17 T.C. 269">*269 In this proceeding the petitioner challenges the Commissioner's denial of its applications for relief with respect to its excess profits taxes for the calendar years 1941 to 1944, inclusive, filed under the provisions of section 22 of the Internal Revenue Code.

17 T.C. 269">*270 FINDINGS OF FACT.

Some of the facts were stipulated, and are incorporated herein by reference.

Petitioner, a corporation organized in 1913 under the laws of Indiana, has its principal place of business in Indianapolis. Its income and excess profits tax returns for the years in controversy were filed with the collector of internal revenue for the district of Indiana.

Petitioner is entitled to use the excess profits credit based on income, pursuant to section 713 of the Internal Revenue Code, but in the years 1943 and 1944 it used the invested capital method because that method allowed petitioner greater credits, without the benefit of section 722 of the Internal Revenue Code. Petitioner's excess profits credits computed without the benefit of section 722 were, under the income1951 U.S. Tax Ct. LEXIS 101">*103 method, $ 71,037.20 for 1941 and $ 77,282.58 for 1942, and, under the invested capital method, $ 109,402.40 for 1943 and $ 82,360.34 for 1944.

The amounts of tax paid by petitioner for each of the years 1941 to 1944, inclusive, based on its returns, as finally adjusted by the Commissioner of Internal Revenue and agreed to by the petitioner, and without the benefit of section 722, were as follows:

The petitioner filed applications for relief under section 722 for the calendar years 1941-1944, inclusive, and thereafter filed claims for refund with respect to those years. The Commissioner determined that petitioner had failed to establish its right to the relief sought and denied the claims for refund.

The petitioner has been engaged since at least 1920 in the buying of live poultry ¹ and eggs from farmer-producers, processing both the poultry and eggs, and marketing the processed products. Since 1921 it has operated six processing plants, three in Illinois (Pana, Paris, and Mattoon) and three in Indiana (Indianapolis, 1951 U.S. Tax Ct. LEXIS 101">*104 Columbus, and Terre Haute). Petitioner procured all its poultry and eggs in Indiana and Illinois, within a radius of forty to fifty miles of each of 17 T.C. 269">*271 its six plants. It did not have any standing arrangement with the farmer either as to production or sale by the farmer, and it determined the price at which it would purchase from the farmer after an analysis of terminal market quotations, supplies, and competitive conditions. Both the prices paid by petitioner and the prices it received might fluctuate from day to day.

Petitioner did not normally sell live poultry. 1951 U.S. Tax Ct. LEXIS 101">*105 It killed and processed the poultry, and shipped it dressed. Ordinarily, the poultry did not remain with petitioner more than several weeks; and except for minor quantities (not exceeding about five per cent of the poultry handled by petitioner), it did not keep poultry in storage. The major source of petitioner's profits from poultry was its dealings in chickens, particularly the larger chickens, roasters. The eggs purchased by petitioner were ungraded. Those that were to be sold in the shell were candled and graded at its plants for quality (the highest grade being denominated as "extras" in the wholesale trade); other eggs were broken, packed in 30-pound cans, and frozen.

Eighty to ninety per cent of the eggs and poultry processed by petitioner were sold, during the base period and prior years, in New York City, Boston, Massachusetts, Newark and Elizabeth, New Jersey, Syracuse, New York, and Philadelphia, Pennsylvania, which are known to petitioner as the eastern market. The prices which petitioner received were based in most instances upon market quotations on the date of arrival. The greatest quantities of eggs were produced and processed between the latter part of February1951 U.S. Tax Ct. LEXIS 101">*106 and the early part of June of each year. The supply of marketable chickens reached its peak during the months of September through December. There was less variation in the movement of fowl during the year.

Petitioner also conducted a creamery business; prior to 1931, it operated two creameries, one in Indianapolis and the other in Terre Haute. In 1931, petitioner transferred its interest in the Terre Haute creamery to a corporation, which had been organized to operate that creamery as well as another creamery not owned by petitioner; in exchange, petitioner received 40 per cent of the stock of the new corporation, and its profits from that portion of its creamery business were thereafter reflected as dividends received.

