Hougland Packing Co. v. Commissioner

Hougland Packing Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent Hougland Packing Co. v. Commissioner Docket No. 42113 United States Tax Court 28 T.C. 519; 1957 U.S. Tax Ct. LEXIS 177; May 28, 1957, Filed *177 Decision will be entered for the respondent. Held, petitioner is not entitled to excess profits tax relief under section 722 (b) (1), (b) (2), (b) (3), or (b) (5), I. R. C. 1939. Sol Goodman, Esq., and M. S. Cassen, Esq., for the petitioner. R. G. de Quevedo, Esq., and Lyman G. Friedman, Esq., for the respondent. Mulroney, Judge. MULRONEY *519 This proceeding involves claims for excess profits tax relief under section 722 of the 1939 Internal Revenue Code for the years ended June 30, 1942, 1943, 1944, 1945, and 1946. Petitioner's claims are based on section 722 (b) (1), (b) (2), (b) (3), and (b) (5) of the 1939 Code. Also involved are deficiencies in excess profits tax determined by the respondent for the years ended June 30, 1943 and 1944, in the amounts of $ 27,296.58 and $ 5,446.94, respectively, *178 by reason of the deferment of payments of such amounts by the petitioner under section 710 (a) (5). FINDINGS OF FACT. Some of the facts have been stipulated and they are hereby incorporated by this reference. Hougland Packing Company, Inc., hereinafter called the petitioner, was organized under the laws of the State of Indiana on December 24, 1932, with its office and place of business at Franklin, Indiana. Petitioner was the successor of Hougland Packing Company, a partnership formed in 1922. In 1953 the petitioner corporation was dissolved and its assets were distributed to the several stockholders. Authorized capital of the petitioner at incorporation was 1,000 shares of common stock, no par value, which was issued at a value of $ 100 per share to the partners of the predecessor partnership in the same proportion as their partnership interests. The shares of stock were issued as follows: Number of shares Isaac R. Hougland 94.2 Daniel M. Hougland 234.8 Clyde E. Hougland 155.1 Leland W. Hougland 155.1 Robert F. Hougland 125.7 Frank M. Cravens 235.1 1,000.0 Petitioner and its predecessor were engaged in the business of canning and packing food products, principally*179 tomatoes and sweet *520 corn. Petitioner obtained its corn and tomatoes by contracting with farmers in petitioner's vicinity for a certain amount of acreage of corn and tomatoes grown by them. This acreage was generally contracted in the early part of the year preceding the growing season. Petitioner was committed to purchase all of the corn and tomatoes on the contracted acreage. Petitioner determined the amount of acreage to be contracted each year by taking the average of what it considered to be its normal production capacity. The area in which petitioner contracted for corn and tomatoes did not exceed a radius of 15 miles from Franklin, Indiana, where petitioner's canning plant was located. Petitioner distributed its canned goods over a geographical area within a radius of approximately 600 miles from Franklin, Indiana. The contracted price per ton for corn and for tomatoes was the same on all contracts entered into by the petitioner each growing season. Contracts made by the petitioner each year with farmers specified a price per ton. There was one price only in petitioner's contracts for corn, which price was determined by the price of competing crops. There were*180 two prices in the contracts for tomatoes, one price for United States Government grade No. 1's, and another price for United States Government grade No. 2's. Separate equipment was required in the processing of corn and tomatoes by the petitioner. Petitioner's processing costs per ton for corn and tomatoes differed, with corn being more expensive to process. Petitioner's profits from its corn- and tomato-canning operations were dependent on the size of the annual crop, the price paid for the crop, cost of cans, labor, and other expenses, managerial and selling ability, the available supply, the selling prices for the product, and other factors. Some of the factors affecting the size of the annual crop of corn and tomatoes are moisture, cultivation, temperature, extent of fertilizer used, and the skill of the individual farmer. Between 1930 and 1934 there occurred a gradual change in the purchasing practices of petitioner's customers. Prior to this period, the predominant practice was to purchase futures, whereby purchases were made before the start of the canning season and delivery was made to the buyers after the products were packed. During the years 1930 through 1934 petitioner's*181 customers gradually changed to the spot-buying method, under which method both the purchase and delivery of the canned products were made after the products had been packed. Petitioner's capital stock and surplus accounts were as follows during the years indicated: *521 Capital stock Surplus Jan. 1, 1933 $ 100,000 $ 29,090.25 Dec. 31, 1933 100,000 62,698.56 Dec. 31, 1934 100,000 87,023.13 Dec. 31, 1935 100,000 149,725.51 Dec. 31, 1936 $ 100,000 $ 101,548.04 Dec. 31, 1937 100,000 105,013.68 Dec. 31, 1938 100,000 103,306.32 Dec. 31, 1939 100,000 104,667.85 Petitioner, since its organization, has kept its