Avey Drilling Machine Co. v. Commissioner

Avey Drilling Machine Company, Petitioner, v. Commissioner of Internal Revenue, Respondent Avey Drilling Machine Co. v. Commissioner Docket No. 17783 United States Tax Court 16 T.C. 1281; 1951 U.S. Tax Ct. LEXIS 165; June 11, 1951, Promulgated *165 Decision will be entered for the respondent. 1. Petitioner filed applications for relief under sections 722 (a) and 722 (b) (1), (2), (3) (A), and ( 4) of the Internal Revenue Code from excess profits taxes for the years 1940, 1941, and 1942. Petitioner's excess profits credits were computed on the invested capital method. Held, petitioner has not shown that its profits cycle differed materially in length and amplitude from the general business cycle or that it changed the character of its business during or immediately prior to the base period; hence, petitioner is not entitled to relief under subsections (b) (3) (A) or (b) (4). 2. Petitioner's claim for relief under subsection (b) (1) was on account of losses resulting from a flood and its claim under subsection (b) (2) was on account of European war preparations which were alleged to have depressed its industry. Since petitioner has not established an amount representing normal earnings large enough to produce a credit greater than the credits computed on the invested capital method, it has not proved that its excess profits taxes are unjust and discriminatory and is not entitled to relief. Louis E. Brockman, Esq., for the petitioner. Irene F. Scott, Esq., and Lester M. Ponder, Esq., for the respondent. Rice, Judge. Murdock, J., dissenting. Kern, J., agrees with this dissent. RICE *1281 Petitioner seeks review of respondent's disallowance in full of its applications for relief under section 722 of the Internal Revenue Code from excess profits tax. Petitioner's applications sought refunds of $ 17,289.19 for 1940; $ 118,634.38 for 1941; and $ 109,270.35 for 1942. In the applications and in this proceeding petitioner urges grounds for relief under section 722 (a) and section 722 (b), subparagraphs (1), (2), (3) (A), and (4). Some of the facts were*167 stipulated. FINDINGS OF FACT. General Facts Relating to All Issues. The stipulated facts are so found and are incorporated herein. The petitioner (hereinafter sometimes referred to as Avey) is an Ohio corporation, incorporated in 1907 and has its principal office in Cincinnati, Ohio. Its plant is now and at all times material hereto has been in Covington, Kentucky. From 1922 through 1942 it kept its books and reported its income for Federal tax purposes on the calendar year basis. *1282 Avey filed income and declared value excess-profits tax returns and excess profits tax returns for the calendar years 1940, 1941, and 1942 with the collector of internal revenue at Cincinnati, Ohio. The excess profits tax liability for the year 1940, 1941, and 1942 as finally determined without the application of section 722, Internal Revenue Code, was, respectively, $ 17,289.19, $ 184,288.58, and $ 260,232.55. Avey was in existence during the entire base period, and is entitled to use the excess profits credit based on income under the provisions of section 713 of the Code. For each of the taxable years 1940, 1941, and 1942 its excess profits credit used in determining its excess profits*168 tax was computed on the invested capital method under section 714 of the Code since that computation resulted in the lesser excess profits tax. The excess profits credits for the years 1940, 1941, and 1942, were $ 28,954.27, $ 34,185.83, and $ 43,437.70, respectively. Avey's excess profits net income or loss for each of the base period years was: [1936] $ 8,523.10 Net income [1937] 43,349.20 Net income [1938] 17,069.43 Loss [1939] 21,509.71 Loss These amounts are subject to adjustment by income taxes paid for 1936 and 1937 to arrive at excess profits net income in computing the credit based on income for 1940. Avey filed applications for relief under section 722 of the Code for 1940, 1941, and 1942. As amended and supplemented these applications claimed refunds of excess profits tax in the amounts of $ 17,289.19, $ 118,634.38, and $ 109,270.35, for the years 1940, 1941, and 1942, respectively. Avey has since 1907 been a manufacturer of precision drilling machines. These are machines designed to drill holes ranging in diameter from 1.25 inches to .01 inch in metal. Avey's products are sold through dealers located in the principal cities and industrial centers of the United*169 States, and in some foreign countries. Its high speed precision drilling machines in single and multiple spindle models are used in many American industries, including principally the automotive, electrical, aircraft, refrigeration, typewriter, adding machine, and agricultural implement industries. The following schedule shows the total net sales, cost of goods sold, gross profit, and net income or (loss) before Federal income taxes of petitioner for each of the years 1922 through 1939: *1283 Cost of goods Net income or Year Net sales sold Gross profit (loss) before Federal taxes [1922] $ 204,806.82 $ 151,460.31 $ 53,346.51 ($ 7,230.11) [1923] 413,900.93 297,313.13 116,587.80 34,866.64 [1924] 299,271.94 214,108.72 85,163.22 (6,098.29) [1925] 487,019.53 327,493.68 159,525.85 62,296.55 [1926] 637,077.46 381,179.06 255,898.40 136,660.55 [1927] 541,301.24 361,521.74 179,779.50 75,715.72 [1928] 802,847.51 539,016.52 263,830.99 144,229.45 [1929] 945,835.52 580,335.80 365,499.72 205,670.97 [1930] 443,439.69 302,663.67 140,776.02 2,269.14 [1931] 174,792.27 178,441.08 (3,648.81) (113,057.76) [1932] 60,775.82 66,354.88 (5,579.06) (75,448.32) [1933] 34,978.54 29,831.80 5,146.74 (47,800.89) [1934] 131,729.26 105,782.32 25,946.94 (28,421.69) [1935] 274,254.80 236,371.62 37,883.18 (27,487.90) [1936] 395,393.41 306,134.89 89,258.52 11,412.85 [1937] 657,962.79 497,524.34 160,438.45 44,403.45 [1938] 275,224.80 193,403.91 81,820.89 (16,589.43) [1939] 323,968.50 244,295.29 79,673.21 (20,829.71) *170 Facts Relating to Issue Under Section 722 (b) (1): Unusual Event in the Experience of the Taxpayer. In the year 1937 the Ohio River overflowed and inundated Avey's plant in Covington, Kentucky. On Friday, January 23, 1937, the plant was shut down and workmen were sent home. By Monday, January 26, there were 2 feet of water on the ground floor. Extra men were hired to pump the water out to protect the furnace. Gas, electricity and water supply were completely shut off. On January 29th the water receded from the ground floor and 4 days later the basement and boiler pits were cleared. Avey rigged up its own pumping station which operated day and night for a week. The machinery and equipment had to be taken down and cleaned by maintenance forces. These expenses were nonproductive although charged to regular operations. The principal item, labor, including overtime and Saturday and Sunday wages, was charged to the general payroll account. In its income tax return for 1937 Avey deducted $ 5,792.17 as "flood expense." Avey's customers generally did not cancel orders that it could not immediately fill. Some of the machines ordered prior to the flood were shipped*171 by Avey in March of 1937. Petitioner's president estimated that, in addition to the above-mentioned "flood expense," Avey sustained, as a result of the flood, loss of profit in the amount of $ 2,166.88 and loss from damage to the plant in the amount of $ 4,000. Facts Relating to Issue Under Section 722 (b) (2): Depression from Unusual Economic Conditions. Avey is a member of the machine tool industry and is also a member of a segment of that industry comprising the builders of drilling *1284 machines mounted on a frame and designed for precision work to drill holes of small diameter, not exceeding one and a quarter inches, in metal. This