Court Opinion

ID: 4623328
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:52:43.800242+00
Date Added: 2024-06-11T07:56:20.628228
License: Public Domain

Liberty Fabrics of New York, Inc. (Formerly Liberty Lace and Netting Works), Petitioner, v. Commissioner of Internal Revenue, RespondentLiberty Fabrics of New York, Inc. v. CommissionerDocket No. 32828United States Tax Court28 T.C. 645; 1957 U.S. Tax Ct. LEXIS 159; June 13, 1957, Filed 1957 U.S. Tax Ct. LEXIS 159">*159 Decision will be entered for the respondent.  Petitioner's claim for relief under section 722 (b) (4), I. R. C. 1939, on the ground that the character of its business had changed, held, properly disallowed in view of the absence of any permissible reconstruction of normal earnings which would exceed the excess profits credit to which it is entitled in any event under section 713 (f).  Jay O. Kramer, Esq., S. Walter Kaufman, C. P. A., and Joseph J. Bryer, Esq., for the petitioner.Arthur N. Mindling, Esq., for the respondent.  Opper, Judge.  OPPER28 T.C. 645">*645  By this proceeding petitioner challenges respondent's disallowance of its claims under section 722, Internal Revenue Code of 1939, for 28 T.C. 645">*646  relief from excess profits tax liabilities for the calendar years 1941 through 1945.  The amounts are as follows:Calendar yearOverpayment claimed1941$ 66,248.72194255,916.34194341,919.08194461,773.94194560,507.801957 U.S. Tax Ct. LEXIS 159">*160  FINDINGS OF FACT.Some of the facts have been stipulated and are hereby found.Petitioner was incorporated on April 29, 1910, and maintains its principal place of business in New York City.  It has occupied its manufacturing premises in Bronx, New York, since 1910, and at all times pertinent to this case engaged in the manufacture of laces, netting, and veiling, woven from natural and synthetic yarns.The manufacture and sale of veilings constituted petitioner's most important activity until about 1921 or 1922.  Following a sharp decrease in the demand for veilings, petitioner expanded its manufacture and sale of allover laces in wide widths, principally used in women's dresses.  Petitioner's management has always followed the policy of being among the first manufacturers to use newly developed yarns and novelty constructions of lace and net.  Thus, petitioner made Spanish laces (1920-1925), Chantilly lace (commencing about 1925), metallic laces and imitation brocade (commencing about 1927), two-tone laces (commencing about 1928), wool laces (commencing about 1930), eyelet, linen, and combination type laces (commencing about 1931), and laces containing acetate yarns (commencing about1957 U.S. Tax Ct. LEXIS 159">*161  1932).  Petitioner was one of the first lace and net manufacturers to use metallic threads, rayon, acetate, and nylon, although it commenced the manufacture of nylon products only after the end of its base period on December 31, 1939.Among other information submitted for administrative consideration in support of the basic applications for relief involved in this proceeding, petitioner submitted a summary schedule purporting to show its net sales before discounts and its net taxable income (or loss) for each of the years 1911 through 1942.  Petitioner's earnings had historically been subject to wide fluctuation, its average net income during the base period years substantially exceeded its average net income for the 18-year period from 1922 through 1939, and it operated at a net loss from 1924 through 1927 and 1931 through 1933.  All of the applications for relief involved in this proceeding relied exclusively upon section 722 (b) (4) of the Internal Revenue Code of 1939.  Petitioner's applications for relief asserted that its excess profits taxes were excessive and discriminatory within the meaning of section 722, and 28 T.C. 645">*647  that its actual earnings for its base period years 1957 U.S. Tax Ct. LEXIS 159">*162  provided an inadequate standard of normal earnings because of certain changes which had been effected "during that period (and immediately prior thereto) in its capacity for production and in the nature of its product" which were not fully reflected in its actual earnings.Petitioner initially manufactured fabrics from Lastex yarn shortly after it was first introduced.  Due to the elasticity of such yarns, petitioner encountered special manufacturing problems which it attempted to overcome by making expenditures for reconverting and rebuilding machines, and other factory improvements from 1930 through 1938.The United States Rubber Company first introduced Lastex yarn in 1931, "Lastex" being the registered trade-mark or trade name of a certain class of elastic yarn it produced.  