22 T.C. 781">*781 The respondent denied petitioner's applications for relief under section 722 (b) (2), (3), and ( 5) of the Internal Revenue Code for the years 1941 and 1942, and for the refund of excess profits tax paid for the said years of $ 5,217.46 and $ 38,756.65. At the trial herein, the petitioner abandoned its claim under section 722 (b) (3), and on brief, it has made no claim and offered no argument for relief under section 722 (b) (5).

FINDINGS OF FACT.

Some of the facts have been stipulated1954 U.S. Tax Ct. LEXIS 157">*159 and are found as stipulated.

Petitioner is a Texas corporation, with its principal place of business at Amarillo, Texas. It keeps its books and files its Federal tax returns on an accrual basis and by calendar years. It filed its returns and its claims for refund for 1941 and 1942 with the collector of internal revenue for the second district of Texas.

Paragraphs 2 and 3 of the stipulation of facts are as follows:

2. The petitioner was incorporated and began business as a new venture in the year 1906. For the period 1906 through 1942, the business of petitioner consisted of wholesale hardware jobbing and the operation of a retail hardware store at Amarillo, Texas. The wholesale area in which petitioner operated 22 T.C. 781">*782 is commonly designated as the "Panhandle of Texas," the Oklahoma Panhandle, Western Oklahoma and Eastern New Mexico.

3. The "Panhandle of Texas," for the purpose of this stipulation, includes Texas crop reporting District 1-N, the counties of Bailey, Lamb, Cochran, Hockley, Lubbock and Crosby in Texas crop reporting District 1-S, and the counties of Wheeler, Donley, Collingsworth, Hall, Childress, Motley, Cottle, Dickens and King in Texas crop reporting District1954 U.S. Tax Ct. LEXIS 157">*160 2; all of crude oil production district No. 10 and the counties of Cochran, Hockley, Lubbock, Crosby and Dickens in Texas crude oil production district No. 8. ¹

1954 U.S. Tax Ct. LEXIS 157">*161 In 1908 petitioner had a sales territory with a radius of about 100 miles and with Amarillo as its center. This territory was covered by one traveling salesman. In 1915 the sales territory was approximately the same as in 1908, but petitioner may have had two traveling salesmen. The population was very thinly distributed, and outside of the towns serving the area the business was farming and ranching. The towns, in the main, were located 20 to 30 miles apart, and in some counties were even more widely spaced. Except for its retail trade in Amarillo, petitioner's customers were the retail hardware stores in the various towns of its trade territory. The goods sold were general hardware items, farmers' supplies, tools, farm machinery, and windmill supplies.

Up to 1920, petitioner handled the International Harvester line of farm machinery and implements. In that year, its farm machinery business was acquired by the Creekmore Implement Company, a partnership which had been formed by petitioner and L. O. Creekmore on a 50-50 basis. In taking over the farm machinery business of petitioner, the Creekmore Implement Company paid petitioner $ 10,000 or less for its farm machinery inventory. 1954 U.S. Tax Ct. LEXIS 157">*162 The operation of the partnership continued from 1920 to 1950, and during that period petitioner did not sell farm machinery.

Oil was discovered in the Texas Panhandle in 1924, and from 1926 the Panhandle became an important oil and natural gas producing area. The oil has been produced principally, or entirely, in Moore, Hutchinson, Carson, Gray, and Wheeler counties. These counties, with Hartley and Potter, also produce natural gas. Potter, in which Amarillo is located, is bordered on the north and the east by the other counties mentioned. The first field opened was around 22 T.C. 781">*783 Borger, in Hutchinson County. The field around Pampa, in Gray County, to the southeast of Borger, was opened up a year or two later. Borger is to the northeast of and approximately 50 miles from Amarillo. A comparable distance separates Amarillo from Pampa. After oil was discovered, active drilling and the bringing-in of producing oil wells in the Panhandle continued in all of the years here pertinent.

During the period 1933 through 1939, petitioner's trade territory in New Mexico extended as far west as Santa Rosa, which is in a county at least one county removed from the Texas border, and as1954 U.S. Tax Ct. LEXIS 157">*163 far south as Carlsbad. The business of the area was predominantly agriculture and ranching, although there was an oil field at Hobbs, "that was developed about 1926."

In about 1934, petitioner began selling its merchandise in eight additional Texas counties, which are located immediately east and south of certain of the counties named from crop reporting districts 1-S and 2 in the above quoted portion of the stipulation of the parties.

Between 1920 and 1930 the population of the cities of the area ² stipulated as the Panhandle of Texas increased to 365 per cent of the population at 1920, and the total population for the area to 223 per cent. There was little change in the total population as between 1930 and 1940. During that period, however, there was an apparent shift of population from the farm and ranch areas to the towns and cities over 2,500, the population of the cities being increased by substantially the same number as the population of the farm and ranch areas was decreased.

1954 U.S. Tax Ct. LEXIS 157">*164 At 1920, 1930, and 1940, the population of the counties stipulated as the Panhandle of Texas, and as between cities having populations of 2,500 and over, non-farm rural, including the population of towns of less than 2,500, and farms and ranches, was as follows:

22 T.C. 781">*784 In its wholesale business, petitioner in 1933 had nine salesmen, seven of these traveled its trade territory, while two served the wholesale customers who came to Amarillo. During the period 1933 to 1939, another such salesman was added. These salesmen called on hardware dealers in the various cities and towns in the trade territory and sold a general line of hardware items. One salesman spent one-half of his time serving the hardware dealers in Amarillo, while another similarly spent one-half of his time in Lubbock. Usually a town with a population of less than1954 U.S. Tax Ct. LEXIS 157">*165 500 did not have a retail hardware store. In such towns hardware was handled by the general store. In the larger towns and cities there were usually one or more retail hardware stores.

