Empire Liquor Corp. v. Commissioner

Empire Liquor Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent Empire Liquor Corp. v. Commissioner Docket No. 29681 United States Tax Court 25 T.C. 1183; 1956 U.S. Tax Ct. LEXIS 250; March 9, 1956, Filed *250 Decision will be entered for the respondent. Petitioner, a wholesale liquor distributor, claims relief from excess profits tax under section 722 (b) (2) and (b) (4) of the 1939 Code. Held, petitioner has shown that it commenced business during the base period within the meaning of section 722 (b) (4), but has failed to establish a constructive average base period net income in excess of its invested capital credits for the years in issue. Briggs G. Simpich, Esq., for the petitioner. James A. Glascock, Jr., Esq., for the respondent. Withey, Judge. WITHEY *1183 The respondent denied the petitioner's applications for relief and claims for refund of excess profits taxes under section 722 (b) (2) and (b) (4) of the Internal Revenue Code of 1939 for the taxable years ended November 30, 1943, and Novembor 30, 1944. *251 The issues presented are whether petitioner qualifies for relief under either subsection (b) (2) or (b) (4) of section 722 of the 1939 Code and, if so, whether it has established what would be a fair and just amount representing normal earnings to be used as a constructive average base period net income. FINDINGS OF FACT. Some of the facts have been stipulated and are found accordingly. Petitioner is a corporation organized under the laws of the State of New York on November 10, 1937, to engage in the wholesale liquor business. It commenced business on or about December 1, 1937. Its base period consists of the 4 fiscal years ended November 30, 1937, through November 30, 1940, inclusive. Its excess profits tax returns for the taxable years ended November 30, 1943, and November 30, 1944, were filed with the collector of internal revenue for the third district of New York. Applications for relief under section 722 were filed on Form 991 claiming refunds of excess profits taxes for the taxable years ended November 30, 1943, and November 30, 1944, in the respective amounts of $ 100,011.01 and $ 24,690.01. Petitioner's claims for refund were disallowed in full by respondent. Petitioner's*252 authorized capital stock consisted of 1,500 shares of common and 500 shares of preferred with a par value of $ 100 per share for each class. Originally, 250 common shares were issued to each of petitioner's three organizers: Jack L. Fein, Leo J. Aberle, and Jack Poust. Fein and Aberle each purchased 100 preferred shares on April 30, 1939. On December 1, 1942, H. H. Saletan purchased 35 shares and S. Bernstecker purchased 25 shares of the common stock. There were no further changes in the ownership of petitioner's stock during the period here involved. *1184 All of petitioner's organizers had had previous experience in some phase of the liquor business. Fein had been associated with Schenley Distillers Corporation as a salesman for more than 10 years. He was personally acquainted with most of the liquor wholesalers in the New York City area and their salesmen. Before petitioner's organization its organizers had canvassed the various suppliers, such as National Distillers, Hiram Walker, Old Tyme Distillers, Browne Vintners, and Schenley, and had been led to believe that when ready for business petitioner would be able to obtain sufficient supplies of well known domestic lines*253 of liquor and wines from those sources. However, after setting up its office, renting a warehouse, and engaging employees, petitioner found that Schenley products were the only ones it would be able to obtain from the aforementioned suppliers. It continued to carry Schenley products, among others, until the fall of 1938 when Schenley changed its distribution policy and thereafter limited its outlets to a single New York distributor other than petitioner. When petitioner was formed, the intention of its incorporators was to base its operations on the sale of the better-known brands of domestic liquors. However, wholesale liquor dealers customarily carry a few popular brand-name import items as an accommodation to customers. Petitioner's incorporators consequently felt it necessary to acquire a small line of imported brands and applied for an import license shortly after incorporation. At first, petitioner did only a small amount of importing in its own name but handled a few well-known brands of whisky and wine purchased from other importers. Among the items purchased from American importers, petitioner acquired for distribution some Valdespino sherry and Hennessey cognac. Petitioner*254 was one of a group of approximately 10 different distributors handling these items in the New York City area. In 1938, petitioner began the development of its importing business. Cognac brandies, Scotch whiskies, and a line of wines are the basic items needed by an importer. In January 1938, petitioner obtained the exclusive agency in the United States for a French cognac known as Ivaldi, and it subsequently placed most of its sales emphasis on this item. Ivaldi cognac previously had not been sold in the United States. In June 1938, petitioner became the sole importer and distributor in the United States for a Spanish wine known as Valdespino sherry, and, in August 1938, it acquired the exclusive agency on the eastern seaboard for a Scotch whisky produced by Sandeman & Sons, Ltd., of Edinburgh, Scotland, known as Sandeman Scotch. The first shipment of Ivaldi cognac was received in May 1938, the first shipment of Sandeman Scotch arrived in March 1938, and the first shipment of Valdespino sherry in April 1939. The commencement of the active promotion by petitioner of its import business during 1938 was *1185 accentuated by the decision of Schenley in the fall of that year*255 to confine its line of products to a single distributor in the New York City area, and the consequent withdrawal of the Schenley line from petitioner. Petitioner subsequently acquired a line of Gibson whiskies from Schenley as a replacement but this was not of much consequence. Since Ivaldi cognac had not been sold in the United States previously, the French distiller was anxious to establish the brand in this country and consequently charged petitioner a relatively low price on its imported cognac. By reason of the low cost of Ivaldi cognac, petitioner was able to sell to retailers, including bars, grills, and restaurants, at a lower price than that charged for other cognacs and the purchasers in turn could sell at a low price per drink and still make an attractive profit, in line with their profit on sales of whisky. Petitioner's officers believed Ivaldi cognac to be an excellent product, as good as any produced in France and comparable in quality to Hennessey, Martel, or Courvoisier. They felt that there was a large potential market for a high grade cognac such as Ivaldi if sold at a popular per-drink price, to compete with Scotch and domestic whiskies. Consequently, they *256 made a determined effort to develop such a market. This required a promotional campaign to convince owners of bars, grills, and restaurants that a consumer demand for cognac could be developed by selling at a competitive price of approximately 25 cents a drink, the popular price per drink for whisky, instead of the customary 50 cents to 75 cents per drink generally charged for cognac. The relatively high price normally charged for cognac had developed a consumer resistance to the product. A considerable period of time is required to acquaint the retail liquor trade with a new product and to establish a market therefor. The length of time necessary to establish