the buttons would otherwise receive.. Other processes left the flash in the center of the button, requiring a drilling operation to remove. This enabled petitioner to produce wash buttons at a great saving in machinery. This particular method of production enabled petitioner to enter this branch of business on a profitable basis.

Petitioner's research and development in perfecting the types of buttons which form the basis of its claim for relief under section 721 were completed prior to the commencement of the taxable year involved.

During the taxable year petitioner's sales of vegetable ivory buttons increased due to the war effort, as the Quartermaster General's office insisted on the use of ivory buttons until some time in 1942, when it finally allowed the use of plastic buttons.

Petitioner conducted and financed all of the research leading to the new products—“Niesac" mottled in the rod buttons, "Robulith" buttons, "Duo Horn" buttons, and the development and use of the pin die mold construction for leaving flash on the back of wash buttons.

The following table shows the amounts charged by petitioner to an account called "Experimental and Research," which amounts were charged to cost of manufacturing and deducted on petitioner's income tax returns in computing its taxable income:

The greatest part of such amounts consisted of labor and supplies. No part of Broderson's salary is included. Owing to limited laboratory facilities, petitioner found it necessary to carry out experimentation on its production machinery, using personnel engaged in production, no part of the expenses of which is included in the expenditures charged to the "Experimental and Research" account.

The beginning of the replacement of ivory buttons with synthetics opened a new avenue for experimental and developmental work in the button industry. Prior thereto, although expenditures for such work were made by petitioner, it was not customary to expend any material amount of money therefor. The art of making buttons from natural products left little room for improvement in that field.

Petitioner is constantly striving to overcome competition and is continuing in its endeavor to improve certain of its products. One

of its post-war objectives is to construct a plant to produce an entirely new plastic substance, which has passed through the development stage and is now operating on a pilot plant scale. This will enable petitioner to make further improvements in its product.

Petitioner has applied for patents other than those mentioned and has additional patents now pending. Qther manufacturers have patents, secret processes, and formulae, the majority being mechanical patents on types of machinery and equipment with which to produce buttons.

In 1940 petitioner was capable of producing as many buttons as were produced by it in 1941. It was not operating at full capacity in 1940, but was operating at full capacity in 1941.

A summary of petitioner's net taxable income (losses) as shown by its tax returns appears as follows:

Petitioner's profit and loss statements for the years ended October

31, 1937, 1938, 1939, 1940, and 1941, are as follows: