Midvale Co. v. Commissioner

The Midvale Company, Petitioner, v. Commissioner of Internal Revenue, Respondent Midvale Co. v. Commissioner Docket No. 31121 United States Tax Court 19 T.C. 1216; 1953 U.S. Tax Ct. LEXIS 208; March 31, 1953, Promulgated *208 Decision will be entered for the respondent. Petitioner's claim for relief under section 722 on the ground of a "change" in the character of its business due to increased capacity actually installed or committed for prior to 1940, held properly disallowed in view of petitioner's failure to show that its reconstruction of a fair and just amount representing normal earnings was more than the excess profits credit to which it is entitled in any event under section 713. J. Marvin Haynes, Esq., for the petitioner. George J. Le Blanc, Esq., for the respondent. Opper, Judge. OPPER *1217 Respondent denied petitioner's applications for relief from excess profits tax amounting to $ 1,376,253.22, $ 1,844,337.93, $ 2,139,843.69, $ 2,629,904.52, and $ 2,627,898.61 for the calendar years 1940, 1941, 1942, 1943, and 1944, respectively, *209 petitioner having also filed claims for refund which included such amounts. The only contested issue is whether petitioner is entitled to any relief under the provisions of Internal Revenue Code, section 722, subsections (a) and (b) (4). Most of the facts are stipulated. FINDINGS OF FACT. The stipulated facts are hereby found accordingly. Petitioner is a corporation which was organized under the laws of the State of Delaware on March 28, 1923, as a successor to The Midvale Steel & Ordnance Company. Its plants and principal office are located at Nicetown, Philadelphia, Pennsylvania. Its facilities, which date back to 1870, were constructed primarily for naval ordnance work. Petitioner filed its excess profits tax returns for the periods here involved with the collector of internal revenue for the first district of Pennsylvania. As a consequence of the 1922 Washington Limitation of Armament Treaty, petitioner's plants and facilities were put to very little use for ordnance work during the years 1924 to 1933, inclusive, and its annual average of ordnance sales for these years was about $ 800,000. During this period petitioner endeavored to develop a market for certain industrial*210 machinery and parts, such as shafts, reaction chambers, heavy oil equipment containers, and hardened rolls. Little effort was made to develop a market for lighter commercial products because petitioner, with its heavy facilities, could not compete with concerns properly equipped to produce lighter machinery and parts. As petitioner was able to use only a small portion of its plant and facilities, it permitted a large part of its ordnance plant and facilities to become idle and to deteriorate. It scrapped many of its furnaces and machines. While it had ten open hearth furnaces in 1923, four were subsequently destroyed and four deteriorated to the extent that only the foundations and frames remained on January 1, 1936. *1218 At July 1, 1934, the naval strength of the United States had diminished far below the treaty limits and there were overage vessels which could be replaced under the treaty provisions. In 1934 the Naval Replacement Act of 1934, sometimes referred to as the Vinson-Trammell Act, authorized the President to construct a sufficient number of vessels to bring the Navy up to full treaty strength and to maintain it there by replacing overage vessels with vessels*211 of modern design and construction. In 1935 the replacement program met with difficulties. In 1937 the completion of new shipbuilding continued to be handicapped and delayed. About 1935 or 1936, officials of petitioner were called to Washington for a conference and were advised that petitioner would have to carry a large part of the load in the Navy's new construction program. Petitioner then began to rebuild its plants and facilities so that it could meet the Navy's requirements. The principal products produced by petitioner for the Navy were armor, guns, projectiles, propulsion parts, shells, gun mounts, and shafts. The time it ordinarily takes petitioner to produce ordnance materials ranges from 5 to 9 months, but the big guns require as much as 20 months. Petitioner has five departments: Melting, forging, heat treating, machining, and testing. In the Melting Department scrap pig iron and other ingredients, such as chrome, nickel, and molybdenum, are placed in the melting furnaces and are melted. When the mixture reaches the proper chemical composition it is tapped into iron molds and cooled. The product at this state is known as an ingot. In the Forging Department the *212 ingot is heated to forging temperature, and pressed into the rough shape of the final product desired. In the Heat Treating Department the product undergoes certain heating and cooling operations to prepare it for handling in the Machining Department. There the product is machined into an almost finished product, except that test metal is left on the ends. The product then goes back to the Treating Department where it is quenched and cooled. In the Testing Department coupons are taken out of the product and tested to determine whether the product will meet Government requirements. If the product passes these requirements it is taken back to the Machining Department where it is finally machined to the desired size and the test metal is cut off. The product is then ready for delivery. With respect to the Melting Department petitioner had in operation on January 1, 1936, two open hearth furnaces, each capable of producing about 28,000 net tons of ingots per year. On the same date it also had in operation four electric melting furnaces, capable of producing a total of about 17,500 net tons of ingots per year. By reason *1219 of ordnance orders received and other ordnance contracts*213 in preparation by the Navy, petitioner started reconstructing four of the open hearth furnaces which it had permitted to deteriorate. By redesigning these furnaces, by strengthening the bottoms, and by installing water-cooled doors, the load capacity of the furnaces was increased by one-third. Reconstruction work was completed on an abandoned furnace during each of the following periods: early 1937, January, June, and December 1939. In the last month, petitioner's operating open hearth capacity was more than two and one-half times greater than it was in January 1936. Petitioner's total operating capacity for producing ingots, including both open hearth and electric furnaces, at the end of each of the base period years, stated in both net tons and pounds of ingots, is as follows: Year Net tons Pounds [1936] 73,500 147,000,000 [1937] 101,500 203,000,000 [1938] 101,500 203,000,000 [1939] 185,500 371,000,000 Petitioner's facilities for processing ingots through its forging, treating, machining, and testing departments had also been allowed to deteriorate after 1923, and many of them had been scrapped. The ordnance materiel developed under the Vinson-Trammell Act differed*214 from that produced prior to 1923. The ships required larger guns, bigger and thicker pieces of armor, and heavier shells. The changes required were not finally completed until 1941. Petitioner was unable in 1939 to make immediate use of all of its increased ingot-producing capacity, but by the end of 1939 petitioner had a processing capacity for producing armor of 1,000 tons per month. During the base period major changes were completed in facilities for forging, heating, and machining armor plate which cost petitioner $ 194,597.38. Of this figure, $ 188,289.85 was deducted as part of the cost of specific ordnance contracts while the balance of $ 6,307.53 was charged to expenses in the year the expenditures were made. During the base period petitioner frequently deducted the cost of changes in its processing facilities as part of the cost of its ordnance contracts. Between December 22, 1938, and January 1, 1940, petitioner expended $ 678,132.02 to increase its armor-producing facilities from 1,000 to 1,700 tons per month. Of this amount, $ 276,092.74 was expended in connection with preparations for the installation of a 6,500-ton press which was leased to petitioner by the Navy*215 Department. Arrangements for petitioner to inspect this press were made on *1220 May 28, 1938, the Chief of the Bureau of Ordnance, United States Navy, wrote petitioner a letter dated September 1, 1939, and the lease agreement itself was signed on March 12, 1940. The letter stated in part: An exigency of the service exists to expedite the Navy shipbuilding program in the cause of National Defense. One of the controlling factors is the delivery of armor for battleships on the dates required by the building yards. In order to meet these dates it has become necessary to expand facilities for armor production in this country. The lease agreement stated in part: WHEREAS, the Department entered into a contract under date of November 24, 1939, with the Lessee for the manufacture of armor for Battleships Nos. 61 and 62; the Lessee having in addition other contracts with the Department for furnishing armor for other Battleships now under construction in private and Government yards; and WHEREAS, there exists an exigency of the service to expedite the Naval Shipbuilding Program in the cause of National Defense; and WHEREAS, the delivery of the Armor for the above-mentioned vessels*216 in the minimum time is urgently necessary to expedite completion of the aforesaid vessels; and The total cost of the project to expand armor production to 1,700 tons per month was $ 1,048,207.74. This change was not completed until July 1940. The dates these expenditures were authorized, the dates the different projects were completed, and the amounts involved were as follows: Authorized Amount expended Total Date completed prior to amount Date Amount Jan. 1, expended [1940] Dec. 22, 1938 $ 150,000 Apr. 1939 $ 150,788.25 $ 150,778.25 Jan. 26, 1939 18,500 Mar. 1939 16,845.43 16,845.43 Mar. 23, 1939 100,000 Nov. 1939 91,699.01 91,699.01 Mar. 23, 1939 35,000 Oct. 1939 37,528.59 37,528.59 Mar. 23, 1939 35,000 Aug. 1939 40,231.14 40,231.14 Mar. 23, 1939 38,000 June 1940 52,267.23 52,335.23 Apr. 27, 1939 5,750 June 1939 5,373.28 5,373.28 Nov. 22, 1939 4,200 Oct. 1939 3,923.29 3,923.29 July 27, 1939 5,000 Jan. 1940 3,393.06 3,393.06 Sept. 28, 1939 177,000 July 1940 103,948.71 179,741.55 Sept. 28, 1939 445,900 July 1940 133,328.80 410,297.81 Sept. 28, 1939 52,300 Mar. 1940 38,815.23 56,061.10 $ 678,132.02 $ 1,048,207.74 *217 Petitioner wrote respondent a letter dated February 23, 1940, which requested a ruling on a proposed procedure for deducting (amortizing) these expenditures as a part of the cost of the ordnance contracts. The letter, which was on petitioner's stationery but contained no written signature, stated in part: We expect that the Bureau of Ordnance of the United States Navy Department will certify that the procurement and installation of these additional and special armor producing facilities were occasioned solely by the required delivery of *1221 armor for battleships Nos. 57, 60, 61 and 62, and aeroplane carrier No. CV 8. These additional facilities are generally not adapted to or required for our general run of commercial work. For this reason these additional and special armor producing facilities could not economically take the place of existing facilities as the latter wear out, nor would we have installed them at the present time for the purpose of replacing existing equipment in the future. After these facilities have served their purpose of making possible the essential deliveries they will be either totally or partially useless to this Company upon the completion of *218 the present Navy Shipbuilding Program. * * * * We proposed at the conference that the last mentioned amount be amortized at a rate per ton of armor shipped, based on the total tonnage of armor covered by existing contracts which The Midvale Company has for armor for battleships Nos. 57, 60, 61 and 62, and CV 8. This tonnage is approximately 25,766 gross tons, which would give a rate of amortization of $ 37.31 per gross ton, which amount is to be included as an item of cost on work performed and charged off on our books monthly for armor shipped. Should we receive further contracts for armor for ships for the United States Government, and assuming that no further