24 T.C. 533">*533 This proceeding involves the respondent's disallowance of petitioner's application for excess profits tax relief under section 722 (c) (1) and (3), Internal Revenue Code of 1939, and the related claim for refund of excess profits tax in the amount of $ 29,157.99 for the calendar year 1945. In his notice of disallowance for the year 1945, respondent determined an excess profits tax liability of $ 45,691.31 1955 U.S. Tax Ct. LEXIS 154">*155 and a deficiency of $ 14,361.34, the payment of which was deferred under Code section 710 (a) (5). The amounts and dates of petitioner's payments of excess profits taxes for 1945 are stipulated.

The primary questions presented are whether petitioner qualified for relief under 1939 Code section 722 (c) (1) and (3) by virtue of having intangible assets making important contributions to income but not 24 T.C. 533">*534 includible in invested capital and further by virtue of having abnormally low invested capital and, if so qualified, the amount of its constructive average base period net income. A further question raised at the hearing, and if petitioner is granted relief herein, is whether petitioner is entitled to any carry-overs of unused excess profits credit from the years 1943 and 1944 to the year 1945.

The proceeding was heard before a commissioner designated by the Court for that purpose. The facts found in the commissioner's report are included herein as our Findings of Fact, with such modifications as are deemed necessary upon a consideration of the objections filed by the parties.

FINDINGS OF FACT.

The stipulated facts are so found and included herein by reference.

The petitioner1955 U.S. Tax Ct. LEXIS 154">*156 is a North Carolina corporation, organized November 8, 1940, with its principal office at Kinston, North Carolina. Petitioner kept its books and filed its tax returns on the calendar year accrual basis of accounting, and its returns for the years involved were filed with the collector of internal revenue for the district of North Carolina.

The petitioner filed a timely application for relief (Form 991) under section 722 of the 1939 Code and a related claim for refund (Form 843) of excess profits tax for the calendar year 1945 in the amount of $ 29,157.99. In connection therewith, and prior to the hearing in this proceeding, petitioner made no claim for carry-overs of unused excess profits credit from the years 1943 or 1944 to the year 1945.

The respondent disallowed petitioner's claims for relief and refund and determined that its excess profits credit for the year 1945 amounted to $ 365.20, computed on the invested capital basis of 8 per cent of total capital of $ 4,564.99 comprised of $ 200 money paid in and $ 4,364.99 earned surplus. Petitioner's 1945 return reported an excess profits net income of $ 66,833.40. The respondent applied the provisions of the 80 per cent limitation1955 U.S. Tax Ct. LEXIS 154">*157 in his computation of petitioner's excess profits tax liability in the amount of $ 45,691.31 for the year 1945.

Since its organization in 1940, petitioner has engaged in the business of manufacturing, for sale to farmers, certain patented oil-burning tobacco curers which had been theretofore produced and sold by a prior existing corporation. Petitioner's outstanding capital stock consists of 129 shares (par value $ 100 each) of common stock of which 127 shares were issued to Forrest H. Smith, president of petitioner, 1 share to his wife Margaret for $ 100 cash, and 1 share to his son John for $ 100 cash. The 127 shares issued to Forrest H. Smith were in exchange for an exclusive 5-year license under United States Letters Patent No. 1,811,980 issued to Smith in 1930, and No. 2,051,348 issued to Smith in 1935, and also a pending patent application serial No. 24 T.C. 533">*535 221,288 filed July 26, 1938. The parties are agreed that for excess profits tax purposes no amount was includible in petitioner's invested capital on account of the patent license.

During the years 1935 through 1939 similar oil-burning tobacco curers were manufactured and sold to farmers by Smith's Heating System, Inc., 1955 U.S. Tax Ct. LEXIS 154">*158 as the exclusive licensee under the above-mentioned patents. That corporation, of which Smith had been the majority stockholder and president, was declared bankrupt and was dissolved in 1940. Petitioner is not an acquiring corporation of Smith's Heating System, Inc., within the meaning of section 740, Internal Revenue Code.

