Edgewater Steel Co. v. Commissioner

Edgewater Steel Company, Petitioner, v. Commissioner of Internal Revenue, Respondent Edgewater Steel Co. v. Commissioner Docket Nos. 10763, 10764 United States Tax Court 23 T.C. 613; 1955 U.S. Tax Ct. LEXIS 272; January 11, 1955, Filed *272 Decisions will be entered under Rule 50. 1. Petitioner has not shown that its excess profits taxes computed without the benefit of section 722, Internal Revenue Code of 1939, were excessive and discriminatory because of qualifying factors found in section 722 (b) (2) and (4), Internal Revenue Code of 1939. 2. No deficiencies having been determined for 1940 and 1941, we have no jurisdiction to enter a decision for refunds for such years due to standard issue adjustments pursuant to section 711 (b) (1) (J), Internal Revenue Code of 1939. 3. The respondent concedes that the petitioner is entitled to a refund in excess profits tax for the year 1942 in an amount to be computed under Rule 50, pursuant to stipulation of the parties. Lee W. Eckels, Esq., for the petitioner. A. W. Dickinson, Esq., for the respondent. LeMire, Judge. LEMIRE *614 These proceedings were consolidated for trial. The issues presented are (1) whether the petitioner's applications for relief from excess profits taxes for the years 1940, 1941, and 1942 were properly denied, and (2) whether, and to what extent, overpayments claimed for the years 1940, 1941, and 1942, under section 711 (b) (1) (J), are barred by the limitations *273 of section 322 of the Code. FINDINGS OF FACT. The stipulated facts are found accordingly. The petitioner is a Pennsylvania corporation and has its principal office and place of business at Oakmont, Allegheny County, Pennsylvania. The petitioner filed timely applications for relief under section 722 (b) (2) and (4) for the taxable years 1940 to 1942, inclusive, with the collector of internal revenue for the twenty-third district of Pennsylvania, at Pittsburgh. On November 17, 1948, it filed amended claims for relief for the years and in the amounts as follows: [1940] $ 148,379.68 [1941] 670,152.28 [1942] 1 228,826.98 After its incorporation in 1916, petitioner established a plant at Oakmont, Pennsylvania, for the manufacture of rolled steel tires and wheels for railroad locomotives and cars. However, from 1916 to 1919, petitioner produced only ordnance materials for the United States Government. In 1919 petitioner commenced production of railroad equipment and from 1919 to 1928, inclusive, over 90 per cent of its sales consisted of tires and wheels for railroads which were manufactured on its big mill. In 1927 petitioner *274 installed its small mill No. 1 for the production of ring springs and draft gears and in 1929 it installed its small mill No. 2. The ring spring manufactured on small mills Nos. 1 and 2 is the basic component of draft gears used in the railroad industry. Practically all draft gears manufactured during the base period were sold to the railroad industry. Sales of petitioner's products to the railroad industry prior to and during the base period were virtually all for maintenance or secondary use as contrasted to original equipment. At the beginning of the base period the petitioner's plant consisted of the big mill on which were produced railroad tires and wheels and steel rings weighing 250 pounds or over, and small mills Nos. 1 and 2, on which were produced steel rings ranging up to 60 pounds. Prior to *615 1937 petitioner's plant contained no equipment specifically designed to produce steel rings in a weight range of from 60 to 250 pounds. Steel rings of intermediate ranges were manufactured prior to 1937 on the big and small mills Nos. 1 and 2, but such manufacture was solely for the accommodation of regular customers and was not economical. Petitioner's average base period net income *275 for each of the taxable years 1940, 1941, and 1942, without application of section 722, and without adjustment under section 711 (b) (1) (J) of the Code, was as follows: Average base period Year net income [1940] $ 610,739.05 [1941] 722,768.89 [1942] 903,461.11 The following schedule shows the petitioner's net income and net sales for the period 1922 to 1939, inclusive: Year Net sales Net income [1922] $ 2,302,592 $ 189,359 [1923] 3,797,186 553,151 [1924] 2,990,055 464,553 [1925] 2,980,655 703,561 [1926] 3,758,447 1,028,687 [1927] 3,028,180 725,807 [1928] 3,195,671 794,119 [1929] 3,949,346 1,205,738 [1930] 3,478,509 893,325 [1931] 2,422,961 523,586 [1932] 1,724,531 331,501 [1933] 2,353,265 707,945 [1934] 2,579,972 608,086 [1935] 3,004,691 645,173 [1936] 4,187,973 1,038,446 [1937] 5,324,484 1,033,672 [1938] 2,287,680 13,483 [1939] 4,202,501 887,256 Average net income for various periods was as follows: Period Amount 1922-1935 $ 669,614 1925-1939 742,692 1930-1939 668,247 1922-1939 685,969 1936-1939 743,214 The following schedule shows petitioner's total sales apportioned between sales to the railroad industry and sales to others than members of the