Court Opinion

ID: 4606692
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:39:06.31229+00
Date Added: 2024-06-11T07:53:25.256758
License: Public Domain

Seekonk Lace Company, Inc., Petitioner, v. Commissioner of Internal Revenue, RespondentSeekonk Lace Co. v. CommissionerDocket No. 29296United States Tax Court24 T.C. 552; 1955 U.S. Tax Ct. LEXIS 156; June 29, 1955, Filed *156 Decision will be entered for the respondent.  Excess Profits Tax -- Relief Under Sec. 722 (b) (2).  -- Petitioner, a lace manufacturer, claimed that its business was depressed in the base period due to the following temporary economic circumstances, acting separately or in conjunction: (a) The trade advantage, or export bounty, accruing to the French lace industry as a result of the devaluation of the franc in the base period; and (b) the reduction in duty imposed by the United States on the import of French laces. Held, the circumstances complained of have not been shown to be "temporary economic circumstances unusual" in the case of petitioner, or of the industry of which petitioner was a member, within the meaning of section 722 (b) (2), Internal Revenue Code of 1939.  Walter F. Gibbons, Esq., for the petitioner.George*157  J. LeBlanc, Esq., for the respondent.  Tietjens, Judge.  TIETJENS*553  The Commissioner denied the petitioner's applications for excess profits tax relief for the taxable years ended December 31, 1941, 1942, 1943, 1944, and 1945, and determined deficiencies for the years 1942 to 1945, inclusive, in the total amount of $ 10,461.96, and an overassessment of $ 1,901.17 for 1941.  The ground for relief relied on by petitioner is that its business, or the industry of which it is a member, was depressed in the base period because of temporary economic circumstances unusual to it or to the industry.  Sec. 722 (b) (2), Internal Revenue Code of 1939.Some of the facts have been stipulated, and are so found.FINDINGS OF FACT.The petitioner is a Rhode Island corporation with its principal office and place of business located at Pawtucket, Rhode Island.  Its returns for the taxable years involved, the calendar years 1941 to 1945, inclusive, were filed with the collector of internal revenue for the district of Rhode Island.Petitioner's business is the manufacture and sale of Levers laces. Laces are divided into three general classifications according to the type of machine on which*158  they are made.  These are Levers laces, manufactured on Levers machines, lace curtains, made on Nottingham machines, and plain net made on "roller locking" machines. Levers laces are a separate industry classification.  They include a number of different types of laces, such as "all-overs," veilings, Valenciennes, Alencons, and bobbin-finings. All-overs are wide widths (up to as much as 18 feet) used primarily for dressmaking.  Veilings are made in various widths and are used chiefly in the millinery industry.  Valenciennes, or "Vals" as they are known in the trade, are narrow laces of from 3/8 to 4 inches in width, used principally for trimming ladies' dresses, blouses, and underwear.  Alencon laces are from 1 to 5 inches in width and are also used for trimming wearing apparel.  Bobbin-fining laces are those made under the so-called bobbin-fining system.  They are made in narrow and wide widths.Petitioner's principal product during the period here under consideration was all-overs made of silk and rayon, 10-point or coarser, which were sold chiefly to the dressmaking industry.  Petitioner is one of the five Levers lace manufacturers in the United States whose *554  base period*159  production was devoted principally to the manufacture of all-overs. Petitioner's sales were made through an exclusive selling agent, Stern & Stern Textiles, Inc., of New York.In December 1932, petitioner acquired control of Rhode Island Lace Works, Inc., another Rhode Island corporation engaged in manufacturing Levers laces. It manufactured Vals, or narrow laces, for the underwear trade, as well as all-overs for the dress trade, and veilings for the millinery trade.  Stern & Stern Textiles, Inc., also acted as its selling agent.The manufacture of Levers laces in the United States was begun about 1866.  The industry expanded slowly, and in 1909 there were about 100 Levers lace machines in this country.  For many years France has been the largest world source of Levers laces, the industry being centered in the cities of Calais and Caudry.  After a study made by the United States Department of State, Congress, in the Tariff Act of 1909, imposed a 70 per cent ad valorem duty on the importation of Levers laces and at the same time provided for duty-free importation of Levers machines into the United States for a period of 17 months.  