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quality to the cotton fabric, which cotton did not have
naturally. Mr. Penalba developed the cotton/Lycra fabric by
wrapping the synthetic filament completely around the cotton
fibers. The cotton/Lycra fabric was used by clothing
manufacturers for such products as athletic jerseys, leotards,
dresses, bicycling shorts, ski shorts, and leggings. Sales for
the cotton/Lycra fabric caused petitioner's gross receipts for
its fiscal year 1990 to increase dramatically.
The cause of petitioner's decrease in sales after 1990 was
primarily market conditions. After its fiscal year 1990, other
operators became able to manufacture fabrics similar to the
cotton/Lycra fabric, causing increased competition for petitioner
in this product.
On its Federal income tax returns for its years ending July
31, 1987 through July 31, 1990, petitioner reported the following
gross receipts:
Year ending July 31 Gross receipts
1987 $9,244,122
1988 7,764,587
1989 11,514,777
1990 22,203,363
On its Federal income tax returns for its years ending July
31, 1987 through July 31, 1990, petitioner reported the following
taxable income:
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