The line of merchandise sold by petitioner included windmills, pipe, casing, tools, spades, shovels, bolts, iron, steel, barbwire, nails, hammers, saws, planes, builders' hardware, iron and aluminum cooking utensils, and water heaters. It did not carry crockery, but did carry a small amount of plain white dinner ware. It did not carry electric lighting fixtures or equipment, but did carry electrical wiring devices, such as rubber covered wire and attachments and plug caps. It did not carry refrigerators or sewing machines.

Petitioner did not handle oil field equipment, such as oil well casing, big pipe, drilling rigs, or the like, but beginning in about 1934, it employed an "industrial salesman," who thereafter devoted his full time to the selling of hardware to oil companies and other industrial establishments in petitioner's trade territory. As examples, the oil companies bought such items as water heaters for their housing properties and various types of construction supplies for maintaining1954 U.S. Tax Ct. LEXIS 157">*166 their camps. The "industrial salesman" sold the same general line of hardware as petitioner's other salesmen, but his sales were to the "industrial type of outlet," as contrasted with retail hardware dealers. The petitioner did not, however, undertake to sell its goods directly to the oil companies operating in the oil field at Hobbs, New Mexico.

In most of the counties in which petitioner sold its merchandise during the years 1933 through 1939, the business activities were chiefly farming and ranching; and the retail stores, which were petitioner's wholesale customers in such counties either directly or indirectly drew most of their customers from the farm and ranch trade. Exceptions were Hutchinson, Moore, Potter, and Gray counties, where approximately 50 per cent of the customers of petitioner's wholesale customers were directly or indirectly from the farm and ranch trade and the remaining 50 per cent from other businesses and lines of endeavor, and Wheeler and Lubbock counties, were such customers 22 T.C. 781">*785 from other lines of endeavor, although substantial, were less, percentage-wise, than those from the farm and ranch trade. ³

1954 U.S. Tax Ct. LEXIS 157">*167 At 1920, 1930, and 1940, the population of the oil producing counties of Gray, Hutchinson, Moore, and Wheeler, and of Potter and Lubbock, in which the two largest cities of petitioner's trade territory are located, was distributed as follows:

A comparison of the total population of the six counties above, according to the categories and at the years shown, 1954 U.S. Tax Ct. LEXIS 157">*168 with the total population of the counties stipulated as the Panhandle of Texas is as follows:

During the period from 1933 to 1939, various chain stores, such as Western Auto Supply, Firestone, and Sears, Roebuck & Company, established branches in petitioner's trade territory. These stores sold various items of hardware in competition with petitioner, but the lines of hardware carried by them were much more limited than a general line of hardware such as was carried and sold1954 U.S. Tax Ct. LEXIS 157">*169 by petitioner.

22 T.C. 781">*786 The principal items produced for market on the farms and ranches were wheat, cotton, and cattle. Very little, if any, cotton was produced in the northern part of petitioner's trade territory, but there was substantial cotton production in the southern portion.

The climate of petitioner's trade territory is comparatively dry, and there are strong winds beginning late in the winter and running usually through the spring season of the year. Periodic droughts are not unusual and sandstorms are fairly common. For the State of Texas, which includes the major portion of petitioner's trade area, the average annual rainfall for the years 1892 to 1942, inclusive, was 30.57 inches. In only eight of those years did the average drop below 25 inches and in only two "5-year moving average" periods did the average drop below 27 inches. In contrast, the average annual rainfall for the counties which form the major part of petitioner's trade territory and stipulated herein as the Panhandle of Texas, for the years 1915 to 1942, inclusive, was 21.15 inches, and for Amarillo an average rainfall of 20.8 to 21 inches is normal.

Most of the farming in petitioner's trade territory1954 U.S. Tax Ct. LEXIS 157">*170 was what is sometimes referred to as dry farming, as distinguished from irrigated farming. The irrigated farming, in the main, was around Roswell, Carlsbad, Portales, and in a limited area of what is known as Pecos Valley, in the southern portion of eastern New Mexico. There was some irrigation during the period 1936 to 1939 in the Lubbock area.

Most of the wheat grown in the area is winter wheat. Winter wheat is seeded in the fall of the year and used for grazing purposes during the winter. In the growing of wheat in the area herein, it is not enough that the annual rainfall merely be normal in amount. Ill-timed rainfall, even though normal, will not produce a normal crop. Sufficient rainfall must "be obtained either within the preparatory period, mainly, with a minimum amount in the growing period, or vice versa." In an area with a normal rainfall of 21 inches, a loss of more than 4 inches in 2 successive years would be damaging and "would be felt in the results on the subsequent crop, as a general rule." It is the usual thing for a wheat farmer in the Panhandle to harvest fewer acres of wheat than were seeded by him.

For the years 1929 through 1939, there was a dearth of 1954 U.S. Tax Ct. LEXIS 157">*171 rainfall in the counties stipulated as the Panhandle of Texas to an extent which was unusual. In 10 of the 11 years, the rainfall was below normal, 7 being the successive years of 1933 through 1939. For those years the annual rainfall ranged from a low of 13.73 inches, for 1933, to highs of 18.76 and 18.9 inches, for 1936 and 1937.