books and filed its Federal income and excess profits tax returns on the accrual method of accounting. Up to the end of 1939 its accounting period was the calendar year. It filed Federal income and excess profits tax returns for the 6-month period ended June 30, 1940, and as of that date changed its accounting period to a fiscal year ending June 30. Petitioner filed income and declared value excess-profits tax returns and excess profits tax returns for the period January 1, 1940, to June 30, 1940, and for the years ended June 30, 1941, 1942, 1943, *182 1944, 1945, and 1946, with the then collector of internal revenue for the district of Indiana at Indianapolis, Indiana. Petitioner's balance sheets at the date of incorporation and at the end of each year from 1933 through 1939 were as shown on the following page: *522 December 31 Jan. 1, 1933 [1935] Assets Cash $ 517.81 $ 2,813.88 $ 60,258.98 $ 7,523.26 Accounts and notes receivable 11,359.31 10,156.86 3,538.25 33,407.99 Inventories 150,891.43 52,520.09 43,853.47 136,867.00 Land 10,037.50 10,037.50 10,037.50 10,037.50 Buildings 34,219.30 34,219.30 35,610.81 41,258.31 Machinery 42,754.14 42,754.14 58,908.47 64,961.87 Furniture and fixtures 879.32 879.32 879.32 879.32 Automobiles 274.22 274.22 274.22 605.72 Field crates 753.71 753.71 753.71 1,469.96 Cash value of life insurance 4,813.15 4,813.15 Unexpired insurance Investments 14,850.00 Miscellaneous 118.65 Total assets $ 256,499.89 $ 174,190.82 $ 214,114.73 $ 297,010.93 Liabilities Notes payable $ 127,000.00 Accounts payable 409.64 $ 13,403.15 Accrued Federal income tax $ 5,525.00 $ 14,283.25 13,572.48 Reserve for depreciation 5,967.26 12,808.35 20,309.79 Net worth Capital stock 100,000.00 100,000.00 100,000.00 100,000.00 Surplus 29,090.25 62,698.56 87,023.13 149,725.51 Total liabilities and net worth $ 256,499.89 $ 174,190.82 $ 214,114.73 $ 297,010.93 *183 December 31 [1939] Assets Cash $ 18,522.93 $ 10,780.63 $ 3,831.78 $ 7,972.02 Accounts and notes receivable 4,735.94 18,791.04 786.84 19,411.05 Inventories 129,950.61 246,963.72 255,340.68 310,792.50 Land 10,037.50 10,037.50 10,037.50 10,037.50 Buildings 41,744.68 70,703.93 70,703.93 70,703.93 Machinery 65,778.37 75,302.98 75,302.98 75,302.98 Furniture and fixtures 909.69 932.19 932.19 932.19 Automobiles 605.72 1,205.72 1,205.72 1,205.72 Field crates 1,793.06 2,446.18 2,446.18 3,420.78 Cash value of life insurance Unexpired insurance 5,083.10 4,870.83 Investments Miscellaneous Total assets $ 274,078.50 $ 437,163.89 $ 425,670.90 $ 504,649.50 Liabilities Notes payable $ 20,000.00 $ 95,000.00 $ 70,000.00 $ 117,700.00 Accounts payable 22,637.73 99,119.62 104,305.58 124,002.01 Accrued Federal income tax 2,847.97 654.01 258.81 Reserve for depreciation 27,797.66 38,129.48 48,059.00 58,020.83 Net worth Capital stock 100,000.00 100,000.00 100,000.00 100,000.00 Surplus 100,795.14 104,260.78 103,306.32 104,667.85 Total liabilities and net worth $ 274,078.50 $ 437,163.89 $ 425,670.90 $ 504,649.50 *184 *523 Corn acreage contracted, tonnage purchased, total cost, cases packed, and number of cans per ton packed by petitioner and its predecessor for the years 1922 to 1939 were as follows: Acreage Tonnage Cases Cans Year contracted purchased Cost packed per ton [1922] 1,400 2,871 $ 22,971.67 79,652 [1923] 1,800 3,981 34,483.04 113,104 [1924] 2,100 3,847 38,523.78 104,254 [1925] 2,529 7,589 103,529.12 160,450 [1926] 2,474 7,423 74,756.69 167,687 [1927] 2,279 3,414 29,543.20 87,131 [1928] 2,500 4,821 48,080.00 129,672 [1929] 2,613 3,608 39,003.54 92,797 [1930] 2,800 2,198 24,333.36 40,739 [1931] 2,600 6,109 54,574.31 1 152,000 [665] 2 20,000 [1932] 1,705 5,212 36,358.24 140,375 [1933] 1,350 2,137 16,992.95 70,841 [1934] 2,500 5,250 41,399.76 [1935] 3,000 7,185 56,901.46 [1936] 2,800 1,988 3 38,125.47 [1937] 3,000 7,080 69,403.41 [1938] 2,000 2,920 29,298.10 [1939] 2,000 4,354 34,264.71 161,253 [889] Averages 1922-1939, incl 2,303 4,555 44,030.16 1923-1939, incl 2,356 4,654 45,268.89 1926-1939, incl 2,401 4,550 42,359.66 1936-1939, incl 2,450 4 4,085 4 43,272.92 *185 Tomato acreage contracted, tonnage purchased, and total cost of tomatoes purchased by the petitioner and its predecessor for the years 1922 through 1939 were as follows: Tomato Tonnage Year acreage purchased Cost contracted [2] 1,145 $ 12,451.65 [2] 2,440 29,144.27 [2] 4,964 66,254.51 [447] 1,927 21,778.39 [492] 3,088 42,467.39 [550] 3,172 35,657.09 [663] 3,219 40,757.69 [810] 5,186 73,828.73 [550] 2,915 24,857.80 [754] 2,696 19,291.55 [331] 2,359 27,797.19 [700] 3,397 38,383.25 [775] 4,004 44,461.05 [760] 3,191 39,669.32 [692] 5,246 62,397.57 [750] 3,431 36,657.92 [720] 3,600 35,581.06 Averages 1923-1939, incl 3,293 38,319.79 1926-1939, incl [642] 3,388 38,827.57 1936-1939, incl [730] 3,867 43,576.47 *524 A comparison of total corn and tomato tonnage purchases by the petitioner with net profit from operations, before deductions for partners' *186 and officers' salaries, is as follows: Net income (or Corn and loss) before tomato deduction for tonnage salaries of purchased partners and officers Averages 1923-1939 7,947 $ 47,868 1936-1939 7,952 27,291 Four highest production years: 1925, 1926, 1935, [1937] 11,354 58,054 Four highest profit years: 1924, 1928, 1934, 1935 8,529 95,078 Four