The purpose of these measures was to build up a *160  Levers lace industry in this country and at the same time to protect that industry from the competition of foreign-made laces. No Levers machines were then, or are now, manufactured in the United States.  About 400 Levers machines were later imported into the United States, and a total of about 650 machines were in operation in the United States in the base period. Petitioner operated 25 machines and Rhode Island Lace Works operated 43 machines during the base period. At the same time there were about 2,000 Levers lace machines in Calais, France, which is the production center for narrow laces; while Caudry, France, which produces mostly all-overs for the dress trade, had approximately 300 such machines. The major portion of the French production is exported to the United States.  All-overs from Caudry provided the principal competition for petitioner's laces during the base period.The standard unit of production of the American Levers lace industry is a "rack." A rack represents 1,920 motions of a Levers lace machine. Exports of Levers laces from France, and imports into the United States, are reported in pounds.  There is no practicable way of converting racks into pounds for*161  purposes of comparison.Petitioner's production of Levers laces for the years 1922 to 1939, inclusive, in racks, was as follows:YearRacks1922217,476    1923182,283 1/21924141,299    192590,704    192645,416 1/2192790,944    1928150,373 3/41929162,066    1930230,588    1931160,275    1932111,224    1933111,510    1934117,949    1935179,027 1/21936165,644    1937161,375    1938118,677    1939106,236    *555  Petitioner's rack production by types of lace for the years 1930 to 1939, inclusive, was as follows:Racks19301931193219331934Wholly or in chief value ofsilk or rayon:All-overs193,349125,10592,41737,481    52,276 1/2Veilings11,587    5,833 1/2Bobbin finingsRacks of silk and rayon193,349125,10592,41749,068    58,110    Wholly or in chief valueof cotton:Valenciennes31,431    4,693    Alencons12,766 1/214,668 1/2All-oversSpecial18,244 1/240,477 1/2Racks of cotton lace37,23935,17018,80762,442    59,839    Total rack production230,588160,275111,224111,510    117,949    *162 Racks19351936193719381939Wholly or in chief value ofsilk or rayon:All-overs103,023 1/287,79172,44667,70563,138Veilings4,975    15,20217,12421,34123,231Bobbin finings5,80815,582246Racks of silk and rayon107,998 1/2108,801105,15289,29286,369Wholly or in chief valueof cotton:Valenciennes14,973    2718217,471Alencons17,020 1/2449448All-overs56,12356,22329,3031,948Special39,035 1/2Racks of cotton lace71,029    56,84356,22329,38519,867Total rack production179,027 1/2165,644161,375118,677106,236*556  The quantities of Levers laces imported into the United States, by types of materials, for the years 1931 to 1939, inclusive, were as follows:Wholly orRayon lacesWholly orin chiefSilk and(other thanin chiefvalue ofrayon laces,veils andTotalvalue ofsilkveils, andveilings)Yearcotton (Vals)(principallyveilingsand metalall-overs)thread lacesQuantity in pounds (1,000 lbs.)19311,09480491,18719321,0442115131,09319331,053101181,08219345815686001935670115869419366094722768519376111526758351938594248107595419391,13130010921,542*163  The quantities of Levers laces (by types of materials) imported into the United States from France between 1931 and 1939, inclusive, and the unit value of such laces were as follows:Wholly orWholly orin chiefin chiefUnitvalue of silkUnitYearvalue ofvalue(principallyvaluecotton (Vals),per lb.all-overs),per lb.1,000 lbs.lbs.19311,046$ 3.7579,792$ 4.4919329262.6820,5782.8719339453.019,2974.0219344903.534,0756.8619354303.378,5993.9819364183.2040,4865.2919374893.37140,7893.5819385652.55242,9272.3019391,0932.49298,1202.12Total (allSilk veilsUnittypes ofUnitYearand veilings,valuelaces), 1,000value(lbs.)per lb.lbs.per lb.19313,949$ 7.491,138$ 3.83193214,6276.609742.77193310,8817.239723.0819345,5226.865063.6019355,4016.074503.41193612,8425.614853.44193738,2315.786983.51193872,4845.429182.72193935,6174.861,5012.47Petitioner's net sales, gross profits, and net income or losses for the years 1917 to 1939, inclusive, were*164  as follows: *557 GrossNetYearNet salesprofitsincome (orlosses)1917$ 490,210$ 70,832($ 1,273)1918617,371127,64927,625 1919863,243196,94758,878 19201,055,802278,08994,981 1921647,428182,19451,100 19221,061,977362,061211,757 1923908,111347,038176,460 1924519,019240,828(23,565)1925461,32892,724(9,346)1926253,65231,463(46,328)1927398,81776,110(19,176)1928675,006178,069(1,949)1929$ 804,710$ 167,150$ 114,413 