The Commissioner denied the petitioner's applications for excess profits tax relief for the taxable years ended December 31, 1941, 1942, 1943, 1944, and 1945, and determined deficiencies for the years 1942 to 1945, inclusive, in the total amount of $10,461.96, and an overassessment of $1,901.17 for 1941. The ground for relief relied on by petitioner is that its business, or the industry of which it is a member, was depressed in the base period because of temporary economic circumstances unusual to it or to the industry. Sec. 722 (b) (2), Internal Revenue Code of 1939.
Some of the facts have been stipulated, and are so found.
FINDINGS OF FACT.
The petitioner is a Rhode Island corporation with its principal office and place of business located at Pawtucket, Rhode Island. Its returns for the taxable years involved, the calendar years 1941 to 1945, inclusive, were filed with the collector of internal revenue for the district of Rhode Island.
Petitioner's business is the manufacture and sale of Levers laces. Laces are divided into three general classifications according to the type of machine on which they are made. These are Levers laces, manufactured on Levers machines, lace curtains, made on Nottingham machines, and plain net made on "roller locking" machines. Levers laces are a separate industry classification. They include a number of different types of laces, such as "all-overs," veilings, Valenciennes, Alençons, and bobbin-finings. All-overs are wide widths (up to as much as 18 feet) used primarily for dressmaking. Veilings are made in various widths and are used chiefly in the millinery industry. Valenciennes, or "Vals" as they are known in the trade, are narrow laces of from 3/8 to 4 inches in width, used principally for trimming ladies' dresses, blouses, and underwear. Alençon laces are from 1 to 5 inches in width and are also used for trimming wearing apparel. Bobbin-fining laces are those made under the so-called bobbin-fining system. They are made in narrow and wide widths.
Petitioner's principal product during the period here under consideration was all-overs made of silk and rayon, 10-point or coarser, which were sold chiefly to the dressmaking industry. Petitioner is one of the five Levers lace manufacturers in the United States whose base period production was devoted principally to the manufacture of all-overs. Petitioner's sales were made through an exclusive selling agent, Stern Stern Textiles, Inc., of New York.
In December 1932, petitioner acquired control of Rhode Island Lace Works, Inc., another Rhode Island corporation engaged in manufacturing Levers laces. It manufactured Vals, or narrow laces, for the underwear trade, as well as all-overs for the dress trade, and veilings for the millinery trade. Stern Stern Textiles, Inc., also acted as its selling agent.
The manufacture of Levers laces in the United States was begun about 1866. The industry expanded slowly, and in 1909 there were about 100 Levers lace machines in this country. For many years France has been the largest world source of Levers laces, the industry being centered in the cities of Calais and Caudry. After a study made by the United States Department of State, Congress, in the Tariff Act of 1909, imposed a 70 per cent ad valorem duty on the importation of Levers laces and at the same time provided for duty-free importation of Levers machines into the United States for a period of 17 months. The purpose of these measures was to build up a Levers lace industry in this country and at the same time to protect that industry from the competition of foreign-made laces. No Levers machines were then, or are now, manufactured in the United States. About 400 Levers machines were later imported into the United States, and a total of about 650 machines were in operation in the United States in the base period. Petitioner operated 25 machines and Rhode Island Lace Works operated 43 machines during the base period. At the same time there were about 2,000 Levers lace machines in Calais, France, which is the production center for narrow laces; while Caudry, France, which produces mostly all-overs for the dress trade, had approximately 300 such machines. The major portion of the French production is exported to the United States. All-overs from Caudry provided the principal competition for petitioner's laces during the base period.
The standard unit of production of the American Levers lace industry is a "rack." A rack represents 1,920 motions of a Levers lace machine. Exports of Levers laces from France, and imports into the United States, are reported in pounds. There is no practicable way of converting racks into pounds for purposes of comparison.