In the calendar years 1920 to and including 1939 the petitioner had sales, gross profits (sales less direct costs and overhead), and net income before taxes as follows: 17 T.C. 269">*272

The amount of gross profit (sales less direct costs) realized by the various departments of petitioner's business during the years 1924 to 1939, inclusive, was as follows:

The dividends received by the petitioner during the years 1931 to 1939, inclusive, were paid exclusively by the corporation to which it had transferred the Terre Haute creamery.

The founder of petitioner's business was Scott Wadley who, until his death in 1934, was petitioner's president and general manager. The change in management in 1934 brought about by Scott Wadley's death was not responsible for such decline in earnings as may have occurred during the base period, 1936-1939. Neither the type of business done, the method of doing business, nor the policies of petitioner were1951 U.S. Tax Ct. LEXIS 101">*109 substantially changed during any of the years 1936 to and including 1939.

The following table shows the units of poultry and eggs handled by the petitioner, and the average gross profit per pound and per 17 T.C. 269">*273 dozen, respectively, realized by it during the years 1924 to 1939, inclusive:

The following table shows the live cost to petitioner of chickens and fowl (delivered to plant) on the 15th of each month of the years 1936 to 1939, inclusive:

1951 U.S. Tax Ct. LEXIS 101">*110 The following table shows the highest quotation in New York on dressed chickens and fowl on the 15th day of each month of the years 1936 to 1939, inclusive:

17 T.C. 269">*274 The following schedule shows the monthly average of the highest daily New York wholesale prices for fresh killed, western roasters (October to December) and fowl (September to December) for the years1951 U.S. Tax Ct. LEXIS 101">*111 1925 to 1939, inclusive, as well as the spreads between such prices and farm chicken prices in Indiana in those years:

During the 1930's there was a decline in the importance of roasters, which was evidenced by a decline in the over-all production of roasters and the beginning of a swing away from heavy-type chickens to the smaller sizes. The declining importance of roasters was a factor in narrowing the spread between roaster prices in New York and farm chicken prices in Indiana. Another factor was the growing competition from poultry produced in areas nearer New York, particularly Delaware, Maryland, and Virginia, known as the Del-Mar-Va area. Beginning in the mid-1920's there came into being in the Del-Mar-Va region the so-called commercial broiler industry, which, in the mid and late 1930's, became an increasingly significant factor in the entire poultry industry. The term "broiler" in this connection is used loosely, and refers to birds of all sizes raised in the area exclusively for meat purposes, including1951 U.S. Tax Ct. LEXIS 101">*113 birds of the fryer and roaster size. New York was the principal market for broilers produced in the Del-Mar-Va area, and those broilers were generally brought into New York by trucks, predominantly in live form. To the extent that transportation costs were lower by reason of a shorter distance to market, broilers from the Del-Mar-Va region enjoyed a competitive advantage over poultry originating in Indiana or Illinois.

17 T.C. 269">*275 The following schedule shows the receipts of dressed poultry at New York from Indiana, West North Central ² region, and Del-Mar-Va area and percentages of total from all states during the years 1925 to 1939, inclusive:

Live fowl originating in Illinois and Indiana commanded a premium price in the New York market, largely because fowl grown in those two states were of heavier grade and of the barred rock variety which was in demand in the live fowl markets. However, there was nothing unusual or unique about this demand for live fowl originating in Illinois and Indiana during the base period, 1936-1939, 1951 U.S. Tax Ct. LEXIS 101">*115 that did not exist in other years outside the base period. Receipts of live poultry at New York from Indiana and Illinois, as well as from the entire United States, in terms of freight cars unloaded, during the years 1930-1937 were as follows:

The foregoing table does not reflect receipts of poultry by truck in New York, particularly from nearby areas and the Del-Mar-Va region. Beginning in 1934, the demand for live fowl in New York was in part satisfied by the commercial broiler production.

