1.50 ¦ +------+------------------------¦ ¦1937 ¦1.64 ¦ +------+------------------------¦ ¦1938 ¦1.41 ¦ +------+------------------------¦ ¦1939 ¦1.56 ¦ +-------------------------------+

Acquiring Gold Seal qualifies as an acquiring corporation under section 740(a) (4) of the Internal Revenue Code of 1939. Component Gold Seal and its subsidiary corporation, Famous, qualify as component corporations under section 740(b)(4) of the Internal Revenue Code of 1939. For the excess profits tax taxable years beginning after January 31, 1942, Acquiring Gold Seal is entitled to use the average base period net income computed under section 742 of the Internal Revenue Code of 1939.

Acquiring Gold Seal and Component Gold Seal have kept their books and filed their income and excess profits tax returns on a fiscal year ended January 31 on an accrual basis. Famous kept its books and filed its income and excess profits tax returns on a fiscal year ended April 30 on an accrual basis until January 31, 194l, when it changed to a fiscal year ending January 31.

Component Gold Seal filed timely corporation income, declared value excess-profits, and excess profits tax returns for the taxable years ended January 31, 1941 and 1942, and Acquiring Gold Seal filed timely corporation income, declared value excess-profits, and excess profits tax returns for the taxable years ended January 31, 1943, 1944, 1945, and 1946, with the collector of internal revenue for the first district of Illinois. Famous filed timely income, declared value excess-profits, and excess profits tax returns for the period May 1, 1940, to January 31, 1941, and the fiscal year ended January 31, 1942, with the collector of internal revenue for the first district of Illinois.

Component Gold Seal's base period consisted of the fiscal years ended January 31, 1937 through 1940; the base period of Famous consisted of the fiscal years ended April 30, 1937 through 1940.

Acquiring Gold Seal filed timely applications for relief on Form 991 under section 722 of the Internal Revenue Code of 1939 for Component Gold Seal for the taxable years ended January 31, 1941 and 1942, and for itself for the taxable years ended January 31, 1943, 1944, 1945, and 1946, and timely related claims for refund on Form 843 for the taxable years ended January 31, 1943 and 1944.

Component Gold Seal and Famous were in existence before January 1, 1940, and are entitled to compute their excess profits credit in accordance with the provisions of either section 713 or section 714 of the Internal Revenue Code of 1939 and to use whichever amount results in the lesser excess profits tax as provided by section 712(a) of the Internal Revenue Code of 1939. With respect to Component Gold Seal the computation under section 714, Internal Revenue Code of 1939, resulted in the lesser excess profits tax for the fiscal years ended January 31, 1941 and 1942. With respect to Famous the computation under section 713, Internal Revenue Code of 1939, resulted in the lesser excess profits tax for the period May 1, 1940, to January 31, 1941, and the fiscal year ended January 31, 1942.

The excess profits net income of Component Gold Seal, Acquiring Gold Seal, and Famous as determined by the Commissioner of Internal Revenue for the periods shown hereunder, were as follows:

+--------------------------------------------------+ ¦Period ¦Invested capital method ¦ +------------------------+-------------------------¦ ¦Component Gold Seal: ¦(Sec.711 (a) (2)) ¦ +------------------------+-------------------------¦ ¦Year ended Jan. 31, 1941¦$54,271.14 ¦ +------------------------+-------------------------¦ ¦Year ended Jan. 31, 1942¦111,292.87 ¦ +------------------------+-------------------------¦ ¦Acquiring Gold Seal: ¦ ¦ +------------------------+-------------------------¦ ¦Year ended Jan. 31, 1943¦257,201.48 ¦ +------------------------+-------------------------¦ ¦Year ended Jan. 31, 1944¦672,567.41 ¦ +------------------------+-------------------------¦ ¦Year ended Jan. 31, 1945¦664,560.75 ¦ +------------------------+-------------------------¦ ¦Year ended Jan. 31, 1946¦508,474.05 ¦ +------------------------+-------------------------¦ ¦ ¦ ¦ +--------------------------------------------------+

Income method Component Famous Liquors: (Sec.711 (a) (1)) May 1, 1940, to Jan. 31, 1941 $15,464.23 Year ended Jan. 31, 1942 21,218.67

