Trunz, Inc. v. Commissioner

Trunz, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent Trunz, Inc. v. Commissioner Docket No. 11066 United States Tax Court 15 T.C. 99; 1950 U.S. Tax Ct. LEXIS 115; August 9, 1950, Promulgated *115 Decision will be entered for the respondent. Excess Profits Tax -- Section 722 (b) -- Section 713 (f). -- Low net earnings of base period years not shown due to earlier depression, to government interference or droughts and, in any event, the constructive average base period net income would not give benefit in excess of that obtained under section 713 (f). Percy W. Phillips, Esq., for the petitioner. Thomas R. Wickersham and Aaron Resnik, Esq., for the respondent. Murdock, Judge. MURDOCK *100 The Commissioner denied the petitioner's application under section 722 (b) of the Internal Revenue Code for relief from excess profits tax imposed for 1943. The only issue for decision is whether the petitioner is entitled to the relief claimed. FINDINGS OF FACT. The petitioner is a New York corporation. Its returns for*116 1943 were filed with the collector of internal revenue for the first district of New York. The petitioner was incorporated in the latter part of 1927 and commenced business as of January 1, 1928. It acquired and carried on the same business theretofore conducted by Max Trunz and his wife as partners. The petitioner's principal business was the sale of pork and pork products at retail in stores owned and operated by it. It purchased only dressed hogs until 1934, but in that year it instituted the system of buying live hogs in midwestern markets and having them shipped to New York. The animals were then slaughtered and dressed by others before being delivered to the petitioner. The cost to the petitioner of dressed weight hogs was less after this new system was instituted. The petitioner also purchased some beef which was combined with pork trimmings in the manufacture of sausage products. Approximately 75 per cent of all its products were sold at retail. The remaining 25 per cent, composed primarily of surpluses and those products not in demand at its retail stores, were sold at wholesale. It also sold, through its retail stores, several foodstuffs customarily associated with*117 the consumption of pork, such as mustard, pickles, sauerkraut, and apple sauce. These items constituted about 6 per cent of the petitioner's total sales. The Agricultural Administration Act became law on May 12, 1933. That act provided, inter alia, for the imposition by the Secretary of Agriculture of taxes upon the processing of hogs and for the use of the proceeds to pay benefits to farmers who agreed to reduce their production of hogs. The processing taxes imposed per 100 pounds of live hogs increased from $ 0.50 in November 1933 to $ 2.25 beginning on March 1, 1934, and continued at $ 2.25 until the law was declared unconstitutional on January 6, 1936. No similar taxes or restrictions were imposed upon the production of beef or other meats. The Act also set up the Agricultural Adjustment Administration. Approximately 220,000 sows and 6,200,000 pigs were slaughtered for that agency in the fall of 1933. About 500,000 hogs were bought by the Federal Surplus Relief Corporation in the fall of 1933, and *101 approximately 8,850,000 hogs were purchased and distributed by the Government during 1934. The number of hogs and cattle on the nation's farms, as of January 1st, *118 during the years 1928 to 1939, inclusive, and the ratio of hogs to cattle during those years were as follows: Cattle and Year Hogs and pigs calves Ratio (in thousands) (in thousands) [1928] 61,873 57,322 1.08 [1929] 59,042 58,877 1.00 [1930] 55,705 61,003 .91 [1931] 54,835 63,030 .87 [1932] 59,301 65,801 .90 [1933] 62,127 70,280 .88 [1934] 58,621 74,369 .79 [1935] 39,066 68,846 .57 [1936] 42,975 67,847 .63 [1937] 43,083 66,098 .65 [1938] 44,525 65,249 .68 [1939] 50,012 66,029 .76 Federally inspected slaughter of hogs and cattle during the years 1928 to 1939 and the ratio of the slaughter of hogs to cattle for each of those years were as follows: Year Hogs (in thousands) 1*119 Cattle (in Ratio thousands) 2 [1928] 49,795 8,467 5.88 [1929] 48,445 8,324 5.82 [1930] 44,266 8,170 5.42 [1931] 44,772 8,108 5.52 [1932] 45,245 7,625 5.93 [1933] 47,226 8,655 5.46 [1934] 43,876 9,943 4.41 [1935] 26,057 9,666 2.70 [1936] 36,055 10,972 3.29 [1937] 31,642 10,070 3.14 [1938] 36,186 9,776 3.70 [1939] 41,368 9,446 4.38 The total sales, gross profits and net income of the business conducted by Max Trunz and his wife for the years 1913 through 1927, inclusive, were as follows: Year Sales Gross profit Net income [1913] $ 86,281.32 $ 8,905.44 [1914] 117,482.51 18,987.73 [1915] 117,491.51 10,823.74 [1916] 129,662.40 15,742.14 [1917] 1,219,258.07 $ 46,290.61 13,602.71 [1918] 1,526,817.96 51,310.05 18,131.65 [1919] 1,886,681.98 89,048.71 42,421.19 [1920] 2,040,406.22 268,674.12 60,817.46 [1921] 1,783,590.34 301,724.84 74,767.33 [1922] 1,933,241.20 340,260.89 51,970.35 [1923] 2,180,455.78 411,169.93 89,433.52 [1924] 2,507,911.23 488,723.79 98,189.76 [1925] 2,805,035.67 477,972.65 75,235.17 [1926] 3,236,841.77 527,182.12 89,608.52 [1927] 3,561,440.28 732,145.20 223,181.31 *102 The number of retail stores owned by the petitioner, its total sales, gross profits and net income during the years 1928 to 1939, inclusive, were as follows: Year Number of retail Sales Gross profit Net income stores [29] $ 4,463,619.39 $ 1,055,127.21 $ 401,438.95 [38] 4,976,480.14 1,117.029.65 353,630.10 [41] 5,032,444.48 1,105,303.28 256,416.29 [45] 4,555,824.67 1,152,627.26 259,524.32 [47] 3,765,785.47 