Stonhard Co.
v.
Comm'r of Internal Revenue

This case is not covered by Casetext's citator
Tax Court of the United States.Nov 21, 1949
13 T.C. 790 (U.S.T.C. 1949)

Docket Nos. 11419 12396.

1949-11-21

STONHARD COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Wentworth T. Durant, Esq., David V. Shapiro, Esq., and John Merrell, Esq., for the petitioner. William H. Best, Esq., and Irene Scott, Esq., for the respondent.


1. EXCESS PROFITS TAX— RELIEF UNDER SECTION 722— CHANGE IN THE CHARACTER OF THE BUSINESS— A DIFFERENCE IN THE PRODUCTS FURNISHED.— The introduction of three new products, which fit into the line constituting the business and do not materially change that business, does not represent a ‘difference in the products * * * furnished‘ within the meaning of section 722(b)(4), I.R.C.

2. EXCESS PROFITS TAX— RELIEF UNDER SECTION 722— PUSH BACK—RECONSTRUCTION OF EARNINGS.— Earnings can not be reconstructed under the ‘push back‘ rule in the absence of persuasive reasons supported by adequate evidence. Wentworth T. Durant, Esq., David V. Shapiro, Esq., and John Merrell, Esq., for the petitioner. William H. Best, Esq., and Irene Scott, Esq., for the respondent.

The Commissioner denied the petitioner's claims under section 722(b) for relief from excess profits taxes imposed for 1941 and 1942. The only issue for decision is whether the petitioner is entitled to relief under section 722(b)(4).

FINDINGS OF FACT.

The petitioner is a Pennsylvania corporation, organized on December 1, 1933, with its principal place of business in Philadelphia, Pennsylvania. Its excess profits tax returns for 1941 and 1942 were filed upon an accrual basis with the collector of internal revenue for the first district of Pennsylvania.

The business was started in 1922 as a sole proprietorship and was continued by the petitioner upon its formation. It consists of the manufacture and sale of building maintenance materials, including flooring, roofing, and waterproofing products. Its principal customers are industrial firms, education and governmental institutions, railroads, and public utilities throughout the United States and in foreign countries.

The petitioner does not market its products through retail outlets. It employs sales and service personnel who deal directly with its customers. The salesmen advise and assist the customers in solving their plant maintenance problems. The service personnel supervise and assist the customers in the installation of the petitioner's products without charge.

The petitioner offers its products on a trial and money-back guarantee basis. It offers to send any Stonhard product to a customer, who may install a portion of the material to determine the suitability of the product. The balance of the material may be returned within 30 days and the order may be canceled at no cost to the customer if the product does not meet his conditions.

The petitioner advertised for sale 5 different products in 1929, 16 in 1933 and 1935, and 29 in 1939. It brought out new products from time to time and may have discontinued certain products. The products sold in 1929 were intended for use in constructing concrete floors, in repairing and resurfacing floors of all types, and in preserving concrete surfaces. The additional products being sold in 1933 and 1935 were intended for use in painting interior walls, preserving and resurfacing wood floors, repairing cracks in walls, repairing and resurfacing all types of roofs, repairing outside driveways, rustproofing metal surfaces, and waterproofing walls, floors, and concrete structures. The products being sold in 1935 included Bondite, Concretite, and Resurfacer. The petitioner began selling Wetwal and Wax in 1936 and Stonpach in 1937. The products added between 1935 and 1939 were intended for use in preserving silos, bonding cork insulation to concrete, cleaning painted surfaces, filling cracks in wood and masonry, finishing and repairing concrete floors, waterproofing exterior concrete and masonry, and treating Resurfacer.

Bondite is a quick-drying paint which is thinned with water at the time of application. It can be applied to damp surfaces, and it is said not to be affected by heat, moisture, steam, or acid fumes.

Concretite is a liquid requiring the addition of sand, cement, and crushed stone. The mixture is used as a two-inch overlay in repairing concrete floors or in making complete new floor installations, and it produces a flint-hard surface.

Resurfacer is a paste requiring the addition of cement, sand, and water. The mixture is used as a one-half inch overlay in patching or entirely resurfacing floors, although it can be spread out to a thin feather edge. It can be used on concrete, wood, brick, asphalt, composition, glass, or steel surfaces if the proper primer is first applied. Resurfacer produces a resilient, rather than a flint-hard surface.