Petitioner's production of Levers laces for the years 1922 to 1939, inclusive, in racks, was as follows:
Year Racks
1922....................................... 217,476 1923....................................... 182,283 1/2 1924....................................... 141,299 1925....................................... 90,704 1926....................................... 45,416 1/2 1927....................................... 90,944 1928....................................... 150,373 3/4 1929....................................... 162,066 1930....................................... 230,588 1931....................................... 160,275 1932....................................... 111,224 1933....................................... 111,510 1934....................................... 117,949 1935....................................... 179,027 1/2 1936....................................... 165,644 1937....................................... 161,375 1938....................................... 118,677 1939....................................... 106,236
Petitioner's rack production by types of lace for the years 1930 to 1939, inclusive, was as follows: Racks 1930 1931 1932 1933 Wholly or in chief value of silk or rayon: All-overs ............... 193,349 125,105 92,417 37,481 Veilings ................ 11,587 Bobbin finings .......... ________ ________ _______ ___________ -------- -------- ------- ----------- Racks of silk and rayon ................ 193,349 12,105 92,417 49,068 ======== ======== ======= =========== Wholly or in chief value of cotton: Valenciennes ............ ________ ________ ________ 31,431 Alençons ................ 12,766 1/2 All-overs ............... ________ ________ ________ ____________ Special ................. 18,244 1/2 -------- -------- -------- ------------ Racks of cotton lace .. 37,239 35,170 18,807 62,442 ======== ======== ======== ============ Total rack production . 230,588 160,275 111,224 111,510 Racks 1934 1935 1936 1937 Wholly or in chief value of silk or rayon: All-overs ............... 52,276 1/2 103,023 1/2 87,791 72,446 Veilings ................ 5,833 1/2 4,975 15,202 17,124 Bobbin finings .......... 5,808 15,582 ------------ ----------- ------- ------- Racks of silk and rayon ................ 58,110 107,998 1/2 108,801 105,152 ============ =========== ======= ======= Wholly or in chief value of cotton: Valenciennes ............ 4,693 14,973 271 Alençons ................ 14,668 1/2 17,020 1/2 449 All-overs ............... 56,123 56,223 Special ................. 40,477 1/2 39,035 1/2 ------------ ----------- ------- ------- Racks of cotton lace .. 59,839 71,029 56,843 56,223 ============ =========== ======= ======== Total rack production . 117,949 179,027 1/2 165,644 161,375 Racks 1938 1939 Wholly or in chief value of silk or rayon: All-overs ............... 67,705 63,138 Veilings ................ 21,341 23,231 Bobbin finings .......... 246 ------- -------- Racks of silk and rayon ................ 89,292 86,369 ======= ======== Wholly or in chief value of cotton: Valenciennes ............ 82 17,471 Alençons ................ 448 All-overs ............... 29,303 1,948 Special ................. _______ ________ ------- -------- Racks of cotton lace .. 29,385 19,867 ======= ======== Total rack production . 118,677 106,236
The quantities of Levers laces imported into the United States, by types of materials, for the years 1931 to 1939, inclusive, were as follows: Wholly or Wholly or in chief Silk and in chief value of rayon laces, value of silk veils and Year cotton (Vals) (principally veilings all-overs) Quantity in pounds (1,000 lbs.) 1931 .................... 1,094 80 4 1932 .................... 1,044 21 15 1933 .................... 1,053 10 11 1934 .................... 581 5 6 1935 .................... 670 11 5 1936 .................... 609 47 22 1937 .................... 611 152 67 1938 .................... 594 248 107 1939 .................... 1,131 300 109 Rayon laces (other than veils and veilings) Total Year and metal thread laces Quantity in pounds (1,000 lbs.) 1931 .................... 9 1,187 1932 .................... 13 1,093 1933 .................... 8 1,082 1934 .................... 8 600 1935 .................... 8 694 1936 .................... 7 685 1937 .................... 5 835 1938 .................... 5 954 1939 .................... 2 1,542 The quantities of Levers laces (by types of materials) imported into the United States from France between 1931 and 1939, inclusive, and the unit value of such laces were as follows: Wholly or Wholly or in chief in chief Unit value of silk Unit Year value of cotton value (principally value (Vals), per lb. all-overs), per lb. 1,000 lbs. lbs. 1931 ........ 1,046 $3.75 79,792 $4.49 1932 ........ 926 2.68 20,578 2.87 1933 ........ 945 3.01 9,297 4.02 1934 ........ 490 3.53 4,075 6.86 1935 ........ 430 3.37 8,599 3.98 1936 ........ 418 3.20 40,486 5.29 1937 ........ 489 3.37 140,789 3.58 1938 ........ 565 2.55 242,927 2.30 1939 ........ 1,093 2.49 298,120 2.12 Total (all Silk veils Unit types of Unit Year and veilings, value laces), 1,000 value lbs. per lb. lbs. per lb. 1931 ........ 3,949 $7.49 1,138 $3.83 1932 ........ 14,627 6.60 974 2.77 1933 ........ 10,881 7.23 972 3.08 1934 ........ 5,522 6.86 506 3.60 1935 ........ 5,401 6.07 450 3.41 1936 ........ 