Strickland Cotton Mills v. Commissioner

Strickland Cotton Mills, Petitioner, v. Commissioner of Internal Revenue, Respondent Strickland Cotton Mills v. Commissioner Docket Nos. 23860, 25163 United States Tax Court 19 T.C. 151; 1952 U.S. Tax Ct. LEXIS 53; November 7, 1952, Promulgated *53 Decisions will be entered for the respondent. 1. Petitioner, a member of the cotton textile industry, Southern division, has not shown that the effect of the large cotton crop of 1937 on the cotton textile industry resulted in an abnormally depressed base period net income entitling it to relief under section 722 (b) (2), Internal Revenue Code. 2. The base period is not to be divided into separate segments; it is a unitary period. Paul Webb, Jr., Esq., and H. H. Hunt, C. P. A., for the petitioner. William J. Stetter, Esq., and Stafford R. Grady, Esq., for the respondent. Withey, Judge. WITHEY *151 The Commissioner denied the petitioner's applications for relief from excess profits taxes under section 722 (b) (2) of the Internal Revenue Code for the fiscal years ending July 31, 1941, 1942, 1943, 1944, 1945, *54 and 1946. The sole issue is whether the business of the petitioner was depressed in the base period because of temporary economic circumstances unusual in the case of the petitioner or because of the fact that an industry of which petitioner was a member was depressed by reason of temporary economic events unusual in the case of such industry. The proceedings were consolidated for hearing. FINDINGS OF FACT. Facts stipulated are so found and incorporated herein by reference. The petitioner is a Georgia corporation which was organized in 1899. It has its principal place of business at Valdosta, Georgia, and is a manufacturer of cotton sheetings. The petitioner during the years 1921 through 1941 manufactured standard narrow Class C sheetings (i. e., sheetings 40 inches wide or less, having an average yarn number of from 21 to 28) for use in the manufacture of cotton bags and in the converting trade. These sheetings were made from undyed and unbleached yarns which were also manufactured by the petitioner. (This product is commonly called "grey goods.") The gray cloth manufactured by the petitioner during all years material to this proceeding was sold through a selling agent in New*55 York. The selling agent sold petitioner's cotton cloth on a commission basis and assumed all credit risks by guaranteeing the accounts receivable. The cotton textile industry is divisible in two ways. Geographically it is divisible into a Northern division and a Southern division. Secondly, *152 it can be divided into industry groups according to the type product manufactured. Generally speaking there are fourteen such major manufacturing groups. They are listed according to the product manufactured, as follows: Corded yarn, combed yarn, miscellaneous cotton yarn, cordage and twine, cotton duck, sheetings and allied fabrics, print cloths and allied fabrics, napped fabrics, colored yarn fabrics, fine cotton goods, towels and toweling (including wash cloths and terry woven fabrics other than toweling), tobacco and cheese cloths (including gauze, absorbent cotton, and surgical dressing), specialty fabrics, and miscellaneous cotton textile products. Petitioner is a member of the cotton textile industry, Southern division, sheetings and allied fabrics group. The mill margin is roughly the difference between the selling price of cotton cloth and the cost of raw cotton. The petitioner*56 has kept its books and filed its income tax returns on the accrual basis since its organization. Prior to August 1, 1931, petitioner kept its books and filed its tax returns on a calendar year basis and since August 1, 1931, petitioner has kept its books and filed its tax returns on the basis of a fiscal year ending July 31. The petitioner filed timely corporation income tax, declared value excess-profits tax, and excess profits tax returns for the fiscal years ended July 31, 1941, 1942, 1943, 1944, 1945, and 1946, with the collector of internal revenue for the district of Georgia. The petitioner filed timely applications for relief (Form 991) under section 722 of the Internal Revenue Code for fiscal