Court Opinion

ID: 4603262
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:31:34.744586+00
Date Added: 2024-06-11T07:52:48.739338
License: Public Domain

Hougland Packing Company, Inc., Petitioner, v. Commissioner of Internal Revenue, RespondentHougland Packing Co. v. CommissionerDocket No. 42113United States Tax Court28 T.C. 519; 1957 U.S. Tax Ct. LEXIS 177; May 28, 1957, Filed *177 Decision will be entered for the respondent.  Held, petitioner is not entitled to excess profits tax relief under section 722 (b) (1), (b) (2), (b) (3), or (b) (5), I. R. C. 1939.  Sol Goodman, Esq., and M. S. Cassen, Esq., for the petitioner.R. G. de Quevedo, Esq., and Lyman G. Friedman, Esq., for the respondent.  Mulroney, Judge.  MULRONEY *519  This proceeding involves claims for excess profits tax relief under section 722 of the 1939 Internal Revenue Code for the years ended June 30, 1942, 1943, 1944, 1945, and 1946.  Petitioner's claims are based on section 722 (b) (1), (b) (2), (b) (3), and (b) (5) of the 1939 Code.  Also involved are deficiencies in excess profits tax determined by the respondent for the years ended June 30, 1943 and 1944, in the amounts of $ 27,296.58 and $ 5,446.94, respectively, *178  by reason of the deferment of payments of such amounts by the petitioner under section 710 (a) (5).FINDINGS OF FACT.Some of the facts have been stipulated and they are hereby incorporated by this reference.Hougland Packing Company, Inc., hereinafter called the petitioner, was organized under the laws of the State of Indiana on December 24, 1932, with its office and place of business at Franklin, Indiana.  Petitioner was the successor of Hougland Packing Company, a partnership formed in 1922.  In 1953 the petitioner corporation was dissolved and its assets were distributed to the several stockholders.  Authorized capital of the petitioner at incorporation was 1,000 shares of common stock, no par value, which was issued at a value of $ 100 per share to the partners of the predecessor partnership in the same proportion as their partnership interests.  The shares of stock were issued as follows:Number of sharesIsaac R. Hougland94.2Daniel M. Hougland234.8Clyde E. Hougland155.1Leland W. Hougland155.1Robert F. Hougland125.7Frank M. Cravens235.11,000.0Petitioner and its predecessor were engaged in the business of canning and packing food products, principally*179  tomatoes and sweet *520  corn. Petitioner obtained its corn and tomatoes by contracting with farmers in petitioner's vicinity for a certain amount of acreage of corn and tomatoes grown by them.  This acreage was generally contracted in the early part of the year preceding the growing season. Petitioner was committed to purchase all of the corn and tomatoes on the contracted acreage. Petitioner determined the amount of acreage to be contracted each year by taking the average of what it considered to be its normal production capacity.  The area in which petitioner contracted for corn and tomatoes did not exceed a radius of 15 miles from Franklin, Indiana, where petitioner's canning plant was located.  Petitioner distributed its canned goods over a geographical area within a radius of approximately 600 miles from Franklin, Indiana.The contracted price per ton for corn and for tomatoes was the same on all contracts entered into by the petitioner each growing season. Contracts made by the petitioner each year with farmers specified a price per ton.  There was one price only in petitioner's contracts for corn, which price was determined by the price of competing crops. There were*180  two prices in the contracts for tomatoes, one price for United States Government grade No. 1's, and another price for United States Government grade No. 2's.Separate equipment was required in the processing of corn and tomatoes by the petitioner.  Petitioner's processing costs per ton for corn and tomatoes differed, with corn being more expensive to process.  Petitioner's profits from its corn- and tomato-canning operations were dependent on the size of the annual crop, the price paid for the crop, cost of cans, labor, and other expenses, managerial and selling ability, the available supply, the selling prices for the product, and other factors.  Some of the factors affecting the size of the annual crop of corn and tomatoes are moisture, cultivation, temperature, extent of fertilizer used, and the skill of the individual farmer.Between 1930 and 1934 there occurred a gradual change in the purchasing practices of petitioner's customers.  Prior to this period, the predominant practice was to purchase futures, whereby purchases were made before the start of the canning season and delivery was made to the buyers after the products were packed. During the years 1930 through 1934 petitioner's*181  customers gradually changed to the spot-buying method, under which method both the purchase and delivery of the canned products were made after the products had been packed.Petitioner's capital stock and surplus accounts were as follows during the years indicated: *521 Capital stockSurplusJan. 