Opinion
Docket No. 38904.
1959-08-13
R. J. PEACOCK CANNING COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Hugh C. Bickford, Esq., Henry H. Elliott, Esq., and Nicholas Kapnistos, Esq., for the petitioner. Donald W. Geerhart, Esq., for the respondent.
Hugh C. Bickford, Esq., Henry H. Elliott, Esq., and Nicholas Kapnistos, Esq., for the petitioner. Donald W. Geerhart, Esq., for the respondent.
Petitioner, a Maine sardine packer, held, not entitled to excess profits tax relief under section 722, I.R.C. 1939, on account of depressed base period net income resulting from competition of foreign imports.
This proceeding involves claims for excess profits tax relief under section 722, I.R.C. 1939, for the fiscal years ended March 31, 1942, 1943, 1944, and 1945, in the respective amounts of $27,822.70, $58,433.74, $45,766.70, and $47,651.10. The question at issue is whether petitioner, a Maine sardine packer, is entitled to relief on a claim that its business was depressed during the base period years by reason of the shipment to the United States of abnormally large quantities of Norwegian sardines for sale at prices with which the Maine packers could not compete economically. Some of the facts have been stipulated.
FINDINGS OF FACT.
The stipulated facts are hereby found.
Petitioner, a Maine corporation with its principal place of business at Lubec, Maine, is engaged in the business of packing sardines. The returns for the years involved were filed with the collector of internal revenue for the district of Maine. The returns were prepared on an accrual basis and for a fiscal year ending March 31.
Petitioner was organized August 1, 1932, and on that date purchased from Seacoast Canning Company certain buildings and equipment located at Lubec and Portland, Maine. In 1935 it purchased another building from Seaboard Canning Company located at Eastport, Maine. Petitioner has been engaged in the business of packing sardines continuously since its incorporation.
The term ‘sardine’ as commonly used is associated with small fish packed in oil, or one of the several types of sauces in use, and hermetically sealed in small tin or other metal containers. Sardines are packed commercially in the United States, Norway, France, Spain, Portugal, Japan, and other countries. About 95 per cent of domestic sardines are packed in Maine and the other 5 per cent in California.
The world pack of sardines is constituted principally of two genera, Clupeidae and Sardina. These, in turn, are divided into several subspecies. The species packed by canners in the eastern United States, all of whom are located in the State of Maine, is Clupea harengus, to which the herring family belongs. On the Pacific coast the pack, which is comparatively small, is derived from Sardina cacrulea; in Norway from Clupea spratus (bristling or sprat) and Clupea harengus (musse or sild); in other European countries from Clupea pilchardus (pilchard). Another species, Sardinella melanosticta, is packed in Japan.
Maine sardines are taken from ocean waters in coves or near shore by means of weirs and seines. They are loaded on boats at the weirs and transported to the canneries in bulk. Salt is added as a preservative and flavoring. As the fish are loaded on the boat at the cannery they are inspected by a State inspector and placed in storage tanks in a brine solution.
In the canning process the fish are first placed on racks, or ‘flakes,‘ in thin layers and are cooked in steaming vats for 10 or 15 minutes. They are then dried and cooled and are ready for canning. The heads and tails are removed and the fish are placed in the cans in one or more layers, depending on the size of the fish. An oil or sauce is then added and the cans are sealed and placed in retorts where they are cooked by steam at a temperature of about 230 degrees for 1 to 1 1/2 hours. The packing job is performed mostly by women. The canneries are generally located in small towns and draw on the townspeople for their labor.
Most of the Maine sardines are packed in soybean or cottonseed oil. The Norwegian and most of the other European sardines are packed in olive oil. The olive oil-packed sardines generally are considered superior to those packed in other oils and are more expensive.
Petitioner and other Maine sardine packers sell their product throughout the United States, including Alaska and the Hawaiian Islands, and in Puerto Rico. Most of the imported sardines come from Norway. Norwegian sardines usually sell for about twice as much as comparable grades of Maine sardines.
At all times involved herein petitioner packed three grades of sardines. They were classified for trade purposes as ‘keyless,’ ‘key-can,‘ and ‘key-carton.’ The first of these three grades was sold under the trade name of ‘Admiral.’ All three grades were packed in No. 1/4 size cans containing 3 1/4 to 3 3/4 ounces of fish and ingredients. The cans were then packed in cases of 100 cans each, the average weight of the cases being about 23 pounds each.
