Opinion
Docket Nos. 23860 25163.
1952-11-7
STRICKLAND COTTON MILLS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Paul Webb, Jr., Esq., and H. H. Hunt, C.P.A., for the petitioner. William J. Stetter, Esq., and Stafford R. Grady, Esq., for the respondent.
Paul Webb, Jr., Esq., and H. H. Hunt, C.P.A., for the petitioner. William J. Stetter, Esq., and Stafford R. Grady, Esq., for the respondent.
1. Petitioner, a member of the cotton textile industry, Southern division, has not shown that the effect of the large cotton crop of 1937 on the cotton textile industry resulted in an abnormally depressed base period net income entitling it to relief under section 722(b)(2), Internal Revenue Code.
2. The base period is not to be divided into separate segments; it is a unitary period.
The Commissioner denied the petitioner's applications for relief from excess profits taxes under section 722(b)(2) of the Internal Revenue Code for the fiscal years ending July 31, 1941, 1942, 1943, 1944, 1945, and 1946. The sole issue is whether the business of the petitioner was depressed in the base period because of temporary economic circumstances unusual in the case of the petitioner or because of the fact that an industry of which petitioner was a member was depressed by reason of temporary economic events unusual in the case of such industry.
The proceedings were consolidated for hearing.
FINDINGS OF FACT.
Facts stipulated are so found and incorporated herein by reference.
The petitioner is a Georgia corporation which was organized in 1899. It has its principal place of business at Valdosta, Georgia, and is a manufacturer of cotton sheetings.
The petitioner during the years 1921 through 1941 manufactured standard narrow Class C sheetings (i.e., sheetings 40 inches wide or less, having an average yarn number of from 21 to 28) for use in the manufacture of cotton bags and in the converting trade. These sheetings were made from undyed and unbleached yarns which were also manufactured by the petitioner. (This product is commonly called ‘grey goods.‘)
The gray cloth manufactured by the petitioner during all years material to this proceeding was sold through a selling agent in New York. The selling agent sold petitioner's cotton cloth on a commission basis and assumed all credit risks by guaranteeing the accounts receivable.
The cotton textile industry is divisible in two ways. Geographically it is divisible into a Northern division and a Southern division. Secondly, it can be divided into industry groups according to the type product manufactured. Generally speaking there are fourteen such major manufacturing groups. They are listed according to the product manufactured, as follows: Corded yarn, combed yarn, miscellaneous cotton yarn, cordage and twine, cotton duck, sheetings and allied fabrics, print cloths and allied fabrics, napped fabrics, colored yarn fabrics, fine cotton goods, towels and toweling (including wash cloths and terry woven fabrics other than toweling), tobacco and cheese cloths (including gauze, absorbent cotton, and surgical dressing), specialty fabrics, and miscellaneous cotton textile products.
Petitioner is a member of the cotton textile industry, Southern division, sheetings and allied fabrics group.
The mill margin is roughly the difference between the selling price of cotton cloth and the cost of raw cotton.
The petitioner has kept its books and filed its income tax returns on the accrual basis since its organization. Prior to August 1, 1931, petitioner kept its books and filed its tax returns on a calendar year basis and since August 1, 1931, petitioner has kept its books and filed its tax returns on the basis of a fiscal year ending July 31.
The petitioner filed timely corporation income tax, declared value excess-profits tax, and excess profits tax returns for the fiscal years ended July 31, 1941, 1942, 1943, 1944, 1945, and 1946, with the collector of internal revenue for the district of Georgia.
The petitioner filed timely applications for relief (Form 991) under section 722 of the Internal Revenue Code for fiscal years ended July 31, 1941, 1942, 1943, 1944, 1945, and 1946.
Since the petitioner was in existence during its entire base period, that is the fiscal years ended July 31, 1937, 1938, 1939, and 1940, it is entitled to use an excess profits credit based on income under the provisions of section 713 of the Internal Revenue Code. Petitioner's excess profits credit computed under the provisions of section 713 of the Internal Revenue Code and without application of section 722 of the Internal Revenue Code as finally determined by the respondent for each of the fiscal years, ending July 31, 1941 to 1946, inclusive, is as follows:
