Court Opinion

ID: 4611909
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:49:59.980705+00
Date Added: 2024-06-11T07:54:20.831953
License: Public Domain

Hanover Canning Company, Petitioner, v. Commissioner of Internal Revenue, RespondentHanover Canning Co. v. CommissionerDocket No. 29860United States Tax Court26 T.C. 1115; 1956 U.S. Tax Ct. LEXIS 81; September 21, 1956, Filed *81 Decision will be entered under Rule 50.  Petitioner duly filed applications for relief under section 722 (b) (4) of the Internal Revenue Code of 1939 for the fiscal years ending May 31, 1941 through 1945.  The claims were allowed in part and disallowed in part, the disallowance being based on the determination by the respondent of a lesser amount than had been claimed by the petitioner as the amount to be used as petitioner's constructive average base period net income. A fair and just amount representing normal earnings to be used as petitioner's constructive average base period net income determined.  Thomas R. Wickersham, Esq., for the petitioner.Jules I. Whitman, Esq., for the respondent.  Turner, Judge.  TURNER *1115  The respondent allowed in part and disallowed in part the petitioner's applications for relief *82  under section 722 of the Internal Revenue Code of 1939 for the fiscal years ending May 31, 1941 through 1945.  The question for determination is as to a fair and just amount representing normal earnings to be used as petitioner's constructive average base period net income, for the purposes of section 722.This proceeding was heard by a commissioner of the Court.  Our findings of fact herein are based upon his proposed findings, with such modifications and additions as on the record appear justified on the basis of the exceptions of the parties.FINDINGS OF FACT.The petitioner, a Pennsylvania corporation, is engaged in the business of canning vegetables, and has its principal place of business at Hanover, Pennsylvania.  Its returns for the taxable years May 31, 1941 through 1945, were filed with the collector of internal revenue for the first district of Pennsylvania. From the date of its organization through 1939 petitioner kept its books and filed its returns on the calendar year basis.  In 1940 it changed to a fiscal year ending May 31.*1116  Petitioner was organized on December 26, 1924, with capital stock of 200 shares issued, 95 shares to H. V. Warehime and 95 shares to*83  John F. Shultz and 5 shares to each of their wives.  In 1927, 100 additional shares were issued, 50 shares to Warehime and 50 to Shultz.  On March 2, 1940, Shultz and his wife sold their 150 shares to petitioner.  Of the 150 shares so acquired, petitioner issued 25 shares to H. V. Warehime and 75 shares to his son, Alan R. Warehime, and retained 50 shares as treasury stock.H. V. Warehime served as petitioner's president throughout the period 1925 through 1945.  He was in charge of production and supervised the farm operations which petitioner conducted in connection with its canning business.Shultz was petitioner's secretary and treasurer until about the time he sold his stockholdings in the company.  He was at all times actively serving as president of the People's Bank of Hanover, and devoted only a small portion of his working time to petitioner.  His services to petitioner consisted, for the most part, of looking after financial matters and supervising the accounting.Alan Warehime has spent full time in petitioner's employ since his graduation from college, in 1935. Prior to that time, he had worked for petitioner part time.  Beginning in 1935, he was engaged successively in*84  the farming department, the sales department, and plant production.  He became general manager in 1938.Petitioner's financial policy was controlled largely by Shultz until 1938 or 1939.  He was conservative in his views, and opposed any sizable plant or business expansion.Petitioner's principal products are, and at all times were, peas, snap beans, and tomatoes. Tomato puree was produced as early as 1935, and kidney beans were added to the line in 1936.  Some dry peas were processed in 1936 and 1937.  The fresh vegetables processed by petitioner were purchased from farmers in or near York County, Pennsylvania, or were produced by petitioner on its own farms. Substantially all, if not all, of the fresh vegetables which were purchased were produced under contracts with the individual farmers.  These contracts were usually entered into 6 or 8 months before harvest time.  Petitioner usually furnished the seed and gave the farmers instructions as to the planting, cultivation, and harvesting of the crops. This was necessary, in order to obtain the uniform freshness and maturity required for packing top quality products.  It was essential that the vegetables be picked at the right stage*85  of maturity, and in the case of peas a margin of 1 day could be critical.  All of the fresh vegetables were subject to rapid deterioration or spoilage after picking.The picking season was from about June 1 through the first week in July, for peas, the peak being in June; from the first week in July to the last week of September, dependent upon the killing frost date, *1117  for snap beans; and from about August 10 through September or the first week in October, for tomatoes.Kidney beans were a "dry pack" product, as distinguished from a "fresh pack," such as peas, beans, and tomatoes. Petitioner packed kidney beans to fill in during the slack season, usually between November and June following.  