El Campo Rice Milling Co. v. Commissioner

El Campo Rice Milling Company, Petitioner, v. Commissioner of Internal Revenue, Respondent El Campo Rice Milling Co. v. Commissioner Docket Nos. 6176, 11957 United States Tax Court 13 T.C. 775; 1949 U.S. Tax Ct. LEXIS 36; November 21, 1949, Promulgated *36 Decisions will be entered under Rule 50. The taxpayer corporation has operated a rice mill since 1903, purchasing rough rice from farmers, milling it, and selling the milled product through brokers. The business is very competitive and speculative; there is no central market; no crop or price statistics are currently published; and the capacity of existing mills exceeds processing needs. Earnings depend largely on inventory position in relation to market trends, and the taxpayer's income experience has shown violent fluctuations, comprising large profits and heavy losses without visible relation to the prices of rough and milled rice or to the difference between the two. During the base period the average prices of rough and milled rice and the differences between them were less than the average for the years 1923-1940; and the taxpayer's annual income for the base period was about $ 800 less than its average annual income since 1923. (1) On the evidence, held, that the taxpayer has not established any temporary economic circumstances unusual in its case which depressed its business during the base period within the meaning of section 722 (b) (2), Internal Revenue Code. *37 (2) In the absence of evidence of the income experience of the rice milling industry as a whole, held, that the taxpayer has failed to establish a factual basis necessary for a finding that its business was depressed during the base period by reason of temporary economic events unusual in the case of the industry, within the meaning of section 722 (b) (2), Internal Revenue Code. (3) Evidence indicating that the undulations of the taxpayer's income experience for the years 1923-1940 varied from those of the average of all United States corporations, held, insufficient to establish that the taxpayer's business was depressed during the base period by reason of conditions prevailing in its industry which subjected it to a profits cycle materially differing from the general business cycle. Sec. 722 (b) (3) (A), I. R. C. George E.*38 H. Goodner, Esq., and Scott P. Crampton, Esq., for the petitioner. Irene P. Scott, Esq., and D. Louis Bergeron, Esq., for the respondent. Johnson, Judge. JOHNSON *776 The Commissioner determined deficiencies in petitioner's taxes for the fiscal years ended June 30 as follows: Declared Docket No. Fiscal Income tax value excess Excess year profits tax profits tax [1941] $ 1,177.63 $ 346.73 $ 1,621.34 [1942] 1,627.67 12,345.14 11957 [1943] 697.89 1,592.05 20,403.37 [1944] 144.61 11,220.75 Petitioner complains that the Commissioner failed to allow adequate amounts as deductions on account of the depreciation of its buildings and equipment in all four years and on account of repair expenses in 1942 and 1943; that by adjustments to surplus he erroneously reduced equity invested capital for all four years; and that he erroneously failed to give 10 per cent credit on the excess profits taxes for 1943 and 1944 as authorized by sections 780 and 781, Internal Revenue Code. All of these issues were either abandoned or settled by a stipulation which by reference is hereby incorporated as findings of fact. For all four years*39 petitioner filed applications for relief under section 722, alleging that its excess profits taxes computed without the benefit of that section were excessive and discriminatory. The Commissioner denied the relief prayed and petitioner assigns this denial as error. By amendment to the petitions, petitioner charges that the Commissioner erroneously failed to give it the benefit of excess profits credit carry-backs from 1945 and 1946 for the fiscal years 1943 and 1944. FINDINGS OF FACT. Petitioner, a Texas corporation with principal place of business at El Campo, Texas, filed its income tax, declared value excess profits tax, and excess profits tax returns for its fiscal years ended June 30, 1941, 1942, 1943, and 1944, with the collector of internal revenue for the first district of Texas. Its books are kept and its returns are prepared on an accrual basis of accounting. Since organization in 1903 petitioner has engaged in the rice milling business, and in 1914 it acquired its present mill at El Campo. Since 1926 it has mixed rice by-products with other grains and sold the mixture as feed. It also sells seed rice to farmers. Since 1922 there has been no material change in petitioner's*40 plant capacity, management, or method of doing business. *777 It is the custom of millers in the southern area to purchase rice from the producing farmer, who leaves a sample of his product with a local broker for millers' competitive bids. After accepting a bid, the farmer makes delivery to the successful bidder in sacks which are weighed, and payment is made by the barrel, which contains 162 pounds. In the process of milling petitioner cleans the rice grain of straw, removes the outer hull, then the inner layers of bran, polishes the kernels, and removes