Lockhart Creamery v. Commissioner

Lockhart Creamery, Petitioner, v. Commissioner of Internal Revenue, Respondent Lockhart Creamery v. Commissioner Docket No. 27237 United States Tax Court 17 T.C. 1123; 1952 U.S. Tax Ct. LEXIS 298; January 8, 1952, Promulgated *298 Decision will be entered under Rule 50. 1. Prior to January 1, 1938, petitioner was engaged in the business of manufacturing and selling butter, ice cream, and ice cream mix in the vicinity of Lockhart, Texas. On that date petitioner purchased a going milk processing plant in Austin, Texas. Petitioner operated the business and it showed steady growth during 1938 and 1939. Held, petitioner changed the character of its business within the meaning of section 722 (b) (4) of the Internal Revenue Code; held, further, that petitioner was entitled to relief under section 722, and a constructive average base period net income has been determined. 2. Petitioner completed and began operating an ice cream plant in Austin, Texas, during November 1941. Held, petitioner within the meaning of section 722(b) (4) of the Internal Revenue Code was committed to this course of action prior to January 1, 1940, and is entitled to relief. A constructive average base period net income on account of the commitment has been determined. 3. In accordance with section 722(d) the formal requirements for claiming unused excess profits credit carry-overs were prescribed in section 35.722-5 (a), *299 as amended, of Regulations 112. In its excess profits tax return for 1942, petitioner claimed an unused excess profits tax credit carry-over of $ 7,474.36 from the years 1940 and 1941. This carry-over has been allowed by the Commissioner. In its application for relief under section 722 for the year 1942, petitioner failed to claim the increase in excess profits credit carry-over arising from the use of a constructive average base period net income for the calendar years 1940 and 1941. Held, since petitioner failed to comply with the regulations, it is not entitled to the constructive credits claimed in its assignment of error. Lee I. Park, Esq., K. Martin Worthy, Esq., and Felix T. Terry, C. P. A., for the petitioner. Irene F. Scott, Esq., for the respondent. Black, Judge. BLACK *1124 This proceeding involves*300 petitioner's claims for refund under section 722 of the Code for excess profits tax relief for the calendar years 1942, 1943, 1944, and 1945. In his notices of disallowances (which also contained determinations of deficiencies and overassessments) respondent allowed in part and disallowed in part petitioner's claim for relief under section 722. A summary of the deficiencies and overassessments in petitioner's tax liability as contained in the deficiency notices follows: Excess profits tax Income Year tax deficiency Deficiency Overassessment [1942] $ 657.32 $ 1,239.76 [1943] 2,492.34 $ 36,164.59 [1944] 2,121.55 20,723.73 [1945] 2,121,31 4,020,66 Totals $ 7,392.52 $ 56,888.32 $ 5,260.42 The deficiency in excess profits taxes resulted from a deferment of payment as provided by section 710 (a) (5) of the Code, and the deficiency in income taxes resulted solely from the partial allowance of petitioner's claim for relief. The petition was filed in accordance with the applicable provisions of the Code. In his amended answer to the petition respondent alleges *1125 error in respect to his determination which allowed petitioner relief based *301 on the following adjustments: Excess profits Constructive tax credit Year average base (exclusive of period net the credit for income net capital additions) [1942] $ 40,000 $ 38,000 [1943] 43,500 41,325 [1944] 43,500 41,325 [1945] 43,500 41,325 Respondent further alleges that "petitioner had in the year 1939 reached a normal level of earnings and its excess profits net income for the year 1939 in the amount of $ 38,549.98 is an adequate standard of normal earnings for petitioner for the year 1939"; and that, "petitioner's actual average base period net income for the purpose of computing its excess profits credit for each of the years 1942, 1943, 1944, 1945 is $ 38,549.98 computed under the provisions of section 713 (f) of the Internal Revenue Code, * * * [and its] average base period net income-general average [is] $ 24,192.48"; and that the $ 38,549.98 is a fair and just amount for computing petitioner's excess profits credit during the taxable years. The Commissioner further alleges in his amended answer as follows: (f) That there are deficiencies in petitioner's excess profits tax for the years ended December 31, 1943 and 1944 in the amounts of*302 $ 40,396.86 and $ 24,744.38, respectively, and that there are no over-assessments against or over-payments by petitioner of excess profits tax for the years 1942 and 1945 as shown in detail in the computation set forth in Ex. A, attached hereto. The amounts of $ 1,239.76 and $ 4,020.66, respectively, were erroneously determined by the Commissioner as over-assessments in excess profits tax because of an erroneous partial allowance of petitioner's claim for refund under Section 722 and the erroneous determination that petitioner is entitled to use a constructive average base period net income under Section 722. (g) That the deficiency in petitioner's excess profits tax for the year ended December 31, 1943 is $ 4,232.27 in excess of the amount determined by respondent in the notice of deficiencies and disallowance dated December 16, 1949 and demand is made for such increased deficiency. (h) That the deficiency in petitioner's excess profits tax for the year ended December 31, 1944 is $ 4,020.65 in excess of the amount determined by respondent in the notice of deficiencies and disallowance dated December 16, 1949 and demand is made for such increased deficiency. (i) That as a result *303 of the increased deficiencies in petitioner's excess profits tax for the taxable years ended December 31, 1943 and 1944 and the determination of no over-assessment in petitioner's excess profits tax for the taxable years ended December 31, 1942 and 1945, there are no deficiencies in income tax for the taxable years ended December 31, 1942, 1943, 1944 and 1945. Wherefore, it is prayed that the Court determine that there are deficiencies in excess profits tax due by petitioner for the taxable years