Flue-cured tobacco is grown principally in the eastern section of North and South Carolina, and to a lesser extent in Virginia, Georgia, Alabama, and Florida. In those areas the ripened tobacco is harvested by being primed, which means that each leaf is plucked separately when ripe. The leaves are then taken to the tobacco barn for the curing process which consists of being allowed to wilt slightly, and then being subjected to a certain degree of even heat to drive out the excess sap and moisture. The traditional method of curing flue-cured tobacco was to heat the barns with wood-burning furnaces fired from outside the barn. From the furnace metal flues extended around the inside walls to the rear of the barn and returned along the center of the barn to give an even distribution of heat. The flues were vented through the walls or roof of the barn. The hand-fed1955 U.S. Tax Ct. LEXIS 154">*159 wood-burning furnaces required the attendance of a worker, 24 hours a day, for 6 or 7 days a week during the curing season, to feed the fire every hour or two and to maintain a proper temperature inside the barn. In a good crop season approximately 2 1/2 to 3 acres of tobacco could be cured in the average size barn. Flue-curing tobacco barns vary in size from 15 to 18 feet square and 14 feet high. In eastern North Carolina the curing season begins around the first part of July and lasts from 4 to 6 weeks.

The Smith tobacco curer consists of a series of small open-flame oil burners, covered by protective metal canopies, arranged evenly over the floor of the tobacco barn so as to give an even distribution of heat. The burners are fed through pipes from an oil tank located outside the barn and the flow of oil is regulated by a carburetor. There are also individual controls on each burner. The size of the curer, that is, the number of burners installed in a particular tobacco barn, depends upon the size of the barn, but the average tobacco barn requires about 24 burners, more or less. At all times material here, the most widely used Smith tobacco curer was the Model A, consisting1955 U.S. Tax Ct. LEXIS 154">*160 of numerous individual burners, each having a separate hood or canopy. 24 T.C. 533">*536 The Smith Model D consists of a number of burners grouped under a single canopy, but comparatively few were ever sold.

Prior to obtaining his first patent, Smith had observed various types of furnaces and burners used in curing tobacco, in the course of his travels for the Florence Stove Company. The practice of using open-flame oil burners to heat and circulate the air in tobacco barns had been public knowledge for some years, and the use of multiple heating units was not a new idea. At least two makes of oil-burner tobacco curers were being made and sold at the time Smith developed his oil-burner curer which was designed for simple operation and maintenance, and for positive control of the desired uniform temperature in the barn. During the early 1930's, the oil-burning curers had not been adopted by farmers for general use in the flue-cured tobacco sections of North and South Carolina, and the predominant method then used was the traditional wood-burning furnace with metal flues.

Smith's Heating System, Inc. (sometimes hereinafter referred to as the old company), was organized in 1934 with a capitalization1955 U.S. Tax Ct. LEXIS 154">*161 of $ 25,000 represented by 250 shares of $ 100 par value stock. Forrest H. Smith and his nominees, his wife and sister-in-law, owned 129 shares which were issued in exchange for a license under Smith's tobacco curer patents. The license ran for the life of the patents. The remaining 121 shares were issued to three other persons for cash paid in. Smith was president of the company.

During the first years of its existence, the old company manufactured and sold 4 curers in 1934, 135 curers in 1935, and 472 in 1936, and in connection with making deliveries crews of men were sent out to superintend the installations and instruct the farmers in their use. Such service increased the company's operating costs, but insured proper operation and satisfactory results. By 1936, the Smith curer had acquired a good reputation for efficiency and dependability. Farmers who purchased Smith curers spread the word among their neighbors that it eliminated the cost of keeping a man more or less in the vicinity of the barn 24 hours a day to feed the wood fires, that the cost of fuel oil was only about $ 1.80 more than the cost of wood per barn of cured tobacco, that the tobacco cured more uniformly1955 U.S. Tax Ct. LEXIS 154">*162 and had a better texture in that all of the natural oils were not cooked out of the leaves and that it was possible to obtain a higher price for the oil-burner cured tobacco. During the latter part of the 1930's, a shortage of fire wood, due to extensive cutting, was a factor in causing farmers to gradually convert from wood to oil-burner curers.