broken grains. It then sells the milled rice in 100-pound bags through samples which a broker displays to prospective buyers in New York, Atlanta, Jacksonville, and other cities, or it may store the rice in a warehouse for later sale. Petitioner's purchases of rough rice and sales of milled rice through the rice brokers have been handled for many years by its manager, R. H. Hancock, an experienced man who has been in its employ since 1907. As there is no standard grading of rice, Hancock's judgment of quality and price has a primary bearing on the mill's profits, and, as there is no rice exchange or general market such*41 as exists for wheat, corn, and cotton, he must also estimate the amount which can be profitably sold after milling, seek a market, and make decision whether to sell at prices offered or to hold in storage. As the price is subject to considerable fluctuation and quotations are not currently published and as the absence of an exchange prevents hedging operations, decisions of the quantities to be bought, sold, or held in storage are of crucial importance and involve considerable risk. Rice is grown extensively in Louisiana, Texas, and Arkansas by small farmers who normally sell the crops to a mill located in the vicinity. As existing mills are capable of processing larger quantities of rice than are grown, competition among millers has been very keen, and practices such as the mixing of different grades of rice and a miller's purchase of all rough rice from farmers in the vicinity of a competing mill have been harmful at times to the industry. The trade in rice has also been handicapped by the lack of an orderly, central market, a small and varying domestic consumption, and an export demand conditioned on low price. Between 1922 and 1940 domestic consumption ranged from 4.5 pounds*42 of rice per capita in 1933 to 6.2 pounds in 1927, and averaged slightly under 6 pounds during 1936-1939. The foreign market, which absorbed a maximum of 17.4 million bushels in 1919, dropped to a minimum demand of 1.7 million bushels in 1925, when the domestic price was high. As rice culture exhausts land, a second year's crop is only 70 per cent of the first year's yield, and the field is usually left fallow the third year, so that an element of instability is inherent in the acreage under production. For the 20 years preceding 1940, domestic production had varied substantially, as shown by the following figures for selected years: *778 Million Year bushels [1920] 51.6 [1921] 39.2 [1924] 32.6 [1927] 44.5 [1933] 37.6 [1935] 39.4 [1936] 49.8 [1937] 53.3 [1938] 52.5 [1939] 53.7 Because of an emergency in the industry, the Secretary of Agriculture in October 1933 induced over 90 per cent of the rice millers, including petitioner, to agree to buy rough rice and sell milled rice at fixed or determinable prices whereby profits were to be assured to all participants. This policy was fortified by an operating license, required of all millers, which imposed on all compliance*43 with the prescribed price controls. It increased the income of producers and millers, but it also increased the price of rice to consumers. After a decline in domestic and foreign purchases and many violations of the controls, this policy was abandoned in the spring of 1935, and instead a processing tax was imposed on millers by the Agricultural Adjustment Act. Suits were instituted to enjoin collection of this tax, and payment of it was thereafter made in escrow to a court. In 1935 petitioner paid in escrow $ 63,751.29 on account of the tax, and after its imposition was held unconstitutional, United States v. Butler, 297 U.S. 1, petitioner received a refund of the $ 63,751.29 on January 23, 1936. Between August 31 and October 2, 1935, petitioner also received $ 46,226.10 on account of rice exported, for which it had presented in satisfaction of processing taxes, tax warrants issued free by the Government against inventory on hand when the taxing act became effective. During the fiscal years ended June 30, 1923-1940, the number of barrels of rough rice milled by petitioner, the average cost per barrel, the average market value of the barrel *44 after milling, and the difference or "milling margin" were as follows: Barrel Market Fiscal year Barrels of cost of value after Milling margin rough rice rough rice milling [1923] 150,976 $ 3.36 $ 3.83 $ 0.47 or 12.27% [1924] 125,201 4.15 4.97 .82 16.50% [1925] 98,851 4.68 5.65 .97 17.17% [1926] 134,606 5.10 5.67 .57 10.05% [1927] 110,799 3.55 4.04 .49 12.13% [1928] 87,994 2.75 3.25 .50 15.38% [1929] 98,004 3.06 3.54 .48 13.56% [1930] 92,185 3.57 3.99 .42 10.53% [1931] 119,216 2.59 2.94 .35 11.90% [1932] 210,287 1.41 1.81 .40 22.10% [1933] 106,986 1.52 2.06 .54 26.21% [1934] 137,373 2.55 3.37 .82 24.33% [1935] 130,664 2.73 3.75 1.02 27.20% [1936] 145,113 2.21 3.53 1.32 37.39% [1937] 178,055 3.17 3.66 .49 13.39% [1938] 236,897 2.27 2.71 .44 16.24% [1939] 179,805 2.33 2.81 .48 17.08% [1940] 224,732 2.46 3.01 .55 18.27% *779 The arithmetical mean value of milled rice for the years 1923-1940 was $ 3.59 a barrel, or 117.7 per cent of the mean of $ 3.05 for the years 1937-1940. The arithmetical mean milling margin for 1923-1940 was 17.87 per cent