Court Opinion

ID: 4633371
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:13:48.166961+00
Date Added: 2024-06-11T07:59:58.861208
License: Public Domain

Green Spring Dairy, Incorporated, Petitioner, v. Commissioner of Internal Revenue, RespondentGreen Spring Dairy, Inc. v. CommissionerDocket Nos. 7871, 22807United States Tax Court18 T.C. 217; 1952 U.S. Tax Ct. LEXIS 203; May 9, 1952, Promulgated *203 Decisions will be entered for the respondent.  Petitioner, although entitled to use the excess profits credit based on income, computed its excess profits taxes on the invested capital method.  It sought relief under the push-back rule of section 722 (b) (4), I. R. C., by reason of the construction of a new plant in 1937.  Held, petitioner was not entitled to such relief where it has failed to show that, even if the new plant had been available 2 years earlier, it would have had sufficient earnings to produce credits based upon constructive average base period net income that would be greater than the credits actually employed by it.  Hugh C. Bickford, Esq., and Morton P. Fisher, Esq., for the petitioner.Arthur Mindling, Esq., for the respondent.  Raum, Judge.  RAUM*217  These proceedings were consolidated for trial.  Docket No. 7871 relates to the calendar years 1940 and 1941; Docket No. 22807 relates to the calendar years 1942-1945, inclusive.  The only issue now in controversy is whether applications for relief from excess profits taxes under section 722 (b) (4) of the Internal Revenue Code were properly denied by the Commissioner.  Relief based upon (b) (2) and (b) (5) was also sought *204 in petitioner's applications filed with the Commissioner, and these grounds may fairly be said to have been preserved in the petitions filed with this Court.  However, these grounds have not been pressed, and were not developed in petitioner's brief.  They must therefore be deemed to have been abandoned.The parties filed a stipulation with exhibits annexed, and in the course of the trial also entered into certain oral stipulations.FINDINGS OF FACT.The written stipulation, the exhibits annexed thereto, and the oral stipulations are hereby incorporated by reference, and the facts therein are found as stipulated.Petitioner is a corporation chartered under the laws of the State of Maryland on June 2, 1932.  At all times material hereto, petitioner was in the business of receiving, processing, bottling,  and distributing milk and allied products.  Its principal office was at Baltimore, Maryland, and it filed its Federal tax returns with the collector of internal revenue for the district of Maryland.  For the years in issue, petitioner filed its Federal tax returns for a calendar year period and on the accrual basis.Petitioner was organized by R. E. Eisenhardt, who had operated a dairy at *205 York, Pennsylvania.  He established petitioner's dairy plant *218  at 5413-5417 Harford Road, in Baltimore, and made the first deliveries of milk from that plant on October 1, 1932.Crown Cork and Seal Company (hereinafter also referred to as "Crown"), of Baltimore, Maryland, manufactured a cap for milk bottles known as the "Dacro" cap, which was an hermetically sealed metal cap for covering the pouring lip of the milk bottle in order to keep the lip and the milk sterile.  Crown had manufactured a metal cap for milk bottles for many years; that cap went through several developments, leading to a changed form in or about 1932.  Use of the "Dacro" cap by distributors of bottled milk required installation of special capping machinery.  At the time of petitioner's organization, the Dacro cap was  being sold to the dairy industry.  It was not, however, being used by any dairy in Baltimore, and Crown could display its actual use only by taking interested persons to some place outside Baltimore.Petitioner's commencement in business was encouraged and assisted by Crown.  R. E. Eisenhardt had used the Dacro cap at his York dairy, and he also used it in petitioner's operations.  Crown extended credit *206 to petitioner to cover the cost of a bottle filler and capping machine. Petitioner also obtained some other equipment on credit.  Crown was interested in having petitioner use and promote the Dacro cap.In the fall of 1933, petitioner was unable to meet its obligations.  Its entire capital stock was sold at that time to Charles E. McManus (hereinafter referred to as "McManus"), who took over its operation.  McManus, a man of substantial wealth, was president of Crown.  He also controlled CEM Securities Corporation (hereinafter referred to as "CEM"), which owned or controlled a very substantial part of the stock in Crown and held a variety of other investments in which McManus was interested.  Title to petitioner's stock was taken by McManus in the name of CEM.Before the end of 1939,  certain Baltimore dairies besides petitioner had come to use the Dacro cap, and before the end of 1940 McManus had decided that the commercial possibilities of the Dacro cap had been demonstrated.  In promoting and establishing the use of the Dacro cap, petitioner's experience was an important factor.  Petitioner's purpose having been served in this regard, in 1940 McManus disposed of his entire interest *207 in petitioner.In 1933 McManus asked George Maryott (hereinafter referred to as "Maryott") to survey petitioner and the Baltimore dairy market.  Maryott at that time had a long and successful career as a dairy executive, serving then as manager of a dairy at New Haven, Connecticut, and he had considerable experience with the use of the Dacro cap. Maryott completed his survey and reported to McManus in 1933 that Baltimore provided a very fertile market, but that "it would cost *219  quite a lot of money to do business and would eventually mean a new plant." Maryott was hired in the fall of 1933 to take over development of petitioner, and became its president and general manager.Petitioner's premises at Harford Road (hereinafter referred to as the "Harford Road plant" or the "main plant") were rented, and consisted of three one-story, store-front, buildings.  In one building was located a soda fountain, sandwich grill and small ice box for selling dairy products, with booths for customers of the soda fountain.  Directly behind these booths was a window through which the plant's main refrigerator for storing bottled milk was visible.  To the rear of this refrigerator was the receiving room *208 for incoming milk. In a second building there were additional booths, and behind these was a room which contained a bottle-filling machine. This machine was located behind a glass panel, so that it could be seen in operation from the lunch room.  In the third building was located petitioner's office, with room for several desks and the manager's office; this building was connected by a corridor with the plant at the other two buildings.  Incoming milk from farmers was unloaded in a public alley, about 15 feet wide, which extended along the side of one of these buildings.In the operation of a dairy, the nature of the product requires all equipment and bottles to be sterile.  The milk, when received from the farmers, is clarified, and then is stored in refrigerated tanks  until ready for pasteurizing.  The pasteurizing process requires controlled heating of the milk to 145 degrees Fahrenheit; the milk must then be held in heated vats for 30 minutes at this temperature, and then must be immediately cooled to 34 degrees F.  It is then pumped to bottling machines, which fill and cap the bottles. Throughout this process, the milk must be sealed in a sterile system of pipes, machines, vats, *209 and tanks, because open contact with the air would contaminate the milk. A bottling machine then receives the milk from this sealed system, and simultaneously receives sterile bottles from a bottle-washing machine. The bottle-washing machine rinses the bottles, which are then put into a soaking tank containing caustic soda; the bottles are then subjected to a number of cleaning operations, and are sterilized.  