additional and special armor producing facilities are authorized, then another rate of amortization will be determined by dividing any unamortized value of special armor producing facilities by the increased total tonnage of armor on contracts at the time. For example, if there was at the end of any period an unamortized balance of say $ 746,200 for expenditures for special armor producing facilities to be amortized over 20,000 tons of armor, or at the rate of $ 37.31 per ton, and we received at that time a contract or contracts*219 for an additional 10,000 tons, the rate of amortization would then be reduced to $ 24.87 per ton. From February 23, 1939, to December 28, 1939, petitioner authorized substantial expenditures for other productive facilities in its four processing departments. The amount actually expended was $ 559,716.06, of which $ 69,539.33 was expended prior to January 1, 1940. These additions were also the result of prior commitments. Of the amount expended, $ 185,120.57 was deducted as a part of the production costs incurred in the performance of specific contracts, $ 24,086.75 was treated as ordinary and necessary operating expenses, and $ 350,508.74 was treated as capital expenditures for permanent additions to petitioner's production facilities. In order to modernize projectile and gun-producing facilities, petitioner expended an additional $ 249,413.69, of which $ 207,597.01 was expended prior to January 1, 1940. The facilities completed after the base period were the result of prior commitments. Except for $ 522.14, which was charged to operating expenses, the amounts expended were deducted as a part of the production costs incurred in the performance of specific contracts. In order *220 to handle the increased load, new boilers were installed in March 1936, January 1937, and January 1938. The entire internal railway system was also changed during the base period because the rails were too light and the curves too sharp for the heavier loads. *1222 Expenditures during the base period for repairs on production facilities relating solely to ordnance were as follows: Years Amounts [1936] $ 319,227 [1937] 473,038 [1938] 497,506 [1939] 660,727 Total $ 1,950,498 Total repair charges during the same period were as follows: Years Amounts [1936] $ 842,533 [1937] 1,160,741 [1938] 1,016,188 [1939] 1,326,515 Total $ 4,345,977 These amounts were charged as expenses in the years indicated and deducted on petitioner's income tax returns. The following total expenditures were made or committed for by petitioner during the base period: 1. Major changes to accommodate new requirements of armor $ 194,597.38 2. Work done to modernize projectile and gun producing facilities 249,413.69 3. Additions to productive facilities other than armor facilities 559,716.06 4. Additional and special armor producing facilities necessary to increase capacity from 1,000 tons per month to 1,700 tons per month 1,048,207.74 5. Additions to property, plant and equipment 1,506,629.42 6. Repairs relating only to facilities for the production of ordnance 1,950,498.00 *221 The purpose of some of these expenditures was to rehabilitate, rebuild, and expand petitioner's ordnance plant and facilities. When an ingot is processed into a finished product there is a loss in poundage in the forging, heating, testing, and machining operations. The average yield per ingot for each of the base period years is shown by the following table: Pounds of products shipped Percentage Pounds of of products Year ingots shipped to produced ingots Ordnance Other Total produced [1936] 107,836,000 6,382,621 46,927,835 53,310,456 49.43 [1937] 133,150,000 4,005,171 63,329,966 67,335,137 50.57 [1938] 122,234,000 15,666,228 33,295,493 48,961,721 40.06 [1939] 197,454,000 20,229,092 53,653,613 73,882,705 37.41 At the end of 1939 petitioner had on hand unfilled orders of over $ 23,000,000. On July 1, 1939, there were 105 Navy ships under construction. *1223 Plans for large ships have to be started about 2 years before construction begins. Contracts totaling over $ 64,500,000 were received by petitioner on ships which were under construction on July 1, 1939. The bulk of such orders was for armor and ordnance*222 for eight battleships and one aircraft carrier. Of the 105 ships under construction on July 1, 1939, 16 had been authorized by the 1938 Act. Of the 138 ships under construction on June 30, 1940, 61 had been authorized under the 1938 Act. Petitioner had four competitors for ordnance work. On December 22, 1938, the Chief of the Navy's Bureau of Ordnance wrote petitioner a letter in which he said in part: I am afraid that the Company is not preparing itself for the increased demands that are to be made on it over the next five or ten years. * * * * With proposals about to be sent out for around 25,000 tons of armor for the next four battleships and with the Department asking Congress this winter for two more 45,000 ton ships, it appears that you will not be able to take your proportionate share of this business. During the base period years, many of petitioner's, deliveries were behind the contract schedule, and there was in each base period year an increase in the amount of unfilled orders over the preceding year. Petitioner's excess profits net income increased during the years 1935 through 1939 as follows: Per cent of Excess profits increase Year net income over preceding year [1935] $ 285,484.79 [1936] 1,419,574.22 397.25 [1937] 1,742,702.22 22.76 [1938] 1,888,200.50 8.34 [1939] 3,300,138.51 74.77 *223 Petitioner's unfilled orders increased during the same years as follows: Per cent of Unfilled increase Year orders at over preceding end of year year [1935] $ 1,832,662 [1936] 2,618,407 42.87 [1937] 4,114,944 57.15 [1938] 5,608,993 36.31 [1939] 23,270,726 314.88 *1224 Petitioner's excess profits tax credit was computed in the following manner: Computation of average for Base period year: [1940] 1941, et. seq. [1936] $ 1,186,937 $ 1,419,574 [1937] 1,468,529 1,742,702 [1938] 1,555,555 1,888,201 [1939] 2,716,078 3,300,139 Totals $ 6,927,099 $ 8,350,616 Average $ 1,731,775 $ 2,087,654 Benefit under section 713 (f) 808,083 1,013,031 Statutory average base period net income $ 