Its first kidney bean pack of any consequence was in 1937.  Most of the kidney beans were grown in New York State.The peak of petitioner's employment was during its fresh vegetable canning season. Most of the employees in the plant were engaged in the preparation of vegetables for canning. These employees were recruited largely from housewives of Hanover, but some migrant labor was employed during the rush season. Hanover has a population of approximately 15,000.In the years 1935*86  to 1939, inclusive, the petitioner's total pack of all products, converted to cases of 24 standard No. 2 cans, was as follows:Item19351936193719381939Peas40,99812,40546,23639,36217,736Green and wax beans43,88477,23879,74891,366133,859Tomatoes41,96269,61526,00375,244106,618Tomato puree4,88614,8775,39012,06634,815Kidney beans107,12720,09678,850Dry peas5278,228Total131,730174,672172,732238,134371,878The comparatively small pack of peas in 1939 was due to adverse weather conditions and pest infestation which occurred in that year in the farm area of petitioner's plant. Weather conditions are normally and regularly an important factor in determining the size of petitioner's pack of fresh vegetables.The following table shows the petitioner's net income, officers' salaries paid, and net income before the deduction of officers' salaries, as reported on its returns for the years 1925 to 1939, inclusive:Officers' salariesNetNetincome beforeYearincomeofficers'reportedJ. F. ShultzH. V.TotalsalariesWarehime1925($ 5,720.53)$ 1,400.00$ 2,700.00$ 4,100($ 1,620.53)19261,353.76 1,657.502,957.504,6155,968.76 19271,144.61 1,600.002,900.004,5005,644.61 19283,326.69 3,150.004,450.007,60010,926.69 19293,338.98 6,950.008,900.0015,85019,188.98 1930(1,668.78 1,950.003,900.005,8504,181.22 1931(289.92)1,950.003,900.005,8505,560.08 1932(1,159.54)1,950.003,900.005,8504,690.46 1933303.92 4,725.006,450.0011,17511,478.92 19348,187.32 6,800.008,600.0015,40023,587.32 1935(1,287.05)1,950.003,900.005,8504,562.95 19361,314.48 1,950.003,900.005,8507,164.48 1937693.80 6,950.008,900.0015,85016,543.80 1938(2,259.82)1,950.003,900.005,8503,590.18 19393,215.76 4,450.0010,100.0014,55017,765.76 *87 *1118   According to its balance sheets, petitioner's total assets were $ 61,892.81 at December 31, 1925, $ 164,123.88 at December 31, 1935, and $ 304,662.57 at December 31, 1939.  Its net worth on those dates, as shown by the balance sheets, was respectively $ 14,279.47, $ 41,304.42, and $ 29,952.66.  1After Alan Warehime became petitioner's general manager in 1938, he began formulating plans for plant improvement and expansion.  Shultz did not agree with the plans to the extent proposed, and it was because of this difference of views that steps were taken by petitioner to purchase his stock.  The price to be paid for the stock was to be, and was, based on the result of an audit of*88  the company's books, which began in the fall of 1939 and which was made as of November 30, 1939.Most of the additions, changes, and replacements covered by the plan were made in 1938 and 1939, but others, though planned, were not made or completed until after 1939.  A new grader and a washer for peas were installed in 1938.  Two additional viners for peas were acquired in 1938 and 1939.  Petitioner's viners had theretofore been dispersed through the farm area.  All were brought in and located at the plant, thereby resulting in a more efficient operation.  Two hundred and fifty new metal boxes were acquired in 1938 and 1939.  These boxes were used in the handling of peas, beans, and possibly tomatoes. Four new graders for processing beans were acquired in 1938.  A new bean cutter was also purchased.  The new graders for both peas and beans were more efficient both with reference to time and effectiveness in end results.  They were electrically driven, as contrasted with the steam power used in operating the old graders, and the power was transmitted by gears, rather than by shafts and belts.  A second line for processing tomatoes was installed in 1939.  Also in 1939 equipment for*89  processing tomatoes by a new method known as vacuum pack was acquired and installed. A different type of machine for sealing the cans in the vacuum pack process was required, as against equipment used in the conventional style of closing cans.In addition to the new or additional machinery acquired for canning vegetables, as stated, petitioner, by new construction, increased its warehouse space in 1939 by "upwards of a hundred thousand cases." Prior to 1939, the cases containing the canned goods were closed by pasting.  In 1939 a machine for stitching the cartons was acquired.Substantial warehouse space was required in the operation of petitioner's business, since its customers did not take immediate delivery of all of the goods purchased from a given year's crop. As a consequence, petitioner carried a substantial quantity of its finished goods in *1119  storage for a goodly part of each year, pending the receipt of purchase and shipping orders.Equipment on order at December 31, 1939, but acquired and installed thereafter, included a tomato soak tank, a high pressure washer, a scalder, and 15 retorts.  