After bottling, the bottled milk is inspected and stored in a refrigerator room until ready for loading on the delivery trucks, at which time the milk in cases is covered with chipped or flaked ice sufficient to refrigerate the milk during delivery.Sanitation requirements impose a limit on the length of a day's operation of milk equipment, because pipes and  equipment begin to pick up bacteria and the milk becomes impure.  The whole system at the end of a day's operation is taken apart entirely, thoroughly washed, and then sterilized with live steam.  The system is then set up again, *220  and the following morning, before milk is put into the system, it is further sterilized by running a chlorine solution through it.  Such cleaning and sterilization may take several hours.  As a *210 result of these requirements, there is a limit to the overtime a plant may be operated, and completely uninterrupted operation is not feasible.Equipment engineers in the industry, in designing a dairy plant, consider the equipment as a whole and design the total producing equipment to have a capacity sufficient to produce a required number of gallons of processed milk in a "normal" working day.  The number of gallons thus determined is known in the industry as the "rated capacity" of the plant. A plant can be operated beyond its "rated capacity" by extending its operations each day.As originally installed in 1932, the Harford Road plant had a "rated capacity" of 2,500 gallons of milk for an operating day of about 9 or 10 hours.Upon taking over petitioner's management in the fall of 1933, Maryott made changes and innovations to improve petitioner's operations.  Introduction of substantially all these changes and innovations was completed by the middle of 1934.  He adopted methods he had previously found successful.  He put into effect sales controls; substantially modified petitioner's system of maintaining records; and had a modern system of accounting installed.  All route drivers *211 were put into uniform; they were paid a commission for returning empty bottles; the 7-day week, then prevailing in Baltimore dairies, was reduced to allow each man a day off for each Sunday worked; and a policy of vacation of one week for employees was instituted.  High quality milk was bought from farmers, and improvements were made in the service to customers, such as the organization of a special delivery service.Petitioner acquired customers and promoted its sales in the following manner: (1) First, and by far the most important persons engaged in this activity, were the regular route drivers, who also served as salesmen.  Their compensation varied with their volume of business; they received a commission on collections on sales.  They were well paid and had good incentive to be aggressive throughout the calendar years 1936 through 1939 (hereinafter also referred to as the "base period years" or the "base period").  There was a low turnover among the route drivers during the base period years.  These route drivers served under route foremen.  (2) Second, there were solicitors whose duties were confined to promoting sales.  There were about 12 solicitors in 1933 and 1934, who were *212 organized into "crews," each crew working under a "crew leader" and operating from "educational service department" or promotional trucks. By the early part of 1935, the number of solicitors had been reduced to about six, and they operated *221  from the plant rather than the promotional trucks, use of which was discontinued.  By the fall of 1937, the number of solicitors had been further reduced to four or five, and this number was not thereafter increased during the remainder of the base period. (3) Finally, some incidental sales solicitation was done by office, plant, and garage employees.Petitioner's services and innovations were brought to the attention of the public through a promotional advertising campaign.  Considerable route advertising was used, route trucks being used as "traveling billboards." The use of the Dacro cap was advertised as providing better milk from the sanitation standpoint.Civic, church, and other groups were invited to tour the Harford Road plant. They were brought to the plant, were served free luncheons at the soda fountain and dairy store, and were given descriptions of petitioner's operations.  Through drawings for prizes the names of the visitors were obtained, *213 and thereafter the solicitors, operating from the promotional trucks, made personal calls to invite them to become regular customers. The solicitors also used other opportunities which might arise for obtaining new customers.New dairy routes were usually "opened" or started by "splitting" one or more old routes. When business on an old route expanded to a point at which it was too large to be handled satisfactorily by one route, part of the business was taken from that route and was put into a new route. It was common to draw on two or more such old routes in setting up a new route.Petitioner always had customers located outside the city limits of Baltimore.  Petitioner's original routes were centered in the vicinity of its Harford Road plant, which was in the northeastern part of Baltimore.Normally, in petitioner's industry there were two main periods during a year when new customers were sought or when new routes might be opened. These were in the spring and in the fall.  Of these two, the fall -- about September -- was preferable, because new customers obtained at that time could be held without interruption through the following winter, whereas contact with new customers obtained *214 in the spring was interrupted by the intervening summer vacations.During the base period years, petitioner's source of increased sales lay primarily in obtaining new customers, rather than in increasing sales to old customers. Many of the new customers petitioner might acquire, were already customers of other dairies in Baltimore, and they would become customers of petitioner only by transferring their purchases from the other dairies to petitioner.Among petitioner's major competitors during the base period were Western Maryland Dairy Company, Inc. (also referred to as "Western *222 Maryland"), Cloverland Farms Dairy, Inc., H. B. Koontz Creamery, Inc., and Kress Farm Dairy, Inc.  In addition, other, smaller dairies sold milk in Baltimore from time to time.  The first three of the foregoing named dairies were aggressively managed, and the dairy market in which petitioner and all these dairies sold their products was highly competitive.  Western Maryland was by far the largest dairy in Baltimore, and was substantially larger than petitioner; in 1939, Cloverland Farms Dairy, Inc., was next in size, and petitioner was third in size.The Maryland Cooperative Milk Producers, Inc. (hereinafter *215 also referred to as the "Coop"), is an incorporated association composed of members who are dairy farmers supplying the "Baltimore Market," consisting of the city of Baltimore and its contiguous suburbs.  The Coop supervised and directed the receipt of all milk from its members, and the distribution of the milk to the dairy companies.  During the years 1936 through 1939, except for a few small "independents," all the dairies operating in the city of Baltimore purchased their milk through the Coop, so that milk receipts by the Coop accounted for the major portion of the total milk distributed and sold in that area.  During the base period years, petitioner and its competitors paid the same prices for milk purchased by them.Milk bought from the Coop was of three classes: (1) Class 1 -- milk purchased for resale as fluid whole milk in bulk or in bottle; (2) Class 2 -- milk purchased for resale as fluid cream, buttermilk and chocolate milk, and milk otherwise retained by the purchasing dairy; (3) Class 3 -- milk which was separated and returned to the Coop in the form of 40 per cent cream, which the Coop sold for manufacturing purposes (e. g., ice cream).  Class 3 milk consisted of milk *216 received by the dairies which was in excess of their needs.  