*239 Decisions will be entered under Rule 50.
Excess Profits Tax -- Sec. 722 (b) (4), I. R. C. 1939 -- Constructive Average Base Period Net Income. -- The Commissioner recognized that the petitioner qualified for relief under section 722 (b) (4) and granted partial relief under section 722. A fair and just amount representing constructive average base period net income determined herein.
*1027 The petitioner filed applications for relief from excess profits taxes for its fiscal years ended November 30, 1942 through 1946. The Commissioner granted those claims in part and denied them in part. The petitioner now contests the disallowance only with relation to the application of*240 section 722 (b) (4).
FINDINGS OF FACT.
Don Baxter, Inc. (hereinafter referred to as the petitioner), a Nevada corporation with its principal place of business at Glendale, California, filed its excess profits tax returns for the taxable years with the collector of internal revenue for the sixth district of California.
Donald E. Baxter, a physician and surgeon, began to work on intravenous solutions in 1927. There were then no such solutions on the market in "ready to use" containers. Some hospitals prepared solutions for themselves. The major problem encountered by hospitals in administering such solutions was called hyperpyretic reactions, that is, a patient's temperature would go up abruptly about 30 minutes after the solution began entering his veins. That condition would persist for as much as 4 hours and would be accompanied by a severe shaking chill and a precipitous drop in the white blood cell count. There would be changes in the heart beat. These patient reactions were common occurrences and physicians were frequently reluctant to administer intravenous solutions on this account.
*1028 Baxter was primarily interested in the elimination of these reactions in his*241 early work in this field and successfully produced a solution which did not contain a pyrogen, a chemical substance containing bacteria and other micro-organisms which caused the trouble. Baxter was also interested in devising a container in which the solutions could be stored, shipped, and ultimately dispensed. He produced his first ready to use intravenous solution in 1928, and packed it in an adaptation of the ordinary pyrex flask then in use in hospitals.
The petitioner was organized on February 26, 1930, to engage in the manufacture and sale of ready to use intravenous solutions. It took over the assets of the sole proprietorship theretofore conducted by Baxter.
The principal function of an intravenous solution is to supply water to the human system. A person with a high fever burns up water rapidly and, in other instances, a patient, because of shock or illness, is either unwilling or unable to take water by mouth. Water is then introduced intravenously so that the patient can maintain the basic processes of life. Distilled water alone cannot be safely administered intravenously due to the difference in osmotic pressure between distilled water and blood. It is therefore*242 necessary that either dextrose or salts, or both, be added to distilled water in order to equalize its osmotic pressure with that of the red blood cells. Dextrose also serves as a source of nutrition for the patient.
Approximately 90 per cent of the petitioner's business during the base period consisted of the manufacture and sale of 5 basic solutions. Those solutions were: Normal saline; 5 per cent dextrose in distilled water; 5 per cent dextrose in normal saline solution; 10 per cent dextrose in distilled water; 10 per cent dextrose in normal saline solution.
New solutions have been introduced by the producers of commercial intravenous solutions from time to time to serve new uses. The development of these solutions is largely attributable to the medical and scientific professions.
The greater use of intravenous solutions, at the time the petitioner commenced business, was in the postoperative phase of surgery. This use expanded later to the preoperative stage to build up the patient for the shock of surgery. A surgeon will not operate now, barring extreme emergency, until the patient has been properly hydrated.
Baxter's original pyrex flask proved unsatisfactory. The petitioner*243 developed a container in 1931 which it called a vacoliter, a glass container in which one liter of intravenous solution was placed under a vacuum. The vacoliter permitted the solutions to be sealed in it by the petitioner and eventually administered directly to the patient without contact with air. The petitioner applied on October *1029 5, 1931, for a patent on the vacoliter and one was issued on December 26, 1933. The petitioner made various improvements in the vacoliter, applied on October 27, 1933, for a second patent on a vacoliter with a rubber seal, and the patent was issued on June 4, 1935. The petitioner applied on October 27, 1933, for a patent on an evacuating machine and process which it had developed for the purpose of creating the necessary vacuum in the containers. That patent was issued on July 27, 1937. A number of permanent features of the vacoliter had been developed by 1935.
