Court Opinion

ID: 4617620
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:36:56.160849+00
Date Added: 2024-06-11T07:55:19.915051
License: Public Domain

Strickland Cotton Mills, Petitioner, v. Commissioner of Internal Revenue, RespondentStrickland Cotton Mills v. CommissionerDocket Nos. 23860, 25163United States Tax Court19 T.C. 151; 1952 U.S. Tax Ct. LEXIS 53; November 7, 1952, Promulgated *53 Decisions will be entered 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.  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.  Withey, Judge.  WITHEY*151  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, *54  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*55  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, *152  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*56  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*57  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$ 55,022.56July 31, 194266,056.90July 31, 194380,392.30July 31, 194480,392.30July 31, 194580,392.30July 31, 194680,414.84Excess 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: *153 For fiscal yearJuly 31, 1941For later yearsJuly 31, 1937$ 133,136.51$ 159,410.56July 31, 193828,641.2933,409.99July 31, 19396,386.757,339.24July 31, 194063,509.3877,974.54Petitioner's excess profits tax liability, without the application of section 722 of the Internal Revenue Code, for each of the fiscal years ending July 31, 1941 to 1946, inclusive, is as follows:July 31, 1941$ 12,081.71July 31, 194244,982.68July 31, 1943130,273.16July 31, 194477,237.21July 31, 194572,420.17July 31, 194630,769.37For the fiscal years ended July 31, 1935, to July 31, 1940, sales, gross profit, gross profit percentage of sales, compensation of officers, and other*58  items of income and expense for petitioner were as follows:INCOME, PROFIT AND LOSS STATEMENTSDistrict    GeorgiaYearJuly 31,July 31,July 31,193519361937Sales$ 450,874 $ 652,397$ 866,109Cost of goods sold456,695 520,372602,933Gross profit from sales(5,821)132,025263,176Gross sales from storeCost of goods soldGross profit from storeGross profit per cent of sales(1.29)20.2330.3815 1/2 Yr. Average 10.58%,4 Yr. Average 20.50%Interest received on Government obligationsOther interest(Not. seg.)Rents7,100 7,3917,591Other income834 6961,003Total income2,113 140,112271,770Loss on sale of cotton contractsCompensation of officers5,556 5,50520,550Salaries and wages3,030 3,0955,363Repairs(Included in "Costof goods sold")Bad debts17 35350Interest paid7,671 11,4597,319Taxes2,119 4,22614,916Contributions5,920Losses by fire, etcDepreciation11,011 16,99716,040Loss on commissaryOther deductions14,754 55,03529,608Total deductions44,158 96,352100,066Current year net income(42,045)43,760171,704Prior year lossDeclared value excess profits tax12,674Wholly nontaxable interest received*59 INCOME PROFIT AND LOSS STATEMENTSDistrict     GeorgiaYearJuly 31,July 31,July 31,193819391940Sales$ 473,140$ 579,584$ 585,964Cost of goods sold389,986503,271452,482Gross profit from sales83,15476,313122,482Gross sales from storeCost of goods soldGross profit from storeGross profit per cent of sales17.5713.1620.9015 1/2 Yr. Average 10.58%,4 Yr. Average 20.50%Interest received on Government obligationsOther interest2,283Rents7,4136,4976,795Other income8291,3028,253Total income91,39684,112150,813Loss on sale of cotton contractsCompensation of officers12,07510,4009,000Salaries and wages5,7206,0766,597Repairs(Included in "Costof goods sold")Bad debts75321Interest paid7,96911,4455,005Taxes9,80210,37813,003Contributions230255300Losses by fire, etcDepreciation17,17617,50617,006Loss on commissaryOther deductions4,38920,39221,852Total deductions57,98676,77372,763Current year net income33,4107,33978,050Prior year lossDeclared value excess profits tax76Wholly nontaxable interest received*60 *154   The following table is a comparison of United States and foreign production and mill consumption of commercial cotton for the years 1922-1939, inclusive:Production (in 1,000 bales)Mill consumption(in 1,000 bales)Year beginning August1 --UnitedForeignWorldUnitedForeignWorldStatesStates192210,1248,32718,4516,66614,67121,337192310,3308,76019,0905,68114,34620,027192414,00610,08824,0946,19316,54122,734192516,18110,56226,7436,45617,71224,168192618,1829,76827,9307,19018,48925,679192712,95710,38623,3436,83418,60825,442192814,55511,24725,8027,09118,68725,778192914,71611,53526,2516,10618,76924,875193013,87311,50325,3765,26317,16922,432193116,8779,60226,4794,86618,02322,889193212,96110,50023,4616,13718,51424,651193312,71213,35426,0665,70019,90225,60219349,57613,46623,0426,36120,11925,480193510,49515,64626,1416,35121,17827,529193612,37518,35430,7297,95022,68830,638193718,41218,33336,7455,74821,82527,573193811,66515,83927,5046,85821,64928,507193911,51615,85127,3677,78420,70228,486Averages:1936-193913,49217,09430,5867,08521,71628,8011922-193913,41412,39625,8126,34618,86625,2131922-193513,39211,05324,4486,13518,05224,187*61  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 Statesheld by --Year beginning AugustGrandForeignTotal1 --totalcountriesU. S. GovernmentOthers192115,1698,2736,534192210,4947,1722,83219237,5715,2462,32519246,6145,0581,55619257,9486,3381,610192610,4736,9313,543192712,6548,8923,762192810,5357,9992,536192910,5418,2282,312193011,8927,3624,530193114,8088,4386,370193218,3368,6589,678193317,1168,9528,1651 3,6261 4,539193417,5409,7967,7443,0374,707193515,0727,8647,2086,0271,181193613,6498,2405,4093,2372,172193713,6959,1964,4991,6652,834193822,70211,16911,5336,9644,589193921,6388,60513,03311,0451,988194020,2729,70810,5648,7331,831*62 *155   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 SHEETSDistrict    GeorgiaYear192119221923Cash$ 961$ 15,089Notes & accounts receivable(net)3,992$ 24,9521,511Inventories227,187233,688361,657Govt. & State obligations20,00020,00020,000Land118,2277,3507,350Net tangible capital assets194,857189,234Reserves133,83085,58793,950Other assets304Total assets$ 370,671$ 480,847$ 594,841Accounts payable$ 9,969$ 4,162$ 2,567Bds, Nts, & Mtgs, less than 1 yr113,154103,126209,626Common stock175,000175,000175,000Surplus, paid-in or capital surplus,earned70,328189,483205,674Other liabilities2,2209,0761,974Total liabilities$ 370,671$ 480,847$ 594,841BALANCE SHEETSDistrict    GeorgiaYear1924192519261927Cash$ 16,490$ 2,055$ 537Notes & accounts receivable(net)9,815$ 10,2405,53712,440Inventories175,247176,275127,73484,666Govt. & State obligationsLand7,3507,3507,5507,550Net tangible capital assets181,246180,819178,962282,583Reserves102,374110,799119,822121,583Other assets7191,003Total assets$ 390,148$ 374,684$ 322,557$ 388,779Accounts payable$ 3,393$ 3,204$ 2,985$ 7,623Bds, Nts, & Mtgs, less than 1 yr33,12643,12512,78957,789Common stock175,000175,000175,000175,000Surplus, paid-in or capital surplus,earned176,772146,441123,283139,308Other liabilities1,8576,9148,5009,059Total liabilities$ 390,148$ 374,684$ 322,557$ 388,779*63 BALANCE SHEETSDistrict    GeorgiaYear192819291930Cash$ 6,698$ 2,001$ 3,109Notes & accounts receivable(net)14,94115,84516,632Inventories107,36089,18992,953Govt. & State obligationsLand7,5507,5507,550Net tangible capital assets279,671268,411261,234Reserves134,668148,014160,891Other assets3,1611,6261,013Total assets$ 419,381$ 384,622$ 382,491Accounts payable$ 2,557$ 23,280$ 13,647Bds, Nts, & Mtgs, less than 1 yr122,289134,789167,789Common stock175,000175,000175,000Surplus, paid-in or capital surplus,earned119,53550,11524,471Other liabilities1,4381,584Total liabilities$ 419,381$ 384,622$ 382,491BALANCE SHEETSDistrict    GeorgiaYearJuly 31,July 31,July 31,July 31,1931193219331934Cash$ 1,998$ 156$ 1,667Notes & accounts receivable(net)22,79622,49519,957$ 1,140Inventories27,99238,19540,723147,216Govt. & State obligationsLand7,5507,5507,5507,550Net tangible capital assets252,671244,297226,938212,700Reserves170,392186,432204,104218,452Other assets6,7998,4107,7755,794Total assets$ 319,806$ 321,103$ 304,610$ 374,400Accounts payable$ 5,091$ 4,715$ 3,964$ 2,749Bds, Nts, & Mtgs, less than 1 yr92,78970,28953,789124,471Common stock175,000175,000175,000175,000Surplus, paid-in or capital surplus,earned42,27866,41166,96764,494Other liabilities4,6484,6884,8907,686Total liabilities$ 319,806$ 321,103$ 304,610$ 374,400*64 *156 BALANCE SHEETSDistrict    GeorgiaYearJuly 31,July 31,July 31,193519361937Cash$ 848$ 2,574Notes & accounts receivable (net)9,79620,450$ 