1,220,719.51 244.123.64 [49] 3,295,388.39 975,781.63 128,003.33 [50] 3,509,691.18 835,992.79 21,575.31 [51] 4,111,565.52 894,432.80 94,439.61 [51] 4,275,524.74 871,082.39 37,359.86 [51] 4,965,792.51 1,020,214.04 103,467.04 [52] 4,958,762.61 1,103,727.54 121,413.53 [53] 4,733,272.62 1,144,876.00 138,277.53 *120 A summary of whole hog purchases made by the petitioner during the years 1928 to 1939, inclusive, is as follows: Dressed weight Number of hogs to nearest Cost (excluding Average Year to nearest thousand tax) to nearest cost per thousand pounds hundred dollars pound [1928] 139,000 14,697,000 $ 2,036,300 13.8 cents [1929] 143,000 15,339,000 2,334,100 15.2 [1930] 152,000 17,002,000 2,472,700 14.5 [1931] 166,000 18,431,000 1,849,800 10.0 [1932] 190,000 21,668,000 1,410,700 6.5 [1933] 174,000 19,797,000 1,310,100 6.6 [1934] 155,000 16,706,000 1,380,200 8.3 [1935] 120,000 13,125,000 1,901,900 14.5 [1936] 143,000 14,588,000 2,106,600 14.4 [1937] 157,000 16,424,000 2,408,800 14.7 [1938] 169,000 19,229,000 2,374,800 12.4 [1939] 176,000 19,555,000 2,022,800 10.3 The relationship of pork production and consumption to beef production and consumption was more favorable to pork during the period 1928 to 1933 than at any other time from 1899 to 1939. The Agricultural Adjustment Act was declared unconstitutional on January 6, 1936, and no other governmental restrictions were thereafter placed on the raising and marketing*121 of hogs during any of the years material to this proceeding. The petitioner was entitled to use the excess profits credit based on income. The petitioner's actual excess profits net income during the base period was as follows: [1936] $ 28,296.24 [1937] 97,611.79 [1938] 138,255.95 [1939] 146,948.88 Average $ 102,778.22 *103 The petitioner, in its application for relief under section 722, made its claim under section 722 (b) (1), (2), (3), and (5). The Commissioner rejected the claim for relief under section 722 but computed the petitioner's excess profits credit under section 713 (f). He allowed as the credit, $ 139,601.44, being 95 per cent of $ 146,948.88, its excess profits net income for 1939, the highest year in the base period. The petitioner is not entitled to excess profits tax relief for the year 1943 under the provisions of section 722. OPINION. The net income of the petitioner for the base period years was lower than that for a number of earlier years, but that fact alone would not entitle it to relief under section 722. Cf. George Kemp Real Estate Co., 12 T. C. 943. It must show, inter alia, that its average base period*122 net income is an inadequate standard of normal earnings because of one or more of the factors set forth in those paragraphs of section 722 (b) mentioned in its application for relief. The position of the petitioner is that its business operated normally until the latter part of 1933 at which time a period of general economic depression reached its low point; the Government then imposed a tax on the processing of hogs, slaughtered a number of hogs, and took steps to reduce the production of hogs; severe droughts occurred in the hog-producing areas in 1934 and 1936; the cumulative effect of those events was to decrease the supply of hogs below normal, increase the price of pork, especially in relation to beef, and reduce the consumption of pork; the profits of the petitioner declined because of those events; and the income of the petitioner for none of the base period years had returned to normal, although conditions were rapidly improving, especially during the latter part of the base period years. The petitioner must relate those events to its own net income for the base period years, that is, it must show, inter alia, that its average base period net income is an inadequate *123 standard of normal earnings because of one or more of the factors mentioned in those paragraphs of section 722 (b) relied upon in its application for relief. It has mentioned paragraphs (1), (2), (3), and (5) of section 722 (b) in its application, but paragraph (2) seems to be the one which most nearly fits its claim, to wit, that its average base period net income is an inadequate standard of normal earnings because its business "was depressed in the base period because of temporary economic circumstances unusual" in its case. It argues that the requisite showing is made by statistics, tables and other evidence introduced in the record. It would go back for normal years to its earnings for the years 1928 through 1933 in order to compute therefrom constructive average base period net income of $ 275,000. *104 The evidence does not bear out the petitioner's contention that the cumulative effect of the depression, the Government interference, and the droughts, was to decrease the petitioner's supply of hogs below normal, to reduce the consumption of pork by the petitioner's customers below normal, and to reduce the profits of the petitioner for the base period years as*124 a whole. Furthermore, the evidence to support the petitioner's contention that its low profits for all of those years were due to an increase in the price of pork is not conclusive. This is so regardless of what the general conditions in the industry may have been. The average number of hogs used by the petitioner during the base period years exceeds the average number used in the period 1928 through 1933 and certainly was not below normal. Likewise, the average annual dressed weight used in the base period was not below normal for the experience of the petitioner. The gross sales for the base period years were higher than those for any prior period of four or