years ended July 31, 1941, 1942, 1943, 1944, 1945, and 1946. Since the petitioner was in existence during its entire base period, that is the fiscal years ended July 31, 1937, 1938, 1939, and 1940, it is entitled to use an excess profits credit based on income under the provisions of section 713 of the Internal Revenue Code. Petitioner's excess profits credit computed under the provisions of section 713 of the Internal Revenue Code and without application of section 722 of the Internal*57 Revenue Code as finally determined by the respondent for each of the fiscal years, ending July 31, 1941 to 1946, inclusive, is as follows: July 31, 1941 $ 55,022.56 July 31, 1942 66,056.90 July 31, 1943 80,392.30 July 31, 1944 80,392.30 July 31, 1945 80,392.30 July 31, 1946 80,414.84 Excess profits net income for each of the base period years computed under section 711 and without the application of section 722 of the Internal Revenue Code is as follows: *153 For fiscal year July 31, 1941 For later years July 31, 1937 $ 133,136.51 $ 159,410.56 July 31, 1938 28,641.29 33,409.99 July 31, 1939 6,386.75 7,339.24 July 31, 1940 63,509.38 77,974.54 Petitioner's excess profits tax liability, without the application of section 722 of the Internal Revenue Code, for each of the fiscal years ending July 31, 1941 to 1946, inclusive, is as follows: July 31, 1941 $ 12,081.71 July 31, 1942 44,982.68 July 31, 1943 130,273.16 July 31, 1944 77,237.21 July 31, 1945 72,420.17 July 31, 1946 30,769.37 For the fiscal years ended July 31, 1935, to July 31, 1940, sales, gross profit, gross profit percentage of sales, compensation of officers, and other*58 items of income and expense for petitioner were as follows: INCOME, PROFIT AND LOSS STATEMENTS District Georgia Year July 31, July 31, July 31, [1937] Sales $ 450,874 $ 652,397 $ 866,109 Cost of goods sold 456,695 520,372 602,933 Gross profit from sales (5,821) 132,025 263,176 Gross sales from store Cost of goods sold Gross profit from store Gross profit per cent of sales (1.29) 20.23 30.38 15 1/2 Yr. Average 10.58%, 4 Yr. Average 20.50% Interest received on Government obligations Other interest (Not. seg.) Rents 7,100 7,391 7,591 Other income [696] 1,003 Total income 2,113 140,112 271,770 Loss on sale of cotton contracts Compensation of officers 5,556 5,505 20,550 Salaries and wages 3,030 3,095 5,363 Repairs (Included in "Cost of goods sold") Bad debts [350] Interest paid 7,671 11,459 7,319 Taxes 2,119 4,226 14,916 Contributions 5,920 Losses by fire, etc Depreciation 11,011 16,997 16,040 Loss on commissary Other deductions 14,754 55,035 29,608 Total deductions 44,158 96,352 100,066 Current year net income (42,045) 43,760 171,704 Prior year loss Declared value excess profits tax 12,674 Wholly nontaxable interest received *59 INCOME PROFIT AND LOSS STATEMENTS District Georgia Year July 31, July 31, July 31, [1940] Sales $ 473,140 $ 579,584 $ 585,964 Cost of goods sold 389,986 503,271 452,482 Gross profit from sales 83,154 76,313 122,482 Gross sales from store Cost of goods sold Gross profit from store Gross profit per cent of sales 17.57 13.16 20.90 15 1/2 Yr. Average 10.58%, 4 Yr. Average 20.50% Interest received on Government obligations Other interest 2,283 Rents 7,413 6,497 6,795 Other income [829] 1,302 8,253 Total income 91,396 84,112 150,813 Loss on sale of cotton contracts Compensation of officers 12,075 10,400 9,000 Salaries and wages 5,720 6,076 6,597 Repairs (Included in "Cost of goods sold") Bad debts [321] Interest paid 7,969 11,445 5,005 Taxes 9,802 10,378 13,003 Contributions [300] Losses by fire, etc Depreciation 17,176 17,506 17,006 Loss on commissary Other deductions 4,389 20,392 21,852 Total deductions 57,986 76,773 72,763 Current year net income 33,410 7,339 78,050 Prior year loss Declared value excess profits tax [76] Wholly nontaxable interest received *60 *154 The following table is a comparison of United States and foreign production and mill consumption of commercial cotton for the years 1922-1939, inclusive: Production (in 1,000 bales) Mill consumption (in 1,000 bales) Year beginning August 1 -- United Foreign World United Foreign World States States [1922] 10,124 8,327 18,451 6,666 14,671 21,337 [1923] 10,330 