12,842 5.61 485 3.44 1937 ........ 38,231 5.78 698 3.51 1938 ........ 72,484 5.42 918 2.72 1939 ........ 35,617 4.86 1,501 2.47 Petitioner's net sales, gross profits, and net income or losses for the years 1917 to 1939, inclusive, were as follows: Net Gross income Year Net sales profits (or losses) 1917 ................ $490,210 $70,832 ($1,273) 1918 ................ 617,371 127,649 27,625 1919 ................ 863,243 196,947 58,878 1920 ................ 1,055,802 278,089 94,981 1921 ................ 647,428 182,194 51,100 1922 ................ 1,061,977 362,061 211,757 1923 ................ 908,111 347,038 176,460 1924 ................ 519,019 240,828 (23,565) 1925 ................ 461,328 92,724 (9,346) 1926 ................ 253,652 31,463 (46,328) 1927 ................ 398,817 76,110 (19,176) 1928 ................ 675,006 178,069 (1,949) 1929 ................ 804,710 167,150 114,413 1930 ................ 1,017,379 259,188 208,234 1931 ................ 655,414 141,965 89,358 1932 ................ 427,956 69,336 32,539 1933 ................ 329,945 37,935 16,004 1934 ................ 426,090 88,782 13,202 1935 ................ 632,556 119,003 105,005 1936 ................ 700,240 198,375 79,106 1937 ................ 668,297 134,100 22,328 1938 ................ 504,956 131,937 22,978 1939 ................ 392,175 78,479 405 The net sales, gross profits, and net income of Rhode Island Lace Works, Inc., for the years 1935 to 1939, inclusive, were as follows: Year Net sales Gross profits Net income 1935 ..................... $608,361.27 $40,947.73 $12,935.20 1936 ..................... 730,448.65 204,502.65 62,153.68 1937 ..................... 735,954.65 211,489.65 3,438.54 1938 ..................... 511,781.31 143,631.31 22,700.35 1939 ..................... 508,366.85 127,075.85 12,751.08 The yearly rack production of Levers laces between 1935 and 1940, inclusive, by 16 domestic producers having 373 machines, as reported by the American Lace Manufacturers Association, was as follows:
Year Racks
1935 .............................. 2,000,044 1936 .............................. 2,020,593 1937 .............................. 1,802,808 1938 .............................. 1,254,014 1939 .............................. 1,501,318 1940 .............................. 1,576,577
The total sales of Levers laces by the above producers and an index of such sales (1936-1939=100) were as follows: Year Sales Index 1936 ....................... $6,403,562 126 1937 ....................... 5,436,795 107 1938 ....................... 4,136,363 81 1939 ....................... 4,379,893 86 There has been a tariff imposed on the importation of Levers laces into the United States at all times since the Tariff Act of 1883. The rates in effect under the various tariff acts and the Reciprocal Trade Agreement of June 15, 1936, between the United States and France, and later international agreements, were as follows:
Tariff act or international agreement Provisions
{40% a.v. on cotton laces 1883 ................ {50% on silk laces {25% on gold, silver, and metallic thread laces {60% on cotton 1890 ................ {60% plus 60¢ per pound on wool {60% on silk 1894 ................ 50% all material {60% on cotton 1897 ................ {60% plus 50¢ per pound on wool {60% on all cotton material 1909 ................ 70% on all material 1913 ................ 60% on Levers laces 1922 ................ 90% on imported laces 1930 ................ 90% rate continued {60% on cotton 12. and finer French Reciprocal {65% on silk veils and veiling Trade Agreement {65% on rayon veils and veiling of June 15, 1936. {90% on other rayon laces {65% on laces wholly or in chief value of silk {60% on cotton laces 12 points and finer made with independent beams. {90% on cotton or rayon or other synthetic less than 12 points {65% on laces wholly or in chief value of silk 1945 ................ {90% on other laces {65% on veils and veilings wholly or in chief value of silk, rayon or other synthetic {90% on veils and veilings of other material {40% on cotton laces 12 points and finer made with independent beams {75% on cotton, rayon or other synthetic material less than 12 points {40% on laces wholly or in chief value of silk 1948 ................ {65% on laces wholly or in chief value of silk coarser than 12 points {45% on laces of other material {45% on veils and veilings wholly or in chief value of silk, rayon, or other synthetic {45% on veils and veilings of other material {35% on cotton laces wholly or in chief value of cotton 12 points and finer {65% on cotton, rayon or other synthetic material coarser than 12 points 1951 ................ {35% on laces wholly or in chief value of silk 12 points or finer {65% on laces wholly or in chief value of silk coarser than 12 points {32 1/2% on veils and veilings of silk or rayon {45% on other laces
Article XI of the Reciprocal Trade Agreement provides in part:
In the event that a wide variation occurs in the rate of exchange between the currencies of the United States of America and France, the Government of either country, if it considers the variation so substantial as to prejudice the industries or commerce of the country, shall be free to propose negotiations for the modification of this Agreement or to terminate this Agreement in its entirety on 30 days' written notice.