segment constitutes an "industry," for purposes of section 722 (b). Ten of these companies are members of the National Tool Builders Association. These companies are: Leland-Gifford Company Providence Engineering Works, Inc. The Taylor & Fenn Company Fosdick Machine Company Edlund Machinery Company The Foote Burt Company Avey Drilling Machine Company Charles G. Allen Company Henry & Wright Manufacturing Company Sigourney Tool Company The first seven companies listed above have been in business for all the years 1922 through*172 1939, inclusive. Avey and the Edlund Machinery Company manufacture only precision drilling machines. The other companies make other machine tools as well as precision drilling machines. Over a period of many years Avey sold approximately 25 per cent of the total sales of the group, by number of spindles, of precision drilling machines. The National Machine Tool Builders Association is an organization formed by machine tool builders. It compiles statistical information for its members from data furnished by them. Avey is a member and receives from the Association the composite of the sales by the ten builders listed above. These members report to the Association the orders on hand, new orders received, shipments made, and balance of orders on hand for each month. Avey had foreign as well as domestic sales. In the base period certain European countries were engaged in rearmament in preparation for war. European purchases of American machine tools increased rapidly. The purchases were primarily in the field of heavy machine tools, manufacture of which would require too much time in Europe. European manufacturers built most of their own machine tools of the lighter type, including*173 precision drilling machines, and sales in Europe of American made machine tools of such types fell off temporarily. The following table shows for the years 1922 through 1939 Avey's total orders, foreign orders, total shipments, domestic shipments, foreign shipments (in thousands of dollars), and the percentage of foreign to total shipments: *1285 Orders Shipments Year Total Foreign Total Domestic Foreign Per cent foreign [1922] $ 209 (*) $ 204.8 $ 202.4 $ 2.4 1.2 [419] (*) 413.9 408.3 5.5 1.3 [290] (*) 299.2 288.8 10.3 3.8 [544] (*) 487.0 470.6 16.3 3.4 [589] $ 14 637.0 603.5 33.4 5.4 [36] 541.3 482.4 58.8 11.6 [80] 802.8 699.0 103.7 15.0 [119] 945.8 857.5 88.2 10.6 [70] 443.4 334.2 101.3 26.8 [16] 174.7 142.2 32.5 20.6 [32] (**) 60.7 60.4 .3 .5 [64] (**) 34.9 34.5 .3 1.1 [6] 131.7 125.8 5.8 4.4 [16] 274.2 264.5 9.7 3.5 [19] 395.3 377.5 17.8 4.5 [66] 657.9 576.2 81.7 12.4 [42] 275.2 211.3 63.9 23.2 [133] 323.9 296.8 27.1 8.4 *174 The following schedule shows the total net dollars sales of machine tools by manufacturers of machine tools in the United States separated between domestic and foreign sales for each of the years 1922 through 1939 together with the net income or loss (in millions of dollars) and the per cent of net income to total net sales for each such year: Total of Domestic Foreign domestic Per cent Year sales sales and foreign foreign sales [1922] $ 40 $ 3 $ 43 7.9 [79] 5.8 [70] 8.5 [87] 12.5 [105] 6.9 [87] 14.5 [128] 12.5 [185] 10.2 [96] 18.8 [51] 34.2 [22] 28.2 [25] 17.6 [50] 24.2 [85] 20.5 [133] 18.7 [195] 19.7 [145] 44.6 [200] 39.9 Average: 1922-39 [99] 1936-39 [168] Per cent of net Net income income or Net income Year or (loss) (loss), after index (1922-39=100) taxes, to total sales [1922] $ 4 9.7 50.2 [12] 14.7 139.2 [4] 5.1 42.4 [9] 10.3 106.6 [12] 11.3 141.7 [7] 8.1 84.2 [26] 20.2 308.8 [29] 15.6 345.1 [1930] (2) (2.1) (23.0) [1931] (15) (28.4) (173.2) [1932] (13) (61.1) (160.4) [1933] (8) (33.3) (99.7) [1934] (.9) (5.5) [6] 7.5 76.2 [16] 12.0 190.0 [28] 14.6 340.2 [11] 7.5 129.9 [26] 12.9 304.4 Average: 1922-39 [8] 8.4 100.0 1936-39 [20] 12.0 241.9 *175 *1286 The number of sensitive drilling top units, shipped by American machine tool companies during the period 1935-1939 as compiled by National Machine Tool Builders' Association, is as follows: Year Total Domestic Foreign [1935] 2,100 (*) (*) [1936] 3,295 (*) (*) [1937] 4,894 4,691 [1938] 1,663 1,483 [1939] 2,552 2,429 [123] Facts Relating to Issue Under Section 722 (b) (3) (A): Industry Cycle. The following table shows the index figures for the years 1922 to 1939 based upon the averages for the full period, of general business net profits, net income and net sales of Avey, the machine tool industry net income and net sales, and net income and net sales of the six of Avey's competitors which were in business throughout such years. Indices of Net Profits, Sales and Income. Machine tool industry Net profits * Avey net Avey net Year general income sales business (or loss) Net income Net sales [1922] 109.8 (34.7) 51.9 50.2 43.6 [1923] 134.3 167.6 104.9 139.2 79.9 [1924] 123.4 (29.3) 75.9 42.4 70.1 [1925] 157.4 299.4 123.5 106.6 87.4 [1926] 161.0 651.9 161.5 141.7 105.8 [1927] 152.5 363.9 137.2 84.2 87.7 [1928] 179.4 692.9 203.5 308.8 129.0 [1929] 191.4 988.4 239.8 345.1 186.5 [1930] 89.8 10.9 112.4 (23.0) 96.8 [1931] 16.9 543.3) 44.3 (173.2) 51.4 [1932] (22.4) (362.6) 15.4 (160.4) 22.2 [1933] 13.5 (229.7) 8.9 (99.7) 25.2 [1934] 49.3 (136.6) 33.4 (5.5) 50.4 [1935] 69.4 (135.1) 69.5 76.2 85.7 [1936] 104.4 54.8 99.9 190.0 134.1 [1937] 103.8 213.4 166.3 340.2 196.5 [1938] 62.8 (79.7) 69.7 129.9 146.1 [1939] 102.4 (100.1) 82.1 307.4 201.6 Average: 1922-39 100.0 100.0 100.0 100.0 100.0 1936-39 93.4 22.1 104.5 241.9 169.6 *176 Indices of Net Profits, Sales and Income. Six builders of ** precision drilling machines Year Net income Net sales [1922] 143.3 103.8 [1923] 206.9 127.0 [1924] (24.3) 96.9 [1925] 20.7 100.5 [1926] 208.3 137.8 [1927] 161.7 115.0 [1928] 400.6 162.2 [1929] 510.7 178.6 [1930] (15.8) 77.4 [1931] (156.5) 35.6 [1932] (159.8) 40.6 [1933] (77.9) 30.4 [1934] (40.3) 45.0 [1935] 48.7 68.0 [1936] 202.1 114.6 [1937] 206.9 144.6 [1938] (85.6) 81.2 [1939] 250.3 140.9 Average: 1922-39 100.0 100.0 1936-39 143.4 120.3 The National Machine Tool Builders' Association's record of orders shows estimated orders for the entire machine tool industry for the base period years as follows: Total orders Per cent Year (estimated) Foreign orders foreign [1936] $ 150,000,000 $ 30,000,000 [1937] 205,000,000 63,000,000 [1938] 115,000,000 60,000,000 [1939] 345,000,000 200,000,000 [58] *177 *1287 The Association commented upon these figures in 1944 as follows: The overall figures conceal a condition with which the industry is very familiar; that the distribution of orders is highly unequal as between units of the industry. This condition follows no pattern based on size of company. It is brought about by the wide variety of product and differences in utilization of the many types and sizes of machine tools that make up the industry's output. Volume of demand for any one company depends more upon the kind of machines it produces, and the extent of utilization of each type and size, under varying conditions in the many different kinds of customer plants, than upon the policies of management or the aggressiveness of the sales organization. Many kinds of machine tools are required to make a single product. While some types can do several kinds of work, most are highly specialized machines designed to do a certain job in the best, quickest manner at the lowest cost. What shall be the types and what the numbers of machine tools that are brought together to turn out the parts for any one of the thousands of products produced therefore varies with the product, and*178 also with the volume of the output required. There is no such thing as a "jack-of-all-trades" type of machine tool that is indispensable in every metal working shop and on every kind of product manufactured. Each size and type of machine tool therefore seeks its own distinctive market among