17 T.C. 269">*276 The number of chickens, in millions of head, produced in Indiana and Illinois during the years 1924-1939 is shown in the following table:

1951 U.S. Tax Ct. LEXIS 101">*116 The following table shows chicken and commercial broiler production in the United States, 1920-1939, in millions of pounds:

During the years 1920 to 1939 the amount of poultry in storage steadily increased during the last three or four months of each year and the high point was usually reached in the early part of January. Thereafter there was a steady decline to the low point which was reached and maintained in the months of July, August, and September. The high and low amounts of dressed poultry in storage in the United States during the years 1920 to 1939, inclusive, in millions1951 U.S. Tax Ct. LEXIS 101">*117 of pounds was as follows:

The following schedule shows the New York City wholesale egg prices for extras and producer prices in Indiana during the months 17 T.C. 269">*277 March to June and September to December of the years 1925 to 1939, inclusive:

The petitioner's average base period net income is not an inadequate standard of normal earnings because its business was depressed in the base period because of temporary economic circumstances unusual in the case of the petitioner, or because the industry of which it was a member was depressed by reason of temporary economic events unusual in the case of that industry.

The petitioner's average base period net income is not an inadequate standard of normal earnings because its business was depressed during the base period by reason of conditions generally prevailing in the industry of which it is a member, subjecting the petitioner1951 U.S. Tax Ct. LEXIS 101">*119 to sporadic and intermittent periods of high production and profits, which periods are not adequately represented in the base period.

The petitioner's average base period net income is not an inadequate standard of normal earnings because of any other factor affecting its business, which would afford relief not inconsistent with the principles underlying subsection (b) of section 722 of the Internal Revenue Code.

OPINION.

It is true that petitioner's average base period net income was lower than its average net income for preceding years; but that fact alone does not entitle it to relief under section 722. Trunz, Inc., 15 T.C. 99, 103. It must go further and show that it comes within one of the provisions of section 722, and petitioner does contend that its average base period net income is an inadequate standard of normal earnings by reason of one or more of the factors set 17 T.C. 269">*278 forth in subsections (b) (2), (b) (3) (B), and (b) (5). Pertinent provisions of section 722 are set forth in the margin. ³

1951 U.S. Tax Ct. LEXIS 101">*120 In petitioner's original applications under section 722 it sought relief under (b) (2) and (b) (5); it urged that the "extremely heavy stock of dressed poultry in storage in December, 1936, resulted in a depressed market at the end of 1936 and materially affected the size of the poultry crop produced in 1937, 1938 and to a lesser extent in 1939" and stated that profits in the industry of which it was a member "are governed to a large extent by the crop of chickens raised and marketed each year, and to a lesser extent to [sic] the quality of dressed poultry which is held over in cold storage from one year to the next." In an amended application it also sought relief under subsection (b) (3) (B), stating that the industry of which it was a member was affected by sporadic poultry production by farmers and poultry growers which was characterized by a sharp drop in production after one or two years of increased production, that the general tendency was for its profits to be up in years of increased production and down in years of reduced production, and that the periods of 17 T.C. 269">*279 sporadic profits were inadequately represented in the base period years.

To prevail under section 7221951 U.S. Tax Ct. LEXIS 101">*121 (b) (2) it is incumbent upon petitioner to prove that its business or the business of the industry of which it was a member was depressed during the base period; that the depression of the business was caused by a temporary economic circumstance; and that this circumstance was "unusual in the case of the taxpayer" or of its industry. See Regulations 112, ⁴ sec. 35.722-3; cf. Lamar Creamery Co., 8 T.C. 928, 938.

1951 U.S. Tax Ct. LEXIS 101">*122 Petitioner does not contend that there were any temporary economic circumstances in relation to its non-poultry business that rendered 17 T.C. 269">*280 (b) (2) applicable. It focuses solely upon its operations in poultry as a basis for relief under (b) (2).