22 T.C. 781">*787 The yearly average precipitation for the counties stipulated as the Panhandle of Texas for the years 1915 to 1942, inclusive, was as follows:

Due to insufficient or ill-timed rainfall, or both, there were successive crop failures in 1933, 1934, and 1935 on a considerable acreage of the land in the wheat growing area of the Panhandle and eastern New Mexico. That is not to say that all crops failed, but there was such widespread crop1954 U.S. Tax Ct. LEXIS 157">*172 failure as to leave much of the land bare of vegetation and of any residue of previous crops, thus making the soil readily susceptible of wind erosion. With the land in such a state, the wind, not necessarily of high velocity, would fill the air with dust to a height of some 5,000 to 10,000 feet, and carry it across the country for great distances. The frequency and severity of these dust storms during the 1930's caused the Texas Panhandle, northern New Mexico, southeastern Colorado, southwestern Kansas, and the Oklahoma Panhandle to be referred to as the Dust Bowl. As distinguished from the familiar and common sand storms, these dust storms were a new and unusual phenomenon for the area.

The dust storms reached their peak in intensity in 1937, when the largest number of regional type or wide scale dust storms occurred and were felt over the Texas Panhandle and the adjacent States. When the blowing of dust was sufficient to affect aviation, by reducing visibility to 6 miles, it was recognized by the Weather Bureau as a dust storm. From the agriculturalist's standpoint, a dust storm was regarded as serious when its density was such as to reduce visibility to 1 mile or less. When1954 U.S. Tax Ct. LEXIS 157">*173 they were milder than that they were not listed as dust storms by the Department of Agriculture, unless they were regional in character, namely, such as to carry the dust a distance 22 T.C. 781">*788 of 100 miles or more on a given day. The Department of Agriculture listed the number of such dust storms as follows:

The dust storms damaged the land by blowing the soil from some areas, while in other areas crops and grasslands were damaged by the settling of the dust upon them. It is possible, however, that the blowing of the dust did more damage to the public health, highways, railroads, machinery, window curtains, and the like, than to the soil resources.

By 1930, more land was in cultivation in the Dust Bowl area than ever before. The largest breaking-out of new land had been in the late 1920's, and along "the western side of the plains," covering parts of Texas, Oklahoma, and New Mexico, "proportionately large areas of low grade land" had been included in the "plow-up." When under cultivation, it is impossible to control the blowing of dust from such low grade or marginal lands and it was such land that suffered1954 U.S. Tax Ct. LEXIS 157">*174 the most damage from soil erosion in the 1930's.

Many of the settlers were new to the area, and aside from the improper selection of land for farming purposes, poor farming methods and crop practices contributed to the dust storms. They had not learned to deal with the problems that arose by reason of the fluctuation in seasonal conditions.

In some parts of the Dust Bowl considerable acreage was abandoned. This abandonment was due, in part, to actual land damage and, in part, to fright and financial disaster which farmers had suffered as the result of the overlapping of low prices during the depression and the unfavorable natural conditions. Approximately 60 per cent of the abandonment was due to fright, rather than to land damage. The acreage abandoned varied widely from county to county, being as high as 30 per cent of the land under cultivation in some counties and a fraction of 1 per cent in others.

The United States Department of Agriculture took its first steps in combating dust storms in 1934, by conducting experimental work on a 25,000-acre tract of land in the vicinity of Dalhart, in the extreme northwestern corner of the Texas Panhandle. It experimented with methods1954 U.S. Tax Ct. LEXIS 157">*175 of preventing wind erosion and of reclaiming land which had been eroded. Working on the program were the State Experimental Stations, the United States Soil Conservation Service, the Farm Security Administration, and the Extension Services. Appreciable and substantial results began to be achieved about 1938 or 1939. The beginning 22 T.C. 781">*789 of dust control is a better selection of land for cultivation. Thereafter, the factors to be considered are water or rainfall, farming methods, and crop management practices. By employing proper farming practices, it is possible to have a drought and not have a "dust condition."

The entire Texas Panhandle was not affected in the same way. Crop reporting district 1-N consists of 23 counties in the northwestern corner of the counties stipulated as the Panhandle of Texas, and in the counties in the eastern and southern portions of that district the drought conditions were not severe enough to expose the land to dust blowing. They were affected to some undisclosed extent by the deposit of soil blown from other counties.

In 1933 Congress created the Production Credit Corporation, which in turn set up Production Credit Associations in various parts1954 U.S. Tax Ct. LEXIS 157">*176 of the United States. One was set up in Amarillo. The associations made loans to farmers and livestock men to finance the production of crops and livestock. Crops, cattle, and other available items were used as collateral. When a crop was sold the money was turned in to the association, to apply on the loan. If the crop proceeds were insufficient to satisfy the loan in full, the balance of the loan was carried to the due date and the farmer was allowed additional amounts for living expenses. At the due date, the amount needed for the making of a new crop was estimated and papers were signed to cover the old balance, plus the added amount for the new crop. The farmer, however, did not receive the amount set up to cover the new crop until it was needed. The Production Credit Associations did not make loans for construction of improvements or for repairs.

In addition to the Production Credit Association loans, the Government also made emergency feed and seed loans. These loans were unsecured. Many such loans were later collected through the Production Credit Associations.