Wetwal is an oil base paint for use on wet surfaces and it may be applied with no preparation other than the brushing off of excess moisture from the surface to be painted. It becomes porous as it dries, allowing moisture to exude. It was designed to cling to interior surfaces which are subjected to excessive moisture and condensation.

Stonhard Wax is a water base wax intended primarily for use in conjunction with Resurfacer where a tough, glossy finish is desired. The petitioner did not sell any wax prior to 1936.

Stonpach is a mixture requiring only the addition of water. Its primary use is in patching floor surfaces, although in some installations it can be used as a complete one-half inch overlay. It can be used only on concrete. It bonds to the old concrete mechanically, necessitating special preparation of the surface to which it is to be applied. The sides of a hole in an old surface must be cut perpendicularly in order that the hole can be properly patched with Stonpach. The use of Stonpach as a complete overlay requires the drilling of many holes in the old surface in order to provide a mechanical bond between the Stonpach and the old surface. Stonpach can not be spread out to a feather edge. It produces a flint-hard surface which resists the penetration of water, oils, and acids.

The petitioner anticipated that some customers might confuse the uses and methods of installing Resurfacer and Stonpach. It made every effort to bring the differences between those products to the attention of its customers. It began to hire and train new salesmen and to train its old salesmen in 1936 in order to prevent any confusion between Resurfacer and Stonpach.

Some customers of the petitioner confused the purposes and methods of application of Stonpach and Resurfacer to an undisclosed extent during 1937 and 1938, in spite of the petitioner's precautionary measures. The new salesmen hired in 1936 and 1937 sold products which were not properly suited to the needs of the customers to an undisclosed extent, due to their inexperience. The detrimental sales practices of one salesman employed by the petitioner during 1937 and 1938 had an adverse effect upon the business. The petitioner made refunds to the customers and replaced defective installations of its products at its own expense to an undisclosed extent in order to rectify the mistakes of its customers and its salesmen and to protect its reputation during the period 1936 to 1939.

The petitioner's profit and loss statements, sales of new products, and all domestic sales, and returns and allowances on those sales, were as follows for the period 1934 to 1942:

+-----------------------------------------------------------------------------------------------+ ¦ ¦1934 ¦1935 ¦1936 ¦1937 ¦1938 ¦1939 ¦1940 ¦1941 ¦1942 ¦ +--------------+--------+--------+--------+--------+--------+--------+--------+--------+--------¦ ¦Gross sales ¦$226,503¦$351,631¦$478,175¦$650,887¦$438,072¦$429,824¦$438,151¦$686,597¦$931,399¦ +--------------+--------+--------+--------+--------+--------+--------+--------+--------+--------¦ ¦Less returns ¦26,375 ¦45,584 ¦73,463 ¦105,566 ¦74,829 ¦66,289 ¦54,129 ¦93,023 ¦95,938 ¦ ¦and allowances¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +--------------+--------+--------+--------+--------+--------+--------+--------+--------+--------¦ ¦Per cent of ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦returns to ¦11.6% ¦13% ¦15.4% ¦16.2% ¦17.1% ¦15.4% ¦12.4% ¦13.6% ¦10.3% ¦ ¦sales ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +--------------+--------+--------+--------+--------+--------+--------+--------+--------+--------¦ ¦Net sales ¦$200,128¦$306,047¦$404,712¦$545,321¦$363,243¦$363,535¦$384,022¦$593,574¦$835,461¦ +--------------+--------+--------+--------+--------+--------+--------+--------+--------+--------¦ ¦Cost of goods ¦61,882 ¦86,261 ¦107,372 ¦146,350 ¦88,915 ¦97,337 ¦104,331 ¦147,910 ¦203,830 ¦ ¦sold ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +--------------+--------+--------+--------+--------+--------+--------+--------+--------+--------¦ ¦Selling ¦84,358 ¦139,942 ¦187,708 ¦281,033 ¦176,640 ¦177,018 ¦167,032 ¦251,366 ¦328,104 ¦ ¦expense ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +--------------+--------+--------+--------+--------+--------+--------+--------+--------+--------¦ ¦Service ¦12,255 ¦20,484 ¦27,848 ¦45,030 ¦37,240 ¦28,516 ¦32,296 ¦44,430 ¦54,409 ¦ ¦expense ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +--------------+--------+--------+--------+--------+--------+--------+--------+--------+--------¦ ¦Administrative¦30,861 ¦44,577 ¦63,840 ¦60,953 ¦46,651 ¦50,232 ¦65,789 ¦108,032 ¦143,456 ¦ ¦expense ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +--------------+--------+--------+--------+--------+--------+--------+--------+--------+--------¦ ¦Research and ¦ ¦ ¦3,300 ¦4,653 ¦6,058 ¦6,605 ¦7,036 ¦7,476 ¦9,458 ¦ ¦development ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +--------------+--------+--------+--------+--------+--------+--------+--------+--------+--------¦ ¦Operating ¦10,772 ¦14,783 ¦14,644 ¦7,302 ¦7,739 ¦3,827 ¦7,538 ¦34,360 ¦96,204 ¦ ¦profit ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +--------------+--------+--------+--------+--------+--------+--------+--------+--------+--------¦ ¦Other income ¦(355) ¦437 ¦(2,665) ¦(5,569) ¦(7,370) ¦(2,702) ¦(7,133) ¦(9,623) ¦(18,157)¦ ¦(expense) net ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +--------------+--------+--------+--------+--------+--------+--------+--------+--------+--------¦ ¦Net income ¦10,417 ¦15,220 ¦11,979 ¦1,733 ¦369 ¦1,125 ¦405 ¦24,737 ¦78,047 ¦ +--------------+--------+--------+--------+--------+--------+--------+--------+--------+--------¦ ¦New products ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦and domestic ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦sales: ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +--------------+--------+--------+--------+--------+--------+--------+--------+--------+--------¦ ¦Domestic gross¦195,172 ¦351,631 ¦445,382 ¦601,375 ¦388,371 ¦387,965 ¦399,763 ¦649,224 ¦883,587 ¦ ¦sales ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +--------------+--------+--------+--------+--------+--------+--------+--------+--------+--------¦ ¦Returns and ¦21,715 ¦44,385 ¦71,269 ¦102,187 ¦72,209 ¦63,724 ¦49,959 ¦88,289 ¦89,806 ¦ ¦allowances ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +--------------+--------+--------+--------+--------+--------+--------+--------+--------+--------¦ ¦Per cent of ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦returns to ¦11.12% ¦13.43% ¦16.00% ¦16.99% ¦18.59% ¦16.43% ¦12.50% ¦13.60% ¦10.16% ¦ ¦sales ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +--------------+--------+--------+--------+--------+--------+--------+--------+--------+--------¦ ¦Stonpach gross¦ ¦ ¦ ¦$14,347 ¦$10,615 ¦$7,655 ¦$12,485 ¦$29,523 ¦$50,875 ¦ ¦sales ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +--------------+--------+--------+--------+--------+--------+--------+--------+--------+--------¦ ¦Returns and ¦ ¦ ¦ ¦2,677 ¦1,873 ¦936 ¦1,276 ¦3,293 ¦4,115 ¦ ¦allowances ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +--------------+--------+--------+--------+--------+--------+--------+--------+--------+--------¦ ¦Per cent of ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦returns to ¦ ¦ ¦ ¦18.66% ¦17.64% ¦12.23% ¦10.22% ¦11.15% ¦8.09% ¦ ¦sales ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +--------------+--------+--------+--------+--------+--------+--------+--------+--------+--------¦ ¦Wetwal gross ¦ ¦ ¦$911 ¦$4,977 ¦$1,797 ¦$5,289 ¦ ¦ ¦ ¦ ¦sales ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +--------------+--------+--------+--------+--------+--------+--------+--------+--------+--------¦ ¦Wax gross ¦ ¦ ¦255 ¦255 ¦345 ¦120 ¦ ¦ ¦ ¦ ¦sales ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------------------------------------------------------------------------------------------+

The record does not show to what extent the petitioner's profits in any year may have been attributable to the sales of any particular product; to what extent the returns and allowances, costs, and expenses in any year may have been attributable to any confusion between Stonpach and Resurfacer or to the introduction of Stonpach, Wetwal, and Wax; or whether the introduction of those three products created any new markets for the petitioner during the period from 1936 to 1939.