the metal working plants of the country. The size and breadth of the market depends upon the degree of application that machine tool has to the variety of jobs to which it is best suited. It follows, then, that some machine tools are needed in quantity and by many different industries. Others whose application is less broad have a relatively narrow market. Some very highly productive machines have a market only where large volume of output is possible. * * * * It cannot be stressed too strongly that industry totals are of value only as an indication of trend and as a measure of the extent of growth or shrinkage in the overall demand for machine tools. As a gage of the volume of business actually received by any one company or group of companies making a similar type of machine the industry totals are of no value. The Association analyzed the reports of 85 companies, members of the industry, *179 for the years 1937, 1938, and 1939 and reached the following conclusions: (a) that the volume of foreign business placed was trebled in 1939 over the preceding two years; (b) that domestic orders dropped from $ 102 to $ 39 millions between 1937 and 1938 (60%), and barely covered the 1937 volume in 1939; (c) that half the total business placed in the three years was for foreign shipment; (d) that the proportion of foreign business placed in each group varies directly as to size of the group, with the largest companies booking the largest percentage of their business, and the smallest companies booking the smallest percentage of their business for shipment abroad. Avey has not established the existence of a variant profits cycle or that its base period earnings were depressed from conditions specified in subparagraph (3) (A). *1288 Facts Relating to Issue Under Section 722 (b) (4): Change in Character of Business. Prior to 1935 Avey marketed only drilling machines in which power was transmitted to the spindle by means of a flat belt from a countershaft which received power from an external source. In 1929 Avey began experimenting to devise a machine in which *180 the power was supplied by a motor attached to each spindle. The objective was a self-contained spindle head having its own built-in power unit. It was also desired to improve the performance of the machines. Attempts to develop improved machines were prompted by customers' complaints that in the old models the power was insufficient, the belts slipped and the machines were difficult to keep in adjustment. Attempts were first made to mount a motor to drive the spindle directly. This method proved unsatisfactory, but after several experiments a method was evolved of mounting a motor on the frame and connecting it to the spindle by gears or by gears and a V-belt. The first design of a motor-driven drilling unit was started in March 1929. A second was made later in 1929 and a third in 1932. With each design, patterns were made for casting the necessary parts and some expense was incurred for tools, jigs, and fixtures in making the experimental model. The second design included a gear box giving three speeds, with a gear shifter. The third design had an enclosed two-speed motor with built-in control gear shift lever and fan ventilation for the motor. Alterations and improvements*181 were made during 1933 on the ventilating fans, grease seals, gear shifter detail, and a switch-box housing, and also in the motor housing to accommodate an improved motor supplied by the motor manufacturers. In 1934 additional improvements were made in the bases, columns, and work tables of the machines. These changes involved principally heavy pattern work. A few experimental models of this type were sold about 1933 and it was found necessary to send out service men at Avey's expense, to remedy defects which developed in these machines. The failure of the grease seal to function properly was one of these defects, and a new seal had to be devised and installed on the machines then in use. Designing of another type, a four-speed machine, was commenced about 1932 with a second design made in 1934. It was redesigned in 1936 to increase the speed range to eight speeds, adapt the gear box for forced oil lubrication, and change the castings of the frame. In 1934 Avey's sales included 46 spindles of the new motor-driven machines as compared with 214 spindles of the old type belt-driven machine. The first active marketing of the motor-driven machines was in 1935. Further improvements*182 were made in these machines during the base period years. These involved changes in design, and refinements in the operating features of the machines. *1289 They included standardizing the switch brackets and control mechanism, use of a new type of oil seal on vertical shafts, change in the design of counter-weights on the frames, alterations in the castings for the housing, gear box and cover, and a change in spindles and quills making all spindles 6-spline, full ball-bearing types. Better methods of manufacture were devised. A change in processing was made involving the balancing of all revolving parts of the machines. For this purpose Avey purchased an automatic balancing machine. Avey also discontinued making gears and purchased them from a gear manufacturer. Avey pioneered in the development of special purpose machinery for deep hole drilling. A machine was desired in the manufacture of automobile motors for drilling long oil holes in crankshafts and connecting rods. Avey built a machine in 1932 designed for this purpose but it was not satisfactory in operation. In 1935 Avey commenced the design of a new machine for this purpose. This was a feeding mechanism which*183 could be installed on a drilling machine and which would withdraw the drill automatically from the work to avoid choking or overheating and to remove chips. Six oil holes could be drilled simultaneously using this mechanism, the attention of only one operator being required. This mechanism involved the principle of hydraulic circuits and was called the Avey-draulic feed. Its development required several years of experiments and cost some $ 40,000 to $ 50,000. This machine was actively marketed in 1937 but improvements continued through 1939. Prior to 1938 Avey built cam-feed attachments under a license from another manufacturer. These were single speed machines having a predetermined rate of feed and were used for single purpose work. Avery designed a machine of its own for this purpose. Several experimental models were made between 1929 and 1938. These units were redesigned in 1939 and actively marketed in that year. Manufacture under the license was discontinued at that time. In the development of the motor-driven machines Avey expended considerable sums for patterns for the experimental models and for tooling, jigs, and fixtures used in the development. During the years*184 1929 through 1935, expenditures for such patterns were $ 8,613, and for tooling, jigs, and fixtures used in development were $ 11,862. In the base period, expenses for such patterns were $ 21,179, and for tooling, jigs, and fixtures, $ 26,147. As the motor-driven machines were improved and more of them were marketed sales of the motor-driven machines increased in proportion to sales of the old model machines. The motor-driven machines had variable spindle speeds ranging up to 12,000 r. p. m. They had more power and were considerably heavier than the flat belt-driven machines. They were easier to operate, required *1290 less servicing, and caused less fatigue to the operators. The cost of manufacture was about 25 per cent higher and the sales prices were also 25 per cent higher. The Avey-draulic feeding mechanism represented a considerable addition to the cost of a machine, as for example, if a drilling machine with hand feed sold for $ 800, with the