lowest production years: 1923, 1924, 1933, [1936] 5,272 60,874 Four lowest profit years: 1931, 1932, 1938, 1939 7,809 3,540 A table showing the trend of wholesale prices for canned corn and canned tomatoes, the cost to the petitioner of purchasing corn and tomatoes at the farms, and the prices received by growers for these products, is as follows: Per cent 1922-39 1936-39 1936-1939 average average of 1922-39 average Corn Wholesale price of canned corn per dozen No. 2's, f. o. b. midwestern canneries $ 0.843 $ 0.727 86.24 Farm value per ton -- Indiana 10.85 10.32 95.12 Farm value per ton -- United States 11.18 10.04 89.80 Petitioner's cost per ton 9.66 10.59 109.62 Tomatoes Wholesale price of canned tomatoes per dozen No. 2's, f. o. b. Indiana 0.853 0.677 79.37 Farm value per ton -- Indiana 11.36 11.32 99.65 Farm value per ton -- United States 13.19 12.56 95.23 Petitioner's cost per ton (1923-1939) 11.64 11.27 96.82 *187 Petitioner and its predecessor partnership had sales, gross profit on sales, and net income as follows (cents omitted): *525 Predecessor Partnership Excess profits net income (or loss) Excess profits as defined in sec. Gross profit Net income 1 net income 711 (b), before Year Sales on sales (or loss) as defined in deduction for sec. 711 (b) partners' and officers' salaries [1922] $ 135,762 $ 56,568 $ 13,256 $ 13,256 $ 17,706 [1923] 270,519 118,901 36,174 36,174 41,224 [1924] 382,823 173,044 78,579 78,579 84,179 [1925] 475,389 162,647 36,816 36,816 43,916 [1926] 361,619 143,388 42,070 42,070 49,870 [1927] 312,678 114,395 27,213 27,213 35,013 [1928] 444,991 167,964 74,781 74,781 85,181 [1929] 360,464 134,571 43,788 43,788 53,670 [1930] 220,018 84,766 3,470 3,470 12,670 [1931] 190,893 59,315 (16,379) (16,379) (6,879) [1932] 227,358 58,959 2 (8,098) 2 (8,098) 1,402 Petitioner Corporation [1933] $ 405,139 $ 121,484 $ 39,133 $ 38,989 $ 63,389 [1934] 534,825 208,872 83,598 76,640 107,340 [1935] 418,836 196,243 74,529 72,913 103,613 [1936] 399,463 147,996 24,006 24,006 54,706 [1937] 362,754 146,319 4,119 4,119 34,819 [1938] 259,726 85,980 (954) (954) 8,546 [1939] 313,197 110,020 1,620 1,620 10,995 *188 Petitioner and its predecessor partnership showed the following cost of sales (cents omitted) in their operations over the years 1922 through 1939: Predecessor Partnership Purchases Beginning Less Cost of Year inventory Labels, ending sales Corn Tomatoes Pumpkin Cans boxes, inventory supplies, etc. [1922] $ 22,971 $ 21,670 $ 36,523 $ 1,971 $ 79,193 [1923] $ 1,971 34,483 $ 12,451 $ 9,352 50,665 48,028 5,335 151,617 [1924] 5,335 38,523 29,144 14,374 103,623 41,524 22,746 209,779 [1925] 22,746 103,529 66,254 2,472 120,524 33,225 36,011 312,741 [1926] 36,011 74,756 21,778 3,229 109,195 22,453 49,195 218,230 [1927] 49,195 29,543 42,467 13,376 88,565 23,173 48,037 198,283 [1928] 48,037 48,080 35,657 20,273 120,542 60,635 23,227 309,999 [1929] 23,227 39,003 40,757 16,158 99,597 26,390 19,241 225,892 [1930] 19,241 24,333 73,828 2,964 75,680 19,073 79,869 135,252 [1931] 79,869 54,574 24,857 [25] 112,723 21,979 162,452 131,578 [1932] 162,452 36,358 19,291 88,705 12,482 150,891 168,398 Petitioner Corporation [1933] $ 150,891 $ 16,992 $ 27,797 $ 4,206 $ 66,489 $ 69,797 $ 52,520 $ 283,655 [1934] 52,520 41,399 38,383 12,889 157,156 67,456 43,853 325,952 [1935] 43,853 56,901 44,461 8,608 171,966 33,669 136,867 222,592 [1936] 136,867 52,284 39,669 11,738 120,444 20,414 129,950 251,467 [1937] 129,950 69,403 62,397 [67] 166,897 34,682 246,963 216,435 [1938] 246,963 29,298 36,657 4,961 96,725 14,480 255,340 173,746 [1939] 255,340 34,264 35,581 15,921 147,091 25,770 310,792 203,176 *189 The deductions shown on the following page were allowed petitioner and its predecessor by respondent for Federal income tax purposes for the years 1922 through 1939 (cents omitted): *526 PREDECESSOR PARTNERSHIP [1927] Deductions Labor $ 12,048 $ 33,827 $ 43,418 $ 37,179 $ 31,961 Salaries and wages $ 30,137 Interest [330] 2,797 [925] 1,568 1,511 1,565 Taxes [641] 1,010 1,352 1,162 Repairs [3] 2,117 2,238 5,543 3,333 Bad debts [150] Brokerage 3,899 7,193 12,051 14,903 10,928 8,012 Coal 1,563 1,703 1,539 1,597 1,159 1,649 Freight 3,310 6,405 9,293 12,533 7,438 7,030 Insurance 2,041 2,890 2,642 4,752 4,302 2,224 Light and power [491] 1,238 1,447 1,693 1,110 [988] Office [422] 4,808 6,866 4,051 2,713 Seeds [840] 2,391 Miscellaneous expense 1,560 3,606 [2] Discount 1,632 3,553 6,764 6,662 5,160 4,218 Auto expense [303] Fertilizer [519] Swells [321] 3,069 [203] Travel [707] Depreciation 9,935 14,920 12,510 13,278 12,005 13,307 Partners' salaries 4,450 5,050 5,600 7,100 7,800 7,800 Tomato plants [626] 1,644 Total $ 43,312 $ 82,727 $ 95,920 $ 125,830 $ 101,317 $ 87,181 *190 PREDECESSOR PARTNERSHIP [1932] Deductions Labor $ 34,651 $ 32,122 $ 26,586 $ 27,440 $ 18,655 Salaries and wages Interest 1,315 [915] 1,734 2,804 3,766 Taxes 1,802 1,747 1,600 1,628 1,904 Repairs 1,886 3,560 5,683 2,392 [808] Bad debts [636] Brokerage 10,938 9,041 4,680 2,678 5,059 Coal 1,605 1,521 1,606 [551] Freight 4,362 6,326 5,942 5,929 7,595 Insurance 2,881 3,593 2,856 5,964 3,894 Light and power 1,019 [713] Office 2,434 2,010 5,471 2,377 3,124 Seeds Miscellaneous expense (9) Discount 6,243 5,133 3,102 2,488 1,943 Auto expense [154] Fertilizer