railroad industry: *616 Sales to Sales to Year railroad other than Total sales industry railroads [1922] $ 2,233,362 $ 69,230 $ 2,302,592 [1923] 3,731,504 65,682 3,797,186 [1924] 2,917,337 72,718 2,990,055 [1925] 2,886,464 94,191 2,980,655 [1926] 3,568,000 190,447 3,758,447 [1927] 2,752,762 275,418 3,028,180 [1928] 2,728,888 466,783 3,195,671 [1929] 3,213,731 735,615 3,949,346 [1930] 2,697,091 781,418 3,478,509 [1931] 1,913,964 508,997 2,422,961 [1932] 1,528,540 195,991 1,724,531 [1933] 2,014,942 338,323 2,353,265 [1934] 1,902,918 677,054 2,579,972 [1935] 1,991,693 1,012,998 3,004,691 [1936] 2,902,526 1,285,447 4,187,973 [1937] 3,087,781 2,236,703 1*276 5,324,484 [1938] 1,571,556 716,124 2,287,680 [1939] 2,879,472 1,323,029 4,202,501 Averages for Various Periods Periods Total Sales Sales to Sales to railroads others 1922-1935 $ 2,969,004 $ 2,577,228 $ 391,776 1922-1939 3,198,261 2,584,585 613,676 1936-1939 4,000,660 2,610,334 1,390,326 The following schedule shows the apportionment of petitioner's gross profits on sales between sales to the railroad industry and to others than members of the railroad industry: Year Railroad Non-railroad Total [1922] $ 806,487 $ 25,078 $ 831,565 [1923] 1,260,865 21,359 1,282,224 [1924] 1,040,160 29,664 1,069,824 [1925] 1,231,889 42,550 1,274,439 [1926] 1,576,838 87,011 1,663,849 [1927] 1,174,993 75,988 1,250,981 [1928] 1,162,792 140,242 1,303,034 [1929] 1,486,971 244,580 1,731,551 [1930] 1,229,436 221,112 1,450,458 [1931] 888,336 160,386 1,048,722 [1932] 720,487 27,289 747,776 [1933] 999,870 89,245 1,089,115 [1934] 835,076 170,998 1,006,074 [1935] 871,331 300,229 1,171,560 [1936] 1,237,893 402,048 1,639,941 [1937] 1,247,774 625,325 1,873,099 [1938] 520,548 93,832 614,380 [1939] 1,188,286 446,275 1,634,561 The average for total sales for various periods is as follows: Period Average total sales 1922-1935 $ 1,208,662 1922-1939 1,260,180 1936-1939 1,440,495 *617 The petitioner's average gross profit on sales to the railroad industry and sales to non-railroad industry for various periods *277 was as follows: Period Railroads Non-railroads 1922-1935 $ 1,091,824 $ 116,838 1922-1939 1,082,224 177,956 1936-1939 1,048,625 391,870 The total annual tonnage for all products, including the sale of ingots to Japan in 1937, sold by petitioner during the period 1922 to 1939, inclusive, was as follows: Total Year tons sold [1922] 23,813 [1923] 36,920 [1924] 30,412 [1925] 29,163 [1926] 36,828 [1927] 29,030 [1928] 29,912 [1929] 35,520 [1930] 30,055 [1931] 21,196 [1932] 16,557 [1933] 22,324 [1934] 24,886 [1935] 25,213 [1936] 33,935 [1937] 48,749 [1938] 17,010 [1939] 31,570 The average of tons sold for various periods was as follows: Period Tons 1922-1935 27,988 1922-1939 29,061 1936-1939 32,816 The petitioner's average sales price, gross profit, and net profit per ton, including sales of ingots to Japan in 1937, for various periods were as follows: Period Sales price Gross profit Net profit 1922-1935 $ 106.08 $ 43.18 $ 23.92 1922-1939 110.05 43.36 23.60 1936-1939 121.91 43.90 22.65 If the sales of ingots to Japan in 1937 be excluded the difference in result would be as follows: Period Sales price Gross profit Net profit 922-1939 $ 111.63 $ 44.11 $ 24.12 936-1939 129.75 47.12 24.70 The following table shows petitioner's capital stock, surplus, and net worth for each of the years 1922 to 1939, inclusive: *618 End of year Capital Surplus Net worth stock [1921] $ 2,106,300 $ 79,558.40 $ 2,185,858.40 [1922] 2,313,600 113,185.46 2,426,785.46 [1923] 2,357,500 435,322.61 2,792,822.61 [1924] 2,357,500 696,494.01 3,053,994.01 [1925] 4,715,000 777,432.83 5,492,432.83 [1926] 4,715,000 1,379,893.46 6,094,893.46 [1927] 4,715,000 1,619,145.67 6,334,145.67 [1928] 4,715,000 1,841,361.40 6,556,361.40 [1929] 4,715,000 2,348,738.11 7,063,738.11 [1930] 4,715,000 2,553,408.52 7,268,408.52 [1931] 4,715,000 2,429,145.42 7,144,145.42 [1932] 4,715,000 2,221,738.07 7,936,738.07 [1933] 4,715,000 2,375,026.06 7,090,026.06 [1934] 4,715,000 2,365,062.29 7,080,062.29 [1935] 4,715,000 2,433,338.50 7,148,338.50 [1936] 4,715,000 2,468,946.22 7,183,946.22 [1937] 4,715,000 2,479,139.75 7,194,139.75 [1938] 4,715,000 2,122,554.08 6,837,554.08 [1939] 4,715,000 2,292,236.74 7,007,236.74 *278 The petitioner's ratio of gross profit and net profit for various periods was as follows: Gross profit Net profit to net to net worth worth Period (per cent) (per cent) 1922-1935 20.27 11.23 1922-1939 20.31 11.05 1936-1939 20.42 10.53 In 1937 petitioner made sales of steel ingots to Japan totaling $ 428,179.45 at a cost of $ 321,472.63, resulting in a gross profit of $ 106,706.82. Petitioner made no other sales of this description. By 1926 railway locomotives and freight train cars in service began a steady decline from 66,847 locomotives and 2,403,967 freight train cars in that year to base period averages of 46,820 locomotives and 1,744,521 freight train cars. By 1926 railway revenue freight ton-miles per capita declined from 3,811 in that year to an average of 2,573 