The petitioner was faced with three distinct problems in producing intravenous solutions. It had to be certain its solutions were sterile, nonpyrogenic, and stable. Stability referred to the "pharmaceutical elegance" of the product, meaning that a product must not only be sterile*244 and pure but must give the appearance of being sterile and pure. The solutions marketed by the petitioner were always sterile and nonpyrogenic and, at all times, met the standards of the United States Pharmacopoeia, an official compendium of pharmaceutical standards. The Council on Pharmacy and Chemistry of the American Medical Association issued its seal of approval of the petitioner's solutions in 1933, and the petitioner received the seal of approval for its solutions from the American College of Surgeons in 1935. However, it was not until August 1939 that the petitioner was able to achieve complete stability in its product.
Precipitation sometimes appeared in the solutions in the petitioner's vacoliters if they were not used promptly, that is, material appeared in the container which was not in solution. Precipitation was not a uniform occurrence. It might not appear at all in some lots; others would be full of precipitation. It would form in some vacoliters within a week; in others within a month; and in others within several months. A solution, before being shipped, was inspected to see if precipitation had developed since manufacture. If so, it was destroyed. As high*245 as 30 to 40 per cent of a lot at times, during 1934, was rejected and destroyed prior to shipment because of the presence of precipitation. Only clear solutions would be shipped under the petitioner's rigid inspection standards. Nonetheless, some complaints would be received from hospitals weeks or months later that precipitation had formed after shipment.
This precipitation did not cause hyperpyretic reactions, but there was a tendency on the part of some in the medical profession to associate reactions with precipitation, and therefore not to use intravenous solutions except in extreme situations.
The petitioner devoted great efforts to find and eliminate the causes of precipitation. It employed Arthur Cherkin, a graduate chemist, in August 1934 to try to eliminate precipitation. The *1030 problem confronting him was difficult and time consuming because of the many possible sources of precipitation. Each test required several weeks or months while sample products stood, in order to determine whether precipitation would form after a given change had been effected. Possible sources of precipitation were the raw materials, the glass in the containers, the equipment with *246 which the solutions came in contact during manufacture, and the rubber stopper on the containers.
The petitioner at first filled the vacoliters while the solutions were hot, the vacuum being formed automatically as the solutions cooled. It was discovered that hot solutions attacked the mixing tanks and extracted materials from the lining which later would form one type of brown precipitation. The adoption of the evacuating machine permitted mixing of the solutions cold, and the petitioner eliminated that particular source of precipitation in 1936.
Copper, iron, nickel, and tin were detected in precipitation in 1935, which implicated the manufacturing equipment. The tin was traced to a tinned bronze filter which was replaced by a monel metal filter. That eliminated the tin precipitate, but a nickel contamination from the monel metal began to form.
Experiments indicated that the glass containers might have been responsible for some precipitation. Extensive research was done in 1935 on the solubility of the glass bottle. It was discovered that glass would precipitate only in saline solutions, brought about, in part, by the solution and, in part, by the application of heat in the*247 sterilizing process. The petitioner, working in collaboration with the supplier of its bottles, lowered the solubility of its glass containers from approximately 48 units in 1936 to 1 or 2 units in 1939. This was accomplished by treating the inside surface of the container with sulphur. The petitioner thus eliminated that source of precipitation.
Another source of precipitation was found to be the pumps and metal lines used in the plant to pump water from the stills on the first floor to the mixing tanks located on the mezzanine. The petitioner moved in June 1938 into a newly designed plant, wherein the materials flowed throughout the manufacturing process by gravity through pyrex lines. Precipitation due to the old plant's equipment was thus eliminated.
Evidence that the rubber stoppers were causing some of the precipitation was discovered in 1935. Wendell I. Wall, a graduate chemist, was employed in May 1936 by the petitioner for the primary purpose of eliminating the precipitation caused by the rubber stoppers. Wall tried various methods of cleaning the stoppers, and also experimented with some 40 or 50 different rubber compounds, all to no avail. The petitioner began in*248 1936 to pursue the possibility of developing a *1031 coating which could be applied to its stoppers and would thus eliminate that particular source of precipitation. A coating was developed in 1937 which, for various reasons, proved unsatisfactory. Work on the stopper coating was abandoned during 1937 and 1938, but was begun again in January 1939. A secret formula was developed later in 1939 for a stopper coating which possessed all of the necessary requirements. It eliminated precipitation from the stopper, was nontoxic, resisted autoclaving and the effects of solution, was flexible enough not to crack when forced into the neck of the vacoliter, would adhere permanently to the rubber, and was free of discoloration and any undesirable odor or taste. The petitioner decided on August 29, 1939, that all future lots of solution should be closed with coated stoppers. That terminated the precipitation problem with respect to the 5 basic solutions which the petitioner produced.