Swells [3] Travel [398] Depreciation 12,117 11,828 10,861 10,068 1 8,992 Partners' salaries 10,400 9,882 9,200 9,500 9,500 Tomato plants [155] Total $ 93,182 $ 90,783 $ 81,295 $ 75,695 $ 67,057 *527 Petitioner Corporation [1936] Deductions Compensation of officers $ 24,400 $ 30,700 $ 30,700 $ 30,700 Repairs [928] 2,415 4,587 5,390 Interest 5,009 [735] Taxes 1,587 3,383 1,503 2,754 Bad debts [37] 1,211 [114] Depreciation 5,967 6,841 7,501 7,487 Salaries and wages 19,828 48,439 56,197 45,447 Office and general expense 2,357 3,186 4,284 3,279 Auto expense and repair [270] Brokerage 7,768 11,319 10,664 8,877 Coal [663] 2,260 1,682 1,504 Discount 4,839 6,886 3,489 6,065 Freight, drayage, and express 5,837 8,701 [416] 5,604 Insurance 1,538 2,705 [67] 5,945 Light and power [630] 1,350 1,363 1,224 Allowance for swells [67] 1,564 [129] Tomato plants [902] Traveling expense 1,117 [137] Adjustments (10) Seed corn [973] Insurance unexpired Total $ 82,787 $ 131,058 $ 125,193 $ 125,836 *191 Petitioner Corporation [1939] Deductions Compensation of officers $ 30,700 $ 9,500 $ 9,375 Repairs 3,855 2,120 3,240 Interest 1,152 1,105 5,968 Taxes 5,155 3,382 6,063 Bad debts [169] Depreciation 10,331 9,929 9,961 Salaries and wages 58,131 39,117 46,893 Office and general expense 5,393 4,062 2,738 Auto expense and repair [607] Brokerage 8,942 6,724 6,220 Coal 2,010 1,201 1,580 Discount 5,004 4,023 4,314 Freight, drayage, and express 4,750 4,731 6,674 Insurance 4,267 3,954 4,507 Light and power 1,334 [967] 1,261 Allowance for swells [158] Tomato plants 1,007 Traveling expense [173] Adjustments Seed corn [84] Insurance unexpired (5,083) Total $ 143,041 $ 87,679 $ 109,739 Salaries and drawings of the predecessor partnership for the years 1922 through 1932, and compensation paid to petitioner's officers for the years 1933 through 1939 were as follows: Partners' Partners' Total partners' Compensation Year salaries drawings salaries and of corporate drawings officers [1922] $ 4,450.00 $ 8,000.00 $ 12,450.00 [1923] 5,050.00 33,669.25 38,719.25 [1924] 5,600.00 72,306.14 77,906.14 [1925] 7,100.00 1,177.35 8,277.35 [1926] 7,800.00 34,544.72 42,344.72 [1927] 7,800.00 50,682.69 58,482.69 [1928] 10,400.00 65,438.25 75,838.25 [1929] 9,882.50 65,300.53 75,183.03 [1930] 9,200.00 14,236.22 23,436.22 [1931] 9,500.00 [1] 9,500.00 [1932] 9,500.00 [1] 9,500.00 [1933] $ 24,400 [1934] 30,700 [1935] 30,700 [1936] 30,700 [1937] 30,700 [1938] 9,500 [1939] 9,375 *192 For the years 1934, 1935, 1936, and 1939, petitioner's board of directors authorized the following annual salaries to be paid to the officers and directors: *528 [1934] Name and title [1939] Original Increase D. M. Hougland, president $ 6,000 $ 1,500 $ 7,500 $ 7,500 $ 2,500 I. R. Hougland, director 1,500 [500] 2,000 2,000 L. W. Hougland, director and packing superintendent 4,100 1,000 5,100 5,100 2,500 F. M. Cravens, vice president 5,000 1,500 6,500 6,500 2,500 C. E. Hougland, secretary-treasurer 4,800 1,000 5,800 5,800 1 1,875 R. F. Hougland, director and warehouse superintendent 3,800 3,800 3,800 $ 21,400 $ 9,300 $ 30,700 $ 30,700 $ 9,375 On December 6, 1938, the petitioner's board of directors decided that "owing to present market conditions, and business prospects the officers salaries be reduced * * * as follows": D. M. Hougland, president $ 2,500 C. E. Hougland, secretary-treasurer 2,500 L. W. Hougland, director 1,800 F. M. Cravens, vice president 1,500 R. F. Hougland, director 1,200 $ 9,500 The following table gives statistics on sweet corn for the*193 State of Indiana published by the United States Department of Agriculture, showing acreage harvested, production, yield per acre, average farm price per season, and number of cases of canned corn packed for the seasons 1922 through 1939. Corn Acreage Production Yield per Farm packed Year harvested (tons) 1 acre price per (in thousands (tons) ton of cases) 2 [1922] 13,730 34,300 2.50 $ 10.00 [1923] 19,670 47,200 2.40 11.00 1,208 [1924] 21,000 35,700 1.70 14.74 [1925] 36,990 88,800 2.40 14.83 2,223 [1926] 30,380 88,100 2.90 10.18 2,044 [1927] 17,010 23,800 1.40 10.41 [1928] 27,390 38,300 1.40 13.00 1,131 [1929] 38,500 50,000 1.30 13.00 1,250 [1930] 43,500 56,600 1.30 13.20 1,272 [1931] 42,000 92,400 2.20 11.00 2,362 [1932] 22,000 50,600 2.30 7.20 1,139 [1933] 26,600 34,600 1.30 7.80 [1934] 38,500 50,000 1.30 8.30 1,037 [1935] 49,700 84,500 1.70 9.30 2,310 [1936] 44,000 39,600 0.90 9.50 [1937] 51,400 107,900 2.10 12.80 2,231 [1938] 42,400 72,100 1.70 10.60 1,681 [1939] 35,000 73,500 2.10 8.40 1,852 Averages 1922-1939 33,321 59,333 1.83 10.85 1,423 1936-1939 43,200 73,275 1.70 10.32 1,649 *194 Sources: United States Department of Agriculture, "Yearbooks" and "Agricultural Statistics." *529 The following table gives statistics on tomatoes for the State of Indiana, published by the United States Department of Agriculture, showing acreage harvested for processing, production, yield per acre, average farm price for season, and number of cases of canned tomatoes and tomato juice packed in the years 1922 through 1939: Tomatoes Tomato canned 1 juice 4 (in Production Yield per Price per (in thousands thousands Season Acreage (tons) acre ton of of cases) cases) (1) (2) (3) (4) (5) (6) [1922] 53,240 308,800 5.8 $ 