Petitioner made no profit on such milk, but was allowed to keep the skimmed milk remaining after the separation process, the skimmed milk being used by petitioner to manufacture certain dairy products.  The Class 1 milk cost petitioner the most.Petitioner sold its milk and milk products at the same prices as its competitors.  Petitioner's sales were both at retail and at wholesale. Milk in quart bottles sold for 2 cents more per bottle at retail than at wholesale. Retail sales were considered by petitioner as more desirable than wholesale sales, and petitioner's increase in gallonage sales during the base period years was mostly in retail sales.  Petitioner had some routes which handled only wholesale sales where there was a sufficient concentration of such business; for the most part, however, its route drivers handled both retail and wholesale sales in the territories covered by their respective routes.*223  At some time prior to December 31, 1939, Western Maryland reduced by 2 cents per quart its wholesale and retail prices for milk bottled in quarts.  About November 16, 1939, petitioner lowered its price for the same item *217 by the same amount of 2 cents for both retail and wholesale sales.  This resulted in a selling price for petitioner which adversely affected its profits.  This reduction in petitioner's price continued at least through the end of 1939.  The volume of petitioner's sales was not significantly affected by this price reduction.In 1934 a bowling alley to the rear of the Harford Road plant was taken over and renovated by petitioner to provide additional storage and garage facilities.  The office space was enlarged by taking over another store immediately adjacent to the Harford Road premises.The volume of sales attained by petitioner in 1935 made it difficult to load all its trucks in the alley adjacent to its  plant and created storage congestion.  At that time, insufficiency was being experienced only in these distribution facilities, and not in petitioner's processing or producing facilities.  Petitioner had producing capacity in excess of the volume then attained by its sales.In order to add to its distribution facilities, in the fall of 1935 petitioner rented a two-story garage in west Baltimore, which was opened as a branch distribution station (hereinafter also referred to as the "branch") *218 in November 1935.  At about the same time, petitioner bought a large refrigerated trailer, which was loaded daily during off hours at the Harford Road plant with enough bottled milk to accommodate 12 retail routes; the trailer was then hauled to the newly opened branch; and the following morning the milk in this trailer was transferred at the branch to the individual route trucks. This trailer was later supplemented by a large truck accommodating about six additional routes. The combined capacity of the trailer and truck was about 1,380 gallons per day, or about 500,000 gallons per year.  There was also set up at the branch an office for the use of one cashier and a supervisor.  Operation of the branch was not as economical as it would have been had all of petitioner's operations been performed at the same place.By the end of October 1935, and before the branch was opened, petitioner was operating about 40 routes. These routes were all being serviced by the main plant. By the end of 1935, the branch serviced 18 of these routes, and about 22 routes were left to be serviced by the main plant. Thereafter the main plant was able to service at least 18 more routes in replacement of the *219 routes transferred to the branch.  By the end of 1936, only 9 of these routes had been replaced at the main plant; at the end of 1936 the total number of petitioner's routes was 49.  By the end of 1936, petitioner's facilities were able to service at least 9 routes in addition to this total.*224  During the latter part of 1934, the daily volume of milk sold by petitioner exceeded the original "rated capacity" of the Harford Road plant of 2,500 gallons per day.During the summer or early fall of 1937, petitioner was processing and distributing about 3,800 gallons of milk per day.  At that time, the bottlewashing machine at the Harford Road plant could process enough bottles for a production of about 7,000 gallons of milk per day.  Petitioner did not have at that time storage and distribution facilities to handle a production in this amount.  If, at that time, petitioner had acquired 1,000 to 2,000 new customers, it could have taken care of them, although to some extent it might have been inconvenient or uneconomical to do so.Prior to the summer or early fall of 1937, the volume of petitioner's sales did not reach the limit of its capacity at that time to process and distribute milk and milk *220 products, under the facilities then operated by it.There had been talk of building a new plant for petitioner since Maryott's report in 1933.  It was not until the spring of 1936, however, that consideration and discussion about a new plant became "quite serious." In July 1936, Maryott and Lucius R. White, a Baltimore industrial architect retained by McManus, went to Chicago to inspect an outstanding, recently constructed dairy, and to confer with a Chicago firm regarding dairy equipment for petitioner's contemplated new plant. McManus wanted to build a "show plant," with very modern and efficient facilities.  It was decided to locate the new plant at 41st Street, between Roland Avenue and Falls Road, in Baltimore; this site was selected on the basis of a forecast that the population center of the city would be in that neighborhood 10 years later.  The land at this site was purchased in part in December 1936 and in part in January 1937.  Construction of the new plant was started in March 1937 and was completed in September 1937, and petitioner moved into the new plant on September 15, 1937.The cost of the land at the new site and of the new plant is reflected in petitioner's balance *221 sheet as of December 31, 1937, which showed the following:Land$ 24,249.27Building452,560.89Machinery & equipment143,354.45Miscellaneous machinery & equipment19,888.47The following amounts had been shown in these accounts on petitioner's balance sheets for December 31, 1935 and 1935:Dec. 31, 1935Dec. 31 1936Land$ 17,744.92BuildingMachinery & equipment$ 51,459.1056,830.18Miscellaneous machinery & equipment*225  Some equipment of the Harford Road plant was transferred to the new plant.All the money used to construct and equip the new plant, and to buy the land on which it was built, was advanced to petitioner by McManus through CEM.  These advances approximated at least $ 600,000.McManus had ample funds or credit available to finance construction of a new plant at all times material hereto.  McManus or CEM made advances to petitioner at such times and in such amounts as they considered necessary or proper for the conduct of petitioner's business.  The new plant was designed and constructed as soon as petitioner's management and McManus felt that its expanding business and future growth required such a plant.During the base period years CEM made substantial advances to petitioner.  Neither *222 CEM nor McManus collected any interest on these amounts, or on the advances made to build the new plant, or on any other funds advanced to petitioner.  During the base period years, CEM had outstanding loans in an amount in excess of the advances made by it to petitioner; the rate of interest paid by CEM on these loans was about 2.8 per cent.  CEM did not obtain any funds from Crown.The new plant was housed in a reinforced concrete, fireproof building containing about 84,000 square feet of floor space.  The dairy unit consisted of two floors and a basement.  Modern, efficient equipment was used, laid out for efficient operation, and mechanical and engineering devices were used to advantage.  An auditorium, with a seating capacity of 250 persons, was provided for lectures, demonstrations and other events.  There was included a garage unit, with space in the garage proper for 150 trucks and for 50 trucks more in covered driveways.  Efficient and modern receiving and loading facilities were provided.  