Avey-draulic feed it would sell for $ 2,000. The increased efficiency of the new machines helped the customers by way of cost cutting and labor saving. As a consequence of the development of these machines Avey made sales to*185 some forty users not previously its customers although, generally speaking, they were the same type of customer previously dealt with by Avey. The new machines performed the same function as the flat belt-driven machines, that of drilling small holes in metal, but were far more efficient. The designing and building of the new type of machines required many changes in manufacturing methods and the employment of electrical engineers and technicians not previously employed in Avey's business. Patents were granted on several of the mechanical devices or improvements. Patents were applied for in 1935, 1936, 1939, and 1940, and were granted in 1938 or later years. Avey's competitors were also devising motor-driven drilling machines, and began selling them in about 1934 or 1935. Avey did not capitalize development expense in its income tax returns for the years 1923 through 1939 except for some pattern costs, which were capitalized during those years in the amount of $ 58,585.11. Certain other pattern costs were charged to expense. Avey's sales of old type and new type machines were as follows: Number of spindles sold Percentage of new spindles Year Old type New type Number Value [77] Total 2,033 1,816 Value $ 782,330 $ 1,082,463 *186 Ultimate Findings of Fact. Petitioner's normal operation was interrupted and diminished by an event unusual and peculiar to its experience, the Ohio River flood, in 1937. The loss to petitioner as a consequence of this event did not exceed $ 11,959.05. Petitioner's business was not depressed in the base period by reason of conditions in its industry subjecting it to a profits cycle differing materially in length and amplitude from the general business cycle. *1291 Petitioner did not change the character of its business during or immediately prior to the base period. Petitioner's excess profits taxes for the years 1940, 1941, and 1942, as computed without the benefit of section 722, are not excessive and discriminatory. Petitioner is not entitled to relief under section 722, Internal Revenue Code. OPINION. Petitioner seeks relief under section 722 of the Internal Revenue Code1 on the ground that its excess profits taxes for 1940, 1941, and 1942 are excessive and discriminatory by reason of conditions or circumstances within subparagraphs (1), (2), (3) (A), and (4) of section 722 (b), and asserts that a fair and just amount representing normal earnings, to be used as a constructive*187 average base period net income, is $ 136,800. Petitioner is entitled to use the average earnings method of computing its excess profits credit. Its base period is the calendar years 1936 to 1939, inclusive. Its average base period net income, computed with the benefit of section 713 (e) (1), was*188 $ 8,700.72 for the purpose of determining under the average earnings method its excess profits credit for 1940 and 1941, and $ 11,600.96 for determining its credit for 1942. Its excess profits credits, computed under the invested capital method, amounted to $ 28,954.27, $ 34,185.83, and $ 43,457.10, for the years 1940, 1941, and 1942, respectively. Section 722 (b) (1), Unusual Event. 2 *189 Petitioner alleges that in its base period normal production, output, or operation was interrupted or diminished because of an event unusual *1292 and peculiar in its experience, namely, the Ohio River flood in 1937. Respondent concedes that the flood was an event such as is described in subparagraph (1), but denies that petitioner has shown that its average base period net income is an inadequate standard of normal earnings by virtue thereof. As respondent points out, if the entire amount, less than $ 12,000, specifically claimed as flood loss (proof of which is not conceded) were restored to income for 1937, the excess profits credit computed upon the average base period net income as so reconstructed would not equal the credits, computed under the invested capital method, which were used in determining Avey's excess profits taxes. Hence, it is not shown that the taxes are unjust and discriminatory by reason of the flood. Petitioner concedes this, provided it is not entitled to relief under some other subparagraph of section 722 (b). However, if the right to relief under another provision is shown, relief under subparagraph (1) might enter into the computation of the constructive*190 average base period net income. This will be discussed hereinafter in connection with the reconstruction of earnings. Section 722 (b) (2) 3Depression from Unusual Economic Conditions. This subparagraph provides relief*191 where a taxpayer's business was depressed from the effects of temporary unusual economic conditions peculiar to the taxpayer or to its industry. Petitioner asserts that such conditions affected its industry, a group of some ten or more builders of precision drilling machines. Respondent asserts that Avey is a member of the machine tool industry. Avey agrees with this, but contends that for purposes of comparison such industry is too broad a classification. The respondent's published Bulletin on Section 722 states that a single large corporation having a monopoly may be an industry in itself. It further states, page 8: In most general terms an "industry" comprises a group of business concerns sufficiently homogeneous in nature of production or operation, type of product or service furnished, and type of customers, so as to be subject to roughly the *1293 same external economic circumstances affecting their prices, volume and profits. Stated otherwise, an industry will generally consist of all of its producers which compete with each other in selling essentially the same products or services in the same market. Petitioner's evidence indicates that there are five recognized*192 arts involved in the machine tool industry, dealing with the processing of metal by five different means, namely, turning, milling, shaping, graining, and boring or drilling. There are more than 200 types and kinds of machine tools using these arts. Each of these arts, says the petitioner, is an industry of its own, and the builders of small precision drilling machines by themselves constitute an industry. There were some 10 or more companies in the group building this type of drilling machine and in the "trade" a "sensitive" drilling machine is defined as one boring a hole no larger than one and one-quarter inches. A drill of larger size is referred to as an upright drill, is sold in a different market, and is not ordinarily used in precision work. There is a difference in the kind of shops that will ordinarily use upright drilling machines and those using sensitive drilling machines. For example, a railroad repair shop would use an upright drill; a typewriter or adding machine manufacturer would require a sensitive drilling machine. According to respondent's own definition of an "industry" the term may properly be applied to a small group of manufacturers building the same*193 type of product having the same end use and competing in the same market. A manufacturer of a wide variety of machine tools, meeting collectively a large part of the needs of machine tool users, might properly be considered a member of the machine tool industry as a whole. Such a manufacturer has a wide market for its products and would normally be subject to those economic influences affecting the bulk of the machine tool builders. On the other hand, a manufacturer of a highly specialized type of machine tool having a limited field of use might not be subject to the same economic influences. The market for such a type might expand or contract with