10.48 2 1,939 [1923] 54,000 156,600 2.9 10.31 2 1,224 [1924] 59,000 200,600 3.4 12.41 1,792 [1925] 72,000 324,000 4.5 12.79 3,337 [1926] 49,990 175,000 3.5 12.60 1,536 [1927] 42,990 163,400 3.8 13.06 1,931 [1928] 49,870 149,600 3.0 12.90 1,046 [1929] 59,840 251,300 4.2 13.20 1,936 [1930] 79,000 395,000 5.0 13.30 3,463 [1931] 64,000 192,000 3.0 10.00 2,034 [1932] 62,000 248,000 4.0 8.10 3 2,750 [1933] 53,000 212,000 4.0 9.60 2,876 1,138 [1934] 83,000 315,400 3.8 9.80 3,487 1,664 [1935] 97,300 321,100 3.3 10.60 3,587 2,281 [1936] 92,000 358,800 3.9 11.60 3,010 2,867 [1937] 80,700 427,700 5.3 12.60 3,642 2,947 [1938] 71,200 299,900 4.2 11.20 3,037 n5 [1939] 72,300 361,500 5.0 9.90 3,376 n5 Averages 1922-1939 66,413 270,038 4.1 11.36 2,556 1936-1939 79,050 361,975 4.7 11.32 3,266 *195 Source: United States Department of Agriculture, "Yearbooks" and "Agricultural Statistics." Franklin, Indiana, the site of petitioner's cannery, is located approximately 20 miles south of Indianapolis, Indiana. Total precipitation at Indianapolis for the years 1922 through 1939, was as follows: Year Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. Annual [1922] 1.26 1.46 7.16 8.55 2.58 0.99 2.67 2.45 1.52 1.78 2.32 4.45 37.19 [1923] 2.73 1.70 4.41 1.94 5.86 2.30 2.43 4.83 3.91 3.29 2.04 5.60 41.04 [1924] 3.13 1.44 4.72 3.28 4.47 4.04 1.75 4.77 2.80 0.79 1.75 5.53 38.47 [1925] 0.49 1.64 2.87 1.98 0.94 4.70 4.67 3.82 5.96 4.16 5.13 1.09 37.45 [1926] 2.72 2.75 3.12 3.91 3.59 1.28 3.78 4.97 9.33 2.68 1.67 1.95 41.75 [1927] 3.15 2.36 6.32 5.16 5.62 1.24 3.48 2.64 2.70 2.01 4.69 2.99 42.36 [1928] 1.74 3.44 2.44 2.76 3.04 8.77 3.07 3.81 0.92 2.93 3.66 2.19 38.77 [1929] 4.74 1.47 3.24 4.28 8.46 5.36 5.44 2.49 2.03 3.66 2.15 4.14 47.46 [1930] 7.34 2.76 1.80 4.05 1.69 1.55 0.90 2.08 2.86 1.77 2.06 0.80 29.66 [1931] 0.54 1.76 2.32 3.58 2.51 2.20 2.95 4.70 3.66 3.75 3.38 4.41 35.76 [1932] 6.10 1.47 1.96 2.77 0.60 5.94 2.86 3.17 7.18 3.25 2.69 4.70 42.69 [1933] 2.02 1.90 6.20 4.16 7.10 2.50 5.85 1.97 5.27 1.28 1.16 2.17 41.58 [1934] 1.25 0.86 3.32 2.23 0.60 2.98 2.50 2.49 4.54 0.19 2.14 1.87 24.97 [1935] 2.33 0.20 3.49 1.54 6.97 4.66 3.16 4.99 3.98 1.01 3.56 1.84 37.73 [1936] 1.32 3.21 2.13 3.89 1.48 2.91 0.67 2.49 4.30 3.29 4.58 3.20 33.47 [1937] 8.05 1.68 1.47 4.27 1.58 3.69 5.37 3.46 3.28 5.59 1.94 3.77 44.15 [1938] 1.00 2.52 7.93 3.24 5.14 6.49 7.15 2.53 1.74 1.06 3.03 1.46 43.29 [1939] 5.33 2.97 3.03 5.74 0.88 5.67 7.20 2.91 1.17 2.93 1.15 1.13 40.11 *196 *530 Petitioner is entitled to compute its excess profits credit in accordance with the provisions of either section 713 or section 714 of the 1939 Internal Revenue Code and to use whichever amount results in the lesser excess profits tax, as provided by section 712 (a). The method which results in the lesser excess profits tax for each of the taxable years ended June 30, 1941 through 1946, is the invested capital method described in section 714. Petitioner's excess profits credit computed under the invested capital method is as follows: Excess profits credit under Year ended June 30 the invested capital method 1940 1 $ 20,948.10 [1941] 17,602.91 [1942] 18,371.61 [1943] 19,257.88 [1944] 24,436.97 [1945] 27,565.29 [1946] 28,415.84 Petitioner's excess profits net income for each of the taxable years ended June 30, 1940 through 1946, is as follows: Excess profits net income Income credit Invested capital Year ended June 30 method method 1940 1 2 $ 286.84 2 $ 1,035.62 [1941] 19,231.40 19,975.30 [1942] 65,159.62 65,566.84 [1943] 124,772.75 125,017.39 [1944] 65,055.35 65,917.35 [1945] 36,989.58 38,704.73 [1946] 50,569.30 51,945.49 *197 Petitioner's excess profits tax liability as finally determined by respondent without benefit of section 722, the amount deferred by reason of section 710 (a) (5) of the 1939 Internal Revenue Code, the amount of credit allowed under section 784, and the excess profits tax previously assessed for each of the taxable years ended June 30, 1940 to 1946, inclusive, are as follows: *531 Excess profits tax finally Amount deferred 10 per cent Excess profits Year ended determined under credit under tax previously June 30 without benefit of sec. 710 (a) (5) sec. 784 assessed sec. 722 1940 1 2 None None None None [1941] 2 None None None None [1942] $ 13,074.57 None None $ 13,074.57 [1943] 90,683.56 $ 27,296.58 None 63,386.98 [1944] 31,377.35 5,446.94 None 25,930.41 [1945] 1,082.47 $ 108.25 974.22 [1946] 6,479.40 647.94 5,831.46 *198 Petitioner filed timely claims for relief under section 722 of the 1939 Internal Revenue Code for the taxable years ended June 30, 1942, 1943, 1944, 1945, and 1946. Respondent, by statutory notice dated April 11, 1952, notified petitioner that the claims were disallowed in full and that there were deficiencies in excess profits tax resulting from petitioner's deferment of a part of its excess profits tax under section 710 (a) (5) of the 1939 Internal Revenue Code for the taxable years ended June 30, 1943 and 1944. OPINION. Petitioner was engaged in the business of canning corn and tomatoes during the years here involved. Petitioner seeks relief from excess profits tax for the years ended June 30, 1942, 1943, 1944, 1945, and 1946, under section 722 (b) (1), (b) (2), (b) (3), and (b) (5). 