1, 1933$ 100,000$ 29,090.25Dec. 31, 1933100,00062,698.56Dec. 31, 1934100,00087,023.13Dec. 31, 1935100,000149,725.51Dec. 31, 1936$ 100,000$ 101,548.04Dec. 31, 1937100,000105,013.68Dec. 31, 1938100,000103,306.32Dec. 31, 1939100,000104,667.85Petitioner, since its organization, has kept its books and filed its Federal income and excess profits tax returns on the accrual method of accounting.  Up to the end of 1939 its accounting period was the calendar year.  It filed Federal income and excess profits tax returns for the 6-month period ended June 30, 1940, and as of that date changed its accounting period to a fiscal year ending June 30.  Petitioner filed income and declared value excess-profits tax returns and excess profits tax returns for the period January 1, 1940, to June 30, 1940, and for the years ended June 30, 1941, 1942, 1943, *182  1944, 1945, and 1946, with the then collector of internal revenue for the district of Indiana at Indianapolis, Indiana.Petitioner's balance sheets at the date of incorporation and at the end of each year from 1933 through 1939 were as shown on the following page: *522 December 31Jan. 1, 1933193319341935AssetsCash$ 517.81$ 2,813.88$ 60,258.98$ 7,523.26Accounts and notesreceivable11,359.3110,156.863,538.2533,407.99Inventories150,891.4352,520.0943,853.47136,867.00Land10,037.5010,037.5010,037.5010,037.50Buildings34,219.3034,219.3035,610.8141,258.31Machinery42,754.1442,754.1458,908.4764,961.87Furniture and fixtures879.32879.32879.32879.32Automobiles274.22274.22274.22605.72Field crates753.71753.71753.711,469.96Cash value of lifeinsurance4,813.154,813.15Unexpired insuranceInvestments14,850.00Miscellaneous118.65Total assets$ 256,499.89$ 174,190.82$ 214,114.73$ 297,010.93LiabilitiesNotes payable$ 127,000.00Accounts payable409.64$ 13,403.15Accrued Federal incometax$ 5,525.00$ 14,283.2513,572.48Reserve for depreciation5,967.2612,808.3520,309.79Net worthCapital stock100,000.00100,000.00100,000.00100,000.00Surplus29,090.2562,698.5687,023.13149,725.51Total liabilitiesand net worth$ 256,499.89$ 174,190.82$ 214,114.73$ 297,010.93*183 December 311936193719381939AssetsCash$ 18,522.93$ 10,780.63$ 3,831.78$ 7,972.02Accounts and notesreceivable4,735.9418,791.04786.8419,411.05Inventories129,950.61246,963.72255,340.68310,792.50Land10,037.5010,037.5010,037.5010,037.50Buildings41,744.6870,703.9370,703.9370,703.93Machinery65,778.3775,302.9875,302.9875,302.98Furniture and fixtures909.69932.19932.19932.19Automobiles605.721,205.721,205.721,205.72Field crates1,793.062,446.182,446.183,420.78Cash value of lifeinsuranceUnexpired insurance5,083.104,870.83InvestmentsMiscellaneousTotal assets$ 274,078.50$ 437,163.89$ 425,670.90$ 504,649.50LiabilitiesNotes payable$ 20,000.00$ 95,000.00$ 70,000.00$ 117,700.00Accounts payable22,637.7399,119.62104,305.58124,002.01Accrued Federal incometax2,847.97654.01258.81Reserve for depreciation27,797.6638,129.4848,059.0058,020.83Net worthCapital stock100,000.00100,000.00100,000.00100,000.00Surplus100,795.14104,260.78103,306.32104,667.85Total liabilitiesand net worth$ 274,078.50$ 437,163.89$ 425,670.90$ 504,649.50*184 *523   Corn acreage contracted, tonnage purchased, total cost, cases packed, and number of cans per ton packed by petitioner and its predecessor for the years 1922 to 1939 were as follows:AcreageTonnageCasesCansYearcontractedpurchasedCostpackedper ton19221,4002,871$ 22,971.6779,65266519231,8003,98134,483.04113,10468219242,1003,84738,523.78104,25465019252,5297,589103,529.12160,45050719262,4747,42374,756.69167,68754219272,2793,41429,543.2087,13161219282,5004,82148,080.00129,67264519292,6133,60839,003.5492,79760319302,8002,19824,333.3640,73944419312,6006,10954,574.311 152,0006652 20,00019321,7055,21236,358.24140,37564719331,3502,13716,992.9570,84180319342,5005,25041,399.765519353,0007,18556,901.465519362,8001,9883 38,125.475519373,0007,08069,403.415519382,0002,92029,298.105519392,0004,35434,264.71161,253889Averages1922-1939, incl2,3034,55544,030.161923-1939, incl2,3564,65445,268.891926-1939, incl2,4014,55042,359.661936-1939, incl2,4504 4,0854 43,272.92*185 Tomato acreage contracted, tonnage purchased, and total cost of tomatoes purchased by the petitioner and its predecessor for the years 1922 through 1939 were as follows:TomatoTonnageYearacreagepurchasedCostcontracted1922111192321,145$ 12,451.65192422,44029,144.27192524,96466,254.5119264471,92721,778.3919274923,08842,467.3919285503,17235,657.0919296633,21940,757.6919308105,18673,828.7319315502,91524,857.8019327542,69619,291.5519333312,35927,797.1919347003,39738,383.2519357754,00444,461.0519367603,19139,669.3219376925,24662,397.5719387503,43136,657.9219397203,60035,581.06Averages1923-1939, incl3,29338,319.791926-1939, incl6423,38838,827.571936-1939, incl7303,86743,576.47*524  A comparison of total corn and tomato tonnage purchases by the petitioner with net profit from operations, before deductions for partners' *186  and officers' salaries, is as follows:Net income (orCorn andloss) beforetomatodeduction fortonnagesalaries ofpurchasedpartners andofficersAverages1923-19397,947$ 47,8681936-19397,95227,291Four highest production years: 1925, 1926, 1935,193711,35458,054Four highest profit years: 1924, 1928, 1934, 19358,52995,078Four lowest production years: 1923, 1924, 1933,19365,27260,874Four lowest profit years: 1931, 1932, 1938, 19397,8093,540A table showing the trend of wholesale prices for canned corn and canned tomatoes, the cost to the petitioner of purchasing corn and tomatoes at the farms, and the prices received by growers for these products, is as follows:Per cent1922-391936-391936-1939averageaverageof 1922-39averageCornWholesale price of canned corn per dozenNo. 