40,363Inventories135,74547,97245,191Govt. & State obligationsLand7,5507,5507,550Net tangible capital assets212,720302,595291,362Reserves233,295194,074212,200Other assets1,4308601,236Total assets$ 368,089$ 382,001$ 385,702Accounts payable$ 2,593$ 3,918$ 7,132Bds, Nts, & Mtgs, less than 1 year142,471135,97162,000Common stock175,000175,000175,000Surplus, paid-in or capital surplus, earned25,01664,53085,309Other liabilities23,0092,58256,261Total liabilities$ 368,089$ 382,001$ 385,702BALANCE SHEETSDistrict    GeorgiaYearJuly 31,July 31,July 31,193819391940Cash$ 4,189$ 5,743$ 4,046Notes & accounts receivable (net)31,44643,04818,679Inventories132,09753,00860,007Govt. & State obligationsLand7,5507,5507,550Net tangible capital assets257,544246,119244,377Reserves302,915319,332339,172Other assets3,8774,2134,008Total assets$ 436,703$ 359,681$ 338,667Accounts payable$ 3,518$ 4,203$ 194Bds, Nts, & Mtgs, less than 1 yr173,00093,000Common stock175,000175,000175,000Surplus, paid-in or capital surplus, earned75,36381,861139,395Other liabilities9,8225,61724,078Total liabilities$ 436,703$ 359,681$ 338,667*65  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(In $ 1,000)ManufacturingYearcorporationsCotton textileother than cottoncorporationstextile19222,548,044 92,963 19233,466,977 103,910 19242,803,307 (39,835)1925(1)      (1)      19263,738,946 (30,843)19273,011,752 75,842 19283,899,944 10,582 19294,383,755 22,017 19301,209,171 (91,507)1931(759,400)(63,570)1932(1,752,601)(53,663)1933172,218 31,828 1934971,591 8,414 19351,826,708 (10,261)19363,102,507 35,138 19373,123,298 37,779 19381,262,283 (6,206)19393,151,164 35,287 Average:1936-19392,659,813 25,500 1922-19351,963,109 4,298 1922-19392,127,039 9,287 Base period Base period 25.05% 174.57% greater than greater than 1922-1939.   1922-1939.   *66 *157   The income and balance sheet data for nine corporations, Southern sheetings mills, 1922-1939, were as follows:Sheetings and Allied Fabrics Industry, Southern Sheetings Mills, Income and Balance Sheet Data for Nine Corporations, Filing Fiscal Year Returns in 1922-1939Compilednet profitTotalNet(or loss)assetsYearsalesless tax-exempt(end of($ 000)incomeyear)($ 000)($ 000)19229,509892 8,811192311,080653 9,791192411,040314 10,255192512,730354 10,025192610,991409 9,206192710,552847 9,787192810,859142 9,492192910,248309 9,48019308,130(913)8,58219316,252(375)7,84719325,237(297)7,09419337,259276 7,44519348,808206 7,86919358,725(126)7,733193611,064739 8,316193710,721668 8,29719387,051(132)7,51919398,37288 7,924Average:1936-19399,302341 8,0141922-19399,368225 8,637Per cent: 1936-1939 to 1922-193999.30151.56 92.79Ratio of compiled netprofit (or loss) lesstax-exempt income to:YearNet salesTotal assets(per cent)(per cent)19229.38 10.12 19235.89 6.67 19242.84 3.06 19252.78 3.53 19263.72 4.44 19278.03 8.65 19281.31 1.50 19293.02 3.26 1930(11.23)(10.64)1931(6.00)(4.78)1932(5.67)(4.19)19333.80 3.71 19342.34 2.62 1935(1.44)(1.63)19366.68 8.89 19376.23 8.05 1938(1.87)(1.76)19391.05 1.11 Average:1936-19393.67 4.261922-19392.40 2.61Per cent: 1936-1939 to 1922-1939*67  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 cottonAverage of7/8 inch: Averagewholesale pricesYearspot price in tenof three constructions,markets (centsf. o. b. millper pound)(cents per pound)192220.49192328.63192427.79192523.10192616.6233.59192716.8532.77192819.1533.14192918.2032.27193012.7325.1919317.9018.1519326.1114.8619331 10.0522.3919341 16.1729.4819351 15.7728.36193611.9326.47193711.2227.8719388.5819.3519399.0420.7519409.9821.941936-1939 10.191936-1939 23.59Averages1922-1939 15.571926-1939 26.06*158  The price index published by the Bureau of Labor Statistics for all commodities, *68  cotton goods, brown sheetings and middling cotton for 1922-1940 was as follows:Indexes of Wholesale Prices of All Commodities, Cotton, Brown Sheetings, and Middling Cotton, 1922-1940 1[1926 = 100]Brown sheetingsMiddlingYearAll commoditiesCottonSeries 1:Series 3:cottongoods4/4,4/4,at New48 x 48,56 x 60,York2.854.00192296.7104.3105.1111.3121.01923100.6116.9133.3132.1167.0192498.1114.7131.7121.3163.91925103.5110.0120.0112.2133.81926100.0100.0100.0100.0100.0192795.497.197.899.6100.2192896.7100.4110.298.7114.1192995.398.8102.093.3109.0193086.484.785.378.577.1193173.066.158.858.448.7193264.854.050.444.636.6193365.971.271.466.249.5193474.986.588.984.870.4193580.083.489.881.367.8193680.880.379.178.969.1193786.384.387.083.465.3193878.665.462.057.849.3193977.167.264.360.053.9194078.671.469.765.359.3Averages:1936-193980.774.373.170.059.41922-193986.388.190.986.888.71926-193982.581.481.977.572.2*69 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.Petitioner bases its claim for relief on section 722 (b) (2), Internal Revenue Code.  