Opinion
Docket Nos. 19359 19360.
1951-03-30
TIN PROCESSING CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Paul Edgar Swartz, Esq., and Harold H. Meyers, Esq., for the petitioner. T. Wickersham, Esq., for the respondent.
Paul Edgar Swartz, Esq., and Harold H. Meyers, Esq., for the petitioner. T. Wickersham, Esq., for the respondent.
Petitioner claiming relief under section 722(c), I.R.C., held not qualified because it has not proved a constructive average base period net income within the framework of section 722(a).
The issue for decision is whether the Commissioner erred in disallowing the petitioner's application under section 722(c) for relief of excess profits tax in the following amounts:
+---------------------------------------+ ¦Period 2/27/41 to 11/30/41 ¦$31,544.12¦ +----------------------------+----------¦ ¦Year ended November 30, 1942¦84,778.49 ¦ +----------------------------+----------¦ ¦Year ended November 30, 1943¦122,816.58¦ +----------------------------+----------¦ ¦Year ended November 30, 1944¦90,026.32 ¦ +---------------------------------------+
FINDINGS OF FACT.
Part of the facts are stipulated and they are so found.
Petitioner is a corporation which commenced business in February 1941. It is a wholly owned subsidiary of N. V. Billiton Maatschappij (hereinafter called Billiton) a Netherlands corporation. During the taxable years and during 1936 through 1939 Billiton was the managing director of N. V. Hollandsche Metallurgische Bedrijven Company (hereinafter referred to as HMB), which operated a tin smelter at Arnhem, The Netherlands.
Early in 1940 it became evident in the United States that all or a substantial part of the tin supply was threatened. As a consequence representatives of the Advisory Committee to the Counsel on National Defense, the State Department, and the Reconstruction Finance Corporation conferred with representatives of various foreign and domestic companies to explore the possibilities of stockpiling tin ore and establishing a tin smelter in the Western Hemisphere. Tin was declared a strategic metal under the Strategic Metals Act of June 7, 1939.
The reason why there was no established tin smelter in this country in 1940 can be found in the history of the industry.
Prior to 1940 there was no metal that carried with it greater international ramifications than tin. The growth of tin-control schemes, the gradual combination of small mining and smelting units into large groups with complex interlocking directional and financial interest and international political aspects are without parallel in the metal industry.
By the year 1900 the British Empire had secured a dominant position in the smelting and marketing of tin, controlling smelters in the United Kingdom and the Straits Settlements. These plants treated the bulk of the Bolivian and Far Eastern outputs, exclusive of the Dutch and Chinese plants in The Netherlands East Indies and China. Great Britain controlled approximately one-third of the tin mine output and two-thirds of the smelter output. It held its dominant interest in the tin industry down to the outbreak of World War II, notwithstanding the growth of the Dutch tin industry and the entry of the Belgians into the business.
With the consolidation and integration of tin mines, similar activities took place in smelting. An example of this is the Patino group. Patino, the Bolivian tin king, shipped his concentrates to Europe for smelting. During the 1920's he secured control of Williams, Harvey $& Company, Ltd., famous smelters in England. In due course Consolidated Tin Smelters, Ltd., was formed, absorbing the Williams Harvey & Company, Ltd., plant and small English plants, together with a large plant at Penang, Straits Settlements. The Patino group also purchased a small interest in the Arnhem smelter. It is the world's largest tin smelting group, sharing the smelting of Malayan, Siamese, Burmese, and other concentrates with the Straits Trading Co., Ltd. It has a practical monopoly in the smelting of Nigerian concentrates and all of the output of the Patino mines in Bolivia representing about one-half of the total output and decidedly the best grade of that country.
The other large British group is represented by the Straits Trading Co., Ltd., with a huge plant at Singapore and smaller plant nearby.
The only other British plant of any consequence is that of Capper, Pass & Son, Ltd., at Bristol, which has an enviable reputation for treating low-grade concentrates.