The keyless grade was sold without keys for opening the can, as its name indicates. The second, or key-can grade was sold under the trade name ‘Continental.’ Petitioner packed a relatively small quantity of this middle grade during the base period years. The third and top grade was sold under several different trade names such as ‘Bulldog,’ ‘Homerun,’ ‘Arab,‘ and ‘Peacanco.’ The middle and top grades were both sold with keys attached to the cans. They were all packed in soybean or cottonseed oil.
There were two grades of the imported Norwegian sardines, classified for trade purposes as ‘one-layer’ and ‘two-layer.’ They were all packed in No. 1/4 size cans and in olive oil. The top grade contained bristling or sprat (Clupea spratus) which is a distinct specie of small fish. There were about 30 or 40 fish to a can. The lower grade, or one-layer pack, consisted of musse or sild; both are names for Clupea harengus, which are immature herring. They were packed 6 to 10 fish to a can. The bristling and, almost always, the musse sold in this country at prices above those of the top Maine sardine.
The Norwegian sardines were generally considered a better product than the Maine sardines. Greater care was taken in their selection, grading, and packing. They were packed in olive oil, whereas the Maine sardines were packed in cottonseed or soybean oil, and were slightly smoked for flavor. The Norwegian sardines had a better appearance when the can was opened.
The competition between the Maine and the Norwegian sardines was principally between the key-carton (or highest) grade of Maine sardine, which included about 5-10 per cent of the Maine pack, and the Norwegian one-layer musse (or lowest grade) which accounted for less than 25 per cent of the imports. There was no serious competition at any time between Maine keyless sardines and the top grade Norwegian sardine, the bristling. The price range of the cheapest grade of Norwegian sardine during all of the base period years was above that of the top grade Maine sardine.
In June 1932, the Tariff Commission, at the request of the tuna fish and sardine packers, instituted an investigation of the cost of production of fish packed in oil in the United States and in the principal competing countries, for the purpose of establishing appropriate tariff rates on such imports. The Tariff Commission made its report (Report No. 71) on October 30, 1933. The report is in part as follows:
There are both in the domestic production and in imports several grades and types of sardines differing as regards the kind of oil in which they are packed, the size of the fish, the style of the tin container, and (word omitted) affecting price and quality. Most of the domestic output is packed in cottonseed oil and only small quantities in olive oil. Practically all the imported product is packed in olive oil. Broadly speaking sardines fall into four general groups according to grade. Half or more of the sardines imported from Norway are of the two upper groups, whereas the domestic production on these groups is very small. About three fourths of the Maine pack is of the fourth or lowest group; there are no imports of this group.
Cost comparison is practicable only with regard to the third group. The representative domestic product of this group is sardines packed in cottonseed oil in no. 1/4 tins. The representative Norwegian product of this group is musse packed in olive oil in no. 1/4 tins, each containing 6 to 10 fish. This Norwegian product under normal conditions sells at a higher price in the United States than the specified Maine product, but recently it has sold as low as or lower than the American sardines. * * *
In its opinion, the Commission said:
The same difference exists now as at the earlier date between domestic sardines and the Norwegian product. They consist of different species of fish, the packing methods and processes are different, and so are the oils used in canning. The only ‘similarity’ which was greater at the time of this investigation than in previous years was found in the price at which the products were sold. Ordinarily the Norwegian sardines of the type selected have sold at a substantially higher price than domestic sardines. During the period chosen by the Tariff Commission as ‘representative’, however, the price in Norway was exceptionally low in terms of American money. The fall was due, in part, to the depreciation of the Norwegian currency and, in part, to the many forces of depression that affected prices everywhere.
As a result of the investigation by the Tariff Commission, the tariff on sardines of a value not in excess of 9 cents per pound was increased by a proclamation issued December 14, 1933, from 30 per cent, where it had stood since 1922, to 44 per cent. That rate continued in effect until after 1940.
In 1931, as a result of the nationwide depression, the Norwegian Government reduced the value of the krone to approximately 18 cents. The exchange rate had stood at about 26 cents since 1926. It reached a high of over 30 cents in 1917, but had fallen off to approximately 14 cents in 1924. This advantage in the rate of exchange resulted in a temporary reduction of prices and an increase in the imports of Norwegian sardines. The effect of the krone devaluation was partially offset by the devaluation of the dollar in 1934.