or 110.04 per cent of the mean of 16.24 per cent for 1937-1940. Nearly half*45 the domestic acreage under rice cultivation is in Louisiana, and, while prices vary to some extent according to types and in different sections, the quotations of the New Orleans market are used, in the absence of a central exchange, for statistical purposes by the Department of Agriculture. The average annual wholesale prices per pound of milled rice at New Orleans fluctuated considerably during the years 1922-1939, ranging from 6.98 cents in 1925 to 2.21 cents in 1932 to 4.22 cents in 1935. During the base period years the average prices were: 3.91 cents in 1936, 2.95 cents in 1937, 2.81 cents in 1938, and 3.50 cents in 1939, or an average of 3.29 cents, being 79.09 per cent of the average of 4.16 cents for the years 1922-1939. The Price Index published by the Bureau of Labor Statistics indicates that the average wholesale price of all commodities for the base period years was 93.51 per cent of the 1922-1939 average, or 18.23 per cent more than the average price of rice at New Orleans for the base period. The Marketing Survey of the Department of Agriculture shows that the prices of rough rice throughout the base period averaged 69.4 per cent of the parity price as defined by*46 the Agricultural Adjustment Act. But fluctuations were constant and substantial, the maximum and minimum percentages for the base period years being: [1939] Maximum 86% 83% 65% 79% Minimum 71% 59% 53% 58% In fixing maximum prices for various types of rough rice the Office of Price Administration based its calculations on market prices for the six-year period from mid-1935 to mid-1941. The fluctuations in the average Louisiana price of rough rice did not follow the same curve as the fluctuations in the average New Orleans price of milled rice, and, while the average difference between the price of a barrel of rough rice and the price of a 100-pound bag of milled rice (the product of a barrel of rough rice) was 95.4 cents for the years 1922-1939, such average difference was only 62.4 cents for the base period 1936-1939. For the fiscal years beginning July 1, 1922-1939 (and ending June 30, 1923-1940) petitioner's reported income or loss and the income or loss (exclusive of tax-exempt interest) of all corporations in the United States which filed returns appear in the schedule below. On the basis of 100 as annual average, the relation of each year's*47 income or loss to the average is shown in the index columns: *780 All U.S. Petitioner corporations (fiscal year (by millions Petitioner's All corporations Year beginning for the average average July 1) calendar index index year) [1922] $ 4,022.33 $ 4,770 53.5 138.9 [1923] 29,928.75 6,308 398.2 183.7 [1924] 27,125.66 5,363 360.9 156.2 [1925] 5,788.21 7,621 77.0 221.9 [1926] -17,524.19 7,504 -233.1 218.5 [1927] -31,967.48 6,510 -425.3 189.6 [1928] -35,902.45 8,227 -477.6 239.6 [1929] -31,689.94 8,740 -421.6 254.5 [1930] -15,232.32 1,552 -202.6 45.2 [1931] -7,560.36 -3,288 100.6 -95.7 [1932] 5,599.47 -5,643 74.5 -164.3 [1933] 33,957.74 -2,547 451.7 -74.2 [1934] 50,422.88 [94] 668.9 2.7 [1935] 83,062.38 1,696 1,105.0 49.4 [1936] 27,601.76 4,370 367.2 127.3 [1937] 4,313.08 4,407 57.4 128.3 [1938] -5,078.72 1,608 -67.6 46.8 [1939] 8,588.05 4,509 114.2 131.3 Note: To preserve the comparison of the calendar year with petitioner's fiscal year ending June 30 of the calendar year, the calendar year in which the fiscal year began appears above; elsewhere the calendar year in which it ended is given. *48 The income and losses reported by petitioner were redetermined by the Commissioner as follows for the years indicated: Fiscal year beginning July 1 -- Reported Determined [1927] -$ 31,967.48 -$ 14,443.29 [1928] -35,902.45 -3,934.97 [1929] -31,689.94 -13,311.68 [1930] -15,232.32 -37,784.67 [1931] -7,560.36 -1,476.08 [1932] 5,599.47 8,652.03 [1933] 33,957.74 40,231.89 [1934] 50,422.88 57,147.35 [1935] 83,062.38 84,097.73 [1936] 27,601.76 30,801.65 [1937] 4,313.08 6,687.15 [1939] 8,588.05 11,556.07 By the Commissioner's adjustments, aggregate reported losses for 1927-1931 were reduced by $ 51,401.86 and aggregate reported income for 1932-1939 was increased by $ 25,628.51. As determined by the Commissioner, petitioner's average net income for its fiscal years beginning July 1, 1922-1939, and ending June 30, 1923-1940, was $ 11,804.73 and for the base period years ending June 30, 1937-1940, was $ 10,991.54. Petitioner's feed mill was operated as a separate branch of its business, and separate accounts were kept for it. Earnings of the feed mill were in general somewhat more stable than those from the rice mill. The sale of seed rice to farmers was a minor activity. For*49 the base period years ended June 30, 1937-1940, petitioner's gross sales, gross profits, and net incomes were as follows: [1940] Sale receipts: Rice mill $ 598,876 $ 816,786 $ 487,082 $ 822,857 Feed mill 309,607 252,528 251,606 284,344 Total sales 908,483 1,069,314 738,688 1,107,201 Gross profits: Rice mill 141,420 151,948 119,148 169,073 Feed mill 54,668 40,114 56,976 58,854 Net incomes 30,801 6,687 -5,078 11,556 *781 Petitioner claims $ 75,000 as the proper amount of reconstructed average