19301,017,379259,188208,234 1931655,414141,96589,358 1932427,95669,33632,539 1933329,94537,93516,004 1934426,09088,78213,202 1935632,556119,003105,005 1936700,240198,37579,106 1937668,297134,10022,328 1938504,956131,93722,978 1939392,17578,479405 The net sales, gross profits, and net income of Rhode Island Lace Works, Inc., for the years 1935 to 1939, inclusive, were as follows:YearNet salesGross profitsNet income1935$ 608,361.27$ 40,947.73$ 12,935.201936730,448.65204,502.6562,153.681937735,954.65211,489.653,438.541938511,781.31143,631.3122,700.351939508,366.85127,075.8512,751.08*165  The yearly rack production of Levers laces between 1935 and 1940, inclusive, by 16 domestic producers having 373 machines, as reported by the American Lace Manufacturers Association, was as follows:YearRacks19352,000,04419362,020,59319371,802,80819381,254,01419391,501,31819401,576,577The total sales of Levers laces by the above producers and an index of such sales (1936-1939=100) were as follows:YearSalesIndex1936$ 6,403,56212619375,436,79510719384,136,3638119394,379,89386There has been a tariff imposed on the importation of Levers laces into the United States at all times since the Tariff Act of 1883.  The rates in effect under the various tariff acts and the Reciprocal Trade *558  Agreement of June 15, 1936, between the United States and France, and later international agreements, were as follows:Tariff act orinternational agreementProvisions188340% a. v. on cotton laces50% on silk laces25% on gold, silver, and metallic thread laces189060% on cotton60% plus 60 cents per pound on wool60% on silk189450% all material189760% on cotton60% plus 50 cents per pound on wool60% on all cotton material190970% on all material191360% on Levers laces192290% on imported laces193090% rate continuedFrench Reciprocal60% on cotton 12. and finerTrade Agreement65% on silk veils & veilingof June 15, 1936.65% on rayon veils & veiling90% on other rayon laces65% on laces wholly or in chief value of silk194560% on cotton laces 12 points and finer made withindependent beams90% on cotton or rayon or other synthetic less than12 points65% on laces wholly or in chief value of silk90% on other laces65% on veils and veilings wholly or in chief value ofsilk, rayon, or other synthetic90% on veils and veilings of other material194840% on cotton laces 12 points and finer made withindependent beams75% on cotton, rayon, or other synthetic material lessthan 12 points40% on laces wholly or in chief value of silk65% on laces wholly or in chief value of silk coarserthan 12 points45% on laces of other material45% on veils and veilings wholly or in chief valueof silk, rayon, or other synthetic45% on veils and veilings of other material195135% on cotton laces wholly or in chief value ofcotton 12 points and finer65% on cotton, rayon or other synthetic materialcoarser than 12 points35% on laces wholly or in chief value of silk 12points or finer65% on laces wholly or in chief value of silk coarserthan 12 points32 1/2% on veils and veilings of silk or rayon45% on other laces*166 *559   Article XI of the Reciprocal Trade Agreement provides in part:In the event that a wide variation occurs in the rate of exchange between the currencies of the United States of America and France, the Government of either country, if it considers the variation so substantial as to prejudice the industries or commerce of the country, shall be free to propose negotiations for the modification of this Agreement or to terminate this Agreement in its entirety on 30 days' written notice.The current French franc was established by the first French Republic in 1803.  For many years prior to World War I it was one of the strongest and most stable currencies in Europe, being valued in terms of United States currency at between 17 and 20 cents.  Between 1916 and 1919 the French Government maintained an artificial rate of 19 cents for the franc. Artificial support of the franc was discontinued in 1919 and its value fell to an average of 7.04 cents in 1920, because of the drastic inflation resulting from World War I and the postwar reconstruction.  Between 1920 and mid-1923 the franc was relatively stable, varying in value between 7 and 6.3 cents, but by mid-1923 the franc began a marked*167  decline in value caused by a growing inflation in France, which seriously affected the economy between 1923 and 1926 and was not finally arrested until late in 1926 when the franc was finally stabilized at 3.2 cents.  From 1926 until 1933 the franc remained relatively stable, but in the latter year the effects of the world-wide depression made it increasingly difficult to maintain the value of the franc. In October 1936 the French Government devalued the franc and set its new value at a range between 4.3 and 4.9 cents.  