+-------------------------+ ¦July 31, 1941 ¦$55,022.56¦ +--------------+----------¦ ¦July 31, 1942 ¦66,056.90 ¦ +--------------+----------¦ ¦July 31, 1943 ¦80,392.30 ¦ +--------------+----------¦ ¦July 31, 1944 ¦80,392.30 ¦ +--------------+----------¦ ¦July 31, 1945 ¦80,392.30 ¦ +--------------+----------¦ ¦July 31, 1946 ¦80,414.84 ¦ +-------------------------+
Excess profits net income for each of the base period years computed under section 711 and without the application of section 722 of the Internal Revenue Code is as follows:
+-------------------------------------------------+ ¦ ¦For fiscal year ¦ ¦ +-------------+-----------------+-----------------¦ ¦ ¦July 31, 1941 ¦For later years ¦ +-------------+-----------------+-----------------¦ ¦ ¦ ¦ ¦ +-------------+-----------------+-----------------¦ ¦July 31, 1937¦$133,136.51 ¦$159,410.56 ¦ +-------------+-----------------+-----------------¦ ¦July 31, 1938¦28,641.29 ¦33,409.99 ¦ +-------------+-----------------+-----------------¦ ¦July 31, 1939¦6,386.75 ¦7,339.24 ¦ +-------------+-----------------+-----------------¦ ¦July 31, 1940¦63,509.38 ¦77,974.54 ¦ +-------------------------------------------------+
Petitioner's excess profits tax liability, without the application of section 722 of the Internal Revenue Code, for eac of the fiscal years ending July 31, 1941 to 1946, inclusive, is as follows:
+-------------------------+ ¦July 31, 1941 ¦$12,081.71¦ +--------------+----------¦ ¦July 31, 1942 ¦44,982.68 ¦ +--------------+----------¦ ¦July 31, 1943 ¦130,273.16¦ +--------------+----------¦ ¦July 31, 1944 ¦77,237.21 ¦ +--------------+----------¦ ¦July 31, 1945 ¦72,420.17 ¦ +--------------+----------¦ ¦July 31, 1946 ¦30,769.37 ¦ +-------------------------+
For the fiscal years ended July 31, 1935, to July 31, 1940, sales, gross profit, gross profit percentage of sales, compensation of officers, and other items of income and expense for petitioner were as follows:
INCOME, PROFIT AND LOSS STATEMENTS
+-----------------------------------------------------------------------------+ ¦District Georgia ¦ ¦ ¦ ¦ ¦ ¦ ¦ +------------------------+--------+--------+--------+-------+--------+--------¦ ¦ ¦July 31,¦July 31,¦July 31,¦July ¦July 31,¦July 31,¦ ¦ ¦ ¦ ¦ ¦31, ¦ ¦ ¦ +------------------------+--------+--------+--------+-------+--------+--------¦ ¦Year ¦1935 ¦1936 ¦1937 ¦1938 ¦1939 ¦1940 ¦ +------------------------+--------+--------+--------+-------+--------+--------¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +------------------------+--------+--------+--------+-------+--------+--------¦ ¦Sales ¦$450,874¦$652,397¦$866,109¦473,140¦$579,584¦$585,964¦ +------------------------+--------+--------+--------+-------+--------+--------¦ ¦Cost of goods sold ¦456,695 ¦520,372 ¦602,933 ¦389,986¦503,271 ¦452,482 ¦ +------------------------+--------+--------+--------+-------+--------+--------¦ ¦Gross profit from sales ¦(5,821) ¦132,025 ¦263,176 ¦83,154 ¦76,313 ¦122,482 ¦ +------------------------+--------+--------+--------+-------+--------+--------¦ ¦Gross sales from store ¦ ¦ ¦ ¦ ¦ ¦ ¦ +------------------------+--------+--------+--------+-------+--------+--------¦ ¦Cost of goods sold ¦ ¦ ¦ ¦ ¦ ¦ ¦ +------------------------+--------+--------+--------+-------+--------+--------¦ ¦Gross profit from store ¦ ¦ ¦ ¦ ¦ ¦ ¦ +------------------------+--------+--------+--------+-------+--------+--------¦ ¦Gross profit per cent of¦(1.29) ¦20.23 ¦30.38 ¦17.57 ¦13.16 ¦20.90 ¦ ¦sales ¦ ¦ ¦ ¦ ¦ ¦ ¦ +------------------------+----------------------------------------------------¦ ¦ ¦15 1/2 Yr. Average 10.58%, 4 Yr. Average 20.50% ¦ +------------------------+----------------------------------------------------¦ ¦Interest received on ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦Government ¦ ¦ ¦ ¦ ¦ ¦ ¦ +------------------------+--------+--------+--------+-------+--------+--------¦ ¦obligations ¦ ¦ ¦ ¦ ¦ ¦ ¦ +------------------------+--------+--------+--------+-------+--------+--------¦ ¦Other interest ¦(Not ¦ ¦ ¦ ¦ ¦2,283 ¦ ¦ ¦seg.) ¦ ¦ ¦ ¦ ¦ ¦ +------------------------+--------+--------+--------+-------+--------+--------¦ ¦Rents ¦7,100 ¦7,391 ¦7,591 ¦7,413 ¦6,497 ¦6,795 ¦ +------------------------+--------+--------+--------+-------+--------+--------¦ ¦Other income ¦834 ¦696 ¦1,003 ¦829 ¦1,302 ¦8,253 ¦ +------------------------+--------+--------+--------+-------+--------+--------¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +------------------------+--------+--------+--------+-------+--------+--------¦ ¦Total income ¦2,113 ¦140,112 ¦271,770 ¦91,396 ¦84,112 ¦150,813 ¦ +------------------------+--------+--------+--------+-------+--------+--------¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +------------------------+--------+--------+--------+-------+--------+--------¦ ¦Loss on sale of cotton ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦contracts ¦ ¦ ¦ ¦ ¦ ¦ ¦ +------------------------+--------+--------+--------+-------+--------+--------¦ ¦Compensation of officers¦5,556 ¦5,505 ¦20,550 ¦12,075 ¦10,400 ¦9,000 ¦ +------------------------+--------+--------+--------+-------+--------+--------¦ ¦Salaries and wages ¦3,030 ¦3,095 ¦5,363 ¦5,720 ¦6,076 ¦6,597 ¦ +------------------------+----------------------------------------------------¦ ¦Repairs ¦(Included in “Cost of goods sold”) ¦ +------------------------+----------------------------------------------------¦ ¦Bad debts ¦17 ¦35 ¦350 ¦75 ¦321 ¦ ¦ +------------------------+--------+--------+--------+-------+--------+--------¦ ¦Interest paid ¦7,671 ¦11,459 ¦7,319 ¦7,969 ¦11,445 ¦5,005 ¦ +------------------------+--------+--------+--------+-------+--------+--------¦ ¦Taxes ¦2,119 ¦4,226 ¦14,916 ¦9,802 ¦10,378 ¦13,003 ¦ +------------------------+--------+--------+--------+-------+--------+--------¦ ¦Contributions ¦ ¦ ¦5,920 ¦230 ¦255 ¦300 ¦ +------------------------+--------+--------+--------+-------+--------+--------¦ ¦Losses by fire, etc ¦ ¦ ¦ ¦ ¦ ¦ ¦ +------------------------+--------+--------+--------+-------+--------+--------¦ ¦Depreciation ¦11,011 ¦16,997 ¦16,040 ¦17,176 ¦17,506 ¦17,006 ¦ +------------------------+--------+--------+--------+-------+--------+--------¦ ¦Loss on commissary ¦ ¦ ¦ ¦ ¦ ¦ ¦ +------------------------+--------+--------+--------+-------+--------+--------¦ ¦Other deductions ¦14,754 ¦55,035 ¦29,608 ¦4,389 ¦20,392 ¦21,852 ¦ +------------------------+--------+--------+--------+-------+--------+--------¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +------------------------+--------+--------+--------+-------+--------+--------¦ ¦Total deductions ¦44,158 ¦96,352 ¦100,066 ¦57,986 ¦76,773 ¦72,763 ¦ +------------------------+--------+--------+--------+-------+--------+--------¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +------------------------+--------+--------+--------+-------+--------+--------¦ ¦Current year net income ¦(42,045)¦43,760 ¦171,704 ¦33,410 ¦7,339 ¦78,050 ¦ +------------------------+--------+--------+--------+-------+--------+--------¦ ¦Prior year loss ¦ ¦ ¦ ¦ ¦ ¦ ¦ +------------------------+--------+--------+--------+-------+--------+--------¦ ¦Declared value excess ¦ ¦ ¦12,674 ¦ ¦ ¦76 ¦ ¦profits tax ¦ ¦ ¦ ¦ ¦ ¦ ¦ +------------------------+--------+--------+--------+-------+--------+--------¦ ¦Wholly nontaxable ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦interest received ¦ ¦ ¦ ¦ ¦ ¦ ¦ +------------------------+--------+--------+--------+-------+--------+--------¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------------------------------------------------------------------------+
The following table is a comparison of United States and foreign production and mill consumption of commercial cotton for the years 1922-1939, inclusive:
+-----------------------------------------------------------------------------+ ¦ ¦ ¦ ¦ ¦Mill consumption (in 1,000 ¦ +-------------------+----------------------------+----------------------------¦ ¦ ¦Production (in 1,000 bales) ¦bales) ¦ +-------------------+----------------------------+----------------------------¦ ¦Year beginning ¦United ¦ ¦ ¦United ¦ ¦ ¦ +-------------------+--------+----------+--------+--------+----------+--------¦ ¦August 1— ¦States ¦Foreign ¦World ¦States ¦Foreign ¦World ¦ +-------------------+--------+----------+--------+--------+----------+--------¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-------------------+--------+----------+--------+--------+----------+--------¦ ¦1922 ¦10,124 ¦8,327 ¦18,451 ¦6,666 ¦14,671 ¦21,337 ¦ +-------------------+--------+----------+--------+--------+----------+--------¦ ¦1923 ¦10,330 ¦8,760 ¦19,090 ¦5,681 ¦14,346 ¦20,027 ¦ +-------------------+--------+----------+--------+--------+----------+--------¦ ¦1924 ¦14,006 ¦10,088 ¦24,094 ¦6,193 ¦16,541 ¦22,734 ¦ +-------------------+--------+----------+--------+--------+----------+--------¦ ¦1925 ¦16,181 ¦10,562 ¦26,743 ¦6,456 ¦17,712 ¦24,168 ¦ +-------------------+--------+----------+--------+--------+----------+--------¦ ¦1926 ¦18,182 ¦9,768 ¦27,930 ¦7,190 ¦18,489 ¦25,679 ¦ +-------------------+--------+----------+--------+--------+----------+--------¦ ¦1927 ¦12,957 ¦10,386 ¦23,343 ¦6,834 ¦18,608 ¦25,442 ¦ +-------------------+--------+----------+--------+--------+----------+--------¦ ¦1928 ¦14,555 ¦11,247 ¦25,802 ¦7,091 ¦18,687 ¦25,778 ¦ +-------------------+--------+----------+--------+--------+----------+--------¦ ¦1929 ¦14,716 ¦11,535 ¦26,251 ¦6,106 ¦18,769 ¦24,875 ¦ +-------------------+--------+----------+--------+--------+----------+--------¦ ¦1930 ¦13,873 ¦11,503 ¦25,376 ¦5,263 ¦17,169 ¦22,432 ¦ +-------------------+--------+----------+--------+--------+----------+--------¦ ¦1931 ¦16,877 ¦9,602 ¦26,479 ¦4,866 ¦18,023 ¦22,889 ¦ +-------------------+--------+----------+--------+--------+----------+--------¦ ¦1932 ¦12,961 ¦10,500 ¦23,461 ¦6,137 ¦18,514 ¦24,651 ¦ +-------------------+--------+----------+--------+--------+----------+--------¦ ¦1933 ¦12,712 ¦13,354 ¦26,066 ¦5,700 ¦19,902 ¦25,602 ¦ +-------------------+--------+----------+--------+--------+----------+--------¦ ¦1934 ¦9,576 ¦13,466 ¦23,042 ¦5,361 ¦20,119 ¦25,480 ¦ +-------------------+--------+----------+--------+--------+----------+--------¦ ¦1935 ¦10,495 ¦15,646 ¦26,141 ¦6,351 ¦21,178 ¦27,529 ¦ +-------------------+--------+----------+--------+--------+----------+--------¦ ¦1936 ¦12,375 ¦18,354 ¦30,729 ¦7,950 ¦22,688 ¦30,638 ¦ +-------------------+--------+----------+--------+--------+----------+--------¦ ¦1937 ¦18,412 ¦18,333 ¦36,745 ¦5,748 ¦21,825 ¦27,573 ¦ +-------------------+--------+----------+--------+--------+----------+--------¦ ¦1938 ¦11,665 ¦15,839 ¦27,504 ¦6,858 ¦21,649 ¦28,507 ¦ +-------------------+--------+----------+--------+--------+----------+--------¦ ¦1939 ¦11,516 ¦15,851 ¦27,367 ¦7,784 ¦20,702 ¦28,486 ¦ +-------------------+--------+----------+--------+--------+----------+--------¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-------------------+--------+----------+--------+--------+----------+--------¦ ¦Averages: ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-------------------+--------+----------+--------+--------+----------+--------¦ ¦1936-1939 ¦13,492 ¦17,094 ¦30,586 ¦7,085 ¦21,716 ¦28,801 ¦ +-------------------+--------+----------+--------+--------+----------+--------¦ ¦1922-1939 ¦13,414 ¦12,396 ¦25,812 ¦6,346 ¦18,866 ¦25,213 ¦ +-------------------+--------+----------+--------+--------+----------+--------¦ ¦1922-1935 ¦13,392 ¦11,053 ¦24,448 ¦6,135 ¦18,052 ¦24,187 ¦ +-----------------------------------------------------------------------------¦ ¦Source: U.S. Dept. of Agriculture, “Agricultural Statistics,” 1941, pp. 123, ¦ ¦125, 126, and 1945, p. 75. ¦ +-----------------------------------------------------------------------------+
The carry-over at the beginning of the year in foreign countries and in the United States 1921-1940, with the amounts of the United States carry-over held by the U.S. Government and by others 1933-1940 were as follows:
+-----------------------------------------------------------------------------+ ¦ ¦ ¦ ¦ ¦United States ¦ +-------+-----------+----------------+----------+-----------------------------¦ ¦ ¦ ¦ ¦ ¦held by— ¦ +-------+-----------+----------------+----------+-----------------------------¦ ¦ ¦Grand ¦Foreign ¦ ¦ ¦ ¦ +-------+-----------+----------------+----------+---------------+-------------¦ ¦Year ¦total ¦countries ¦Total ¦ ¦ ¦ +-------------------+----------------+----------+---------------+-------------¦ ¦beginning August 1—¦ ¦ ¦U. S. ¦ ¦ +-------------------+----------------+----------+---------------+-------------¦ ¦ ¦ ¦ ¦ ¦Government ¦Others ¦ +-------+-----------+----------------+----------+---------------+-------------¦ ¦1921 ¦15,169 ¦8,273 ¦6,534 ¦ ¦ ¦ +-------+-----------+----------------+----------+---------------+-------------¦ ¦1922 ¦10,494 ¦7,172 ¦2,832 ¦ ¦ ¦ +-------+-----------+----------------+----------+---------------+-------------¦ ¦1923 ¦7,571 ¦5,246 ¦2,325 ¦ ¦ ¦ +-------+-----------+----------------+----------+---------------+-------------¦ ¦1924 ¦6,614 ¦5,058 ¦1,556 ¦ ¦ ¦ +-------+-----------+----------------+----------+---------------+-------------¦ ¦1925 ¦7,948 ¦6,338 ¦1,610 ¦ ¦ ¦ +-------+-----------+----------------+----------+---------------+-------------¦ ¦1926 ¦10,473 ¦6,931 ¦3,543 ¦ ¦ ¦ +-------+-----------+----------------+----------+---------------+-------------¦ ¦1927 ¦12,654 ¦8,892 ¦3,762 ¦ ¦ ¦ +-------+-----------+----------------+----------+---------------+-------------¦ ¦1928 ¦10,535 ¦7,999 ¦2,536 ¦ ¦ ¦ +-------+-----------+----------------+----------+---------------+-------------¦ ¦1929 ¦10,541 ¦8,228 ¦2,312 ¦ ¦ ¦ +-------+-----------+----------------+----------+---------------+-------------¦ ¦1930 ¦11,892 ¦7,362 ¦4,530 ¦ ¦ ¦ +-------+-----------+----------------+----------+---------------+-------------¦ ¦1931 ¦14,808 ¦8,438 ¦6,370 ¦ ¦ ¦ +-------+-----------+----------------+----------+---------------+-------------¦ ¦1932 ¦18,336 ¦8,658 ¦9,678 ¦ ¦ ¦ +-------+-----------+----------------+----------+---------------+-------------¦ ¦1933 ¦17,116 ¦8,952 ¦8,165 ¦1 3,626 ¦1 4,539 ¦ +-------+-----------+----------------+----------+---------------+-------------¦ ¦1934 ¦17,540 ¦9,796 ¦7,744 ¦3,037 ¦4,707 ¦ +-------+-----------+----------------+----------+---------------+-------------¦ ¦1935 ¦15,072 ¦7,864 ¦7,208 ¦6,027 ¦1,181 ¦ +-------+-----------+----------------+----------+---------------+-------------¦ ¦1936 ¦13,649 ¦8,240 ¦5,409 ¦3,237 ¦2,172 ¦ +-------+-----------+----------------+----------+---------------+-------------¦ ¦1937 ¦13,695 ¦9,196 ¦4,499 ¦1,665 ¦2,834 ¦ +-------+-----------+----------------+----------+---------------+-------------¦ ¦1938 ¦22,702 ¦11,169 ¦11,533 ¦6,964 ¦4,589 ¦ +-------+-----------+----------------+----------+---------------+-------------¦ ¦1939 ¦21,638 ¦8,605 ¦13,033 ¦11,045 ¦1,988 ¦ +-------+-----------+----------------+----------+---------------+-------------¦ ¦1940 ¦20,272 ¦9,708 ¦10,564 ¦8,733 ¦1,831 ¦ +-----------------------------------------------------------------------------¦ ¦Source: U.S. Dept. of Commerce, Bureau of Census, “Cotton Production and ¦ ¦Distribution,” Bulletin No. 182, 1944-1945, p. 52, and New York Cotton ¦ ¦Exchange, “Cotton Yearbook,” 1945-1946, pp. 48-49. ¦ +-----------------------------------------------------------------------------+
The condition of petitioner as of the close of each calendar year from 1921 to 1930, and as of the close of each fiscal year from July 31, 1931, to July 31, 1940, was as follows:
+------------------------+ ¦BALANCE SHEETS ¦ +------------------------¦ ¦District Georgia ¦¦¦¦¦¦¦¦ +------------------------+
Year 1921 1922 1923 1924 1925 1926 1927 Cash $961 $15,089 $16,490 $2,055 $537 Notes & accounts receivable (net) 3,992 $24,952 1,511 9,815 $10,240 5,537 12,440 Inventories 227,187 233,688 361,657 175,247 176,275 127,734 84,666 Govt. & State 20,000 20,000 20,000 obligations Land ) ( 7,350 7,350 7,350 7,350 7,550 7,550 Net tangible )118,227 ( 189,234 181,246 180,819 178,962 282,583 capital assets 194,857 Reserves 133,830 85,587 93,950 102,374 110,799 119,822 121,583 Other assets 304 719 1,003 Total assets $370,671 $480,847 $594,841 $390,148 $374,684 $322,557 $388,779 Accounts payable $9,969 $4,162 $2,567 $3,393 $3,204 $2,985 $7,623 Bds, Nts, & Mtgs, less than 113,154 103,126 209,626 33,126 43,125 12,789 57,789 1 yr Common stock 175,000 175,000 175,000 175,000 175,000 175,000 175,000 Surplus, paid-in or capital surplus, earned 70,328 189,483 205,674 176,772 146,441 123,283 139,308 Other 2,220 9,076 1,974 1,857 6,914 8,500 9,059 liabilities Total $370,671 $480,847 $594,841 $390,148 $374,684 $322,557 $388,779 liabilities
BALANCE SHEETS District Georgia
July 31, July 31, July 31, July 31, Year 1928 1929 1930 1931 1932 1933 1934 Cash $6,698 $2,001 $3,109 $1,998 $156 $1,667 Notes & accounts receivable (net) 14,941 15,845 16,632 22,796 22,495 19,957 $1,140 Inventories 107,360 89,189 93,953 27,992 38,195 40,723 147,216 Govt. & State obligations Land 7,550 7,550 7,550 7,550 7,550 7,550 7,550 Net tangible 279,671 268,411 261,234 252,671 244,297 226,938 212,700 capital assets Reserves 134,668 148,014 160,891 170,392 186,432 204,104 218,452 Other assets 3,161 1,626 1,013 6,799 8,410 7,775 5,794 Total assets $419,381 $384,622 $382,491 $319,806 $321,103 $304,610 $374,400 Accounts payable $2,557 $23,280 $13,647 $5,091 $4,715 $3,964 $2,749 Bds, Nts, & Mtgs, less than 122,289 134,789 167,789 92,789 70,289 53,789 124,471 1 yr Common stock 175,000 175,000 175,000 175,000 175,000 175,000 175,000 Surplus, paid-in or capital surplus, earned 119,535 50,115 24,471 42,278 66,411 66,967 64,494 Other 1,438 1,584 4,648 4,688 4,890 7,686 liabilities Total $419,381 $384,622 $382,491 $319,806 $321,103 $304,610 $374,400 liabilities