This section is set forth in the margin.  1 To prevail under this section petitioner must show that its *159  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*70  average base period net income. Petitioner's contentions are that the temporary economic depression of the industry is evidenced 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.*71  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).  2 We compare the price of *160  middling cotton to the price of narrow sheetings. The average price per pound of middling cotton went from 15.57 cents for the 1922-1939 period to 10.19 cents for the base period, a decrease of 5.38 cents or 34.55 per cent; at the same time the price per pound of narrow sheetings went from 26.06 cents for 1926-1939 to 23.59 cents in the base period, a decrease of 2.47 cents or 9.47 per cent.  In other words, the price*72  of middling cotton decreased 263 per cent more than the price of narrow sheetings. Thus, it can be seen that the price of finished sheetings is not proportionately based on the price of raw cotton and the crux of petitioner's major premise is not sustained.  Further, the cost of raw cotton was 60 per cent of the price of narrow sheetings in the long period (1922-1939) whereas the cost of raw cotton represented only 43 per cent of the price of narrow sheetings in the base period. This would indicate the textile manufacturer can obtain a higher profit when raw cotton is selling at a lower price.*73  Petitioner further contends, as before stated, that the oversupply of raw cotton was unusual causing a decrease in the price of cotton goods and emphasizes the character of the circumstances under which the oversupply was created.  Examination of Exhibit 8-H discloses a constant fluctuation in the production of commercial cotton during the 1922-1939 period.  In 1922 production was 10,000,000 bales; by 1926, five years later, production was 18,000,000 bales; a decrease to 13,000,000 bales occurred in 1927; a rise to 16,800,000 bales in 1931; 1932 witnessed a drop to 13,000,000 bales; and 1934 a continuation of the downward trend to 9,500,000 bales. Production again rose to 18,400,000 bales in 1937 and dropped sharply to 11,600,000 bales in 1938.  In Industrial Yarn Corporation, 16 T. C. 681, 689, we said:* * * It is not unusual for a cotton crop to vary in size from year to year.  The fortuitous circumstances that 1937 may have produced a cotton crop of extraordinary size does not, of itself, create an abnormality in petitioner's business of the character sufficient to bring petitioner within the scope of the cited section.  * * *It must be remembered*74  that petitioner is not a cotton grower.  It is a manufacturer.  The effect of the large cotton crop was to reduce the cost of cotton to petitioner but it did not reduce the necessary profit it had to maintain to keep in business.  Its success depended on keeping its costs of production down.  The price of the raw cotton was reduced by the large crop and the price of cotton cloth was in turn reduced but its mill margin during the base period was substantially maintained.  The statements of petitioner's condition evidence the fact that it did not overstock during the base period. Petitioner's average base period inventory was $ 72,576 as against the 10-year average from July 31, 1931, to July 31, 1940, inclusive, of $ 72,814.  In petitioner's fiscal year ended July 31, 1938, when petitioner claims *161  an abnormal crop, its inventory did not exceed its inventory for the two highest years, 1934 and 1935.For the base period years, ending July 31, 1937 to 1940, the average cost of goods sold was 79.50 per cent of sales as compared to the 1921-1936 average of 89.42 per cent of sales.  