Lastex consists of an extruded rubber core covered with helical windings of very fine nonelastic material or synthetic threads. Lastex was one of the first latex yarns to be made in fine sizes, but several firms, other than United States Rubber, began selling a variety of similar yarns in fine sizes, with cores of less than one-fiftieth of an inch in diameter, soon after 1931.  Some of these other elastic 1957 U.S. Tax Ct. LEXIS 159">*163  yarns had been marketed in somewhat coarser form for many years prior to the introduction of Lastex and were used rather extensively in the corset and girdle industry during the 1920's.  All-elastic girdles made with such other yarns were marketed as early as 1917 or 1918.The elastic yarns used as warp threads in elastic bobbinet are set into the fabric diagonally to achieve a two-way stretch effect.  Some other elastic fabrics provide greater support with even less bulk.  Some of these other fabrics were woven or knitted in mesh or ventilated patterns as early as 1921 or 1922.  The outward appearance of these fabrics resembled elastic bobbinet and beginning in the early 1930's some were given a two-way stretch effect.  The corset and girdle industry, during the base period years, used a wide variety of elastic fabrics besides elastic bobbinet, many of which could be stretched in two directions.  Certain users of elastic fabrics considered bobbinet superior to other types of rubber fabrics and employed it in high-priced or luxury garments.In 1932 petitioner received shipment of 393 pounds of Lastex from United States Rubber. Petitioner started making samples of Lastex fabric in 1957 U.S. Tax Ct. LEXIS 159">*164  1933 and then went into production.  The first production took place on standard bobbinet and Levers lace machines which were not adapted to Lastex, such machines being unable to carry the strain of elastic yarn.Elastic fabrics were difficult to make and the early ones had a poor appearance because of the unevenness of the elastic warps. Prior to the base period no specifically designed machinery existed for the 28 T.C. 645">*648  new art of making fabrics using an elastic warp, although petitioner was able to adapt some of its existing machinery to that use.Petitioner encountered variations in elongation, inherent in the manufacture of the rubber yarns employed in the manufacture of elastic fabrics, from the time it first used rubber yarns and was still encountering those variations at the time of the trial of this proceeding.  These variations made it necessary for petitioner's employees to spend a great deal more time in preparing warps containing rubber yarn than in preparing warps containing nonelastic yarns, and petitioner had to modify its warp-making equipment for preparing warps from rubber yarn.Petitioner received elastic yarn in skeins which had to be wound with uniform elongation1957 U.S. Tax Ct. LEXIS 159">*165  onto spools.  This process proved time-consuming in order to avoid stretch.  The spools upon which the elastic yarn was wound had to be specially constructed; and the creel which held the spools in the warping operation differed from that used for the nonelastic type.Warps of elastic yarn are made slowly when compared to nonelastic warps. The warping mill is a big drum around which the thread is wound.  When completed the warp is put on a beam.  Steel beams have been known to snap like matches from the pressure of Lastex.  A 240-inch warp contains 4,000 to 5,000 elastic threads. Each warp contains about 500 pounds of Lastex.United States Rubber began to ship Lastex to petitioner in 1932 and in 1934 and 1935, respectively, to each of two other firms, sometimes referred to as Wilson and United Nets, each of which had productive facilities comparable to petitioner's.  These two firms and petitioner comprised the three principal lace and net accounts which received such shipments prior to the end of World War II, but heavier shipments of Lastex were made to the manufacturers of other types of elastic fabrics for use in the corset and girdle industry.  All shipments were cut off early1957 U.S. Tax Ct. LEXIS 159">*166  in 1942 to conserve rubber for wartime military use.  The following schedule shows the annual pound shipments of Lastex to the three principal lace and net accounts for 1935 through 1939, together with the percentage relationship which the shipments to petitioner bore to the combined shipments for each year:Petitioner'sYearPetitionerWilsonUnited Netspercentageof total193513,0682,66067579.7193637,1527194,44487.8193760,6913,78210,79280.6193864,9406,57816,95873.4193989,10816,94026,63367.2Each Lastex thread must be individually tied into the Levers machines or individually run into the bobbinet machines. The process 28 T.C. 645">*649  of tying in 4,000 to 5,000 threads requires the work of several people for a day or more.Petitioner had 15 bobbinet machines in place in its factory at both the beginning and end of its base period. It had replaced two 12-point bobbinet machines in good condition but which its