a new brand on the market generally varies from between 2 to 5 years, depending on the quality of the product and the sales promotion efforts made. Petitioner was able to sell cognac to bars, grills, and restaurants located on Third Avenue, Second Avenue, and the Bowery where cognac previously had never been sold, and thereby developed a new, although limited, market for cognac. One of the principal advantages enjoyed by petitioner in selling Ivaldi cognac was the fact that a substantial percentage of its sales to retail *257 outlets was not in competition with other wholesalers who sold domestic products, whereas as between dealers in domestic liquors the competition was quite keen. On the whole, petitioner's endeavors to establish a market for Ivaldi were reasonably successful. No sales of Ivaldi cognac were made to wholesalers during 1938, but in 1939 about 10 per cent of the amount withdrawn from bond *1186 was sold to other distributors or wholesalers located outside the New York City area. Sales to wholesalers were made for the purpose of building up the brand in localities outside New York City. Petitioner realized a profit of approximately $ 2.50 per case on sales to wholesalers, as compared with a profit of from $ 6 to $ 8 per case on sales to retailers. During 1938 and 1939 the competition among distributors of nationally advertised brands of distilled spirits in the New York City area was unusually keen. Nationally advertised brands generally were being sold at extremely low prices. Petitioner was making virtually no profit on such sales during 1938 and 1939. In September or October 1938, petitioner issued a printed price list to the trade in which the following selling prices were *258 listed: Per case Ivaldi Cognac Brandy $ 29.50 Valdespino Sherry Wines: Pale Dry 10.50 Golden 10.50 Amontillado 11.50 Solera 11.50 Fino Regente 14.00 Flor de Lis 15.25 Oloroso 15.25 Golden Dinner 22.00 Silver Amontillado 22.00 Tio Diego 21.00 Royal Cream 28.00 Inocente Amontillado 28.00 These selling prices were also in effect in 1939. Occasionally, a discount of about 10 per cent was allowed from the selling price shown in the price list. During 1938 and 1939, Ivaldi cognac actually was sold to retailers at prices ranging from $ 26.50 to $ 27.50 or $ 28 per case, or a markup of about 30 per cent. On sales to wholesalers, about $ 2.50 per case was added to cost as profit in determining the selling price. On Valdespino sherry, the markup on retail sales was 75 to 100 per cent. Petitioner's officers and salesmen called on numerous prospective retail customers in the New York City area, such as bars, grills, and restaurants, and succeeded in having Ivaldi cognac advertised in many public drinking places at a retail price competitive with the popular brands of whisky. At the commencement of its business petitioner had from 12 to 14 salesmen. This*259 number was increased to about 20 or 25 by the end of 1938. It was petitioner's policy to spend a very limited amount for advertising and to depend on personal contacts for the promotion of its products. All salesmen were employed on *1187 a commission basis. During 1938 and 1939, petitioner was selling to approximately 1,500 bars and grills, and 500 retail stores in the New York City area. During 1938 and 1939, there were approximately 10,000 retail outlets for petitioner's products in the Metropolitan New York area, consisting of some 8,000 bars, grills, restaurants, clubs, and hotels and about 2,000 retail stores. Petitioner ordinarily destroyed its sales records after 3 1/2 or 4 years and such records have been destroyed for the years 1937, 1938, and 1939. However, it maintained a "bond book" for those years showing the cost of every import and the monthly withdrawals from bond. The following schedule shows the monthly imports by cases of Ivaldi cognac, Sandeman