The new plant received attention and publicity as a very modern and efficient dairy.The new plant was designed and constructed for a "rated capacity" of 20,000 gallons of milk for a "normal" *223 working day.  Equipment was installed, however, which limited its productive capacity to 10,000 gallons per "normal" day at all times material hereto.  At no time during the base period, did petitioner have distribution equipment or distribution personnel sufficient to handle an output of 10,000 gallons per day.The "break-even point" represents a level of sales or income which provides a gross profit sufficient to match the expenses of operation.  At the time the new plant was opened, petitioner's production was 3,800 gallons of milk per day, which was less than required by the break-even point of the new plant. *226   During the years 1934 through 1939, petitioner maintained a general policy of adding one new retail route per month, but did not achieve this objective in any year except 1934.  On moving into the new plant, petitioner adopted the goal of increasing routes and sales over a 5-year period so as to attain sales sufficient to absorb its capacity production of 10,000 gallons per day.The sales promotion techniques used at the new plant were basically the same as those which had been used at the Harford Road plant, although the more impressive and elaborate facilities of the new *224 plant lent themselves to more effective adaptation of those techniques.Petitioner's selling expense during the base period years was as follows:YearAmount1936$ 124,899.551937149,480.881938176,126.721939188,893.32In addition to the other items of expense included in this selling expense, such as salaries of route salesmen, route foremen, and related supervisory personnel, the following promotional expenses were included:Solicitor'sAdvertisingYearsalariesexpensesTotal1936$ 8,104.33$ 8,917.11$ 17,021.4419378,593.428,835.2017,428.6219385,440.4110,288.9015,729.3119395,272.106,872.9612,145.06 Petitioner's expense in promoting sales was substantial during the base period years as well as prior thereto.  For the year 1935 petitioner spent $ 3,149 on newspaper advertising, made advances of $ 2,992.50 to solicitors on account of salary, and had $ 4,404.80 of other promotional expenses, totaling $ 10,546.30.  In 1936 either CEM or Crown paid $ 10,000 to petitioner to refund sales promotion expenses made by petitioner; this $ 10,000 is included in the amount of $ 124,899.55 for sales expense shown above for 1936.The following is a comparative profit and loss statement for petitioner, for the years *225 1936 through 1939, showing petitioner's net income or loss for Federal income tax purposes: *227 Dec. 31, 1936Dec. 31, 1937Income from Net Sales$ 689,870.05$ 814,770.91 Deduct cost of sales:Cost of dairy products367,481.02450,304.62 Plant costs48,312.4366,144.82 Cost of sales415,793.45516,449.44 Gross Profit on Sales274,076.60298,321.47 Deduct Operating Expenses:Selling and distribution173,111.54218,116.91 Containers' expense36,638.0844,915.05 Administrative39,486.4141,248.75 Total operating expenses249,236.04304,280.71 Net Operating Profit (Loss)24,840.56(5,959.24)Nonoperating Income1,512.964,154.59 26,353.52(1,804.65)Nonoperating Deductions3,754.6513.224.99 Net Income (Loss)22,598.87(15,029.64)Depreciation 1*226 6,706.854,086.92 Net Income as Finally Determined for FederalIncome Tax Purposes15,892.02(19,116.56)Dec. 31, 1938Dec. 31, 1939Income from Net sales$ 946,135.41$ 1,066,400.63Deduct cost of sales:Cost of dairy products514,123.59 563,438.12Plant costs97,877.48 97,169.06Cost of sales612,001.07 660,607.18Gross Profit on Sales334,134.07 405,793.45Deduct Operating Expenses:Selling and distribution248,298.75 261,133.90Containers' expense52,008.02 53,923.48Administrative48,314.70 57,735.36Total operating expenses348,621.47 372,792.74Net Operating Profit (Loss)(14,487.40)33,000.71Nonoperating Income3,929.01 4,868.68(10,558.39)37,869.39Nonoperating Deductions5,246.79 4,681.91Net Income (Loss)(15,805.18)33,187.48Depreciation 16,735.66 5,746.95Net Income as Finally Determined for FederalIncome Tax Purposes(22,540.84)27,440.53 The following table shows, for the indicated years, petitioner's operations in terms of retail routes, customers, gallons of milk sold, and total employees:Number ofIncrease inretail milkCustomerscustomersYearroutes atat end ofover previousend of yearyearyear1932121,5001933183,0001,5001934306,0003,0001935407,5001,50019364912,0004,50019375715,0003,00019386717,5002,50019397320,0002,500Increase inTotalGallons ofgals. overemployees,Yearfluid milkprecedingendsoldyearof year193245,000281933292,432247,432561934543,785251,3538419351,108,685564,90010719361,207,76399,07812619371,322,851115,08816619381,581,910259,05917019391,917,436335,526174Petitioner's dollar sales during the base period years were as follows:1936193719381939Milk and Cream$ 658,065.41$ 769,862.53$ 901,419.62$ 1,011,471.79Other Sales36,953.1548,887.9551,214.0260,986.70Gross Sales695,018.56818,750.48952,633.641,072,458.49Discount5,148.513,979.576,498.506,057.86Net$ 689,870.05$ 814,770.91$ 946,135.14$ 1,066,400.63*227 *228   Milk receipts by the Maryland Cooperative Milk Producers, Inc., which accounted for the major portion of the total milk sold in the "Baltimore market," are shown in the following table for the base period years, as well as the total quantity of milk received by petitioner from the Coop during these years, and the percentage of petitioner's receipts from the Coop to the total milk received by the Coop (for the years 1936, 1937, and 1938 the quantities are shown in gallons, and for 1939 they are shown in pounds; the factor of conversion generally recognized in the dairy industry is 8.6 pounds of milk to one gallon):Percentage ofReceipts byGreen SpringYearMonthTotal CoopGreen SpringDairy to totalreceiptsDairyreceiptsJanuary1,929,16293,3494.84February1,796,34387,8544.89March1,972,13997,0524.92April1,937,53296,3554.97May2,282,458114,9185.03June2,188,342107,5454.911936 -- Data in gallonsJuly2,026,22199,6744 92August2,129,194104,7704.92September2,035,231104,2125.12October1,940,74199,1485.11November1,798,199103,1395.74December1,889,596105,6685.59January1,917,245106,4335.55February1,725,21899,3375.76March1,935,705114,1045.89April1,937,674112,0045.78May2,301,800115,2445.00June2,131,252117,0295.491937 -- Data in gallonsJuly2,057,964120,9475.88August2,140,964127,4135.95September2,042,765125,0896.12October1,947,966125,9806.47November1,785,596122,3156.85December1,894,647129,6286.84January1,897,907126,5026.67February1,743,399121,6446.98March1,983,370135,1796.82April2,020,021134,4716.66May2,495,743159,0256.37June2,379,812148,4736.241938 -- Data in gallonsJuly2,241,563144,1526.43August2,406,389160,2586.66September2,250,114152,5316.78October2,121,141155,6507.34November1,988,247153,1537.70December2,048,043161,6097.89January17,427,0291,469,1408.43February15,920,4611,276,0578.02March18,021,3151,513,1068.40April17,910,0201,432,1138.00May21,656,1151,684,6077.78June19,851,0681,575,2147.941939 -- Data in poundsJuly19,481,0761,560,1838.01August18,661,0691,491,3267.99September18,324,2401,468,1588.01October17,959,1931,602,9478.93November16,623,3571,600,9379.63December17,057,4771,765,59710.35*228 *229   The following table presents data, reported by the Coop, on the milk produced and sold by it in the indicated years:Class 1 & 2Wt. ave.sales (fluidClass 3 sales --Value of 4 perprice 4 perYearProductionmilk & fluidmfg. purposescent milkcent milk(gallons)cream sales,(gallons)f. o. b. cityf. o. b. citygallons)Cents193127,554,82622,495,3065,059,520$ 6,814,321.4124.73193227,666,69121,001,7476,664,9445,591,944.7020.21193324,772,10020,015,4304,756,6704,474,313.7218.06193425,958,19722,029,5533,928,6445,226,586.9120.13193524,831,25520,648,8174,182,4385,408,621.3221.78193623,925,15819,523,3494,401,8095,242,418.8221.91193723,818,79620,327,9123,490,8845,759,314.6524.18193825,575,74920,275,1245,300,6255,787,615.4822.63193925,452,60319,627,9705,824,6335,459,395.2521.45The Baltimore City Health Department (hereinafter referred to as the "Health Department") has for many years received monthly, from dairies selling milk in the city of Baltimore, reports purporting to show the total quantities of milk sold in the city of Baltimore.  