in the base period. By 1926 railway operating revenues of class I, II, and III railroads declined from $ 6.51 billion in that year to an average of $ 4 billion in the base period. By 1921 the ratio of railway operating revenues of class I, II, and III railroads to national income had begun a decline from 10.89 per cent in that year to 5.72 per cent in 1939. By 1921 the ratio of railway operating revenues of class I, II, and III railroads to *279 gross national product declined from 8.43 per cent in that year to 4.57 per cent in 1939. The following is a comparison of percentage change in railway revenue freight ton-miles and in the Federal Reserve Board index of industrial production at turning points in business cycles, 1919-1938: *619 Annual Data Expansions Revenue F. R. B. Dates ton-miles index (percent) (percent) 1919-1920 [4] 1921-1923 [52] 1924-1926 [17] 1927-1929 [16] 1932-1937 [95] Monthly Data March 1919-February 1920 [21] July 1921-April 1923 [65] June 1924-July 1926 [21] December 1927-August 1929 [31] July 1932-April 1937 [133] Annual Data Contractions Revenue F. R. B. Dates ton-miles index (percent) (percent) 1920-1921 -25 -23 1923-1924 -6 -7 1926-1927 -3 -1 1929-1932 -48 -47 1937-1938 -20 -21 Monthly Data February 1920-July 1921 -31 -31 April 1923-June 1924 -17 -15 July 1926-December 1927 -10 -6 August 1929-July 1932 -55 -54 April 1937-May 1938 -31 -33 Source: Data for turning points and revenue ton-miles taken from tables 5 and 6, American Transportation in Prosperity and Depression, by Thor Hultgren. Data for F. R. B. index by computation from index number of industrial production, page 45, Federal Reserve Index of Industrial Production, October 1943. In the various contractions of business *280 from 1920 to 1938, as shown by the Federal Reserve Index of Industrial Production, railroad revenue ton-miles declined in about the same ratio as the Federal Reserve Index, but in the various expansions of business in the same period, except the 1919-1920 period, the increases in revenue ton-miles fell behind the ratio of increases in the Federal Reserve Index. Total registration of passenger cars in the United States increased from 10,863,000 in 1922 to 26,201,000 in 1939. The registration of motor trucks increased from 1,376,000 in 1922 to 4,414,000 in 1939. The total domestic passengers carried by air transportation increased from 5,782 in 1926 to 1,876,051 in 1939. The total pounds of express carried by air increased from 3,555 in 1926 to 9,514,229 in 1939. The total cargo tonnage of domestic waterborne commerce in the United States increased from 384,454 in 1924 to 657,058 short tons in 1939. The continuous and rapid growth of competing media of transportation largely accounts for the steady decline in railroad traffic and revenue. The depressed condition of the railroads in the base period was neither temporary nor unusual. The following schedule compares total equipment miles with *281 total expenditures for maintenance for all railroads for the years 1922 to 1939, inclusive: *620 Expenses for maintenance of equipment Total equipment miles for all railroads for all railroads adjusted by the price index Year Actual Index Actual Index (millions (1922- (millions of (1922- of miles) 1939=100) dollars) 1939=100) [1922] 25,269 [92] 1,198 [1923] 29,732 [109] 1,281 [1924] 29,226 [107] 1,143 [1925] 31,114 [114] 1,183 [1926] 32,984 [120] 1,288 [1927] 32,716 [120] 1,247 [1928] 33,220 [121] 1,181 [1929] 34,012 [124] 1,254 [1930] 30,375 [111] 1,096 [1931] 25,766 [1932] 20,405 [1933] 20,560 [1934] 22,111 [1935] 22,437 [1936] 26,077 [1937] 27,363 [1938] 23,635 [1939] 25,749 [71] 1922-1939 -- Average 27,375 [100] The following schedule shows the index of expenses for maintenance of equipment per equipment mile adjusted by price index for all railroads for the period 1914 to 1939, inclusive: Total maintenance of Maintenance of equipment expenses equipment expenses per adjusted by price Total equipment miles equipment mile index adjusted by price index Year Actual (millions Index Actual Index Actual Index of (1922-1939 (millions (1922-1939 (cents 1922-1939 dollars) =100) of miles) =100) (1)/(3) =100) (1) (2) (3) (4) (5) (6) [61] 24,831 [91] 2.41 [47] 23,896 [87] 1.94 [36] 27,272 [100] 1.30 [37] 27,418 [100] 1.32 [67] 26,612 [97] 2.47 [92] 25,365 [93] 3.56 [1920] 1,129 [115] 27,414 [100] 4.12 [1921] 1,247 [128] 24,350 [89] 5.12 [1922] 1,198 [122] 25,269 [92] 4.74 [1923] 1,281 [131] 29,732 [109] 4.31 [1924] 1,143 [117] 29,226 [107] 3.91 [1925] 1,183 [121] 31,114 [114] 3.80 [1926] 1,288 [132] 32,984 [120] 3.90 [1927] 1,247 [128] 32,716 [120] 3.81 [1928] 1,181 [121] 33,220 [121] 3.56 [1929] 1,254 [128] 34,012 [124] 3.69 [1930] 1,096 [112] 30,375 [111] 3.61 [94] 25,766 [94] 3.56 [75] 20,405 [75] 3.61 [72] 20,560 [75] 3.42 [73] 22,111 [81] 3.24 [77] 22,437 [82] 3.34 [86] 26,077 [95] 3.22 [78] 27,363 [100] 2.77 [64] 23,635 [86] 2.63 [71] 25,749 [94] 2.70 [76] 1922-1939 [100] 27,375 [100] 3.55 [100] -- Average *282 Source: (1) Exhibit 