In South America there is no firmly established tin smelting industry. Attempts have been made from time to time to operate tin smelters in Bolivia, but all previous attempts have failed for a number of reasons, such as high altitude, cost of fuel, lack of skilled labor, inefficient equipment, and inadequate finances.
In 1931, the International Tin Committee was formed in London, England, composed of delegates representing the Malaya, Nigeria, Netherlands East Indies, and Bolivian Governments. On February 27, 1931, there was an ‘agreement on the International Tin Control Scheme‘ executed by representatives of those governments. The stated purpose of the International Tin Committee was to regulate, control and allocate world production of tin. The objectives of the ‘Agreement on the International Tin Control Scheme‘, as stated in the agreement, were ‘to secure a fair and reasonable equilibrium between production and consumption with the view of preventing rapid and severe oscillation of price.‘ The main part of the agreement dealt with control over the mine production of member states. The 1929 production of tin by countries was taken as standard and thereafter quotas were allocated on a percentage basis of 1929 production. This allocation is set forth in the stipulation of facts. Quotas applied to exports and were subject to change every 3 months. The governments agreed to pass legislation putting the restriction into effect and providing for the distribution of the quotas among their own individual producers. The aim was to have production correspond as closely as possible with yearly export quotas. The administration of production control was vested in the International Tin Committee. The International Tin Committee and the ‘Agreement on the International Tin Control Scheme,‘ as renewed on September 1, 1939, were thereafter in existence at all times up to December 31, 1939. There was no allocation nor control of ore by the International Tin Committee insofar as distribution was concerned. No allocation nor control has ever been exerted by the International Tin Committee over smelting of tin ore.
In 1940 the world's total tin smelting capacity was far in excess of the capacity of the world's tin mines to produce. Technically this capacity was 50 per cent greater than maximum world production but because many of the small plants are either obsolete or uneconomic the difference was not as great. However, in 1940 it still was in excess of mine productive capacity.
Foreign smelters do not want any new competitors and will use any political and economic expedient to prevent the establishment of such competition.
On July 29, 1940, J. Van den Broek, the managing director of Billiton, now deceased, wrote to the National Defense Commissioner concerning the establishment of a tin smelting industry in the United States, in part as follows:
2. Reasons why there is no smelting industry within the U.S.A.
Studying the situation of the third biggest tin producing country, Bolivia, it seems illogical that the Bolivian tin ores travel all the way from Bolivia to England to be smelted there, although the voyage from Bolivia to the U.S.A. is so much shorter than that from Bolivia to England, the more so as the U.S.A. are the biggest consumers in the world.
The answer is twofold:
a. Experience has taught us that notwithstanding the higher rate of freight from Bolivia to England than from Bolivia to the U.S.A. it is more profitable to smelt in England than in the U.S.A.
b. The Bolivian tin ores treated without mixing them with other ores do not yield the quality of tin wanted by the consumers in this country, particularly not the tin wanted by the tinplate industry, which is the most important consumer.
The United States is the principal consumer of tin, using approximately 50 per cent of world production.
In early 1940 the nearest principal supply of tin ore was located in Bolivia and the closest smelters available were in the British Isles and The Netherlands. It was therefore of first importance to the national defense program that Bolivian and other available ore be obtained and a smelter built to treat them.
In the fall of 1940 the United States Government entered into negotiations with Bolivian producers to assure a supply of tin ore. By December 7, 1941, a stockpile of 43,000 tons had been built up, consisting of Bolivian and alluvial ores.
Alluvial ores and Bolivian ores were described at the hearing by counsel for petitioner as follows:‘* * * Alluvial ores, Your Honor, are high tin content ores, generally found in watery deposits such as riverbeds, whereas the Bolivian ores are low, at least the Bolivian ores with which we are concerned here, are low tin content ores, complex ores, having a great amount of impurities.
In early 1940 Reconstruction Finance Corporation contacted various American and foreign companies, among which was Billiton, for the construction of a tin smelter in this country. Billiton, as heretofore pointed out, had had considerable experience in the processing of tin, especially from low-grade Bolivian tin ore. It, as heretofore mentioned, was the managing director of HMB which had constructed a tin smelter at Arnhem, The Netherlands, in 1928 for the smelting of low-grade and complex Bolivian ores as well as high-grade alluvial ores from the Netherlands East Indies. That smelter was rebuilt in 1931 and placed in full operation in 1932. HMB used secret processes in the smelting of tin from the Bolivian tin ore.