However, there is grave doubt upon this record as to the soundness of petitioner's indispensable major premise, namely, that the reduction in its total net earnings during the base period was attributable to a decline in profits in its poultry department during the base period. Thus, although petitioner's average annual net income for the base period ($ 90,192.67) was less than its average annual net income for the 10-year period ending 1939 ($ 99,088.85), ⁵ its average annual gross profits from poultry for the base period ($ 162,736.69) ⁶ was greater than its average annual gross profits from poultry for the same 10-year period ($ 159,043.33). 6

The situation is brought even1951 U.S. Tax Ct. LEXIS 101">*123 more sharply into focus by contrasting two of the base period years, 1937 and 1938, with two earlier years, 1933 and 1934. Petitioner's gross profits from poultry in 1937 and 1938 were $ 165,984.85 and $ 165,099.09, respectively, whereas its gross profits from poultry in 1933 and 1934 were only $ 143,295.70 and $ 155,924.31, respectively. But, in 1933 and 1934, petitioner's total net income ($ 128,983.26 and $ 125,975.33, respectively) was substantially higher than its total net income in 1937 and 1938 ($ 92,792.09 and $ 83,719.52, respectively). ⁷

These facts raise strong doubts whether1951 U.S. Tax Ct. LEXIS 101">*124 the decrease in the base period net income was attributable primarily or even in major part to petitioner's poultry business. The decrease may well have been due to one or more reasons extraneous to the poultry business. Indeed, the evidence suggests that shrinkage of profits in the egg business -- not urged as a basis for relief under section 722 -- contributed in substantial measure to the decline in petitioner's net income. ⁸ For aught we know, other factors, unrelated to the poultry business, may have played a part also in lowering the level of petitioner's income.

1951 U.S. Tax Ct. LEXIS 101">*125 We do not say that no part of the decrease in net earnings was chargeable to petitioner's poultry business. Thus, the year 1939 17 T.C. 269">*281 shows a decline both in petitioner's gross profits from poultry and in its total net income. Undoubtedly, some part of the reduction in petitioner's 1939 net income was attributable to the poultry business. But the base period is not to be divided into separate segments; it is a unitary period, and when that period is taken as a whole we are still left in doubt as to whether the poultry business was responsible for at least a major portion of the decrease in petitioner's net income for the entire period. The burden of proof was on the petitioner, and that burden has not been discharged. Certainly, it has not established, as it must, what adjustments should be made in its earnings by reason of the alleged depression in its poultry business during the base period, in order to arrive at "a fair and just amount representing normal earnings to be used as a constructive average base period net income." Section 722 (a).

Although, for the foregoing reason, we might well conclude this portion of our opinion relating to (b) (2) at this point, we nevertheless1951 U.S. Tax Ct. LEXIS 101">*126 pause to consider petitioner's contention that two temporary and unusual factors depressed its poultry business in the base period, one forcing up its procurement cost and the other depressing the sale price of its product.

It argues that its procurement cost was forced up because live fowl from Indiana and Illinois commanded premium prices in New York and, although petitioner sold its poultry dressed, it was nevertheless compelled to pay higher prices to farmers for its poultry in order to meet the pressure of "live buying" in the Indiana-Illinois area for the New York market. We think that contention must fail, not only because petitioner is precluded from raising the issue, but also because it has not furnished satisfactory proof that its business was in fact depressed to any substantial extent in any of the four base years by reason of such "live buying."

Neither in its original nor in its amended claims for relief under section 722 did petitioner anywhere raise the point or submit facts to establish that its procurement costs were forced up by reason of the "live buying" pressure in the Indiana-Illinois area. In the circumstances, the point is not open to petitioner here. 1951 U.S. Tax Ct. LEXIS 101">*127 As was made clear in Blum Folding Paper Box Co., 4 T.C. 795, 799:

The scheme of the statute is that applications for relief under section 722 are to be presented in full to the Commissioner, who handles them administratively and passes upon them in the first instance in an effort to settle them without suit. This means that the applications must set forth not only the grounds for relief, but also a statement of the facts which the Commissioner is to consider in support of the reasons given. Additions are made by amendments before the claim is acted upon by the Commissioner. The Tax Court merely reviews his final determination. See sec. 732 (a), I. R. C. The taxpayer may not, as here, file a superficial claim, leaving the Commissioner in ignorance of the possible factual support for the claim, and then, after the 17 T.C. 269">*282 resulting disallowance, come forward for the first time with the supporting statement of facts. That information is not a part of the application and consideration of it is beyond the scope of review by the Tax Court.