2,539,858 $ 3,100,685 Petitioner's annual average profit per pound of total product shipped during the years 1936, 1937, 1938, and 1939 was $ .02751, $ .02677, $ .03906, and $ .04466, respectively. Petitioner's average profit per pound for the base period computed from the annual averages was $ .0345. Almost all of petitioner's changes had been completed by July 1940. In 1940 petitioner produced and sold 39,289,544 pounds of finished ordnance products *224 and 73,590,481 pounds of finished commercial products at a total profit of $ 7,043,642, or $ .0624 per pound. In 1941, which is the first full year of operation after completion of the program of increasing its facilities, petitioner produced and shipped 54,674,499 pounds of finished ordnance products and 117,307,111 pounds of finished commercial products at a total profit of $ 8,609,568.83, or $ .0501 per pound. This amount represents the 1941 profits of petitioner after reduction by $ 2,000,000 pursuant to the Renegotiation Act. Respondent determined petitioner's excess profits tax liabilities for the years 1940 to 1944, inclusive, as follows: [1940] $ 1,404,626.71 [1941] 4,774,017.39 [1942] 13,560,120.03 [1943] 4,287,910.54 [1944] 902,653.61 Timely applications for relief were filed on Form 991. Petitioner also filed timely claims for refund on Form 843 for the above calendar years, and therein made claims for refund for unused excess profits credit carry-overs and carry-backs arising from the reconstructed base period net income. *1225 On November 14, 1949, the Excess Profits Tax Council notified petitioner of its reasons for rejecting such applications. This letter*225 stated in part: The record establishes that the taxpayer's capacity for production and operation was greater at the end of the base period than it was at the beginning. Consideration has therefore been given to the question of whether the taxpayer's average base period net income is an inadequate standard of normal earnings to be used for comparison with earnings during an excess profits tax period. The record establishes that the business of the taxpayer was not new during the base period, but was then well established. The taxpayer's management was not new. The record indicates that the taxpayer was doing everything which it could to make sales and obtain additional business all during the base period. It was increasing its capacity as it saw the need therefor. However, the record does not establish that at any time during the base period the taxpayer's sales were limited by lack of capacity. Consequently, it cannot be concluded that greater capacity in each year of the base period would have resulted in greater sales or earnings. It is decided, therefore, that no basis exists for reconstructing upward the taxpayer's actual average, base period earnings. See National Grinding Wheel Co., 8 T. C. 1278.*226 Petitioner's gross sales for the years 1924 to 1939, inclusive, were divided between ordnance and commercial products as follows: Commercial Ordnance products Total (to Year products (to the nearest the nearest dollar) dollar) [1924] $ 506,284 $ 4,608,334 $ 5,114,618 [1925] 76,891 5,863,232 5,940,123 [1926] 342,159 6,339,467 6,681,626 [1927] 550,837 7,085,321 7,636,158 [1928] 856,176 6,743,531 7,599,707 [1929] 1,045,728 8,114,318 9,160,046 [1930] 1,563,454 7,547,382 9,110,836 [1931] 2,393,633 3,729,257 6,122,890 [1932] 575,091 1,800,888 2,375,979 [1933] 186,878 2,416,683 2,603,561 [1934] 1,551,765 3,406,076 4,957,841 [1935] 1,398,360 4,102,309 5,500,669 [1936] 2,246,835 5,976,130 8,222,965 [1937] 1,483,205 9,098,794 10,581,999 [1938] 5,194,971 5,059,110 10,254,081 [1939] 6,413,383 6,955,099 13,368,482 Petitioner's gross sales of armor to the Navy in 1939 amounted to $ 3,831,067. The average price which petitioner received for its ordnance product during the years 1936, 1937, 1938, and 1939 was $ .35202, $ .37032, $ .3316, and $ .31704, respectively. Its average ordnance price during the base period computed from the annual averages*227 was $ .342745. Petitioner's open hearth production of ingots increased from 3,526 net tons in January 1936 to 8,569 net tons in December 1939. At the latter date all of petitioner's plant and equipment had not been placed in full operation. *1226 The total net tons of ingots produced by petitioner during the base period years and the percentage of year-end capacity represented thereby follow: Percentage or production Production to end Year (in tons) of year capacity [1936] 53,918 73.4 [1937] 66,575 65.5 [1938] 61,117 60.2 [1939] 98,727 53.2 The net profits realized by petitioner during the base period years and the ratio thereof to the capital stock and surplus were as follows: Average of capital stock Profits to Net profits and surplus average Year (before income beginning capital stock taxes) and end of and surplus year [1936] $ 1,466,982 $ 12,081,311 12.14% [1937] 1,802,833 12,121,175 14.87 [1938] 1,912,399 12,191,573 15.69 [1939] 3,369,706 12,609,186 26.72 In accordance with certain provisions of the Vinson-Trammell Act, which were also made applicable to construction under the Naval Expansion *228 Act of 1938, petitioner repaid to the Treasury of the United States profits in excess of 10 per cent of the total contract prices of the contracts subject thereto, which contracts it had completed during the base period years, as follows: Refund under Total contract Vinson-Trammell Contracts completed price Net profit Act [1936] $ 821,603.29 $ 155,550.36 $ 73,390.03 [1937] 3,411,316.79 537,252.37 196,120.69 [1938] 838,212.45 111,461.66 27,640.41 [1939] 2,261,652.07 451,369.12 225,203.91 The minutes of the March 23, 1939, meeting of petitioner's board of directors read in part as follows: The Chairman brought up for consideration that portion of the President's report of this date to the Board of Directors having to do with the determination by the Secretary of Labor of the minimum wage of 62 1/2 cents per hour for work performed on contracts subject to the Walsh-Healey Act. After full discussion, upon motion duly made, seconded and carried, it was decided that the Company should not bid at this time upon the inquiry from the United States Navy, for 833 gross tons of