8,760 19,090 5,681 14,346 20,027 [1924] 14,006 10,088 24,094 6,193 16,541 22,734 [1925] 16,181 10,562 26,743 6,456 17,712 24,168 [1926] 18,182 9,768 27,930 7,190 18,489 25,679 [1927] 12,957 10,386 23,343 6,834 18,608 25,442 [1928] 14,555 11,247 25,802 7,091 18,687 25,778 [1929] 14,716 11,535 26,251 6,106 18,769 24,875 [1930] 13,873 11,503 25,376 5,263 17,169 22,432 [1931] 16,877 9,602 26,479 4,866 18,023 22,889 [1932] 12,961 10,500 23,461 6,137 18,514 24,651 [1933] 12,712 13,354 26,066 5,700 19,902 25,602 [1934] 9,576 13,466 23,042 6,361 20,119 25,480 [1935] 10,495 15,646 26,141 6,351 21,178 27,529 [1936] 12,375 18,354 30,729 7,950 22,688 30,638 [1937] 18,412 18,333 36,745 5,748 21,825 27,573 [1938] 11,665 15,839 27,504 6,858 21,649 28,507 [1939] 11,516 15,851 27,367 7,784 20,702 28,486 Averages: 1936-1939 13,492 17,094 30,586 7,085 21,716 28,801 1922-1939 13,414 12,396 25,812 6,346 18,866 25,213 1922-1935 13,392 11,053 24,448 6,135 18,052 24,187 *61 Source: U. S. Dept. of Agriculture, "Agricultural Statistics," 1941, pp. 123, 125, 126, and 1945, p. 75. The carry-over at the beginning of the year in foreign countries and in the United States 1921-1940, with the amounts of the United States carry-over held by the U. S. Government and by others 1933-1940 were as follows: United States held by -- Year beginning August Grand Foreign Total 1 -- total countries U. S. Government Others [1921] 15,169 8,273 6,534 [1922] 10,494 7,172 2,832 [1923] 7,571 5,246 2,325 [1924] 6,614 5,058 1,556 [1925] 7,948 6,338 1,610 [1926] 10,473 6,931 3,543 [1927] 12,654 8,892 3,762 [1928] 10,535 7,999 2,536 [1929] 10,541 8,228 2,312 [1930] 11,892 7,362 4,530 [1931] 14,808 8,438 6,370 [1932] 18,336 8,658 9,678 [1933] 17,116 8,952 8,165 1 3,626 1 4,539 [1934] 17,540 9,796 7,744 3,037 4,707 [1935] 15,072 7,864 7,208 6,027 1,181 [1936] 13,649 8,240 5,409 3,237 2,172 [1937] 13,695 9,196 4,499 1,665 2,834 [1938] 22,702 11,169 11,533 6,964 4,589 [1939] 21,638 8,605 13,033 11,045 1,988 [1940] 20,272 9,708 10,564 8,733 1,831 *62 *155 The condition of petitioner as of the close of each calendar year from 1921 to 1930, and as of the close of each fiscal year from July 31, 1931, to July 31, 1940, was as follows: BALANCE SHEETS District Georgia Year [1923] Cash $ 961 $ 15,089 Notes & accounts receivable (net) 3,992 $ 24,952 1,511 Inventories 227,187 233,688 361,657 Govt. & State obligations 20,000 20,000 20,000 Land 118,227 7,350 7,350 Net tangible capital assets 194,857 189,234 Reserves 133,830 85,587 93,950 Other assets [304] Total assets $ 370,671 $ 480,847 $ 594,841 Accounts payable $ 9,969 $ 4,162 $ 2,567 Bds, Nts, & Mtgs, less than 1 yr 113,154 103,126 209,626 Common stock 175,000 175,000 175,000 Surplus, paid-in or capital surplus, earned 70,328 189,483 205,674 Other liabilities 2,220 9,076 1,974 Total liabilities $ 370,671 $ 480,847 $ 594,841 BALANCE SHEETS District Georgia Year [1927] Cash $ 16,490 $ 2,055 $ 537 Notes & accounts receivable (net) 9,815 $ 10,240 5,537 12,440 Inventories 175,247 176,275 127,734 84,666 Govt. & State obligations Land 7,350 7,350 7,550 7,550 Net tangible capital assets 181,246 180,819 178,962 282,583 Reserves 102,374 110,799 119,822 121,583 Other assets [719] 1,003 Total assets $ 390,148 $ 374,684 $ 322,557 $ 388,779 Accounts payable $ 3,393 $ 3,204 $ 2,985 $ 7,623 Bds, Nts, & Mtgs, less than 1 yr 33,126 43,125 12,789 57,789 Common stock 175,000 175,000 175,000 175,000 Surplus, paid-in or capital surplus, earned 176,772 146,441 123,283 139,308 Other liabilities 1,857 6,914 8,500 9,059 Total liabilities $ 390,148 $ 374,684 $ 322,557 $ 388,779 *63 BALANCE SHEETS District Georgia Year [1930] Cash $ 6,698 $ 2,001 $ 3,109 Notes & accounts receivable (net) 14,941 15,845 16,632 Inventories 107,360 89,189 92,953 Govt. & State obligations Land 7,550 7,550 7,550 Net tangible capital assets 279,671 268,411 261,234 Reserves 134,668 148,014 160,891 Other assets 3,161 1,626 1,013 Total assets $ 419,381 $ 384,622 $ 382,491 Accounts payable $ 2,557 $ 23,280 $ 13,647 Bds, Nts, & Mtgs, less than 1 yr 122,289 134,789 167,789 Common stock 175,000 175,000 175,000 Surplus, paid-in or capital surplus, earned 119,535 50,115 24,471 Other liabilities 1,438 1,584 Total liabilities $ 419,381 $ 384,622 $ 382,491 BALANCE SHEETS District Georgia Year July 31, July 31, July 31, July 31, [1934] Cash $ 1,998 $ 156 $ 1,667 Notes & accounts receivable (net) 22,796 22,495 19,957 $ 1,140 Inventories 27,992 38,195 40,723 147,216 Govt. & State obligations Land 7,550 7,550 7,550 7,550 Net tangible capital assets 252,671 244,297 226,938 212,700 Reserves 170,392 186,432 204,104 218,452 Other assets 6,799 8,410 7,775 5,794 Total assets $ 319,806 $ 321,103 $ 304,610 $ 374,400 Accounts payable $ 5,091 $ 4,715 $ 3,964 $ 2,749 Bds, Nts, & Mtgs, less than 1 yr 92,789 70,289 53,789 124,471 Common stock 175,000 175,000 175,000 175,000 Surplus, paid-in or capital surplus, earned 42,278 66,411 66,967 64,494 Other liabilities 4,648 4,688 4,890 7,686 Total liabilities $ 319,806 $ 321,103 $ 304,610 $ 374,400 *64 *156 BALANCE SHEETS District Georgia Year July 31, July 31, July 31, [1937] Cash $ 848 $ 2,574 Notes & accounts receivable (net) 9,796 20,450 $ 40,363 Inventories 135,745 47,972 45,191 Govt. & State obligations Land 7,550 7,550 7,550 Net tangible capital assets 212,720 302,595 291,362 Reserves 233,295 194,074 212,200 Other assets 1,430 [860] 1,236 Total assets $ 368,089 $ 382,001 $ 385,702 Accounts payable $ 2,593 $ 3,918 $ 7,132 Bds, Nts, & Mtgs, less than 1 year 142,471 135,971 62,000 Common stock 175,000 175,000 175,000 Surplus, paid-in or capital surplus, earned 25,016 64,530 85,309 Other liabilities 23,009 2,582 56,261 Total liabilities $ 368,089 $ 382,001 $ 385,702 BALANCE SHEETS District Georgia Year July 31, July 31, July 31, [1940] Cash $ 4,189 $ 5,743 $ 4,046 Notes & accounts receivable (net) 31,446 43,048 18,679 Inventories 132,097 53,008 60,007 Govt. & State obligations Land 7,550 7,550 7,550 Net tangible capital assets 257,544 246,119 244,377 Reserves 302,915 319,332 339,172 Other assets 3,877 4,213 4,008 Total assets $ 436,703 $ 359,681 $ 338,667 Accounts payable $ 3,518 $ 4,203 $ 194 Bds, Nts, & Mtgs, less than 1 yr 173,000 93,000 Common stock 175,000 175,000 175,000 Surplus, paid-in or capital surplus, earned 75,363 81,861 139,395 Other liabilities 9,822 5,617 24,078 Total liabilities $ 436,703 $ 359,681 $ 338,667 *65 The compiled net profit (or loss) less tax-exempt income for manufacturing corporations other than cotton textile, and for cotton textile manufacturing corporations for the years 1922-1939 was as follows: Compiled Net Profit (or Loss) Less Tax-Exempt Income for Manufacturing Corporations Other Than Cotton Textile, and Cotton Textile Manufacturing Corporations, 1922-1939 (In $ 1,000) Manufacturing Year corporations Cotton textile other than cotton corporations textile [1922] 2,548,044 92,963 [1923] 3,466,977 103,910 [1924] 2,803,307 (39,835) [1925] (1) (1) [1926] 3,738,946 (30,843) [1927] 3,011,752 75,842 [1928] 3,899,944 10,582 [1929] 4,383,755 22,017 [1930] 1,209,171 (91,507) [1931] (759,400) (63,570) [1932] (1,752,601) (53,663) [1933] 172,218 31,828 [1934] 971,591 8,414 [1935] 1,826,708 (10,261) [1936] 3,102,507 35,138 [1937] 3,123,298 37,779 [1938] 1,262,283 (6,206) [1939] 3,151,164 35,287 Average: 1936-1939 2,659,813 25,500 1922-1935 1,963,109 4,298 1922-1939 2,127,039 9,287 Base period Base period 25.05% 174.57% greater than greater than 1922-1939. 1922-1939. *66 *157 The income and balance sheet data for nine corporations, Southern sheetings mills, 1922-1939, were as follows: Sheetings and Allied Fabrics Industry, Southern Sheetings Mills, Income and Balance Sheet Data for Nine Corporations, Filing Fiscal Year Returns in 1922-1939 Compiled net profit Total Net (or loss) assets Year sales less tax-exempt (end of ($ 000) income year) ($ 000) ($ 000) [1922] 9,509 [892] 8,811 [1923] 11,080 [653] 9,791 [1924] 11,040 [314] 10,255 [1925] 12,730 [354] 10,025 [1926] 10,991 [409] 9,206 [1927] 10,552 [847] 9,787 [1928] 10,859 [142] 9,492 [1929] 10,248 [309] 9,480 [1930] 8,130 (913) 8,582 [1931] 6,252 (375) 7,847 [1932] 5,237 (297) 7,094 [1933] 7,259 [276] 7,445 [1934] 8,808 [206] 7,869 [1935] 8,725 (126) 7,733 [1936] 11,064 [739] 8,316 [1937] 10,721 [668] 8,297 [1938] 7,051 (132) 7,519 [1939] 8,372 [88] 7,924 Average: 1936-1939 9,302 [341] 8,014 1922-1939 9,368 [225] 8,637 Per cent: 1936-1939 to 1922-1939 99.30 151.56 