The petitioner's excess profits net income during the base period was as follows:

+-------------------+ ¦1936 ¦$11,979.28 ¦ +-------+-----------¦ ¦1937 ¦1,733.45 ¦ +-------+-----------¦ ¦1938 ¦368.76 ¦ +-------+-----------¦ ¦1939 ¦1,497.05 ¦ +-------+-----------¦ ¦Total ¦15,578.54 ¦ +-------+-----------¦ ¦Average¦3,894.63 ¦ +-------------------+

It paid excess profits taxes for 1941 and 1942 in the amounts of $5,156.70 and $67,078.45, respectively.

An application for relief under section 722(b)(2), (4) and (5) of the code and a claim for refund of 1941 excess profits taxes based thereon were duly filed by the petitioner and denied by the Commissioner. An application for relief under section 722(b)(4) and (5) of the code and a claim for refund of 1942 excess profits taxes based thereon were duly filed by the petitioner and denied by the Commissioner.

The petitioner in its claims for relief filed with the Commissioner did not advance the contention or ground for relief that its sales of products other than Stonpach, Wetwal, and Wax should be reconstructed for any base year. The constructive average base period net income claimed therein was $11,699.36 and was arrived at by a method wholly different from the one advanced by the petitioner in the present proceeding in order to arrive at the constructive average base period net income of $24,868.99.

There was no change in the character of the business of the petitioner during the base period.

The record does not show that the average base period net income of the petitioner was an inadequate standard of normal earnings, that the average base period net income does not reflect the normal operation of the business for the entire base period, or that the business of the petitioner had not reached by the end of the base period the earning level which it would have reached if the petitioner had begun selling Stonpach, Wetwal, and Wax two years before it did.

OPINION.

MURDOCK, Judge:

The petitioner is a domestic corporation which was in existence before January 1, 1940, and is, therefore, entitled to use the excess profits credit based on income pursuant to section 713 or the excess profits credit based upon invested capital pursuant to section 714, whichever amount results in a lesser tax. Sec. 712(a). The statements attached to the notices of rejection indicate that the petitioner's excess profits credit based on invested capital was $4,700.87 for 1941 and $5,203.03 for 1942. The petitioner's base period was the years 1936 through 1939 and its excess profits credit based on its income for those years amounts to about $3,700 for 1941 and to about $4,500 for 1942. The credits under the invested capital method, being greater than the credits under the income method, must be used in computing this petitioner's excess profits tax for 1941 and 1942 unless one of the relief provisions of section 722(b) applies. The petitioner claims relief in this proceeding solely under section 722(b)(4).

The claim is that section 722(b)(4) applies because the petitioner changed the character of its business during the base period by introducing Wetwal, Wax, and Stonpach, which represented a difference in the products furnished, and the average base period net income does not reflect the normal operation for the entire base period since the business did not reach, by the end of the base period, the earning level which it would have reached if the change in the character of the business had been made two years earlier. The petitioner contends that $24,868.99 is a fair and just amount representing average normal earnings for the base period for the purpose of computing the excess profits credit based on income. It arrives at that figure by adjusting the 1939 sales of its old products to approximate those of 1936 on the ground that the 1939 sales were abnormally low because of customer resistance resulting from earlier confusion between the new product Stonpach and the old product Resurfacer; by adjusting the 1936 Wetwal sales to 75 per cent of the 1937 sales on the ground that the 1936 Wetwal sales would have been 75 per cent of the 1937 sales if the product had been introduced two years earlier; by adjusting the Stonpach sales for all of the base period years to 15 per cent of the domestic sales of the old products for each year on the ground that Stonpach sales never reached their normal level during the base period, and if the product had been introduced two years earlier the sales would have reached by December 31, 1939, the level of 15 per cent of the sales of other products; and by adjusting the net profits for each base period year to 4.3 per cent of the gross sales for that year as adjusted.

The table set forth in the findings of fact shows that the net income of the petitioner for each of the last three base period years and for 1940 was low in comparison with the net income for 1934, 1935, and 1936, but, as the petitioner concedes, the mere fact that the income for all or a portion of the base period was low does not entitle a taxpayer to relief under section 722 unless the pertinent facts as a whole bring that taxpayer within one of the relief provisions. Monarch Cap Screw & Manufacturing Co., 5 T.C. 1220.