2's, f. o. b. midwestern canneries$ 0.843$ 0.72786.24Farm value per ton -- Indiana10.85 10.32 95.12Farm value per ton -- United States11.18 10.04 89.80Petitioner's cost per ton9.66 10.59 109.62TomatoesWholesale price of canned tomatoes per dozenNo. 2's, f. o. b. Indiana0.8530.67779.37Farm value per ton -- Indiana11.3611.32 99.65Farm value per ton -- United States13.19 12.56 95.23Petitioner's cost per ton (1923-1939)11.64 11.27 96.82*187  Petitioner and its predecessor partnership had sales, gross profit on sales, and net income as follows (cents omitted): *525 Predecessor PartnershipExcess profits netincome (or loss)Excess profitsas defined in sec.Gross profitNet income 1net income711 (b), beforeYearSaleson sales(or loss)as defined indeduction forsec. 711 (b)partners' andofficers' salaries1922$ 135,762$ 56,568$ 13,256 $ 13,256 $ 17,706 1923270,519118,90136,174 36,174 41,224 1924382,823173,04478,579 78,579 84,179 1925475,389162,64736,816 36,816 43,916 1926361,619143,38842,070 42,070 49,870 1927312,678114,39527,213 27,213 35,013 1928444,991167,96474,781 74,781 85,181 1929360,464134,57143,788 43,788 53,670 1930220,01884,7663,470 3,470 12,670 1931190,89359,315(16,379)(16,379)(6,879)1932227,35858,9592 (8,098)2 (8,098)1,402 Petitioner Corporation1933$ 405,139$ 121,484$ 39,133 $ 38,989 $ 63,389 1934534,825208,87283,598 76,640 107,340 1935418,836196,24374,529 72,913 103,613 1936399,463147,99624,006 24,006 54,706 1937362,754146,3194,119 4,119 34,819 1938259,72685,980(954)(954)8,546 1939313,197110,0201,620 1,620 10,995 *188 Petitioner and its predecessor partnership showed the following cost of sales (cents omitted) in their operations over the years 1922 through 1939:Predecessor PartnershipPurchasesBeginningLessCost ofYearinventoryLabels,endingsalesCornTomatoesPumpkinCansboxes,inventorysupplies,etc.1922$ 22,971$ 21,670$ 36,523$ 1,971$ 79,1931923$ 1,97134,483$ 12,451$ 9,35250,66548,0285,335151,61719245,33538,52329,14414,374103,62341,52422,746209,779192522,746103,52966,2542,472120,52433,22536,011312,741192636,01174,75621,7783,229109,19522,45349,195218,230192749,19529,54342,46713,37688,56523,17348,037198,283192848,03748,08035,65720,273120,54260,63523,227309,999192923,22739,00340,75716,15899,59726,39019,241225,892193019,24124,33373,8282,96475,68019,07379,869135,252193179,86954,57424,85725112,72321,979162,452131,5781932162,45236,35819,29188,70512,482150,891168,398Petitioner Corporation1933$ 150,891$ 16,992$ 27,797$ 4,206$ 66,489$ 69,797$ 52,520$ 283,655193452,52041,39938,38312,889157,15667,45643,853325,952193543,85356,90144,4618,608171,96633,669136,867222,5921936136,86752,28439,66911,738120,44420,414129,950251,4671937129,95069,40362,39767166,89734,682246,963216,4351938246,96329,29836,6574,96196,72514,480255,340173,7461939255,34034,26435,58115,921147,09125,770310,792203,176*189  The deductions shown on the following page were allowed petitioner and its predecessor by respondent for Federal income tax purposes for the years 1922 through 1939 (cents omitted): *526 PREDECESSOR PARTNERSHIP192219231924192519261927DeductionsLabor$ 12,048$ 33,827$ 43,418$ 37,179$ 31,961Salaries and wages$ 30,137Interest3302,7979251,5681,5111,565Taxes336411,0101,3521,162Repairs32,1172,2385,5433,333Bad debts150Brokerage3,8997,19312,05114,90310,9288,012Coal1,5631,7031,5391,5971,1591,649Freight3,3106,4059,29312,5337,4387,030Insurance2,0412,8902,6424,7524,3022,224Light and power4911,2381,4471,6931,110988Office6274224,8086,8664,0512,713Seeds5928402,391Miscellaneousexpense1,5603,6062Discount1,6323,5536,7646,6625,1604,218Auto expense461182325158238303Fertilizer519Swells244343213,069408203Travel338690581941977707Depreciation9,93514,92012,51013,27812,00513,307Partners' salaries4,4505,0505,6007,1007,8007,800Tomato plants6261,644Total$ 43,312$ 82,727$ 95,920$ 125,830$ 101,317$ 87,181*190 PREDECESSOR PARTNERSHIP19281929193019311932DeductionsLabor$ 34,651$ 32,122$ 26,586$ 27,440$ 18,655 Salaries and wagesInterest1,3159151,7342,8043,766 Taxes1,8021,7471,6001,6281,904 Repairs1,8863,5605,6832,392808 Bad debts714636 Brokerage10,9389,0414,6802,6785,059 Coal1,6051,5211,606767551 Freight4,3626,3265,9425,9297,595 Insurance2,8813,5932,8565,9643,894 Light and power1,019704793975713 Office2,4342,0105,4712,3773,124 SeedsMiscellaneousexpense(9)Discount6,2435,1333,1022,4881,943 Auto expense368379242218154 FertilizerSwells10634859653 Travel335272368240398 