base period net income on the basis of the following computation: [1938] Gross sales, rice mill, (118.23% of actual) $ 708,051 $ 965,686 Gross profits ratio (153.23% of actual) 36.18% 28.5% Constructive gross profit $ 256,173 $ 275,221 Gross profit, feed mill (actual) 54,668 40,114 Total constructive gross profit 310,841 315,335 Less expenses, depreciation, etc. (125% of actual) 210,454 243,399 Net profit, constructive 100,387 71,936 Average net profit: $ 76,802. [1940] Gross sales, rice mill, (118.23% of actual) $ 575,877 $ 972,864 Gross profits ratio (153.23% of actual) 37.48% 31.49% Constructive gross profit $ 215,839 $ 306,355 Gross profit, feed mill (actual) 56,976 58,854 Total constructive gross profit 272,815 365,209 Less expenses, depreciation, etc. (125% of actual) 228,491 274,649 Net profit, constructive 44,324 90,560 *50 On its income tax, declared value excess profits tax, and excess profits tax returns, as filed or amended, for the fiscal years ended June 30, 1941, 1942, 1943, and 1944, petitioner showed the following amounts as the tax due: Declared value Excess profits Fiscal year Income tax excess profits tax tax [1941] $ 10,678.13 $ 284.58 $ 1,524.41 [1942] 22,264.25 2,093.56 16,264.98 [1943] 9,522.36 5,083.03 58,320.48 [1944] 12,648.08 39,078.42 The excess profits taxes shown for 1943 and 1944 are the amounts after petitioner had deferred payments of $ 12,166.55 and $ 1,960.95, respectively, pursuant to section 710 (a) (5), Internal Revenue Code. Payments of the taxes reported due for 1941 were made in equal quarterly installments on September 13 and December 17, 1941, and March 19 and June 23, 1942. Payments of the taxes reported due for 1942 were made in equal quarterly installments on September 12 and December 17, 1942, and March 29 and June 24, 1943. Payments of the taxes reported due for 1943 and 1944 were made as follows: Income and declared Excess value excess profits tax profits tax 1943 taxes Sept. 25,1943 $ 3,637.40 $ 14,580.12 Oct. 30, 1943 55.79 Dec. 31, 1943 3,637.40 14,580.12 March 24, 1944 3,641.90 14,584.62 June 19, 1944 3,632.90 14,575.62 1944 taxes Sept. 13, 1944 $ 1,661.05 Dec. 19, 1944 1,661.05 March 26, 1945 1,661.05 May 15, 1945 7,664.93 $ 39,050.42 *51 On April 19, 1944, petitioner filed applications for relief under section 722 on Form 991 with respect to its fiscal years ended June 30, 1941 and 1942, claiming its average net income for the four fiscal years ended June 30, 1934-1937, as a proper index for a constructive base period income on the ground that the average for those years "represents the normal earnings of the taxpayer during past 24 years." In support of *782 this claim it submitted a schedule of annual sales, costs, gross profits, expenses, and net income for its fiscal years 1919-1943 as tending to show that "its business was depressed during the base period" and its "income was showing a downward trend." It also submitted an experience chart intended to demonstrate "a profits cycle differing materially from the general business cycle." Petitioner likewise filed a relief application on November 5, 1943, for the fiscal year 1943, and on September 15, 1944, for the fiscal year 1944. It later filed amended applications for 1943 and 1944. It incorporated by reference the schedules, charts, and allegations of the first application. In a supplemental claim for relief, filed on May 22, 1945, for the fiscal year*52 1943, petitioner advanced an extended argument for its right to relief, invoking subsections (b) (2), (b) (3) (A), (b) (3) (B), and (b) (5) of section 722. It claimed therein a reconstructed average base period net income of $ 53,069.65, computed by reference to average net income for the fiscal years 1934-1937. On its tax returns and prior applications its computation of actual average base period net income ranged from $ 9,647.59 to $ 16,617.69. It claimed the following refunds on the relief applications: Fiscal year [1944] Original application $ 1,524.41 $ 5,007.71 $ 24,701.78 Amended application 6,231.73 $ 5,942.26 Supplemental application 10,393.58 On July 6, 1944, the Commissioner sent by registered mail a statutory notice of deficiencies, advising petitioner of deficiencies for the fiscal years ended June 30, 1941 and 1942, inclusive, of $ 1,621.34 and $ 12,345.14, respectively, in excess profits tax. By like notice dated June 5, 1946, the Commissioner advised petitioner of deficiencies for the fiscal years ended June 30, 1943 and 1944, inclusive, of $ 20,403.37 and $ 11,220.75, respectively, in excess profits taxes. In *53 both notices were references to the applications for relief under section 722, but relief was denied because petitioner had "not established [its] right to the relief therein requested." In determining petitioner's excess profits taxes, the Commissioner computed by the invested capital method the following excess profits credits: Fiscal Year Credit [1941] $ 22,590.13 [1942] 27,316.78 [1943] 39,752.44 [1944] 42,251.08 *783 OPINION. Petitioner charges respondent with error in refusing to grant any relief in respect of its excess profits taxes for the fiscal years ended June 30, 1941, 1942, 1943, and 1944, arguing that the grounds urged in its rejected