BALANCE SHEETS District Georgia
July 31, July 31, July 31, July 31, July 31, July 31, Year 1935 1936 1937 1938 1939 1940 Cash $848 $2,574 $4,189 $5,743 $4,046 Notes & accounts receivable (net) 9,796 20,450 $40,363 31,446 43,048 18,679 Inventories 135,745 47,972 45,191 132,097 53,008 60,007 Govt. & State obligations Land 7,550 7,550 7,550 7,550 7,550 7,550 Net tangible capital 212,720 302,595 291,362 257,544 246,119 244,377 assets Reserves 233,295 194,074 212,200 302,915 319,332 339,172 Other assets 1,430 860 1,236 3,877 4,213 4,008 Total assets $368,089 $382,001 $385,702 $436,703 $359,681 $338,667 Accounts payable $2,593 $3,918 $7,132 $3,518 $4,203 $194 Bds, Nts. & Mtgs, less 142,471 135,971 62,000 173,000 93,000 than 1 yr Common stock 175,000 175,000 175,000 175,000 175,000 175,000 Surplus, paid-in or capital surplus, earned 25,016 64,530 85,309 75,363 81,861 139,395 Other liabilities 23,009 2,582 56,261 9,822 5,617 24,078 Total liabilities $368,089 $382,001 $385,702 $436,703 $359,681 $338,667
The compiled net profit (or loss) less tax-exempt income for manufacturing corporations other than cotton textile, and for cotton textile manufacturing corporations for the years 1922-1939 was as follows:
COMPILED NET PROFIT (OR LOSS) LESS TAX-EXEMPT INCOME FOR MANUFACTURING CORPORATIONS OTHER THAN COTTON TEXTILE, AND COTTON TEXTILE MANUFACTURING CORPORATIONS, 1922-1939
+--------------------------------------------------------+ ¦COMPILED NET PROFIT (OR LOSS) LESS TAX-EXEMPT INCOME FOR¦ +--------------------------------------------------------¦ ¦MANUFACTURING CORPORATIONS OTHER THAN COTTON TEXTILE, ¦ ¦AND ¦ +--------------------------------------------------------¦ ¦COTTON TEXTILE MANUFACTURING CORPORATIONS, 1922-1939 ¦ +--------------------------------------------------------¦ ¦ ¦ ¦ ¦ +--------------------------------------------------------+
(In $1,000) Manufacturing corporations other than Cotton textile Year cotton textile corporations 1922 2,548,044 92,963 1923 3,466,977 103,910 1924 2,803,307 (39,835) 1925 (1 ) (1 ) 1926 3,738,946 (30,843) 1927 3,011,752 75,842 1928 3,899,944 10,582 1929 4,383,755 22,017 1930 1,209,171 (91,507) 1931 (759,400) (63,570) 1932 (1,752,601) (53,663) 1933 172,218 31,828 1934 971,591 8,414 1935 1,826,708 (10,261) 1936 3,102,507 35,138 1937 3,123,298 37,779 1938 1,262,283 (6,206) 1939 3,151,164 35,287 Average: 1936-1939 2,659,813 25,500 1922-1935 1,963,109 4,298 1922-1939 2,127,039 9,287 Base period 25.05% Base period 174.57% greater than greater than 1922-1939. 1922-1939. Source: Bureau of Internal Revenue, “Statistics of Income” and “Source Book of Statistics of Income.”
To prevail under this section petitioner must show that its average base period net income is an inadequate standard of normal earnings because its business was depressed or because the taxpayer's industry was depressed by reason of temporary economic events unusual in the industry. It must, also, by competent evidence, establish a fair and just constructive average base period net income. Petitioner's contentions are that the temporary economic depression of the industry is evidence by (1) the disparity between the price of cotton goods as compared with the price of all commodities during the base period years; (2) the oversupply of raw cotton during the base period years and its depressing effect upon the price of cotton goods during the base years; and (3) ‘the character of the circumstances under which the oversupply of raw cotton was created as it relates to section 722(b)(2).‘ The Court is unable to distinguish between the last two contentions as the evidence relating to both contentions is the same. We have therefore considered them together.
Based on the Bureau of Labor Statistics, Wholesale Prices, the index of all commodities during the base period was 93.51 per cent of the 1922-1939 average while the price of cotton goods was 84.34 per cent of the 1922-1939 average, or a difference of 9.17 per cent. This small disparity is merely the ordinary fluctuation that can be found by examining the yearly index of prices of cotton as compared to other commodities.
While being fully aware of the disparity of price between all commodities opposed to the price of raw cotton, it is nevertheless incumbent upon us to consider particularly the specific industry of which petitioner is a member, that is, the sheetings industry, Southern division. Regs. 112, sec. 35.722-2(b)(8).
1Data not available.