Very few, if any, of the Production Credit Association or emergency feed and seed loans in petitioner's1954 U.S. Tax Ct. LEXIS 157">*177 trade territory were current during the period 1933 through 1939.

In addition to the above, various other subsidy or relief payments were made to the farmers in the Texas Panhandle area during the 1930's and through 1939. Substantial amounts were paid through the Soil Conservation Service; and during the years 1936 through 1939, substantial acreage of seeded wheat was plowed up under a Government agricultural program, and the farmers were compensated therefor.

In the counties comprising crop reporting district 1-N, "Federal aid per capita, by average of counties, was $ 255, 1933-36, except for 22 T.C. 781">*790 Gray, Hutchinson, and Potter counties, which are the three most populous counties in the district and are producers of oil or gas." The Federal aid for the same period in Potter County was $ 72 per capita. ⁴

1954 U.S. Tax Ct. LEXIS 157">*178 The acres of wheat seeded, the acres harvested, yield per seeded acre, yield per harvested acre, and total yield in bushels for crop reporting district 1-N and for the State of Texas, for the years 1927 through 1939, were as follows:

The small wheat yield for 1936 through 1939 was not primarily due to the dust storms, but to insufficient and ill-timed rainfall.

The major portion of cotton produced in petitioner's trade area was in counties of crop reporting districts 2 and 1-S. The cotton production for district 1-N, as to acreage in cultivation, yield per 22 T.C. 781">*791 acre, and production in bales of 500 pounds gross weight, for the years 1928 through 1939, were as follows:

During the years 1927 to 1939, inclusive, the farm products in thousands of dollars, by various categories and the total thereof, 1954 U.S. Tax Ct. LEXIS 157">*180 produced in crop reporting districts 1-N, 1-S, and 2 in the State of Texas, were as follows:

1954 U.S. Tax Ct. LEXIS 157">*181 Note: In addition to the counties in crop reporting district 1-N, petitioner's trade territory covered approximately one-half of the counties in districts 1-S and 2.

22 T.C. 781">*792 The cash farm income, including Government payments and estimated value of products consumed on farms in crop reporting district 1-N, and the indexes of farm income for that area, for eight drought States and for the United States, as a whole, for the years 1927 to 1939, inclusive, were as follows:

1954 U.S. Tax Ct. LEXIS 157">*182 The oil and gas wells completed, the crude oil and gas produced and the average prices therefor in the counties stipulated as the Panhandle of Texas, for the years 1924 through 1939, were as follows:

The value of the mineral production in crude oil production district No. 10, all of which was in petitioner's trade territory, for the years 1929 to 1939, inclusive, was as follows: 22 T.C. 781">*793

Petitioner's sales, gross profits, other income, combined gross profits and other income, expenses, and net profit for the years 1915 to 1939, inclusive, were as follows:

22 T.C. 781">*794 For consecutive 4-year periods, petitioner's total sales for 1915 through 1939, and its wholesale sales for 1924 through 1939 were 1954 U.S. Tax Ct. LEXIS 157">*185 as follows:

During the period 1905 through 1915 the percentage of petitioner's retail sales to its total sales ranged from 17 1/2 per cent to 20 per cent. After 1915, the ratio gradually decreased. The petitioner's retail sales and ratio of retail sales to total sales for the years 1924 through 1939 were as follows:

1954 U.S. Tax Ct. LEXIS 157">*186 The percentage of petitioner's gross profits to sales and the percentage of its net profits to sales for the years 1915 through 1939 were as follows: 22 T.C. 781">*795

The items of other income received by petitioner consisted of interest, partnership income, discount, capital gain, rent, bad debt recoveries, and dividends, with losses in negligible amounts for most years from the sale of depreciable assets. ⁵

1954 U.S. Tax Ct. LEXIS 157">*187 Interest ranged from a high of $ 8,043.47 in 1932, to a low of $ 2,459.94 in 1939. The average for the years 1922 to 1930, inclusive, was $ 4,377.06; for 1922 to 1939, inclusive, $ 4,814.35; and for the base period, $ 3,792.79.

Partnership income was very erratic. The high was $ 13,267.77 for 1929, as compared with $ 7,426.83 for the preceding year and $ 2,403.38 for the year following. Losses of $ 15,432.79 and $ 74.97 were reported for 1932 and 1933, and no amount was shown for 1923. The average for the years 1922 to 1930, inclusive, was $ 4,379.10; for 1922 to 1939, inclusive, was $ 1,776.22; and for the base period, $ 1,815.73.

Income from discounts ranged from a high of $ 8,139.35 for 1926, to a low of $ 850.63 for 1933. In all years from 1922 to 1930 discount was in excess of that for the best of the base period years. The average for the years 1922 to 1930, inclusive, was $ 4,788.07; for 1922 to 1939, inclusive, $ 3,173.91; and for the base period, $ 1,766.39.

22 T.C. 781">*796 The capital gain realized for the entire period was only $ 6,232.43 and substantially all of it was realized in 1924, 1925, and 1939, the other gain years being 1926 and 1927, when the amounts were $ 338.291954 U.S. Tax Ct. LEXIS 157">*188 and $ 27.90. Capital losses of $ 2,000 and $ 185.06 were sustained in 1933 and 1937.

