Pelton & Crane Co. v. Commissioner

The Pelton and Crane Company, Petitioner, v. Commissioner of Internal Revenue, Respondent Pelton & Crane Co. v. Commissioner Docket No. 31575 United States Tax Court 20 T.C. 967; 1953 U.S. Tax Ct. LEXIS 71; September 10, 1953, Promulgated *71 Decision will be entered for the respondent. 1. Petitioner, a manufacturer of dental and surgical equipment, filed claims for relief under section 722 (a), (b) (1) and ( 4), Internal Revenue Code. During the base period petitioner had one 10-day strike, three 4-day strikes and occasional "slowdowns." Held, the strikes and "slowdowns" did not cause petitioner's average base period net income to be an inadequate standard of normal earnings within the meaning of section 722 (b) (1). 2. Petitioner placed the E & O light on the market in 1939. Held, the E & O light was not a different product within the meaning of section 722 (b) (4). Samuel E. Gawne, Esq., and J. Donald McLeod, Esq., for the petitioner. Edward E. Pigg, Esq., for the respondent. Withey, Judge. WITHEY *968 The respondent denied the petitioner's*72 applications for relief and claims for refund from excess profits taxes under section 722 (b) (1) and (b) ( 4) of the Internal Revenue Code for the years 1941, 1942, 1943, and 1944. The sole issue is whether the respondent erred in such action. FINDINGS OF FACT. Facts stipulated are so found and incorporated herein by reference. The petitioner is a corporation organized in 1910 under the laws of the State of Michigan. At all times material hereto its books were kept on a calendar year basis using the accrual method of accounting. Its principal office and place of business was at 632 Harper Avenue, Detroit 2, Michigan. Returns for the years here involved were filed with the collector of internal revenue for the district of Michigan. Applications for relief under section 722 of the Internal Revenue Code were filed on Form 991 for the following years in the following amounts: Year Date filed Refund claimed [1941] Sept. 15, 1943 $ 783.19 [1942] Sept. 15, 1943 31,644.10 [1943] Nov. 29, 1946 38,374.53 [1944] Nov. 29, 1946 8,304.05 Additional claims for refund on Form 843 were filed for the year 1942 in the following amounts: Date filed Refund claimed May 10, 1944 $ 63,634.69 June 13, 1945 63,634.69 *73 Petitioner has duly claimed refunds of all excess profits taxes for 1941, 1942, 1943, and 1944. No claim was filed with respondent requesting a carry-over of an unused excess profits credit based on a constructive average base period net income for the year 1940. The first reference to such credit was made in a requested recomputation to be used after application of section 722 contained in a supplementary memorandum dated August 15, 1947, and filed with the internal revenue agent in charge in Detroit, Michigan. Petitioner has been engaged continuously since 1900 in the manufacture and sale of dental and surgical equipment. During the years pertinent, its principal products have been sterilizers, lights, compressors, dental lathes, and cuspidors. Each of these lines consisted of a number of different models, totaling in all 25 to 30 models. Petitioner manufactured almost all parts going into its finished products. Three to four thousand production parts were being handled at all times. It had many departments for a small company: A general machine shop; screw machine shop; automatic department; welding department; polishing, buffing, and plating department; *969 sheet metal*74 department; press department; two assembly departments; stock control department; shipping department; repair and service department; and engineering, tool, and die department. The employees of each department physically moved the work in process to the department next in the production sequence. The company had no conveyer system as is known in a mass production shop. Petitioner had a production cycle based on the calendar month. The first 2 weeks of a month were devoted primarily to sub-assemblies and the last 2 weeks to final assemblies. It was the policy of the company to ship all finished products at the end of each month. Except for 1936 and the first quarter of 1937, petitioner had no inventory of finished goods during the base period. Petitioner sold its products through some 600 dealers. Dental and surgical equipment was of two types: heavy equipment, such as dental chairs and X-rays, and small equipment, such as the equipment manufactured by petitioner. Approximately 60 per cent of petitioner's volume was for dentists and 40 per cent for physicians. Sales of petitioner's equipment by its dealers were approximately 25 per cent to graduating dentists and interns and*75 75 per cent to practicing physicians and dentists. Sales to practicing dentists and physicians were for replacement and modernization. Sales to the graduating dentists or interns consisted of the items necessary to open an office. Petitioner and its competitors endeavored to reach their market through salesmen who called on dealers; through advertising; and