37-K, schedule 2; (3) 1914-1921: Exhibit 39-M, schedule 2; 1922-1939: Exhibit 23-W, schedule 2. *621 The following table shows railroad operating revenues and expenditures for equipment maintenance of class I, II, and III railroads for the period 1916 to 1939, inclusive: Railroad Maintenance of operating equipment Year ended December 31 revenues expenses (billions of (millions of dollars) dollars) [1916] 3.69 [1917] 4.12 [1918] 4.99 1,121 [1919] 5.25 1,245 [1920] 6.31 1,614 [1921] 5.63 1,272 [1922] 5.67 1,270 [1923] 6.42 1,486 [1924] 6.05 1,280 [1925] 6.25 1,278 [1926] 6.51 1,301 [1927] 6.25 1,235 [1928] 6.21 1,181 [1929] 6.37 1,216 [1930] 5.36 1,030 [1931] 4.25 [1932] 3.17 [1933] 3.14 [1934] 3.32 [1935] 3.50 [1936] 4.11 [1937] 4.23 [1938] 3.62 [1939] 4.05 [773] Totals 1922-1939 88.48 17,750 1936-1939 16.01 3,082 Averages 1922-1939 4.92 [986] 1936-1939 4.00 [770] Per cent that 1936-1939 is to 1922-1939 81.30 78.09 The following schedule shows freight train car-miles and expenditures of class I railroads, and freight train car-miles and maintenance of equipment expenditures of class I, II, and III railroads for the period 1919 to 1939, inclusive: Class I Class I, II, and III Year Freight car Maintenance Freight-car-miles repair Freight-car-miles of equipment (billions expenditures (billions expenditures of miles) (millions of miles) (billions of dollars) of dollars) [1919] 21,404 447,789 20,805 1,245 [1920] 23,246 591,545 22,601 1,614 [1921] 20,358 466,568 19,758 1,272 [1922] 21,358 407,566 20,724 1,270 [1923] 25,618 475,434 25,145 1,486 [1924] 25,032 380,926 24,621 1,280 [1925] 26,833 373,314 26,408 1,278 [1926] 28,603 377,703 28,170 1,301 [1927] 28,396 340,696 27,952 1,235 [1928] 28,973 325,279 28,528 1,181 [1929] 29,745 338,079 29,274 1,216 [1930] 26,335 262,884 25,915 1,030 [1931] 22,223 187,609 21,859 [1932] 17,516 120,548 17,205 [1933] 17,998 119,477 17,694 [1934] 19,488 131,363 19,159 [1935] 19,747 144,676 19,405 [1936] 22,593 183,002 22,241 [1937] 23,692 197,266 23,339 [1938] 20,169 133,884 19,872 [1939] 22,228 169,425 21,907 [773] The *283 following shows net income, before taxes, for various groupings of railway equipment manufacturers for the period 1922 to 1939, inclusive, and index numbers derived therefrom (1922-1939 average=100): *622 Year Total 11 Total 14 Total 18 Total 21 companies companies companies companies [1922] $ 11,999,803 $ 12,867,645 $ 21,216,843 $ 23,943,462 [1923] 44,704,700 46,098,117 64,973,177 74,310,754 [1924] 19,437,066 20,130,675 37,583,364 41,655,520 [1925] 13,114,048 13,745,997 23,505,207 27,177,180 [1926] 31,075,434 32,031,573 45,183,320 50,979,589 [1927] 20,815,777 21,736,824 29,693,788 33,831,276 [1928] 7,981,422 8,288,469 14,463,436 18,152,688 [1929] 20,663,430 21,676,880 35,127,301 40,977,224 [1930] 14,520,866 15,152,980 22,596,851 27,060,815 [1931] (4,877,903) (5,290,012) (9,899,621) (10,467,405) [1932] (7,409,273) (7,751,222) (11,670,205) (12,469,675) [1933] (7,104,365) (7,447,141) (12,269,714) (12,613,863) [1934] (6,264,731) (6,214,068) (6,745,700) (5,983,332) [1935] (1,531,101) (1,317,837) (2,668,134) (2,006,671) [1936] 6,690,029 7,121,124 14,133,248 16,858,999 [1937] 18,694,814 19,382,044 29,182,115 34,210,879 [1938] 385,204 327,975 (3,534,674) (3,404,987) [1939] 5,952,553 6,076,196 9,619,582 11,473,090 Total 1922-1939 $ 188,847,773 $ 196,616,219 $ 300,490,184 $ 353,685,543 1936-1939 31,722,600 32,907,339 49,400,271 59,137,981 Average 1922-1939 $ 10,491,543 $ 10,923,123 $ 16,693,899 $ 19,649,197 1936-1939 7,930,650 8,226,835 12,350,068 14,784,495 Indexes 1922-1939 100.00 100.00 100.00 100.00 1936-1939 75.59 75.32 73.98 75.24 *284 Although the average earnings of railway equipment manufacturers were depressed in the base period approximately 25 per cent, as measured by average earnings for the period 1922-1939, this depression was the result of a continuous decline from the year 1930. The business of the taxpayer was not depressed in the base period because of temporary economic circumstances unusual in the case of the petitioner or because the industry of which it was a member was depressed by reason of temporary economic events unusual in the case of such industry. The business of the petitioner was not depressed during the base period. Section 722 (b) (4) Issue. In 1936 petitioner began to set up a new small mill No. 3, specifically designed for rolling rings of intermediate weight, i. e., between 60 and 250 pounds. The new mill began operations in the latter part of May 1937. Prior to the completion of small mill No. 3 petitioner ascertained there was a market for intermediate rings and began taking orders for rings from those who were customers for products produced on its big mill and its small mills Nos. 1 and 2. After the completion of small mill No. 3 the petitioner made a search of its records and transferred *285 to small mill No. 3 the orders for intermediate rings which it was then manufacturing on its big mill and its small mills Nos. 1 and 2. The cost of equipment