ended December 31, *1126 1943 and 1944 in the amounts of $ 40,396.86 and $ 24,744.38, respectively; that there are no over-payments in excess profits tax due to petitioner for the taxable years ended December 31, 1942, 1943, 1944 and 1945; and that petitioner's applications for relief and claims for refund under Section 722 of the Internal Revenue Code for the taxable years ended December 31, 1942, 1943, 1944 and 1945 are, in all respects, denied. Petitioner in its reply to respondent's amended answer denies respondent's claim for increased deficiencies in petitioner's excess profits taxes and concludes its reply with the following prayer: Wherefore, petitioner prays that this Court determine*304 that there is no deficiency in excess profits taxes for the taxable years ended December 31, 1942, December 31, 1943, December 31, 1944 and December 31, 1945, and further determine that petitioner be entitled to refunds as follows: Taxable Year Ended December 31, 1942 $ 34,438.12 Taxable Year Ended December 31, 1943 113,237.70 Taxable Year Ended December 31, 1944 93,023.32 Taxable Year Ended December 31, 1945 28,477.59 Total $ 269,176.73 Petitioner claims it meets the requirements of section 722(b) (4) of the Code and is entitled to relief with respect to the milk plant acquired in Austin on January 1, 1938, and because of a commitment made prior to January 1, 1940, to erect an ice cream plant. The principal issue, then, is what amount of excess profits tax relief, if any, is petitioner entitled to under the provisions of section 722 of the Code for the calendar years 1942, 1943, 1944, and 1945. If relief under section 722 is granted to petitioner, then another issue arises in respect to the year 1942. By reason of an increase in "excess profits tax credit based on income" for the years 1940 and 1941 resulting from the relief granted, petitioner would be entitled*305 to a larger carry-over credit in its excess profits tax computation for the year 1942 if proper application therefor has been made in accordance with Treasury regulations. The secondary question then is whether respondent, in denying the benefits of the constructive carry-over credits to petitioner erred in his determination that petitioner failed to claim the carry-over credits in 1942 from 1940 and 1941. FINDINGS OF FACT. Many of the facts were stipulated and as stipulated are adopted as part of our Findings of Fact. Petitioner was incorporated on July 1, 1929, under the laws of the State of Texas to conduct a dairy and creamery business in and around Lockhart, Texas. Petitioner has since its organization kept its books on an accrual basis. Prior to July 1, 1936, petitioner's books were kept and its income tax returns were made upon a fiscal year basis ending on June 30. After June 30, 1936, its books were kept and its *1127 income tax returns were made upon a calendar year basis. Petitioner's income and excess profits tax returns for the calendar years 1942 through 1945, were filed with the collector of internal revenue for the first district of Texas. In 1929, Newton*306 Wilson, a local dairy farmer, was employed as petitioner's general manager. Between 1929 and 1933, petitioner processed milk and manufactured butter, cheese, and ice cream at Lockhart. The milk and ice cream were sold in the vicinity of Lockhart and some of its products were sold at retail at the plant, whereas the butter was sold in wholesale quantities over an area which included Austin, Texas. Petitioner also made ice cream mix which was sold in Austin and Taylor, Texas. Petitioner abandoned the manufacture of cheese in 1934. Petitioner's operations through 1933 were not profitable, but thereafter it had earnings each year. The management of Lockhart Creamery decided that it would be more profitable to increase the manufacture and sales of ice cream. Until 1934, petitioner did not have any large volume of ice cream but in that year petitioner began selling ice cream through its own retail stores which were opened in Austin and towns in the vicinity of Lockhart. The development of its ice cream stores proceeded slowly because of the lack of money. During the base period, petitioner continued its policy of not pushing its butter sales and concentrating on the more profitable*307 ice cream sales. Petitioner planned eventually to use its butter fat in the production of ice cream almost exclusively, and by 1941 it was producing only a small amount of butter. A total of 11 retail ice cream stores were opened by petitioner during the period 1934-1941, and six of these still operate. Between September 1935 and July 1936, petitioner added sandwiches, barbecues, and lunch-counter items to its stores in Austin. In September 1935, J. Caldwell, an experienced lunch-counter manager, was employed to manage a store in Austin and shortly thereafter he was given supervision of all the stores in Austin. Facts: Milk Plant. Herman Heep owned and operated a well and favorably known dairy farm near Austin, Texas. In the Spring of 1937, Heep proposed to Wilson that petitioner go into the milk business in Austin. Wilson agreed but insisted on having an ice cream business as well. It was agreed that petitioner was to engage in both businesses in Austin, and Heep then bought approximately one-third of the capital stock of petitioner and agreed to market a portion of the milk from his farms through the Lockhart Creamery. In September 1937, petitioner acquired a plot of land*308 at 6th and Ruiz Streets in Austin, Texas, at a cost of $ 9,000 and had plans drawn *1128 for a combination milk and ice cream plant suitable to this location. In accordance with the plans petitioner secured on October 20, 1937, a building permit and construction bids were received for the proposed plant. Petitioner, however, abandoned these plans due to two circumstances. First, the city of Austin threatened to condemn a part of the lot, leaving it inadequate for the proposed building. Subsequently 20 feet of the lot were condemned for widening Ruiz Street, and the remaining portion of the lot was sold in 1940. Second, the residents in the area complained of the use of the lot for a milk and ice cream plant and threatened an injunction. In order to comply with city health ordinances and in order to commence doing