In the years 1936 through 1939, the Smith tobacco curer was sold principally in the flue-cured tobacco section of North Carolina, although 24 T.C. 533">*537 some were sold in South Carolina and other flue-curing areas. The size and value of flue-cured tobacco production in North Carolina, which is the largest producer of that product in the United States, is as follows:

The old company advertised the Smith curer both in newspapers and over the radio. In the flue-cured tobacco section of North Carolina, the Smith curer was generally regarded 1955 U.S. Tax Ct. LEXIS 154">*163 as one of the first oil-burner curers successfully sold in commercial quantities. In addition to direct sales to farmers various dealerships were established. During the period from 1936 through 1939, there were two or more competitor oil-burning curers being sold. During that same period there was a large potential market for oil-burning curers. By the end of 1939 as many as 50 per cent of the tobacco barns in local areas had been converted, but only about 15 per cent of the tobacco barns in the whole flue-cured tobacco section of North Carolina had been converted from wood to oil-burning curers.

During the years 1935 through 1939, the old company experienced a concentration of orders for Smith curers during the months of May, June, and the first part of July, when farmers were preparing their tobacco barns for the approaching curing season. During the years 1935, 1936, and 1937, the old company sold all of the tobacco curers it was able to manufacture in the peak order period, and usually at the end of those years it had a number of unfilled orders. Some farmers who preferred the Smith curer but could not get delivery bought another make of oil-burner curer and the old company1955 U.S. Tax Ct. LEXIS 154">*164 thereby lost numerous potential customers. The old company's inability to fill all of the orders received by it was due in part to inadequate cash working capital and apparently an insufficient line of credit to enable it to maintain, in most of the base period years, a satisfactory inventory of raw materials and finished goods on hand at the beginning of the peak order season. The petitioner's insufficient line of credit with its suppliers was due in part to petitioner's overextension of credit to customers who did not make payments promptly. In some of those years the old company was in the position of having to delay the purchase of raw materials until it had obtained funds from sales of finished products. The company's raw materials included 24 T.C. 533">*538 small enameled oil burners, made in Milwaukee, Wisconsin, and sheet steel from Richmond, Virginia, for fabricating hoods, and also steel pipe, oil tanks, carburetors, fittings, nuts and bolts, etc., which had to be shipped in or hauled by truck.

The old company's inadequate working capital and insufficient line of credit resulted in production costs which were higher than they otherwise would have been if the company could have1955 U.S. Tax Ct. LEXIS 154">*165 purchased its supplies in larger quantities so as to obtain lower prices and also to avoid delays in shipping which sometimes caused the employees to be idle though still on the payroll. The lack of sufficient working capital and/or credit was one reason for the company giving varying amounts of discounts (sometimes 20 per cent) on the retail price to farmers and the wholesale price to dealers; another reason was to induce greater sales of petitioner's burners.

Forrest H. Smith was anxious to increase the capitalization of the old company so as to raise additional working capital, but the other stockholders were opposed. In the early part of 1936, C. L. Stanfield, a tobacco grower and purchaser of three or four Smith curers, was enthusiastic about the performance and future possibilities of the curer and wanted to invest at least $ 10,000 in the venture and possibly more if an investigation of the company proved satisfactory. He was interested in getting control if that was possible. When advised that no stock in the company was available he became a dealer and for 2 or 3 years he sold, installed, and serviced Smith curers in his area around Brown's Summit, North Carolina. Toward1955 U.S. Tax Ct. LEXIS 154">*166 the end of 1936, L. B. Jenkins of Kinston, North Carolina, desired to invest and had an independent audit made of the old company, but when he could not obtain control of the company he lost interest. The manner in which some venture capital became available actually served no useful purpose, and the old company operated on its original capitalization of $ 25,000 during most of its existence. Some time in 1939 one of the minority stockholders sold his stock in the old company to a person who agreed to an increased capitalization, but by the time the charter was amended the financial condition of the company was such that its stock was practically worthless. Forrest H. Smith sold only a few shares and the old company's capital stock outstanding was $ 25,750 on December 31, 1939.