an appreciable degree of variance from the market of the machine tool industry. Since there is evidence indicating that the builders of light precision drilling machines were subject to some economic influences which did not also affect the machine tool industry as a whole, we conclude that the "sensitive drilling machine builders group," which comprises Avey and its competitors, may be treated as Avey's "industry," and we have so found in our findings of fact. A taxpayer may qualify for relief under subparagraph (2) if it establishes*194 that its earnings were depressed as a consequence of temporary economic conditions peculiar to the taxpayer or its industry. This provision does not refer to ordinary economic hazards. The depression in earnings must result from unusual conditions over which the taxpayer has no control. The petitioner contends that during *1294 the base period its earnings, as well as those of other builders of precision drilling machines, were depressed because the European countries then engaged in a rearmament race manufactured their own precision drilling machines and other light machine tools, with the result that American manufacturers of such machines received less export business. The argument is that petitioner and other manufacturers of small, light machinery, including precision drilling machines, and particularly such manufacturers having only a small volume of business, normally received a fair amount of business; that when the rearmament race started abroad the European countries concentrated their efforts and their own equipment on the manufacture of small, light machinery; and that, generally, they imported only heavy machinery from the United States, as heavy machinery could*195 not readily be procured in Europe. This was a policy which petitioner and manufacturers similarly situated could not change. After the base period years the situation changed and petitioner, as well as other manufacturers in its group, received a large amount of export business. This base period condition, it is contended, was an unusual economic condition. As petitioner points out, there was a strong upward trend in sales of machine tools in the base period years, an increasing part of which was foreign. Total shipments show an increase from $ 65 million in 1935 to $ 200 million in 1939 with foreign shipments increasing from about twenty per cent to about forty per cent of the total and amounting in 1939 to more than four times the 1935 shipments in dollar value. Foreign orders increased while domestic orders declined. Profits of machine tool builders as a whole showed a favorable percentage. On the other hand, shipments of precision drilling top units increased to 1937, but in 1938 declined to about one-third of 1937, and rose in 1939 to about half the 1937 shipments, with foreign shipments representing only some five per cent of the total in 1939. Net income of Avey's competitors*196 was apparently not as favorable as net income of machine tool builders generally, in comparison with the long term average for the period 1922 to 1939. Avey's total shipments increased in 1936 and 1937, dropped to less than half of 1937 in 1938, and increased in 1939 to about half of 1937, while Avey's foreign shipments averaged 10.3 per cent in the base period but declined from 1937 to 1939 in dollar value. In 1939 Avey's foreign orders increased rapidly in volume. Since shipments lag behind orders, this development did not serve to increase Avey's base period earnings, but did increase its earnings in the taxable years. Statistics of the National Machine Tool Builders' Association show that the larger machine tool manufacturers, generally speaking, secured the bulk of the foreign orders; smaller concerns, such as Avey, *1295 having comparatively little of them. Petitioner argues that, had it and other manufacturers of light machinery secured foreign orders in the base period in accordance with the upward trend of the machine tool industry as a whole, its shipments would have amounted to $ 3,733,000 in the base period and that its loss of position compared to the increased*197 business of the machine tool industry amounted to $ 2,084,000 in those years. Avey's actual shipments in the base period were about $ 1,650,000. Preparation for war in Europe in the base period affected various businesses in different ways. Some derived increased earnings. Other suffered a shrinkage in their businesses from the diversion of funds into war channels or for other reasons. While the increasing volume of foreign orders for machine tools for war preparations doubtless served to swell the base period volume and earnings of some machine tool builders, it does not follow that manufacturers who did not share in this should be entitled to reconstruct earnings on the assumption that they should have received a part of such business. We find it unnecessary to decide whether this buying policy was an unusual economic condition within the meaning of subparagraph (2), for, conceding for the purpose of this argument that it was, petitioner has not established the further requisite of a fair and just amount representing normal earnings of sufficient magnitude to provide an excess profits credit more favorable than its actual credits based upon invested capital. This matter will*198 be discussed hereinafter in dealing with reconstruction of earnings. Section 722 (b) (3) (A), 4Variant Profits Cycle. Under this provision a taxpayer may be entitled to relief if its business is depressed as a result of conditions in its*199 industry which subject the taxpayer to a profits cycle differing materially from the general business cycle in length and amplitude. This provision applies where the depression results from conditions usual in the industry, which conditions also exist in the case of the taxpayer, as distinguished from unusual economic conditions referred to in subparagraph *1296 (2). Petitioner contends that its business was depressed because of conditions generally prevailing subjecting it and other builders of sensitive drilling machines to such a profits cycle. Petitioner also contends that the machine tool industry, of which petitioner is also a member, likewise has a profits cycle at variance with the general business cycle. It is essential to the establishment of a right to relief under this provision that the taxpayer's profits cycle differ materially in length and amplitude from the general business cycle. If this is not demonstrated, any variance that may exist in the cycle of the taxpayer's industry, as compared with the general business cycle, is immaterial. We think petitioner here has not shown a substantial variance in its own cycle from that of general business. Our findings*200 include tables of index figures showing indices of the net profits of general business and Avey's net profits and net sales. The findings also show Avey's actual net profits and annual orders and shipments. A study of these figures reveals that the fluctuations in Avey's business conform closely to those of general business. These figures show a fairly steady rise from 1922 to 1929 with slight dips in 1924 and 1927, a sharp decline from 1929 to 1932 or 1933, a rise to 1937, a sharp dip for 1938 and a recovery in 1939; except that Avey's net loss in 1939 was greater than in 1938 even though it had more orders and more sales. A temporary distortion due to some non-recurring cause would not create a variant profits cycle. 