Class B armor, if the wage determination above mentioned is applicable thereto, as any*229 contract awarded as a result of such a bid would undoubtedly result in the establishment of 62 1/2 cents per hour as the minimum hourly rate throughout the workshops of the Company with the result *1227 that Midvale would become unable to compete with other companies in respect to commercial or nongovernment work upon which it (Midvale) must normally depend for its continuing activities and earnings. Petitioner's excess profits tax as computed under the provisions of chapter 2, subchapter E of the Internal Revenue Code (without the benefit of section 722 thereof) results in a fair and just tax for the calendar years 1940, 1941, 1942, 1943, and 1944. Petitioner's actual average base period net income, as computed under the method provided by section 713 of the Code, results in an adequate standard of normal earnings. OPINION. Regardless of other issues, petitioner must satisfy us that "a fair and just" amount to represent reconstructed base period earnings is greater than the actual credit to which it would be entitled under the excess profits tax provisions apart from section 722. In this case petitioner was automatically entitled to the benefits of the growth formula of section*230 713. It is not entitled to avail itself of both sections. Homer Laughlin China Co., 7 T. C. 1325. It follows that unless it has shown here a reconstructed average base period net income resulting in a greater credit to it than that computed under section 713, it should not be granted the relief here claimed under section 722. Irwin B. Schwabe Co., 12 T. C. 606. 1 Although the disallowance of the claimed refund was couched in the most general terms, petitioner, relying on a previous letter from the Excess Profits Tax Council, insists that it cannot be required to support its reconstruction here because fault was found with it neither in the Council's letter nor the notice of disallowance. With this position we are unable to agree. Under section 722 (a) a taxpayer always has the burden of showing what would be the fair and just*231 amount to represent its normal base period earnings and further that that amount is an inadequate standard of comparison. Green Spring Dairy, Inc., 18 T. C. 217. Having rejected petitioner's claim there was no necessity for respondent to go further and disagree with the reconstruction. 2 Here was no such limited disallowance under 711 (b) *1228 as appeared in Wentworth Manufacturing Co., 6 T. C. 1201, and no implication that the issues were correspondingly narrow. Similarly, the questions of the extent to which demand or capacity was normal or abnormal, temporary or permanent, are matters essential to the reconstruction itself. Petitioner's burden of proof cannot be borne unless a reasonably plausible reconstructed figure for "normal earnings" appears from the record as a whole. R. W. Eldridge Co., 19 T. C. 792. *232 Petitioner's basic contention is that it increased its productive facilities for naval orders before the end of the base period or committed itself before then to increases completed thereafter which, had they been in existence during the base period, would have resulted in largely increased earnings to it. The method of petitioner's claimed reconstruction is outlined in its brief as follows: (a) After the completion of all plant additions acquired or committed for during the base period, petitioner had the capacity to produce and process 371,000,000 pounds of ingots. (b) During the base period petitioner obtained an average yield of finished products in the amount of 43.42 percent of the ingots produced. (c) By applying this percentage to 371,000,000 pounds of ingots, there results an annual production from petitioner's expanded plant of 161,088,200 pounds of finished materials. (d) In 1939, petitioner's rate of profit was $ 0.04466 per pound of finished products. (e) By applying such base period rate of profit to 161,088,200 pounds of finished products, it is established that petitioner's base period net earnings from its changed business would have been $ 7,194,199. 3 *233 Petitioner's case accordingly rests upon the hypothesis that the increased capacity could have been utilized to supply the demand of the Navy for battleship construction. There is no suggestion that petitioner's commercial business which formed a considerable, if fluctuating, part of the total would have been any larger in the base period years even assuming the increased capacity. In dealing with the reconstruction we must hence first discard petitioner's assumption that its total ingot production is a proper measure of the increase in capacity. For that additional ingot capacity was as susceptible of use for increased commercial business as for its ordnance orders. And in fact we know that the expanded business of the excess profits years was due to a large extent to growth in commercial *1229 business. 4 It follows that not the larger ingot production but the capacity to produce finished products in the ordnance field 5 is on petitioner's own theory the more appropriate measure of any "change" and a reconstruction based thereon. Petitioner, itself, in criticizing respondent's contention that petitioner's business was not limited by lack of productive capacity, says: *234 "He has mistaken petitioner's ingot-producing capacity during the base period for its capacity to turn out finished products" and "the limitation on petitioner's productive capacity, throughout the base period and particularly during the last base period year, was its lack of facilities for processing ingots into finished ordnance and armor." (Emphasis as in petitioner's reply brief.) Concentrating*235 then on finishing capacity we find the significant claimed expansion lies in the facilities for production of armor plate. In this area, petitioner contends for a demonstrated increase to 1,700 tons a month. Here, however, there is some question resulting from petitioner's own contemporary statement regarding 700 tons of that increase. As our findings show, shortly after the end of the base period and while the facilities were apparently still under construction petitioner