applications entitle it to the benefits of section 722, Internal Revenue Code. This section was designed to "afford relief in meritorious cases to corporations which bear an excessive tax burden because of an abnormally low excess profits tax credit." Senate Finance Committee Rept. No. 1631, 77th Cong., 2d sess. By subsection (a) 1 a taxpayer who demonstrates that his excess profits tax, as normally computed, is "excessive and discriminatory" and establishes "a fair and just amount representing normal earnings" may compute*54 his credit by use of that amount in lieu of the invested capital method or his average net income for the statutory base period years 1936-1939. By subsection (b) the normally computed excess profits tax shall be considered "excessive and discriminatory" if the average base period net income is "an inadequate standard of normal earnings because" of several specified reasons. Of these reasons, petitioner first cites the following as applicable to it: (2) the business of the taxpayer was depressed in the base period because of temporary economic circumstances unusual in the case of such taxpayer or because of the fact that an industry of which such taxpayer was a member was depressed by reason of temporary economic events unusual in the case of such industry. *55 Petitioner contends that its business was depressed during the base period because of "a price depression, an adverse price movement and an abnormally low profit margin." Admitting that no one of these factors is "unique," it submits that the concurrence of all three to the degree shown was "unusual" within the meaning of the statute and that the depression which they caused and the consequent effect on its excess profits credit resulted in an excess profits tax that should be considered "excessive and discriminatory." Disregarding the disjunctive *784 character of the two types of causes described in subsection (b) (2), its counsel merges his reasoning as to both, concluding with the statement that the question for decision is: * * * whether the years 1936-1939 are a fair measure of normal earnings. Since it is apparent that the petitioner and its industry were temporarily depressed in the base period, it logically follows that that period does not provide a fair test. * * * This statement is an oversimplification of the issue. Even if the base period income "does not provide a fair test," it must still serve as a measure for computing the excess profits credit unless the*56 taxpayer establishes that its base period business was depressed and that this depression resulted from one or more of the specified causes. Petitioner introduced the testimony of Dr. Elgin Groseclose, an economist of broad experience, who had carefully prepared a number of statistical tables, price index charts, and illustrative graphs indicating that during the base period the average New Orleans prices for all types of rough and milled rice and the "milling margin," or spread between comparable quantities of the two, was less than such averages for the years 1922-1939; that rough rice prices averaged only 69.4 per cent of parity during the base period; and that, while the index of all commodities during such period was 93.51 per cent of the 1922-1939 average, the price of rice was only 79.09 per cent. It was the witness' opinion that a depression in petitioner's milling business was indicated by these figures, and under that theory petitioner proposes a reconstructed normal base period income computed by swelling the base period's annual gross sales to the amount that the mean price of rice at New Orleans for 1923-1940 would have provided and by increasing gross milling profits*57 so as to reflect the mean milling margin for 1923-1940. We have given to the charts, computations, and explanations of the witness a careful study, but are of opinion that they fall short of establishing that petitioner's business was depressed because of temporary circumstances unusual in its case. Factually, there was no "adverse price movement" in the New Orleans rice market during the base period. There was merely fluctuation, which at the end of the period was ascending. The average price of milled rice was 3.91 cents a pound in 1936, 2.95 cents in 1937, 2.81 cents in 1938, and 3.5 cents in 1939. The market value of petitioner's milled rice for its fiscal years 1937-1940 likewise fluctuated, being 3.66 cents in 1937, 2.71 cents in 1938, 2.81 cents in 1939, and 3.01 cents in 1940. There were fluctuations in the price of rough rice and in the "milling margins," but no steady adverse movement. While the calendar year and petitioner's fiscal year are not coterminous, we note in any event such differences between petitioner's prices and the New Orleans averages *785 as to render the latter a questionable standard for judging of petitioner's experience. But it is unnecessary*58 to do so, for petitioner's earnings bear no visible relation to the price of rice, rough or milled. This is obvious from a cursory examination of the schedules set forth in the findings of fact. If the volume and operating costs of its milling had been relatively constant, it might be reasonably assumed that potential profits would bear a