In tin smelting, the tin content of the ore is not the only factor to consider. Important also is the type of impurities present in the ore. The alluvial ores contain only small amounts of silica and iron and traces of other metallic impurities, and it is, therefore, a rather simple matter to smelt these ores in reverberatory furnaces and obtain a high amount of the tin in the ores in the form of high-grade metal. Bolivian ores as received at the smelter vary in tin content from 18 per cent to approximately 62 per cent. These ores, even where the tin content is reasonably high, present a completely different problem. They contain a great variety of impurities which vary from mine to mine. The smelting of these ores in the same manner as alluvial ores would yield a material of only a comparably low tin content which would be useless for the important uses of tin, such as tin plating. In order to treat Bolivian ores, certain metals, such as arsenic, lead, antimony, copper, bismuth, silver, and iron must be removed before smelting, and certain other impurities also must be eliminated. By the use of the secret processes HMB was able efficiently and successfully to process the Bolivian ores.
Billiton owned during the base period years 1936-1939 and the taxable years 37 1/2 per cent of the stock of Gemeenschappelijke Mijnbouwmaatschappij Billiton (Joint Mining Company Billiton, hereinafter referred to as GMB) on the Island of Billiton in the Netherlands East Indies. Sixty-two and one-half per cent of the stock of GMB was owned by the Netherlands East Indies Government, which also owned mines on the Island of Banka in the Netherlands East Indies. GMB and the Netherlands East Indies Government were and are the only producers and smelterers of tin in the Netherlands East Indies.
In the latter part of 1940 it was determined by the Government of the United States to award a contract for the smelting of tin to Billiton. Such contract was awarded to Billiton principally because it had demonstrated at Arnhem that it could successfully treat low-grade Bolivian ores.
Billiton then caused the organization of petitioner as its wholly owned subsidiary.
It was determined that the tin smelting plant should be built at Texas City, Texas. The capital stock of petitioner, consisting of 1,000 shares of $10 par value, was issued to Billiton for a consideration of $200,000.
After extensive negotiations, on February 5, 1941, a ‘Memorandum of Understanding‘ was entered into among Defense Plant Corporation, Metals Reserve Company (both subsidiaries of RFC), petitioner and Billiton. That memorandum provided , among other things, that work was to start immediately upon the construction of the plant; that petitioner was to be paid a management fee for the operation of the plant at the rate of $150,000 annually; and that at any time up to the second year of operation Plant Corporation could elect to require petitioner to operate the plant for petitioner's own account. Under such latter operation the memorandum provided that treatment charges shall be as follows:
Treatment Charge.— For ores and concentrates delivered at works the treatment charge will be $50.40 (Fifty Dollars and Forty Cents) per ton, on basis of 60% (sixty percent) tin content. For lots assaying under 60% (sixty percent), the basic treatment charge shall be increased by 33.6 (thirty-three and six-tenths) cents per ton for each unit below 60% (sixty percent), fractions pro rata. For lots assaying above 60% (sixty percent), the basic treatment charge shall be decreased by 70 (seventy) cents per ton for each unit above 60% (sixty percent), fractions pro rata.
All the agreements between petitioner and Plant Corporation and Metals Reserve Company are included in the stipulation of facts and are incorporated herein by this reference.
An amendatory agreement between Metals Reserve Company and petitioner executed on August 1, 1942, provided in part as follows:
* * * that only for the twelve-month period commencing August 1, 1942, the Tin Corporation shall receive a fee of $50,000 (fifty thousand dollars) in addition to the aforesaid fixed fee of $150,000 (one hundred and fifty thousand dollars) to be paid by Metals Company in equal monthly installments.