A summary of the old company's balance sheets from its auditors' reports for the years ending December 31, 1936 through 1939, is as follows: 24 T.C. 533">*539

A summary of the old company's1955 U.S. Tax Ct. LEXIS 154">*168 profit and loss statements from its auditor's reports for the years ending December 31, 1936 through 1939, is as follows:

The1955 U.S. Tax Ct. LEXIS 154">*169 old company's selling prices were based upon the number of units, that is the number of burners, comprising the respective tobacco curers which varied according to the size of the barns. The list retail price on the Smith Model A 22-burner curer was $ 144.50 during 1936 24 T.C. 533">*540 and 1937, and $ 139.75 during 1938 and 1939, or an average of $ 142.12 for the base period years, and the wholesale price was 25 per cent off the list price. During the base period years the average number of burners per curer, the number of tobacco curers sold, and the average price per curer received (after discounts) by the old company, were approximately as follows:

The old company's per burner (unit) cost of manufacture and sale of the Smith tobacco curer during 1937 and 11 months of 1938, was as follows:

1955 U.S. Tax Ct. LEXIS 154">*170 During 1936 the old company was still in the stage of promoting its product and developing a market by inducing greater numbers of farmers to convert from wood-burning barns to Smith oil-burning curers and the company sustained a loss for that year. The year 1937 was the old company's best year in production and sales and resulted in a profit. For the year 1938 the old company anticipated the manufacture and sale of at least 2,000 curers and in connection therewith it substantially increased its selling expenses, as compared with those for 1937, most of which increase was for advertising during 1938. The company's sales for 1938 did not equal those for 1937, and its closing inventory for 1938 exceeded by several hundred dollars the opening inventory for that year. During 1938 and 1939 the old company increased the amount of credit it extended to its dealers and retail purchasers. The 1939 flue-cured tobacco crop in North Carolina (in both acreage planted and yield per acre) was unusually large, being 812,540,000 pounds compared with an average of approximately 519,020,000 pounds for the 3 preceding years, and the 1939 price was depressed to 15.2 cents per pound compared with 1955 U.S. Tax Ct. LEXIS 154">*171 an average of approximately 23.16 cents per pound for the 3 preceding years. The tobacco market in eastern North Carolina opened the last of August 1939, 24 T.C. 533">*541 and after operating a couple of weeks the auction houses were forced to close their doors when European buyers withdrew from the market, apparently due to war conditions in Europe. The old company's accounts receivable became uncollectible, since tobacco was its customers' principal cash-producing crop. In turn, the old company was unable to pay its creditors or to get a further extension of credit. By the end of 1939 the old company was insolvent and it was declared bankrupt and dissolved in 1940. At the bankrupt sale the old company's machinery, equipment, materials, and supplies were purchased by one Royals (or Rawls).

Upon the incorporation of petitioner in November 1940, it acquired the 5-year patent license for 127 shares of stock and issued 2 shares for $ 200, as hereinbefore mentioned, and it purchased, from Royals, the old company's machinery, equipment, materials, and supplies. Upon the expiration of the 5-year patent license to manufacture and sell Smith tobacco curers, a new license was granted to petitioner1955 U.S. Tax Ct. LEXIS 154">*172 under a royalty arrangement.