The nation's financial difficulties worsened and the franc was devalued again, late in 1938, to 2.79 cents.  It remained generally stable until the outbreak of war with Germany in September 1939.  Between 1936 and 1939 the franc depreciated in value by almost 60 per cent.After World War II inflationary conditions again prevailed in France, and in December 1945, the franc was devalued approximately 58 per cent to 1.78 cents.  There were further devaluations of the French franc in 1946, 1948, and 1949, its value decreasing from 0.84 of a cent in 1946 to 0.46 of a cent in 1949.In summary, the following changes in the value of the franc in relation to the dollar took*168  place between 1926 and 1949:New value othe francDate(cents)December 1926De facto devaluation and stabilization3.9170June 25, 1928De jure devaluation3.9170Jan. 31, 1934Devaluation of United States dollar1 6.6197Sept. 25De jure devaluation2Oct. 1, 1936July 22, 1937De jure devaluation4.3555May 5, 1938De facto devaluation2.7956Nov. 12, 1938De jure devaluation2.7855Sept. 1, 1939Cabinet decree suspended gold reserverequirement of the Act of June 25, 19283*169  2.7855Feb. 29, 1940Revaluation of gold reserve of Bank of Francein accordance with conditions of theConvention of September 25, 19362.3641Dec. 26, 1945De jure devaluation1.7822January 1946De jure devaluation0.8396Jan. 21, 1948De jure devaluation0.4671Sept. 20, 1949De jure devaluation0.2857*560  Petitioner's excess profits tax liability, without regard to the provisions of section 722 of the Internal Revenue Code, for the years here involved was as follows:Excess profitsYeartax liability1941$ 8,859.601942184,905.461943200,738.26194474,414.86194585,392.16Petitioner's base period consists of the calendar years 1936 to 1939, inclusive. Petitioner is entitled to compute its excess profits credit under the provisions of section 713 of the Internal Revenue Code of 1939.The petitioner's actual excess profits net income for the base period years and the average thereof as adjusted under the provisions of section 713 (e) of the Internal Revenue Code of 1939, which section is applicable to the taxable years 1942, 1943, 1944, and 1945, was as follows:Excess profitsYearnet income1936$ 79,106.44193722,327.80193822,978.091939404.77Total$ 124,817.10General average$ 31,204.28Increase in average under sec. 713 (e)7,674.57Average as adjusted$ 38,878.85*561  The*170  petitioner's excess profits credit, computed without reference to section 722 for the years 1940 to 1945, inclusive, was as follows:YearAmount19401 $ 31,336.8719411 32,685.2619422 36,934.9119432 36,934.9119441 38,670.9019451 41,543.64Petitioner is not entitled to excess profits tax relief for the years 1941, 1942, 1943, 1944, and 1945 under the provisions of section 722, Internal Revenue Code of 1939.OPINION.Section 722 (a) of the Internal Revenue Code of 1939 provides relief from excess profits tax if the taxpayer establishes (a) that its tax, computed without the benefit of section 722, is excessive and discriminatory, and (b) 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.  To show that its tax is excessive and discriminatory petitioner contends that its average base period net income (1936-1939) is an inadequate standard of normal earnings because its business was depressed*171  in the base period due to temporary economic circumstances unusual in its business, or in the industry of which it is a member (section 722 (b) (2)).  These temporary economic circumstances, according to petitioner, were (a) the trade advantage, or export bounty, accruing to the French Levers lace industry as a result of the devaluations of the franc in the base period; and (b) the reduction in duty imposed by the United States on the import of French Levers laces, which was contained in the Reciprocal Trade Agreement between the United States and France, effective June 15, 1936.  