The construction of the smelter at Texas City, Texas, hereinafter called the Longhorn smelter), was started in April 1941. On April 24, 1941, a contract was entered into between petitioner and Ford, Bacon & Davis Inc., construction engineers, which provided in part as follows:
Section 1 General: The Engineer-Constructors are hereby employed by the Company, as its agents and under its direction as hereinafter provided, for construction work in connection with the said Tin Smelter and Refinery to be located at or near Texas City, Texas, and for certain of the design thereof.
That contract was amended on August 12, 1941.
As originally planned, the Longhorn smelter was designed to cost $3,500,000 and to have the capacity of 18,000 tons of tin per year. The plant was subsequently enlarged under two general expansion plans. The capacity of the plant was thereby substantially increased and the cost increased to approximately $8,000,000.
Metals Reserve never exercised its option to place petitioner upon the toll basis and it furnished a revolving fund from which all costs of operations were paid.
The processes and formulae developed at the Arnhem smelter were made available by Billiton to petitioner in the Longhorn smelter to produce high-grade tin from low-grade Bolivian ores. During the war, such processes and formulae were smuggled past German censors and transmitted to petitioner via Switzerland. Petitioner did not pay any consideration for the use of the processes and formulae, nor do the processes and formulae appear in the balance sheet of petitioner.
The monthly production of tin in the Longhorn smelter from April 1942 to December 1944, in tins, is disclosed by the following table:
+---+ ¦¦¦¦¦ +---+
1942 1943 1944 January 2,611 2,153 February 2,334 2,419 March 1,491 2,513 April 525 1,055 2,611 May 1,246 1,032 2,402 June 1,663 1,498 2,439 July 1,924 1,184 2,618 August 1,655 1,347 2,553 September 2,026 2,029 2,501 October 2,014 2,089 2,651 November 2,251 2,020 2,852 December 2,391 2,037 2,907 Total 15,695 20,727 30,619
Of the tin produced at the Longhorn smelter, more than 75 per cent was in excess of 99.8 per cent purity. That is the same purity as the tin produced in Malaya, which is called Straits tin. The remainder was of a lesser quality, but not substantially lower in quality than Straits tin.
Petitioner's balance sheet attached to its income and declared value excess-profits tax return for its fiscal year ending November 30, 1944, was as follows:
+-------------------------------------------------------------------+ ¦Assets ¦ +-------------------------------------------------------------------¦ ¦ ¦ ¦ ¦ ¦ +-------------------------------+----------+------------+-----------¦ ¦Current Assets: ¦ ¦ ¦ ¦ +-------------------------------+----------+------------+-----------¦ ¦Cash in Bank ¦ ¦$203,895.27 ¦ ¦ +-------------------------------+----------+------------+-----------¦ ¦Accounts Receivable: ¦ ¦ ¦ ¦ +------------------------------------------+------------+-----------¦ ¦Metals Reserve Company—Management fee ¦10,860.29 ¦ ¦ +------------------------------------------+------------+-----------¦ ¦Miscellaneous ¦ ¦100.00 ¦ ¦ +-------------------------------+----------+------------+-----------¦ ¦Accrued Income: ¦ ¦ ¦ ¦ +------------------------------------------+------------+-----------¦ ¦Interest Earned on U.S. Treasury Bonds ¦1,146.62 ¦ ¦ +------------------------------------------+------------+-----------¦ ¦Investments: ¦ ¦ ¦ ¦ +-------------------------------+----------+------------+-----------¦ ¦Capital Stock—Subsidiary Corp ¦$1,000.00 ¦ ¦ ¦ +-------------------------------+----------+------------+-----------¦ ¦U.S. Treasury Bonds ¦250,000.00¦251,000.00 ¦$467,002.18¦ +-------------------------------+----------+------------+-----------¦ ¦ ¦ ¦ ¦ ¦ +-------------------------------+----------+------------+-----------¦ ¦Fixed Assets: ¦ ¦ ¦ ¦ +-------------------------------+----------+------------+-----------¦ ¦Expenditures for Tin Smelter ¦ ¦6,378,964.84¦ ¦ +------------------------------------------+------------+-----------¦ ¦Funds Advanced—Defense Plant Corporation ¦6,378,964.84¦ ¦ +------------------------------------------+------------+-----------¦ ¦ ¦ ¦ ¦ ¦ +-------------------------------+----------+------------+-----------¦ ¦Other Assets: ¦ ¦ ¦ ¦ +-------------------------------+----------+------------+-----------¦ ¦Postwar Refund on Federal Taxes¦ ¦ ¦23,893.60 ¦ +-------------------------------+----------+------------+-----------¦ ¦Total ¦ ¦ ¦490,895.78 ¦ +-------------------------------+----------+------------+-----------¦ ¦ ¦ ¦ ¦ ¦ +-------------------------------------------------------------------+
Liabilities Current Liabilities: Accounts Payable $2,457.24 Provision for Federal Income and Excess Profit Taxes 103,010.35 $105,467.59 Capital Stock: Authorized—1,000 Shares at $10.00 Par Issued and Outstanding—1,000 Shares 10,000.00 Surplus: Paid in 190,000.00 Earned: Balance December 1,1943 146,898.19 Net Income for Period December 1, 1943 to November 30, 1944 38,530.00 185,428.19 Total 490,895.78 NOTE.—Expenditures on behalf of Metals Reserve Company in managing and operating Tim Smelter from March 3, 1941 to November 30, 1944 9,386,607.20 Funds advanced by Metals Reserve Co 9,386,607.20
Petitioner's income for the taxable year December 1, 1943, to November 30, 1944, was as follows:
+------------------------------------------------------+ ¦Fee for managing and operating tin smelter¦$149,166.74¦ +------------------------------------------+-----------¦ ¦Accrued interest earned ¦2,499.96 ¦ +------------------------------------------+-----------¦ ¦Total ¦151,666.70 ¦ +------------------------------------------+-----------¦ ¦Less expense ¦19,128.98 ¦ +------------------------------------------+-----------¦ ¦Total ¦132,537.72 ¦ +------------------------------------------------------+
Petitioner is not entitled to use the excess profits credit based upon income pursuant to section 713, Internal Revenue Code. Petitioner's excess profits credit based on the invested capital method in the taxable years is disclosed by the following tabulation:
+--------------------------------------------+ ¦Fiscal year ending ¦ ¦ +--------------------+-----------------------¦ ¦November 30 ¦Excess profits credit ¦ +--------------------+-----------------------¦ ¦1941 ¦$16,606.50 ¦ +--------------------+-----------------------¦ ¦1942 ¦22,823.82 ¦ +--------------------+-----------------------¦ ¦1943 ¦27,272.38 ¦ +--------------------+-----------------------¦ ¦1944 ¦30,283.29 ¦ +--------------------------------------------+
Petitioner in constructing its base period net income computed its costs on the basis of treating 53,817 tons of Bolivian ore and 5,570 tons of alluvial ore during the years 1943-1944. Included in the costs is the treatment of secondaries. It then projected those costs back to the years 1936 through 1939 upon the basis of the same number of tons of ore treated during 1943-1944. But in reconstructing its costs and income during the base period years petitioner used the figures of 25,000 tons of Bolivian ore and 2,600 tons of alluvial ore. On the basis of the actual cost of operating the smelter covering the 12-month period of operation ending March 31, 1944, petitioner adjusted those costs in respect to the direct labor charges, repair supplies, firebrick, cement, chemicals, coal and coke by applying the indices for these items for each of the base period years, except in the case of firebrick, for which no index was available. As to that the petitioner used a statement from the supplier of brick, setting forth the prices thereof in the base period years. In this manner petitioner used as a starting point actual costs in the taxable year and reduced or adjusted such costs to eliminate the difference in economic conditions existing between the year 1943 and the years of the base period.
Petitioner's construction of base period net income which is set forth in exhibit 18 is incorporated herein by this reference.
