Crane Co. of Minnesota v. Comm'r of Internal Revenue

• Citation: 25 T.C. 727
• Decision Date: 17 January 1956
• Docket Number: Docket No. 26262.
• Parties: CRANE COMPANY OF MINNESOTA, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: United States Tax Court

25 T.C. 727

CRANE COMPANY OF MINNESOTA, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 26262.

Tax Court of the United States.

Filed January 17, 1956.

Petitioner is engaged in the sale at wholesale of a wide variety of plumbing and heating supplies and equipment in a sales area comprising 4 States and parts of 3 other States. It claims relief from excess profits tax under the provisions of subsections (b)(2), (b)(3)(A), (b)(3)(B), and (b)(5) of section 722 of the 1939 Code. Held, petitioner has failed to establish the qualifying factors requisite to relief under any of the above subsections of section 722(b). George S. Stansell, Esq., John B. Chamberlain, Esq., and Leonard S. Schmitz, Esq., for the petitioner.

Charles D. Leist, Esq., and Arthur B. White, Esq., for the respondent.

The taxable year involved is 1941. The Commissioner agrees that the petitioner is entitled to the benefit of an unused excess profits credit carryover or carryback, as the case may be, to the taxable year 1941. The years 1940 and 1942 are involved in the application of an unused excess profits credit carryover and carryback. The respondent has determined that the amount of excess profits tax for 1941 is $58,700.46, after giving effect to an unused excess profits credit carryover and carryback. If the petitioner's claim for relief from excess profits tax is sustained in this proceeding, then there is overpayment of excess profits tax for the year 1941 in the amount of $58,700.46. The petitioner has filed a claim for refund of excess profits tax which has been paid.

The petitioner filed application for relief from excess profits tax under section 722 of the 1939 Code for the year 1941. The petitioner's application for relief for the year 1941 was denied after consideration and review by the Excess Profits Tax Council. Thereafter, the Commissioner issued his notice of disallowance, determining that the petitioner was not entitled to any relief under section 722. The Commissioner determined that the petitioner did not qualify for relief under any of the provisions of section 722 which were relied upon by the petitioner, and that it had not established what would be a fair and just amount representing earnings to be used as a constructive average base period net income for the purpose of computing an excess profits tax based upon a comparison of normal earnings and earnings during the excess profits taxable year ended December 31, 1941.

The issues, in general, are whether the petitioner qualifies for relief under the provisions of either subsection (b)(2), (b)(3)(A), (b)(3)(B), or (b)(5) of section 722 of the 1939 Code, and , if the petitioner qualifies for relief under any subsection of section 722, whether the petitioner has established what would be a fair and just amount representing normal earnings to be used as a constructive average base period net income. The petitioner relies primarily upon the provisions of section 722(b)(3)(A). The petitioner contends that throughout its history it has carried on a business through which it supplied certain types of building materials to the construction industry and that, therefore, at all times it was either a member of the construction industry, or, in the alternative, it was a member of an industry which was so closely related to and dependent economically upon the construction industry that its profits cycle was affected or controlled by the profits or volume cycle, or both, of the construction industry. The petitioner claims that it has a variant profit cycle.

The record in this proceeding is large; it includes 10 volumes of transcript and more than 240 exhibits. A few of the facts have been stipulated.

FINDINGS OF FACT.

The stipulated facts are founds as facts. The stipulations are incorporated herein by this reference.

The petitioner filed its excess profits tax returns for the taxable years 1940, 1941, and 1942, with the collector of internal revenue for the district of Minnesota. The petitioner filed timely applications for relief under section 722 of the 1939 Code for the taxable years 1941 and 1942, on September 15, 1943. Petitioner did not file application for relief under section 722 or claim for refund with respect to the year 1940, and the statutory period within which such application or claim might be filed has expired.

The petitioner, a Minnesota corporation, was organized on December 15, 1892, under the name of Crane & Ordway Company. Its charter was renewed on December 15, 1922, and at that time its corporate name was changed to Crane Company of Minnesota. The petitioner maintains its principal office in St. Paul, Minnesota.