According to petitioner these circumstances, separately or in conjunction, caused a heavy increase in the volume of exports of French Levers laces to the United States, which depressed the selling price of Levers laces here, and as a result its earnings in the base period were seriously depressed.Respondent's position is (a) that petitioner's business was not temporarily depressed during the base period by reason of the increase in imports of Levers laces from France; (b) that the circumstances relied on by petitioner as the cause of its depression were not *562  temporary economic circumstances unusual*172  in the case of petitioner, or petitioner's industry, within the meaning of section 722 (b) (2), but were legislative events or administrative acts pursuant to legislative or constitutional authority; and (c) that petitioner has not established what would be a fair and just amount representing normal earnings to be used as a constructive average base period net income.Petitioner's argument reduces to this: the two factors, i. e., the export advantage resulting from the devaluation of the French franc in the period 1936 to 1939 and the United States tariff reduction during the base period were unusual temporary economic circumstances, the concurrence of which resulted in a depression of petitioner's business or of the industry of which it was a member.  As we see it, neither the devaluation nor the reduction in duty was unusual or temporary. Reference to our Findings of Fact indicates a long history of devaluations and many changes in duty. We see nothing unusual about the circumstances complained of.  The historical data of record establish the contrary -- that such currency fluctuations and duty changes were the normal or expected happenings in the field of international monetary*173  and tariff policy.  We find nothing in the evidence before us which would justify characterizing these events either as temporary or unusual.Furthermore, the circumstances on which petitioner relies had no direct effect on petitioner's business.  They were not like a strike or a fire or a ruinous price war.  If petitioner's business, or the business of the American lace industry of which it was a member, was depressed during the base period years so that the resulting excess profits tax was excessive and discriminatory (a question which we find unnecessary to answer) it was the result of competition with French lace makers during a period when the French manufacturers had the competitive advantage.  The evidence shows that ever since the Levers lace industry became established in the United States, its principal competition has come from French Levers laces. In fact, in order to establish the industry in this country, it was necessary to raise the import duties on Levers laces, at the same time providing for the duty-free entrance into the United States of the machinery on which Levers laces are made since none of it was manufactured in this country.  The industry enjoyed high*174  protection until 1936, the duty rising to as high as 90 per cent on all Levers laces imported into the United States between 1922 and 1936.  In the latter year the rates were reduced in recognition of the need to stimulate international trade as a means of bettering economic conditions in trading nations and, particularly, to combat the worldwide depression of the early 1930's.  The reduction of duties in 1936, *563  in our view, was attributable to a change in the trade policy of the United States from the protectionism of the 1920's to a recognition of the economic interdependence of the principal countries of the world and the need to stimulate trade between these countries.  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;*175 Norfolk & Chesapeake Coal Co., 18 T.C. 904">18 T. C. 904.As stated above, in this case the circumstances complained of had no direct impact at all on petitioner's business.  The duties were not levied on petitioner's product and the franc devaluation was the action of a foreign government which only very indirectly affected petitioner.  The most that can be said is that the duty change and the franc devaluation contributed to increased competition between the French and American manufacturers of Levers laces. But we have held in several cases that competition is not a temporary economic circumstance within the meaning of section 722 which would entitle taxpayers to relief under that section.  Lamar Creamery Co., 8 T. C. 928, 938, 939; Harlan Bourbon & Wine Co., 14 T. C. 97, 104. No different result is called for here.The action of respondent in rejecting petitioner's claims for relief is sustained.Reviewed by the Special Division.Decision will be entered for the respondent.  Footnotes1. As a result of the devaluation of the dollar on January 31, 1934, the new par of exchange between the ranc and the dollar appreciated↩ to 6.6197 cents.2. To a range↩ between 4.3555 and 4.9763.  First action was taken on September 25, 1936, to devalue the franc and to effectuate the so-called Tripartite Agreement with England, the United States, and France of same date; the formal decree was not executed until October 1, 1936.3.  Not a formal devaluation, but this action caused market value of franc to drop to an average of 2.2736 cents in October 1939.1. Invested capital credit.↩2. Income credit.↩