As a result of such construction of its base period net income petitioner determined that it would have had a net profit for each year as summarized in the following table:
+------------------------+ ¦SUMMARY OF NET PROFIT ¦ +------------------------¦ ¦ ¦ ¦ +---------+--------------¦ ¦1936 ¦$374,900.00 ¦ +---------+--------------¦ ¦1937 ¦230,000.00 ¦ +---------+--------------¦ ¦1938 ¦94,600.00 ¦ +---------+--------------¦ ¦1939 ¦207,300.00 ¦ +---------+--------------¦ ¦Total ¦906,800.00 ¦ +---------+--------------¦ ¦Average ¦226,700.00 ¦ +------------------------+
Petitioner filed applications for relief under section 722 for its fiscal years ending November 30, 1941, 1942, 1943, and 1944. It here seeks to establish a constructive average base period net income as indicated in the table contained in exhibit 18.
In the statement attached to the statutory notice under section 732 of the Internal Revenue Code respondent stated as follows with respect to petitioner's claim for refund for the years ended November 30, 1941 and 1942:
You are advised that the determination of your excess profits tax for the taxable years ended November 30, 1941 and 1942, discloses an excess profit tax liability of $34,894.73 and $85,012.93, respectively.
After careful consideration of your applications for relief under section 722 of the Internal Revenue Code, filed September 15, 1943, it has been determined that you have not established your right to the relief requested in such application.
In accordance with the provisions of section 732 of the Internal Revenue Code notice is hereby given of the disallowance of the claims for refund asserted in your applications (Form 991).
Respondent stated substantially the same with respect to petitioner's applications for relief for the fiscal years 1943 and 1944.
OPINION.
HILL, Judge:
Section 722(c)provides that when a taxpayer is not entitled to use the excess profits credit based on income pursuant to section 713 its tax shall be considered excessive and discriminatory if it can prove that its excess profits credit based on invested capital is an inadequate standard for determining excess profits because of the existence of any one of the three conditions set forth in subsections (1), (2), or (3), quoted in the margin. If the taxpayer proves the presence of a qualifying situation under any of those subsections, then it is considered to be entitled to use the excess profits credit based on income, using the constructive average base period net income determined under section 722(a).
SEC. 722. GENERAL RELIEF— CONSTRUCTIVE AVERAGE BASE PERIOD NET INCOME.(c) INVESTED CAPITAL CORPORATIONS, ETC.— 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, not entitled to use the excess profits credit based on income pursuant to section 713, if the excess profits credit based on invested capital is an inadequate standard for determining excess profits, because—(1) the business of the taxpayer is of a class in which intangible assets not includible in invested capital under section 718 make important contributions to income.(2) the business of the taxpayer is of a class in which capital is not an important income-producing factor, or(3) the invested capital of the taxpayer is abnormally low.In such case for the purposes of this subchapter, such taxpayer shall be considered to be entitled to use the excess profits credit based on income, using the constructive average base period net income determined under subsection (a). For the purposes of section 713(g) and section 743, the beginning of the taxpayer's first taxable year under this subchapter shall be considered to be that date after which capital additions and capital reductions were not taken into account for the purposes of this subsection.
However, under the provisions of section 722 it is not sufficient merely to establish that petitioner meets the requirements under section 722(c)(1), (2), or (3); it must also show within the framework of section 722(a) a fair and just amount representing normal earnings to be used as a constructive average base period net income. See Danco Co., 14 T.C. 276, 283; Part VIII (A) of the Bulletin of section 722, 1949-1 C.B. 134.
GENERAL RULE.— In any case in which the taxpayer establishes that the tax computed under this subchapter (without the benefit of this section) results in an excessive and discriminatory tax and establishes what would be a fair and just amount representing normal earnings to be used as a constructive average base period net income for the purposes of an excess profits tax based upon a comparison of normal earnings and earnings during an excess profits tax period, the tax shall be determined by using such constructive average base period net income in lieu of the average base period net income otherwise determined under this subchapter. In determining such constructive average base period net income, no regard shall be had to events or conditions affecting the taxpayer, the industry of which it is a member, or taxpayers generally occurring or existing after December 31, 1939, except that in the cases described in the last sentence of section 722(b)(4) and in section 722(c), regard shall be had to the change in the character of the business under section 722(b)(4) or the nature of the taxpayer and the character of its business under section 722(c) to the extent necessary to establish the normal earnings to be used as the constructive average base period net income.