and machinery used in small mill No. 3 was $ 129,926.03, an 8 per cent increase in the net book value of petitioner's *623 equipment as of January 1, 1936. To accommodate the new mill the petitioner purchased a building at a cost of $ 27,964.25. During the period from September 1936 to March 1938 petitioner acquired five new boring mills at a total cost of $ 120,995.78. The addition of these boring mills enabled the petitioner to machine its products faster and more efficiently. The following schedule shows the petitioner's monthly sales in pounds by mills for the base period years: Small mills Small mill Draft Total Big mill Nos. 1 and No. 3 gears and shipments [2] ring springs [1936] January 4,374,721 500,342 87,510 4,962,573 February 4,557,561 351,048 1,127,355 6,035,964 March 4,479,771 319,558 519,496 5,318,825 April 5,248,320 608,146 505,275 6,361,741 May 4,524,119 453,025 212,762 5,189,906 June 4,220,966 536,354 136,978 4,894,298 July 5,202,712 538,543 275,351 6,016,606 August 5,445,365 637,727 240,322 6,323,414 September 4,108,743 663,730 526,050 5,298,523 October 5,405,496 416,474 422,388 6,244,358 November 3,770,904 532,141 487,804 4,790,849 December 5,700,219 450,850 290,095 6,441,164 Total 57,038,897 6,007,938 4,831,386 67,878,221 [1937] January 5,368,393 585,261 877,301 6,830,955 February 6,115,215 831,102 69,376 7,015,693 March 6,724,886 1,074,319 96,202 7,895,407 April 7,556,164 972,245 859,079 9,387,488 May 7,185,069 782,127 860,131 8,827,327 June 6,596,372 766,735 35,898 411,306 7,810,311 July 4,668,355 839,490 48,283 164,650 5,720,778 August 6,421,856 387,021 63,442 294,448 7,166,767 September 4,647,760 538,505 170,320 192,872 5,549,457 October 3,466,055 432,228 38,772 68,482 4,005,537 November 1,705,313 506,687 65,511 58,647 2,336,558 December 2,097,293 275,938 93,688 18,272 2,484,791 Total 62,552,731 7,991,658 515,914 3,970,766 75,031,069 [1938] January 1,194,780 118,795 65,020 190,511 1,569,106 February 2,329,152 82,324 53,944 72,022 2,537,442 March 2,953,501 137,182 112,257 66,330 3,269,270 April 1,395,046 241,876 67,039 7,825 1,711,786 May 2,181,289 73,933 20,037 19,645 2,294,904 June 1,989,357 56,749 51,512 205,037 2,302,655 July 1,960,816 63,932 66,068 233,300 2,324,116 August 3,210,736 91,425 174,818 369,920 3,846,899 September 2,283,994 128,679 76,557 182,326 2,671,556 October 3,352,663 153,942 180,085 123,006 3,809,696 November 2,112,120 107,140 193,368 2,867 2,415,495 December 4,311,934 145,482 156,110 611,154 5,224,680 Total 29,275,388 1,401,459 1,216,815 2,083,943 33,977,605 [1939] January 3,505,398 215,119 160,439 181,199 4,062,155 February 3,771,454 141,017 124,576 54,231 4,091,278 March 4,838,276 264,134 241,431 173,550 5,517,391 April 3,903,896 229,633 344,772 73,959 4,552,260 May 3,960,274 217,586 207,209 33,766 4,418,835 June 3,270,188 374,868 400,911 68,695 4,114,662 July 3,036,164 146,284 122,006 365,436 3,669,890 August 4,279,633 170,480 122,189 498,249 5,070,551 September 3,122,062 170,069 214,257 757,125 4,263,513 October 7,290,185 227,572 498,501 400,067 8,416,325 November 6,207,208 437,824 454,379 514,502 7,613,913 December 5,454,509 426,426 531,120 793,018 7,205,073 Total 52,639,247 3,021,012 3,421,790 3,913,797 62,995,846 *286 *624 The monthly production of small mills Nos. 1 and 2 and the big mill was greatly reduced following the installation of small mill No. 3. The installation of small mill No. 3 did not result in a higher level of earnings. The following schedule compares quarterly sales in pounds of small mills Nos. 1 and 2 with those of small mill No. 3 for the years 1938 and 1939: Ratio sales of Small mills Small mill small mill No. 3 Nos. 1 and 2 No. 3 to sales of small mills Nos. 1 and 2 in per cent (1) (2) (2)/(1) [1938] 1st quarter 338,301 231,221 68.3 2d quarter 372,558 138,588 37.2 3d quarter 284,036 317,443 111.8 4th quarter 406,564 529,563 130.3 [1939] 1st quarter 620,270 526,446 84.9 2d quarter 822,087 952,892 115.9 3d quarter 486,833 458,452 94.2 4th quarter 1,091,822 1,484,000 135.9 The installation of small mill No. 3 constituted a change in the character of the business of the petitioner during its base period. The petitioner has failed to establish that as a result of such change in character of its business its average base period net income is an inadequate standard of normal earnings. Section 711 (b ) (1) (J) Issue. On July 30, 1951, petitioner filed claims for refund on Form 843 under section 711 (b) (1) (J) of the Internal Revenue Code*287 for the taxable years 1940, 1941, and 1942 in the amounts as follows: Amount of refund Year claimed [1940] $ 4,365.18 [1941] 4,781.36 [1942] 4,817.73 The following schedule sets forth the dates of various actions taken by the parties which may have a bearing on this issue: Taxable year [1942] Return filed 3-15-41 3-15-42 3-15-43 Normal expiration date 3-15-44 3-15-45 3-15-46 Consent (Form 872) accepted 2-12-44 1- 6-45 Expiration of extension 6-30-45 6-30-46 Last payment 12- 4-41 12-17-42 12-13-43 Claim (Form 