Due to the above-mentioned limited assets and working capital, the petitioner's operations during the remainder of 1940, and during the years 1941 and 1942, were confined to using materials and supplies on hand and mainly the selling of spare parts, servicing and repairing Smith tobacco curers sold by the old company during the 1930's and also buying, repairing, and reselling second-hand Smith curers. In 1942 the Government imposed controls on the purchase and use of metals and petitioner was required to obtain priorities to secure metals for manufacturing tobacco curers. Petitioner had no priority during 1942. In 1943 petitioner's first priority was of such a low rating it was unable to obtain any metals. Later in 1943 petitioner obtained another priority to make 1 curer a month for the first half of 1943 and 2 curers a month for the second half of that year, and petitioner was able to get the metals to fill those quotas. The production of petitioner's competitors was also restricted by the system of priorities.

In December 1943 the War Production Board informed petitioner it would be granted priorities to manufacture 300 curers during 1944. Petitioner1955 U.S. Tax Ct. LEXIS 154">*173 replied that it had insufficient working capital to produce such a quota, but was advised to make its priorities known to its customers and to take advance payments with orders. Accordingly, petitioner sent out notices to the old company's customers and dealers that it would receive orders for Smith tobacco curers on a certain day, accompanied by advance cash deposits in amounts of $ 5 less than the wholesale price of each curer ordered. On the stated day in 1944, petitioner booked orders for the allotted 300 curers and turned away orders for about 300 more. During 1944 a further priority was granted to petitioner and it produced and sold a total of 460 tobacco curers for that year. During 1945 petitioner continued to require 24 T.C. 533">*542 advance deposits with orders and continued to receive more orders than it could fill. With increased priorities granted during 1945 petitioner produced and sold a total of 1,453 tobacco curers in that year. In 1945 there was an advance of about $ 30 in the retail price on a 22-burner Smith curer, over the base period prices. The principal item sold by petitioner in 1944 and 1945 was the Smith Model A curer which was essentially the same product1955 U.S. Tax Ct. LEXIS 154">*174 which had been sold by the old company during the 1930's.

The advance deposits received with orders during 1944 and 1945 alleviated petitioner's handicap of inadequate working capital and insufficient line of credit and furnished petitioner with ample cash funds for the procurement of materials and labor resulting in a more economical and continuous operation. During 1944 and 1945 the wartime shortage of labor on the farms and the pent-up demand for oil-burning tobacco curers in the flue-cured tobacco sections was such that petitioner did not need to do much advertising, or to offer discounts, or incur expenses for installing curers and instructing farmers in their use. A comparison of certain selling expenses, inter alia, of the old company during the years 1936 through 1939, and similar expense items of petitioner during 1945 in approximate amounts, is as follows:

1955 U.S. Tax Ct. LEXIS 154">*175 A summary of the petitioner's profit and loss statement from its auditor's reports for the year 1945, and the computed percentages of gross sales, are as follows:

24 T.C. 533">*543 A summary of the petitioner's balance sheets from its auditor's reports for the years 1944 and 1945, is as follows:

1955 U.S. Tax Ct. LEXIS 154">*176 Though not an acquiring corporation of Smith's Heating System, Inc., within the meaning of section 740, Internal Revenue Code, the petitioner had certain assets theretofore used by the old company and petitioner engaged in a business similar in many respects to that engaged in by the old company. Both companies under a license under the same patents, manufactured the same product which was sold under the same trade name in the same general area and both companies had the same president and majority stockholder. The old company's capitalization of $ 25,000 (with $ 12,900 par value issued for a patent license and $ 12,100 par value issued for cash paid in) proved inadequate but could not be adequately increased without the likelihood of Forrest H. Smith losing control. The old company operated at a loss during each of the base period years except for 1937 and its management policies, inter alia, of excessive discounts to induce sales and the overextension of credit coupled with the 1939 depressed market price for flue-cured tobacco in North Carolina culminated in 24 T.C. 533">*544 insolvency by the end of 1939 and bankruptcy in 1940. The patents covering the Smith oil-burner curer embraced1955 U.S. Tax Ct. LEXIS 154">*177 certain ideas which were common knowledge and in prior use. However, the particular design, positive heat controls, and other features of the Smith burner made it one of the best tobacco curers on the market during the base period years.