The excess profits net income of Component Gold Seal and Famous for each of the base period years was as follows:

+--------------------------------------------+ ¦ ¦Component ¦ ¦ +------+------------------+------------------¦ ¦ ¦Gold Seal ¦Famous ¦ +------+------------------+------------------¦ ¦Year ¦(Fiscal Jan. 31) ¦(Fiscal Apr. 30) ¦ +------+------------------+------------------¦ ¦1937 ¦$22,786.98 ¦1 $19,479.95 ¦ +------+------------------+------------------¦ ¦1938 ¦20,161.46 ¦16,024.07 ¦ +------+------------------+------------------¦ ¦1939 ¦17,806.32 ¦7,840.58 ¦ +------+------------------+------------------¦ ¦1940 ¦27,616.61 ¦5,294.87 ¦ +--------------------------------------------+

Includes $205,536 sales at cost to Component Gold Seal for 3 months ended Apr. 30, 1940.

In two of the years for which relief is claimed— the years ending January 31, 1941, and January 31, 1942— Component Gold Seal was in existence, and petitioner's claim for those years relates to that corporation.

1Computed in accordance with sec. 713 (d), I.R.C. 1939

The average base period net income and the excess profits credits of Component Gold Seal, Famous, and Acquiring Gold Seal computed under the indicated sections were as follows for the periods stated below:

+--------------------------------------------------------------+ ¦ ¦Average base ¦Excess profits ¦ +------------------------+-------------------+-----------------¦ ¦ ¦period net income ¦credit computed ¦ +------------------------+-------------------+-----------------¦ ¦Period ¦(Sec.713) ¦under sec.714 ¦ +------------------------+-------------------+-----------------¦ ¦Component Gold Seal: ¦ ¦ ¦ +------------------------+-------------------+-----------------¦ ¦Year ended Jan. 31, 1941¦$19,586.34 ¦$36,990.59 ¦ +------------------------+-------------------+-----------------¦ ¦Year ended Jan. 31, 1942¦23,330.09 ¦56,681.64 ¦ +------------------------+-------------------+-----------------¦ ¦ ¦ ¦ ¦ +--------------------------------------------------------------+

Component Famous Liquors: Sec.713 Period May 1, 1940, to Jan. 31, 1941 11,255.65 $10,692.87 Year ended Jan. 31, 1942 12,159.87 11,551.88

Supplement A Acquiring Gold Seal: sec.713 (e) Sec.714 Year ended Jan. 31, 1943 $34,801.23 $89,204.31 Year ended Jan. 31, 1944 34,801.23 62,522.09 Year ended Jan. 31, 1945 34,801.23 82,690.03 Year ended Jan. 31, 1946 34,801.23 99,911.77

Acquiring Gold Seal's and its components' excess profits tax liabilities for the taxable years ended January 31, 1941, 1942, 1943, 1944, 1945, and 1946, without the benefit of section 722 of the Internal Revenue Code of 1939, are as follows:

+-----------------------------------------------------+ ¦Year ended January 31¦Components ¦ ¦ +---------------------+-------------------+-----------¦ ¦ ¦ ¦ ¦Acquiring ¦ +---------------------+---------+---------+-----------¦ ¦ ¦Gold Seal¦Famous ¦Gold Seal ¦ +---------------------+---------+---------+-----------¦ ¦1941 ¦$3,070.14¦(1) ¦ ¦ +---------------------+---------+---------+-----------¦ ¦1942 ¦18,844.49¦$1,633.38¦ ¦ +---------------------+---------+---------+-----------¦ ¦1943 ¦ ¦ ¦$132,027.14¦ +---------------------+---------+---------+-----------¦ ¦1944 ¦ ¦ ¦457,418.33 ¦ +---------------------+---------+---------+-----------¦ ¦1945 ¦ ¦ ¦445,240.14 ¦ +---------------------+---------+---------+-----------¦ ¦1946 ¦ ¦ ¦298,497.55 ¦ +-----------------------------------------------------+ 1None. Period May 1, 1940, to Jan. 31, 1941.

OPINION

RAUM, Judge:

Petitioner contends that it is entitled to excess profits tax relief under section 722(b)(4) of the Internal Revenue Code of 1939.