Depreciation12,11711,82810,86110,0681 8,992 Partners' salaries10,4009,8829,2009,5009,500 Tomato plants760506155Total$ 93,182$ 90,783$ 81,295$ 75,695$ 67,057 *527 Petitioner Corporation1933193419351936DeductionsCompensation of officers$ 24,400$ 30,700 $ 30,700$ 30,700Repairs9282,415 4,5875,390Interest5,009735 Taxes1,5873,383 1,5032,754Bad debts9537 1,211114Depreciation5,9676,841 7,5017,487Salaries and wages19,82848,439 56,19745,447Office and general expense2,3573,186 4,2843,279Auto expense and repair127124 123270Brokerage7,76811,319 10,6648,877Coal6632,260 1,6821,504Discount4,8396,886 3,4896,065Freight, drayage, and express5,8378,701 4165,604Insurance1,5382,705 675,945Light and power6301,350 1,3631,224Allowance for swells671,564 145129Tomato plants24106902Traveling expense1,117417 174137Adjustments(10)Seed corn973Insurance unexpiredTotal$ 82,787$ 131,058 $ 125,193$ 125,836*191 Petitioner Corporation193719381939DeductionsCompensation of officers$ 30,700$ 9,500 $ 9,375Repairs3,8552,120 3,240Interest1,1521,105 5,968Taxes5,1553,382 6,063Bad debts400169 Depreciation10,3319,929 9,961Salaries and wages58,13139,117 46,893Office and general expense5,3934,062 2,738Auto expense and repair430367 607Brokerage8,9426,724 6,220Coal2,0101,201 1,580Discount5,0044,023 4,314Freight, drayage, and express4,7504,731 6,674Insurance4,2673,954 4,507Light and power1,334967 1,261Allowance for swells923109 158Tomato plants1,007 Traveling expense256204 173AdjustmentsSeed corn84 Insurance unexpired(5,083)Total$ 143,041$ 87,679 $ 109,739Salaries and drawings of the predecessor partnership for the years 1922 through 1932, and compensation paid to petitioner's officers for the years 1933 through 1939 were as follows:Partners'Partners'Total partners'CompensationYearsalariesdrawingssalaries andof corporatedrawingsofficers1922$ 4,450.00$ 8,000.00$ 12,450.0019235,050.0033,669.2538,719.2519245,600.0072,306.1477,906.1419257,100.001,177.358,277.3519267,800.0034,544.7242,344.7219277,800.0050,682.6958,482.69192810,400.0065,438.2575,838.2519299,882.5065,300.5375,183.0319309,200.0014,236.2223,436.2219319,500.0019,500.0019329,500.0019,500.001933$ 24,400193430,700193530,700193630,700193730,70019389,50019399,375*192 For the years 1934, 1935, 1936, and 1939, petitioner's board of directors authorized the following annual salaries to be paid to the officers and directors: *528 1934Name and title193519361939OriginalIncreaseD. M. Hougland, president$ 6,000$ 1,500$ 7,500$ 7,500$ 2,500I. R. Hougland, director1,5005002,0002,000L. W. Hougland, director andpacking superintendent4,1001,0005,1005,1002,500F. M. Cravens, vice president5,0001,5006,5006,5002,500C. E. Hougland,secretary-treasurer4,8001,0005,8005,8001 1,875R. F. Hougland, director andwarehouse superintendent3,8003,8003,800$ 21,400$ 9,300$ 30,700$ 30,700$ 9,375On December 6, 1938, the petitioner's board of directors decided that "owing to present market conditions, and business prospects the officers salaries be reduced * * * as follows":D. M. Hougland, president$ 2,500C. E. Hougland, secretary-treasurer2,500L. W. Hougland, director1,800F. M. Cravens, vice president1,500R. F. Hougland, director1,200$ 9,500The following table gives statistics on sweet corn for the*193 State of Indiana published by the United States Department of Agriculture, showing acreage harvested, production, yield per acre, average farm price per season, and number of cases of canned corn packed for the seasons 1922 through 1939.CornAcreageProductionYield perFarmpackedYearharvested(tons) 1acreprice per(in thousands(tons)tonofcases) 2192213,73034,3002.50$ 10.00665192319,67047,2002.4011.001,208192421,00035,7001.7014.74846192536,99088,8002.4014.832,223192630,38088,1002.9010.182,044192717,01023,8001.4010.41703192827,39038,3001.4013.001,131192938,50050,0001.3013.001,250193043,50056,6001.3013.201,272193142,00092,4002.2011.002,362193222,00050,6002.307.201,139193326,60034,6001.307.80838193438,50050,0001.308.301,037193549,70084,5001.709.302,310193644,00039,6000.909.50831193751,400107,9002.1012.802,231193842,40072,1001.7010.601,681193935,00073,5002.108.401,852Averages1922-193933,32159,3331.8310.851,4231936-193943,20073,2751.7010.321,649*194  Sources: United States Department of Agriculture, "Yearbooks" and "Agricultural Statistics."*529  The following table gives statistics on tomatoes for the State of Indiana, published by the United States Department of Agriculture, showing acreage harvested for processing, production, yield per acre, average farm price for season, and number of cases of canned tomatoes and tomato juice packed in the years 1922 through 1939:TomatoesTomatocanned 1juice 4 (inProductionYield perPrice per(in thousandsthousandsSeasonAcreage(tons)acretonofof cases)cases)(1)(2)(3)(4)(5)(6)192253,240308,8005.8$ 10.482 1,939192354,000156,6002.910.312 1,224192459,000200,6003.412.411,792192572,000324,0004.512.793,337192649,990175,0003.512.601,536192742,990163,4003.813.061,931192849,870149,6003.012.901,046192959,840251,3004.213.201,936193079,000395,0005.013.303,463193164,000192,0003.010.002,0345193262,000248,0004.08.103 2,7505193353,000212,0004.09.602,8761,138193483,000315,4003.89.803,4871,664193597,300321,1003.310.603,5872,281193692,000358,8003.911.603,0102,867193780,700427,7005.312.603,6422,947193871,200299,9004.211.203,037n5193972,300361,5005.09.903,376n5Averages1922-193966,413270,0384.111.362,5561936-193979,050361,9754.711.323,266*195  Source: United States Department of Agriculture, "Yearbooks" and "Agricultural Statistics."Franklin, Indiana, the site of petitioner's cannery, is located approximately 20 miles south of Indianapolis, Indiana.  