The petitioner commenced business in November 1940, and continued operations to and including the taxable year 1945, with a relatively small amount of invested capital. As compared with the old company its capitalization of $ 12,900 (with $ 12,700 par value issued for a patent license and only $ 200 par value issued for cash paid in) proved wholly inadequate and during part of 1940 and the years 1941 and 1942, the petitioner did not engage in manufacturing new Smith curers because of lack of operating capital. During 1943, 1944, and 1945, petitioner manufactured and sold the same tobacco curer as theretofore made by the old company but, due to then prevailing conditions, petitioner found it unnecessary to give discounts to induce sales or to sell on credit and it adopted a new policy of requiring advance cash deposits on curers ordered. The petitioner's increased sales and profits for 1944 and 1945 were due primarily to a combination of war conditions1955 U.S. Tax Ct. LEXIS 154">*178 which made possible the manufacture of substantial numbers of Smith curers and other makes of oil-burning tobacco curers, and to the impetus of a pent-up demand by farmers which enabled petitioner to ask for and get cash payments with the orders received for its burners.

The petitioner's patent license was not an important income-producing factor during the taxable year 1945. The petitioner was organized in 1940 and continued to operate during the taxable year 1945 with an abnormally low invested capital.

If petitioner, as actually organized, had been in existence during the base period years, its product would have had the same potential market for the gradual conversion from wood-to oil-burning tobacco curers, the same competition, the same or somewhat similar financial difficulties, and a more or less similar sales and profit or loss experience, as the old company had. The petitioner has failed to establish what would be a fair and just amount representing normal earnings to be used as a constructive average base period net income if petitioner had been in business during the base period years.

OPINION.

The petitioner was not an acquiring corporation within the meaning of section1955 U.S. Tax Ct. LEXIS 154">*179 740. It was not in existence prior to January 1, 1940; therefore, it was not entitled to an excess profits credit under section 713 of the 1939 Code computed on average base period net income.

24 T.C. 533">*545 The Commissioner allowed an excess profits credit based on total invested capital under section 714 in the amount of $ 365.20. Petitioner's total invested capital, for the purpose of the credit, amounted to $ 4,564.99, which represents paid-in capital of $ 200, and earned surplus of $ 4,364.99. The credit was computed on the basis of 8 per cent of $ 4,564.99.

Petitioner seeks relief under sections 722 (a), 722 (c) (1), and 722 (c) (3) of the 1939 Code. ¹ It alleges that excess profits tax computed without the benefit of those sections results in an excessive and discriminatory tax because a credit based on invested capital is an inadequate standard for determining excess profits. The reasons assigned are as follows: That within the meaning of 722 (c) (1), petitioner's business was in a class in which intangible assets (patent license), not includible in invested capital under section 718, made important contributions to income; and that within the meaning of 722 (c) (3), petitioner's1955 U.S. Tax Ct. LEXIS 154">*180 invested capital was abnormally low.

1955 U.S. Tax Ct. LEXIS 154">*181 The record establishes, and we have so found, that the petitioner's invested capital was abnormally low within the meaning of section 722 (c) (3). Where a taxpayer qualifies under any one of the three conditions set forth in (1), (2), and (3) of section 722 (c), it is entitled to receive consideration of its claim for relief. Crossfield Products Corporation, 20 T.C. 97; Tin Processing Corporation, 16 T.C. 713, 722; Regs. 112, sec. 35.722-4.

24 T.C. 533">*546 The question to be decided is whether petitioner is entitled to an amount for constructive average base period net income which would result in a credit in excess of the amount computed by the invested capital method and allowed by the respondent.