business in Austin at the earliest possible date, petitioner on December 14, 1937, contracted to purchase the milk and ice cream plant of F. McCray (hereinafter sometimes referred to as the McCray plant) located in Austin, Texas. The operation of the plant was taken over by petitioner on January 1, 1938, and E. A. Moeller was employed by petitioner to manage the*309 plant. McCray was employed by petitioner as sales manager for 11 months but he took very little part in the business. Prior to the purchase of the McCray plant, petitioner's sales of pasteurized milk were limited to the Lockhart area. None of this milk was sold in the Austin area, except for the limited amount sold to its ice cream stores during 1936 and 1937 for use in ice cream drinks. Petitioner used the trade names of Heep's Dairy Products or Heep's Superior Dairies, as the use of the name "Heep" was a benefit to business in the Austin area. All the milk sold by petitioner was pasteurized and some of the milk from Heep Dairies was sold as premium milk at premium prices. The capacity of the McCray plant in 1938 and 1939 was between 4,000 and 5,000 gallons of milk per day. During the years 1938 and 1939, the number of delivery routes of the McCray plant increased materially. In 1937, McCray operated his plant with two wholesale milk routes, and he also sold some ice cream. After the purchase of the McCray plant by petitioner, the making of ice cream there was discontinued in order to make more room for its milk business. Petitioner continued to sell ice cream to the former*310 customers of McCray. The ice cream sold through the McCray plant was supplied by petitioner's Lockhart plant. Petitioner immediately divided the two wholesale milk routes into five, putting on five drivers instead of two. In addition to selling milk at wholesale, petitioner began selling milk at retail in its ice cream stores in Austin and through home deliveries. After acquiring the McCray plant the petitioner started a sales promotion program. It painted the old delivery trucks, purchased new trucks, dressed the route salesmen in uniform, and initiated an advertising *1129 program. Such an aggressive selling campaign was new to the dairy business in Austin. On January 1, 1938, in addition to petitioner there were five dairies selling pasteurized milk in Austin, and a larger number of dairies bottled and sold raw milk from their farms. Four of the five dairies sold both wholesale and retail, while the other sold only at retail. The milk which petitioner processed at the McCray plant was obtained from Heep and other producers in the vicinity of Austin. There was a surplus of graded milk during the base period years and petitioner had a waiting list of several producers. *311 Petitioner had an arrangement with each producer for all of his milk so long as it was good milk and petitioner could use it. The milk was purchased at the prevailing prices for base price and surplus price milk. Purchased at base price through the year was the amount of milk the producer actually delivered during the months of November, December, January, and February of each year. Any excess milk delivered by a producer during other months was purchased by petitioner at surplus prices which was usually the price paid by cheese plants for ungraded milk. Whenever there was a surplus of milk at the McCray plant it was transferred to the Lockhart plant. The amount of milk so transferred was only a small portion of the milk received at the McCray plant. During the years 1938 and 1939, the milk received at the McCray plant was 228,564 gallons in 1938 and 420,183 gallons in 1939. The McCray plant received its butter from the Lockhart plant at a transfer price of 2 cents per pound less than the regular wholesale price; approximately 80 to 90 per cent of the 253,000 pounds of butter sold by the Lockhart plant in 1939 was transferred through the McCray plant. Prior to 1938, petitioner*312 sold its butter in Austin through a salesman who was paid approximately 2 cents per pound commission. Petitioner now has no record of the butter sales of the McCray plant to the public in 1938 and 1939, as these records were destroyed. In addition to selling milk, butter, and ice cream petitioner also sold some skimmed milk and buttermilk which were transferred to it from the plant at Lockhart. It was in May 1938 that petitioner started the sale of milk at retail in Austin. The only available records of petitioner's milk sales were based on a system of "points" which were maintained for sales promotional work of Moeller. While each quart of milk was recorded as one point, the same treatment was also given to each quart of buttermilk or skimmed milk and a half pint of cream was treated as the equivalent of one quart of milk. On the basis of treating four "points" as equal to one gallon of milk, petitioner's total sales in gallons of milk were in 1938, 190,530 gallons sold at wholesale and *1130 50,892 sold at retail, and in 1939, 283,555 gallons were sold at wholesale and 180,457 gallons at retail. The consumption of milk in Austin during the base period years was as follows: *313 Average daily Year Population milk consumption Per cent (gals.) pasteurized [1936] 71,850 7,151 (1) [1937] 75,558 7,028 (1) [1938] 79,482 7,130 56.0 [1939] 83,563 7,144 57.7 In 1939, the Lockhart plant sold 181,828 gallons of ice cream which includes between 42,000 and 46,000 gallons that were transferred to the McCray plant. Between 40 and 50 per cent of the ice cream sold by the McCray plant was sold to petitioner's retail stores and most of the remaining ice cream was sold to fraternities and sororities at the University of Texas, and the other customers taken over from McCray. Petitioner's books do not show an allocation of the dollar sales from the McCray plant for 1938 and 1939 between the various dairy products sold and no records are available as to petitioner's sales in dollars of the products manufactured at its McCray plant. The amount of petitioner's purchases of raw milk, butter, and ice cream are available, however, and petitioner so set its selling prices as to have a fairly constant markup. It attempted to sell its milk so as to have a 50 per cent margin on milk and raw material purchases which is equivalent*314 to