through physical exhibits at dental colleges and at meetings of interns. Exhibits at the dental colleges and interns' meetings occurred during the months of February through May. Dealers made sales to graduating dentists and interns during the months of May, June, and July and made delivery on the date, usually in June, July, and August, or September, when the purchasers opened their offices. Delivery on the promised date was very important to the student and dealer; to the student because he had planned and announced that his office would be opened on a named date; to the dealer in order to initiate good business relationships, looking toward the acquisition in each case of a lifelong customer. In addition to the sale of new equipment, petitioner repaired its products forwarded to it by dealers. It also sold repair parts*76 to dealers for repair of equipment in the field. Its policy, particularly in the case of sterilizers, was to make the repairs and to ship the item on the day it was received. Petitioner constantly made technical improvements in its products. Dealer demand and improvements by competitors necessitated a more or less continual abandonment or modification of old products. None of petitioner's products or the competitive products of other companies were patented. The dental and surgical supply industry was highly competitive. *970 The following is a table showing the units sold by petitioner for the years 1927 to 1939, inclusive: Units sold by The Pelton and Crane Company, 1927-1939 [1933] Sterilizers: [211] 2,442 2,706 3,363 2,674 2,154 1,063 1,178 [764] 1,056 1,305 1,307 [854] 1,113 1,057 [949] 1,040 1,071 [11] 2 1/2 [208] A 11 A 14 A 16 Special Total sterilizers 4,425 4,939 5,873 5,170 4,843 3,851 3,977 Auto claves: HP137 (2) [46] FL Total auto claves [46] Cabinets and stands: Tubular stands [199] Ward (2) [100] 51DX (2) [529] 81DX (2) 91DX (2) Surgical (2) [10] Clinic [927] 1,275 1,430 1,039 [193] Simplex (2) [143] Hospital (2) 61A [140] Total cabinets and stands 1,455 1,880 1,983 1,565 1,522 1,373 1,174 Lights: General illuminators: Clusters: Wall 1,217 1,544 2,119 1,166 [423] Unit (2) [563] 1,025 [240] Equalite Flood: Unit Wall Ceiling Stand Utility Spot Type: Localite: Unit Wall Stand Oralite: Unit Wall E & O: Surgery Dental Total lights 1,217 2,107 3,144 1,817 1,338 [663] Other products: Syringe [140] Lathe [72] Cut off (2) [176] Compressor [263] Dental cuspidor [27] Surgical cuspidor [181] Total other products 1,866 2,075 2,661 2,566 1,546 [869] *77 Units sold by The Pelton and Crane Company, 1927-1939 [1939] Sterilizers: [211] 1,178 [214] 1,288 1,725 1,817 [960] 1,014 [22] (1) (1) 2 1/2 [6] (1) [208] (2) [744] A 11 (2) [74] A 14 (2) [123] A 16 (2) [317] Special (2) [515] Total sterilizers 4,015 4,274 4,369 3,201 2,536 3,239 Auto claves: HP137 [64] FL (2) [227] Total auto claves [291] Cabinets and stands: Tubular stands [177] Ward [111] 51DX [6] (1) 81DX [131] (1) (1) 91DX [37] (1) Surgical [3] (1) (1) Clinic [19] (1) (1) (1) Simplex [11] (1) (1) (1) Hospital [13] (1) (1) (1) 61A (2) [51] (2) [81] (2) [140] (2) [438] Total cabinets and stands 1,156 1,374 1,503 1,314 1,611 1,212 Lights: General illuminators: Clusters: Wall [98] (1) Unit [163] Equalite (2) [2] Flood: Unit (2) [5] (1) (1) Wall (2) [39] (1) (1) Ceiling (2) [12] (1) (1) Stand (2) [62] (1) (1) Utility (2) [336] Spot Type: Localite: Unit (2) 3,458 2,075 [231] Wall (2) [16] Stand (2) [13] Oralite: Unit (2) [505] Wall (2) [20] E & O: Surgery (2) [61] Dental (2) [93] Total lights [763] 1,395 4,777 3,210 [572] 1,414 Other products: Syringe [98] Lathe [157] Cut off [61] Compressor [550] Dental cuspidor [10] Surgical cuspidor [244] Total other products 1,168 1,415 1,120 [634] 1,120 *78 *971 By products, petitioner's sales for the period 1936 through 1939 were as follows: [1939] Sterilizers $ 192,892 $ 181,286 $ 161,387 $ 170,798 Lights 113,511 87,157 18,508 46,253 Repairs and replacement 14,288 20,442 38,460 27,791 Others 49,212 35,234 23,048 58,444 Total $ 369,903 $ 324,119 $ 241,403 $ 303,286 The cost of goods sold for the 14-year period, 1922 to 1935, inclusive, was 63 per cent of the selling price of the goods sold. The cost of goods sold during the base period, 1936 to 1939, inclusive, was 64 per cent of the selling price of the goods sold. The unionization of petitioner's employees began in the fall of 1936 and was completed in early 1937. Petitioner experienced a 10-day sitdown strike in May 1937, during which period the plant ceased manufacturing operations. No vacation was given employees that year. Sitdown strikes of 4 days' duration also occurred in petitioner's plant in September 1937, September 1938, and November 1938. During these strikes plant operation ceased entirely. No orders for petitioner's products were refused or rejected during the strike *79 periods however. Contracts were signed with the United Auto Workers of America, Local 157, in March 1937 and April 1937 and on May 24, 1937, November 1, 1938, and November 1, 1939. Petitioner also experienced occasional "slowdowns" during the period from May 1937 to November 1939 as the automotive industry became unionized. The term "slowdown" is herein used to denote a concerted and deliberate slackening of the normal speed of production on the part of petitioner's employees. When employees were found to be slowing down they were sent home at once. Petitioner's foremen were normally working foremen who performed the ordinary work of the plant in addition to their supervisory tasks. The foremen were not members of the union. During the base period petitioner's peak employment was approximately 85 to 90 employees. During 1935 it averaged approximately 60 persons, during 1936 approximately 75, and during the last quarter of 1936 and first quarter of 1937 employment ranged between 80 and 90. Petitioner's wage rates were not as high as those of the automotive industry in Detroit with which it was in competition for the labor supply. The average annual labor turnover in the automobile*80 and body industry during the years 1936 through 1939 was 86 per 100 employees. From the middle of 1936 through 1939, petitioner experienced *972 a labor turnover of 132 people, with an average number of employees during the base period of approximately 65, or an average annual labor turnover of approximately 62 per 100 employees. One of the main divisions of petitioner's business was the manufacture of lights for use in dental offices. In 1927 petitioner was manufacturing the Cluster light. The Cluster light consisted of four 75-watt blue lamp units on a ball joint which permitted instant tilting in any direction without rotation. The Cluster unit could be attached to the wall of the dentist's office or could be attached to standard makes of dental equipment units. The ball joint on the bracket permitted the light to be adjusted to illuminate the oral cavity and also the adjacent area and equipment. In 1935 petitioner introduced the Flood light which was designed for general illumination. It was made in three styles: one for a stand, one to be attached to the wall, and another to be attached to the ceiling. In April 1936 petitioner sold the first Localite. The Localite*81 was 4 inches in diameter and was made by use of the same tools as a Packard automobile taillight. It was of low voltage (6 to 9 volts), transformed from 110 volts. On the back of the light a means of adjustment was provided whereby a single-beam spot could be concentrated in the oral cavity. It was 400 candlepower and unlike other lights then on the market its use was not accompanied by heat or glare. This was another technical improvement in the field of dental lighting which petitioner was required to make. In 1937 petitioner introduced Equalite to the dental lighting industry. This was a shade that attached to any make of Cluster light, using conventional glass globes. It was all metal, air cooled, and easily washed. The shade eliminated all glare in the dentist's eyes while actually doubling light volume on the operating zone. Petitioner also introduced a Utility light in the latter part of 1938. It was suited for examinations, obstetrics, minor surgery, and use by dermatologists. It provided more than 100-foot candles of shadowless, "color-corrected" light without heat or glare and used a standard 100-watt daylight blue bulb in conjunction with the Equalite shade. After*82 the Localite was in service for awhile the petitioner received suggestions from customers that the light should have more intensity. The petitioner in 1939 brought out the Oralite which had been in development since 1937. This was a modification of the Localite and had 1,000 candlepower compared to Localite's 400 candlepower. It was also a low voltage light. Its reflector was the same as a Dodge automobile headlight, being 8 inches in diameter. Its heat-absorbing lens filtered all heat from the light beam and produced a "cold-corrected" *973 light. The Oralite was not successful because the surge of current caused by X-ray machines blew out the bulb. The defect was never cured. Wilmot-Castle Company of Rochester, New York, one of petitioner's competitors, came out with a Tru-Vision light in July 1937. The introduction of this light into the dental lighting field put Wilmot-Castle in control of this line of the business. Petitioner's sales of Localites and Clusters had fallen off substantially. Petitioner had tried to develop a larger and more powerful Localite by proceeding on the low voltage theory when it brought out the Oralite, but Oralite was a failure. Petitioner*83 then abandoned plans for modernizing the Localite and Oralite and copied the Tru-Vision light in 1939. Petitioner's new light was called the E & O light, meaning examining and operating light. The only difference between Tru-Vision and E & O light is that Tru-Vision was a light with a rigid arm and petitioner's light had a flexible arm. Tru-Vision was a general illuminator. The E & O light had a lens diameter of 12 5/8 inches. It was a high voltage light of 110 volts, with no transformer, and producing 