more consecutive years. The average cost per pound for the base period years was below normal if the three unusually low years, 1932, 1933, and 1934, might be disregarded as subnormal. The average total cost of hogs purchased by the petitioner for the base period years was higher than for corresponding prior periods, but that was due in part to increased quantities purchased, and a large part of the difference is offset by increased gross sales, with the result that gross profits of the petitioner for the base period *125 years were about normal. Those gross profits were somewhat less than those for 1928-1933 but the difference is due mostly to 1931 and 1932, the two highest years in the entire history of the petitioner. It is not at all clear that its gross profits for the base period years were below normal because of an increase in the price of pork. It is not necessary to determine at this time exactly why the earnings of the petitioner for the base period years were lower than they had been for earlier years provided it was not due to the circumstances and events mentioned by the petitioner in its application for relief. Nevertheless, the record shows that net profits for the base period years were lower than those for earlier years because increased expenses, such as shipping and delivery costs, selling expenses and general and administrative expenses, had to be subtracted from fairly normal gross profits. These increased expenses might have been due to the advance in wages, reduction in hours, or other changes which may have taken place during that period. It does not appear, and the petitioner has not attempted to show, that the increase in any of those expenses was due to the depression, *126 the interference of the Government in the pork industry, or droughts. A careful study of the entire record fails to reveal that the average base period net income of the petitioner is an inadequate standard of normal earnings because *105 of any of the circumstances, events or factors described in section 722 (b) (1), (2), (3), or (5). Furthermore, the evidence shows affirmatively that the petitioner is not entitled to any relief under section 722, even if it qualified for that relief under some provision of section 722 (b) because of conditions in the early years of the base period. The evidence refutes the petitioner's contention that the effect of the depression, the Government interference and the droughts had not worn off completely prior to the beginning of 1939 and that 1939 was a year below normal. The petitioner has received a substantial benefit under section 713 (f) due to the fact that the Commissioner has used the excess profits net income for 1939, in lieu of average base period net income, in computing the excess profits credit. If the increase in the cost of hogs was the cause of the decrease in net profits for some of the years of the base period, still there*127 would be no relief under section 722 unless the constructive average base period net income exceeds the excess profits net income for 1939. Homer Laughlin China Co., 7 T. C. 1325; Irwin B. Schwabe Co., 12 T. C. 606. The number of hogs used, the dressed weight figures, gross sales, and the gross profits for 1938 were above normal. The average cost per pound was below normal. The petitioner's supply of hogs was not below normal at the beginning of 1939. Its sales were high. The costs of pork were certainly not above normal. The number of hogs used in 1939 and the dressed weight were above normal. The gross sales and gross profits were normal or above normal, and the average cost per pound was below normal. The record does not show that the net income for 1939 was in any way affected by the depression, by the Government interference, or by the droughts to which the petitioner has referred. Consequently, if the constructive average base period net income of the petitioner were to be determined under section 722, it certainly would not exceed the excess profits net income for 1939 and the petitioner would not be entitled*128 to any greater relief under section 722 than it has received under section 713 (f). Consideration of a number of other differences which the parties have argued in their briefs, including the question of whether the Court can take judicial notice of droughts, of whether legislation is a temporary economic circumstance, and the question of how the constructive average base period net income should be determined, becomes unnecessary in view of the conclusion just reached. However, it seems appropriate at this time to mention that Blum Folding Paper Box Company, 4 T. C. 795, is not authority for some of the principles for which the Commissioner cites it. It was held in that case that this Court will not consider facts which were not set forth in the application or applications for relief. The Court did not hold that evidence *106 to support facts stated in the applications would have to be the same as that presented to the Commissioner or that the taxpayer would have to set forth in its application the evidence upon which it relied to establish facts stated therein, and it did not say anything about methods of computing constructive average *129 base period net income or restrict the taxpayer as to theories relating to that question. Decision will be entered for the respondent. Footnotes 1. Purchases on Government account for the Emergency Hog Production Control Program from August 22 to October 7, 1933, are excluded.↩ 2. Excludes cattle purchased for slaughter for Federal Surplus Relief Corp. from June 1934 to Feb. 1935, and for August and Sept. 1936.↩