Total precipitation at Indianapolis for the years 1922 through 1939, was as follows:YearJan.Feb.Mar.Apr.MayJuneJulyAug.Sept.Oct.Nov.Dec.Annual19221.261.467.168.552.580.992.672.451.521.782.324.4537.1919232.731.704.411.945.862.302.434.833.913.292.045.6041.0419243.131.444.723.284.474.041.754.772.800.791.755.5338.4719250.491.642.871.980.944.704.673.825.964.165.131.0937.4519262.722.753.123.913.591.283.784.979.332.681.671.9541.7519273.152.366.325.165.621.243.482.642.702.014.692.9942.3619281.743.442.442.763.048.773.073.810.922.933.662.1938.7719294.741.473.244.288.465.365.442.492.033.662.154.1447.4619307.342.761.804.051.691.550.902.082.861.772.060.8029.6619310.541.762.323.582.512.202.954.703.663.753.384.4135.7619326.101.471.962.770.605.942.863.177.183.252.694.7042.6919332.021.906.204.167.102.505.851.975.271.281.162.1741.5819341.250.863.322.230.602.982.502.494.540.192.141.8724.9719352.330.203.491.546.974.663.164.993.981.013.561.8437.7319361.323.212.133.891.482.910.672.494.303.294.583.2033.4719378.051.681.474.271.583.695.373.463.285.591.943.7744.1519381.002.527.933.245.146.497.152.531.741.063.031.4643.2919395.332.973.035.740.885.677.202.911.172.931.151.1340.11*196 *530   Petitioner is entitled to compute its excess profits credit in accordance with the provisions of either section 713 or section 714 of the 1939 Internal Revenue Code and to use whichever amount results in the lesser excess profits tax, as provided by section 712 (a).  The method which results in the lesser excess profits tax for each of the taxable years ended June 30, 1941 through 1946, is the invested capital method described in section 714.  Petitioner's excess profits credit computed under the invested capital method is as follows:Excess profits credit underYear ended June 30the invested capital method1940 1$ 20,948.101941   17,602.911942   18,371.611943   19,257.881944   24,436.971945   27,565.291946   28,415.84Petitioner's excess profits net income for each of the taxable years ended June 30, 1940 through 1946, is as follows:Excess profits net incomeIncome creditInvested capitalYear ended June 30methodmethod1940 12 $ 286.842 $ 1,035.62194119,231.4019,975.30194265,159.6265,566.841943124,772.75125,017.39194465,055.3565,917.35194536,989.5838,704.73194650,569.3051,945.49*197 Petitioner's excess profits tax liability as finally determined by respondent without benefit of section 722, the amount deferred by reason of section 710 (a) (5) of the 1939 Internal Revenue Code, the amount of credit allowed under section 784, and the excess profits tax previously assessed for each of the taxable years ended June 30, 1940 to 1946, inclusive, are as follows: *531 Excess profitstax finallyAmount deferred10 per centExcess profitsYear endeddeterminedundercredit undertax previouslyJune 30without benefit ofsec. 710 (a) (5)sec. 784assessedsec. 7221940 12 NoneNoneNoneNone19412 NoneNoneNoneNone1942$ 13,074.57NoneNone$ 13,074.57194390,683.56$ 27,296.58None63,386.98194431,377.355,446.94None25,930.4119451,082.47$ 108.25974.2219466,479.40647.945,831.46*198  Petitioner filed timely claims for relief under section 722 of the 1939 Internal Revenue Code for the taxable years ended June 30, 1942, 1943, 1944, 1945, and 1946.  Respondent, by statutory notice dated April 11, 1952, notified petitioner that the claims were disallowed in full and that there were deficiencies in excess profits tax resulting from petitioner's deferment of a part of its excess profits tax under section 710 (a) (5) of the 1939 Internal Revenue Code for the taxable years ended June 30, 1943 and 1944.OPINION.Petitioner was engaged in the business of canning corn and tomatoes during the years here involved.  Petitioner seeks relief from excess profits tax for the years ended June 30, 1942, 1943, 1944, 1945, and 1946, under section 722 (b) (1), (b) (2), (b) (3), and (b) (5).  1 It is the argument of the petitioner that drought conditions *532  in 1936 and an overproduction of corn and tomatoes in 1937 caused lower earnings during the base period years.  To obtain relief petitioner must connect these events with its own net income for the base period years.  It must show that its average base period net income is an inadequate standard of normal earnings because *199  of one or more of the factors mentioned in the sections relied upon for relief.  A. B. Frank Co., 174">19 T. C. 174, affd.  211 F. 2d 497; Trunz, Inc., 15 T.C. 99">15 T. C. 99. The causal relationship cannot be left entirely to surmise.  