The petitioner never mentioned or used in its sales promotion, in its literature or through its salesmen, the fact that it had eliminated precipitation.
Competitors of the petitioner in the intravenous *249 solutions industry also experienced difficulties with precipitation which they found to be caused, in part, by flaking glass, rubber stoppers, and particulate from plastic closures.
The petitioner incurred the following expenses as a result of defective products, including those detected before shipment and those complained of by customers, for the fiscal years 1934 through 1939:
| Replacements | ||||
| Fiscal year ended November 30 | Credits to | and | Total | Per cent of |
| customers | rejects at | gross sales | ||
| shipping | ||||
| 1934 | $ 329 | $ 752 | $ 1,081 | 1.6 |
| 1935 | 295 | 2,127 | 2,422 | 2.4 |
| 1936 | 346 | 1,593 | 1,939 | 1.3 |
| 1937 | 644 | 1,736 | 2,380 | 1.2 |
| 1938 | 613 | 496 | 1,109 | 0.5 |
| 1939 | 796 | 1,259 | 2,055 | 0.8 |
The petitioner's old plant, wherein it conducted its business prior to June 1938, contained approximately 11,000 square feet of space. Most of the petitioner's operations in the old plant were done by hand.
The vacoliters had to be set aside for 16 hours after sterilization to permit them to cool for further handling. The petitioner was prevented from mixing and filling vacoliters each day in its old plant by lack of cooling and storage space. It would fill and sterilize one day, setting*250 the products aside to cool. The following day it could not fill and sterilize because of lack of storage space for cooling. Therefore, personnel who had filled and sterilized the previous day, would devote their time to packing. The solutions were mixed in 3 tanks having capacities of 100 gallons, 200 gallons, and 300 gallons. *1032 The potential capacity of the old plant for an 8-hour shift was 1,400 vacoliter units.
The petitioner moved in June 1938 into a new plant which had been designed expressly to accommodate its manufacturing processes. The new plant was a 3-story structure containing 28,440 square feet. Water was distilled on the top floor, mixed with dextrose or salt on the second floor, and the vacoliters filled on the first floor. The materials flowed throughout the process by gravity through lines made of pyrex instead of metal. The operation in the new plant was largely mechanized. Ample space was provided to permit filling and sterilizing each day. Solutions were mixed in three 100-gallon tanks, a 300-gallon tank, and a 600-gallon tank. A 1,000-gallon tank was purchased in 1940. The potential capacity of the new plant for an 8-hour shift was 4,800 vacoliter*251 units. The petitioner operated its plant on an 8-hour day, 5-day week basis during the period 1936 to 1940. A weekly inventory, roughly based upon sales, was used by the production superintendent to determine the size of the production runs.
Baxter, the petitioner, and Ralph Falk entered into an agreement on October 13, 1931, providing for the formation of a Delaware corporation to be known as the Don Baxter Intravenous Products Corporation. The petitioner and Baxter agreed to grant an exclusive perpetual license to the new company to manufacture and sell any intravenous solutions then or thereafter manufactured and sold by the petitioner. The new company's territory embraced all the United States, with the exception of the 11 Western States, and also embraced Canada and all other foreign countries. It was further provided that the new company could either manufacture the products or purchase them from the petitioner. The corporation was duly organized. Its name was subsequently changed to Baxter Laboratories, Inc., hereafter called Laboratories.
Laboratories purchased its intravenous solutions from the petitioner until 1933. Thereafter, Laboratories manufactured, and, at *252 all times material hereto, has continued to manufacture, its own products. Laboratories paid the petitioner, pursuant to the agreement of October 13, 1931, a royalty on each vacoliter sold. The royalties received by the petitioner from Laboratories during the fiscal years 1936 through 1940 were as follows:
| Royalties | ||
| Fiscal year ended November 30 | Royalties | expressed as |
| per cent of | ||
| net sales | ||
| 1936 | $ 19,311 | 13 |
| 1937 | 26,439 | 13 |
| 1938 | 31,141 | 14 |
| 1939 | 35,336 | 14 |
| 1940 | 39,748 | 13 |
*1033 Laboratories had also encountered the problem of precipitation in manufacturing its solutions. The petitioner advised Laboratories on September 16, 1939, that it had perfected a stopper coating which eliminated rubber precipitation. Laboratories formally advised the petitioner on March 23, 1940, that it desired to use the petitioner's stopper coating. The petitioner submitted its secret process and formula to Laboratories on July 12, 1940. Difficulties in adopting the process were experienced, and it was not until 1941 that Laboratories was able to solve its precipitation problem.