843) filed 7-30-51 7-30-51 7-30-51 Statutory notice mailed 2- 1-46 2- 1-46 2- 1-46 Petition filed 5- 1-46 5- 1-46 5- 1-46 Amended petition filed 1-18-52 1-18-52 1-18-52 *625 For the years 1940 and 1941 the respondent determined no deficiency. With respect to the year 1942 a deficiency of $ 3,287.33 in excess profits tax was determined. OPINION. The petitioner contends that its excess profits taxes for the calendar years 1940, 1941, and 1942 are excessive and discriminatory because of the existence of factors specified in subsections (b) (2) and (b) (4) of section 722 of the Internal Revenue Code of 1939. The primary basis for relief under (b) (2) is an alleged depression in its base period sales to railroads of equipment for rolling *288 stock maintenance because of a temporary and unusual circumstance of a severe decline in the equipment maintenance expenditures of the railroad industry. The petitioner is a fabricator of various steel products. The major portion of its net income is derived from the sale of products used by the railroad industry, although a considerable portion of its net income is derived from the sale of products used in other industries. However, the petitioner does not claim a base period depression in its non-railroad sales. The parties are agreed that the expenditures by the railroad industry during the base period were curtailed. They differ as to whether this was the result of a temporary and unusual circumstance within the purview of the statute. Numerous schedules, charts, and graphs have been presented in support of the respective positions of the parties. A critical analysis of such evidence persuades us that the depression in the railroad industry was not by reason of temporary economic events unusual in the case of such industry but was the result of a persistent long-term declining trend which commenced considerably prior to the base period. This record is replete with evidence that *289 the railroad industry was a declining one prior to, during, and beyond the base period. The primary reason for the declining trend of the railroad industry is the development of transportation media competitive with the railroads. The extremely rapid growth of the automotive passenger and truck transportation, the sharp increase in transportation facilities afforded by air carriers, water carriers, and pipe lines, set forth in our Findings of Fact, attest to the ruinous competition to which the railroad industry was subjected. The statistical data presented show the existence of a persistent declining trend in the railroad industry generally and, also, in the maintenance equipment industry. This record does not establish that the business of the railroad industry or that of the maintenance equipment industry was depressed because of a temporary *626 and unusual circumstance such as constitutes a qualifying factor within the purview of subsection (b) (2) of section 722 of the 1939 Code. The petitioner's sales to the railroads and the railway equipment industry in its base period were not depressed below normal levels. The petitioner's average annual sales to railroads for the long period *290 1922 through 1939 were $ 2,584,585, for the period 1922 through 1935 were $ 2,577,228, and for the base period 1936 through 1939 were $ 2,610,334. The petitioner's average annual sales to non-railroad industries were also greater in its base period than in the extended periods 1922 to 1939 and 1922 to 1935. During the base period the average of such sales was $ 1,390,326, whereas the average was $ 391,776 for the period 1922 through 1935, and $ 613,676 for the long period 1922 through 1939. The petitioner's business was not depressed in the base period when analyzed in relation to its entire business. The petitioner's average total sales were $ 4,000,660, whereas its average sales for the 18-year period 1922 through 1939 were $ 3,198,261. The base period average annual sales were higher than for any prior 4 consecutive years and exceeded any single year in its prior experience. The petitioner's annual gross profit was $ 1,440,495 as compared to an average of $ 1,260,180 for the 18-year period 1922 through 1939. The gross profit in three of its base period years was exceeded in only two prior years. The average annual sales price per ton was $ 121.91 in the base period compared to *291 an average of $ 110.05 for the long period 1922 through 1939. If the unusual sale of ingots to Japan in 1937 is excluded, the sales price per ton is increased to $ 129.75 and $ 111.63 for those respective periods. The average annual gross profit per ton for the base period was $ 43.90 and $ 43.36 for the long period. The net profit per ton for the base period was slightly less than for the long term. If the unusual sale of ingots to Japan is excluded the net profit per ton is greater for the base period than that for the long period 1922-1939. The average annual base period net income of the petitioner was $ 743,214 for the base period, whereas