in order to avail itself of the benefits of contemporary depreciation deductions represented to respondent that "* * * these additional and special armor producing facilities could not economically take the place of existing facilities as the latter wore out, nor would we have installed them at the present time for the purpose of replacing existing equipment in the future. After these facilities have served their purpose of making possible the essential deliveries they will be either totally or partially useless to this Company upon the completion of the present Navy Shipbuilding Program." And that this program was regarded by petitioner and the Navy as an emergency of a short-lived, temporary, 6 and abnormal*236 nature appears *1230 from other contemporary statements. For example, in the same letter and apparently referring to a conference held with respondent's representative a short time previously, petitioner states: "we proposed at the conference that the last mentioned amount [that is, cost less salvage] be amortized at a rate per ton of armor shipped, based on the total tonnage of armor covered by existing contracts which the Midvale Company has for armor for battleships Nos. 57, 60, 61 and 62, and CV 8. This tonnage is approximately 25,766 gross tons, which * * * is to be included as an item of cost on work performed and charged off on our books monthly for armor shipped." 7 On September 1, 1939, the Chief of the Bureau of Ordnance, United States Navy, wrote petitioner: "An exigency of the service exists to expedite the Navy shipbuilding program in the cause of National Defense." The letter related to a lease of equipment for the installation of which part of the expenditures involved were used. In the lease, dated March 12, 1940, the parties again recite: "WHEREAS, there exists an exigency of the service to expedite the Naval Shipbuilding Program in the cause of National *237 Defense; and WHEREAS, the delivery of the Armor for the above-mentioned vessels in the minimum time is urgently necessary to expedite completion of the aforesaid vessels * * *." We need not speculate as to the reason for the time at which petitioner's expansion in its ordnance finishing capacity was ultimately completed. Whether it was because demand limited capacity rather than capacity limiting demand as petitioner apparently contends by its statement that "Alert businessmen do not lag four *238 years behind demand * * * in undertaking plant expansions"; whether it was because petitioner was reluctant to undertake government work; or whether it was because petitioner was unwilling to commit itself until the war conditions became certain, is of no concern. The fact remains that almost two-thirds of this expenditure was not authorized until after petitioner received the expediting letter from the Chief of the Bureau of Ordnance, which in turn was written on the very day the war in Europe commenced. Under these circumstances, it is doubtful whether the increase from 1,000 to 1,700 tons per month capacity referred to in those documents did represent a permanent increase in capacity (since it was for a limited purpose), did contribute to petitioner's "normal" earnings, *1231 and can form a part of any reconstruction. See Avey Drilling Machine Co., 16 T. C. 1281, 1300; Crowncraft, Inc., 16 T. C. 690. As to ordnance other than armor, petitioner has not shown how greatly its facilities for the production of guns and projectiles were changed, but it appears that the expenditures exclusively for these purposes were*239 made to the extent of about one-half, early in the base period, and that the total of such expenditures form a slight portion of the entire claim for expansion generally. 8 If there was any increase, we conclude that it was relatively insignificant and hence has not been shown to have been of sufficient magnitude to alter the conclusion to which the remainder of the record would otherwise compel us. *240 Generally speaking, the statute itself prohibits consideration of post-1939 events, except to a limited extent, in connection with cases governed by the last sentence in section 722 (b) (4) and (c). Southern California Edison Co., 19 T. C. 935. Cf. 7- Up Fort Worth Co., 8 T. C. 52, 66; Wisconsin Farmer Co., 14 T. C. 1021, 1032. But even if we examine such events to the fullest extent, beyond the permissible limits of section 722 (a), a comparison would not help petitioner here any more than it did in Industrial Supplies, Inc., 18 T. C. 1067. Thus, if, notwithstanding the statutory scheme, the total ordnance shipments for the 4-year period 1938 through 1941 were used as a basis of computation 9*241 the total ordnance products shipped would be some 130,000,000 pounds. Adding average commercial shipments for the base period years which form no part of petitioner's claimed increased capacity, total poundage for the reconstructed *1232 4-year period would be some 327,000,000 or an annual average of approximately 81,800,000 pounds. 10 Our findings show that the average profit per pound of ordnance material produced during the base period was approximately $ .0345 which, assuming all of the increased capacity could have been sold at a similar profit, 11*243 would result in reconstructed net income of $ 2,822,100. For all years after 1940 petitioner, invoking section 713, used an average base period income credit of $ 3,100,685, or substantially in excess of this reconstruction. And for the year 1940 its reconstruction is admittedly to be reduced by 18 per cent (the amount of income tax payable for that year, section 711 (b), repealed as to later years). 