Arrangements had also been made for installation of an overhead monorail*90  in the plant and an electric crane conveyance.  Two additional machines for the vacuum packing of tomatoes were ordered in November of 1939.  The plant boiler did not produce steam according to specifications.  During 1938 and 1939 it was concluded that the location was bad and the draft was not right.  The deficiency was rectified by moving the boiler to a new location and constructing a new stack.  This work was completed in the spring of 1941.To some extent, the plant improvements were financed by a loan of $ 30,000 from the First National Bank of Gettysburg.  Application for the loan was made in 1939 and the loan was approved early in 1940.  As security for the loan, petitioner gave a mortgage on certain of its real estate.By the vacuum pack method of canning tomatoes, the air content of the can is reduced by a vacuum pressure in the course of the sealing process. The tomatoes so packed are superior in quality to the regular pack, and as they became established, commanded a premium price.  This was due in part to the fact that only the better tomatoes were used, leaving the remainder to be processed as puree.  Petitioner was one of the first, if not the first, to pack tomatoes*91  by the vacuum pack method.  This process helped to establish petitioner in the trade as a leading canner of quality tomatoes in the United States.There was a market during the base period for most, if not all, of petitioner's products.  It could have sold more "vacuum pack" tomatoes and more of some of its other products than it produced.Prior to 1938 most of petitioner's products were packed under the labels of its buyers and distributors. In that year, petitioner began packing some of its fancy grade items under its own trade name.  This was pursuant to a plan eventually to pack all of its fancy grade products under its own label.  This was particularly true of tomatoes packed by the vacuum pack method.  To some extent, it also began selling its production on a commission basis, as against selling to distributors.The additions to plant and equipment and the changes made by petitioner during the base period and those which it thereafter made pursuant to the course of action to which it was committed prior to January 1, 1940, substantially increased its capacity for production.The following table shows a comparison of petitioner's pack of fresh vegetables with the nationwide *92  pack, for the years 1936 to 1944, inclusive: *1120 Petitioner'sNationwidepack (Casespack (CasesYearbasis #2)basis #2)1936174,13550,853,7301937157,37762,704,9491938218,03861,668,7381939293,02851,132,918Total842,578226,360,335Average210,64456,590,0841940320,01166,689,1901941328,29576,600,3861942395,742104,122,5131943527,61292,472,1811944546,02482,916,879Total2,117,684422,801,149Average423,53784,560,231The yield per acre and total pack of fresh peas, beans, and tomatoes in the State of Pennsylvania for the years 1936 to 1941, inclusive, as compiled by the National Canners Association, were as follows:193619371938193919401941Green and wax beans:Yield per acre (tons)1.51.71.51.81.51.2Pack (cases No. 2's)292,196363,043371,563364,586402,058376,270Tomatoes:Yield per acre (tons)6.84.35.37.45.67.1Pack (cases No. 2's)778,853446,253600,334850,143683,295700,364Green peas:Yield per acre (lbs.)1,7002,1502,5201,1502,4502,200Pack (cases No. 2's)272,618555,217626,549227,106583,921524,012*93  Petitioner's closing inventories of finished goods, for the years 1935 to 1939, inclusive, were $ 60,577.91 for 1935, $ 73,833.08 for 1936, $ 72,100.08 for 1937, $ 137,324.44 for 1938, and $ 176,248.27 for 1939.  2Petitioner's statement of income and profit and loss for the years 1935 to 1939, inclusive, as stipulated by the parties, shows the following:19351936193719381939Sales 2$ 166,946.74$ 239,520.43$ 262,645.66$ 260,296.61$ 417,986.73Cost of sales146,766.81204,421.27209,764.37229,572.08352,020.28Gross profit$ 20,179.93$ 35,099.16$ 52,881.29$ 30,724.53$ 65,966.45Sellingexpenses$ 7,680.74$ 9,605.06$ 12,809.67$ 14,952.43$ 20,085.27Administrativeexpenses6,354.857,893.3123,964.078,107.7424,958.78Operatingprofit$ 6,144.34$ 17,600.79$ 16,107.55$ 7,664.36$ 20,922.40*94 *1121  In the years 1940, 1941, and 1942 the petitioner's total pack of all products, converted to cases of 24 standard No. 2 cans, was as follows:Item194019411942Peas47,69442,48958,808Beans141,616106,054237,283Tomatoes103,867122,17574,102Tomato puree26,83457,57725,549Kidney beans60,98085,52456,513Idaho red beans645Pork and beans10,20750,309Sauerkraut18941529Pork and sauerkraut2,4494,7694,331Total383,629429,855506,924In its income tax returns for the fiscal years ended May 31, 1941, 1942, and 1943, petitioner reported its sales, cost of goods sold, and gross profits from sales as follows:Fiscal year194119421943Sales$ 652,557.95$ 958,894.60$ 1,093,704.74Cost of goods sold493,867.31720,877.89726,667.05Gross profits from goods sold$ 158,690.64$ 238,016.70$ 367,037.69The effect of*95  some of the changes made by petitioner during the base period and to which it was committed prior to January 1, 1940, was that its business did not by the end of 1939 reach the earning level which it would have reached if the changes had been made 2 years before they were.The petitioner filed timely applications for relief under section 722 of the Internal Revenue Code of 1939 for the fiscal years ended May 31, 1941 through 1945, and for the refund pursuant thereto of excess profits taxes paid for those years.  