Rental income ranged from a high of $ 1,709.50 for 1927, to a low of $ 127.51 for 1931. The second highest amount was $ 1,388.16 in 1937. The average for the years 1922 to 1930, inclusive, was $ 743.87; for 1922 to 1939, inclusive, $ 633.73; and for the base period, $ 802.06.

Dividends were limited to the period 1933 through 1939. The aggregate amount was $ 8,292.35, of which $ 3,964 was received in 1936 and $ 4,190 in 1937. In each of the other years the amount received was $ 40 or less.

The petitioner's bad debt recoveries for the years 1920 to 1939, inclusive, and its bad debt losses for the years 1915 through 1939 were as follows:

1954 U.S. Tax Ct. LEXIS 157">*189 For the years 1915 to 1939, inclusive, petitioner's expenditures for officers' salaries, taxes, depreciation, general expense, and salaries and wages were as follows: 22 T.C. 781">*797

Other items listed among expenses were rent, interest, catalogue expense, charitable contributions, insurance, advertising, and miscellaneous. The total charitable contributions were $ 36 for 1937 and $ 38 for 1938. Miscellaneous consisted of only one item of $ 157.17 for 1937.

Rent was paid or incurred for the year 1922 and for the years 1927 through 1938, ranging from a low of $ 100 for 1931, to a high of $ 969.60 for 1937. The average for the years 1922 to 1930, inclusive, was $ 151.33; for 1922 to 1939, inclusive, $ 202.83; and for the base period, $ 378.46.

Interest was paid or incurred for all years for the period 1922 to 1939, inclusive, except 1935, 1936, and 1939. For the years in which paid or incurred, the low was $ 13.58 for 1932; the high, $ 1,245.13, for 1926. The average for the years 1922 to 1930, inclusive, was 1954 U.S. Tax Ct. LEXIS 157">*191 $ 497.96; for 1922 to 1939, inclusive, $ 307.50; and for the base period, $ 143.28.

22 T.C. 781">*798 Catalogue expense was paid or incurred only in the years 1927, 1928, 1936, 1937, and 1939. The total amount expended was $ 21,205.79, of which $ 12,912.27 was in the base period years.

The insurance costs for the years 1917 through 1939 were, as a whole, fairly uniform. The average for the years 1922 to 1930, inclusive, was $ 2,497.95; for 1922 to 1939, inclusive, $ 2,314.34; and for the base period, $ 2,170.65. The years of highest expenditure were 1926, 1927, 1928, and 1929, when the costs were $ 2,944.66, $ 3,257.01, $ 3,171.81, and $ 3,603.54, and the lowest 1922, 1925, 1935, and 1937, when the costs were $ 1,573.16, $ 1,563.76, $ 1,887.51, and $ 1,861.55.

Advertising costs for the years 1922 through 1939 were likewise fairly uniform. Except for 1926, 1927, 1936, and 1939, when they were $ 1,630.15, $ 1,834.20, $ 1,628.62, and $ 1,678.47, and for 1932, 1934, and 1935, when they were $ 805.42, $ 1,084.93, and $ 960.01, the annual costs ranged from $ 1,153.71 to $ 1,576.58. The average for the years 1922 to 1930, inclusive, was $ 1,507.57; for 1922 to 1939, inclusive, $ 1,373.23; and1954 U.S. Tax Ct. LEXIS 157">*192 for the base period, $ 1,452.79.

The gross income, net income, net income plus tax-exempt income, net income plus interest paid, and the ratio of net income to gross income for all corporations for the years 1916 to 1939, inclusive, were as follows:

1954 U.S. Tax Ct. LEXIS 157">*193 With 1922-1939 equaling 100, a comparison of the net income of the petitioner with the net income of all corporations for 1915 through 1939, by index number, is as follows: 22 T.C. 781">*799

The period from 1915 to 1922 was a highly abnormal, erratic period, by reason of factors relating to World War I, such as increase in the amount of cultivated farmland, demand for production of war munitions, decrease in residential construction, and increase in other forms of construction. After the armistice, in 1918, there were other disturbing factors, such1954 U.S. Tax Ct. LEXIS 157">*194 as absorption of returning military personnel and large Government loans abroad. Prices were distorted, rising from 1913 to a peak around 1920 at a much more rapid rate than over the preceding 20 years. This period has been referred to by economists as an interregnum, or a period of derangement.

In its excess profits tax return for 1940, petitioner computed its excess profits credit at $ 37,283.63, on the basis of invested capital. It reported $ 33,159.18 as its average base period net income. In its excess profits tax return for 1941, petitioner computed its excess profits credit at $ 40,193.57, on the basis of invested capital. It reported its average base period net income as $ 38,571.90. On its excess profits tax return for 1942, petitioner reported its average base period net income as $ 39,147.48 and its excess profits credit based thereon as $ 37,190.11. Its excess profits credit, based on invested capital, for 1942 was shown as $ 36,434.54.

For the years 1941 and 1942, the petitioner filed timely claims for relief under section 722 (b) (2), (3), and ( 5) of the Internal Revenue Code and claims for refund of $ 5,217.46 in excess profits tax for 1941 and of $ 38,756.651954 U.S. Tax Ct. LEXIS 157">*195 for 1942. In both claims for relief, it reported its 22 T.C. 781">*800 average base period net income, determined without regard to section 722, to be $ 39,147.48. As constructive average base period net income for each year, it claimed $ 79,926.97.