12 Its reconstructed income for that year would accordingly amount 13 to only $ 2,314,122 compared to its section 713 credit for 1940 of approximately*242 $ 2,500,000. In any event, the permissible reconstruction without the prohibited recourse to post-1939 events shows that no relief is warranted. Thus, *1233 even if we grant petitioner all of its proven increase in finishing capacity, namely, that relating to armor, including that capacity which may well have been abnormal, it would still not result in a reconstruction in excess of the credit computed under section 713 (f). Seventeen hundred tons of armor per month or 40,800,000 pounds per year, at an average 1939 price of approximately*244 32 cents per pound 14 would result in $ 13,056,000 of armor sales. Subtracting the $ 3,831,067 worth of armor actually sold in 1939, we could obtain increased armor sales of $ 9,224,933. Application of the 10 per cent limitation in the Vinson-Trammell Act which was a condition of the base period 15 would yield a profit no greater than $ 922,493 which when added to petitioner's actual 1939 profit of $ 3,300,139 would result in a reconstructed 1939 profit of $ 4,222,632. When constructive earnings throughout the base period are shown not to be subject to material variations from year to year, the 1939 reconstruction may be taken as the constructive average*245 base period net income. 7- Up Fort Worth Co., supra;Del Mar Turf Club, 16 T. C. 749. On the other hand, where such variations may reasonably be expected to occur within the base period, reconstructed 1939 earnings must be backcast by an appropriate index over the earlier base period years in order to get average reconstructed base period net earnings. E. P. C. 13, 1947-1 C. B. 83; Alexandria Amusement Corporation, 16 T. C. 446; see East Texas Motor Freight Lines, 7 T. C. 579. Since the latter situation is typical of most taxpayers' experience, 1939 reconstructed earnings can be used for the base period average only where the lack of significant variation is clearly established. E. P. C. 13, supra; see Tober-Saifer Shoe Manufacturing Co., 17 T. C. 1042. We deem that the lack of significant variation has not been clearly established 16 and that backcasting on some index is therefore required. *246 Petitioner's own experience is the preferable index for such backcasting. E. P. C. 8, 1947-1 C. B. 73; see Avey Drilling Machine Co., supra, at 1300. Not only has petitioner the burden of proving some other index more appropriate, Jefferson Amusement Co., 18 T. C. 44, 58, but petitioner itself contends that in the event backcasting is found necessary its own experience be considered "the most accurate index." *1234 Petitioner's effort, however, to superimpose the growth formula of section 713 on the index of its own experience we regard as doomed to failure. 17 E. P. C. 8, supra, on which petitioner relies refers, it is true, to a taxpayer's actual experience as a valid index. But it would be inconsistent to vary that actual experience by further unreal hypotheses such as the growth formula, and in theory, we think, would do violence to the rule of Homer Laughlin China Co., supra;Stimson Mill Co., 7 T. C. 1065, affd. (C. A. 9) 163 F. 2d 269, certiorari denied 332 U.S. 824;*247 Dowd-Feder, Inc., 10 T. C. 345, affd. (C. A. 6) 173 F. 2d 673. If we use petitioner's experience by itself as our index for backcasting, an approximate average reconstruction of only $ 2,671,000 would result. 18*248 This again is substantially less than the credit of $ 3,100,685 computed under section 713 (f) for 1941 and subsequent years, and if the necessary adjustment for corporate income tax were made, 19 would also be less than the credit used for 1940 of about $ 2,500,000. We have used round figures and possibly arrive at an amount only approximately correct. But the difference is so great that any omissions or errors in computation cannot be but equalized by the excess. Although the foregoing is based upon the theory of reconstruction advanced by petitioner, we have analyzed other possible methods of reconstruction, see, e. g., E. P. C. 13, supra, and find that none of them results in a reconstructed average adequate to entitle petitioner to relief under section 722. Assuming, therefore, that petitioner has shown some change in the conduct of its business so as to fall within the provisions of section 722 (b) (4), a question we need not now decide; and assuming further that the increased production would all have been sold under normal conditions during or by the end of the base period, a conclusion strenuously resisted by respondent; we conclude that petitioner has *1235 failed to show that the tax computed with the benefit of section 713 is excessive or discriminatory, or that a fair and just amount representing normal earnings would be greater than that to which the statute without the application of section 722 entitles it. Reviewed by the Special Division. *249 Decision will be entered for the respondent. Footnotes 1. Petitioner acknowledges that "the inadequacy of the actual average has been partially compensated for" by section 713 (f).↩ 2. Moreover, petitioner no longer claims the reconstructions sought in its applications. The 1940 application, for example, bases the reconstruction on such different facts as to cast doubt on whether the Tax Court even has jurisdiction over the years covered. That reconstruction was based on adjusted 1941 production figures and not on total ingot capacity nor finished product yield percentage. The Tax Court cannot grant relief upon the basis of facts, even though proved, which were not set forth in petitioner's claim for relief. Block One-Thirty-Nine, Inc., 17 T. C. 1364; Wadley Co., 17 T. C. 269; Blum Folding Paper Box Co., 4 T. C. 795; see Trunz, Inc., 15 T. C. 99; Vica Co., 5 T. C. 535; affd. (C. A. 9) 159 F. 2d 148, certiorari denied 311 U.S. 833↩. While there is no need to consider the jurisdictional question, it is certain that if respondent were estopped to attack petitioner's reconstructions, it would be the reconstructions claimed in the applications. And those reconstructions petitioner has abandoned. 3. A different figure is used as the claimed credit for 1940 since under the "variable credit" rule some of the new facilities were not in operation during that year. Petitioner computes this as follows: 112,880,225 (pounds of finished product in 1940)/161,088,200 (subparagraph (c) above) X $ 7,194,199 = $ 5,035,940 It then reduces this amount by 18 per cent to $ 4,129,471 to reflect the average amount of income taxes which would have been paid on that amount of annual net income during the base period years, as required by section 711 (b) (1) (A) (repealed as to later years).