its average for the period 1922 through 1939 was $ 685,969. The average base period net income also exceeds the average for the shorter periods 1922 through 1935 and 1930 through 1939. This Court has used the long period 1922 through 1939 as a test period where appropriate. Foskett & Bishop Co., 16 T. C. 456; Industrial Yarn Corporation, 16 T. C. 681; El Campo Rice Milling Co., 13 T. C. 775. Cf. Ainsworth Manufacturing Corporation, 23 T. C. 372. The figures hereinabove set out, and which are summarized from schedules set forth in our Findings *292 of Fact, show that by almost every test the business of the petitioner was not depressed in the base period. The initial requirement of the statute is a depression in the taxpayer's business. Average net earnings in excess of the long-term average of *627 the business as an entity demonstrate here that the base period is not an inadequate standard of normal earnings. The average net profits shown here indicate that the base period was not one in which the business of the petitioner was depressed. A. B. Frank Co., 19 T. C. 174. The petitioner further contends as a basis for relief under (b) (2) that in 1937 and 1938 the cost of its principal raw materials was abnormally high and because of market conditions its selling prices did not fully compensate for such abnormally high material cost. As a consequence it is claimed that its gross profit was narrowed, and its net income in those 2 base period years was temporarily and unusually depressed below its normal levels. This point was not raised in either petitioner's original or amended claims for relief under section 722, but is raised in its amended petition. Therefore, consideration of this basis for relief is beyond the scope of review *293 by this Court. Blum Folding Paper Box Co., 4 T. C. 795. We next consider the petitioner's contention with respect to its claim for relief under section 722 (b) (4) by reason of the installation within the base period of five new boring machines and the addition in June 1937 of small mill No. 3, which was specifically designed for the fabrication of intermediate sized rings. The petitioner claims that, by reason of its increased capacity for operation, its average base period net income does not reflect the normal operations of the business for the entire base period and seeks the benefit of increased earnings on the basis of an extension of 2 years. The new boring machines installed by petitioner during the base period were of improved design and undoubtedly enabled faster and more efficient machining of its products. We are not satisfied that the petitioner has sustained its burden of showing increased earnings which are specifically traceable to the installation of the boring machines. With respect to the addition of small mill No. 3, the record shows that prior to the time it was put into operation in June 1937, the petitioner had made intermediate sized rings on its big mill and *294 its small mills Nos. 1 and 2. They were not, therefore, a new product but one in which the petitioner had considerable experience in making prior to the base period. Because it was not economical to make intermediate sized rings on its old mills, the petitioner had not actively solicited customers for such rings, but made them for the accommodation of its old customers. Preliminary surveys made in 1935 and 1936 indicated a demand for intermediate sized rings, and the petitioner specifically designed and constructed small mill No. 3 for the purpose of entering that market. The petitioner actively solicited customers for intermediate sized rings while the construction of that mill was in progress. It did not, however, increase its sales force. After the mill was put *628 into operation the petitioner transferred all orders then on its books and records to the new mill, and no rings were made on the older mills that could be made on its small mill No. 3. The primary effect of the installation of small mill No. 3 was to decrease sales from the older mills to an extent not readily ascertainable, and we are in doubt as to whether a higher level of earnings resulted. The petitioner had 2 *295 1/2 years in which to reach the normal level of its sales from small mill No. 3 prior to the end of the base period. Since it had experience in making intermediate sized rings, no appreciable lag was required, and it appears reasonable to assume that the normal level of production was reached by the end of 1939. Exhibit 91-M shows the total sales in pounds in 1939 from small mills Nos. 1, 2, and 3 were 6,442,802 pounds, whereas the sales from small mills Nos. 1 and 2 were 7,991,658 in the year 1937. The petitioner is entitled to use the excess profits credit based on income. It claimed and has been allowed the benefit of the 1939 Code, section 713 (e). In 1938 the petitioner had a deficit in excess profits net income amounting to $ 59,469.35. Under section 713 (e) (1), as applicable to the taxable years 1940 and 1941, such deficit