The income and balance sheet data for nine corporations, Southern sheetings mills, 1922-1930, were as follows:
SHEETINGS AND ALLIED FABRICS INDUSTRY, SOUTHERN SHEETINGS MILLS, INCOME AND BALANCE SHEET DATA FOR NINE CORPORATIONS, FILING FISCAL YEAR RETURNS IN 1922-1939
+-----------------------------------------------------------------------------+ ¦ ¦ ¦Compiled ¦ ¦Ratio of compiled net¦ +------------------------------+------+---------+-------+---------------------¦ ¦ ¦ ¦net ¦Total ¦profit (or loss) less¦ ¦ ¦ ¦profit ¦ ¦ ¦ +------------------------------+------+---------+-------+---------------------¦ ¦ ¦Net ¦(or loss)¦assets ¦tax-exempt income to:¦ +------------------------------+------+---------+-------+---------------------¦ ¦Year ¦sales ¦less tax ¦(end of¦ ¦ +------------------------------+------+---------+-------+---------------------¦ ¦ ¦($000)¦exempt ¦year) ¦ ¦ ¦ +------------------------------+------+---------+-------+---------+-----------¦ ¦ ¦ ¦income ¦($000) ¦Net sales¦Total ¦ ¦ ¦ ¦ ¦ ¦ ¦assets ¦ +------------------------------+------+---------+-------+---------+-----------¦ ¦ ¦ ¦($000) ¦ ¦(per ¦(per cent) ¦ ¦ ¦ ¦ ¦ ¦cent) ¦ ¦ +------------------------------+------+---------+-------+---------+-----------¦ ¦1922 ¦9,509 ¦892 ¦8,811 ¦9.38 ¦10.12 ¦ +------------------------------+------+---------+-------+---------+-----------¦ ¦1923 ¦11,080¦653 ¦9,791 ¦5.89 ¦6.67 ¦ +------------------------------+------+---------+-------+---------+-----------¦ ¦1924 ¦11,040¦314 ¦10,255 ¦2.84 ¦3.06 ¦ +------------------------------+------+---------+-------+---------+-----------¦ ¦1925 ¦12,730¦354 ¦10,025 ¦2.78 ¦3.53 ¦ +------------------------------+------+---------+-------+---------+-----------¦ ¦1926 ¦10,991¦409 ¦9,206 ¦3.72 ¦4.44 ¦ +------------------------------+------+---------+-------+---------+-----------¦ ¦1927 ¦10,552¦847 ¦9,787 ¦8.03 ¦8.65 ¦ +------------------------------+------+---------+-------+---------+-----------¦ ¦1928 ¦10,859¦142 ¦9,492 ¦1.31 ¦1.50 ¦ +------------------------------+------+---------+-------+---------+-----------¦ ¦1929 ¦10,248¦309 ¦9,480 ¦3.02 ¦3.26 ¦ +------------------------------+------+---------+-------+---------+-----------¦ ¦1930 ¦8,130 ¦(913) ¦8,582 ¦(11.23) ¦(10.64) ¦ +------------------------------+------+---------+-------+---------+-----------¦ ¦1931 ¦6,252 ¦(375) ¦7,847 ¦(6.00) ¦(4.78) ¦ +------------------------------+------+---------+-------+---------+-----------¦ ¦1932 ¦5,237 ¦(297) ¦7,094 ¦(5.67) ¦(4.19) ¦ +------------------------------+------+---------+-------+---------+-----------¦ ¦1933 ¦7,259 ¦276 ¦7,445 ¦3.80 ¦3.71 ¦ +------------------------------+------+---------+-------+---------+-----------¦ ¦1934 ¦8,808 ¦206 ¦7,869 ¦2.34 ¦2.62 ¦ +------------------------------+------+---------+-------+---------+-----------¦ ¦1935 ¦8,725 ¦(126) ¦7,733 ¦(1.44) ¦(1.63) ¦ +------------------------------+------+---------+-------+---------+-----------¦ ¦1936 ¦11,064¦739 ¦8,316 ¦6.68 ¦8.89 ¦ +------------------------------+------+---------+-------+---------+-----------¦ ¦1937 ¦10,721¦668 ¦8,297 ¦6.23 ¦8.05 ¦ +------------------------------+------+---------+-------+---------+-----------¦ ¦1938 ¦7,051 ¦(132) ¦7,519 ¦(1.87) ¦(1.76) ¦ +------------------------------+------+---------+-------+---------+-----------¦ ¦1939 ¦8,372 ¦88 ¦7,924 ¦1.05 ¦1.11 ¦ +------------------------------+------+---------+-------+---------+-----------¦ ¦Average: ¦ ¦ ¦ ¦ ¦ ¦ +------------------------------+------+---------+-------+---------+-----------¦ ¦1936-1939 ¦9,302 ¦341 ¦8,014 ¦3.67 ¦4.26 ¦ +------------------------------+------+---------+-------+---------+-----------¦ ¦1922-1939 ¦9,368 ¦225 ¦8,637 ¦2.40 ¦2.61 ¦ +------------------------------+------+---------+-------+---------+-----------¦ ¦Per cent: 1936-1939 to ¦99.30 ¦151.56 ¦92.79 ¦ ¦ ¦ ¦1922-1939 ¦ ¦ ¦ ¦ ¦ ¦ +-----------------------------------------------------------------------------+
The average spot price of middling cotton in ten markets and the average wholesale prices of three constructions of narrow sheetings for 1922-1940 were as follows:
+-----------------------------------------------------------------------------+ ¦ ¦ ¦Narrow sheetings: ¦ +-------------+---------------------------+-----------------------------------¦ ¦ ¦Middling cotton ¦Average of ¦ +-------------+---------------------------+-----------------------------------¦ ¦ ¦7/8 inch: Average ¦wholesale prices ¦ +-------------+---------------------------+-----------------------------------¦ ¦ ¦spot price in ten ¦of three constructions, ¦ +-------------+---------------------------+-----------------------------------¦ ¦ ¦markets (cents ¦f.o.b. mill ¦ +-------------+---------------------------+-----------------------------------¦ ¦Year ¦per pound) ¦(cents per pound) ¦ +-------------+---------------------------+-----------------------------------¦ ¦1922 ¦20.49 ¦ ¦ +-------------+---------------------------+-----------------------------------¦ ¦1923 ¦28.63 ¦ ¦ +-------------+---------------------------+-----------------------------------¦ ¦1924 ¦27.79 ¦ ¦ +-------------+---------------------------+-----------------------------------¦ ¦1925 ¦23.10 ¦ ¦ +-------------+---------------------------+-----------------------------------¦ ¦1926 ¦16.62 ¦33.59 ¦ +-------------+---------------------------+-----------------------------------¦ ¦1927 ¦16.85 ¦32.77 ¦ +-------------+---------------------------+-----------------------------------¦ ¦1928 ¦19.15 ¦33.14 ¦ +-------------+---------------------------+-----------------------------------¦ ¦1929 ¦18.20 ¦32.27 ¦ +-------------+---------------------------+-----------------------------------¦ ¦1930 ¦12.73 ¦25.19 ¦ +-------------+---------------------------+-----------------------------------¦ ¦1931 ¦7.90 ¦18.15 ¦ +-------------+---------------------------+-----------------------------------¦ ¦1932 ¦6.11 ¦14.86 ¦ +-------------+---------------------------+-----------------------------------¦ ¦1933 ¦1 10.05 ¦22.39 ¦ +-------------+---------------------------+-----------------------------------¦ ¦1934 ¦1 16.17 ¦29.48 ¦ +-------------+---------------------------+-----------------------------------¦ ¦1935 ¦1 15.77 ¦28.36 ¦ +-------------+---------------------------+-----------------------------------¦ ¦1936 ¦11.93 ¦26.47 ¦ +-------------+---------------------------+-----------------------------------¦ ¦1937 ¦11.22 ¦27.87 ¦ +-------------+---------------------------+-----------------------------------¦ ¦1938 ¦8.58 ¦19.35 ¦ +-------------+---------------------------+-----------------------------------¦ ¦1939 ¦9.04 ¦20.75 ¦ +-------------+---------------------------+-----------------------------------¦ ¦1940 ¦9.98 ¦21.94 ¦ +-------------+---------------------------+-----------------------------------¦ ¦ ¦(1936-1939——10.19 ¦1936-1939——23.59 ¦ +-------------+---------------------------+-----------------------------------¦ ¦Averages ¦(1922-1939——15.57 ¦1926-1939——26.06 ¦ +-----------------------------------------------------------------------------¦ ¦Source: U.S. Dept. of Agriculture, “Agricultural Statistics,” 1935, p. 433, ¦ ¦and “Prices of Cotton Cloth and Raw Cotton, and Mill Margins for Certain ¦ ¦Constructions of Unfinished Cloth,” September 1937, p. 23, and January 1947, ¦ ¦Table 19. ¦ +-----------------------------------------------------------------------------+ 1Includes process tax of 4.0 cents per pound from Aug. 1933 to Dec. 1935.
The price index published by the Bureau of Labor Statistics for all commodities, cotton goods, brown sheetings and middling cotton for 1922-1940 was as follows:
+-----------------------------------------------------------+ ¦INDEXES OF WHOLESALE PRICES OF ALL COMMODITIES, COTTON ¦ ¦GOODS, ¦ +-----------------------------------------------------------¦ ¦BROWN SHEETINGS, AND MIDDLING COTTON, 1922-1940 1 ¦ +-----------------------------------------------------------¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------------------------------------------------------+
[1926=100]
Brown sheetings Series 1: Series 3: Middling 4/4, 4/4, cotton All Cotton 48 x 48, 56 x 60, at New Year commodities goods 2.85 4.00 York 1922 96.7 104.3 105.1 111.3 121.0 1923 100.6 116.9 133.3 132.1 167.0 1924 98.1 114.7 131.7 121.3 163.9 1925 103.5 110.0 120.0 112.2 133.8 1926 100.0 100.0 100.0 100.0 100.0 1927 95.4 97.1 97.8 99.6 100.2 1928 96.7 100.4 110.2 98.7 114.1 1929 95.3 98.8 102.0 93.3 109.0 1930 86.4 84.7 85.3 78.5 77.1 1931 73.0 66.1 58.8 58.4 48.7 1932 64.8 54.0 50.4 44.6 36.6 1933 65.9 71.2 71.4 66.2 49.5 1934 74.9 86.5 88.9 84.8 70.4 1935 80.0 83.4 89.8 81.3 67.8 1936 80.8 80.3 79.1 78.9 69.1 1937 86.3 84.3 87.0 83.4 65.3 1938 78.6 65.4 62.0 57.8 49.3 1939 77.1 67.2 64.3 60.0 53.9 1940 78.6 71.4 69.7 65.3 59.3 Averages: 1936-1939 80.7 74.3 73.1 70.0 59.4 1922-1939 86.3 88.1 90.9 86.8 88.7 1926-1939 82.5 81.4 81.9 77.5 72.2 1Processing tax of 4.0 cents per pound on cotton is not reflected in above indexes of cotton prices from August 1933 to December 1935. With the processing tax included, the cotton price indexes are as follows:
+-------------------------------------------------------------------------+ ¦Year or average ¦1926=100 ¦ +----------------------------------------------+--------------------------¦ ¦1933 ¦59.4 ¦ +----------------------------------------------+--------------------------¦ ¦1934 ¦93.1 ¦ +----------------------------------------------+--------------------------¦ ¦1935 ¦90.9 ¦ +----------------------------------------------+--------------------------¦ ¦1922-1939 ¦91.8 ¦ +----------------------------------------------+--------------------------¦ ¦1926-1939 ¦76.2 ¦ +-------------------------------------------------------------------------¦ ¦Source: Bureau of Labor Statistics, “Wholesale Prices,” annual bulletins.¦ +-------------------------------------------------------------------------+
The petitioner's average base period net income is not an inadequate standard of normal earnings because the industry of which it was a member was not depressed by reason of temporary economic events unusual in the case of that industry within the meaning of section 722(b)(2) of the Internal Revenue Code.
OPINION.
WITHEY, Judge:
Petitioner bases its claim for relief on section 722(b)(2), Internal Revenue Code. This section is set forth in the margin.