A. B. Frank Co., supra.*200  Petitioner in its short brief has largely ignored these problems.  Although section 722 (b) (1), (b) (2), (b) (3), and (b) (5) are mentioned, there is no serious effort by the petitioner, apart from a recitation of some of the statutory language, to develop arguments under each of these sections.  It appears, however, that petitioner's emphasis is on section 722 (b) (1) and (b) (2), and consequently we shall first examine its claim for relief in the light of these sections.Petitioner relies upon the alleged drought in 1936 and the overproduction of corn and tomatoes in 1937 as factors qualifying it for relief.  Total precipitation, in inches, at Indianapolis, approximately 20 miles from petitioner's cannery, for the years 1936, 1937, 1938, and 1939 was 33.47, 44.15, 43.29, and 40.11, respectively.  Over the longer period 1923 to 1939 the average precipitation in this area was 38.87 inches.  We are not convinced that a variation of this degree in the precipitation for 1936 from the average precipitation over the longer period qualifies as an event "unusual and peculiar" in the experience of the petitioner.  Nor are we persuaded that the overproduction of corn and tomatoes in 1937 *201  was such a qualifying event within the meaning of section 722 (b) (1).  We have difficulty determining just what petitioner is arguing, but if it is actually arguing that the overproduction of corn and tomatoes in 1937 brings it within section 722 (b) (2), we still do not believe that such overproduction can be regarded as a qualifying factor.  In Industrial Yarn Corporation, 16 T. C. 681, 689, where the taxpayer sought relief under section 722 (b) (2) with the argument that a record cotton crop caused a temporary and unusual depression of prices, this Court said:It is not unusual for a cotton crop to vary in size from year to year.  The fortuitous circumstances that 1937 may have produced a cotton crop of extraordinary size does not, of itself, create an abnormality in petitioner's business of the character sufficient to bring petitioner within the scope of [section 722 (b) (2)] * * *Assuming that the drought condition in 1936 and the overproduction in 1937 were qualifying factors within section 722 (b) (1) and (b) (2) we must still find the causal relationship, if any, between these factors and petitioner's low base period earnings. The average*202 *533  excess profit net income of the petitioner and its predecessor partnership over the base period was $ 7,197.92, while the average over the longer period, 1923 to 1939, inclusive, was $ 31,515.  To make a true comparison of the income of the longer period with that of the base period it is essential to make adjustments to the income of the predecessor partnership in an amount which will approximate the deductions allowed to the petitioner for officers' compensation.  If the income of the predecessor partnership for each of the years 1923 to 1932 is adjusted downward by $ 24,400, which amount represents the officers' compensation allowed to the petitioner in 1933, the average income over the 17-year period becomes $ 21,975.56.  2*203  We have indicated that the petitioner's average excess profits net income for the base period was slightly over $ 7,000.  Petitioner seizes upon this low income figure for the base period, points to an alleged drought in 1936 and to the overproduction of corn and tomatoes in 1937, and without more, reaches the conclusion that it qualifies for relief.  We cannot agree.  Under section 722 (b) (1) it is necessary to show that average base period net income is an inadequate standard of normal earnings because the alleged "unusual and peculiar" events interrupted or diminished the normal operations of the petitioner during one or more of the base years, and under section 722 (b) (2) it is necessary to show that the inadequacy of base period earnings as a standard was because the business of the petitioner was depressed in the base period because of temporary economic circumstances unusual in the case of the petitioner or in the case of an industry to which petitioner belonged.  As this Court pointed out in Harlan Bourbon & Wine Co., 14 T. C. 97, 104, "A mere failure to maintain a given level of earnings does not establish a depression of earnings *204  within the meaning of section 722." We have examined the record and are unable to discover any evidence to support petitioner's arguments that the alleged drought in 1936 and the overproduction in 1937 caused the low earnings during the base period.In the first place, petitioner does not segregate anywhere, by products, the figures for sales or gross profits.  There was testimony that the processing cost differed for corn and tomatoes, with corn being more expensive to process, but we are not told the nature and extent of this difference.  In 1936, when the alleged drought occurred, the tomato crop purchased by petitioner from the contracted acreage was normal, while the corn purchases were substantially lower.  