The 1937-1940 average of 79.50 per cent is almost as low as the lowest year in the prior period, *75  namely, 1934 when the cost of goods sold was 79.14 per cent of sales.  This shows petitioner had a higher gross profit and a lower cost of goods sold in the base period years which is contrary to petitioner's contention that its industry was depressed. The carry-over chart shows that of the abnormal crop more than half was being held by the United States Government and others.  The petitioner was still buying in proportion to production capacity and was not bound by reason of the large crop of 1937 to buy more than it wanted.While considering cotton production, we should not fail to observe the increase in mill consumption which shows petitioner's industry was not depressed. At a time when the base period United States production increased 100,000 bales over the 1922-1935 average, the base period United States mill consumption increased 950,000 bales over the 1922-1935 average.  Since petitioner is in the mill end of the industry, the above comparison shows a more favorable position for its phase of activity therein.  Comparing the base period years to the long period of 1922-1939 we find mill consumption in 1936 was 125 per cent of the long period, 1937 was 91 per cent, 1938 was*76  108 per cent, 1939 was 122 per cent and the average base period consumption was 112 per cent of the long period.  This further shows petitioner's advantageous position in the base period.Lastly, petitioner must show that because of the temporary depression its actual average base period net income is an inadequate standard of normal earnings. Petitioner has not done this.  It has, in lieu thereof, treated the base period as being comprised of separate yearly units, proof of a depression in any one of which entitles it to relief under section 722 (b) (2).  We must, as stated in Wadley Co., 17 T. C. 269, treat all of the base period years as a unit, for in that case we said "the base period is not to be divided into separate segments; it is a unitary period * * *." Examination of the income statements for petitioner shows average sales for the base period of $ 626,199 as against sales from January 1, 1921, to July 31, 1940, of $ 454,636, an increase of $ 171,563 or 37 per cent over the long period.  At the same time average net income during the base period was $ 72,626 as against an average of $ 18,998 for the 18 7/12-year period from January 1, 1922*77  to July 31, 1940, an increase of $ 53,628 or 282 per cent over the long period average net income even after substantial increases in officers' salaries were allowed in a so called depressed period, the *162  1939 salaries paid to petitioner's officers being twice the 1926-1936 average.The increase in base period net income above noted is also true as to nine other Southern sheetings mills, whose net sales for the base period were 99.3 per cent of the 1922-1939 average and whose base period net profit was 151.56 per cent of the 1922-1939 average.  The same profit picture can be viewed by comparing the manufacturing corporations other than cotton textile with the cotton textile corporations.  By so doing we see that the base period average net profit of cotton textile corporations of $ 25,500,000 was 174 per cent greater than the average net profit for the period from 1922-1939 of $ 9,287,000 of the cotton textile corporations.  At the same time the base period net profit for other manufacturing corporations was only 25.05 per cent greater than the net profit for the long period of 1922-1939.We have made a detailed examination of the many exhibits presented by petitioner but *78  fail to see that the effect of the large cotton crop in the year 1937 upon petitioner's industry resulted in the temporary economic depression of petitioner's business during the base period. U. S. Treasury Department Bulletin on Section 722 of the Internal Revenue Code (Nov. 1944), Part III, par. (B), p. 17.  3*79  It is, therefore, our conclusion that petitioner has not established its right to relief under section 722 (b) (2), for it would be completely disregarding the facts to find petitioner's industry, the Southern sheetings mills, was depressed in the base period as compared to the average long term period 1922-1939.  