The respondent denied petitioner's claims for relief and refund for the years 1941 and 1942, and, as finally determined by him, computed petitioner's average base period net income as follows:

Because of the prolonged drought of the 1930's and the resulting crop failures and dust storms, petitioner's business and its net profits therefrom were depressed in the base period, and to the extent that its net profits were so depressed, they constituted an inadequate standard of normal earnings. Absent 1954 U.S. Tax Ct. LEXIS 157">*196 the drought and its consequences, petitioner's average base period sales would have been greater by $ 25,000 than they were and the net profits it would have realized on such added sales would have averaged $ 1,315.

A fair and just amount to be used as petitioner's constructive average base period net income is $ 40,462.48.

OPINION.

By section 722 (a) of the Internal Revenue Code, ⁶ it is provided that if a taxpayer establishes that its excess profits tax, computed without the benefit of section 722, is excessive and discriminatory, and also establishes "what would be a fair and just amount representing normal earnings to be used as a constructive average base period net income for the purposes of an excess profits tax based upon a comparison of normal earnings and earnings during an excess profits tax period, the tax shall be determined by using such constructive average base period net income in lieu of the average base period net income otherwise determined" under the statute. By section 722 (b) (2) of the Code, 6 it is provided that if the business of a taxpayer entitled 22 T.C. 781">*801 to use the excess profits credit based on income pursuant to section 713 was depressed in the base1954 U.S. Tax Ct. LEXIS 157">*197 period because of temporary economic circumstances unusual to it, then its excess profits tax, computed without the benefit of section 722, "shall be considered to be excessive and discriminatory * * * if its average base period net income is an inadequate standard of normal earnings."

1954 U.S. Tax Ct. LEXIS 157">*198 It is the claim of the petitioner that, by reason of prolonged drought and dust storms, unusual in its trade area, its business was depressed during the base period, and as a consequence, its average base period net income was an inadequate standard of normal earnings within the meaning of section 722 (b) (2). It further claims that its average net earnings for the period 1915 to 1933, inclusive, is a fair and just amount to be used as its constructive average base period net income for the purposes herein.

It is the position of the respondent that dust storms and drought are not unusual in petitioner's trade territory, that they did not therefore constitute temporary economic circumstances unusual in the case of petitioner, within the meaning of section 722 (b) (2), that the evidence does not show that petitioner's business was depressed in the base period, and that its average base period net income is a fair and proper standard of normal earnings.

We have heretofore held that where a prolonged drought and resulting crop failures adversely affected a taxpayer's base period earnings to such an extent that the average of such earnings was an inadequate standard of normal earnings, 1954 U.S. Tax Ct. LEXIS 157">*199 such taxpayer qualifies, under section 722 (b) (2), for such section 722 relief as may result from the determination of its excess profits tax by using the "constructive average base period net income" as established by the evidence, in lieu of the "average base period net income otherwise determined" under the 22 T.C. 781">*802 statute. S. N. Wolbach Sons, Inc., 22 T.C. 152. Cf. A. B. Frank Co., 19 T.C. 174. That there was a prolonged drought, with resulting crop failures and dust storms, which were unusual in duration and effect in petitioner's trade territory, is definitely and clearly shown by the evidence, and we are thus brought to the question whether the petitioner's business in the base period was depressed thereby and to such an extent that its average net income for the base period years was an inadequate standard of normal earnings, for the purposes of section 722.

As demonstrating that its business was depressed because of the drought and dust storms and that its average base period net income was accordingly an inadequate standard of normal earnings, petitioner, on brief, sums up its argument as follows:

The drought1954 U.S. Tax Ct. LEXIS 157">*200 and dust storms experienced in petitioner's trade territory during the years 1933 through 1939 curtailed agricultural production; the total annual cash farm income in said territory was seriously depressed; the income of petitioner was dependent upon agricultural production and income; the depression of agricultural production and income depressed petitioner's income, * * *

While we find no fault with the stated syllogism, as such, the question for decision is not, on the record here, readily or reasonably susceptible of such simplification or disposition. In the first place, the income of petitioner was only partially dependent upon agriculture, and we are not advised whether that dependency, dollar- or profit-wise, was major or minor. In the second place, the volume of business done by petitioner during the base period was higher than for any prior 4 consecutive years as far back as 1915, except the period 1926 to 1929, inclusive, and with respect to that period, it is to be noted that oil had been discovered in petitioner's trade territory in 1924, and 1926, for practical purposes, marked the beginning of oil and gas production on a substantial scale; and further, that in 19261954 U.S. Tax Ct. LEXIS 157">*201 petitioner's retail sales jumped to $ 171,353.65, as compared with $ 83,178.25 for 1925 and $ 89,384.33 for 1927, which were petitioner's years of next highest retail sales volume. ⁷ And while it is true that the percentage of net profits to sales was noticeably less in the base period than for most, if not all, other consecutive 4-year periods, except those covering the depression years of 1930 to 1935, inclusive, the petitioner has not undertaken to point out or demonstrate that its sales prices were ratably lower or that the increased or possibly added cost items, whichever brought about lower net profits for the base period in spite of the higher volume of sales, were attributable to or the result of the drought and dust storms.

