26 T.C. 383">*384 The Commissioner disallowed the petitioner's applications for relief under section 722, Internal Revenue Code of 1939, for the years 1941 to 1945, inclusive.

The petitioner alleges that its business was depressed in the base period (1) because of the loss of its principal sales agents (sec. 722 (b) (2)), and (2) because of conditions generally prevailing in the wool industry which subjected the petitioner to a profit cycle differing materially from the general business cycle (sec. 722 (b) (3) (A)). No evidence was presented and no argument made in support of the (b) (3) (A) claim, and that will be deemed abandoned.

FINDINGS OF FACT.

The petitioner, a Massachusetts corporation, filed its returns for the taxable years with the collector of internal revenue for the district of Massachusetts. The returns were for a calendar year and were made on an accrual basis.

The petitioner is a manufacturer of high grade "fancy" woolen cloth used principally in men's and women's suits and coats. It has been engaged in that business since its incorporation in 1906. It operates about 48 looms. It sells most of its product through selling agents although it makes some1956 U.S. Tax Ct. LEXIS 176">*178 sales directly to clothing manufacturers.

A function of the selling agent is to keep informed about the popular trend in clothing fabrics and to suggest patterns and designs to the textile manufacturers and the clothing manufacturers. The agent may represent several textile mills, particularly mills manufacturing different types of materials, and may have several clothing manufacturers to whom he regularly sells their products. He is usually the sole contact between the textile manufacturer and the clothing manufacturer. Some of the large textile mills have their own selling agents but smaller mills, such as the petitioner, usually depend upon selling agents to handle most of their products.

The petitioner, through no fault of its own, lost the services in 1932 of its two principal selling agents, Frankenberg and Salomon, who had represented it for many years. It undertook to find other capable selling agents but without prompt success. The well established selling agents were reluctant to take on new clients at that time owing to the depressed condition of the woolen textile industry and the highly competitive situation among textile mills. The petitioner tried a number of 1956 U.S. Tax Ct. LEXIS 176">*179 agents over the next several years, most of whom, for one reason or another, proved unsatisfactory. It also undertook to increase its sales directly to the clothing manufacturers.

The following table shows the selling agents engaged by the petitioner, the total sales and percentage of sales made by each, and the 26 T.C. 383">*385 percentage of total sales made by all agents, in each of the years 1922 through 1941, inclusive.

1956 U.S. Tax Ct. LEXIS 176">*180 26 T.C. 383">*386 Frankenberg, the petitioner's sole selling agent over the period 1922 through 1926, handled materials for women's clothing only. L. Salomon, whom the petitioner engaged in 1927, handled men's wear fabrics. He had contacts with several large men's clothing manufacturers. The petitioner lost the services of both of these agents when they retired from the textile business in 1932.

The other selling agents listed above served the petitioner with varying success. The contract was terminated in some instances because of illness or the death of an agent, while in others the agents failed to get sufficient orders or otherwise proved unsatisfactory.

The petitioner made operational changes and installed new, or newly acquired, equipment in its plant at Uxbridge from time to time. The balance in the petitioner's machinery and equipment account, before depreciation, for each of the years 1928 through 1939, inclusive, was as follows:

1956 U.S. Tax Ct. LEXIS 176">*181 There was a decline in the number of woolen mills in operation in the United States over the period 1923 through 1937. The decrease was from a high of 513 mills in 1923 to a low of 344 in 1933. There was a recovery to 373 mills by 1937. There were similar decreases and increases in the number of looms and spindles in such mills over the same period.

The following schedule shows the petitioner's annual production, in yards, of woolen cloth as compared with the production of the industry in the United States as a whole over the period 1922 through 1939, inclusive:

26 T.C. 383">*387 The petitioner's profits and losses1956 U.S. Tax Ct. LEXIS 176">*182 for the years 1922 through 1939, inclusive, shown for comparative purposes with those of all worsted and woolen textile corporations and of all corporations in the United States, were as follows:

A downward trend in the demand for woolen goods, particularly of the heavier types, began soon after World War I, and at the same time, or soon thereafter, there was an increase in the demand for cotton and rayon fabrics. This was due in part to a change in dress habits from heavier to lighter weight1956 U.S. Tax Ct. LEXIS 176">*183 garments and to the development of synthetic materials and improved methods of treating cotton fabrics. The vogue for better heated homes and offices and inclosed automobiles contributed to the popularity of lighter clothing materials.