The Health Department has published statistics on the total quantities of milk sold by the dairies for indicated periods.  1 The following table shows, for the years *229 1936 through 1939, the total amount of milk sold in Baltimore by months as reported by the dairies to the Health Department:(In Pints)1936193719381939January11,540,68011,638,64011,835,80011,768,096February10,961,76810,730,49610,794,11210,759,616March11,799,59211,829,84812,061,23212,006,176April11,521,92011,614,32011,566,80011,568,720May12,442,65612,197,88011,991,79212,267,072June11,862,48011,991,12011,388,96011,856,000July11,455,36812,094,46411,390,64011,904,744August12,097,19211,888,87211,727,17612,601,128September11,854,56011,885,04011,328,00011,854,800October12,307,99212,463,73611,935,49612,628,160November11,636,64011,854,56011,439,00012,462,480December11,728,91212,037,17612,058,75212,932,704Totals (pints)141,201,760142,226,152139,517,760144,609,696Totals (gallons)17,651,22017,778,26917,439,72018,076,212Index (1939 = 100.00)97.6598.3596.47100.00The following data, published by the Bureau of Agricultural Economics of the United States Department of Agriculture, shows the *230  daily per *230 capita consumption of fluid milk and cream in Baltimore for the indicated years:Daily per capital consumptionPopulationusing purchasedMilk andYearmilk --Cream (milkmilk equiv.thousands 1Milk -- pintsequiv.) --of cream --pintspints19328170.4360.0740.5101933822.444.074.5181934828.472.066.5381935833.478.071.5491936839.460.071.5311937844.462.075.5371938850.450.080.5301939855.463.080.543The Cost of Living Index for Baltimore, as determined for the indicated years by the Bureau of Labor Statistics, United States Department of Labor, was as follows:YearMonthAll itemsFoodMiscellaneousJanuary99.8100.8100.0April99.198.8100.41936July99.7101.9100.0September100.6103.699.8December99.7100.399.4March101.4104.299.9June101.7104.999.91937September102.9105.8100.6December101.9102.1100.8March100.398.2100.5June100.398.6100.41938September100.198.599.8December100.097.8100.3March99.696.5100.8June99.296.1100.71939September100.599.4100.9December98.994.6100.4Federal income tax returns, filed by petitioner for years after its base period, included such returns for the calendar years 1940, 1941, and 1942.  In the returns for these three years, petitioner claimed deductions for depreciation. *231 Respondent adjusted the amounts claimed for depreciation for each of these three years, and instead allowed depreciation in lesser amounts.Petitioner also claimed deductions for depreciation in its Federal income tax returns for each of its base period years.  Those depreciation deductions were not adjusted by respondent.  If the amount of depreciation for each of the base period years were adjusted and computed on the same basis that respondent computed the depreciation allowed for 1940, 1941, and 1942, petitioner's net income would have been greater, or its net loss less, for each of the base period years than the net income or net loss reported on its returns for those years.  *231  The net income or net loss reported on petitioner's returns for those years, and the net income or net loss which would have resulted from such adjustment in petitioner's deductions for depreciation for those years are as follows:ProposedReported netadjustedTax yearincomenet income1936$ 15,892.02 $ 22,598.87 19371 (19,116.56)1 (15,029.64)19381 (22,540.84)1 (15,805.18)193927,440.53 33,187.48 Petitioner's excess profits tax net income or deficit for the base period years, as determined for excess *232 profits tax purposes for 1941, was as follows:YearAmount1936$ 15,892.02 19371 (15,341.67)19381 (22,854.66)193926,347.74 For the tax year 1940, the foregoing deficits for 1937 and 1938 remained the same, but the income for 1936 and 1939 was less than the foregoing.  For the tax years 1942-1945, the excess profits tax net income or deficit for the base period years did not differ substantially from the corresponding figures shown above for 1941.For Federal excess profits tax purposes, petitioner computed its excess profits credit for the calendar years 1940 through 1945 on the invested capital method, and was accordingly allowed the following credits by respondent for these years:YearAmount1940$ 36,513.66194145,228.48194242,053.95194346,681.04194446,446.43194546,884.82With respect to its excess profits tax liability for the calendar years 1940 through 1945, petitioner filed applications with respondent for relief under section 722, I. R. C.  These applications were filed on Treasury Department Form 991 (hereinafter also referred to as "Form 991" or the "Form").A Form 991 for each of the calendar years 1940 and 1941 was filed by petitioner and was *233 received by respondent on or about June 24, 1943.  On each of these Forms, relief was claimed under subsections *232  (b) (2), (4) and (5) of section 722, I. R. C.  Statements were attached to these Forms, and the following appeared in these statements, with respect to the relief claimed under section 722 (b) (4):Sec. 722 (b) (4). The taxpayer during the base period changed the character of its business and the average base period net income does not reflect the normal operation for the entire base period of the business as the capacity for production was greatly increased in September, 1937.* * * *In September, 1937 the taxpayer completed the erection of a new plant with a capacity of approximately ten thousand gallons of milk a day as compared with the capacity of the old plant of two thousand gallons a day.  The new plant capacity was in excess of the immediate needs of the taxpayer and the taxpayer was thereby burdened with fixed and other operating charges in excess of those normal for its current operations.  Therefore, the income for part of the year 1937 and the years 1938 and 1939 has been adjusted to eliminate the expenses applicable to the unused capacity.  This adjustment to *234 base period net income is set forth in Schedules B-1, C-1 and D-1 [all attached to these statements] for the years 1937, 1938 and 1939, respectively.Relief was claimed, in the statements attached to the foregoing Forms for the years 1940 and 1941, under subsection (b) (2) of section 722, I. R. C., as follows:Sec. 722 (b) (2). The business of the taxpayer was depressed in the base period because of temporary economic circumstances unusual in the case of the taxpayer.* * * *During the year 1939 (from November 16, 1939 to December 31, 1939) the taxpayer was engaged in a price war with competitors.  There is set forth in Schedule D-3 the unit prices prevailing during the price war, and the unit prices prevailing immediately before it began.  There is also set forth in Schedule D-3 the additional income that would have been received had normal prices prevailed during the entire year.In order to arrive at a constructive base period net income for the year 1939 it is equitable that the actual income be increased by the additional income that would have been received had there been no price war.Relief was claimed, in the statements attached to the foregoing Forms for the years 1940 and 1941, *235 under subsection (b) (5) of section 722, I. R. C., on the following ground:Sec. 722 (b) (5). The taxpayer during the base period was engaged in a sales promotion program resulting in expenses not normal for ordinary operations, resulting in a base period net income below what it would have been otherwise.* * * *During all of the base period years the taxpayer was engaged in a sales promotion program.  The taxpayer started in 1932 without a single customer and thereafter until 1939 emphasis was on expansion under the belief that profits could be obtained later to offset the losses of the expansion years.  To develop a profitable business for the future, considerable expense was incurred * * *.*233  The claims for relief in these Forms, for the calendar years 1940 and 1941, were denied by respondent in a notice dated February 13, 1945.  