22 T.C. 781">*803 The petitioner has shown, however, that for crop reporting1954 U.S. Tax Ct. LEXIS 157">*202 districts 1-N, 1-S, and 2, in which the counties comprising its Texas trade territory were located, the farm income during the base period, though it had recovered to some extent from the depression period, was still substantially lower than it had been in years preceding the depression, and there is also evidence which convinces us that the same was true of counties comprising the Oklahoma Panhandle and that part of petitioner's trade territory which was in northeastern New Mexico. The evidence further shows that in by far the greater portion of petitioner's trade territory the business activities were chiefly farming and ranching, and the retail stores, which were petitioner's customers in such area, drew their customers, directly or indirectly, from the farm and ranch trade; and as to the much smaller geographical area, in which oil and gas was produced, and in the 2 counties in which the 2 largest cities of the area, Amarillo and Lubbock, are located, the respondent has acceded to petitioner's requested finding that 50 per cent or more of the customers of the retail stores, which in turn were petitioner's customers, were similarly attributable to farming and ranching operations.

1954 U.S. Tax Ct. LEXIS 157">*203 In addition to the above, the facts further show that following successive crop failures, resulting from the prolonged drought in the middle 1930's, a very substantial portion of petitioner's trade territory, along with southeastern Colorado and southwestern Kansas, was subjected to dust storms of such intensity and frequency as to become known as the Dust Bowl. And due in part to the actual land damage resulting from wind erosion and in part to fright and financial disaster, substantial acreage of the land under cultivation was abandoned, the acreage abandoned varying from a high of 30 per cent in some counties, to a fraction of 1 per cent in others, approximately 40 per cent of the abandonments being because of actual land damage and approximately 60 per cent to fright or other causes. It was the view of one witness, who had a major part in the Federal soil conservation program, that there was possibly some damage to 10 per cent of the land in the counties affected.

Having examined and considered the evidence, we are convinced by the over-all picture shown that because of the prolonged drought of the 1930's and the resulting crop failures and dust storms petitioner was unable 1954 U.S. Tax Ct. LEXIS 157">*204 to make some sales during the base period which it would have made, absent the drought and the consequences thereof; that by reason of its failure and inability to make those sales, its business and earnings during the base period were depressed; and to the extent that its base period earnings were so depressed, they were an inadequate standard of earnings within the meaning of section 722 (b) (2), supra.

22 T.C. 781">*804 As to the amount by which petitioner's base period earnings were depressed because of the drought and the consequences thereof and what would be a fair and just amount representing normal earnings to be used as its constructive average base period net income, the evidence is most indefinite and the conclusion of amount which may be drawn therefrom is largely conjecture. In its applications for relief, petitioner seemingly accepted its average base period sales of $ 733,275 as normal for the period, applying thereto its experienced 1915-1929 net profits factor of 10.8818 per cent to arrive at a claimed constructive average base period net income of $ 79,926.97. In the instant proceeding, the petitioner has abandoned that approach and the use of its 1915-1929 experienced1954 U.S. Tax Ct. LEXIS 157">*205 net profits to sales ratio, and now claims that its average net profits for the 1915-1933 period of $ 49,993, or $ 50,000, "in round figures," represents the proper amount to be used as its constructive average base period net income. It makes no suggestion or claim whatever as to what would have been a normal volume of business for the base period, absent the drought and its consequences, or what a normal net profits to sales ratio would have been on normal sales for the period. In fact, beyond the claim itself, with the attendant explanation that the 1915-1933 period included 9 depression and 10 prosperity years, petitioner has not indicated how the realization of a net profit of $ 49,993, or 9.12 per cent, on average annual sales of $ 548,130 for the 1915-1933 period is to be translated into or established as normal average net profits for a period in which it claims its business was depressed because of the reduced buying power of the farmers of its trade territory, but in which, in spite of such depressed business, its actual average annual sales were $ 733,275, or approximately one-third again as large as its average 1915-1933 sales of $ 548,130.

The volume of the base period1954 U.S. Tax Ct. LEXIS 157">*206 business being up, not down, it is thus apparent that the key to the comparably lower base period net profits is to be found in the substantially reduced base period net profits to sales ratio. For the 1915-1933 period, which petitioner now seeks to have us accept as indicative of normal for the base period, the ratio of net profits to average annual sales of $ 548,130 was 9.12 per cent, as contrasted with a ratio of 5.26 per cent on actual average sales of $ 733,275 for the base period. A glance at the figures reflecting petitioner's sales and profits experience for 1915 through the base period readily discloses that the lower ratable profits for the base period were the result of two things, a lower margin of gross profits to sales and an over-all increase in expenses. As compared with the 1915-1933 period, the margin of gross profits to sales was 18.99 per cent for the base period, as against 21.88 per cent for the earlier period, while the average of expenses incurred in realizing the average base period net profits of $ 39,147.48 was $ 113,440, or 137 22 T.C. 781">*805 per cent of the average 1915-1933 expenses of $ 82,905 incurred in earning average net profits of $ 49,993. These1954 U.S. Tax Ct. LEXIS 157">*207 two items, the increased expenses and the reduced margin of gross profits to sales, account for several times more than the margin of $ 10,852.52 between the $ 50,000, "in round figures," claimed by petitioner as the fair and just amount to be used as its constructive average base period net income and its actual average base period net income of $ 39,147.48. It does not follow, however, that the items in question were abnormal for the base period, or would have been ratably different on a normal volume of business, absent the drought and dust storms. There is no showing, or claim, for that matter, that the drought and its consequences had any influence on the cost of the goods sold by petitioner in the base period; and to the extent the reduced margin of gross profits on sales resulted from an increase in the cost of goods sold, there is no basis for saying that such margin of profit was not normal. It could have been possible that the narrow margin resulted to some extent from bargain or reduced prices offered by petitioner to the farmers of the area, but, if so, there is no claim or proof to that effect.