5Avey's cycle appears to be of the same length as those of general business profits. Avey's business did not show as great a proportionate increase in the base period and three or four preceding years as was shown by general business profits. Even if this is interpreted as a difference in amplitude, that is not sufficient to meet the requirements of the statute, for the taxpayer's cycle must be shown to differ both in length and amplitude from the general*201 business cycle. This is not shown here. A further difficulty with the proof herein is that the alleged variance in the cycle of petitioner's industry is not shown to be due to conditions generally prevailing in that industry, either machine tools or precision drilling machines. See El Campo Rice Milling Co., 13 T. C. 775, 787 (1949). Petitioner has no explanation for the supposed variance, if any exists, unless it flows from the abnormal lack of foreign demand mentioned hereinafter. If this is the cause, it is a temporary condition rather than a condition generally prevailing in Avey's industry, since Avey asserts in its claim under subparagraph (2) that it and its competitors had substantial foreign business in late 1939 and subsequent years. Avey has not established the existence of a variant profits cycle or that its base period earnings were depressed from conditions specified in subparagraph (3) (A). *1297 Section*202 722 (b) (4), 6Change in Character of Business. *203 Under this subparagraph petitioner alleges that it changed the character of its business just prior to and during the base period and that, as a result of such change, its average base period net income does not reflect the normal operation for the entire base period. A change in character includes a difference in the products. Petitioner's argument is that the new machines it developed and introduced just prior to and during the base period were not merely routine improvements, but embodied changes which revolutionized the industry. The changes effected in the machines were quite extensive and no such changes in Avey's models had been made during the 1920's or early 1930's, nor were any changes of similar degree made during the 10-year period following 1939. The process of development carried on during the period 1932 to 1939 resulted in the issuance of a number of letters patent applied for in the years 1935 to 1940, and granted in the years 1939 to 1942. The new machines differed from the earlier models in several particulars, the principal difference being that power was supplied by a motor mounted on the frame to drive each spindle, instead of being transmitted by a flat*204 belt drive from an external source of power. The new type machines were considerably heavier than the old. They provided a wider choice of spindle speeds and were far more efficient in precision work. Their increased efficiency helped the customers by way of cost cutting and labor saving. The petitioner also developed a mechanism for withdrawing the drill from the work automatically to prevent choking and to remove chips. This was called the Avey-draulic feed and involved the principle of hydraulic circuits. Such development required several years and cost some $ 40,000 or $ 50,000 to develop. The mechanism could be installed in connection with a drilling machine in which case it represented a substantial addition to the cost. As a consequence of the *1298 development of the new machines, Avey made sales to some 40 new customers generally similar in type to its other customers. The designing and building of the new type of machines required changes in manufacturing methods, a higher scale of costs and selling prices and the employment of electrical engineers and technicians not theretofore employed in Avey's business. Sales of the new machines rose to 66 per cent in*205 number and 77 per cent in dollar volume of Avey's sales in 1939. Avey's orders were rapidly accelerating in late 1939, as shown in the findings of fact. We think the evidence does not justify a conclusion that Avey "changed the character of the business" within the intent of the statute by reason of the invention and development of its new model machines. Avey, and other members of the machine tool industry, found it necessary to survival in business to do research and development to keep up with the demands of their customers and the improved products of their competitors. Avey's customers were demanding machines of greater spindle speed and Avey's development of improved machines was necessary to prevent loss of its business to competitors who were at the same time improving their machines to meet the same customer demand. The changes, we think, cannot be characterized as more than improvements. Avey was in the business of building precision drilling machines used to drill small holes in metal. The new machines served the same purpose as the old and, generally, were sold to customers in the same industries as before. A change in character, within the intent of the statute, *206 must be a substantial departure from the preexisting nature of the business. The Avey-draulic mechanism may have been a development beyond anything Avey's competitors could match, but the record does not show what sales of this device resulted or could reasonably have expected to result from its development. As respondent says, had petitioner not made the improvements in its machines it could not have stayed in business. Petitioner relies upon W. B. Knight Machinery Co., 6 T. C. 519 (1946), in which a taxpayer in a section 721 proceeding proved that as a result of research and development it introduced a milling machine which was different from anything it had manufactured theretofore. Upon the evidence we concluded that because of the changes effected the new machines manufactured by the company were essentially different from the earlier models even though they were still milling machines and had the same end use in general as the earlier machines. They were adapted to perform work, both in kind and extent, which the old machines could not perform. The case is not in point because it involved a different question. The issue there was whether *207 income in an excess profits tax year was "abnormal" income resulting from development of tangible property. No question of a change in character of the taxpayer's business was raised. It does not *1299 follow that "development" which meets the requirements of section 721 (a) (2) (C) constitutes a "change in the character" of a business for the purposes of section 722 (b) (4). Petitioner also cites other cases. In East Texas Motor Freight Lines, 7 T. C. 579 (1946), we held that a change in the petitioner's business occurred when, as a common carrier of freight by motor truck as an intrastate carrier, it changed its function to serve as an interstate carrier as well. In 7- Up Fort Worth Co., 8 T. C. 52 (1947), the business of the petitioner was that of bottling a soft drink known as "7-Up," and in December of 1939, it acquired the right to bottle and sell an orange beverage. We there recognized a change in the character of the business. In Lamar Creamery Co., 8 T. C. 928 (1947), the petitioner added a new product, an ice cream mix, which we held satisfied the requirement for a difference*208 in the products or services furnished. These cases are not controlling here where the change in product was an improvement, and not a radical change in function or addition of a new and different product. Reconstruction of Earnings. Petitioner contends that the fair and just amount representing normal earnings, to be used as a constructive average base period net income is $ 136,800. This is based upon the assumption that a normal sales level would have amounted to about $ 1,000,000 per annum by the end of 1939 on which the profit would be $ 150,000. To this figure is applied an index of 91.2 per cent to reach the amount stated. This amount is further reduced by adjustments for income taxes in each of the years 1940 and 1941 which adjustments petitioner says may be cared for under Rule 50. The president of petitioner expressed his opinion, based