↩ 4. Petitioner's commercial and ordnance production for the years 1936 through 1941 is shown by the following table: ↩ Pounds of product shipped Year Ordnance Commercial Total [1936] 6,382,621 46,927,835 53,310,456 [1937] 4,005,171 63,329,966 67,335,137 [1938] 15,666,228 33,295,493 48,961,721 [1939] 20,229,092 53,653,613 73,882,705 [1940] 39,289,544 73,590,481 112,880,025 [1941] 54,674,499 117,307,111 171,981,610 5. As petitioner itself states: "* * * processing↩ facilities for commercial products could not be used for ordnance products * * *." [Emphasis as in petitioner's reply brief.] 6. In attempting to distinguish National Grinding Wheel Co., 8 T. C. 1278, petitioner relies, among other points, on the fact that there "there was no * * * proof that as a result of the additional capacity a higher level of earnings of a permanent character↩ had been established * * *." (Emphasis added.) 7. It is true that petitioner further proposed a readjustment of such claimed amortization, but that was conditional only in the event it received additional Navy contracts in the future.↩ 8. In terms of completed cost, the following schedule shows the year of completion of petitioner's claimed increase in productive and processing facilities: [1938] Modernization of projectile and gun-producing facilities $ 12,698 $ 120,482 $ 1,403 Additional and special armor-producing facilities Productive facilities other than armor Repair expenditures on ordnance facilities 319,227 473,038 497,506 Additions to plant property and equipment 538,824 528,736 190,940 Allocation of $ 194,597 expended during the base period for new requirements for armor plate over the years 1936-1939 48,649 48,649 48,649 Total by years $ 919,398 $ 1,170,905 $ 738,498 ↩ [1941] Modernization of projectile and gun-producing facilities $ 60,601 $ 54,230 Additional and special armor-producing facilities 346,379 701,829 Productive facilities other than armor 397,517 $ 162,200 Repair expenditures on ordnance facilities 660,727 Additions to plant property and equipment 248,129 Allocation of $ 194,597 expended during the base period for new requirements for armor plate over the years 1936-1939 48,649 Total by years $ 1,364,485 $ 1,153,576 $ 162,200 9. As petitioner itself says: "the unit of profit figures for 1942 to 1944, inclusive, would not be comparable with the unit of profit figure for 1939."↩ 10. ↩ Pounds of product shipped by petitioner Year Ordnance Other Total [1936] 46,927,835 [1937] 63,329,966 [1938] 15,666,228 33,295,493 [1939] 20,229,092 53,653,613 [1940] 39,289,544 [1941] 54,674,499 Totals 129,859,363 197,206,907 327,066,270 Annual average 32,464,841 49,301,727 81,766,568 11. In attributing to petitioner a constructive profit of $ .0345 per pound of product, there seems to be a considerable weighting in petitioner's favor. During the base period years the Vinson-Trammell Act limited profits to 10 per cent on Navy business. Petitioner's price per pound for the four base period years was about $ .35, $ .37, $ .33, and $ .32, respectively, or an average of a little over $ .34 which if limited to 10 per cent would give an average profit or a little over $ .034. However, the year of largest price was 1937, in which a comparatively small amount of Navy business was produced and the year of smallest price was 1939, in which the largest amount was produced so that on a weighted average an even lower profit would result. It is true that the Vinson-Trammell Act limitation was suspended by the Second Revenue Act of 1940, and not effective in the years 1940 and 1941. But the suspension of the 10 per cent limitation was directly related to the enactment of the Excess Profits Tax provisions which were presumed to take its place. See Report, Ways and Means Committee, H. Rept. No. 2894, 76th Cong., 3d Sess., p. 2. And the excess profits tax in turn was the result of war conditions and defense preparations. To antedate that into the base period years would be as inadmissible as any other assumption that the war conditions had been effective earlier than the facts justify and equally inadmissible. Fezandie & Sperrle, Inc., 5 T. C. 1185↩. 12. Sec. 711. (b) Taxable Years in Base Period. (1) General rule and adjustments * * * the following adjustments shall be made * * *: (A) Income Taxes. -- The deduction for taxes shall be increased by an amount equal to the tax * * * for such taxable year under Title I or Chapter 1, as the case may be, of the revenue law applicable to such year.↩ 13. This is without taking into account a further reduction conceded by petitioner to be required by the "variable credit" rule because some of the new facilities were not in operation during 1940. See footnote 3, supra↩. 14. Since the proposed reconstruction proceeds with 1939 as its premise, we have employed 1939 figures. Other permitted methods would not result in a significantly more favorable reconstruction nor be effective to grant petitioner any relief.↩ 15. See footnote 11, supra. See also Alexandria Amusement Corporation, 16 T. C. 446↩. 16. The record in fact contains evidence of variations within the base period. The following schedule demonstrates a few of these variations: Commercial sales as compared with ordnance sales: [1937] Commercial $ 5,976,130 $ 9,098,794 Ordnance 2,246,835 1,483,205 Compensation of officers 186,552 197,621 Interest payments 1,298.13 Net profit per pound .02751 .02677 Profit on completed government contracts 82,160.33 341,131.68 ↩ Commercial sales as compared with ordnance sales: [1939] Commercial $ 5,059,110 $ 6,955,099 Ordnance 5,194,971 6,413,383 Compensation of officers 154,918 176,669 Interest payments 104.02 28,622.58 Net profit per pound .03906 .04466 Profit on completed government contracts 83,821.25 226,165.21 17. Nor would it be correct to use reconstructed 1939 earnings for both the years 1938 and 1939 in such backcasting. E. P. C. 31, 1948-1 C. B. 93↩. 18. ↩ Petitioner's Reconstructed Year excess profits Index earnings net income (% of reconstructed 1939) [1936] $ 1,419,574 43.0 $ 1,815,631 [1937] 1,742,702 52.8 2,229,549 [1938] 1,888,200 57.2 2,415,345 [1939] 3,300,139 100.0 4,222,632 Total 10,683,157 Annual average $ 2,670,789 19. Reduced for 1940 by at least 18 per cent to $ 2,190,220. See footnotes 12 and 13, supra↩.