1 It is the argument of the petitioner that drought conditions *532 in 1936 and an overproduction of corn and tomatoes in 1937 caused lower earnings during the base period years. To obtain relief petitioner must connect these events with its own net income for the base period years. It must show that its average base period net income is an inadequate standard of normal earnings because *199 of one or more of the factors mentioned in the sections relied upon for relief. A. B. Frank Co., 19 T. C. 174, affd. 211 F. 2d 497; Trunz, Inc., 15 T. C. 99. The causal relationship cannot be left entirely to surmise. A. B. Frank Co., supra. *200 Petitioner in its short brief has largely ignored these problems. Although section 722 (b) (1), (b) (2), (b) (3), and (b) (5) are mentioned, there is no serious effort by the petitioner, apart from a recitation of some of the statutory language, to develop arguments under each of these sections. It appears, however, that petitioner's emphasis is on section 722 (b) (1) and (b) (2), and consequently we shall first examine its claim for relief in the light of these sections. Petitioner relies upon the alleged drought in 1936 and the overproduction of corn and tomatoes in 1937 as factors qualifying it for relief. Total precipitation, in inches, at Indianapolis, approximately 20 miles from petitioner's cannery, for the years 1936, 1937, 1938, and 1939 was 33.47, 44.15, 43.29, and 40.11, respectively. Over the longer period 1923 to 1939 the average precipitation in this area was 38.87 inches. We are not convinced that a variation of this degree in the precipitation for 1936 from the average precipitation over the longer period qualifies as an event "unusual and peculiar" in the experience of the petitioner. Nor are we persuaded that the overproduction of corn and tomatoes in 1937 *201 was such a qualifying event within the meaning of section 722 (b) (1). We have difficulty determining just what petitioner is arguing, but if it is actually arguing that the overproduction of corn and tomatoes in 1937 brings it within section 722 (b) (2), we still do not believe that such overproduction can be regarded as a qualifying factor. In Industrial Yarn Corporation, 16 T. C. 681, 689, where the taxpayer sought relief under section 722 (b) (2) with the argument that a record cotton crop caused a temporary and unusual depression of prices, this Court said: It is not unusual for a cotton crop to vary in size from year to year. The fortuitous circumstances that 1937 may have produced a cotton crop of extraordinary size does not, of itself, create an abnormality in petitioner's business of the character sufficient to bring petitioner within the scope of [section 722 (b) (2)] * * * Assuming that the drought condition in 1936 and the overproduction in 1937 were qualifying factors within section 722 (b) (1) and (b) (2) we must still find the causal relationship, if any, between these factors and petitioner's low base period earnings. The average*202 *533 excess profit net income of the petitioner and its predecessor partnership over the base period was $ 7,197.92, while the average over the longer period, 1923 to 1939, inclusive, was $ 31,515. To make a true comparison of the income of the longer period with that of the base period it is essential to make adjustments to the income of the predecessor partnership in an amount which will approximate the deductions allowed to the petitioner for officers' compensation. If the income of the predecessor partnership for each of the years 1923 to 1932 is adjusted downward by $ 24,400, which amount represents the officers' compensation allowed to the petitioner in 1933, the average income over the 17-year period becomes $ 21,975.56. 2 *203 We have indicated that the petitioner's average excess profits net income for the base period was slightly over $ 7,000. Petitioner seizes upon this low income figure for the base period, points to an alleged drought in 1936 and to the overproduction of corn and tomatoes in 1937, and without more, reaches the conclusion that it qualifies for relief. We cannot agree. Under section 722 (b) (1) it is necessary to show that average base period net income is an inadequate standard of normal earnings because the alleged "unusual and peculiar" events interrupted or diminished the normal operations of the petitioner during one or more of the base years, and under section 722 (b) (2) it is necessary to show that the inadequacy of base period earnings as a standard was because the business of the petitioner was depressed in the base period because of temporary economic circumstances unusual in the case of the petitioner or in the case of an industry to which petitioner belonged. As this Court pointed out in Harlan Bourbon & Wine Co., 14 T. C. 97, 104, "A mere failure to maintain a given level of earnings does not establish a depression of earnings *204 within the meaning of section 722." We have examined the record and are unable to discover any evidence to support petitioner's arguments that the alleged drought in 1936 and the overproduction in 1937 caused the low earnings during the base period. In the first place, petitioner does not segregate anywhere, by products, the figures for sales or gross profits. There was testimony