The first question is whether the petitioner changed the character of its business during the base period within the meaning of section 722(b)(4) by the introduction of these three products. Did they represent a ‘difference in the products * * * furnished‘? The evidence shows that the petitioner brought out Wetwal and Wax in 1936 and Stonpach in 1937. It had never previously marketed any product similar to Wax. The petitioner claims that the introduction of Wax gave it some entree to new customers. However, the sales of Wax were almost insignificant and the record fails to show that the introduction of Wax had any material effect upon the business of the petitioner. The petitioner was already marketing Bondite, a product somewhat similar to Wetwal, when it introduced the latter product. Likewise, there were similarities and also some differences between Stonpach and Concretite which the petitioner was marketing at the time Stonpach was brought out in 1937. Recognition has been given to the differences, as well as to the similarities, among these four products as shown by the evidence. The differences do not add up to a change in the character of the business within the meaning of section 722(b)(4).

The petitioner from its inception was marketing a line of products which, generally speaking, were used in the maintenance of buildings and other construction work. It normally brought out new products from time to time and occasionally discontinued one. The 3 products, Stonpach, Wetwal, and Wax were not a closely related group of new products differing from the others. They were more closely related to old products than to each other. They were only 3 of 13 brought out during the base period. Wax was for the purpose of giving an old product, Resurfacer, wider use. Wetwal was for the purpose of painting damp or moist surfaces. Bondite was another product used for that same general purpose. Stonpach was for the purpose of repairing concrete installations, particularly floors. Concretite was sold for a similar purpose, and Resurfacer, although different in composition, had, as one of its uses, the repair of floor surfaces, whether of concrete or some other material. The record does not show how the sales of Wetwal for any year compared with the sales of Bondite, how the sales of Stonpach for any year compared with the corresponding sales of Concretite or Resurfacer, or what the net profit or loss for any year was from the sales of any of these products. Sales of Stonpach, while larger than those of Wetwal, were with those of Wetwal and Wax only about 3 per cent of the total sales of the petitioner during the last 3 base period years. These 3 new products fitted into the general line of products being sold by the petitioner. They were not a departure from and did not represent any change in the character of the business carried on by the petitioner. They were several relatively small new products which the trade would recognize as mere additions to the line. They did not affect the type of customers solicited, open new markets, change the sales policies, affect manufacturing, or materially affect earnings, so far as this record shows. The business was the same after their introduction as before. The introduction of a few new products which fit into the line constituting the business and do not materially change that business does not represent ‘a difference in the products * * * furnished.‘ Congress, in enacting section 722(b)(4), contemplated a greater change than that shown in the present record by the introduction of these three products. H. Rept. No. 2333, 77th Cong., 2d sess., pp. 23, 24, 145, 146; S. Rept. No. 1631, 77th Cong., 2d sess., pp. 200-201. This conclusion completely defeats the petitioner's claim for relief as presented in this case. Cf. Regulations 112, sec. 35.722-3(d).

The substantial change in the business which took place in the case of Lamar Creamery Co., 8 T.C. 928, distinguishes that case. That company adopted new methods of merchandising, solicited and acquired new customers for the new product, and started quantity production of that product. The introduction of the new product changed the taxpayer from a small business operator to one of the largest in its area. No such conditions exist in the present case.

Furthermore, if the introduction of these three products could be regarded as a change in the character of the business of the petitioner within the meaning of section 722(b)(4), still the record would not justify any relief. The petitioner argues that the 1939 sales of old products were abnormally low because of customer resistance resulting from earlier confusion between Resurfacer and Stonpach and should be adjusted to approximate those of 1936. Not only did the petitioner fail to mention any such ground or partial ground for relief in its claims upon which the Commissioner acted (Blum Folding Paper Box Co., 4 T.C. 795), but it also failed to introduce evidence to justify an over-all adjustment of 1939 sales. The petitioner's point seems to be that, while 1939 sales in certain industries which it feels are closest to its field were as great as or larger than the 1936 sales, its sales for 1939 were about $49,000, or approximately 10 per cent, less than its sales for 1936. This falls far short of a justification for adjusting the petitioner's sales for 1939 on the theory that they were not normal.