The petitioner contends, first, that the secret processes used in the Texas City smelter which were obtained from the smelter at Arnhem via Switzerland during the war qualifies it under section 722(c)(1) because they were intangible assets not includible in equity invested capital which made important contributions to income. It further contends that it meets the requirements of section 722(c)(3) because its invested capital was abnormally low. It then argues that it also comes within the provisions of section 722(a) because (1) it could have operated successfully during the base period years and (2) its reconstruction of income during the years 1936 through 1939, as set forth in our findings, is proper under the applicable statute.
The respondent, on the other hand, maintains that petitioner does not qualify for relief under section 722(c) since it had not proved that it comes within the provisions of section 722(c)(1), (2), or (3). He insists, moreover, that petitioner is not eligible for relief under section 722 because it is assuming a theoretical business in the base period which contemplates a smelter operating on a toll basis rather than on a management basis. The respondent further argues as an additional reason for denying relief that petitioner's incorporation after December 31, 1939, was attributable solely to the outbreak of war in Europe and the rearmament of the United States, citing Fezandie & Sperrie, Inc., 15 T.C. 1185. The respondent's final point is that petitioner has not established that it could have successfully operated a tin smelter in the base period years and that, in any event, its reconstruction contains numerous errors of fact and theory.
We need not consider the question of whether petitioner qualifies under section 722(c)(1), (2) or (3), for even assuming that it does, we still do not believe that it has demonstrated that it is entitled to relief within the framework of section 722(a).
We believe that petitioner's reconstruction of income for the base period years is placed upon a basis not contemplated by section 722(a); for it assumes a business different from the one petitioner was engaged in during the taxable years. In the taxable years petitioner was a management corporation receiving a fixed fee each year for its services, the two subsidiary corporations of R.F.C. paying for the construction of the plant and equipment and all costs of producing the refined tin. Petitioner's reconstruction is based upon a corporation which built a smelting plant at its own expense and paid for all cost of producing the tin and received as income a certain amount for each ton of tin produced.
Section 722(a) provides that relief shall be based upon establishing ‘* * * what would be a fair and just amount representing normal earnings to be used as a constructive average base period net income * * *.‘ We believe, as stated in the Bulletin on Section 722, Part V (f), page 124, G.P.O., November 1944, that ‘* * * implicit in this comparison is the idea that the normal operating conditions, upon which relief is based, and the operating conditions during the excess profits tax period must be comparable * * *.‘ It is obvious that the assumed business operation upon which petitioner constructed its average earnings for the base period years is wholly different from the actual business operation of petitioner during the taxable years.
We think in another part of section 722(a) that Congress also implicitly provided that the business upon which the constructive income is based for the years 1936 through 1939 must be of the same type and character as that in existence during the taxable years. Section 722(a) provides that in determining constructive average base period net income ‘* * * no regard shall be had to events or conditions affecting the taxpayer, the industry of which it is a member, or taxpayers generally occurring or existing after December 31, 1939, except * * * regard shall be had to * * * the nature of the taxpayer and the character of its business under section 722(c) to the extent necessary to establish the normal earnings to be used as the constructive average base period net income.‘ And having determined the nature of the taxpayer and the character of its business, we think the law requires that the constructive income for the base period years must be on the basis of an operation of the same type. Hence, in the case at bar, petitioner should have premised its reconstruction on the assumption of a management business rather than upon an operation of a plant for its own account. This requirement has not been met by petitioner in this proceeding. We therefore hold that petitioner is not entitled to relief under section 722.
A number of other contentions as to why petitioner should not prevail in this proceeding have been advanced by respondent. Each of them presents either a controversial question of fact or of law. We deem it unnecessary to resolve them in view of our conclusion and holding above stated.
Reviewed by Special Division.
Decisions will be entered for respondent.