management regarded as unsuitable for use on Lastex with two rebuilt bobbinet machines of somewhat coarser (11-point) gauge late in 1935.In the spring of 1938 petitioner installed 2 new 11-point bobbinet1957 U.S. Tax Ct. LEXIS 159">*167  machines and dismantled at about the same time 2 fine-gauge (12-point) machines which were in good condition.The total number of calendar months in which petitioner used each of its bobbinet machines to manufacture elastic fabrics during the base period years is as follows:Number of months in whichmachine was used onelastic fabricsMachine No.193619371938193988121212921 1151210851612121212186121212201210921112109222232248592585926121212122712121212446121212457121212463 812473 812The total number of calendar months in which petitioner used each bobbinet machine to manufacture nonelastic fabrics during the base period years is as follows:Number of months in whichmachine was used onnonelastic fabricsMachine No.1936193719381939849101112121521618520821221231241242251042262744645546471957 U.S. Tax Ct. LEXIS 159">*168 28 T.C. 645">*650  Some bobbinet machines remained idle for one or more calendar months during the base period years, the total number of months of complete idleness for such machines being as follows:Number of monthsMachine No.completely idle1936193719381939152271812042321112322121212312121245325253Total42262 1619Machine No. 9 was the only bobbinet machine in petitioner's plant at the end of the base period which was classified as a fine-gauge machine. Such machine, known as a 13-point machine, carried 26 bobbins per inch of width and was too fine and delicate for use with the Lastex yarns available during the base period years.The 2 new bobbinet machines acquired in 1938 were built to petitioner's own specifications, and were faster than the older machines. These1957 U.S. Tax Ct. LEXIS 159">*169  2 machines carried larger bobbins enabling them to hold twice as much yarn as earlier types.  A larger bobbin creates longer runs, less stoppage, more efficiency, and these machines, being specially designed, broke down less, broke fewer threads, and were more efficient.The 2 new bobbinet machines acquired in 1938 increased petitioner's maximum theoretical physical capacity to produce Lastex net by approximately 20 per cent.  Such increase was accompanied by a reduction of petitioner's maximum theoretical physical capacity for the production of nonelastic net, insofar as the new machines were specially designed for the production of elastic fabrics.A bobbinet plain net hand normally works 2 machines per shift.  At the end of 1939, petitioner had 11 1/2 plain net hands available for 14 bobbinet machines since 1 employee worked 1 machine not suitable for Lastex.The strong craft union having jurisdiction over plain net hands during the base period had long maintained a scarcity of skilled workers.  The union's unusually severe apprenticeship rules permitted only 1 learner or apprentice for each 9 plain net hands employed, and required each learner to serve an apprenticeship of 5 to1957 U.S. Tax Ct. LEXIS 159">*170  7 years before beginning to operate a bobbinet machine. The union's policy made it impossible for a manufacturer to employ additional operators until the union became convinced that sufficient demand for the manufacturer's 28 T.C. 645">*651  product provided reasonable assurance that additional plain net hands could be employed on a reasonably consistent and continuous fulltime basis.Two plain net hands ordinarily work as a team in operating bobbinet machines. One hand operates 2 machines on 1 shift while the other operates the same machines on the following shift.  They then divide their total earnings regardless of the relative production respectively achieved.  This practice, together with the union's policy of job scarcity, made it practically impossible for petitioner to replace sick or absent plain net hands during the base period. The plain net hands were mainly of foreign birth and training.Petitioner's total net sales (before discounts) for each of 4 different classes of products for 1935 through 1939 were as follows:Net sales of nonelastic productsNet salesYearof LastexTotal netgoodssalesLacesNetsVeilings1935$ 413,667$ 121,091$ 74,289$ 162,145$ 771,1921936305,044114,201118,822354,766892,8331937298,38452,599152,914777,0991,280,9961938232,70758,494210,870771,2951,273,4561939159,99216,031210,701915,4911,302,2151957 U.S. Tax Ct. LEXIS 159">*171  Petitioner's total production of Lastex nets, Lastex laces, and each of 3 categories of nonelastic products in terms of racks in each of the same years was as follows:Nonelastic productsYearLastexLastexnetslacesLacesNetsVeilings193523,55215,460110,86475,18210,120193648,11023,077111,60057,67022,878193794,34337,71687,28614,22429,6761938104,41131,95766,45211,09757,0831939126,31944,48143,9147,34866,380The drop in nonelastic lace sales and production adversely affected petitioner's Lastex lace production and caused a decline in Lastex lace production in the second half of 1939.  