Scotch whisky, and Valdespino sherry received by petitioner at bonded warehouses, petitioner's monthly withdrawals from bond by cases, and the cost per case, including duties, for the years 1938, 1939, and 1940: *260 Ivaldi cognac Sandeman Scotch Receipts Withdrawals Cost Receipts Withdrawals Cost [1938] Mar [25] $ 24.65 Apr [25] 24.65 May [36] $ 21.39 [25] 24.65 June [15] 21.39 [75] 25.09 July [94] 21.39 [50] 25.09 Aug [25] 21.39 [25] 25.09 Sept [30] 21.39 [25] 25.09 Oct [100] 20.96 [100] 24.72 Nov [100] 20.96 [175] 24.65 Dec [350] 20.92 [175] 24.65 Total [1939] Jan [150] $ 20.92 [100] $ 24.55 Feb [300] 20.99 [75] 24.55 Mar [200] 20.99 [100] 24.55 Apr [100] 20.99 [100] 24.55 May [180] 20.99 [75] 24.54 June 1,200 [220] 20.94 [25] 24.54 July [100] 20.94 [25] 24.54 Aug [125] 20.94 [25] 24.54 Sept [350] 20.94 [100] 24.54 Oct [250] 20.94 [50] 22.81 Nov 2,500 [825] 20.79 [200] 22.81 Dec [625] 20.79 [50] 22.91 Total 4,600 3,425 1,499 [1940] Jan 2,475 [370] $ 20.79 [174] $ 22.91 Feb [375] 23.21 [50] 22.91 Mar 2,000 [424] 22.74 [100] 22.91 Apr [800] 22.74 [75] 22.94 May 1,500 [298] 22.08 [100] 22.94 June 1,575 22.08 [325] 22.94 July [100] 22.08 1,000 [75] 25.43 Aug [50] 22.08 [100] 25.43 Sept [600] 22.08 [150] 25.43 Oct [450] 22.08 1,000 [325] 25.48 Nov [250] 20.79 [525] 25.48 Dec [200] 20.79 2,000 [350] 25.43 Total 6,625 5,492 4,500 2,349 *261 Valdespino sherry Receipts Withdrawals Cost [1938] Mar Apr May June July Aug Sept Oct Nov Dec Total [1939] Jan Feb Mar Apr [4] $ 11.72 May June July [50] 8.77 Aug Sept Oct Nov [218] 9.46 Dec [239] 8.51 Total [1940] Jan [225] $ 8.77 Feb Mar [50] 8.77 Apr May [50] 14.84 June [57] 14.84 July Aug Sept Oct Nov Dec 1,025 [25] 9.11 Total 1,300 [407] *1188 An importer of liquor who purchases directly from a foreign producer is required to pay an import duty and Federal excise tax on such imports. However, the importer may postpone payment of such duties and taxes by storing the merchandise in United States Customs bonded warehouses, sometimes referred to hereinafter as bonded warehouses. The duty and excise taxes on imported alcoholic beverages so stored are paid upon withdrawal of the liquor from the bonded warehouse. Moreover, goods stored in such warehouses may be sold in bond, thereby transferring to the purchaser the obligation to pay the duty and taxes upon withdrawal. Petitioner financed the purchase of imported goods by hypothecating warehouse receipts with its bank. Under this arrangement, the bank paid the*262 cost of a shipment of goods upon arrival, and stored them in a bonded warehouse, retaining the warehouse receipt. The merchandise was not withdrawn from bond by petitioner until needed for sale to customers. Petitioner normally withdrew only about a 2-weeks' to 30 days' supply of imports from bond. Imported items could be withdrawn from bond within 2 days. The bank received payment upon withdrawal of the liquor from bond. By postponing payment of the cost of its merchandise and the payment of duty and Federal excise taxes in this manner, petitioner was able to maintain its inventory of imported liquor with a small cash outlay. The foregoing method of financing the purchase of supplies of imported liquor contrasts with the method of financing the purchase of domestic brands. Domestic items were purchased from local suppliers who required payment in full within 10 to 30 days from the date of purchase. The duties and taxes on the imports listed above were as follows: Cognac: $ 10.85 per case in 1938, 1939 and through August 1940, and $ 12.65 thereafter through December 1940. Scotch: $ 10.95 per case through October 1938; $ 11.55 thereafter through April 1939; $ 11.54 thereafter*263 through June 1940; and $ 13.33 thereafter through December 1940. Wine: $ 2.98 per case from April 1939 through November 1939; $ 3.04 per case thereafter from December 1939 through November 