The applications for relief were bottomed on the provisions of section 722 (b) (4), and under that section the specific grounds were that there had been a change in the management of the business during the base period, a change in the method of distribution by petitioner of its products, and a change in its capacity for production, part of which was effected during the years 1938 and 1939 and part of which was consummated after January 1, 1940, to which consummation petitioner was committed prior to 1940.  In the said applications, $ 58,509.46 was claimed as the amount of constructive average base period net income to be used in computing petitioner's excess profits tax for*96  the said years.It was the determination of the respondent, notice of which was given under date of May 15, 1950, that petitioner was qualified for relief under section 722 (b) (4), and that a fair and just amount to be used as its constructive average base period net income was $ 10,000.  *1122  A constructive average base period net income of $ 10,000 did not afford relief for the fiscal year ended May 31, 1944, since the excess profits credit based thereon was less than petitioner's excess profits credit for that year based on invested capital.  3Petitioner's excess profits credit based on invested capital for each of the taxable years herein is as follows:Year ended May 31Credit1941$ 7,152.4719428,076.8519438,191.54194410,392.63194514,453.94A fair and just amount representing normal earnings to be used as petitioner's constructive average base period net income is $ 18,000.OPINION. *97  The respondent, by his determination, has conceded that the petitioner is qualified for section 722 relief within the meaning of section 722 (b) (4) of the Internal Revenue Code of 1939, and the only remaining question is as to a fair and just amount representing normal earnings to be used as petitioner's constructive average base period net income.In its applications for relief and its petition herein, it was the claim of the petitioner that $ 58,509.46 was such fair and just amount.  Its claim now is that if the changes made in the base period and the changes to which it was committed at the end of 1939 had been made 2 years before they were, it would have packed and sold in 1939, 500,000 cases of the No. 2 size can of the various vegetables it was then packing, and on the basis of such production the fair and just amount to be used as its constructive average base period net income would have been $ 32,696.  It caused its accountant to prepare, and it has placed in evidence, schedules to show computation thereof.In making his computation, the accountant prorated the assumed 500,000 cases among the vegetables being packed in 1939 according to the average of the actual pack of *98  the various items for the years 1935 through 1939, and, assuming the sale of the entire 500,000 cases in 1939, he applied sales and cost factors purportedly reflecting petitioner's actual experienced rates of sales and costs for 1939, to arrive at gross sales, cost of sales, and gross profit, and with some modifications, as indicated in footnotes to the computation, deducted petitioner's purported "Administrative and Other Expenses" for 1939, to arrive at constructive net income.*1123  While the computation appears to be mathematically accurate, it is of little or no value for the purposes here, because of lack of proof of the basic facts from which the various factors were derived.  The parties have stipulated in dollars the aggregate of petitioner's sales, cost of sales, and the resulting gross profit for each of the years 1925 through 1939, but there is no proof of the prices at which the various vegetables were sold in 1939, nor of the quantities sold.  Similarly, we are advised as to the opening and closing inventories of goods on hand in dollar amounts, but we have no information as to such inventories in terms of cases of vegetables and no breakdown thereof between the *99  various varieties.  We do know the actual annual pack of vegetables in cases and by varieties, but we also know that the annual pack in cases did not represent the annual sales in cases.  It is not possible therefore to arrive at proper sales factors by prorating the 1939 dollar sales to the 1939 pack by cases and varieties.  On brief, petitioner states that the sales prices per dozen cans as used in the computation were taken from and reflected amounts shown on its 1939 sales invoices.  The assertion, if true, is not supported by any proof.  There is no indication that the invoices were in court at the time of the trial, and we are not advised of the effort, if any, on the part of the petitioner to stipulate such facts from the invoices, pursuant to Rule 31 (b) of the Court's Rules of Practice.The state of the record, to some extent, is much the same with respect to the cost factors used by the accountant in his computation. Here again, there is no indication that petitioner attempted to stipulate its basic facts, pursuant to Rule 31 (b) above.  