Petitioner had 22 Levers machines in operation in 1939.  On Lastex production it used 5 machines throughout the year, 1 additional machine for 8 consecutive months, and another for 4 consecutive months.  Operation of petitioner's entire Levers department, including preparatory and auxiliary help, to obtain the production of 5 out of 22 machines would have been impractical.  It would also have created union and seniority problems.  The course chosen by petitioner's management under the circumstances was to cut 1957 U.S. Tax Ct. LEXIS 159">*172  back Levers Lastex production to the nonelastic rate by going on short hours.28 T.C. 645">*652  The 1939 cutback in Levers Lastex production did not affect Lastex bobbinet production.  Average weekly production of Lastex bobbinet during each quarter of 1939 was as follows:Average productionQuarter(in racks)1st2,631.82d2,304.93d2,426.24th2,565.7Average for year2,477.0Important factors contributing to the continuous downward movement in petitioner's sales of nonelastic lace from 1936 through 1939 included foreign and domestic competition and changes in fashion which led to a general falling off of demand for lace goods by dress manufacturers.Petitioner's excess profits net income, as finally adjusted after audit of its Federal income tax returns, for 1936 through 1939, is as follows:YearExcess profits net income1936$ 103,515.191937196,728.761938196,329.341939200,874.24The following "Series C" index shows total "compiled" 1 net taxable income, less tax-exempt income, plus interest paid for all corporations filing Federal income tax returns for 1936 through 1939, and indices of such data treating 1939 as equal to 100:Net incomeYear(millions of dollars)Index1936$ 7,451102.019377,410101.419384,47961.319397,306100.01957 U.S. Tax Ct. LEXIS 159">*173 During part of the base period years, petitioner's customers for Lastex net made on bobbinet machines were asking for additional deliveries.  Seasonal swings in petitioner's sales of elastic bobbinet during the base period years tended to precede the peak seasons of demand for finished corsets and girdles. Petitioner could not meet the actual demand for bobbinet Lastex net, at least at these periods of peak demand.  It might have increased its sales at these periods of peak demand if it had produced more goods in advance of firm orders or postdated its billings on shipments during slack seasons.Full production at maximum theoretical capacity, week after week, on petitioner's bobbinet machines during the base period could not have been expected for a number of reasons, including machinery breakdowns, shortages of good quality yarn, shortages of skilled 28 T.C. 645">*653  labor, respringing for different quality fabrics, use of regular machines for preparing samples, and annual employee vacations.  Petitioner1957 U.S. Tax Ct. LEXIS 159">*174  operated one particularly coarse-gauge machine during only 4 months of 1939 because of the very limited demand for the fabrics which could be produced on it.  Petitioner made samples on its regular production equipment; it had no machine suitable only for making samples.Petitioner's finished Lastex goods inventory at December 31, 1939, totaled $ 34,140.13, far less than its sales for the month of December 1939 of $ 74,745.81.Petitioner's hypothetical cycle of manufacturing of Lastex bobbinet during the base period years took from 4 to 6 weeks from the time the yarn was received until the finished goods were ready for delivery.  The actual weaving and finishing cycle required only about 10 days to 2 weeks.Petitioner made substantially all of its sales of elastic goods during the base period to the manufacturers of corsets and allied garments.The number of patterns of elastic nets included in petitioner's closing goods in process inventory in 1939 was 24.  Any increase in the number of pattern in process in earlier years resulted from greater experimentation in those years.A "rack" means 1,920 movements of a bobbinet machine or 1,440 movements of a Levers machine. Each bobbinet1957 U.S. Tax Ct. LEXIS 159">*175  or Levers machine has a rack counter.  The number of square yards of finished elastic net in a given rack produced on a bobbinet machine necessarily varied with the "quality" of the goods.  The bobbinet machine can be regulated to make a rack equivalent to 20 inches or 40 inches of linear production.  If set for 20 inches, the product is technically described as being of 20-inch quality.The total linear yardage of all goods produced on petitioner's bobbinet machines for 1939 can be roughly approximated by multiplying the aggregate rackage count for all production thereon by .28.  The width to which finished goods were dressed varied considerably.  