that the processing cost differed for corn and tomatoes, with corn being more expensive to process, but we are not told the nature and extent of this difference. In 1936, when the alleged drought occurred, the tomato crop purchased by petitioner from the contracted acreage was normal, while the corn purchases were substantially lower. However, without the necessary segregation of profits from each operation, it *534 is impossible to begin to trace the effect of the low corn yield in 1936 on petitioner's profit for the base period. Also, we have examined the evidence and cannot discern any relationship between petitioner's level of production and its annual earnings. In petitioner's and its predecessor's 4 highest years, 1925, 1926, 1935, and 1937, it purchased an annual average of 11,354 tons of *205 corn and tomatoes and showed an annual average of excess profits net income (before deduction for partners' and officers' salaries) in the amount of $ 58,054, while in the 4 years of lowest production, 1923, 1924, 1933, and 1936, it made average annual purchases of corn and tomatoes amounting to 5,272 tons and showed an average annual excess profits net income of $ 60,874. In the 4 years of its lowest excess profits net income, 1931, 1932, 1938, and 1939, petitioner showed average annual profits of $ 3,540, while the average purchases of corn and tomatoes were 7,809 tons, which amounted to 92 per cent of the average purchases, or production, in the 4 highest years. Also, it appears that the average sales of $ 333,785 during the base period are not materially different from the average sales made by petitioner and its predecessor during the 17-year period 1923 through 1939, amounting to $ 349,453. Indeed, the average sales during the base period were slightly higher than the average sales, amounting to $ 332,845, during the 6 years immediately preceding the base period years. In connection with the overproduction of corn and tomatoes in 1937 which petitioner argues had an adverse*206 effect on its base period earnings, there is no evidence enabling us to measure the effect of such overproduction on petitioner's operations. We recognize that a distortion in inventory carryover from year to year would have its effect on annual earnings, but here again we cannot make the necessary analysis because petitioner's inventories are a conglomeration of labels, cans, boxes, and supplies, as well as canned corn and tomato products. It is not necessary at this time to determine why the earnings of the petitioner were lower in the base years than over the longer period. Trunz, Inc., supra. However, there are indications in the record of some of the reasons for the lower earnings of the petitioner during the base years. Although gross profits from sales in the base period remained fairly normal, operating expenses showed a marked increase over the long-term period from 1923 to 1939, and petitioner makes no claim that the increased operating expenses were due to the alleged drought conditions in 1936 or to the overproduction of corn and tomatoes in 1938. Average gross profit on sales for the base period was $ 122,579, and the average gross profit*207 on sales over the long period from 1923 to 1939 was $ 131,463. During the 6 years preceding the base period the average gross profit from sales was $ 121,606. The average of the operating expenses of the petitioner over the long period *535 from 1923 to 1939 was $ 100,372, while the average of the operating expenses over the base period was $ 116,574. During the 6-year period preceding the base period the average operating expenses were $ 93,848. Some of the averages of individual items of expense which showed marked increases in the base period years over the longer period from 1923 to 1939 were salaries and wages, from $ 37,061 to $ 47,397, taxes, from $ 2,159 to $ 4,338, insurance, from $ 3,470 to $ 4,668, and officers' and partners' compensation, from $ 14,583 to $ 20,069. Another cause which could conceivably contribute to the lower earnings during the base period is the indication of a declining profit margin in petitioner's operations. The farm prices of tomatoes and corn in Indiana during the base period were 95 per cent and 99 per cent, respectively, of the average farm prices of these same products during the period 1922 through 1939. While these farm prices *208 were fairly constant, the average wholesale price of canned corn f. o. b. midwestern canneries during the base period was 86.24 per cent of the average wholesale price from 1922 through 1939, and the average wholesale price of canned tomatoes f. o. b. Indiana during the base period was 79.37 per cent of the average wholesale price during the long period of 1922 through 1939. It also appears that between the years 1930 and 1934 a change took place in the purchasing practices of petitioner's customers from the method of purchasing futures, in which all purchases were made prior to the canning season, to the spot-buying method whereby purchase and delivery of the canned products were made after the products had been packed. We are not given any information to gauge the effect of these changes on petitioner's operations, yet it is significant that petitioner's sales, which were $ 