92.79 Ratio of compiled net profit (or loss) less tax-exempt income to: Year Net sales Total assets (per cent) (per cent) [1922] 9.38 10.12 [1923] 5.89 6.67 [1924] 2.84 3.06 [1925] 2.78 3.53 [1926] 3.72 4.44 [1927] 8.03 8.65 [1928] 1.31 1.50 [1929] 3.02 3.26 [1930] (11.23) (10.64) [1931] (6.00) (4.78) [1932] (5.67) (4.19) [1933] 3.80 3.71 [1934] 2.34 2.62 [1935] (1.44) (1.63) [1936] 6.68 8.89 [1937] 6.23 8.05 [1938] (1.87) (1.76) [1939] 1.05 1.11 Average: 1936-1939 3.67 4.26 1922-1939 2.40 2.61 Per cent: 1936-1939 to 1922-1939 *67 The average spot price of middling cotton in ten markets and the average wholesale prices of three constructions of narrow sheetings for 1922-1940 were as follows: Narrow sheetings: Middling cotton Average of 7/8 inch: Average wholesale prices Year spot price in ten of three constructions, markets (cents f. o. b. mill per pound) (cents per pound) [1922] 20.49 [1923] 28.63 [1924] 27.79 [1925] 23.10 [1926] 16.62 33.59 [1927] 16.85 32.77 [1928] 19.15 33.14 [1929] 18.20 32.27 [1930] 12.73 25.19 [1931] 7.90 18.15 [1932] 6.11 14.86 [1933] 1 10.05 22.39 [1934] 1 16.17 29.48 [1935] 1 15.77 28.36 [1936] 11.93 26.47 [1937] 11.22 27.87 [1938] 8.58 19.35 [1939] 9.04 20.75 [1940] 9.98 21.94 1936-1939 10.19 1936-1939 23.59 Averages 1922-1939 15.57 1926-1939 26.06 *158 The price index published by the Bureau of Labor Statistics for all commodities, *68 cotton goods, brown sheetings and middling cotton for 1922-1940 was as follows: Indexes of Wholesale Prices of All Commodities, Cotton, Brown Sheetings, and Middling Cotton, 1922-1940 1 [1926 = 100] Brown sheetings Middling Year All commodities Cotton Series 1: Series 3: cotton goods 4/4, 4/4, at New 48 x 48, 56 x 60, York 2.85 4.00 [1922] 96.7 104.3 105.1 111.3 121.0 [1923] 100.6 116.9 133.3 132.1 167.0 [1924] 98.1 114.7 131.7 121.3 163.9 [1925] 103.5 110.0 120.0 112.2 133.8 [1926] 100.0 100.0 100.0 100.0 100.0 [1927] 95.4 97.1 97.8 99.6 100.2 [1928] 96.7 100.4 110.2 98.7 114.1 [1929] 95.3 98.8 102.0 93.3 109.0 [1930] 86.4 84.7 85.3 78.5 77.1 [1931] 73.0 66.1 58.8 58.4 48.7 [1932] 64.8 54.0 50.4 44.6 36.6 [1933] 65.9 71.2 71.4 66.2 49.5 [1934] 74.9 86.5 88.9 84.8 70.4 [1935] 80.0 83.4 89.8 81.3 67.8 [1936] 80.8 80.3 79.1 78.9 69.1 [1937] 86.3 84.3 87.0 83.4 65.3 [1938] 78.6 65.4 62.0 57.8 49.3 [1939] 77.1 67.2 64.3 60.0 53.9 [1940] 78.6 71.4 69.7 65.3 59.3 Averages: 1936-1939 80.7 74.3 73.1 70.0 59.4 1922-1939 86.3 88.1 90.9 86.8 88.7 1926-1939 82.5 81.4 81.9 77.5 72.2 *69 The petitioner's average base period net income is not an inadequate standard of normal earnings because the industry of which it was a member was not depressed by reason of temporary economic events unusual in the case of that industry within the meaning of section 722 (b) (2) of the Internal Revenue Code. OPINION. Petitioner bases its claim for relief on section 722 (b) (2), Internal Revenue Code. This section is set forth in the margin. 1 To prevail under this section petitioner must show that its *159 average base period net income is an inadequate standard of normal earnings because its business was depressed or because the taxpayer's industry was depressed by reason of temporary economic events unusual in the industry. It must, also, by competent evidence, establish a fair and just constructive*70 average base period net income. Petitioner's contentions are that the temporary economic depression of the industry is evidenced by (1) the disparity between the price of cotton goods as compared with the price of all commodities during the base period years; (2) the oversupply of raw cotton during the base period years and its depressing effect upon the price of cotton goods during the base years; and (3) "the character of the circumstances under which the oversupply of raw cotton was created as it relates to section 722 (b) (2)." The Court is unable to distinguish between the last two contentions as the evidence relating to both contentions is the same. We have therefore considered them together. *71 Based on the Bureau of Labor Statistics, Wholesale Prices, the index of all commodities during the base period was 93.51 per cent of the 1922-1939 average while the price of cotton goods was 84.34 per cent of the 1922-1939 average, or a difference of 9.17 per cent. This small disparity is merely the ordinary fluctuation that can be found by examining the yearly index of prices of cotton as compared to other commodities. While being fully aware of the disparity of price between all commodities opposed to the price of raw cotton, it is nevertheless incumbent upon us to consider particularly the specific industry of which petitioner is a member, that is, the sheetings industry, Southern division. Regs. 112, sec. 35.722-2 (b) (8). 