Appeal from that denial was taken by petitioner in Docket No. 7871, in which the petition was filed on May 2, 1945.On or about October 9, 1943, respondent received a Form 991 from petitioner for the calendar year 1942.  On or about July 16, 1945, respondent received from petitioner a Form 991 for each of the calendar years 1943 and 1944, and on or about April *236 25, 1946, respondent received from petitioner a Form 991 for the calendar year 1945.  Relief was claimed in all these Forms under the same statutory provisions and on the same grounds as were asserted in the Forms for 1940 and 1941.  To the Form 991 for 1942, there was attached a copy of the same statement which had been attached to the Forms for 1940 and 1941; and the Forms for 1943, 1944, and 1945 referred to and relied on the statements thus filed with the Forms for 1940, 1941, and 1942.On or about June 20, 1947, respondent received from Wm. Gordon Buchanan & Company, a firm of accountants representing petitioner, a letter dated June 17, 1947, to which were attached statements presenting statistical and financial data.  This letter stated in part:Reference is made to your letter dated October 15, 1946 to the above-named taxpayer [petitioner] and to our letter to you dated October 21, 1946, in reply thereto having to do with Application for Relief under Section 722 of the Internal Revenue Code filed for the taxpayer for the years 1941 to 1945, both inclusive.We have been collecting data as to the effect on the average base period net income under the so-called "push-back" rule.The *237 taxpayer began use of its new plant in September, 1937 as set forth in various applications on Form 991.The general manager of the taxpayer has estimated that had the taxpayer had the use of the new plant two years before it did so, that is, beginning in September, 1935, there would have been sold during each of the years 1936-1939 inclusive, 250,000 more gallons of milk than actually occurred.  Based on this estimate the net income for the base period years has been reconstructed.  This has necessitated a detail study of expenses to determine the extent to which they would vary because of the increased volume.This letter dated June 17, 1947, asserted a claim for relief under the "push-back" provisions of section 722 (b) (4), I. R. C.  The data accompanying this letter was furnished in support of the "push-back" claim thus being made.In a notice of deficiency dated February 2, 1949, respondent denied petitioner's claims for relief under section 722, I. R. C., for the years 1942 through 1945.  Appeal from that denial was taken by petitioner in Docket No. 22807, in which the petition was filed on May 2, 1949.No claim for relief under the "push-back" provisions of section 722 (b) (4), I. R. C., *238 was presented by petitioner prior to the denial contained in respondent's notice of deficiency of February 13, 1945.  The claims for relief denied by that notice of deficiency, pertaining *234  to the calendar years 1940 and 1941, did not include a claim under the "push-back" provisions of section 722 (b) (4), I. R. C., and with respect to the calendar years 1940 and 1941 respondent has made no determination on such a "push-back" claim by petitioner.In the Forms 991 filed by petitioner as found above, petitioner claimed the following constructive income on the basis of the adjustments it asserted to be necessary under subsections (b) (2), (4) and (5) of section 722, I. R. C.:ConstructiveYearincome1936$ 44,087.05193731,610.46193870,197.521939112,921.06Total$ 258,816.09Average for base period$ 64,704.02The foregoing amounts of constructive income were further adjusted pursuant to section 713 (f), I. R. C., and, in accordance with the provisions of that section, the constructive income for 1939, $ 112,921.06, was claimed to be the reconstructed average base period net income.In the additional computations and data submitted to respondent by petitioner's accountants with the foregoing letter *239 dated June 17, 1947, the following constructive income was claimed:ConstructiveYearincome1936$ 46,472.55193732,527.14193843,973.551939116,979.78Total$ 239,953.02Average for base period$ 59,988.26 The adjustments responsible for these amounts of constructive income, claimed in the additional data of June 17, 1947, were based on: (1) a constructive increase in petitioner's sales by 250,000 gallons of milk for each of the base period years; and (2) an increase in petitioner's constructive income for 1939 by $ 19,272.54, as a "Price War Adjustment." Similarly, adjustment for this "Price War" item was made in the amount of $ 19,272.54 in the Forms 991 as originally filed, but the adjustment was there claimed under section 722 (b) (2), I. R. C.  Both in the additional data of June 17, 1947, and in the original Forms, the alleged price war was asserted to have started November 16, 1939.*235  During the base period, there was a substantial increase in petitioner's capacity for production and there was a change in the character of its business, as a result of the construction of the new plant which was completed in September 1937.By the end of the base period, petitioner's sales and net profits *240 were growing.Completion of the new plant in September 1937 rather than 2 years earlier, did not result in an appreciable loss of sales by petitioner during any of the base period years,  and, if the new plant had been completed in September 1935 rather than September 1937, petitioner's net income during the base period years would not have been substantially higher than the net income it actually realized in those years.  Prior to completion of the new plant, lack of productive capacity was not a factor which, to any appreciable extent, limited petitioner's sales.The excess profits tax paid by petitioner for the years in issue was not excessive and discriminatory.  Petitioner was not entitled to a constructive average base period net income which was large enough to produce a credit greater than any of the invested capital credits used by petitioner.  Petitioner was not entitled to a constructive average base period net income large enough to result in a lower excess profits tax, for any of the years in issue, than the excess profits tax actually paid by petitioner for those years.OPINION.Petitioner commenced business in 1932, processing and distributing milk, cream, and other dairy *241 products.  Its growth was continuous and vigorous, and it was still growing at the end of the base period, December 31, 1939.  It had been apparent during the early years of its life that, if its growth were to continue, its existing plant capacity would become inadequate to handle all its business.  Petitioner in 1937 constructed a new and modern plant, with a much greater productive capacity, at just about the time when its sales had reached the point calling for maximum utilization of the productive capacity of the old plant. It moved into the new plant in September 1937, and thereafter continued steadily to increase its sales during the remainder of the base period.Although petitioner was entitled to compute its excess profits taxes for the years in controversy, 1940-1945, by using the credit based upon its base period net income, together with such accompanying benefits as would be afforded by the so-called growth formula in section 713 (f) of the Code, it chose instead to use the alternative credit based upon invested capital. It had excess profits tax net income in an amount less than $ 16,000 for 1936, and in an amount less than $ 27,000 for 1939; *236  the years 1937 and 1938 were *242 deficit years.  However, on the invested capital method, petitioner was entitled to excess profits credits ranging from $ 36,513.66 to $ 46,884.82, depending upon the year involved.  Thus, petitioner's credits based upon the invested capital method were considerably in excess of any credits available under the income method, even after taking into account the section 713 (f) growth formula.  