In 1937, the Norwegian Government sponsored the formation of a ‘central’ (trade association) for the purpose of stabilizing the prices of Norwegian sardines and bettering the conditions of the industry. Many of the Norwegian packers were in financial difficulties and had been taken over by the banks. Under rules adopted by the central, sardines could not be exported for sale below fixed minimum prices and could not be shipped on consignment.
The following table shows the production of Maine sardines and the imports of Norwegian sardines for the calendar years 1922 to 1942, inclusive, and the rates of exchange for the krone, in cents, for the period 1915 to 1939, inclusive:
+----+ ¦¦¦¦¦¦ +----+
Norwegian sardine imports Maine sardine Cents per Year production Krone 30 per cent 44 per cent U.S. duty U.S. duty
In pounds 1915 25.8794 1916 28.6276 1917 30.5678 1918 30.8424 1919 24.5760 1920 16.5300 1921 14.9068 1922 40,385,194 3,373,354 17.5016 1923 28,052,525 9,297,961 16.6710 1924 41,856,964 20,097,169 13.9403 1925 40,913,780 13,592,014 17.8836 1926 37,847,765 19,841,698 22.3347 1927 28,086,519 19,931,322 26.0477 1928 45,972,492 22,329,920 26.6876 1929 45,733,568 23,092,864 26.6827 1930 30,933,804 17,194,025 26.7598 1931 19,824,942 19,449,312 25.0546 1932 12,131,005 29,833,131 18.0039 1933 22,019,602 26,581,946 21.4292 1934 27,590,869 16,042,905 2,066,455 25.3161 1935 37,220,647 23,848,199 615,988 24.6268 1936 43,346,306 25,971,459 1,060,291 24.9738 1937 40,475,837 22,525,976 68,464 24.8396 1938 15,170,432 15,847,143 2,420 24.5658 1939 49,948,341 23,725,909 3,630 23.2263 1940 24,548,498 4,866,692 1941 70,477,658 148,056 1942 64,077,632 86,233
The average wholesale selling prices of the different grades of Maine and Norwegian sardines in dollars per case over the 1935-1939 period, as computed from the market quotations appearing each Monday in the Journal of Commerce and Commercial, were as follows:
+-----+ ¦¦¦¦¦¦¦ +-----+
Maine one-quarter Imported Norwegian oil musse Year
Keyless Key Key-carton One-layer Two-layer 1935 $3.17 $3.53 $3.84 $5.44 $5.77 1936 3.19 3.57 3.86 5.16 5.53 1937 3.02 3.58 3.90 5.53 5.97 1938 3.25 3.79 3.98 6.20 6.84 1939 3.60 4.15 4.58 6.32 7.06
The foregoing were market quotations and do not purport to show actual transactions in which sardines were sold by packers or jobbers during those years.
The average selling price per case of all grades of Maine sardines, as shown by the accounting records of a selected group of Maine sardine packers, and the average import value per case of all imported Norwegian sardines for the years 1924 to 1939, inclusive, are given in the following table:
+--+ ¦¦¦¦ +--+
Import Maine Year value Selling 3 3/4 price 1924 $4.779 $4.155 1925 4.878 4.007 1926 4.846 4.123 1927 5.612 4.739 1928 5.035 4.456 1929 5.231 4.004 1930 4.583 3.669 1931 3.495 3.386 1932 2.170 3.230 1933 2.196 2.607 1934 3.017 3.206 1935 3.110 3.340 1936 3.157 3.361 1937 3.308 3.058 1938 3.579 3.379 1939 3.901 3.494
‘Import value’ in the above table denotes the wholesale market in Norway plus import tax. It does not include ocean transportation, importers' charges, brokerage commissions, or other charges that might have been included in determining the actual domestic selling prices.
The following reference to the sardine industry appears in a 1948 United States Tariff Commission publication, Summaries of Tariff Information, vol. 7, pt. 2, p. 52:
Competition of imports with domestic production.— Most imported sardines differ materially from the bulk of the domestic output in the method of preparation and packing, and they have an established prestige value. At most times the domestic and the imported sardines have been sold to substantially different groups of consumers, and price competition between them has at most times not been a major factor. An exception to this situation occurred during the depression of the early 1930's.