However, without the necessary segregation of profits from each operation, it *534  is impossible to begin to trace the effect of the low corn yield in 1936 on petitioner's profit for the base period. Also, we have examined the evidence and cannot discern any relationship between petitioner's level of production and its annual earnings. In petitioner's and its predecessor's 4 highest years, 1925, 1926, 1935, and 1937, it purchased an annual average of 11,354 tons of *205  corn and tomatoes and showed an annual average of excess profits net income (before deduction for partners' and officers' salaries) in the amount of $ 58,054, while in the 4 years of lowest production, 1923, 1924, 1933, and 1936, it made average annual purchases of corn and tomatoes amounting to 5,272 tons and showed an average annual excess profits net income of $ 60,874.  In the 4 years of its lowest excess profits net income, 1931, 1932, 1938, and 1939, petitioner showed average annual profits of $ 3,540, while the average purchases of corn and tomatoes were 7,809 tons, which amounted to 92 per cent of the average purchases, or production, in the 4 highest years.  Also, it appears that the average sales of $ 333,785 during the base period are not materially different from the average sales made by petitioner and its predecessor during the 17-year period 1923 through 1939, amounting to $ 349,453.  Indeed, the average sales during the base period were slightly higher than the average sales, amounting to $ 332,845, during the 6 years immediately preceding the base period years.In connection with the overproduction of corn and tomatoes in 1937 which petitioner argues had an adverse*206  effect on its base period earnings, there is no evidence enabling us to measure the effect of such overproduction on petitioner's operations.  We recognize that a distortion in inventory carryover from year to year would have its effect on annual earnings, but here again we cannot make the necessary analysis because petitioner's inventories are a conglomeration of labels, cans, boxes, and supplies, as well as canned corn and tomato products.It is not necessary at this time to determine why the earnings of the petitioner were lower in the base years than over the longer period. Trunz, Inc., supra. However, there are indications in the record of some of the reasons for the lower earnings of the petitioner during the base years.  Although gross profits from sales in the base period remained fairly normal, operating expenses showed a marked increase over the long-term period from 1923 to 1939, and petitioner makes no claim that the increased operating expenses were due to the alleged drought conditions in 1936 or to the overproduction of corn and tomatoes in 1938.  Average gross profit on sales for the base period was $ 122,579, and the average gross profit*207  on sales over the long period from 1923 to 1939 was $ 131,463.  During the 6 years preceding the base period the average gross profit from sales was $ 121,606.  The average of the operating expenses of the petitioner over the long period *535  from 1923 to 1939 was $ 100,372, while the average of the operating expenses over the base period was $ 116,574.  During the 6-year period preceding the base period the average operating expenses were $ 93,848.  Some of the averages of individual items of expense which showed marked increases in the base period years over the longer period from 1923 to 1939 were salaries and wages, from $ 37,061 to $ 47,397, taxes, from $ 2,159 to $ 4,338, insurance, from $ 3,470 to $ 4,668, and officers' and partners' compensation, from $ 14,583 to $ 20,069.  Another cause which could conceivably contribute to the lower earnings during the base period is the indication of a declining profit margin in petitioner's operations.  The farm prices of tomatoes and corn in Indiana during the base period were 95 per cent and 99 per cent, respectively, of the average farm prices of these same products during the period 1922 through 1939.  While these farm prices *208  were fairly constant, the average wholesale price of canned corn f. o. b. midwestern canneries during the base period was 86.24 per cent of the average wholesale price from 1922 through 1939, and the average wholesale price of canned tomatoes f. o. b. Indiana during the base period was 79.37 per cent of the average wholesale price during the long period of 1922 through 1939.  