Petitioner nevertheless contends that the tax thus computed for each of the years involved was "excessive and discriminatory," and it seeks relief under section 722, 2*243 *244 *245  and particularly under subparagraph (b) (4).Section 722 (b) (4) provides that the tax shall be considered excessive and discriminatory if the taxpayer's average base period net income is an inadequate standard of normal earnings "because" the *237  taxpayer "changed the character of the business" during the base period and "the average base period net income does not reflect the normal operation for the entire base period." And a "change in the character of the business" is defined to include "a difference in the capacity for production or operation." Accordingly, in view of the construction of the new plant, petitioner has established that there was a "change in the character of the business" within the meaning of (b) (4).  This does not mean, however, that it automatically becomes entitled to relief.  For, the statute provides in addition that it must show that its average base period net income is an inadequate standard of *246 normal earnings "because" of this factor, and must show still further under section 722 (a) "what would be a fair and just amount representing normal earnings." See Bulletin on Section 722, pp. 4-5; E. P. C. 16, 1947-1 C. B. 90. Moreover, even if section 722 (b) (4) were  otherwise fully applicable, no relief would be forthcoming here unless petitioner can show that the invested capital credit actually used by it was less than the credit based upon constructive average net income which it has established.  Lamport Co., 17 T. C. 1079, 1084-5; General Metalware Co., 17 T.C. 286">17 T. C. 286, 292; Blaisdell Pencil Co., 16 T.C. 1469">16 T. C. 1469, 1484. For reasons which will appear presently we think that petitioner has failed to show constructive average net income in an amount sufficient to produce credits in excess of those which it actually used.In the application of (b) (4), petitioner relies upon the so-called push-back rule, which is set forth in the second sentence of those provisions as follows: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 *247 before it did so, it shall be deemed to have * * * made the change at such earlier time.Seeking to apply these provisions, petitioner contends that the productive capacity of its old plant restricted its sales and earnings in the base period and, if the new plant had been available in 1935 instead of 1937, it would have sold at least 2,550,000 gallons of milk in 1939 and its earnings would have been not less than $ 106,890.09 in 1939.  It seeks the benefit of a constructive average base period net income predicated upon that amount.  We are satisfied that no such level of sales or earnings could have been attained merely because the new plant had come into being in 1935 rather than in 1937.  Moreover, we are also satisfied that petitioner has failed to show that it would have achieved a level of growth by the end of 1939 with earnings of such magnitude as to produce credits based on constructive average base period net income greater than the credits actually used by it.*238  Petitioner's actual growth, from 1932 (its first year) through 1939, is strikingly shown by the following table which we have taken from our findings:Number ofIncrease inIncrease inTotalretail milkCustomerscustomersGallons ofgals. overemployees,Yearroutes atat end ofover previousfluid milkprecedingend ofend of yearyearyearsoldyearyear1932121,50045,000281933183,0001,500292,432247,432561934306,0003,000543,785251,353841935407,5001,5001,108,685564,90010719364912,0004,5001,207,76399,07812619375715,0003,0001,322,851115,08816619386717,5002,5001,581,910259,05917019397320,0002,5001,917,436335,526174*248  The foregoing data furnish dramatic evidence that petitioner's business was growing steadily without the new plant prior to 1937.  However, the old plant was reaching its saturation point at about that time, and if the growth was to continue, enlarged facilities would have to be supplied.  This does not mean that the new facilities caused the growth thereafter.  Rather, the enlarged facilities afforded by the new plant enabled the growth to continue.  The prior advent of the new plant 2 years earlier does not persuade us that petitioner's growth during that 2-year period would have been substantially greater than it in fact was.  And we are similarly not persuaded that petitioner would have attained a level of sales by the end of 1939 that would have been substantially higher than was in fact attained at that time.The evidence establishes, in our opinion, that productive capacity did not operate materially to restrict petitioner's sales during the first two base period years, 1936 and 1937.  No evidence has been introduced to show that in either of those years any customers or sales were lost because petitioner's production facilities were inadequate; on the contrary, there is evidence *249 that both in 1936 and 1937 petitioner could have served at least some additional customers if it had been able to get them.  In both years major strides were made in increasing the number of new customers and new routes, and petitioner's growth appears to have been about as much as market and competitive conditions then permitted.  While petitioner experienced difficulty with its facilities toward the end of 1935, the difficulty lay in its distribution and storage facilities and not in its production facilities; moreover, corrective measures were taken before the end of 1935 to increase distribution and storage capacity through the opening of a branch station.  Although there was undoubtedly a certain amount of congestion in petitioner's plant, we are satisfied that it had not yet reached the limit of its capacity, and that its sales or acquisition of new customers was not in any way impeded.  Throughout these years petitioner's operation *239  and management were in the hands of tried and capable businessmen, who had the resources to construct a new plant earlier if it had been necessary, and we are unable to conclude that they did not act in time.Petitioner contends that it deliberately *250 reduced its sales effort in 1936 and 1937 because it had reached its ceiling in productive capacity. The record leaves this in considerable doubt.  Rather than a substantial relaxation there is evidence of a sustained sales effort in the continued rise in those years of new customers and new retail routes, in the growing ratio of raw milk bought by petitioner to the total raw milk bought by other dairies in the area, and in the sizeable increase in petitioner's dollar sales for 1937.  Nor does the evidence show that there was any appreciable reduction in advertising expense during 1936 and 1937.  If there was a significant relaxation in sales effort, the evidence fails to establish its nature or the extent to which it caused a reduction in sales and net income during those years.  Petitioner also asserts that the planning and construction of the new plant resulted in a neglect of attention to sales.  While petitioner's management undoubtedly concerned itself with the new plant, the evidence is inconclusive that as a consequence there was any serious diversion in sales effort.  Petitioner's route drivers, who constituted its principal "sales force," continued  with a substantially undiminished *251 incentive to increase sales, and there is nothing to show their efforts were relaxed.  Although the number of "solicitors" declined during these 2 years, the reduction appears to have been part of a permanent program, because the number of solicitors was not subsequently increased after the new plant came into existence.The new plant was opened in September 1937, and thereafter there could be no question about the existence of sufficient productive capacity. For the rest of the base period, the number of customers and of retail routes, and the volume of sales, increased as well.  