In terms of quality and price, sardines packed in oil may be divided into three broad classifications:
(1) High-priced sardines, the consumption of which in the United States is normally supplied chiefly by imports. Before the war high-priced sardines constituted from 75 to 90 percent of the total imports from all countries, and the proportion was not far different from this as regards the imports from each of the two principal sources, Norway and Portugal. Normally, sardines comparable with the better imported grades have comprised no more than 5 percent of the total domestic production of sardines packed in oil.
Medium-priced sardines. Most of the lower grades produced in Norway and Portugal fall into this group, which before the war accounted for from 10 to 25 percent of total imports into the United States. From 10 to 20 percent of the domestic pack was of this group.
(3) Low-priced sardines. Relatively few of the sardines falling within this group are produced in the principal foreign sardine-canning countries, but it accounts for from 75 to 90 percent of the domestic pack.
Most of the domestic pack has usually sold at materially lower prices than most of the imports. However, during the depression of the early 1930's prices of both domestic and imported sardines fell sharply, with the imported product showing a relatively greater decline. Since the duty was then, as now, ad valorem rather than specific, the decline in prices had no tendency to increase the restrictive effect of the duty; it may even have tended to lessen it. After Norway and Portugal went off the Gold Standard in 1931 and 1932, respectively, this action enabled them temporarily to lower their prices for sardines in terms of dollars, until shortly after the dollar itself was devalued. During this period prices of many of the sardines imported from those countries dropped to about the level of the better grades of domestic sardines packed in Maine.
It was under these circumstances that, on the application of domestic producers, the Tariff Commission in 1932 instituted a cost of production investigation under section 336 of the Tariff Act of 1930. As a result of this investigation the President, by proclamation effective January 1934, established two value brackets for sardines packed in oil, increasing the duty on sardines when valued (foreign value) at not more than 9 cents per pound, including the weight of the immediate container, to 44 percent ad valorem, but leaving the rate on sardines of a higher value unchanged at 30 percent ad valorem. The importance of this value bracket arrangement at that time is indicated by the fact that in 1933 the average foreign unit value of total imports from all sources was 8.4 cents per pound (including the weight of the immediate container), and that of those from Norway was 7.7 cents. The average for the total imports from Portugal in the same year was 10.5 cents per pound; but a considerable part of the imports from that country were probably valued at not more than 9 cents per pound.
As already stated, imports under the lower value bracket became insignificant soon after this change in the duty. This result, however, was probably only in small part due to the increase in the duty on the lower priced sardines. It was due to a greater extent to the upward trend in the prices of sardines after the depression, more or less parallel with the general increase in commodity prices.
The comparatively small production of Maine sardines in 1932 was due in part to the general business conditions and in part to the heavy importation of Norwegian sardines in 1931 and 1932. The low production in 1938 was due to failure of the supply of fish in that area. The fish did not come into the Maine waters in sufficient quantities to supply the canners. This scarcity of fish in 1938 resulted in an increase per unit cost of production to the Maine packers and a lower net profit ratio since their overhead remained about the same.
There are normally wide fluctuations in the size of the Maine sardine pack. During the entire 1931-1937 period the Maine sardine packers restricted their production because of the limited market for their product.
