The following table shows railroad operating revenues and expenditures for equipment maintenance of class I, II, and III railroads for the period 1916 to 1939, inclusive:

The following schedule shows freight train car-miles and expenditures of class I railroads, and freight train car-miles and maintenance of equipment expenditures of class I, II, and III railroads for the period 1919 to 1939, inclusive:

The following shows net income, before taxes, for various groupings of railway equipment manufacturers for the period 1922 to 1939, inclusive, and index numbers derived therefrom (1922-1939 average=100):

Although the average earnings of railway equipment manufacturers were depressed in the base period approximately 25 per cent, as measured by average earnings for the period 1922-1939, this depression was the result of a continuous decline from the year 1930.

The business of the taxpayer was not depressed in the base period because of temporary economic circumstances unusual in the case of the petitioner or because the industry of which it was a member was depressed by reason of temporary economic events unusual in the case of such industry.

The business of the petitioner was not depressed during the base period.

Section 722 (b) (4) Issue.

In 1936 petitioner began to set up a new small mill No. 3, specifically designed for rolling rings of intermediate weight, i. e., between 60 and 250 pounds. The new mill began operations in the latter part of May 1937. Prior to the completion of small mill No. 3 petitioner ascertained there was a market for intermediate rings and began taking orders for rings from those who were customers for products produced on its big mill and its small mills Nos. 1 and 2. After the completion of small mill No. 3 the petitioner made a search of its records and transferred to small mill No. 3 the orders for intermediate rings which it was then manufacturing on its big mill and its small mills Nos. 1 and 2.

The cost of equipment and machinery used in small mill No. 3 was $129,926.03, an 8 per cent increase in the net book value of peti

tioner's equipment as of January 1, 1936. To accommodate the new mill the petitioner purchased a building at a cost of $27,964.25.

During the period from September 1936 to March 1938 petitioner acquired five new boring mills at a total cost of $120,995.78. The addition of these boring mills enabled the petitioner to machine its products faster and more efficiently.

The following schedule shows the petitioner's monthly sales in pounds by mills for the base period years:

The monthly production of small mills Nos. 1 and 2 and the big mill was greatly reduced following the installation of small mill No. 3. The installation of small mill No. 3 did not result in a higher level of earnings.

The following schedule compares quarterly sales in pounds of small mills Nos. 1 and 2 with those of small mill No. 3 for the years 1938 and 1939:

The installation of small mill No. 3 constituted a change in the character of the business of the petitioner during its base period.

The petitioner has failed to establish that as a result of such change in character of its business its average base period net income is an inadequate standard of normal earnings.

Section 711 (b) (1) (J) Issue.

On July 30, 1951, petitioner filed claims for refund on Form 843 under section 711 (b) (1) (J) of the Internal Revenue Code for the taxable years 1940, 1941, and 1942 in the amounts as follows:

Year 1940

Amount of refund
claimed
$4, 365. 18

1941----

1942_

4, 781. 36
4,817. 73

The following schedule sets forth the dates of various actions taken by the parties which may have a bearing on this issue:

For the years 1940 and 1941 the respondent determined no deficiency. With respect to the year 1942 a deficiency of $3,287.33 in excess profits tax was determined.

OPINION.

LEMIRE, Judge: The petitioner contends that its excess profits taxes for the calendar years 1940, 1941, and 1942 are excessive and discriminatory because of the existence of factors specified in subsections (b) (2) and (b) (4) of section 722 of the Internal Revenue Code of 1939.

The primary basis for relief under (b) (2) is an alleged depression in its base period sales to railroads of equipment for rolling stock maintenance because of a temporary and unusual circumstance of a severe decline in the equipment maintenance expenditures of the railroad industry.

The petitioner is a fabricator of various steel products. The major portion of its net income is derived from the sale of products used by the railroad industry, although a considerable portion of its net income is derived from the sale of products used in other industries. However, the petitioner does not claim a base period depression in its non-railroad sales.

The parties are agreed that the expenditures by the railroad industry during the base period were curtailed. They differ as to whether this was the result of a temporary and unusual circumstance within the purview of the statute. Numerous schedules, charts, and graphs have been presented in support of the respective positions of the parties. A critical analysis of such evidence persuades us that the depression in the railroad industry was not by reason of temporary economic events unusual in the case of such industry but was the result of a persistent long-term declining trend which commenced considerably prior to the base period. This record is replete with evidence that the railroad industry was a declining one prior to, during, and beyond the base period. The primary reason for the declining trend of the railroad industry is the development of transportation media competitive with the railroads. The extremely rapid growth of the automotive passenger and truck transportation, the sharp increase in transportation facilities afforded by air carriers, water carriers, and pipe lines, set forth in our Findings of Fact, attest to the ruinous competition to which the railroad industry was subjected. The statistical data presented show the existence of a persistent declining trend in the railroad industry generally and, also, in the maintenance equipment industry. This record does not establish that the business of the railroad industry or that of the maintenance equipment industry was depressed because of a temporary