We cannot find that achievement at the new plant was substantially handicapped or sales or earnings were there materially reduced by the productive facilities which antedated it, and we think the record requires the conclusion that it would not have made a marked difference in petitioner's sales or earning level, either during the base period years or at the end of the base period, if the new plant had opened in 1935 rather than 1937.True, the new plant was an attractive structure with unusual features, and had petitioner been able to commence an aggressive sales promotion program making maximum utilization *252 of its facilities for that purpose 2 years earlier, it might well have attained a level of sales somewhat higher than was in fact reached.  But petitioner was growing, wholly apart from the new plant, and we cannot say that the attractions provided by the new plant were of such character that *240  the growth after its supposed completion in 1935 would have been due in any substantial amount to the plant rather than to the other forces which spurred the growth prior to the new plant. Certainly, we cannot find on this record that the 2-year prior advent of the new plant would have resulted in a 1939 level of earnings of such magnitude as to produce credits that would be greater than the credits actually used.  The latter were substantially higher than credits based on petitioner's actual base period earnings, and we conclude that petitioner has failed to establish constructive earnings of such magnitude as to result in higher credits than those employed by it.A basic fallacy in petitioner's position is the premise that in applying the push-back rule we must assume not only that the new plant was constructed in 1935 rather than in 1937, but also that the new plant commenced business in 1935 *253 with the level of sales that was in fact reached in 1937 when the plant actually began operation.  The latter assumption does violence to the theory of the push-back rule.  We are required to assume merely that the (b) (4) "change" occurred 2 years earlier.  In the context of this case, this means only that we are to assume that the new plant was constructed in 1935 rather than in 1937.  The new plant is superimposed upon conditions as they existed in 1935 including the then level of sales.  Cf.  National Grinding Wheel Co., 8 T. C. 1278. Under petitioner's theory, the 2-year growth actually attained by it as of September 1937, when the new plant was opened, would be treated as having been achieved in September 1935 and used as a starting point for computing hypothetical growth from September 1935, thus enabling it artificially to pyramid growth upon growth.  We think that no such extraordinary result was ever intended by the statute, and its plain language indicates otherwise.Although petitioner's various applications for relief were predicated upon section 722 (b) (2), (b) (4), and (b) (5), and although these grounds were summarized at the outset of petitioner's brief, the only basis *254 for relief actually urged upon this Court was the one founded on the push-back rule in (b) (4).  In the circumstances the other grounds must be deemed to have been abandoned.As to the calendar years 1940 and 1941, which are the only years involved in Docket No. 7871, additional reason exists for affirming respondent's denial of relief.  The claims filed for those years included a claim for relief under subsection (b) (4).  The ground of this (b) (4) claim was that, because the capacity of the new plant was in excess of petitioner's needs at the time operation of the new plant began, petitioner "was thereby burdened with fixed and other operating charges in excess of those normal for its current operations.  Therefore, the income for part of the year 1937 and the years 1938 and 1939 has been adjusted [in arriving at a proposed reconstructed *241  income] to eliminate the expenses applicable to the unused capacity." This claim obviously was based on excessive expenses, and not on abnormally low sales; no complaint was made about the sufficiency of revenues, or that they should have been greater, but only that excessive expenses had left an insufficient net return.It was this (b) (4) claim *255 that was denied by respondent in his determination of February 13, 1945, and it was from that determination that petitioner appealed in 1945 in Docket No. 7871.  It was only after respondent's denial and after commencement of the proceeding in Docket No. 7871 that additional information was presented to respondent and a push-back claim was asserted before him in June 1947.  The only (b) (4) claim now urged by petitioner in Docket No. 7871, a push-back claim based on abnormally low sales, was not presented to the Commissioner and was not ruled on by him, and therefore cannot be considered by us.  Cf.  Wadley Co., 17 T. C. 269, 281-282; Block One Thirty-Nine, Inc., 17 T. C. 1364, 1370-1371; Monarch Cap Screw & Manufacturing Co., 5 T.C. 1220">5 T. C. 1220, 1229; Blum Folding Paper Box Co., 4 T.C. 795">4 T. C. 795, 799.Reviewed by the Special Division.Decisions will be entered for the respondent.  Footnotes1. These amounts represent part of the depreciation deductions taken by petitioner and allowed by the Commissioner for the indicated years.  They are set forth separately because petitioner seeks to reduce those deductions by these amounts, and correspondingly to increase the net income and decrease the net loss for its base period years.1. The reports received by the Health Department showed the quantities sold by the individual dairies: these reports, however, were confidential, and statistics were published only on the aggregate sales.↩1. Estimated resident population.↩1. Net loss.↩1. Deficit in excess profits net income.↩2. SEC. 722. GENERAL RELIEF -- CONSTRUCTIVE AVERAGE BASE PERIOD NET INCOME.(a) General Rule.  -- In any case in which the taxpayer establishes that the tax computed under this subchapter (without the benefit of this section) results in an excessive and discriminatory tax and establishes what would be a fair and just amount representing normal earnings to be used as a constructive average base period net income for the purposes of an excess profits tax based upon a comparison of normal earnings and earnings during an excess profits tax period, the tax shall be determined by using such constructive average base period net income in lieu of the average base period net income otherwise determined under this subchapter.  In determining such constructive average base period net income, no regard shall be had to events or conditions affecting the taxpayer, the industry of which it is a member, or taxpayers generally occurring or existing after December 31, 1939, except that in the cases described in the last sentence of section 722 (b) (4) and in section 722 (c), regard shall be had to the change in the character of the business under section 722 (b) (4) or the nature of the taxpayer and the character of its business under section 722 (c) to the extent necessary to establish the normal earnings to be used as the constructive average base period net income.(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.* * * *(4) the taxpayer, either during or immediately prior to the base period, commenced business or changed the character of the business and the average base period net income does not reflect the normal operation for the entire base period of the business.  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 commenced business or made the change in the character of the business two years before it did so, it shall be deemed to have commenced the business or made the change at such earlier time.  For the purposes of this subparagraph, the term "change in the character of the business" includes a change in the operation or management of the business, a difference in the products or services furnished, a difference in the capacity for production or operation, * * *.(5) of any other factor affecting the taxpayer's business which may reasonably be considered as resulting in an inadequate standard of normal earnings during the base period and the application of this section to the taxpayer would not be inconsistent with the principles underlying the provisions of this subsection, and with the conditions and limitations enumerated therein.