The following is a statement of petitioner's operations from the commencement of its business through the fiscal year ended March 31, 1940:
SUMMARY OF OPERATIONS
+--------+ ¦¦¦¦¦¦¦¦¦¦ +--------+
Year ended Mar. 31— Aug. 1, 1932 to Mar. 31, 1933 1934 1935 1936 1937 1938 1939 1940 Sardine $291,013.84 $649,593.55 $709,724.34 $1,104,366.44 $1,147,019.11 $1,114,017.01 $804,557.89 $1,249,322.83 sales—net Factory cost 261,265.74 582,051.04 622,537.45 918,693.44 956,122.42 971,101.73 699,964.47 986,387.54 Gross profit 29,748.10 67,542.51 87,186.89 185,673.00 190,896.69 142,915.28 104,593.42 262,935.29 Miscellaneous operating (300.29) 1,737.19 4,125.31 5,185.33 1,464.07 (118.60) 3,514.37 (599.52) profit (or loss) Total gross 29,447.81 69,279.70 91,312.20 190,858.33 192,360.76 142,796.68 108,107.79 262,335.77 profit Selling and administrative 16,656.87 51,776.89 65,836.53 109,305.21 107,149.92 103,554.49 93,725.22 114,784.28 expense Operating profit (or 12,790.94 17,502.81 25,475.67 81,553.12 85,210.84 39,242.19 14,382.57 147,551.49 loss) Other charges less other 1,297.42 10,815.33 12,972.11 18,998.22 21,025.41 19,063.43 12,526.32 24,351.01 income Net profit (or loss) before 11,493.52 6,687.48 12,503.56 62,554.90 64,185.43 20,178.76 1,856.25 123,200.48 Federal income tax Case sales 118,681 244,489 226,364 327,637 339,312 358,901 233,184 366,516 Case inventory 28,472 10,208 14,338 25,638 71,199 71,390 8,346 59,027 Average sales 2.452 2.657 3.135 3.371 3.380 3.104 3.450 3.409 price per case Average operating profit (or .108 .072 .113 .249 . 251 .109 .062 .403 loss) per case sold Average net profit (or .097 .027 .055 .191 . 189 .056 .008 .336 loss) per case sold
Most of petitioner's sales of sardines were made through established brokers throughout the United States. These brokers kept petitioner informed about the prices at which sardines were being sold in their localities. During most of the base period there was severe competition among the brokers and the Maine packers for the low-priced sardine market. To meet this competition, some of the packers reduced their prices below the cost of production. Some of the brokers cut their brokerage fees, which usually were 5 per cent, or offered rebates to purchasers, or resorted to other methods of obtaining business.
In August 1939, the Norwegian Government prohibited the exportation of any goods having a value in excess of 50 kroner. The restriction applied to sardines. This action and the outbreak of war in Europe in 1939 resulted in a greatly increased demand for domestic sardines and a rush by jobbers and large purchasers to stock up from existing supplies of Maine sardines.
Petitioner's monthly gross sales of sardines for each of the base period years were as follows:
+----+ ¦¦¦¦¦¦ +----+
Fiscal year Fiscal year Fiscal year Fiscal year 3/31/1937 3/31/1938 3/31/1939 3/31/1940
1936 1937 1938 1939 April $17,678.68 $51,126.57 $59,748.57 $34,886.32 May 45,713.74 116,058.96 49,433.40 57,804.00 June 106,766.48 132,137.50 91,860.37 214,139.07 July 220,192.00 132,412.21 108,621.18 179,076.37 August 151,311.35 124,641.36 85,874.47 98,366.38 September 104,975.95 105,266.44 67,285.34 326,741.82 October 98,286.27 149,623.84 83,109.59 154,350.44 November 115,129.38 66,632.16 76,184.30 42,801.74 December 63,790.56 37,038.02 44,057.10 32,645.31
1937 1938 1939 1940 January 76,496.15 54,497.40 67,844.31 66,684.08 February 82,700.64 66,204.20 66,883.22 57,820.04 March 86,490.51 94,669.33 31,951.59 57,506.99 Total 1,169,531.71 1,130,307.99 832,853.44 1,322,822.56
Petitioner's excess profits net income determined under the income credit method, and excess profits tax liability as determined by respondent for its taxable years 1942 to 1945, inclusive, are as follows:
+-----------------------------------------------------+ ¦Fiscal year ended ¦Excess profits ¦Excess profits ¦ +-------------------+----------------+----------------¦ ¦Mar. 31— ¦net income ¦tax liability ¦ +-------------------+----------------+----------------¦ ¦1942 ¦$188,535.62 ¦$28,681.09 ¦ +-------------------+----------------+----------------¦ ¦1943 ¦140,159.55 ¦53,922.54 ¦ +-------------------+----------------+----------------¦ ¦1944 ¦173,236.48 ¦89,740.94 ¦ +-------------------+----------------+----------------¦ ¦1945 ¦174,789.34 ¦82,251.70 ¦ +-----------------------------------------------------+
In determining petitioner's excess profits tax liability, respondent allowed an excess profits credit for each of the years involved of $68,588.52, computed as follows:
+----------------------------------------------+ ¦Fiscal year ended ¦Excess profits ¦ +-----------------------------+----------------¦ ¦Mar. 31— ¦net income ¦ +-----------------------------+----------------¦ ¦1937 ¦$64,819.80 ¦ +-----------------------------+----------------¦ ¦1938 ¦20,812.02 ¦ +-----------------------------+----------------¦ ¦1939 ¦725.53 ¦ +-----------------------------+----------------¦ ¦1940 ¦124,083.00 ¦ +-----------------------------+----------------¦ ¦Aggregate ¦210,440.35 ¦ +-----------------------------+----------------¦ ¦Arithmetic average ¦52,610.09 ¦ +-----------------------------+----------------¦ ¦Increase under section 713(f)¦19,588.35 ¦ +-----------------------------+----------------¦ ¦Average under section 713(f) ¦72,198.44 ¦ +-----------------------------+----------------¦ ¦Credit at 95 per cent ¦68,588.52 ¦ +----------------------------------------------+
Petitioner has filed claims for excess profits tax relief under section 722, and claims for refund of the excess profits tax paid for each of the years involved, based on a constructive average base period net income of $121,000.