a 100 per cent markup; its butter so as to have a 7 1/2 per cent margin (8.10 per cent markup); and its ice cream so as to have a 30 per cent margin (42.9 per cent markup). Profit margins fluctuated from month to month during 1938 and 1939, but the average markup for the year was substantially in the amounts we have stated. Through the application of these margins to petitioner's actual purchases and sales in 1939 of butter and ice cream the sales of the various products of the McCray plant can be estimated. So computed the sales of milk products actually processed at the McCray plant in 1939 were $ 193,842.89 and the gross profit ratio on milk and cream was 32.706 per cent. The computation is as follows: Milk and cream Butter Ice cream Total Cost of sales $ 130,443.86 $ 64,521.45 $ 20,699.88 $ 215,665.19 Gross profit 63,399.03 5,228.55 8,871.36 77,498.94 Sales $ 193,842.89 $ 69,750.00 $ 29,571.24 $ 293,164.13 Gross profit ratio 32.706% 7.4961% 30.000% 26.43% Milk and cream purchases at the McCray plant during the year 1939 amounted to $ 94,651.21, while its sales of milk and cream as *1131 computed above were $ 193,842.89. The margin *315 is 48.8 per cent, or substantially the margin estimated by petitioner's management. The gross profit ratio on milk and cream was 32.706 per cent as shown above. Petitioner received an average sales price of 46.13 cents per gallon based upon the gallons of milk received by the McCray plant in 1939. Petitioner received in 1939 an average sales price of 41.78 cents per gallon based upon sales as computed from its point system for the year 1939. Petitioner's milk plant had not reached by the end of the year 1939 the earning level which it would have reached if petitioner had made this change in the character of its business 2 years earlier. The general trend of sales of milk processed at the McCray plant by months from the beginning of 1938 through the end of 1939 was upward. Had petitioner acquired the McCray plant 2 years earlier petitioner would have processed and sold an additional 200,000 gallons of milk through its McCray plant during 1939, as computed under the "point" system, or an additional 181,101 gallons of milk as computed from its milk receipts. The additional net profit from milk plant sales based on an additional 200,000 gallons of milk would have been as follows: Additional assumed sales (gallons) 200,000 1939 average sales price per gallon (cents) 41.78 Additional milk sales in dollars, 1939 $ 83,560.00 Actual gross profit in 1939 32.706% Gross profit to be realized from additional sales $ 27,329.13 Less: Selling and administrative expense of 20.625% with officer's salary of $ 5,000 added 22,234.25 Additional net profit in 1939 $ 5,094.88 *316 As so reconstructed petitioner's net income for 1939 would be $ 43,644.86 computed as follows: Additional net income from milk plant $ 5,094.88 Excess profits tax net income for 1939, as stipulated 38,549.98 Total $ 43,644.86 By applying the index for each of the base period years, a constructive average base period net income of $ 38,963.95 is computed as follows: Year Dairy earnings index Reconstructed income [1939] 100.0 $ 43,644.86 [1938] 85.3 37,229.07 [1937] 78.9 34,435.79 [1936] 92.9 40,546.07 $ 155,855.79 Average for four years $ 38,963.95 *1132 Facts: Ice Cream Plant. After petitioner abandoned the plan to erect a combination ice cream and milk plant on its lot at Sixth and Ruiz Streets in Austin, Wilson started looking for another location. After looking at a number of places he acquired a lot for petitioner in July 1939, at a cost of $ 12,000. The site was at Red River Avenue and First Street, and several small buildings were on the lot. The lot was graded in the latter part of 1939 at a cost of $ 450 under the supervision of the architect who had drawn the plans for the proposed plant at Sixth and Ruiz Streets and*317 who, in 1940, drew up plans for the ice cream plant. In October of 1939, Wilson asked the Cherry-Burrell Corporation, a manufacturer of ice cream and dairy equipment, to draw an equipment floor plan showing the necessary equipment for the operation of the milk and ice cream plant which was to be erected. Such plan, dated December 11, 1939, was drawn and furnished to petitioner without cost. No contract for equipment was entered into at that time, but subsequently equipment was purchased from Cherry-Burrell Corporation and was laid out in the plant substantially in accordance with the plan. John D. Simpson, vice president of petitioner, was employed by petitioner on January 15, 1941, to supervise the construction of the ice cream plant in Austin and to manage the plant after it was completed. Simpson had been employed in Texas by Borden Company for many years, and he was well acquainted with the ice cream business. Wilson first discussed the hiring of Simpson as a Lockhart employee in February 1937, but Simpson did not decide to accept the offer until sometime during 1940. In the Spring of 1940, Wilson, together with salesmen for a Cherry-Burrell distributor, made a 3-day trip*318 through Oklahoma, Louisiana, Arkansas, and Texas for the purpose of looking at combination milk and ice cream plants. In Norman, Oklahoma, he found a plant that pleased him and the ice cream plant erected by petitioner is the same type building as the one at Norman. After returning to Austin, Wilson described the plant to petitioner's architect, who proceeded to draw plans for the proposed building. The plans for the ice cream plant were drawn up before the end of 1940. The construction of the milk part of the plant was postponed, but the ice cream plant was planned for the subsequent addition of a milk plant and this was done in 1947. A building permit for the construction of an ice cream plant was obtained on February 20, 1941. The building was completed in November 1941, and petitioner began operations in that month. The capacity of petitioner's new ice cream plant when completed in 1941 was between 450,000 and 500,000 gallons per year. The capacity *1133 of the Lockhart plant was between 250,000 and 275,000 gallons per year. The manufacture of ice cream at the Lockhart plant was discontinued in November 1941, but petitioner continued to manufacture ice cream mix in*319 Lockhart. Petitioner also