1940; and $ 3.51 thereafter through December 1940. The following table shows on a monthly basis from March 1938 through December 1939 (a) value, before Federal taxes and duties, of petitioner's withdrawals from bond of Ivaldi cognac, Sandeman Scotch, and Valdespino sherry, respectively, (b) total United States imports for consumption 1 of brandy, whisky, and still wines, respectively, *1189 and (c) percentage ratio of petitioner's withdrawals of Ivaldi cognac, Sandeman Scotch, and Valdespino sherry, respectively, to total United States imports for consumption of brandy, whisky, and still wines, respectively: Ivaldi cognac Sandeman Scotch Petitioner's U. S. Percentage Petitioner's U. S. Percentage withdrawals imports ratio withdrawals imports ratio [1938] Mar $ 230,106 $ 342.50 $ 3,531,147 0.01 Apr 223,700 342.50 3,195,946 0.01 May $ 379.44 216,837 0.17 342.50 3,163,806 0.01 June 158.10 214,112 0.07 1,060.50 3,506,254 0.03 July 990.76 188,634 0.53 707.00 2,668,667 0.03 Aug 263.50 156,013 0.17 353.50 2,336,178 0.02 Sept 316.20 233,266 0.14 353.50 3,466,383 0.01 Oct 1,011.00 383,983 0.26 1,377.00 4,283,608 0.03 Nov 1,011.00 382,252 0.26 2,292.50 5,022,439 0.05 Dec 3,524.50 571,080 0.62 2,292.50 6,206,460 0.04 [1939] Jan $ 1,510.50 $ 206,481 0.73 $ 1,300.00 $ 2,376,624 0.05 Feb 3,042.00 204,638 1.49 975.00 2,444,279 0.04 Mar 2,028.00 283,488 0.72 1,300.00 3,061,251 0.04 Apr 1,014.00 236,232 0.43 1,300.00 2,989,141 0.04 May 1,825.20 233,048 0.78 975.00 3,147,557 0.03 June 2,219.80 203,120 1.09 325.00 2,918,924 0.01 July 1,009.00 150,310 0.67 325.00 2,342,013 0.01 Aug 1,261.25 176,753 0.71 325.00 2,664,427 0.01 Sept 3,531.50 619,210 0.57 1,300.00 6,928,771 0.02 Oct 2,522.50 380,899 0.66 563.50 3,946,080 0.01 Nov 8,200.50 306,823 2.67 2,254.00 3,582,932 0.06 Dec 6,212.50 437,763 1.42 568.50 5,140,656 0.01 *264 Valdespino sherry Petitioner's U. S. Percentage withdrawals imports ratio [1938] Mar Apr May June July Aug Sept Oct Nov Dec [1939] Jan Feb Mar Apr $ 34.96 $ 791,921 0.004 May 441,519 June 388,663 July 289.50 289,553 0.099 Aug 285,030 Sept 746,629 Oct 647,397 Nov 1,630.64 714,497 0.228 Dec 1,307.33 806,437 0.162 There is a seasonal increased demand for liquor and wines during the months of October, November, and December, preceding the Christmas holidays, which is reflected in petitioner's sales. After the capitulation of France to Germany in June 1940, petitioner was unable to make any further purchases of Ivaldi cognac, with the exception of one shipment of 150 cases received in November of that year. Following is an analysis of petitioner's merchandise and strip stamp inventories month by*265 month, for the period December 31, 1937, to November 30, 1941: *1190 Imports in Merchandise Strip bonded in stamps Date Tota Floor stock warehouse distilleries and on pier Dec. 31, 1937 $ 115,852.68 Jan. 31, 1938 155,228.03 Feb. 28, 1938 123,527.06 Mar. 31, 1938 140,841.45 Apr. 30, 1938 126,287.11 May 31, 1938 106,035.82 June 30, 1938 101,714.63 July 31, 1938 109,457.44 Aug. 31, 1938 105,323.38 $ 94,854.32 $ 10,404.02 $ 65.04 Sept. 30, 1938 105,451.80 97,904.98 7,399.82 147.00 Oct. 31, 1938 130,465.37 113,114.23 17,173.90 177.24 Nov. 30, 1938 174,729.44 150,263.83 16,867.73 $ 7,486.04 111.84 Dec. 31, 1938 152,137.52 134,493.95 17,399.13 244.44 Jan. 31, 1939 116,096.41 99,200.55 9,900.90 6,591.52 403.44 Feb. 28, 1939 157,250.75 113,422.30 15,308.80 28,196.25 323.40 Mar. 31, 1939 181,864.16 127,096.46 26,552.28 27,945.66 269.76 Apr. 30, 1939 174,172.47 109,027.67 30,365.47 34,524.33 255.00 May 31, 1939 171,800.37 113,484.80 25,562.77 32,518.80 234.00 June 30, 1939 186,590.56 119,469.18 32,226.35 34,805.03 90.00 July 31, 1939 169,764.80 104,437.14 29,550.24 35,576.42 201.00 Aug. 31, 1939 170,601.51 106,857.00 26,994.53 36,401.98 348.00 Sept. 30, 1939 200,410.70 134,459.23 28,589.26 36,449.37 912.84 Oct. 31, 1939 