It also appears that between the years 1930 and 1934 a change took place in the purchasing practices of petitioner's customers from the method of purchasing futures, in which all purchases were made prior to the canning season, to the spot-buying method whereby purchase and delivery of the canned products were made after the products had been packed. We are not given any information to gauge the effect of these changes on petitioner's operations, yet it is significant that petitioner's sales, which were $ 534,825 in 1934, fell to $ 418,836 in 1935, while the total corn and tomatoes purchased by petitioner rose from 8,647 tons in 1934 to 11,189 in 1935.We hold that petitioner has not established its right to excess profits tax relief under section 722 (b) (1) and (b) (2).Petitioner also claims excess profits*209  tax relief under section 722 (b) (3) (A) and (b) (3) (B), under which it must be shown that "the business of the taxpayer was depressed in the base period by reason of conditions generally prevailing in an industry of which the taxpayer was a member, subjecting such taxpayer to (A) a profits cycle differing materially in length and amplitude from the general business cycle, or (B) sporadic and intermittent periods of high production and profits, and such periods are inadequately represented in the base period." Petitioner has completely failed to carry its burden of proof on this portion of its claim.  We are not given any industry statistics or other evidence which would enable us to determine whether or not there were conditions prevailing in such industry that caused a depression in petitioner's business.  No information is supplied *536  to us concerning profits cycles or sporadic periods of high production and profits.  We hold that petitioner is not entitled to excess profits tax relief under section 722 (b) (3) (A) or (b) (3) (B).Petitioner's claim for relief under section 722 (b) (5) must also be denied since it is not based on "any other factor" than those which are *210  specifically mentioned in section 722 (b) (1), (b) (2), (b) (3) (A), and (b) (3) (B).  Crane Co. of Minnesota, 25 T. C. 727; Gulf Coast Broadcasting Co., 24 T.C. 1094">24 T. C. 1094.We conclude that petitioner has failed to establish that its average base period net income is an inadequate standard of normal earnings because of the reasons explicitly set forth in section 722 (b) (1), (b) (2), (b) (3) (A), (b) (3) (B), and (b) (5), and consequently must deny petitioner's claim for excess profits tax relief under these sections.Reviewed by the Special Division.Decision will be entered for the respondent.  Footnotes1. No. 2's.↩2. No. 303's.↩5. Not available.↩3. $ 14,159.29 of field corn purchased in addition.↩4. Does not include field corn purchases.↩1. None.↩2. Not available.↩1. Net income figures for the predecessor partnership are after↩ deductions for partners' salaries.2. After deducting depreciation of $ 8,992 which was omitted by the petitioner on its return for that year↩1. Depreciation not deducted on return filed by petitioner.↩1. None.↩1. For 9 months.↩1. Tonnage in husk.↩2. Stated in cases of 24 No. 2 cans.↩1. Stated in cases of 24 No. 2 cans; calendar year.↩4. Actual cases.↩2. Estimated from data in terms of cases of 24 No. 3 cans as follows: 1922, 1,312,000 cases; and 1923, 717,000 cases.↩5. Data not available by States.↩3. Data for 1932 not available.  Department of Agriculture estimates 1932 Indiana pack as between 2,500,000 and 3,000,000 cases of 24 No. 2 cans.  Figure used is the average of these figures.↩1. Six months.↩1. Six months.↩2. Under laws applicable to fiscal years ended June 30, 1941 and 1942, for purposes of unused excess profits credit carryover.↩1. Six months.↩2. After benefit of unused excess profits credit carryover from the period ended June 30, 1940, in the amount of $ 9,381.19, applied $ 2,372.39 to the year ended June 30, 1941, and $ 7,008.80 to the year ended June 30, 1942↩1. SEC. 722.  GENERAL RELIEF -- CONSTRUCTIVE AVERAGE BASE PERIOD NET INCOME.(b) Taxpayers Using Average Earnings Method.  -- The tax computed under this subchapter (without the benefit of this section) shall be considered to be excessive and discriminatory in the case of a taxpayer entitled to use the excess profits credit based on income pursuant to section 713, if its average base period net income is an inadequate standard of normal earnings because -- (1) in one or more taxable years in the base period normal production, output, or operation was interrupted or diminished because of the occurrence, either immediately prior to, or during the base period, of events unusual and peculiar in the experience of such taxpayer,(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,(3) the business of the taxpayer was depressed in the base period by reason of conditions generally prevailing in an industry of which the taxpayer was a member, subjecting such taxpayer to (A) a profits cycle differing materially in length and amplitude from the general business cycle, or(B) sporadic and intermittent periods of high production and profits, and such periods are inadequately represented in the base period,* * * *(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.↩2. In determining its net income for the years 1923 to 1932 the predecessor partnership deducted partners' salaries ranging from a low of $ 5,050 in 1923 to a high of $ 10,400 in 1928.  These salary deductions have been eliminated prior to the adjustment of $ 24,400.  It must also be pointed out that, in addition to partners' salaries, there were drawings by the partners which, over the period 1923 to 1932, averaged $ 41,918.↩