is excluded from the computation of average base period net income. The effect would be the same as if the petitioner were permitted to increase net income for 1938 by $ 59,469.35. For the taxable year 1942, section 713 (e) (1) permits the substitution for the deficit net income of an amount equal to 75 per cent of the average net income of the other *296 3 base period years. The substitute constructive net income for 1938 so computed amounts to $ 722,768.88. Thus, in lieu of a deficit in excess profits net income of $ 59,469.35, the petitioner has an actual excess profits net income of $ 722,768.88. Assuming the addition of the new small mill No. 3 to be a qualifying factor under subsection (b) (4), we are satisfied that there was no such level of earnings as contended for by the petitioner if the new mill had been installed in 1935 rather than in June 1937. The petitioner used the method of least squares to project adjusted 1938 and 1939 sales an additional 2 years. The reconstructed pounds for the second year of the projection for small mill No. 3 is 8,502,412 pounds, whereas the production of small mills Nos. 1 and 2 during 1937 was only 7,991,658 pounds. The reconstructed pounds for 1938, a relatively poor year for business generally, are 9,457,233. We are convinced that a proper reconstruction of sales from small mill No. 3, based upon base period conditions and in the light of the facts revealed by the record, would not result in credits based on constructive average base period net income greater than the benefits already *297 allowed. The final issue relates to the claims for refund under section 711 (b) (1) (J) of the 1939 Code. No deficiency was determined with *629 respect to the years 1940 and 1941. A deficiency was determined in excess profits taxes for the taxable year 1942 in the amount of $ 3,287.33. The respondent mailed two separate statutory notices on February 1, 1946. The notice for the taxable year 1940 related solely to the disallowance of the claim for relief under section 722. The other notice advised that the respondent had determined overassessments in income taxes for the years 1941 and 1942, an overassessment in excess profits tax for 1941, and a deficiency in excess profits tax liability for 1942. It further advised that, pursuant to sections 272 and 732, notice was given of the deficiency mentioned and of the disallowance of the claim for refund asserted in applications for relief under section 722 and the related claim, Form 843, filed November 18, 1944. The related claim referred to petitioner's claim for relief under section 721, involving abnormal income for the year 1941. On May 1, 1946, the petitioner filed timely separate petitions, one relating to the year 1940 and the other *298 relating to the taxable years 1941 and 1942. On July 30, 1951, the petitioner filed claims for refund for each of the taxable years 1940, 1941, and 1942, based on abnormal deductions under section 711 (b) (1) (J). On January 18, 1952, pursuant to order of this Court, the petitioner filed amended petitions assigning as error the respondent's failure to allow the claims for relief under section 711. The respondent filed amended answers to the amended petitions alleging that the claims for refund under section 711 were barred by the statute of limitations with respect to the taxable years 1940 and 1941. Assuming, without deciding, that the claims for refund under section 711 are timely, we think there is presented a question of our jurisdiction to determine the matter of refund with respect to the taxable years 1940 and 1941. This Court has repeatedly held that where no deficiencies have been determined we are without jurisdiction to determine the merits of a claim for refund or credit, due to standard issue adjustments. Mutual Lumber Co., 16 T. C. 370; Martin Weiner Corp., 21 T. C. 470; Packer Publishing Co., 17 T. C. 882, 899; West Flagler Amusement Co., 21 T. C. 486. Until this *299 Court changes its position, we are required to hold that we have no jurisdiction of the claims for refund under section 711 (b) (1) (J) for the taxable years 1940 and 1941. The taxable year 1942 presents a different situation. A deficiency was determined with respect to the petitioner's excess profits tax liability for that year. No question of timeliness is raised. Our jurisdiction to determine the merits is well established. E. B. & A. C. Whiting Co., 10 T. C. 102; Sommerfeld Machine Co., 11 T. C. 86. The respondent concedes that the petitioner is entitled to a refund in excess profits tax for the year 1942 in an amount to be computed *630 under Rule 50, pursuant to stipulation of the parties, and such refund is directed. Other adjustments have been disposed of by stipulation. Reviewed by the Special Division as to the section 722 issue. Decisions will be entered under Rule 50. Footnotes 1. Erroneously stated in the amended petition in Docket No. 10764 as being $ 782,610.52.↩ 1. Includes sales of ingots to Japan of $ 428,179.