2 We compare the price of *160 middling cotton to the price of narrow sheetings. The average price per pound of middling cotton went from 15.57 cents for the 1922-1939 period to 10.19 cents for the base period, a decrease of 5.38 cents or 34.55 per cent; at the same time the price per pound of narrow sheetings went from 26.06 cents for 1926-1939 to 23.59 cents in the base period, a decrease of 2.47 cents or 9.47 per cent. In other words, the price*72 of middling cotton decreased 263 per cent more than the price of narrow sheetings. Thus, it can be seen that the price of finished sheetings is not proportionately based on the price of raw cotton and the crux of petitioner's major premise is not sustained. Further, the cost of raw cotton was 60 per cent of the price of narrow sheetings in the long period (1922-1939) whereas the cost of raw cotton represented only 43 per cent of the price of narrow sheetings in the base period. This would indicate the textile manufacturer can obtain a higher profit when raw cotton is selling at a lower price. *73 Petitioner further contends, as before stated, that the oversupply of raw cotton was unusual causing a decrease in the price of cotton goods and emphasizes the character of the circumstances under which the oversupply was created. Examination of Exhibit 8-H discloses a constant fluctuation in the production of commercial cotton during the 1922-1939 period. In 1922 production was 10,000,000 bales; by 1926, five years later, production was 18,000,000 bales; a decrease to 13,000,000 bales occurred in 1927; a rise to 16,800,000 bales in 1931; 1932 witnessed a drop to 13,000,000 bales; and 1934 a continuation of the downward trend to 9,500,000 bales. Production again rose to 18,400,000 bales in 1937 and dropped sharply to 11,600,000 bales in 1938. In Industrial Yarn Corporation, 16 T. C. 681, 689, we said: * * * It is not unusual for a cotton crop to vary in size from year to year. The fortuitous circumstances that 1937 may have produced a cotton crop of extraordinary size does not, of itself, create an abnormality in petitioner's business of the character sufficient to bring petitioner within the scope of the cited section. * * * It must be remembered*74 that petitioner is not a cotton grower. It is a manufacturer. The effect of the large cotton crop was to reduce the cost of cotton to petitioner but it did not reduce the necessary profit it had to maintain to keep in business. Its success depended on keeping its costs of production down. The price of the raw cotton was reduced by the large crop and the price of cotton cloth was in turn reduced but its mill margin during the base period was substantially maintained. The statements of petitioner's condition evidence the fact that it did not overstock during the base period. Petitioner's average base period inventory was $ 72,576 as against the 10-year average from July 31, 1931, to July 31, 1940, inclusive, of $ 72,814. In petitioner's fiscal year ended July 31, 1938, when petitioner claims *161 an abnormal crop, its inventory did not exceed its inventory for the two highest years, 1934 and 1935. For the base period years, ending July 31, 1937 to 1940, the average cost of goods sold was 79.50 per cent of sales as compared to the 1921-1936 average of 89.42 per cent of sales. The 1937-1940 average of 79.50 per cent is almost as low as the lowest year in the prior period, *75 namely, 1934 when the cost of goods sold was 79.14 per cent of sales. This shows petitioner had a higher gross profit and a lower cost of goods sold in the base period years which is contrary to petitioner's contention that its industry was depressed. The carry-over chart shows that