The current French franc was established by the first French Republic in 1803. For many years prior to World War I it was one of the strongest and most stable currencies in Europe, being valued in terms of United States currency at between 17 and 20 cents. Between 1916 and 1919 the French Government maintained an artificial rate of 19 cents for the franc. Artificial support of the franc was discontinued in 1919 and its value fell to an average of 7.04 cents in 1920, because of the drastic inflation resulting from World War I and the postwar reconstruction. Between 1920 and mid-1923 the franc was relatively stable, varying in value between 7 and 6.3 cents, but by mid-1923 the franc began a marked decline in value caused by a growing inflation in France, which seriously affected the economy between 1923 and 1926 and was not finally arrested until late in 1926 when the franc was finally stabilized at 3.2 cents. From 1926 until 1933 the franc remained relatively stable, but in the latter year the effects of the world-wide depression made it increasingly difficult to maintain the value of the franc. In October 1936 the French Government devalued the franc and set its new value at a range between 4.3 and 4.9 cents. The nation's financial difficulties worsened and the franc was devalued again, late in 1938, to 2.79 cents. It remained generally stable until the outbreak of war with Germany in September 1939. Between 1936 and 1939 the franc depreciated in value by almost 60 per cent.
After World War II inflationary conditions again prevailed in France, and in December 1945, the franc was devalued approximately 58 per cent to 1.78 cents. There were further devaluations of the French franc in 1946, 1948, and 1949, its value decreasing from 0.84 of a cent in 1946 to 0.46 of a cent in 1949.
In summary, the following changes in the value of the franc in relation to the dollar took place between 1926 and 1949: New value of the franc Date (cents) December 1926 .. De facto devaluation and stabilization ... 3.9170 June 25, 1928 .. De jure devaluation ...................... 3.9170 Jan. 31, 1934 .. Devaluation of United States dollar ...... 6.6197 Sept. 25 ...... } } De jure devaluation ...................... Oct. 1, 1936 .. } July 22, 1937 .. De jure devaluation ...................... 4.3555 May 5, 1938 .... De facto devaluation ..................... 2.7956 Nov. 12, 1938 .. De jure devaluation ...................... 2.7855 Sept. 1, 1939 .. Cabinet decree suspended gold reserve requirement of the Act of June 25, 1928 . 2.7855 Feb. 29, 1940 .. Revaluation of gold reserve of Bank of France in accordance with conditions of the Convention of September 25, 1936 .... 2.3641 Dec. 26, 1945 .. De jure devaluation ...................... 1.7822 January 1946 ... De jure devaluation ...................... 0.8396 Jan. 21, 1948 .. De jure devaluation ...................... 0.4671 Sept. 20, 1949 . De jure devaluation ...................... 0.2857 Petitioner's excess profits tax liability, without regard to the provisions of section 722 of the Internal Revenue Code, for the years here involved was as follows: Excess profits Year tax liability
1941 ................................... $8,859.60 1942 ................................... 184,905.46 1943 ................................... 200,738.26 1944 ................................... 74,414.86 1945 ................................... 85,392.16
Petitioner's base period consists of the calendar years 1936 to 1939, inclusive. Petitioner is entitled to compute its excess profits credit under the provisions of section 713 of the Internal Revenue Code of 1939.
The petitioner's actual excess profits net income for the base period years and the average thereof as adjusted under the provisions of section 713 (e) of the Internal Revenue Code of 1939, which section is applicable to the taxable years 1942, 1943, 1944, and 1945, was as follows:
Excess profits Year net income
1936 ................................... $79,106.44 1937 ................................... 22,327.80 1938 ................................... 22,978.09 1939 ................................... 404.77 ----------- Total ................................ $124,817.10 =========== General average ........................ $31,204.28 Increase in average under sec. 713 (e) . 7,674.57 ----------- Average as adjusted .................... $38,878.85
The petitioner's excess profits credit, computed without reference to section 722 for the years 1940 to 1945, inclusive, was as follows:
Year Amount
1940 .................................... $31,336.87
1941 .................................... 32,685.26
fn1 1942 .................................... 36,934.91
1943 .................................... 36,934.91
fn2 1944 .................................... 38,670.90
fn1 1945 .................................... 41,543.64
fn1
Petitioner is not entitled to excess profits tax relief for the years 1941, 1942, 1943, 1944, and 1945 under the provisions of section 722, Internal Revenue Code of 1939.
OPINION.