Petitioner's base period net income is not an inadequate standard of normal earnings because petitioner's business was depressed in the base period because of temporary economic circumstances unusual in the case of petitioner or its industry.
Petitioner's excess profits credit as determined by respondent under section 713(f) does not result in an excessive and discriminatory excess profits tax.
OPINION.
OPPER, Judge:
Petitioner contends that it is entitled to excess profits tax relief under section 722(b)(2) because its business was depressed during the first 3 years of its base period by reason of the dumping on the domestic market of unusually large quantities of Norwegian sardines for sale at prices with which the Maine packers could not economically compete. It also contends that its business was further depressed because of the scarcity of fish and the resulting small pack of sardines in 1938, although it does not specifically advance this as a separate ground for relief. Petitioner claims that its fiscal year ended March 31, 1940, was a normal year
and it seeks to use that period as the basis for computing a constructive income for the other base period years.
More than half of fiscal 1940 was subsequent to the outbreak of war in Europe. It is difficult to see how viewing the entire year as normal would comport with the purpose of section 722. Fezandie & Sperrle, Inc., 5 T.C. 1185.
Competition from imported sardines, and particularly the Norwegian musse, has generally been a factor in the Maine sardine industry. The Norwegian imports of all grades of sardines were approximately 50 per cent of the Maine production in 1924 and remained at about that proportion or greater until 1940. For the most part, however, the competition has been between the lowest priced of the Norwegian imports, the musse, and the key grade, or highest priced, Maine product. Until the early 1930's the keyless grade, the lowest priced Maine product, which accounted for about 75 per cent of Maine production, sold for about half the price of the Norwegian musse, and hence was not seriously affected by Norwegian competition.
Petitioner contends, however, that the prices and sales of keyless sardines were nevertheless determined by the prices of the Norwegian imports, because when the margin between the prices of the domestic keyless and the imported musse grades narrowed to a certain point consumers switched to the Norwegian sardines.
Such a condition may have existed in 1931 and 1932 when, due to devaluation of the krone in 1931 and perhaps to other contributing general economic causes, the Norwegian musse sold at nearly as low a price as the Maine keyless grade. We have no figures on the actual import prices for years prior to 1935. The Norwegian imports rose from 17,194,025 pounds in 1930 to 19,449,312 pounds in 1931, and to 29,833,131 pounds in 1932, the highest since 1922; while Maine production fell off from 30,933,804 pounds in 1930 to 19,824,942 pounds in 1931, and to 12,131,005 pounds in 1932.
The ratio became more normal after the devaluation of the dollar in 1934. In 1935 the Maine production was 37,220,647 pounds and the Norwegian imports 24,464,187 pounds. The domestic production and imports remained at about that proportion until 1940, except for 1938 when, as disclosed in our findings, the failure of fish supplies reduced the Maine production to 15,170,432 pounds. In that year, however, the Norwegian imports were only a little more, 15,849,563 pounds.
Moreover, petitioner had large inventory carryovers in 1937 and 1938, amounting to over 71,000 cases in each year, as against an average inventory for the 4 preceding years of less than 20,000 cases. The inventory was reduced to 8,346 at the end of 1939.
The evidence lacks support for petitioner's contention that the price of Norwegian imports always determined the price and production of Maine sardines. There is no consistent pattern of conformity of the variation of prices or production of the domestic with the imported products. For example, the imports and domestic production were about equal in 1931 when Norwegian imports were selling at almost domestic prices and were again about equal in 1938 when import prices were about twice those of the Maine products. Again, when Norwegian imports increased from approximately 18 million pounds in 1934 to 24,464,000 pounds in 1935, domestic production increased at about the same ratio from approximately 27,590,000 pounds to 37,220,000 pounds.