Similarly, the ratable increase in petitioner's expenses for the base period1954 U.S. Tax Ct. LEXIS 157">*208 could, to some degree, have been attributed to a costly operation, due to the drought. The ratable cost of making the sales, for instance, could have been higher, but, as in the case of the lower margin of gross profits to sales, there is no proof or claim that such was the case. Furthermore, by their nature, one or more of the other categories of expenditures would not in any event readily lend themselves to a claim that they were higher in the base period as a consequence of the drought. An illustration is officers' salaries. A reduction therein might well have been more logical, if they had been affected by the drought. Another item of expense contributing, to some noticeable extent, to the ratably lower base period gross profits was the seldom recurring item of catalogue expense. It likewise has not been attributed to the drought by claim or proof. As to various other items of expense, some were slightly higher, on the average, for the base period than for prior years or periods, some were slightly lower, while others continued at substantially the same levels. As to such other items, however, we have made detailed findings, according to the evidence of record, for all1954 U.S. Tax Ct. LEXIS 157">*209 the years 1915 to 1939, inclusive, and the facts with respect thereto tell their own story, making further review at this point unnecessary.

One of the items making up the category "other income," namely, income from the farm implement dealing partnership, although shown to have been erratic over the years, was, on the average, relatively lower for the base period than for years prior to the depression, and might well have been depressed because of the consequences 22 T.C. 781">*806 of the drought. The average of such income was relatively small over the years, however, and taking the category of "other income" as a whole, the average thereof for the base period was substantially the same as for the 1915-1933 period and other suggested periods.

We are thus brought to the conclusion that the evidence of record does not indicate or justify as normal for the base period a greater net profits to sales ratio than that of 5.26 per cent actually experienced by petitioner. We have heretofore concluded, however, that because of the prolonged drought and the resulting crop failures and dust storms petitioner was unable to make some sales during the base period which it would otherwise have made and, 1954 U.S. Tax Ct. LEXIS 157">*210 by reason of its inability to make those sales, its business and earnings during the base period were depressed to the extent of the profits which would have been realized on such additional sales. It is our further conclusion that petitioner's actual average base period net income, increased by the profits which it would have realized on such additional sales, constitutes the fair and just amount to be used as its constructive average base period net income, for the purposes herein.

As to the amount by which petitioner's sales for the base period would have been so increased, absent the drought, there is very little evidence on which to base a definitive determination. We do know that in some parts of petitioner's trade territory, particularly the marginal areas, there was considerable abandonment of the land then in cultivation, while in other areas abandonment was negligible. We also know that, to some degree, the abandonment was temporary and the quality of the land abandoned was such that it would in reason be returned to cultivation; whereas other portions of the land abandoned were marginal, and as to such land, it was the cultivation, not the abandonment, which was temporary. 1954 U.S. Tax Ct. LEXIS 157">*211 And while it is true that the population of the cities and towns of the area appears to have been increased to about the same extent that the population of the rural areas decreased, to the end that the outlets for petitioner's goods among the people involved were not wholly lost, it does stand to reason that to some extent the abandonments meant a complete loss of customers to petitioner and petitioner did lose some net profits on the sales of merchandise of which it was thereby deprived. There was also some loss of sales, we think, to farmers who did not abandon their holdings but continued on the land. It is not possible, on the proof, however, to conclude that the sales so lost were nearly as substantial as petitioner would have us do. In the first place, by a comparison of petitioner's base period business with that for all of the prior years it had been in operation, there was no loss of sales, since its sales in the base period were actually higher than in any 4 consecutive 22 T.C. 781">*807 year periods, save one, and in one of the years of that period retail sales were abnormally high. It is also reasonable to conclude that the loss of purchasing power by the farmers, which 1954 U.S. Tax Ct. LEXIS 157">*212 in turn would have had a depressing effect on petitioner's sales, was offset to a very substantial extent through Federal loans and subsidies to farmers of the area. The Government was providing direct financial assistance to enable the farmers of the area to maintain their operations, and the maintenance of those operations, even though by loans and subsidies, would tend to keep petitioner's business that much closer to the normal level. The extent to which sales were lost and to which potentially lost sales were offset in the manner indicated, there is no way of knowing. Some indication might have been given by showing, dollar-wise, whether petitioner's sales during the base period in the counties in which agriculture was predominant indicated a downward fluctuation, as compared with its sales in those counties for other years. Such a possibility of proof was suggested at the trial and the respondent consented to cooperate in submitting by stipulation, following the trial herein, such data with respect thereto as might be shown by petitioner's books, but no such data has been submitted.

The record being as it is, and following the principle of Cohan v. Commissioner, 39 F.2d 540,1954 U.S. Tax Ct. LEXIS 157">*213 we have concluded and found that absent the drought and its consequences, petitioner's average base period sales would have been greater by $ 25,000 than they were and on such added sales it would have realized average base period net profits of $ 1,315, and further, that a fair and just amount to be used as petitioner's constructive average base period net income is $ 40,462.48. See and compare National Grinding Wheel Co., 8 T.C. 1278.

Reviewed by the Special Division.

Decision will be entered under Rule 50.