1,000 candlepower. It threw a rectangular double beam of light. The E & O light was color correcting and heat absorbing. One of the light beams could be blocked out and the dentist would still have ample light in the oral cavity. The Tru-Vision light and the E & O light were so similar that the average layman could not tell the lamps apart. Petitioner's excess profits net income, computed for each of the base years 1936 through 1939, was as follows: [1936] $ 18,034.16 [1937] 9,478.76 1938 (loss) (3,516.03) [1939] 1,457.69 Total $ 25,454.58 Petitioner's actual average base period net income was $ 6,364, but when determined under the deficit rule was $ 7,243, and*84 when determined under section 713 (e) was $ 9,053. Petitioner's excess profits credits computed under the invested capital method without the benefit of section 722 were as follows: [1941] $ 10,693.89 [1942] 10,855.63 [1943] 11,476.51 [1944] 13,893.52 Petitioner's average base period net income was not an inadequate standard of normal earnings. *974 OPINION. Section 722 (b) (1). Unusual Event. Petitioner bases its claim for relief on section 722 (a), 1*85 (b) (1), 2(2), and ( 4) of the Internal Revenue Code. We have stated in D. L. Auld Co., 17 T. C. 1199, and Triangle Raincoat Co., 19 T. C. 548, that strikes are the type of events coming within the ambit of subsection (b) (1). Respondent concedes that petitioner experienced a 10-day strike in May 1937 but contends that the mere fact of a strike does not of itself entitle petitioner to relief. In order to qualify for the use of a constructive average base period net income in the computation of its excess profits credit petitioner must show that as a result of the strikes and "slowdowns" its base*86 period net income was depressed to the extent that its average base period net income was an inadequate standard of normal earnings. Triangle Raincoat Co., supra. Petitioner contends that the strikes and "slowdowns" damaged its manufacturing operations by causing a heavy labor turnover, thus increasing labor costs and decreasing its sales. Petitioner has not shown that its labor turnover was unusually large. On the contrary, petitioner fared much better than its competitor, the automotive industry, for the labor supply. It had a labor turnover during the base period of 62 per 100 employees as against a yearly average of 86 per 100 employees for the automobile and body industry. There is no showing here that its labor turnover was unusual in its experience. It is equally as possible that such turnover as it did experience was attributable as much to its low wage scale as to the strikes and *975 "slowdowns." We are unable to determine the cause because of the lack of any showing as to petitioner's experience in that regard prior to the base period. In regard to petitioner's increased labor costs, we find that its cost of goods sold for the base*87 period was 64 per cent of its sales while its cost of goods sold for the 14-year period, 1922 to 1935, inclusive, was 63 per cent of sales. An increase of 1 per cent in cost of goods sold hardly sustains petitioner's contention that its labor turnover thereby caused a serious decrease in its average base period net income. Examination of the entire record does not indicate a serious interruption or diminution of production or operations because of the strikes or the occasional "slowdowns." We note that petitioner had an average of 75 employees in 1936, which year petitioner concedes was a normal year. For the first 8 months of 1937 the average number of employees continued to be 75. During the last 4 months of 1937 the number of employees dropped to 60. During 1938 the number of employees averaged about 52 during the whole year. In 1939 the average increased to 60 towards the last half of the year. A comparison of the number of employees with the sales of products during the base period discloses that as the sales of lights decreased in 1937, 1938, and 1939 the number of employees also decreased. It is obvious that petitioner had to decrease the number of employees when the*88 demand for its lights was sharply decreased. The only conclusion that can be reached is that petitioner lost its competitive position in the dental light field because of its refusal to modernize its Cluster light which was one of its established products and had been in the words of its treasurer and manager a "world-beater." In 1935 at its autumn sales conference, it was decided that petitioner should take advantage of the ground work laid in the past years for the Cluster light and adhere strictly to the cluster type, even though in 1935 one of its competitors, Ritter Dental Manufacturing Company, had placed on the market the Ritter Dualite. The petitioner's position at that time was that sales of the Ritter Dualite had not been too successful, it served no specific dental need, and dentists were getting their investment out of the light by using it for general illumination, and since the Cluster light served the same purpose it was not necessary