We do not know what portion of the Norwegian imports consisted of the competitive one-layer musse and what portion of the noncompetitive high-priced bristling. According to the 1948 United States Tariff Commission report quoted in our findings, before the onset of the war in 1939 the high-priced sardines constituted from 75 to 90 per cent of the total imports and no more than 5 per cent of the total domestic production was of comparable grades. The Norwegian imports having a value not exceeding 9 cents a pound, and subject to the increased duty of 44 per cent, amounted to only 2,066,455 pounds in 1934, as against approximately 14 million pounds of the higher grade imports, and became negligible after 1936.
The cutthroat competition of which petitioner complains was actually in the early base period years among the Maine packers and brokers rather than between them and the Norwegian importers. This is established beyond question by the large volume of correspondence between petitioner and its principal brokers extending over the entire base period. The brokers kept petitioner informed about the grades offered by rival brokers and jobbers and were constantly urging petitioner to reduce its prices to meet this competition. Some of the brokers cut their brokerage fees, or offered rebates to purchasers, or used other extreme methods of obtaining business. The correspondence in a few instances contains casual references to the Norwegian imports, but not as seriously affecting petitioner's market or prices. One of petitioner's officers testified that the price cutting among the Maine packers was always present in the industry.
Any competition that the Maine packers encountered during the base period from the Norwegian imports was not a temporary or unusual circumstance. It has varied in intensity from time to time according to prevailing economic conditions, but, as petitioner recognizes, has always been present as a vital factor in the Maine sardine industry. Such competition does not meet the requirements of section 722(b)(2) and Regulations 112. Fish Net & Twine Co., 8 T.C. 96; Lamar Creamery Co., 8 T.C. 928; Winter Paper Stock Co., 14 T.C. 1312; Democrat Publishing Co., 26 T.C. 377. And this would be true even though the competition were unusual or temporary, Democrat Publishing Co., supra, or came from foreign rather than domestic sources. Fish Net & Twine Co., supra.
A comparison of petitioner's operations over the base period years with those of prior years does not reveal any notable depression in its volume of business or earnings in any of the base period years except its fiscal year ended March 31, 1939. Since petitioner did not commence business until August 1932, the comparison of its base period operations with its pre-base-period experience may lack significance. But no other comparable packer existed, at least as far as petitioner's evidence is concerned.
Moreover, it is the nature or cause of any base period depression, whatever may have been its measure, with which we are chiefly concerned. Changes in international monetary exchange rates or other official action, which seem to be the principal causes for petitioner's complaint, are not qualifying factors for excess profits tax relief under section 722, to say nothing of their virtual neutralization by other counteracting governmental measures. We said in Seekonk Lace Co., 24 T.C. 552, 563:
Both the devaluation of the franc and the reduction in the duty rates were the result of the interplay of world-wide economic conditions. They were governmental actions taken to implement national economic policies to ameliorate those conditions. Governmental actions, even where they have a direct impact on a taxpayer's business, are not the basis for relief under section 722. Acme Breweries, 14 T.C. 1034; Packer Publishing Co., 17 T.C. 882, 897; Norfolk & Chesapeake Coal Co., 18 T.C. 904.
Petitioner refers to the failure of the fish supply in 1938, during its fiscal year ended March 31, 1939. In that year the Maine pack was only a little more than half of normal and petitioner's operating profits were proportionately even lower. Without pausing to discuss the classification of this factor as an ‘economic event,‘ see S. N. Wolbach Sons, Inc., 22 T.C. 152, the evidence affords no basis for a reconstruction of petitioner's operations for that year, relative to a normal supply of fish; nor for assessing the reciprocal effect of petitioner's large inventory carryover.
Petitioner's treasurer and general manager gave it as his opinion that to adjust for the 1939 low earnings, petitioner's profits for that year should be increased by not less than $20,000. As noted in our findings, respondent in his computation of petitioner's excess profits credit under section 713(f) has increased petitioner's average base period income by $19,588.35. That amount would consequently equalize for that year as well as the other 3 any detriment which petitioner might conceivably have suffered by reason of the short pack in fiscal 1939. Petitioner is not entitled to section 722 relief where section 713(f) benefits make it unnecessary. Homer Laughlin China Co., 7 T.C. 1325.
Reviewed by the Special Division.
Decision will be entered for the respondent.