213,941.93 152,530.58 23,069.90 37,618.21 723.24 Nov. 30, 1939 270,118.16 198,460.13 32,587.37 38,589.94 480.72 Dec. 31, 1939 238,188.45 163,034.54 33,937.60 39,387.81 1,828.50 Jan. 31, 1940 249,896.58 157,066.98 51,080.78 40,192.67 1,556.15 Feb. 29, 1940 225,753.76 137,025.99 46,680.10 40,559.01 1,488.66 Mar. 31, 1940 231,352.04 135,615.99 54,157.87 40,361.06 1,217.12 Apr. 30, 1940 239,121.17 145,825.32 51,699.27 40,443.97 1,152.61 May 31, 1940 264,792.12 160,832.67 62,847.52 40,162.43 949.50 June 30, 1940 236,432.10 149,907.03 45,066.35 40,523.22 935.50 July 31, 1940 323,677.58 231,537.17 50,486.98 40,669.67 983.76 Aug. 31, 1940 291,254.14 173,121.86 76,429.41 40,734.16 968.71 Sept. 30, 1940 277,308.46 173,243.09 62,876.24 39,924.01 1,265.12 Oct. 31, 1940 286,012.77 185,440.89 60,185.84 39,254.22 1,131.82 Nov. 30, 1940 271,985.11 173,102.58 59,184.15 38,623.80 1,074.58 Dec. 31, 1940 289,437.02 176,474.35 73,631.99 38,525.87 804.81 Jan. 31, 1941 298,008.36 184,793.67 73,578.39 38,573.03 1,063.27 Feb. 28, 1941 282,833.74 177,202.99 63,484.82 41,082.66 1,063.27 Mar. 31, 1941 268,513.06 170,490.73 54,003.24 42,962.41 1,056.68 Apr. 30, 1941 252,390.00 161,323.16 45,536.49 44,654.48 875.87 May 31, 1941 271,605.29 192,562.05 31,394.23 46,348.07 1,300.94 June 30, 1941 334,566.79 207,763.09 77,442.80 48,716.37 644.53 July 31, 1941 432,821.25 276,847.79 103,750.54 50,353.78 1,869.14 Aug. 31, 1941 426,316.99 257,275.00 114,195.99 51,906.95 2,939.05 Sept. 30, 1941 374,470.55 190,169.38 127,762.18 53,588.37 2,950.62 Oct. 31, 1941 406,102.41 227,359.82 122,025.58 53,737.84 2,979.17 Nov. 30, 1941 435,365.70 248,251.61 117,958.96 49,668.09 19,487.04 *266 The following table shows petitioner's net sales to retailers and to wholesalers and its total net sales for the years 1938 to 1941, inclusive: Year Net sales to Net sales to Total net retailers wholesalers sales [1938] $ 1,127,457 $ 107,627 $ 1,235,084 [1939] 1,259,406 193,547 1,452,953 [1940] 1,424,549 189,964 1,614,513 [1941] 1,484,836 106,288 1,591,124 The 1935-1940 net sales and "comparative" 2 net income of 16 wholesale liquor dealers located in the New York City area were as follows: *1191 Ratio of Year Sales Comparative comparative net income net income to sales [1935] $ 27,499,310 ($ 459,967) (1.67) [1936] 53,655,980 53,204 0.10 [1937] 78,394,862 542,705 0.69 [1938] 84,381,696 529,579 0.63 [1939] 94,355,981 688,544 0.73 [1940] 107,253,360 2,272,236 2.12 *267 The 1935-1940 net sales and "comparative" net income of 14 wholesale liquor dealers and importers or liquor importers located in the New York City area were as follows: Ratio of Year Sales Comparative comparative net income net income to sales [1935] $ 26,499,223 $ 365,271 1.38 [1936] 36,012,701 1,508,316 4.19 [1937] 41,071,074 1,817,500 4.43 [1938] 39,108,890 961,397 2.46 [1939] 45,370,779 1,990,773 4.39 [1940] 50,767,248 2,955,321 5.82 Shown on the following page are condensed profit and loss statements of petitioner's operations for the years ended November 30, 1938, to November 30, 1946. *1192 Year ended November 30 [1940] Total net sales (after adjustment) $ 1,050,821.35 $ 1,452,012.05 $ 1,611,584.44 Less: Cost of goods sold 947,014.88 1,303,876.90 1,422,454.49 Gross profit $ 103,806.47 $ 148,135.15 $ 189,129.95 Other income 800.89 217.41 402.50 Total income $ 104,607.36 $ 148,352.56 $ 189,532.45 Officers' salaries $ 1,800.00 $ 700.00 $ 7,850.00 Other salaries 51,403.77 73,776.10 85,852.34 Rent 5,100.00 5,100.00 5,100.00 Repairs Bad debts 4,786.56 4,912.47 10,669.08 Interest 1,624.68 3,032.19 8,236.75 Taxes 7,181.73 10,205.37 9,495.75 Contributions 224.50 Depreciation 987.19 1,233.47 600.42 Advertising 1,339.45 2,017.70 1,674.42 Loss carryover Other deductions 36,372.26 47,460.33 52,662.16 Total deductions $ 110,595.64 $ 148,437.63 $ 182,365.42 Net profit (or loss) ($ 5,988.28) ($ 85.07) $ 7,167.03 *268 Year ended November 30 [1943] Total net sales (after adjustment) $ 1,546,731.75 $ 2,627,104.41 $ 6,616,767.25 Less: Cost of goods sold 1,346,250.58 2,336,068.40 5,820,974.22 Gross profit $ 200,481.17 $ 291,036.01 $ 795,793.03 Other income 353.29 26,542.75 6,084.26 Total income $ 200,834.46 $ 317,578.76 $ 801,877.29 Officers' salaries $ 7,800.00 $ 15,325.00 $ 43,175.00 Other salaries 83,907.91 134,786.94 322,809.31 Rent 5,150.00 6,150.00 7,150.00 Repairs 1,983.43 Bad debts 8,518.36 14,612.11 1,867.46 Interest 8,870.26 12,491.70 11,939.10 Taxes 11,206.89 19,161.13 28,190.88 Contributions 472.50 389.20 4,850.50 Depreciation 655.34 671.92 1,143.15 Advertising 1,675.53 Loss carryover 853.23 Other deductions 73,778.40 99,347.17 215,739.91 Total deductions $ 202,035.19 $ 303,788.40 $ 638,848.74 Net profit (or loss) ($ 1,200.73) $ 13,790.36 $ 163,028.55 Year ended November 30 [1946] Total net sales (after adjustment) $ 7,554,165.89 $ 7,258,223.77 $ 8,210,196.36 Less: Cost of goods sold 6,707,099.85 6,449,401.43 7,320,849.92 Gross profit $ 847,066.04 $ 808,822.34 $ 889,346.44 Other income 3,781.73 6,382.67 10,839.47 Total income $ 850,847.77 $ 815,205.01 $ 900,185.91 Officers' salaries $ 60,000.00 $ 52,400.00 $ 51,600.00 Other salaries 387,647.70 426,130.53 451,590.15 Rent 7,920.00 9,450.00 12,700.00 Repairs 4,303.66 2,348.40 523.25 Bad debts 812.23 3,024.45 Interest 14,998.04 19,378.43 12,479.59 Taxes 39,590.65 24,698.06 31,859.27 Contributions 4,743.58 1,208.65 4,998.01 Depreciation 1,587.96 1,153.32 1,442.31 Advertising 4,575.34 Loss carryover Other deductions 239,016.07 255,474.17 230,431.43 Total deductions $ 760,619.89 $ 792,241.56 $ 805,223.80 Net profit (or loss) $ 90,227.88 $ 22,963.45 $ 94,962.11 *269 *1193 Petitioner's average base period net income computed pursuant to the provisions of section 713 (e) of the 1939 Code and its excess profits credits based on invested capital computed pursuant to the provisions of section 714 of the 1939 Code for the fiscal years ended November 30, 1941, to November 30, 1944, inclusive, are as follows: Average base period Invested capital Fiscal year ended November 30 net income credits [1941] $ 6,237.92 $ 14,311.33 [1942] 6,237.92 16,952.27 [1943] 6,237.92 19,545.01 [1944] 6,237.92 25,025.34 OPINION. Petitioner contends that it is entitled to excess profits tax relief under section 722 (b) (2) and (b) (4) of the 1939 Code. 3 *270 Petitioner takes the position that its business was depressed in the base period because of the depression of the liquor industry by reason of a price war in that industry in New York State during the base period years which it claims was a temporary economic event unusual in the case of the industry. However, petitioner offered no specific evidence in support of its position with reference to the alleged price war. The evidence is sufficient to demonstrate no more than keen competition during the base period years, a fact which we have held must be considered normal in the liquor industry. *1194 Harlan Bourbon & Wine Co., 14 T. C. 97. Petitioner therefore has failed to establish that it qualifies for relief under section 722 (b) (2). Permold Co., 21 T. C. 759. Petitioner contends that it is entitled to relief under section 722 (b) (4) either because of a change in the character of its business during the base period resulting from the shift in its sales from domestic brands of liquor to imported brands or because it commenced business during the base period and did not reach by the end of the base period the level*271 of earnings it would have reached had it begun business 2 years earlier. Respondent has taken the position that the changeover from the sale of domestic items to imported items constitutes simply the replacement of or additions to the lines of products previously handled and that the importing of foreign brands represents