fixed relation to the "milling margin." But the evidence eliminates even this inference. Petitioner's volume was subject to very great variation from year to year throughout the 1923-1940 period. It ranged from a low of 87,994 barrels in 1928 to a high of 236,897 barrels in 1938, and contained such sharp differences as 119,216 barrels in 1931 against 210,287 in 1932. Likewise, its profits would seem to have no relation to the milling margin even in comparable income years. It earned, for example, about $ 27,000 in both 1925 and 1937, but its volumes were 98,851 and 178,055 barrels and its milling margins were 17.17 per cent and 13.39 per cent for the respective years. In three of the six years during which it constantly sustained heavy losses, its milling margin was in fact in excess of the 13.39 per cent margin of 1937, when it realized income*59 of $ 6,687.15. Since all the above mentioned fluctuations recurred constantly over the period 1923-1940, as our findings indicate, they were neither temporary nor unusual, and we perceive no casual connection between them and earnings. According to petitioner's manager, R. H. Hancock, profits in the rice milling business depend on "how well you guessed on how much to buy." Hancock, Dr. Groseclose, and respondent's expert economist, Dr. A. J. Weaver, were in agreement that the business was highly speculative and that the amount of inventory which a mill carries is usually determinative of the amount of profit or loss according to subsequent price fluctuations. These fluctuations are not readily ascertainable or reasonably predictable as in the case of wheat, corn, or cotton, for which a central market or exchange exists and crop statistics are currently published. Because of this highly speculative element, Hancock described the rice milling industry as one of "feast or famine." And such a condition is evident even within the base period, for petitioner earned $ 30,801.65 in its fiscal year 1937, or almost triple its base period average of $ 10,991.54, while it lost $ 5,078.72 in*60 its fiscal year 1939 and earned $ 11,556.07 the year following. We have held a taxpayer entitled to relief under the first clause of subsection (b) (2) upon a showing that its base period earnings were substantially below the average of many years because of difficulties with organized labor, an adverse factor peculiar to it. Dyer Engineers, Inc., 10 T. C. 1265. But we have denied relief where low earnings were attributable to *786 keen competition, for that circumstance is neither unusual nor temporary, but "the very essence of our capitalistic system." Lamar Creamery Co., 8 T. C. 928. We fail to see that the fluctuations in the market price of rice and the mathematically resultant "milling margins" were temporary or unusual or that they can even be correlated to earnings. Petitioner contends further, however, that it is the member of an industry which "was depressed by reason of temporary economic events unusual in the case of such industry" -- the second clause of subsection (b) (2). Again it suggests nothing other than the concurrence of price depression, adverse price movement, and abnormally low profit margin*61 as the unusual temporary economic event which caused the alleged depression. Without having in evidence the income experience of the industry as a whole or indeed of any other rice mill, we are asked to assume that petitioner's experience was typical. After alleging inability to procure general statistics on the industry, Dr. Groseclose reasoned that, since petitioner's business was exclusively in rice and had undergone no change in capacity, management, or methods for eighteen years, conditions affecting it must have been generally prevailing in the industry. In the absence of published statistics on rice milling, we can appreciate petitioner's difficulties in procuring evidence that the industry was depressed during the base period, but we can not for that reason excuse petitioner from its burden of proving a fact essential to its contention. Even in the case of a taxpayer engaged in a type of business in which given factors produce a fairly predictable effect on earnings, we could not accept the taxpayer's experience without more as an index of trends in the whole industry's income. A fortiori, we can not do so here, for the highly speculative element in rice milling, the*62 role of inventory in profits, and the lack of any apparent relation between petitioner's volume of business, rice prices, mill margins, and other details which have been placed in evidence affirmatively rebut any inference that millers' incomes in general can be correlated to a pattern based on the data in evidence or on the experience of one miller. We can make no finding that the milling industry was depressed in the base period by unusual, temporary economic events or for any other reason, and must reject petitioner's contention that the evidence supports an application of either clause of subsection (b) (2). This failure of proof also requires a rejection of the final contention based on subsection (b) (3) (A), which provides that the normally computed excess profits tax is to be considered excessive and discriminatory if the