placed additional ice cream equipment in its new plant for brick ice cream and novelties. Petitioner's investment in the ice cream plant and equipment (at cost per books) was $ 55,823.62 on December 31, 1941. Simpson was manager of Borden's ice cream business in San Antonio and Austin was in the territory serviced by the San Antonio ice cream plant of Borden. The Borden Company operated three retail ice cream stores in Austin during the base period and in addition a small quantity of ice cream was sold from its storage vault in Austin. Simpson, sometime during the base period years, made an analysis of the ice cream market in Austin for Borden. Borden decided not to buy or build a plant in Austin and enter the wholesale trade there but continued to serve its retail stores from its plant in San Antonio, 75 miles away. In 1939, the Borden Company received an average wholesale price of 82 cents per gallon for ice cream in the San Antonio area, including Austin. Among the competitors of Borden in Austin during the base period were Austin Maid, Polar, Meyer Creamery, and Jones and Anderson, and some of these companies sold ice cream for as low as 70 cents*320 or 75 cents per gallon. All the ice cream sold in Austin was not of the same quality. The ice cream made at the Lockhart plant and transferred to the McCray plant was sold for approximately 67 cents per gallon, including ice cream transferred to the retail store at 30 cents to 60 cents per gallon. The ice cream sold to the retail stores was of a lower grade than that petitioner planned to sell wholesale when the new ice cream plant was completed. It planned to manufacture ice cream of as high grade as that of Borden. When it got into production in late 1941, it did so. Most of the ice cream sold by the new plant during 1942 and 1943, was sold to the wholesale trade and to the Army with the balance being sold to petitioner's retail stores. The petitioner manufactured ice cream and ice cream mix at its Lockhart plant during the base period. Total sales of ice cream (including transfers to the retail stores) from the Lockhart plant in 1939 were 151,828 gallons. Prior to January 1, 1940, petitioner was committed to a course of action which was consummated upon completion of an ice cream plant in Austin during November 1941. If petitioner had completed the ice cream plant 2 years*321 prior to December 31, 1939, it would have sold an additional 150,000 gallons of ice cream to the wholesale trade in and *1134 around Austin during 1939. The following represents a reconstruction of the net income that would have been received by petitioner in 1939 from its ice cream business if it had completed the ice cream plant in Austin to which it was committed 2 years prior to December 31, 1939: Per gallon Per gallon Totals Estimated gallons 150,000 Estimated sales price $ .82 Mix cost $ .24 Other ingredients .05 Packing supplies .04 Mfg. expense .075 Total cost of sales .405 Gross profit .415 Delivery expense .17 Office and admn. exp .06 Advertising .035 Total selling & adm. expense .265 Net profit .15 Total net profit (150,000 x .15) $ 22,500 Based on statistical data which is in the record, the reconstruction (additional wholesale sales only) for 1936, 1937, and 1938, of net income from the ice cream plant in Austin to which petitioner was committed prior to January 1, 1940, constructed in a similar manner as above, giving effect to the various factors involved would be as follows: Total net profit for 1936 $ 8,328.00 Total net profit for 1937 19,498.50 Total net profit for 1938 19,735.80 *322 Petitioner's constructive earnings from the new ice cream plant in Austin to which it was committed prior to January 1, 1940, as shown in the foregoing computations are as follows: [1936] $ 8,328.00 [1937] 19,498.50 [1938] 19,735.80 [1939] 22,500.00 Total $ 70,062.30 Average $ 17,515.58 Petitioner's actual earnings during the base period were not a fair and normal standard of earnings. A fair and just amount representing normal earnings to be used as a constructive average base period net income under section 722 is made up as follows: *1135 Constructive earnings Additional constructive exclusive of earnings Year additional from new Total earnings from ice cream plant ice cream plant commitment [1936] $ 40,546.07 $ 8,328.00 $ 48,874.07 [1937] 34,435.79 19,498.50 53,934.29 [1938] 37,229.07 19,735.80 56,964.87 [1939] 43,644.86 22,500.00 66,144.86 Total $ 155,855.79 $ 70,062.30 $ 225,918.09 Average $ 38,963.95 $ 17,515.58 $ 56,479.53 Other Facts. No excess profits taxes were owed by petitioner for the years 1940 or 1941, as computed by use of the growth formula provided by section 713 (f) of the Code. It was*323 stipulated that petitioner's excess profits net income as computed without regard to section 722 during each of its base period years was as follows: Period Amount July 1, 1936 -- December 31, 1936 $ 8,363.91 [1937] 14,155.70 [1938] 23,604.21 [1939] 38,549.98 Petitioner's excess profits net income for 1940 was $ 21,626.21 as computed under the 1940 law, and $ 31,069.70 as computed under the 1941 law. For the year 1941, its excess profits net income was $ 34,700.90. Petitioner's average base period net income as computed under section 713 (f) and without benefit of section 722 was $ 33,294.92 computed under the Revenue Act of 1940, and $ 38,549.98 computed under the Revenue Act of 1941. Respondent determined that petitioner was entitled to relief under section 722 of the Code, and allowed in the deficiency notice the constructive average base period net income for each taxable year as set forth in our preliminary statement. The amount of $ 43,500 was computed as follows: Additional assumed sales (gallons) 142,993 Average 1939 sales price .4614 Additional milk sales $ 65,976.97 Gross profit at 32.706% which is the same as actually realized in [1939] 21,578.43 Deduct: Selling and administrative expense of 20% of sales (actual per cent obtained in 1939) 13,195.39 Reconstructed profit on the assumed increase in sales for year [1939] $ 8,383.04 Actual net profit as shown by schedule 12-A of supplemental data filed August 24, 1945 38,639.98 Reconstructed income (per Field Committee) $ 47,023.02 Less, additional officers' salaries 10,000.00 Reconstructed net income for 