The petitioner's excess profits credit, computed on the basis of invested capital, its excess profits tax liability as determined by the Commissioner, and the amounts of the refunds claimed under section 722, for the years 1941 through 1944, inclusive, are as follows:

(There is an excess profits tax credit carryover from 1940 to 1941 and a carryback from 1945 to 1943.)

All stipulated facts are incorporated herein by this reference.

OPINION.

The petitioner seeks excess profits tax relief under section 722 (b) (2), Internal Revenue Code of 1939. It contends that its base period net income is an inadequate standard of normal earnings because of the loss of the services of its two established sales representatives1956 U.S. Tax Ct. LEXIS 176">*184 in 1932 and its inability to replace them with capable representatives about the middle of the base period.

26 T.C. 383">*388 Its two principal salesmen, Frankenberg and Salomon, retired from the textile business in 1932 and terminated their services with the petitioner. The latter engaged a number of other agents from time to time, prior to and during the base period, but for one reason or another found them unsatisfactory. The petitioner contends that their failure to produce a profitable volume of sales was responsible for its base period losses and that, therefore, "the business of the taxpayer was depressed in the base period because of temporary economic circumstances unusual in the case of such taxpayer" within the meaning of section 722 (b) (2).

The petitioner proposes to reconstruct its base period income by adjusting base period sales to their relative position in the woolen industry prior to 1932. In this manner its average base period sales are increased 100 per cent, from $ 480,972 to $ 961,944, and its average base period net income from a loss of $ 13,068 to a net income of $ 53,417.

The petitioner sustained net losses in the first 2 base period years and it had net income1956 U.S. Tax Ct. LEXIS 176">*185 in the last 2 years amounting to $ 17,527 in 1938 and $ 4,150 in 1939. It had sustained losses in every year prior to the base period, since 1928, with an average loss for the 7 years of over $ 33,000. Assuming, however, that the petitioner's business was depressed during the base period within the meaning of section 722 (b) (2), it is not at all clear from the evidence that this depression was due to the loss of the services of the sales agents, Frankenberg and Salomon. Frankenberg was the petitioner's sole selling agent from 1922 to 1927. Its sales averaged close to $ 1,000,000 a year for that period. Salomon began selling for the petitioner in 1927. He and Frankenberg were both selling for the petitioner during the years 1927, 1928, and 1929, and its sales fell off from $ 1,184,508 in 1927 to $ 797,245 in 1928, and $ 527,360 in 1929. The downward trend continued to $ 292,845 in 1932 although another agent, Exner & Fine, was added in 1930. There was a succession of agents after the services of Frankenberg and Salomon were terminated in 1932. There were 10 different agents over the period 1932-1940. Some of them served for only 1 or 2 years, some longer. There were as 1956 U.S. Tax Ct. LEXIS 176">*186 many as 5 or 6 agents in some of the years. They dealt in various types of fabrics and sold to manufacturers of different types of clothing. Prendergast, who began selling for the petitioner in 1938, handled goods for men's wear. He accounted for 34.97 per cent of the petitioner's sales in 1938, 85.49 per cent in 1939, 89.29 per cent in 1940 and 75.31 per cent in 1941.

The decline in the petitioner's production and sales from 1927 followed generally that of the woolen industry as a whole, although in some years there were unaccounted for variations. This may have 26 T.C. 383">*389 been due to the fact that the petitioner manufactured "fancy" goods. The evidence does not show that the petitioner's sales agents were responsible for those variations. Nor does it show that its production, or net income, would have followed any very different pattern, if over the 1932-1939 period the petitioner had retained the same agents or had been able to obtain other thoroughly capable and satisfactory agents. The petitioner's difficulties before and during the base period were apparently due more to changes in clothing trends and styles, the introduction of new fabrics, and the effect of supply and1956 U.S. Tax Ct. LEXIS 176">*187 demand, than to the failure of its selling agents. There is little doubt that if there had been a market for the petitioner's goods in the base period its sales agents or its own officers would have been able to find it.

Nor is it clear that increased sales in the base period would have resulted in proportionately increased net income. The ratio of the petitioner's net income to sales has not followed a consistent pattern either before or during the base period.

The petitioner's excess profits credits, based on invested capital, are $ 26,711.90 in 1941 and over $ 30,000 for each of the other taxable years. The petitioner would have to establish a constructive average base period net income sufficient to convert its average base period net loss of approximately $ 13,000 into an average net income sufficient to produce excess profits credit greater than those computed under the invested capital method. The evidence affords no basis for such a reconstruction.

Reviewed by the Special Division.

Decision will be entered for the respondent.