534,825 in 1934, fell to $ 418,836 in 1935, while the total corn and tomatoes purchased by petitioner rose from 8,647 tons in 1934 to 11,189 in 1935. We hold that petitioner has not established its right to excess profits tax relief under section 722 (b) (1) and (b) (2). Petitioner also claims excess profits*209 tax relief under section 722 (b) (3) (A) and (b) (3) (B), under which it must be shown that "the business of the taxpayer was depressed in the base period by reason of conditions generally prevailing in an industry of which the taxpayer was a member, subjecting such taxpayer to (A) a profits cycle differing materially in length and amplitude from the general business cycle, or (B) sporadic and intermittent periods of high production and profits, and such periods are inadequately represented in the base period." Petitioner has completely failed to carry its burden of proof on this portion of its claim. We are not given any industry statistics or other evidence which would enable us to determine whether or not there were conditions prevailing in such industry that caused a depression in petitioner's business. No information is supplied *536 to us concerning profits cycles or sporadic periods of high production and profits. We hold that petitioner is not entitled to excess profits tax relief under section 722 (b) (3) (A) or (b) (3) (B). Petitioner's claim for relief under section 722 (b) (5) must also be denied since it is not based on "any other factor" than those which are *210 specifically mentioned in section 722 (b) (1), (b) (2), (b) (3) (A), and (b) (3) (B). Crane Co. of Minnesota, 25 T. C. 727; Gulf Coast Broadcasting Co., 24 T. C. 1094. We conclude that petitioner has failed to establish that its average base period net income is an inadequate standard of normal earnings because of the reasons explicitly set forth in section 722 (b) (1), (b) (2), (b) (3) (A), (b) (3) (B), and (b) (5), and consequently must deny petitioner's claim for excess profits tax relief under these sections. Reviewed by the Special Division. Decision will be entered for the respondent. Footnotes 1. No. 2's.↩ 2. No. 303's.↩ 5. Not available.↩ 3. $ 14,159.29 of field corn purchased in addition.↩ 4. Does not include field corn purchases.↩ 1. None.↩ 2. Not available.↩ 1. Net income figures for the predecessor partnership are after↩ deductions for partners' salaries. 2. After deducting depreciation of $ 8,992 which was omitted by the petitioner on its return for that year↩ 1. Depreciation not deducted on return filed by petitioner.↩ 1. None.↩ 1. For 9 months.↩ 1. Tonnage in husk.↩ 2. Stated in cases of 24 No. 2 cans.↩ 1. Stated in cases of 24 No. 2 cans; calendar year.↩ 4. Actual cases.↩ 2. Estimated from data in terms of cases of 24 No. 3 cans as follows: 1922, 1,312,000 cases; and 1923, 717,000 cases.↩ 5. Data not available by States.↩ 3. Data for 1932 not available. Department of Agriculture estimates 1932 Indiana pack as between 2,500,000 and 3,000,000 cases of 24 No. 2 cans. Figure used is the average of these figures.↩ 1. Six months.↩ 1. Six months.↩ 2. Under laws applicable to fiscal years ended June 30, 1941 and 1942, for purposes of unused excess profits credit carryover.↩ 1. Six months.↩ 2. After benefit of unused excess profits credit carryover from the period ended June 30, 1940, in the amount of $ 9,381.19, applied $ 2,372.39 to the year ended June 30, 1941, and $ 7,008.80 to the year ended June 30, 1942↩ 1. SEC. 722. GENERAL RELIEF -- CONSTRUCTIVE AVERAGE BASE PERIOD NET INCOME. (b) Taxpayers Using Average Earnings Method. -- The tax computed under this subchapter (without the benefit of this section) shall be considered to be excessive and discriminatory in the case of a taxpayer entitled to use the excess profits credit based on income pursuant to section 713, if its average base period net income is an inadequate standard of normal earnings because -- (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, (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, (3) the business of the taxpayer was depressed in the base period by reason of conditions generally prevailing in an industry of which the taxpayer was a member, subjecting such taxpayer to (A) a profits cycle differing materially in length and amplitude from the general business cycle, or (B) sporadic and intermittent periods of high production and profits, and such periods are inadequately represented in the base period, * * * * (5) of any other factor affecting the taxpayer's business which may reasonably be considered as resulting in an inadequate standard of normal earnings during the base period and the application of this section to the taxpayer would not be inconsistent with the principles underlying the provisions of this subsection, and with the conditions and limitations enumerated therein.↩ 2. In determining its net income for the years 1923 to 1932 the predecessor partnership deducted partners' salaries ranging from a low of $ 5,050 in 1923 to a high of $ 10,400 in 1928. These salary deductions have been eliminated prior to the adjustment of $ 24,400. It must also be pointed out that, in addition to partners' salaries, there were drawings by the partners which, over the period 1923 to 1932, averaged $ 41,918.↩