Nevertheless, the total square yardage produced on petitioner's bobbinet machines in 1939 can be roughly approximated by multiplying the total linear yardage by 4.  The total linear yardage of all goods produced on petitioner's Levers machines in 1939 can be roughly approximated by multiplying the aggregate rackage by .55.  The total square yardage produced on petitioner's Levers machines in 1939 can be roughly approximated by multiplying the linear yardage by 6.Petitioner's efficiency in bobbinet Lastex rack production, determined by 1957 U.S. Tax Ct. LEXIS 159">*176  reference to average production per man-hour, increased from 7.078 racks per hour in the first half of 1939 to 7.197 racks per hour in the second half.28 T.C. 645">*654  Despite the drop in the sales of nonelastic laces and nets in 1939, petitioner's total sales increased from 1938 to 1939 because of increased bobbinet Lastex sales.The total of petitioner's gross sales, cost of goods sold, and markup, as determined by comparison of gross sales and costs of those sales, for each of the base period years, together with the average percentage markup for those years was as follows:1936193719381939Gross sales$ 950,429.23$ 1,367,357.41$ 1,371,462.83$ 1,411,134.45Cost of sales518,376.12733,951.94720,459.21735,654.99Markup432,053.11633,405.47651,003.62675,479.46Percentage markup83.386.390.491.8Petitioner charged higher unit prices for its elastic fabrics during the base period years in relation to the unit prices charged for other elastic fabrics used in substantially greater volume by the corset and girdle industry, with the result that petitioner's elastic products were primarily used in high-priced and luxury-type garments.  Most other1957 U.S. Tax Ct. LEXIS 159">*177  elastic fabrics competing with petitioner's elastic products sold for half or less than half the unit prices petitioner charged for its elastic nets.  Petitioner began to feel competitive pressure for price reduction on some elastic nets as early as March 1936.  The average unit price at which petitioner sold elastic nets and the average unit cost of producing such fabric in each of the base period years were as follows:AveragesellingAverageprice percost persquaresquareYearyardyard1936$ 4.89 $ 3.42 19374.50 2.96 19384.21 2.56519394.1252.75 The main reason for petitioner's initial decision to sell its elastic products directly to manufacturers of corsets and allied garments, rather than through jobbers, was that petitioner's prices for elastic fabrics were high, and direct sales would make it unnecessary to charge such manufacturers still higher prices.That petitioner's elastic fabrics were a great deal more bulky than its nonelastic fabrics created complications at petitioner's factory which caused its management to consider seriously expanding its floor space during the base period years.  Primarily because of its conservatism, 1957 U.S. Tax Ct. LEXIS 159">*178  petitioner's management neither reached nor carried out any definite decision to expand the factory during the base period years when its nonelastic lace business was not increasing.28 T.C. 645">*655  Petitioner's outstanding capital stock was closely held throughout the base period years, a major portion being owned or controlled by Eugene Metzger, then its president, and Hugo Schloss, then its secretary and treasurer.  All or nearly all of the remaining stock was owned by its executive vice president, Richard Bloch.  Since his initial employment, about 1920, Bloch has served as petitioner's stylist, the connecting link between petitioner's manufacturing and selling activities.  During the base period years the terms of his employment called for a fixed salary, plus a right to participate in petitioner's profits.  His participation in profits during the base period years was governed by a formula under which he received one portion in cash and another in special nonvoting capital stock.  Bloch's compensation, aside from his fixed salary, equaled the sum of (1) 8 per cent of petitioner's net profits before deductions for all income and capital stock taxes, salaries to Metzger and Schloss, 1957 U.S. Tax Ct. LEXIS 159">*179  fixed rental paid to "Bronxville," and Bloch's extra compensation, and (2) 7 1/2 per cent of the net profits after such deductions except for the amount of compensation to be computed at 7 1/2 per cent.No breakdown of petitioner's sales of Lastex goods between elastic nets and elastic laces was made for any year prior to 1938, but the annual sales by petitioner of Lastex goods, for 1938 and 1939, could be broken down as follows:Sales ofSales ofYearelastic laceselastic nets1938$ 215,797$ 555,5881939287,264628,227Veilings are used principally for making veils for the ornamentation of women's hats.  