Cf. Monarch Cap Screw Manufacturing Co., 5 T.C. 1220, 1229.

What was said in1951 U.S. Tax Ct. LEXIS 101">*128 the Blum Folding Paper Box Co. case applies with even greater force here; for petitioner neither presented the facts to the Commissioner in this connection, nor did it even raise the point superficially. It is particularly important in section 722 cases that the issues and facts upon the basis of which petitioner seeks relief be presented in the first instance to the Commissioner. The facts in such cases are likely to be complex, and interaction of elusive economic forces must frequently be taken into account. The Bureau of Internal Revenue is equipped with staffs of investigators and economists, and the statute contemplates that such matters will be considered initially at the administrative level, where they may conceivably be disposed of without the need for litigation.

In any event, we think that petitioner has failed to establish facts in relation to the "live buying" issues that would entitle it to relief. In the first place, the testimony with respect to that issue related almost exclusively to "fowl" rather than to poultry generally. The testimony was that Indiana and Illinois "fowl" commanded premium prices in New York. There was no showing as to what percentage1951 U.S. Tax Ct. LEXIS 101">*129 of petitioner's poultry business involved the purchase and sale of fowl. In fact, it was stated that the major source of its profits from poultry was its dealings in chickens, particularly roasters. To what extent any pressure on the "fowl" market would be felt in the prices to be paid for chickens was a subject on which petitioner presented no evidence. Moreover, whatever may have been the situation in relation to the pressures alleged to have been created by the New York demand for Indiana and Illinois fowl, there would be no basis for relief under subsection (b) (2), because there was nothing "temporary" or unusual about such condition. Witnesses, both for the taxpayer and the Government, were unequivocal in stating that there was nothing unusual about the demand for live poultry during the base period that made it any different from such demand outside the base period. Finally, the evidence is far from clear that petitioner in fact did pay higher prices for its poultry during the base period, and indeed the figures for 1939, petitioner's poorest year, indicate that the prices which it paid were, on the whole, lower than in previous years.

Nor has petitioner proved that there1951 U.S. Tax Ct. LEXIS 101">*130 were any factors in the base period of a temporary or unusual character within the scope of (b) (2) which were responsible for diminution of its earnings from poultry by depressing the prices that it received for its product. The only factor relied upon by petitioner as having a depressing effect upon its selling prices is the high national storage of dressed poultry during 17 T.C. 269">*283 the base years. The evidence indicates that the amount of dressed poultry in storage in the United States during the years 1920 to 1939, inclusive, showed a steady increase during the last three or four months of each year and usually reached the annual high point in the early part of January, then steadily declined to the low point which was reached and maintained in the months of July, August, and September. The only difference in the base period years was that the amount of dressed poultry in storage in 1936 climbed to record proportions in the latter part of that year so that at the beginning of 1937 there were 188,000,000 pounds in storage, which was the highest point reached in any of the years 1920 to 1939, inclusive, and the low point reached in September and October of 1937 was not as low 1951 U.S. Tax Ct. LEXIS 101">*131 as it had been in prior years even though a greater amount was removed from storage during the first 9 months of that year than had been removed in any prior or subsequent year. The high points in January of 1938 and 1939 appear to have been normal when compared to prior years, with the exception of 1937, but the low points in these 2 years were higher than the average of prior years.

We think that the evidence as to storage, even if otherwise within the scope of (b) (2), is far from clear in establishing the reason for any reduction in earnings which petitioner may have suffered. The peak storage year was 1937. Yet petitioner's worst year in the base period in terms of total net income as well as gross income from poultry was 1939. Moreover, even as to 1937, while the New York quotations on dressed chickens and fowl appear to have been generally lower in the months of January to July than they were in the corresponding months of 1936, 1938, and 1939, such quotations from July to December, 1937, particularly toward the end of the year (the period when the greatest amount of chickens are sold) were generally higher than they were in corresponding months of the years 1936, 1938, 1951 U.S. Tax Ct. LEXIS 101">*132 and 1939. In the circumstances, we are unable to find that the storage of dressed poultry during the base period was a substantial factor in any decline of petitioner's earnings due to a reduction in the prices that it obtained for its poultry.