A schedule purporting to show the actual cost per dozen No. 2 size cans of petitioner's actual pack for 1939 was prepared and placed*100  in evidence.  Some of the basic cost figures used in the preparation of the schedule were taken from petitioner's books, which books were in the courtroom and available for check by respondent's counsel, but as in the case of sales, some of the records from which such figures were taken were not available for check.  Aside, however, from any question as to the correctness of the basic facts from which the allocations and computations were made, the responses of the accountant, on cross-examination, cast substantial doubt upon some of the assumptions made and steps taken in arriving at the ultimate figures.In addition to our difficulties with the sales and cost factors applied by the accountant in his computation, the proof does not, in our opinion, support the conclusion or assumption that petitioner would have packed 500,000 cases of vegetables in 1939, if the changes made and to which it was committed by the end of the base period had been consummated 2 years before they were.  The assumed pack of 500,000 cases represented the expressed opinion of Alan Warehime in the *1124  course of his testimony, and in support thereof, petitioner relies on copies of letters mailed by it*101  to potential customers during the base period, advising that it could not supply various quantities of goods in respect of which inquiries had been made.  It also relies on the testimony of several brokers and distributors to the effect that they would have purchased substantially greater quantities of various items from petitioner if they had been available.  Granting the fact that petitioner did actually receive orders it could not fill and that the brokers and distributors would have purchased more of certain items if they had been available, we are still unable to find justification for an assumed pack in 1939 of 500,000 cases of vegetables, based on the changes made and to be made.In the first place, there is no showing that petitioner was limited in the base period to its actual production by the capacity of its plant, even prior to the changes in question, and except possibly for "vacuum pack" tomatoes and peas, due to the short pea crop in that year, that it could not have packed in 1939 the quantity of vegetables for which it now contends.  According to representations which it made to respondent in support of its applications for relief, it would definitely appear from *102  a comparison of petitioner's production by weeks that there could have been comparatively few weeks during any canning season in the base period in which it operated at or near capacity.  There was an assertion by at least one witness that petitioner did operate to capacity during the fresh vegetable season, but when pressed as to what the actual capacity of the plant was, one answer was that petitioner in the base period years packed all of the peas, beans, and tomatoes which were available to it.  This only meant, of course, that with due allowance for variations in the weather and other factors affecting the growth of the various vegetables, petitioner had available to it and packed in each of the years all of the vegetables it had contracted for or, by its own prearranged plan, produced on its farms. Presumably petitioner did in 1938 and 1939 increase the acreage of the vegetables grown for it under contracts and possibly on its own farms, since it did make noticeable increases in its purchases of seeds in those years, and admittedly, adverse growing conditions did result in a short pea crop in 1939, but so far as appears, the bean and tomato crops were in keeping with plans and*103  expectations under the contracts which had been made.  Whatever reasons petitioner may have had for not contracting for a more ample supply of vegetables, we are not advised, but we are satisfied on the record that it was not because the capacity of its plant was so limited that it could not pack substantially more than it did.  As for kidney beans, which were packed in the off-season, it is quite obvious that petitioner could have increased its pack very substantially at any time during the base period *1125  that it chose to do so.  It is a fact, and we have so found, that the changes made did substantially increase the capacity of petitioner's plant, but on the record as a whole we are satisfied that petitioner's failure to pack substantially more vegetables during the base period was due to reasons other than lack of capacity, which are not disclosed.That is not to say, however, that petitioner's production in 1939 would not have been considerably higher than it actually was, if the changes herein had been made 2 years before they were, and that, as a consequence, the fair and just amount to be used as petitioner's constructive average base period net income would not be *104  greater than the respondent has determined.  Since some of the changes were not consummated until after December 31, 1939, we are privileged, under section 722 (a), 4 to consider post-1939 events to the extent necessary to establish the amount to be used as petitioner's constructive average base period net income, and we find these events as they appear of record both revealing and helpful.  