Most veilings are made on Levers machines. When the demand for veilings fell off very sharply around 1922, most veiling producers completely discarded their inventories, but petitioner stored a substantial stock of veiling at that time.  Such inventory cost approximately $ 250,000 which petitioner had gradually written down to $ 1 by the beginning of the base period or earlier.  Veils suddenly became stylish in 1937 after a long period of dull demand.  Petitioner then was able to get rid of a major portion of its old stock of veilings and thereby recovered1957 U.S. Tax Ct. LEXIS 159">*180  approximately 75 per cent of the original cost because of the sharp and sudden increase in demand.Substantial reductions in the import duties on certain lace and net articles which took place during petitioner's base period resulted from the reciprocal trade agreement program inaugurated in the early 1930's which had become a relatively permanent national policy by 1939.  The progressive devaluation of the French franc during the base period, which contributed to increased imports of lace and lace articles from France in 1939, was not a novel or unusual development because there had been many earlier devaluations of the franc during the 25-year period immediately preceding.28 T.C. 645">*656  If petitioner had increased its capacity for producing Lastex bobbinet 2 years earlier than it actually did, its production thereof at the end of the base period would have been not more than 5 1/3 per cent greater than the level actually reached.OPINION.On first impression it is reasonable to assume that petitioner qualifies for relief under section 722 (b)(4).  We find it unnecessary to consider this question nor to determine whether this is so by reason of the increased capacity furnished by the1957 U.S. Tax Ct. LEXIS 159">*181  2 new machines and the possible addition of trained employees that might have resulted; or whether to predicate that conclusion on the development of a new product -- the Lastex net.  See Davenport Hosiery Mills, Inc., 28 T.C. 201. Even if we make these assumptions, it is impossible to grant petitioner any relief.This results from an analysis of its reconstructed income.  The only reconstruction submitted by petitioner must be discarded for a number of reasons.  The year 1936 is treated as though the increased capacity existed throughout the year, whereas even if the installation had been made 2 years earlier, under the so-called push-back rule, 2 the use of the machines could not have been for more than 8 months of that year.  The cost of goods sold is computed throughout on petitioner's entire product, whereas the cost of the Lastex material employed in fabricating the net was considerably greater.  The deductions taken in arriving at the reconstructed net income are not adequate.  Additional compensation to officers was merely estimated and an effort to apply to 1936, as an example, the contractual formula agreed upon between petitioner and the1957 U.S. Tax Ct. LEXIS 159">*182  interested officers indicates that the estimate is considerably too low.  Certain other deductions, like bad debts, have been omitted entirely although it must be assumed that larger business would cause the creation of greater indebtedness from customers with at least the possibility of an increased bad debt deduction.  And there are other omissions and inaccuracies in the detail of the reconstruction.But a greater difficulty is the formula adopted for reconstructing the increase presumptively available during the base period. Petitioner's calculation is that the1957 U.S. Tax Ct. LEXIS 159">*183  net income for 1939 would have been increased by some $ 27,000 over its actual income.  This is the result 28 T.C. 645">*657  of an approximate 25 per cent theoretical increase in productivity in the manufacture of Lastex net.  It is apparent that if this 25 per cent increase were applied to petitioner's actual Lastex net production for the remaining 3 base period years it would, along with the other corrections, fail to justify a constructive average base period net income greater than the amount now granted petitioner under the provisions of section 713.  Instead of this, petitioner has reconstructed its production on an index derived from the national business experience (Series C) thereby arriving at theoretical production for the first 2 base period years greatly in excess of a 20 per cent, or even of a 25 per cent, increase over its actual operation.  Some such computation would be necessary to justify any relief because petitioner's actual experience shows that its Lastex net production for the earlier years was much less than that for 1939.All of petitioner's reconstructed figures are based on this essentially unfounded estimate, that at the end of 1939 it had not only failed to reach1957 U.S. Tax Ct. LEXIS 159">*184  the earning level it would have if the change had been made 2 years sooner but that this earning level was so far from having been reached that it is necessary to increase the actual 1939 production by some 25 per cent before the appropriate constructive production would be attained.  