Foskett & Bishop Co., 16 T. C. 456; Winter Paper Stock Co., 14 T.C. 1312">14 T. C. 1312; Monarch Cap Screw & Manufacturing Co., 5 T. C. 1220; Fish Net & Twine Co., 8 T.C. 96">8 T. C. 96.In view of the fact that petitioner has not proved its industry was depressed it is unnecessary to comment on petitioner's constructive average base period net income reconstruction.Reviewed by the Special Division.Decisions will be entered for the respondent.  Footnotes1. As of Nov. 30, 1933.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.↩1. Data not available.Source: Bureau of Internal Revenue, "Statistics of Income" and "Source Book of Statistics of Income."↩1. Includes processing tax of 4.0 cents per pound from Aug. 1933 to Dec. 1935.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.↩1. Processing 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 average1926 = 100193359.4193493.1193590.91922-193991.81926-193976.2Source: Bureau of Labor Statistics, "Wholesale Prices," annual bulletins.↩1. SEC. 722. GENERAL RELIEF -- CONSTRUCTIVE AVERAGE BASE PERIOD NET INCOME.* * * *(b) Taxpayers Using Average Earnings Method.  -- The tax computed under this subchapter (without the benefit of this section) shall be considered to be excessive and discriminatory in the case of a taxpayer entitled to use the excess profits credit based on income pursuant to section 713, if its average base period net income is an inadequate standard of normal earnings because -- * * * *(2) the business of the taxpayer was depressed in the base period because of temporary economic circumstances unusual in the case of such taxpayer or because of the fact that an industry of which such taxpayer was a member was depressed by reason of temporary economic events unusual in the case of such industry,* * * *↩2. SEC. 35.722-2. CONSTRUCTIVE AVERAGE BASE PERIOD NET INCOME. --* * * *(b) Rules for determination.* * * *(8) For the purposes of section 722 and of section 35.722-3 (b) and (c), no exclusive definition of the concept "industry" can be constructed.  In general an industry may be said to include a group of enterprises engaged in producing or marketing the same or similar products or services under analogous conditions which are essentially different from those encountered by other enterprises.  The mere similarity of product and marketing methods, however, is not enough of itself to comprehend taxpayers satisfying such conditions within the same industry.  Factors such as geographical location, character and location of markets, availability and character of raw material supply, and other conditions under which operations are carried on must be considered.  Regard may be had to trade custom and practice in determining whether a group of enterprises constitutes an industry.* * * *↩3. (B) Scope of Section 722 (b) (2).Since the economic circumstances giving rise to relief must be temporary and unusual, it is important that the taxpayer furnish evidence concerning the exact nature of the circumstances alleged.  It is not sufficient that the taxpayer merely show a depression during the base period by comparing its earnings during this period with earnings in a prior period, accompanied by general allegations concerning hard times or unfortunate conditions.  It is expected that for all industries and all taxpayers there will be fluctuations from year to year in their earnings experience.  Such fluctuations are perfectly normal, and in fact occurred in the experience of corporations generally during the base period. The year 1938 was in general a year of poor profits, and it would be improper under section 722 (b) (2) to grant relief due to that fact.  In some particular industries one or more of the other years of the base period were depressed because of usual and recurring circumstances.  Thus, it is necessary that the circumstances alleged under section 722 (b) (2)↩ be identified specifically as to character, causes, extent and severity, and that positive evidence be presented to show that they were both peculiar and temporary.