The petitioner had the burden of establishing a constructive average base period net income sufficient in amount to result in a credit in excess of $ 365.20 allowed by the respondent for the taxable period based on invested capital.

The petitioner requests us to find constructive average base period net income of $ 76,807.10. Using such figure, petitioner claims an excess profits credit under the income method of $ 72,966.74.

1955 U.S. Tax Ct. LEXIS 154">*182 No useful purpose would be served by a detailed discussion of the method used by petitioner in arriving at the amount. Briefly, petitioner assumes that if it had been in existence during the base period years, it would have recapitalized with sufficient paid-in working capital to have enabled it to purchase materials at substantial savings; to maintain an inventory of finished goods which would be ready for sale prior to the season when the largest quantity of orders are received; to obviate the giving of discounts to induce sales; and to eliminate the need for making sales on credit. Also, petitioner assumes average yearly sales of 1,718 curers if it had been in existence during the base period years and if it had been recapitalized with sufficient working capital. Petitioner's proposed constructive average base period net income of $ 76,807.10 is based upon assumed sales of 1,718 curers, which represents twice the average number (859) of curers sold by the old company in the base period years. For reconstruction purposes, petitioner would use the old company's unit cost per burner in 1937, and the old company's average list selling price of a 22-burner curer in the base period1955 U.S. Tax Ct. LEXIS 154">*183 years. Also, it would disregard, inter alia, the old company's practice of giving discounts to induce sales and to obtain cash; and it would disregard the operating losses of the old company. In its reconstruction, petitioner assumes that if it had been in existence during the base period years and had recapitalized to obtain adequate working capital, its chief stockholder, Forrest Smith, would have remained in control.

The respondent contends that petitioner has failed to establish a fair and just amount to be used as its constructive average base period net income. Respondent contends that petitioner must show that it could have operated at a profit in the base period years, if it had been in existence, in order to support any reconstruction of earnings. Harry Lang Manufacturing Co., 19 T.C. 567. Respondent contends that petitioner has not shown wherein it would have operated in any manner which was different from the operations of the old corporation, except that it hopes it would have done everything on a larger scale. Respondent attacks petitioner's assumption that if it had been 24 T.C. 533">*547 in existence during the base period years it would1955 U.S. Tax Ct. LEXIS 154">*184 have sold 1,718 curers, which number is twice the average number of curers which the old company sold in the base period years, namely, 859 curers. Respondent contends that there is no evidence which supports such assumption.

The petitioner must establish "what would be a fair and just amount representing normal earnings to be used as a constructive average base period net income * * *." The petitioner has the burden of establishing what amount would constitute its normal earnings if it had been in existence during the base period years. Consideration of all of the evidence compels the conclusion that petitioner has not made the necessary showing.

The petitioner assumes that during the base period years, its normal sales would have been an average of 1,718 curers per year. In the taxable year 1945, in a market which reflected the impetus of pent-up war demand, scarcity, and cash in the hands of buyers, the petitioner sold only 1,453 curers. We are not persuaded by the evidence that petitioner's average annual sales during the base period can be assumed to be as great as 1,718 curers. The petitioner's assumption disregards conditions which existed during the base period years 1955 U.S. Tax Ct. LEXIS 154">*185 in a competitive market for oil-burning curers in the flue-curing tobacco area. Furthermore, the petitioner has failed to establish that its experience, if it had existed during the base period years, would have been substantially or even moderately different from the experience of Smith's Heating System, Inc., the earlier company, which made and sold the same product, under the same trade name, in the same area, and under the direction of the same manager and chief stockholder, Forrest H. Smith.