We are unable to concur in this conclusion.There is no convincing evidence that if the increase in capacity had occurred 2 years sooner petitioner's level of operations would have expanded not only by the assumed 20 per cent increase in capacity but, in addition, by an increase of 25 per cent over the end of the base period. By the end of 1939 the new machines had already been in operation for some 1 year and 8 months.  The improvement in petitioner's physical plant was thus complete by the end of the base period.We are willing to assume that some increase in the skill, or even in the number, of the "twist hands" operating the machines might have been achieved by 2 years of additional experience but there is no evidence that the machines themselves were not being used as great a proportion of the time as was practical.  3 We cannot hence attribute to this possible increase in efficiency any such 1957 U.S. Tax Ct. LEXIS 159">*185  theoretical expansion in production as petitioner assumes.  Based on the actual figures during the period the machines were in active operation, the highest figure for a presumptive increase in production due to greater experience by the end of the base period, even under the push-back rule, 4 would not be more than some 5 1/3 per cent.28 T.C. 645">*658  Use of this proportionate increase for the years when the machines were in operation, together with a backcast combining the Series C index with the assumed increase in capacity for the1957 U.S. Tax Ct. LEXIS 159">*186  earlier years of the base period, fails to produce a figure sufficient to exceed or even approach petitioner's base period income under the provisions of section 713 (f).  Irwin B. Schwabe Co., 12 T.C. 606; Wentworth Military, Scientific, Etc. Co., 22 T.C. 721; Trunz, Inc., 15 T.C. 99. Even if we assume all other factors of qualification in its favor, we still, as has been said, fail to reach a constructive average base period net income great enough to justify any relief.  Petitioner has not established that the tax otherwise computed "results in an excessive" or "discriminatory tax."For the reasons stated, we find it unnecessary to decide whether, in fact, petitioner does qualify or whether, in fact, any increase for greater efficiency or the 2-year push-back should be assumed.  Even if these matters are disposed of in petitioner's favor, no relief could be granted.The petition includes a prayer for relief under section 722 (b) (5).  No mention of this was made in the original applications.  See Telfair Stockton & Co., 21 T.C. 239. In view of the lack1957 U.S. Tax Ct. LEXIS 159">*187  of any arguments in the briefs, it is reasonable to assume that this part of the controversy has been abandoned.  In any event, no grounds for relief under section 722 (b) (5), other than those already considered under section 722 (b) (4), have been advanced and petitioner would not be entitled to any more relief under section 722 (b) (5) than it would receive on the assumption we have made that it qualifies under section 722 (b) (4).  General Metalware Co., 17 T.C. 286, 293; Roy Campbell, Wise & Wright, Inc., 15 T.C. 894, 901.Reviewed by the Special Division.Decision will be entered for the respondent.  Footnotes1. Rubber samples only.↩2. Dismantled and replaced by machine Nos. 46 and 47 in April 1938.↩3. Tried out or tested on nonelastic fabrics immediately after initial erection in April 1938.↩1. Dismantled and replaced by machine Nos. 46 and 47 in April 1938.↩1. Dismantled and replaced by machine Nos. 46 and 47 in April 1938.↩2. Does not include any months of idleness for machine Nos. 22 and 23 which were dismantled sometime prior to the erection of machine Nos. 46 and 47 in April 1938.↩1. So stipulated.↩2. SEC. 722.  GENERAL RELIEF -- CONSTRUCTIVE AVERAGE BASE PERIOD NET INCOME.(b) Taxpayers Using Average Earnings Method.  -- * * * * * * *(4) * * * If the business of the taxpayer did not reach, by the end of the base period, the earning level which it would have reached if the taxpayer had * * * made the change in the character of the business two years before it did so, it shall be deemed to have * * * made the change at such earlier time. * * *↩3. On the contrary, we have found as a fact, at petitioner's request, that "[full] production at maximum theoretical capacity, week after week, on petitioner's bobbinet machines during the base period could not have been expected for a number of reasons, including machinery breakdowns, shortages of good quality yarn, shortages of skilled labor, respringing for different quality fabrics, use of regular machines for preparing samples, and annual employee vacations. * * *"↩4. See footnote 2.↩