upon the progress of the sales of the new machines and an analysis of such sales and assuming that the machines had in each instance been introduced 2 years earlier and on the further assumption that the company was enjoying a normal period of business, and that there had been no flood and no depression because of temporary economic*209 conditions or cyclic variations, that Avey's sales would have reached $ 1,000,000 in 1939 and its net income would have been $ 150,000. The opinion expressed by Avey's president was responsive to a hypothetical question which assumed the existence or nonexistence of certain facts and conditions, among these the existence of a change in the character of the business and the existence of a variant profits cycle. We have decided that there was no change in the character of the business and that Avey's profits cycle did not differ materially from the general business cycle. To the extent the opinion was based upon these hypotheses, it was without substantial foundation. *1300 The secretary of the National Machine Tool Builders' Association expressed the opinion, based upon a study of Avey's orders and shipments in comparison with those of the machine tool industry, that if Avey's foreign shipments had continued in the base period to hold their relative position with those of the industry, Avey would have had additional sales of $ 2,084,000 in the base period. This figure was computed by statistical methods. This opinion involves, we think, a fundamental error. The petitioner's*210 own argument is that the foreign sales of the machine tool industry in the base period were abnormally concentrated on heavy types because of the rearmament race, that the war preparations created an unusual economic condition. The machine tool industry's foreign shipments in 1936 were higher in dollar value than in any prior year shown in the record and increased greatly each succeeding year throughout the base period, much of the increase being due to war conditions in foreign countries. This proposed computation of Avey's constructive sales appears to assume that Avey should share pro rata in these war orders. While the base period was one of recovery from the depression years preceding, and some increase in foreign sales could be expected in normal conditions, we think the assumptions upon which a reconstruction of normal income must be predicated may not include an assumed sharing in the war use sales. Where a taxpayer has an earnings experience, any reconstruction of earnings must bear some relation to that experience. Avey's asserted loss of foreign orders in the base period presents a problem of reconstructing the foreign sales it might have had if the abnormal condition*211 were not present. Avey's foreign sales averaged about $ 36,600 for the whole period 1922-1939. The highest year was 1928 when foreign sales were about $ 103,700. The highest foreign sales for a period of 4 years was $ 352,000 for the years 1927 through 1930, an average of $ 88,000. Foreign sales in the base period were about $ 190,500, an average of $ 47,615. No warrant has been shown for assuming that "normal" earnings should include foreign sales greatly in excess of any in Avey's prior experience. If a reconstruction of earnings is made by assuming base period foreign sales of $ 352,000, an increase of $ 161,500, over actual foreign sales, and net profits on the additional sales are calculated at 15 per cent, the rate assumed by Avey's president in his estimate based upon much greater assumed sales, the gross addition to base period income is $ 24,225. The entire amount claimed as flood loss was slightly under $ 12,000. If $ 12,000 were added on this account, the increase to actual base period net income amounts to $ 36,225, or an average of $ 9,056.25. Reconstruction by increasing the actual base period net income by this *1301 amount will not produce as large an *212 excess profits credit as that actually used under the invested capital method in computing Avey's excess profits taxes. If reconstruction is based upon the average of Avey's earnings for the long term 1922 through 1939, the amount thereof, about $ 20,800, is likewise insufficient to produce a credit equivalent to the credit under the invested capital method. The petitioner argues that in any such reconstruction the depression years of 1931 to 1934 should be omitted, giving an average of over $ 62,000. These depression years involved losses totaling $ 264,000. We find no sanction for selecting favorable years and omitting depression years in arriving at a long term average. We have held that where average base period income exceeds the average of the long term 1922-1939, the base period average is not an inadequate standard of normal earnings. Foskett & Bishop Co., 16 T. C. 456; Industrial Yarn Corporation, 16 T. C. 681. We conclude from all the evidence, that petitioner's excess profits taxes, as computed without the benefit of section 722, are not excessive and discriminatory, and that petitioner has not established*213 a right to relief under section 722. Decision will be entered for the respondent. MURDOCK Murdock, J., dissenting: The petitioner manufactured and sold a type of drilling machines prior to 1935 which was not self-powered. The purchaser of one of those machines had to supply a separate power plant to cause the machine to operate. That power plant was not a part of the machine as manufactured and sold by the petitioner. The petitioner had been working on a machine which would include its own power plant in the form of an electric motor mounted on the top of the machine. The petitioner actively marketed those machines for the first time in 1935, and further improvements were made on them during the base period. Also, the petitioner pioneered in the development of a special-purpose machine for drilling deep holes and actively marketed such a machine for the first time in 1937. The findings indicate that no similar machine had been marketed previously. Improvements continued through 1939. The petitioner expended over $ 67,000 in developing the machine which included its own power plant, and it expended between $ 40,000 and $ 50,000 in developing the deep-hole drilling machine. *214 No similiar changes in its products occurred between 1920 and 1949. Patents were obtained on the machines. The designing and building of the new-type machines required many changes in manufacturing methods and the employment of electrical engineers and technicians not previously employed in the business. *1302 The machines had important advantages over the old ones. New customers were obtained. Sales of the new machines increased as improvements were made on them during the base period. Section 722 (b) (4) provides that the tax without the benefit of section 722 shall be considered excessive and discriminatory if the average base period net income is an inadequate standard of normal earnings because the taxpayer either during or immediately prior to the base period changed the character of its business and the average base period net income does not reflect the normal operation of the business for the entire base period. It further provides that a change in the character of the business includes a difference in the products furnished. Those relief provisions should be interpreted in the light of the general purpose which Congress had in mind in enacting them. Furthermore, *215 as Congress has suggested, they should be administered sympathetically in order to carry out the general purpose. Congress intended that the high excess profits taxes which it imposed during the war years should apply only to the excess of income of each year over the portion of its income for that year which might fairly be regarded as normal. One method of determining what was