to make any improvements in its product. In July of 1937 Wilmot-Castle introduced to the market its Tru-Vision light which was an immediate success. The effect of this light on petitioner's light sales was readily noticeable in 1938*89 and 1939 when its sales of lights were $ 18,000 and $ 46,000, respectively, as compared to 1936 when its sales were $ 113,000. At the same time its sales of sterilizers, compressors, dental lathes, and cuspidors and income from repairs and replacements varied but slightly from its normal year of *976 1936. Its total sales for all products except its dental lights during the base period years were as follows: [1936] $ 256,392 [1937] 236,962 [1938] 222,895 [1939] 257,033 Its total sales of dental lights for the base period years were as follows: [1936] $ 113,511 [1937] 87,157 [1938] 18,508 [1939] 46,253 Petitioner's contention that the strikes and "slowdowns" were the reasons for its drop in net income is not borne out by the above comparison. The fact is that its refusal to modernize and improve its lights as its competitors had done was the cause of its decreased income. Section 722 (b) (2). Temporary Economic Circumstances. The petitioner also requested relief under section 722 (b) (2) in its petition and its brief. This ground for relief was not requested by petitioner in its original application filed with the respondent. This Court has clearly*90 indicated in its prior decisions that it will not consider grounds for relief or supporting facts unless they have been presented to the Commissioner for his consideration prior to the rejection of the applications and claims. Hummel & Downing Co., 19 T. C. 61; Blum Folding Paper Box Co., 4 T. C. 795; Monarch Cap Screw & Mfg. Co., 5 T. C. 1220; Alexandria Amusement Corporation, 16 T. C. 446; and Wadley Co., 17 T. C. 269. It does not appear in this case that petitioner amended its application to include a claim for section 722 (b) (2) relief prior to the denial of the claim by the Commissioner. We, therefore, cannot give consideration to the section 722 (b) (2) ground for relief. Section 722 (b) (4). Change in Character of Business. 3 *91 The second ground for relief in this proceeding is based on section 722 (b) (4). The petitioner's contention is that section 722 (b) (4)*977 applies because petitioner changed the character of its business during the base period by introducing the E & O light, which represented a difference in the products furnished and therefore the average base period net income does not reflect the normal operation for the base period which would have been reached had the change in the character of the business taken place 2 years before it did. A change in character includes a difference in the products. Did the introduction of the E & O light constitute a difference in products furnished by petitioner? The record shows that petitioner had manufactured dental lights throughout its existence. Its first light was the Cluster light which had a ball joint permitting the dentist to tilt the light in various positions to illuminate the oral cavity. Through the years petitioner had introduced new models and made various modifications to its lights. It made and sold the Flood light in 1935, Localite in 1936, Equalite in 1937, the Utility light late in 1938, Oralite in 1939, and E & O light*92 in 1939. These were merely technological changes necessitated by changes competitors had made in their lights. The Cluster light had been the principal light used by dentists and surgeons for operating until it was outmoded. The E & O light was simply an improvement. Such changes were necessary if petitioner was to maintain its standing in the dental light market. The test of whether a different product has been introduced requires something more than a routine change customarily made by businesses. A change in character must be substantial. See East Texas Theatres, Inc., 19 T. C. 615, and Jefferson Amusement Co., 18 T. C. 44, where motion picture houses started selling candy and popcorn; and Lamar Creamery Co., 8 T. C. 928, where the petitioner began manufacturing and selling ice cream mix. These cases demonstrate the marked "difference in the products * * * furnished" which entitles the taxpayer to relief under section 722 (b) (4). The product here involved does not represent the requisite "difference" for relief under this section; it did not change the character of petitioner's*93 business; it did not affect the type of customers solicited, open new markets, change sales policies, or affect manufacturing. Triangle Raincoat Co., supra;Stonhard Co., 13 T. C. 790. See also respondent's Bulletin on Section 722, at page 52. *978 Petitioner's record of units sold shows that it was continually modifying its products and bringing out new models. From 1936 through 1939 sixteen items were discontinued and fourteen took their places. The record does not disclose any sales of petitioner's wall Cluster light in 1939; it is disclosed that Flood lights were discontinued in 1938. These facts indicate