taxpayer's average base period income is an inadequate standard of normal earnings because: *787 (3) the business of the taxpayer was depressed in the base period by reason of conditions generally prevailing in an industry of which the taxpayer was a member, subjecting such taxpayer to (A) a profits cycle differing materially in length and amplitude*63 from the general business cycle * * *. Under the assumption that the curve of petitioner's earning experience reflects "conditions generally prevailing in its industry," Dr. Groseclose compared that curve with a second curve representing the taxable income experience of all United States corporations for the years 1922-1939. The graph places in bold relief the great extremes of petitioner's earnings and losses as compared with the less undulating line of general corporate experience, and shows further that petitioner sustained heavy losses in the generally prosperous years 1926-1929, while a sharp rise in its income occurred during the depression years 1931-1935. In 1936, after the price agreement program of the Department of Agriculture was discontinued, a decline in its earnings was precipitate. The parties' expert witnesses, both of whom made a forceful presentation of their differing views, were in sharp disagreement over the significance of petitioner's income curve. Dr. Weaver, stressing the highly speculative character of rice milling and the effect of unprecedented market control by the price agreement program in 1934-1935, was of opinion that the curves demonstrated *64 the total absence of any pattern of cyclical behavior. Dr. Groseclose reasoned that the extremes of fluctuation, varying so markedly in trend and in such degree from the general corporate experience curve, made it manifest that petitioner was subject to a profits cycle which differed materially in length and amplitude from the general business cycle, and he concluded that, as petitioner's base period income was depressed by reason of "conditions generally prevailing in its industry," its average base period net income was an inadequate standard of normal earnings. We deem it unnecessary to decide whether or not petitioner's highly erratic line of earning experience can properly be regarded as indicating cyclical behavior. To be of any significance for an application of section 722 a cycle, if established, must have been caused by conditions generally prevailing in the industry, and petitioner has shown no such conditions. The market price of rice and the mill margins would not do so for the reasons above set forth. Dr. Groseclose, after candidly stating that an economist who could give the causes of any profit cycle "would be a prophet without peer," expressed the view that the*65 absence of a central market, the very important role of inventory in the earning of profits, and the necessity for allowing rice land to lie fallow after two or three successive crops were unsettling conditions *788 which tended to create a cyclical variance in the miller's income. We agree that the conditions mentioned, by their nature, affect the whole industry, as Dr. Groseclose asserted, but we are not convinced that they cause or contribute to a profit pattern that is cyclical. The very stress which he and Hancock placed on the miller's inventory and the greatly varying volumes of rough rice which petitioner processed from year to year suggest rather that profits reflect how well the miller "guessed on how much to buy." The accuracy of managerial judgment is susceptible of no cyclical pattern. If the managers of competitive mills made better or worse guesses than Hancock during the base period, it is to be supposed that other mills had greater or lesser base period income. Dr. Groseclose was of opinion that, since subsection (b) (3) (A) refers to a profits cycle to which the taxpayer is subject, there was no necessity to show the profit pattern of other mills, it*66 being enough that conditions considered as causing the cycle generally prevailed in the industry. We can not accept this view, for if the cited condition caused a profits cycle at all, that cycle would also be generally prevailing in the industry. If other mills' base period earning records varied widely from petitioner's and from one another, it would seem obvious that the cited conditions failed to cause a cycle or indeed that there was a cycle for any cause. The present record, lacking in evidence about other mills' income, not only fails to show any profits cycle for the industry which could have resulted from the alleged causes, but indicates, on the contrary, that the profit of each member varied with the manager's decisions as to inventory and could be great or small according to subsequent market prices difficult to predict in advance. On this record we do not find that petitioner has established the existence of any cycle variant within the meaning of subsection (b) (3) (A). Apart from the factual conditions prescribed by the subordinate parts (2) and (3) (A) above considered, subsection (b) is in general applicable only if a taxpayer's "average base period net income*67 is an inadequate standard of normal earnings." Petitioner has assumed, without arguing, that