part of the business commenced. Respondent further contends that the addition of imported lines was not productive of a higher level of earnings. Although petitioner has demonstrated to our satisfaction that it commenced business during the base period within the meaning of section 722 (b) (4) of the 1939 Code, and that it is entitled to the application of the 2-year push-back rule, after taking into account its record throughout the base period, particularly the costs of imported liquor, the expenses of operation and the net losses experienced in two of the base period years, we are unable to arrive at a constructive average base period net income figure in excess of petitioner's invested capital credits for the years in issue. Petitioner's excess profits credits based on invested capital, computed pursuant to the provisions of section 714 of the 1939 Code, amount*272 to $ 19,545.01 for the fiscal year ended November 30, 1943, and $ 25,025.34 for the fiscal year ended November 30, 1944. It is our best judgment that the most favorable constructive average base period net income allowable on the evidence would not exceed the credits allowed by the respondent based on invested capital. It is well settled that a taxpayer which has used excess profits credits based on invested capital in computing its excess profits taxes is not entitled to relief under section 722 where its excess profits credits based on a constructive average base period net income do not exceed its credits computed under the invested capital method. Sartor Jewelry Co., 22 T. C. 773; Triangle Raincoat Co., 19 T. C. 548; Godfrey Food Co., 18 T. C. 1083. We conclude, therefore, that there was no error in respondent's action in disallowing petitioner's claim for relief under section 722. Reviewed by the Special Division. Decision will be entered for the respondent. Footnotes 1. Imports for consumption are the imports that go directly into domestic merchandising or consumption channels and the withdrawals from bonded warehouses for domestic consumption.↩ 2. The principal difference between "comparative" net income and excess profits tax net income is the absence of adjustments for capital gains and losses. "Comparative" net income is a figure computed to approximate excess profits tax net income from the information contained in corporation income tax returns, Form 1120, by deducting from net income dividends on stocks of domestic corporations and tax-exempt interest (including that subject to declared value excess-profits tax and to surtax only) on Federal, State, and municipal bonds.↩ 3. SEC. 722. GENERAL RELIEF -- CONSTRUCTIVE AVERAGE BASE PERIOD NET INCOME. (b) Taxpayers Using Average Earnings Method. -- * * * * * * * (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, * * * * (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 purposes 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, a difference in the capacity for production or operation, a difference in the ratio of nonborrowed capital to total capital, and the acquisition before January 1, 1940, of all or part of the assets of a competitor, with the result that the competition of such competitor was eliminated or diminished. Any change in the capacity for production or operation of the business consummated during any taxable year ending after December 31, 1939, as a result of a course of action to which the taxpayer was committed prior to January 1, 1940, or any acquisition before May 31, 1941, from a competitor engaged in the dissemination of information through the public press, of substantially all the assets of such competitor employed in such business with the result that competition between the taxpayer and the competitor existing before January 1, 1940, was eliminated, shall be deemed to be a change on December 31, 1939, in the character of the business * * *↩