normal was to compute a credit based upon the average excess profits net income for the years 1936 through 1939. Congress recognized that there would be some cases in which that base period would not be a fair means of determining normal income of the business actually in operation during the later tax year. One of the exceptions, as set forth in section 722 (b) (4), is where the sales during the high-tax war year include sales of a product which the sales of the base period do not adequately reflect, due to the fact that immediately prior to the base period or during the base period a difference occurred in the products furnished. The Commissioner by his regulations and this Court by opinions have pointed out that not every difference in the products furnished is sufficient to bring a taxpayer within *216 section 722 (b) (4). But obviously the provision should not be written out of the statute, and neither the Commissioner nor this Court should take a narrow view of what is a difference in the products furnished, within the meaning of section 722 (b) (4). The prevailing opinion interprets the word too narrowly. It seems to find something against the petitioner's contention in the fact that, not only the petitioner, but other members of the industry, in order to survive and to meet competition, had to keep up with the demands of their customers. It holds that the change must be a substantial departure from the preexisting nature of the business and describes the new machines as mere improvements, since they "served the same purpose as the old and, generally, were sold to customers in the same industry as before." I do not agree with *1303 those reasons, and believe that they have led the majority to find incorrectly as a fact that no change in the business occurred. The majority would distinguish 7-Up Fort Worth Co., 8. T. C. 52, and Lamar Creamery Co., 8 T. C. 928, because here "the change in the product was an improvement, and not a radical*217 change in the function or addition of a new and different product." That is a distinction without any substantial difference. The taxpayer in the first case began to sell a new beverage, but it "served the same purpose as the old and, generally, [was] sold to the same customers in the same industry as before." The situation in the other case was similar in principle. The deep-hole drilling machine actually served a purpose which was not served by any prior machine. A parallel to the introduction of the self-powered machine is furnished by the advent of the automobile. Studebaker, for example, had long manufactured vehicles, the purpose of which was to transport persons and things from one place to another. However, they would not fulfill that purpose until the purchaser supplied a power plant, usually in the form of a horse or a mule. It was later found that a power plant in the form of a gasoline motor or electric batteries could be incorporated in the vehicle so that it would move under its own power. Studebaker began manufacturing and selling such vehicles. But even the majority must concede that they were a different product. Yet there, as here, the product first manufactured*218 and sold was just a machine which had no power plant incorporated in it and would not operate until outside power was applied, whereas later the thing manufactured and sold was a machine which had as an integral part of it the power plant to make it operate. There was in both not a mere improvement, but a real, substantial difference in the products furnished, although they "served the same purpose as the old and, generally, were sold to customers in the same industry as before." Here, normal sales of neither of the new products, the self-powered drills and the deep-hole drills, are reflected over the base period years; the average base period net income does not reflect the normal operation of a business, including the sale of such machines, for the entire base period; and this seems a proper case in which to hold that there was a change in the character of the business due to a change or difference in the products furnished. Whether its constructive average base period net income would be sufficient to give it any relief is another question. Footnotes *. Figures not given.↩ **. Less than $ 500.↩ *. Figures not furnished.↩ *. From Commissioner's Mimeograph I. T. 5807, 1945 C. B. 273↩. **. Includes Edlund Machinery Co., Inc., The Foote Burt Co., The Fosdick Machine Co., Leland-Gifford Co., Providence Engineering Works, Inc., The Taylor & Fenn Co. Computed from income tax returns.↩ 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. * * *↩ 2. SEC. 722. GENERAL RELIEF -- CONSTRUCTIVE AVERAGE BASE PERIOD NET INCOME. * * * * (b) Taxpayers Using Average Earnings Method. -- The tax computed under this subchapter (without the benefit of this section) shall be considered to be excessive and discriminatory in the case of a taxpayer entitled to use the excess profits credit based on income pursuant to section 713, if its average base period net income is an inadequate standard of normal earnings because -- (1) in one or more taxable years in the base period normal production, output, or operation was interrupted or diminished because of the occurrence, either immediately prior to, or during the base period, of events unusual and peculiar in the experience of such taxpayer, * * * *↩ 3. SEC. 722. GENERAL RELIEF -- CONSTRUCTIVE AVERAGE BASE PERIOD NET INCOME. * * * * (b) Taxpayers Using Average Earnings Method. -- The tax computed under this subchapter (without the benefit of this section) shall be considered to be excessive and discriminatory in the case of a taxpayer entitled to use the excess profits credit based on income pursuant to section 713, if its average base period net income is an inadequate standard of normal earnings because -- * * * * (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, * * * *↩ 4. SEC. 722. GENERAL RELIEF -- CONSTRUCTIVE AVERAGE BASE PERIOD NET INCOME. * * * * (b) Taxpayers Using Average Earnings Method. -- The tax computed under this subchapter (without the benefit of this section) shall be considered to be excessive and discriminatory in the case of a taxpayer entitled to use the excess profits credit based on income pursuant to section 713, if its average base period net income is an inadequate standard of normal earnings because -- * * * * (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 from the general business cycle, or * * *↩ 5. See respondent's Bulletin on Section 722↩, Part IV (B). 6. SEC. 722. GENERAL RELIEF -- CONSTRUCTIVE AVERAGE BASE PERIOD NET INCOME. * * * * (b) Taxpayers Using Average Earnings Method. -- The tax computed under this subchapter (without the benefit of this section) shall be considered to be excessive and discriminatory in the case of a taxpayer entitled to use the excess profits credit based on income pursuant to section 713, if its average base period net income is an inadequate standard of normal earnings because -- * * * * (4) the taxpayer, either during or immediately prior to the base period, commenced business or changed the character of the business and the average base period net income does not reflect the normal operation for the entire base period of the business. If the business of the taxpayer did not reach, by the end of the base period, the earning level which it would have reached if the taxpayer had commenced business or made the change in the character of the business two years before it did so, it shall be deemed to have commenced the business or made the change at such earlier time. For the purposes of this subparagraph, the term "change in the character of the business" includes a change in the operation or management of the business, a difference in the products or services furnished. * * *↩