of the abnormal crop more than half was being held by the United States Government and others. The petitioner was still buying in proportion to production capacity and was not bound by reason of the large crop of 1937 to buy more than it wanted. While considering cotton production, we should not fail to observe the increase in mill consumption which shows petitioner's industry was not depressed. At a time when the base period United States production increased 100,000 bales over the 1922-1935 average, the base period United States mill consumption increased 950,000 bales over the 1922-1935 average. Since petitioner is in the mill end of the industry, the above comparison shows a more favorable position for its phase of activity therein. Comparing the base period years to the long period of 1922-1939 we find mill consumption in 1936 was 125 per cent of the long period, 1937 was 91 per cent, 1938 was*76 108 per cent, 1939 was 122 per cent and the average base period consumption was 112 per cent of the long period. This further shows petitioner's advantageous position in the base period. Lastly, petitioner must show that because of the temporary depression its actual average base period net income is an inadequate standard of normal earnings. Petitioner has not done this. It has, in lieu thereof, treated the base period as being comprised of separate yearly units, proof of a depression in any one of which entitles it to relief under section 722 (b) (2). We must, as stated in Wadley Co., 17 T. C. 269, treat all of the base period years as a unit, for in that case we said "the base period is not to be divided into separate segments; it is a unitary period * * *." Examination of the income statements for petitioner shows average sales for the base period of $ 626,199 as against sales from January 1, 1921, to July 31, 1940, of $ 454,636, an increase of $ 171,563 or 37 per cent over the long period. At the same time average net income during the base period was $ 72,626 as against an average of $ 18,998 for the 18 7/12-year period from January 1, 1922*77 to July 31, 1940, an increase of $ 53,628 or 282 per cent over the long period average net income even after substantial increases in officers' salaries were allowed in a so called depressed period, the *162 1939 salaries paid to petitioner's officers being twice the 1926-1936 average. The increase in base period net income above noted is also true as to nine other Southern sheetings mills, whose net sales for the base period were 99.3 per cent of the 1922-1939 average and whose base period net profit was 151.56 per cent of the 1922-1939 average. The same profit picture can be viewed by comparing the manufacturing corporations other than cotton textile with the cotton textile corporations. By so doing we see that the base period average net profit of cotton textile corporations of $ 25,500,000 was 174 per cent greater than the average net profit for the period from 1922-1939 of $ 9,287,000 of the cotton textile corporations. At the same time the base period net profit for other manufacturing corporations was only 25.05 per cent greater than the net profit for the long period of 1922-1939. We have made a detailed examination of the many exhibits presented by petitioner but *78 fail to see that the effect of the large cotton crop in the year 1937 upon petitioner's industry resulted in the temporary economic depression of petitioner's business during the base period. U. S. Treasury Department Bulletin on Section 722 of the Internal Revenue Code (Nov. 1944), Part III, par. (B), p. 17. 3 *79 It is, therefore, our conclusion that petitioner has not established its right to relief under section 722 (b) (2), for it would be completely disregarding the facts to find petitioner's industry, the Southern sheetings mills, was depressed in the base period as compared to the average long term period 1922-1939. Foskett & Bishop Co., 16 T. C. 456; Winter Paper Stock Co., 14 T. C. 1312; Monarch Cap Screw & Manufacturing Co., 5 T. C. 1220; Fish Net & Twine Co., 8 T. C. 96. In view of the fact that petitioner has not proved its industry was depressed it is unnecessary to comment on petitioner's constructive average base period net income reconstruction. Reviewed by the Special Division. Decisions will be entered for the respondent. Footnotes 1. As of Nov. 30, 1933. Source: U. S. Dept. of Commerce, Bureau of Census, "Cotton Production and Distribution," Bulletin No. 182, 1944-1945, p. 52, and New York Cotton Exchange, "Cotton Yearbook," 1945-1946, pp. 48-49.