that the new E & O light was merely a needed modification and improvement of petitioner's other lights. This case is similar in principle to Avey Drilling Machine Co., 16 T. C. 1281, where we stated: We think the evidence does not justify a conclusion that Avey "changed the character of the business" within the intent of the statute by reason of the invention and development of its new model machines. Avey, and other members of the machine tool industry, found it necessary to survival*94 in business to do research and development to keep up with the demands of their customers and the improved products of their competitors. Avey's customers were demanding machines of greater spindle speed and Avey's development of improved machines was necessary to prevent loss of its business to competitors who were at the same time improving their machines to meet the same customer demand. The changes, we think, cannot be characterized as more than improvements. Avey was in the business of building precision drilling machines used to drill small holes in metal. The new machines served the same purpose as the old and, generally, were sold to customers in the same industries as before. A change in character, within the intent of the statute, must be a substantial departure from the preexisting nature of the business. * * * Every business is constantly required to produce better services and modify its products to maintain its sales, but the statute does not contemplate granting relief on the basis of such changes. Stonhard Co., supra. A consideration of the entire record does not warrant a finding that petitioner introduced such a substantially*95 different product as to constitute a change in the character of its business for the purposes of section 722 (b) (4). We conclude from all the evidence that petitioner's excess profits taxes, computed without the benefit of section 722, are not excessive and discriminatory and that petitioner has not established a right to relief under section 722. In view of the fact that petitioner has not established that it qualifies for relief under section 722 (b) (1) and (4), it is unnecessary to consider its method of reconstructing average base period net income. Reviewed by the Special Division. Decision will be entered for the respondent. Footnotes 2. New.↩ 1. Discontinued.↩ 1. SEC. 722. GENERAL RELIEF -- CONSTRUCTIVE AVERAGE BASE PERIOD NET INCOME. (a) General Rule. -- In any case in which the taxpayer establishes that the tax computed under this subchapter (without the benefit of this section) results in an excessive and discriminatory tax and establishes what would be a fair and just amount representing normal earnings to be used as a constructive average base period net income for the purposes of an excess profits tax based upon comparison of normal earnings and earnings during an excess profits tax period, the tax shall be determined by using such constructive average base period net income in lieu of the average base period net income otherwise determined under this subchapter. * * *↩ 2. SEC. 722. GENERAL RELIEF -- CONSTRUCTIVE AVERAGE BASE PERIOD NET INCOME. (b) Taxpayers Using Average Earnings Method. -- The tax computed under this subchapter (without the benefit of this section) shall be considered to be excessive and discriminatory in the case of a taxpayer entitled to use the excess profits credit based on income pursuant to section 713, if its average base period net income is an inadequate standard of normal earnings because -- (1) in one or more taxable years in the base period normal production, output, or operation was interrupted or diminished because of the occurrence, either immediately prior to, or during the base period, of events unusual and peculiar in the experience of such taxpayer,↩ 3. SEC. 722. GENERAL RELIEF -- CONSTRUCTIVE AVERAGE BASE PERIOD NET INCOME. (b) Taxpayers Using Average Earnings Method. -- The tax computed under this subchapter (without the benefit of this section) shall be considered to be excessive and discriminatory in the case of a taxpayer entitled to use the excess profits credit based on income pursuant to section 713, if its average base period net income is an inadequate standard of normal earnings because -- * * * * (4) the taxpayer, either during or immediately prior to the base period, commenced business or changed the character of the business and the average base period net income does not reflect the normal operation for the entire base period of the business. If the business of the taxpayer did not reach, by the end of the base period, the earning level which it would have reached if the taxpayer had commenced business or made the change in the character of the business two years before it did so, it shall be deemed to have commenced the business or made the change at such earlier time. For the purpose of this subparagraph, the term "change in the character of the business" includes a change in the operation or management of the business, a difference in the products or services furnished, * * *↩