1939 $ 37,023.02 Dairy Earnings Index [1936] 92.9 $ 34,394.39 [1937] 78.9 29,211.16 [1938] 85.3 31,580.64 [1939] 100.0 37,023.02 Average $ 33,052.30 Add, Constructive Credit for ice cream plant commitment 10,600.00 Total $ 43,652.30 CABPNI Recommended $ 43,500.00 *324 *1136 In his determination respondent refused to allow a carry-over to 1942 based on constructive average base period net income for 1940 and 1941 because "the benefits of a constructive credit carry-over from such years was not claimed in the 1942 application." The following information was supplied by petitioner on its Form 991 (Revised January 1943) in connection with the taxable year, 1942: Adjusted excess profits net income computed without regard to section 722 $ 41,583.37 CABPNI claimed 196,214.20 Excess profits tax per return 37,425.03 Reduction in tax under section 722 37,425.03 Excess profits tax computed after application of section 722 [0] On the blank space appearing at the bottom of page 1 on the application, petitioner had typed in: Note: Reference is hereby made to Form 991 filed under Section 722 for the calendar year 1940 for data supporting this claim. On the Form 991 no question appears asking whether the applicant claims a carry-over credit from previous years. Petitioner filed a Form 991 for each of the years 1940 and 1941 though no excess profits taxes were due for those two years. On its excess profits tax return for the year 1942 petitioner*325 claimed under item 5, an unused excess profits tax credit adjustment of $ 7,474.36. Schedule 2, attached to petitioner's return computed the sum as follows: *1137 Excess Profits Credit Carry-Over For the Year Ended December 31, 1942 Excess Profits Net Income under 1940 Law $ 21,626.21 Income Tax -- Year 1940 9,443.49 Adjusted Excess Profits Net Income -- 1940 31,069.70 Excess Profits Credit (corrected) 36,622.48 Excess Profits Credit Carry-Over -- 1940 $ 5,552.78 Excess Profits Net Income -- 1941 $ 34,700.90 Excess Profits Credit (corrected) 36,622.48 Excess Profits Credit Carry-Over -- 1941 1,921.58 Total Excess Profits Carry-Over $ 7,474.36 This has been allowed by respondent in his determination in the deficiency notice. OPINION. Three issues are presented in this proceeding relating to petitioner's excess profits tax liability for the taxable years 1942, 1943, 1944, and 1945: (1) Is petitioner entitled to relief from excess profits tax under the provisions of section 722 (b) (4) of the Code for the milk plant acquired on January 1, 1938, and if so, in what amount; (2) was petitioner committed prior to January 1, *326 1940, to erect an ice cream plant which was constructed in 1941, and if so, what amount of relief is to be allowed therefor under the provisions of section 722 (b) (4) of the Code; and (3) whether petitioner is to be denied, because of its failure to claim it, the benefit of a constructive unused excess profits credit carry-over to the year 1942, resulting from a constructive unused excess profits credit in the years 1940 and 1941. Issue 1: Milk Plant -- Section 722 (b) (4) Relief. Respondent's determination that petitioner's acquisition of the milk plant was a "change in the character of the business" is well corroborated by the evidence. Petitioner's average base period net income as computed under section 713 (e) was $ 24,192.51, and as computed under the "growth formula provisions" of section 713 (f) petitioner's average base period net income was $ 38,549.98. The excess profits tax shall be considered excessive and discriminatory if the taxpayer's average base period net income as computed under section 713 of the Code is an inadequate standard of normal earnings because of the existence of factors *1138 enumerated in section 722 (b) (4) of the Code. See East Texas Motor Freight Lines, 7 T. C. 579, 587-588.*327 The milk plant was operated by petitioner during the last 24 months of its base period. Under the provisions of section 713 (f) petitioner's average base period net income was larger than under section 713 (e), this being due in part because of the earnings from the milk plant during 1938 and 1939. The facts presented by petitioner established that the business of the milk plant showed a steady growth during the 24 months, and they further established that the earnings of petitioner did not reach by the end of the base period the level they would have reached if petitioner had made the change in the character of its business 2 years before January 1, 1938. Since petitioner has satisfied all the requirements of section 722 (b) (4) of the Code, the milk plant business of petitioner shall be deemed to have commenced on January 1, 1936, for the purpose of reconstruction. We shall next consider whether petitioner has established what a fair and just amount representing normal earnings to be used as a constructive average base period net income would be. The deficiency notice computation, the petition and our opinion all use the same index for reconstructing earnings for the base years*328 1936, 1937, and 1938, but there are certain differences between the parties in the reconstruction of milk plant earnings for the calendar year 1939. Petitioner contends in its brief that had it made such changes in the character of its business 2 years earlier its total earnings (exclusive of any consideration of the ice cream plant) would have reached a level of at least $ 58,838.21 at the end of the year 1939, while respondent determined an earnings level of $ 37,023.02 would have been attained at that time. Petitioner contends that at the end of 1939, its reconstructed sales would have reached an annual level of 850,000 gallons (as computed on the basis of gallons purchased), or additional sales amounting to 429,817 gallons. Respondent determined for the year 1939 additional sales of 142,993 gallons as computed on the basis of gallons purchased. We have determined that additional sales as computed on the basis of gallons purchased would have been 181,101 gallons, and as computed on the "point" system additional sales of 200,000 gallons. Under the gallons purchased method the selling price is 46.14 cents per gallon, and under the point system the selling price is .4178 per gallon. *329 In either case additional gross sales in dollars amount to $ 