If petitioner had been in business during the base period years it would have had to promote its product in an undeveloped market, offer inducements to tobacco growers to convert from wood-burning to oil-burning curers, extend credit, and compete with two or more others who manufactured oil-burning curers and sold them in the same area. Petitioner, in the base period years, would have had to incur expenses, such as those of advertising and promotional work, and to have adjusted the selling price of its product to what buyers were willing to pay in a buyer's market. Petitioner, in 1939, would have encountered the difficulty of finding a large number of buyers who were able to pay for its1955 U.S. Tax Ct. LEXIS 154">*186 product at a time when their income and buying power was reduced because the price of tobacco fell from 23.16 cents per pound to 15.2 cents per pound, and, in August, was practically eliminated by the closing of the tobacco market in eastern North Carolina.

Furthermore, the evidence does not persuade us that petitioner, if it had been in existence in the base period, could have obtained additional working capital without changing its management and methods of operation; that is to say, without having control pass from Forrest 24 T.C. 533">*548 H. Smith to an investor. The evidence shows that individuals who, in the base period, demonstrated interest in investing risk capital in the old company made the acquisition of a controlling interest a condition of advancing capital. As we pointed out in Tin Processing Corporation, supra, p. 724,

We believe as stated in the Bulletin on section 722, Part V (f), that "* * * implicit in this comparison is the idea that the normal operating conditions upon which relief is based and the operating conditions during the excess profits tax period must be comparable * * *." Having determined the nature of the taxpayer and the1955 U.S. Tax Ct. LEXIS 154">*187 character of its business we think that the law required that the constructive income for the base period years must be on the basis of an operation of the same type.

The contentions of the petitioner present the question whether we can assume, upon the record in this case, operations during the base period years as successful as petitioner's operations in the taxable year 1945. Petitioner assumes an average base period net income of $ 76,807.10. However, its net profit for 1945, during the war economy, amounted to less, namely, $ 71,099.36. We must conclude that it is unrealistic, upon due consideration of the entire record, to assume that petitioner would have enjoyed during the base period years the same expansion of business and increase in profits as it realized in 1945 under the stimulation of wartime marketing conditions. We are provided with evidence of the unreality of petitioner's assumption by the experience in 1938 of the earlier company. In 1938, it planned to manufacture and sell 2,000 curers and advertised the Smith curer extensively to achieve that goal. But the sales of the old company in 1938 amounted to only 981 curers, many of which were made on credit.

Even1955 U.S. Tax Ct. LEXIS 154">*188 if we assume additional working capital in the base period, it does not necessarily follow that petitioner could have operated profitably, or that it could have avoided operating at a loss in some of the base period years. Petitioner's assumption contemplates both the ability of buyers to pay for its product in the base period and a demand for an average volume of sales of 1,718 curers. Petitioner assumes a large potential market in the base period without presenting proof of an equal ability of the potential buyers to make payment for the product. It was the lack of paying power which led to the eventual failure of the earlier company.

Petitioner's proposed average base period net income amounts to little more than an assertion of the ultimate fact. We must have better proof than mere assertion of the ultimate fact. Arden-Rayshine Co., 43 B. T. A. 314; Transit Buses, Inc., 20 T.C. 999.

It is petitioner's experience in 1945, a post base-period year, which gives the chief, if not only, support for petitioner's contention. We may not take into account the taxpayer's experience in an excess profits 24 T.C. 533">*549 year1955 U.S. Tax Ct. LEXIS 154">*189 in determining the extent to which the profits in an excess profits year were excessive. Transit Buses, Inc., supra, p. 1010.

It is concluded that petitioner's reconstruction is unsupported by the evidence. We have searched the record, without success, to find an appropriate basis upon which a lesser figure could be found as a fair and just amount representing constructive normal earnings, in the light of what would constitute normal operating conditions for petitioner during the base period. Upon the evidence before us, we are unable to make any determination which would provide relief. The petitioner's claim for relief must be denied.

Petitioner is liable for a deficiency in excess profits tax in the amount of $ 14,361.34 by reason of having deferred payment of that amount under the provisions of section 710 (a) (5) of the 1939 Code.

Reviewed by the Special Division.

Decision will be entered for the respondent.