The only witness called was the treasurer of the petitioner. The attempt was made to prove through him and the statistical evidence offered that the falling off in the profits of the petitioner for the last three years of the base period was due to the introduction of these three new products. That is, the introduction of the products caused additional expense for the training of salesmen, for the time consumed in introducing these products, and for the cost of undue mistakes which occurred, and, furthermore, confusion between the new product Stonpach and the old product Resurfacer resulted in an increase in returns and allowances, and, after that confusion no longer existed, in sales resistance to the products of the petitioner because of the confusion. This witness testified exclusively in general terms and gave no examples, although pressed to do so. The decline in earnings started and a large increase in returns and allowances occurred before Stonpach was introduced. Confusion between Resurfacer and Stonpach might be expected to show the returns and allowances for any period on Resurfacer, and those on Stonpach were less percentagewise than those on all products. A finding has been made that there was some confusion between Resurfacer and Stonpach, but better evidence of the extent of that confusion and its effect upon earnings would be required before relief would be justified. There is no showing that the average sales per salesman did not actually increase. The table of sales and expenses set forth in the findings of fact shows that there were a number of different factors which tended to reduce the earnings during the last three years of the base period, which factors have nothing to do with those referred to by the witness. For example, the figures shown for research and development and those for expenses other than selling and service expenses could alone account for the reduction in earnings. The drop in sales in 1939 was due to the loss of foreign markets and there was almost no decrease in domestic sales. The failure to consider and explain these and other possible factors affecting earnings seriously weakens the witness' statement that the decline in 1939 sales was due to the ‘confusion‘ which he described.

The petitioner reasons that 1936 Wetwal sales would have been 75 per cent of the 1937 Wetwal sales if the product had been introduced two years earlier. Here again the evidence does not support the petitioner's contention. It does not show that the sales of Wetwal at the end of the base period had not reached the earning level which they would have reached if the product had been brought out two years earlier. There is no evidence as to what, if anything, the earnings were from this product. There was not a steady increase in sales of this product. The sales for 1939 were somewhat larger than they ever had been and there is no good reason advanced justifying the belief that the sales or earnings for 1939 would have been greater if the product had been introduced two years earlier.

The petitioner argues that Stonpach sales never reached their normal level during the base period, if the product had been introduced two years earlier sales would have reached a level of 15 per cent of the sales of other products by December 31, 1939, and the sales for all base period years should be adjusted to 15 per cent of the domestic sales of the old products. It gets the 15 per cent by comparing the Stonpach sales for 1947 (‘after December 31, 1939 ‘) with the sales of other products for that year. Why that should be done does not clearly appear. This adjustment would mean that the sales of Stonpach for the base years should be adjusted so that they would range from about $56,000 for the low year to over $87,000 for the high year as compared to actual sales of Stonpach ranging from about $7,600 for the low year to slightly more than $14,000 for the high year. It can not be stated too emphatically that the record does not justify any such adjustments as these. Actually, the Stonpach sales fell off during the base period; also, the returns on Stonpach were less percentagewise than the returns on all products. The base period sales of Stonpach appear to have been about normal; at least the record offers no reason for a belief that they were less than normal. No figures are given for earnings on Stonpach and the record does not justify a finding that the earnings from the sales of Stonpach at the end of the base period had not reached the earning level which would have been reached if the product had been brought out two years earlier.

The next step in the petitioner's process of reconstructing a fair and just amount representing normal earnings to be used as a constructive average base period net income for the purpose of the excess profits tax credit based on earnings is to take 4.3 per cent of the gross sales adjusted for each base year in order to arrive at net profits for that year. The figure of 4.3 per cent is arrived at by comparing the net income for 1935 with the gross sales for that year. The petitioner reaches this conclusion, as well as others vital to its contention, too cavalierly and without supporting evidence or persuasive reasoning. Not only does the record fail to justify the conclusion that the normal earnings for the base period would have been 4.3 per cent of the gross sales as adjusted, but it fails to indicate that there was any substantial difference between the actual earnings and normal earnings. The low actual earnings for the last three base period years, and the possibility that the earnings from these three new products for the base period years might possibly have been somewhat greater had they been brought out two years earlier, has not been overlooked. The evidence indicates that, if any increase in the earnings might have resulted from the earlier introduction of these three products, the increase would not have been great enough to have made the excess profits credit based on income under section 713 greater than the excess profits credit based on invested capital under section 714. Thus, in no event is the petitioner subjected to any obvious hardship by the denial of the claim for relief under section 722(b)(4).

Reviewed by the Special Division.

Decision will be entered for the respondent.