Indeed, the evidence indicates that there were economic forces other than high storage, or removal of large amounts from storage, that exerted pressure toward a reduction in prices and a narrowing of the margin of profit, particularly during the last of the four base years. For example, the late 1930's witnessed the sharply increasing competition from poultry coming into the consuming market from the Del-Mar-Va area. Nothing in the evidence suggests that such condition was temporary; it reflected the normal interplay of economic forces due to the rapid growth of a new and strong competing industry on the east coast, and such competition surely could not qualify as a 17 T.C. 269">*284 "temporary economic circumstance" within the meaning of (b) (2). Cf. Lamar Creamery Co., 8 T.C. 928, 939; Harlan Bourbon & Wine Co., 14 T.C. 97, 104-106. We conclude that petitioner has failed to make out1951 U.S. Tax Ct. LEXIS 101">*133 a case for relief under (b) (2).

Petitioner contends that it is also entitled to relief under the provisions of section 722 (b) (3) (B). ⁹ In its amended application for relief it alleged that the "condition generally prevailing in the industry of which the Wadley Company is a member is that poultry production by farmers and poultry growers is sporadic, having usually a sharp drop in production after one or two years of increased production"; that it is "this sporadic production which is the basic cause of sporadic profits realized by the taxpayer as a processor * * *"; that in view of "the relationship established * * * between production and profits * * * the taxpayer is subjected to sporadic and intermittent periods of high production and profits"; and that "the periods of sporadic profits are inadequately represented in the base period years 1936-1939."

1951 U.S. Tax Ct. LEXIS 101">*134 17 T.C. 269">*285 We think that there has been a complete failure of proof of these allegations. Thus, as shown by the chart, p. 276, supra, there has been remarkably little variation in the production of chickens in the United States during the 20-year period ending 1939. Similarly there has not been any wide variation in the amount of poultry handled by petitioner itself over the years; and to the extent that there was variation it is noteworthy that petitioner handled a greater amount of poultry during the base years than during any other consecutive 4-year period going back to 1924. See chart, p. 273, supra.

Petitioner apparently recognizes its inability to prove that there were sporadic and intermittent periods of high production and profits, and now contends in its brief merely that there were sporadic and intermittent periods of high profits alone that were inadequately represented in the base period. But we cannot eliminate the statutory requirement of "high production." The provisions of (b) (3) (B) are applicable only in the case of "sporadic and intermittent periods of high production and profits." There is no basis whatever for ignoring the "high production" requirement.

1951 U.S. Tax Ct. LEXIS 101">*135 Moreover, even if attention is directed solely to profits, we think that petitioner has not established the existence of sporadic and intermittent periods of high profits that are inadequately represented in the base period. Its net income for 1936, the first year of the base period, was higher than in any other year during the 10-year period ending 1939. It is true that there were several years of considerably higher profits during the 1920's. But we are satisfied that the experience in those boom years was not fairly representative of normal earnings, and unless such peaks as did occur in the 1920's could reasonably be expected to recur they have no place in a reconstruction of base period income on the ground that they are inadequately represented in the base period. And, in view of the diminishing spread between poultry prices in New York and the farm prices in Indiana and Illinois, it is apparent that petitioner was settling down to a lower normal level of profits in the 1930's, so that its experience in several of the boom years in the 1920's would be out of place in determining whether its base period income was depressed in relation to normal earnings.

Petitioner's final1951 U.S. Tax Ct. LEXIS 101">*136 contention is that there are other factors affecting its business which may reasonably be considered as resulting in an inadequate standard of normal earnings during the base period within the general provisions of section 722 (b) (5). However, it has presented no facts in support of this claim, and since it has not even identified such "other factors," we must hold that it is not entitled to relief under section 722 (b) (5).

Decision will be entered for the respondent.