In 1940 petitioner's output was 383,629 cases, as compared with 371,879 for 1939.  By the beginning of the 1941 packing season, most, if not all, of the changes had been made, and petitioner's pack for that year was 429,855 cases.  In 1942 the pack was 506,924, and at first blush might appear to be corroborative of the 500,000 cases upon which petitioner based its computation. Of that amount, however, 50,309 cases were pork and beans, a commodity petitioner had never packed before 1941, and could have been the result of the war demand.  At any rate, there is no indication of record that the production of pork and beans was geared to or in any way resulted from the changes herein, and there being no evidence to the contrary, it is also within reason to conclude that pressure for added food production*105  in the prosecution of the war may have accounted, to some extent, for the increases in the pack of other items.  Though satisfied that a considerable increase in petitioner's production did result from the said changes, we find no justification for an assummed pack for 1939 much, if any, greater than the actual pack for 1941.*106  Aside from the increase in production, there are other factors shown of record which, to some degree, support a greater constructive average base period net income than that determined by respondent.  To illustrate, the new graders for both peas and beans were faster in *1126  operation and the grading between the top and secondary qualities was more effectively done, thereby improving petitioner's best grades of peas and beans. Similarly, new equipment for washing and scalding tomatoes permitted more effective operation in preparing tomatoes for packing. The packing of tomatoes by the vacuum pack method, which began in 1939, resulted in a quality product and a demand therefor which petitioner was unable to meet for some indefinite time to come, although it is to be noted that there is an absence of proof as to the comparative costs of packing tomatoes by the prior method and by vacuum pack and there is no way of knowing whether the margin of profit was relatively great or small.  Neither do we have any showing as to the effect on profits of the change from canning of the lower grade tomatoes to the processing thereof as puree.  As another factor resulting in increased profits, *107  petitioner stresses the change in its methods of marketing its products, but there again, there is no proof from which we might determine the extent of such increase, even if we accept as true the assertion that increased profits did result.  On the whole, however, we are satisfied that these and other changes did tend to increase the earning level of petitioner's business, and that the respondent did not make due allowance for those increases in his determination of constructive average base period net income.Another fact which in our opinion is of significance is that if the cost of goods sold by petitioner during the years 1935 through 1939 and for the fiscal years ended May 31, 1941 through 1943, be related to the sales for the said years, it will be noted that the costs in the years as and after the changes were made were noticeably lower, indicating that the changes produced a much more favorable margin of profit.As noted, it is not possible, due to the state of the record, to determine with any definiteness what petitioner's 1939 production would have been if the changes herein had been effected 2 years before they were, and even if we could make such a determination, we *108  would be left to conjecture as to the costs and sales factors to be applied to the quantities of the various varieties of vegetables making up such pack to arrive, by computation, at the constructive profit thereon. Based, however, on the evidence which we do have, it is our conclusion, and we have found as a fact, that a fair and just amount representing normal earnings to be used as petitioner's constructive average base period net income is $ 18,000.Reviewed by the Special Division.Decision will be entered under Rule 50.  Footnotes1. There is some question as to the correctness of the fixed assets figures included in total assets.  The only indicated book in which such assets were recorded disclosed purchases only, and reflected no amounts for worn out or discarded items.  Similarly, there is also question as to the correctness of the reserve for depreciation.↩2. Just what these dollar amounts represent in terms of cases of the various items packed by petitioner is not shown.  There is accordingly no way of determining the ratio of the goods on hand at the end of a particular year to the goods packed or sold during the year.↩2. Just what these dollar amounts represent in terms of cases of the various items packed by petitioner is not shown.  There is accordingly no way of determining the ratio of the goods on hand at the end of a particular year to the goods packed or sold during the year.↩3. By amended answer, respondent made the same claim with respect to the year ended May 31, 1945.↩4. SEC. 722.  GENERAL RELIEF -- CONSTRUCTIVE AVERAGE BASE PERIOD NET INCOME.(a) General Rule.  -- * * * 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 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.