83,560. Petitioner's selling and administrative expenses for the year 1939 were 20.625 per cent of sales and in our reconstruction, we used the same ratio. Petitioner contends that additional officers' salaries based on total sales of 850,000 gallons would have been not more than $ 5,000, *1139 while respondent determined additional officers' salaries of $ 10,000 on additional sales of 142,993 gallons. After a consideration of the evidence, we have concluded that additional officers' salaries where the sales and income were the amounts contained in our reconstruction would be $ 5,000. We have determined that petitioner's constructive average base period net income on account of its milk plant is $ 38,963.95. See our Findings of Fact under the heading "Milk Plant." Issue 2 -- Ice Cream Plant -- Section 722 (b) (4) Relief. Respondent determined that petitioner was committed before January 1, 1940, to a course of action of erecting an ice cream plant in Austin, Texas, and relief was granted to petitioner. The relief granted was to "Add Constructive Credit for Ice Cream Plant Commitment, $ 10,600.00." In his amended*330 answer to the petition, respondent contends that he erred in granting any such relief as petitioner was not in fact so committed. The actual construction of the ice cream plant was done between February 1941 and November 1941. The Internal Revenue Code does not define "committed," 1 but the respondent has set forth in some detail the "course of action" necessary to qualify as a commitment. The Treasury Department Bulletin on Section 722 (November 1944) at pages 58 and 59 discusses the tests to be satisfied. This is somewhat lengthy and we shall not copy it here. It is sufficient to say that we think petitioner's evidence brings petitioner within these requirements with respect to its commitment to construct a new and improved ice cream plant in Austin. *331 Whether petitioner was committed to a course of action within the meaning of section 722 (b) (4) is a question of fact to be decided from the evidence which is to be interpreted in accordance with the prescribed regulations. In allowing a constructive credit to petitioner for earnings deemed to have been received from the ice cream plant, respondent thereby determined that petitioner was in fact committed to this course of action. Petitioner herein did more than acquire a lot and the evidence corroborates the respondent's determination. We have found, therefore, that prior to January 1, 1940, *1140 petitioner had committed itself to a course of action looking to the erection of an ice cream plant in Austin. Respondent's contention in his amended answer that he erred in granting petitioner a constructive credit of $ 10,600 for "Constructive Credit for Ice Cream Plant Commitment" is not sustained. Petitioner has also introduced sufficient evidence to establish a fair and just amount representing normal earnings to be used as a constructive average base period net income for ice cream plant commitment. We have determined it to be $ 17,515.58 and explanation is given in our *332 Findings of Fact as to how we arrived at that figure. It need not be repeated here. Summary: Issues 1 and 2. In our Findings of Fact we determined that petitioner's constructive average base period net income is $ 56,479.53 which is composed of $ 38,963.95 due to the milk plant and $ 17,515.58 due to the ice cream plant commitment. In a computation under Rule 50, $ 56,479.53 should be used as petitioner's constructive average base period net income. Issue 3 -- 1942 Carry-Over Credit from 1940 and 1941. The Internal Revenue Code, section 710 (b), authorizes a taxpayer to reduce "excess profits net income" by three credits, one of them being the "unused excess profits credit." On its 1942 excess profits tax return petitioner computed an "unused excess profits credit carry-over" of $ 7,474.36 in accordance with section 710 (c) (3) (B) of the Code and this credit was used by petitioner. The credit, $ 5,552.78 carry-over from 1940 and $ 1,921.58 carry-over from 1941, was computed without consideration of a constructive average base period net income based on section 722. The granting of relief to petitioner under section 722 based upon the acquisition of the milk plant will *333 increase petitioner's unused excess profits credits for the years 1940 and 1941, and petitioner is entitled to the benefit of the increase in unused credits in computing its excess profits tax liability for the year 1942, provided petitioner properly claimed the credits for the year 1942. In respondent's computation of petitioner's excess profits tax liability for 1942 which was attached to the notice of deficiency, a carry-over credit of $ 7,474.36 was used. (Same as petitioner claimed on its return.) Respondent further stated in the notice that: Although timely claims were filed on Form 991 for the years 1940 and 1941, there was no excess profits tax liability for either year. The benefits of a constructive credit carry-over from such years was not claimed in the 1942 application. Accordingly, the Excess Profits Tax Council made no determination *1141 as to the years 1940 and 1941 and no constructive credit carry-over is being allowed. For a computation of the $ 7,474.36 excess profits credit carry-over allowed herein, see the 1942 return as filed. In connection with its claim for relief from excess profits tax for the calendar year 1942, petitioner timely filed Forms 991*334 and 843. For the year 1942, petitioner's adjusted excess profits net income computed without regard to section 722 was $ 41,583.37, and a constructive average base period net income of $ 196,214.20 was claimed in the application for relief. Even considering the 10 per cent reduction and 20 per cent reduction as provided in subchapter E of the Code, the constructive average base period net income claimed for the year 1942 was sufficiently large so that petitioner would owe no excess profits tax for the year 1942. Constructive credits carry-overs from 1940 and 1941, therefore, were not needed to reduce petitioner's excess profits tax liability to zero. In its brief, however, petitioner computed a constructive average base period net income of only $ 70,043.39 based upon a much more realistic estimate arrived at after a more careful consideration of the facts. Had the smaller and not quite so exaggerated estimates been used by petitioner in its claim for relief, perhaps petitioner would have recognized the importance of setting forth in no uncertain terms its claim for the carry-over credits. In order for a taxpayer to be entitled to the relief provisions of section 722 of the Code*335 it must comply with section 722 (d) as set forth in the margin. 