↩ 1. Data not available. Source: Bureau of Internal Revenue, "Statistics of Income" and "Source Book of Statistics of Income."↩ 1. Includes processing tax of 4.0 cents per pound from Aug. 1933 to Dec. 1935. Source: U. S. Dept. of Agriculture, "Agricultural Statistics," 1935, p. 433, and "Prices of Cotton Cloth and Raw Cotton, and Mill Margins for Certain Constructions of Unfinished Cloth," September 1937, p. 23, and January 1947, Table 19.↩ 1. Processing tax of 4.0 cents per pound on cotton is not reflected in above indexes of cotton prices from August 1933 to December 1935. With the processing tax included, the cotton price indexes are as follows: Year average 1926 = 100 [1933] 59.4 [1934] 93.1 [1935] 90.9 1922-1939 91.8 1926-1939 76.2 Source: Bureau of Labor Statistics, "Wholesale Prices," annual bulletins.↩ 1. SEC. 722. GENERAL RELIEF -- CONSTRUCTIVE AVERAGE BASE PERIOD NET INCOME. * * * * (b) Taxpayers Using Average Earnings Method. -- The tax computed under this subchapter (without the benefit of this section) shall be considered to be excessive and discriminatory in the case of a taxpayer entitled to use the excess profits credit based on income pursuant to section 713, if its average base period net income is an inadequate standard of normal earnings because -- * * * * (2) the business of the taxpayer was depressed in the base period because of temporary economic circumstances unusual in the case of such taxpayer or because of the fact that an industry of which such taxpayer was a member was depressed by reason of temporary economic events unusual in the case of such industry, * * * *↩ 2. SEC. 35.722-2. CONSTRUCTIVE AVERAGE BASE PERIOD NET INCOME. -- * * * * (b) Rules for determination. * * * * (8) For the purposes of section 722 and of section 35.722-3 (b) and (c), no exclusive definition of the concept "industry" can be constructed. In general an industry may be said to include a group of enterprises engaged in producing or marketing the same or similar products or services under analogous conditions which are essentially different from those encountered by other enterprises. The mere similarity of product and marketing methods, however, is not enough of itself to comprehend taxpayers satisfying such conditions within the same industry. Factors such as geographical location, character and location of markets, availability and character of raw material supply, and other conditions under which operations are carried on must be considered. Regard may be had to trade custom and practice in determining whether a group of enterprises constitutes an industry. * * * *↩ 3. (B) Scope of Section 722 (b) (2). Since the economic circumstances giving rise to relief must be temporary and unusual, it is important that the taxpayer furnish evidence concerning the exact nature of the circumstances alleged. It is not sufficient that the taxpayer merely show a depression during the base period by comparing its earnings during this period with earnings in a prior period, accompanied by general allegations concerning hard times or unfortunate conditions. It is expected that for all industries and all taxpayers there will be fluctuations from year to year in their earnings experience. Such fluctuations are perfectly normal, and in fact occurred in the experience of corporations generally during the base period. The year 1938 was in general a year of poor profits, and it would be improper under section 722 (b) (2) to grant relief due to that fact. In some particular industries one or more of the other years of the base period were depressed because of usual and recurring circumstances. Thus, it is necessary that the circumstances alleged under section 722 (b) (2)↩ be identified specifically as to character, causes, extent and severity, and that positive evidence be presented to show that they were both peculiar and temporary.