The petitioner is not and never has been engaged in any construction work. The petitioner's charter, both the original and the renewed charter, describes the scope of petitioner's authorized activities in the following way: ‘The general nature of its business shall be buying, selling, dealing in pipe, fittings, railway, mill, steam fittings and plumbers' supplies and similar commodities.’ The nature of petitioner's business operations and of the products its sells are described in more detail hereinafter. In general, petitioner's business operations during the taxable year, the base period years, and during all of the earlier years is and has been primarily the purchase and the resale at wholesale of plumbing and heating equipment and supplies manufactured by Crane Co. of Illinois and by other manufacturers. Petitioner is and always has been primarily a wholesale distributor and it has done very little manufacturing at any time and very little fabricating work. Such fabricating of materials as petitioner does is done in connection with its business of wholesale distribution.

Crane Co., the Illinois corporation, has its principal office in Chicago. It is referred to hereinafter as Crane of Illinois. It was organized in 1865. Crane of Illinois, at all times material, has been and is a manufacturer of a wide line of plumbing and heating materials and allied equipment, heating boilers, heating radiators, plumbing earthenware, plumbing enamelware, and bathroom fixtures such as lavatories, bathtubs, closets, closet tanks, sinks, laundry trays; various kinds of valves and fittings, steam specialties, and pipe fittings. Crane of Illinois, in 1932, operated 11 manufacturing plants. Crane of Illinois has various subsidiaries such as Crane-O'Fallon Co. of Colorado, Trenton Potteries Co. of New Jersey, and Crane Enamelware Co. of Tennessee; and it has a nationwide distributing organization with headquarters in New York, Birmingham, Cleveland, Chicago, Dallas, St. Paul, Denver, and San Francisco. Crane of Illinois, over the long period of its existence, has developed a national system for the distribution and sale of its own manufactured goods. It also has maintained a control purchasing department for the purchase of goods manufactured by others, called jobbed goods, which are sold by Crane's subsidiaries and branches.

In Poor's Industry and Investment Survey of July 5, 1939, the use of Crane products is described in the following way:

Crane's products are used in all major industries as well as for household, office building, hospital and industrial building purposes. Among the major industrial markets are public utilities, railroads, water works and steel, shipbuilding, oil, chemical, textile, paper and food products industries.

In a report to stockholders of Crane of Illinois for the year 1932, the market for the products of Crane of Illinois is described as falling into three large divisions, namely, industry, building construction, and replacements and remodeling; the market of ‘industry’ is indicated by reference to steel mills, oil refineries, public service plants, packing houses, railroads, ships, waterworks, and any plant where water, air, gas, steam, or oil has to be conveyed and controlled; and the field of building construction is indicated by reference to residential construction, served by Crane's plumbing and heating division, and to construction by the Federal Government.

From 1892 until the end of 1922, petitioner's outstanding capital stock was owned 50 percent by Lucius P. Ordway, and 50 per cent by Crane of Illinois. On December 31, 1922, Crane of Illinois acquired an additional .025 per cent of petitioner's stock. Thereafter, including 1939, Crane of Illinois owned 50.025 per cent, and the Ordway family owned 49.975 per cent of petitioner's stock.

Since 1910, petitioner's books of account have been kept on a calendar year basis. From 1892 to 1909, inclusive, petitioner's books were kept on the basis of a fiscal year ended on November 30. Accounting data set forth hereinafter is based on the accounting periods which existed in the respective years.

In its nationwide distribution and sales of its products, Crane of Illinois has established 8 regions, or sales territories. The petitioner's sales territory constitutes 1 of these regions.

The petitioner's sales territory, during all of the time which is material, has consisted of Minnesota, the northwest quarter of Wisconsin, the upper peninsula of Michigan, North Dakota, South Dakota, the northern third of Wyoming, and Montana. From 1906 to 1916, inclusive, petitioner also had a sales outlet in Winnipeg, Canada, and it made substantial sales in the Winnipeg area. The sales territory of the petitioner is principally an agricultural area, but in the States of Minnesota, South Dakota, and Montana there are industrial and mining enterprises.

During the base period years, and before, petitioner had 9 sales offices or branches in its sales territory, together with warehouses. The locations of the branches, the years of their operation, and the type of economy in the area served by each branch are set forth in the following table:

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