2*336 Congress did not attempt in enacting section 722 to enumerate the requirements in connection with the taxpayer's application for relief, but the statute did authorize the Commissioner with the approval of the Secretary of the Treasury to do so. In compliance with the Code provision, the requirements of an application for relief were set forth in section 35.722-5 (a), as amended, of Regulations 112, the pertinent portion appears in the margin. 3 See T. D. 5393, 1944 C. B. 415, at 421. *337 *1142 By filing applications for relief and claims for the years 1940 and 1941, though petitioner clearly had no excess profits tax liability for those years, the regulations in respect to unused excess profits credits were in part complied with by petitioner. Moreover, in its application Form 991 for the year 1942, petitioner did refer to its application for the year 1940 for data supporting its application for the year 1942. But petitioner does not deny that it did not claim in its application for 1942 carry-over credits from the years 1940 and 1941. In this respect petitioner's application for relief in 1942 does not comply with the applicable provisions prescribed by the regulations. The computation of an unused excess profits credit, like the net operating loss deduction, is by its own nature quite complicated and particularly is this so when the credit is to be increased by reason of section 722 relief. We are persuaded that for administrative reasons the formal and detailed requirements which here deny petitioner any excess profits credit carry-over based on section 722 relief for the years 1940 and 1941, were correctly prescribed by the Commissioner. When the validity*338 of regulations pertinent here is considered in view of the language of the Supreme Court in Angelus Milling Co. v. Commissioner, 325 U.S. 895, we are further convinced that the regulations were lawfully prescribed in accordance with authority previously granted by Congress. Cf. Blum Folding Paper Box Co., 4 T. C. 795. In the recent case of Packer Publishing Co., 17 T. C. 882, we had occasion to consider the adequacy of another claim for an unused constructive excess profit credit. After considering that application we held that the taxpayer was entitled to a credit arising from relief granted in prior years, because there was attached to its application for the taxable year 1944, a recomputation of excess profits tax wherein the taxpayer "took account of an unused excess profit credit * * * in an amount equal to the unused excess profit credit carry-over from 1942 shown in its application for relief for 1943." We held that this was sufficient notice to respondent of taxpayer's claim for an unused excess profits credit arising out of constructive relief claimed for prior years. Petitioner*339 in the instant proceeding made no such tax computation in its application for relief, nor did petitioner in any other way claim *1143 an increased credit by reason of section 722 relief claimed for prior years. Petitioner's application was entirely silent on that subject. As to this issue the Commissioner is sustained. Decision will be entered under Rule 50. Footnotes 1. Not available.↩ 1. SEC. 722. GENERAL RELIEF -- CONSTRUCTIVE AVERAGE BASE PERIOD NET INCOME. * * * * (b) * * * * * * * (4) * * * Any change in the capacity for production or operation of the business consummated during any taxable year ending after December 31, 1939, as a result of a course of action to which the taxpayer was committed↩ prior to January 1, 1940, * * * shall be deemed to be a change on December 31, 1939, in the character of the business, * * * [Emphasis added.] 2. SEC. 722. GENERAL RELIEF -- CONSTRUCTIVE AVERAGE BASE PERIOD NET INCOME. * * * * (d) Application for Relief Under This Section. -- * * * The benefits of this section shall not be allowed unless the taxpayer within the period of time prescribed by section 322 and subject to the limitation as to amount of credit or refund prescribed in such section makes application therefor in accordance with regulations prescribed by the Commissioner with the approval of the Secretary. If a constructive average base period net income has been determined under the provisions of this section for any taxable year, the Commissioner may, by regulations approved by the Secretary, prescribe the extent to which the limitations prescribed by this subsection may be waived for the purpose of determining the tax under this subchapter for a subsequent taxable year.↩ 3. * * * If an application on Form 991 (revised January, 1943) for the benefits of section 722 has been filed with respect to any taxable year, or if the filing of such application is unnecessary under (d) of this section, and if the excess profits credit based upon a constructive average base period net income determined for such taxable year produces an unused excess profits credit for such year, to obtain the benefits of such unused excess profits credit as an unused profits credit carry-over or carry-back the taxpayer should file an application upon Form 991 (revised January, 1943), or an amendment to such application if already filed, for the taxable year to which such unused excess profits credit carry-over or carry-back is to be applied. Such application or amendment should be filed within the period of time prescribed by section 322 for the filing of a claim for credit or refund for the taxable year to which the carry-over or carry-back is to be applied. In addition to all other information required, such application or amendment should incorporate by reference the data and information submitted in support of the application filed for the taxable year for which the unused excess profits credit arose, and in addition should claim the benefit of the unused excess profits credit carry-over or carry-back↩. * * * [Emphasis added.]