its average base period net income was inadequate. On brief its counsel states that it "and respondent agree wholeheartedly that the rice milling business was depressed in the base period," a fact which Dr. Weaver, respondent's witness, "could hardly emphasize enough." Respondent denied any such agreement, and a careful examination of Dr. Weaver's testimony discloses an opinion that the southern rice milling industry suffers from a "permanent depressed state caused largely by its overcapacity and by its aggressive and destructive competitive tactics." Dr. Weaver later expressed the view that the base period years were "quite normal for the rice industry for reasons * * * stated before." *789 In its brief and exhibits petitioner has not set forth any comparison of its average base period income with its average annual income for the period 1923-1940. On its tax returns and various applications for relief it reported a base period net income ranging from $ 9,647.59 on the 1941 return to $ 16,617.69 on some of the relief applications. Our computation, based on the amounts finally determined*68 by respondent, indicate an average annual net income of $ 10,991.54 for the four base period years against an average annual net income of $ 11,804.73 for the fiscal years 1923-1940. These figures indicate that the base period earnings were somewhat under the long term average, but, as we said in Monarch Cap Screw & Manufacturing Co., 5 T. C. 1220: "The mere fact that base period profits were not large would not necessarily mean that the business was depressed." Likewise, that fact would not mean that the base period profits were an inadequate standard of normal earnings. Cf. Irwin B. Schwabe Co., 12 T. C. 606. A study of Dr. Groseclose's profit graph discloses less fluctuation in petitioner's income experience during the base period than during any other four years charted. Since the maximum profits were realized during the years when the agreements and price controls of the Department of Agriculture were in effect, it is obvious, moreover, that the annual average of the 1923-1940 period was raised by profits artifically inflated. As the base period average is only $ 813.19 less than the 1923-1940 average, we would*69 have difficulty in holding that the former was an inadequate standard of normal earnings or that petitioner's business was depressed during the base period even if the evidence presented were persuasive of the existence of temporary and unusual circumstances or events affecting profits. Cf. Fish Net & Twine Co., 8 T. C. 96. But the evidence is not persuasive of these essential facts, and petitioner's reconstruction of an average base period net income of $ 75,000 graphically points up the impropriety of the computation factors on which it relies, for its earnings during 1923-1940 averaged only $ 11,804.73 annually, and no single year's profit ever approached $ 75,000 except that for the fiscal year 1936, when petitioner received large refunds from the United States Government on account of processing tax payments and warrants. We hold that the applications for relief under section 722 were properly denied. In amending the petition in Docket No. 11957 to assign error in the Commissioner's failure to reflect carry-backs of unused excess profits credits for the fiscal years 1945 and 1946 in computing the excess profits taxes for the fiscal years 1943 *70 and 1944, petitioner's counsel stated that he did not propose to try any issue for the subsequent years, but anticipated that he would thereby be in a position to "agree *790 with the government as to whether or not there was a carry-back." He has not proved or stipulated that there was, and there is hence nothing in the record which permits of any decision of the matter raised in the assignment. Decisions will be entered under Rule 50. Footnotes 1. SEC. 722. GENERAL RELIEF -- CONSTRUCTIVE AVERAGE BASE PERIOD NET INCOME. (a) General Rule. -- In any case in which the taxpayer establishes that the tax computed under this subchapter (without the benefit of this section) results in an excessive and discriminatory tax and establishes what would be a fair and just amount representing normal earnings to be used as a constructive average base period net income for the purposes of an excess profits tax based upon a comparison of normal earnings and earnings during an excess profits tax period, the tax shall be determined by using such constructive average base period net income in lieu of the average base period net income otherwise determined under this subchapter. In determining such constructive average base period net income, no regard shall be had to events or conditions affecting the taxpayer, the industry of which it is a member, or taxpayers generally occurring or existing after December 31, 1939, except that in the cases described in the last sentence of section 722 (b) (4) and in section 722 (c), regard shall be had to the change in the character of the business under section 722 (b) (4) or the nature of the taxpayer and the character of its business under section 722 (c)↩ to the extent necessary to establish the normal earnings to be used as the constructive average base period net income.