TIETJENS, Judge:
Section 722 (a) of the Internal Revenue Code of 1939 provides relief from excess profits tax if the taxpayer establishes (a) that its tax, computed without the benefit of section 722, is excessive and discriminatory, and (b) 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. To show that its tax is excessive and discriminatory petitioner contends that its average base period net income (1936-1939) is an inadequate standard of normal earnings because its business was depressed in the base period due to temporary economic circumstances unusual in its business, or in the industry of which it is a member (section 722 (b) (2)). These temporary economic circumstances, according to petitioner, were (a) the trade advantage, or export bounty, accruing to the French Levers lace industry as a result of the devaluations of the franc in the base period; and (b) the reduction in duty imposed by the United States on the import of French Levers laces, which was contained in the Reciprocal Trade Agreement between the United States and France, effective June 15, 1936. According to petitioner these circumstances, separately or in conjunction, caused a heavy increase in the volume of exports of French Levers laces to the United States, which depressed the selling price of Levers laces here, and as a result its earnings in the base period were seriously depressed.
Respondent's position is (a) that petitioner's business was not temporarily depressed during the base period by reason of the increase in imports of Levers laces from France; (b) that the circumstances relied on by petitioner as the cause of its depression were not temporary economic circumstances unusual in the case of petitioner, or petitioner's industry, within the meaning of section 722 (b) (2), but were legislative events or administrative acts pursuant to legislative or constitutional authority; and (c) that petitioner has not established what would be a fair and just amount representing normal earnings to be used as a constructive average base period net income.
Petitioner's argument reduces to this: the two factors, i. e., the export advantage resulting from the devaluation of the French franc in the period 1936 to 1939 and the United States tariff reduction during the base period were unusual temporary economic circumstances, the concurrence of which resulted in a depression of petitioner's business or of the industry of which it was a member. As we see it, neither the devaluation nor the reduction in duty was unusual or temporary. Reference to our Findings of Fact indicates a long history of devaluations and many changes in duty. We see nothing unusual about the circumstances complained of. The historical data of record establish the contrary — that such currency fluctuations and duty changes were the normal or expected happenings in the field of international monetary and tariff policy. We find nothing in the evidence before us which would justify characterizing these events either as temporary or unusual.
Furthermore, the circumstances on which petitioner relies had no direct effect on petitioner's business. They were not like a strike or a fire or a ruinous price war. If petitioner's business, or the business of the American lace industry of which it was a member, was depressed during the base period years so that the resulting excess profits tax was excessive and discriminatory (a question which we find unnecessary to answer) it was the result of competition with French lace makers during a period when the French manufacturers had the competitive advantage. The evidence shows that ever since the Levers lace industry became established in the United States, its principal competition has come from French Levers laces. In fact, in order to establish the industry in this country, it was necessary to raise the import duties on Levers laces, at the same time providing for the duty-free entrance into the United States of the machinery on which Levers laces are made since none of it was manufactured in this country. The industry enjoyed high protection until 1936, the duty rising to as high as 90 per cent on all Levers laces imported into the United States between 1922 and 1936. In the latter year the rates were reduced in recognition of the need to stimulate international trade as a means of bettering economic conditions in trading nations and, particularly, to combat the worldwide depression of the early 1930's. The reduction of duties in 1936, in our view, was attributable to a change in the trade policy of the United States from the protectionism of the 1920's to a recognition of the economic interdependence of the principal countries of the world and the need to stimulate trade between these countries. Both the devaluation of the franc and the reduction in the duty rates were the result of the interplay of world-wide economic conditions. They were governmental actions taken to implement national economic policies to ameliorate those conditions. Governmental actions, even where they have a direct impact on a taxpayer's business, are not the basis for relief under section 722. Acme Breweries, 14 T.C. 1034; Packer Publishing Co., 17 T.C. 882, 897; Norfolk Chesapeake Coal Co., 18 T.C. 904.
As stated above, in this case the circumstances complained of had no direct impact at all on petitioner's business. The duties were not levied on petitioner's product and the franc devaluation was the action of a foreign government which only very indirectly affected petitioner. The most that can be said is that the duty change and the franc devaluation contributed to increased competition between the French and American manufacturers of Levers laces. But we have held in several cases that competition is not a temporary economic circumstance within the meaning of section 722 which would entitle taxpayers to relief under that section. Lamar Creamery Co., 8 T.C. 928, 938, 939; Harlan Bourbon Wine Co., 14 T.C. 97, 104. No different result is called for here.
The action of respondent in rejecting petitioner's claims for relief is sustained.
Reviewed by the Special Division.
Decision will be entered for the respondent.