The petitioner's sales territory, under its agreement with Laboratories, comprised the 11*253 Western States, Hawaii, Alaska, and the Philippine Islands. The solutions of the petitioner and Laboratories were generally available throughout the United States by 1933. The petitioner employed John L. Sweeny on September 18, 1933, as its first salesman. It had no jobbers or distributors prior to that time, but sold its product directly to hospitals. Sweeny selected distributors from time to time for the petitioner's products throughout its sales area. A second salesman, Miles R. Holt, was employed in August 1936. T. A. Dobbie was employed in December 1936 as sales manager, a newly created position. The petitioner created the position of advertising manager and employed G. P. Fielding to fill it in April 1937. Keith P. Pattengill was employed as an additional salesman in November 1939. The total number of salesmen selling the petitioner's products as of the end of 1936 was 39, including the petitioner's sales force of 3 salesmen and the salesmen employed by its distributors. That number was increased to 78 by 1940. The petitioner covered its entire territory throughout its base period. The above-mentioned additions to its sales force made that coverage more thorough *254 but not more extensive.
The petitioner acquired additional territories in which to sell its product under a December 31, 1938, modification of the agreement of October 21, 1931. The additions included Mexico, Brazil, Argentina, Chile, certain Central American countries, Spain, Portugal, Yugoslavia, Italy, and Trieste. The petitioner was not able to begin development of its newly acquired foreign market until mid-1939 because of preoccupation with its plant expansion program. Its exports prior to that time consisted of shipments to the Philippines and China.
The petitioner had taken steps to exploit the market in Mexico and Central and South America by the end of 1939. Its representative had established some outlets for its products in Mexico, Buenos Aires, Costa Rica, and Brazil during that year. The petitioner's first sale in Argentina was on March 23, 1940, and its first sale in Brazil was on June 28, 1940. Its products were first advertised throughout *1034 South America in the 1940 edition of a hospital yearbook. The petitioner began negotiations with a prospective licensee in Mexico in 1940. The advent of war terminated exploitation of foreign markets for a number*255 of years.
The petitioner's products are not directly advertised to the public, but rather to the medical profession. It can be helpful, in selling of that type, to have a medical director supervise the manufacturer's approach to the profession. The petitioner employed Lloyd L. Ely, a doctor of medicine, in December 1939 to fill the newly created position of medical director. His duties included: Preparation of literature for distribution, illustrating the uses of various intravenous solutions, as well as the problems encountered in their use; maintenance of an extensive medical library; attendance at medical meetings to learn new procedures in intravenous therapy; review of petitioner's advertising; and responding to daily calls and correspondence from physicians.
The petitioner advertised blood transfusion sets and parts in its catalogues in 1938. The important part of the set was a half-size vacoliter into which the user injected an anticoagulant. A sterile tube and needle set was used to withdraw the blood from the donor and transfer it to the container. The user created a vacuum within the container during the procedure through the use of a rubber bulb. Such equipment permitted*256 withdrawal of the blood from the donor, its citration, storage, and infusion, all within one container in which the blood was sealed from contamination throughout the entire procedure.
Laboratories brought on the market in 1939 a new type of blood transfusion set called the transfuso-vac. The difference between that set and the one advertised by the petitioner in 1938 was that the transfuso-vac contained the proper amount of anticoagulant and had a self-contained vacuum.
The transfuso-vac was the subject of an agreement dated March 25, 1939, between Laboratories and the petitioner, wherein it was agreed that each could use the name "transfuso-vac" and could make and sell such containers in their respective territories free of royalties. The petitioner's first recorded sales of the blood transfusion sets appear in 1939 when it sold an estimated 3,000 containers for a total sales price of $ 2,369.
The technique of blood transfusion was extremely cumbersome and difficult prior to the development of transfusion equipment of the nature set forth. It required the assistance of about eight people. The advent of the transfuso-vac permitted a single individual to conduct *1035 the*257 entire operation of withdrawal and transfusion. It also permitted establishment of the "blood bank" as it is known today.
The following table shows the total civilian sales of intravenous solutions, in number of units having a capacity of 500 cc or greater, made by the petitioner, its licensee Laboratories, and a group of four other selected companies:
| Year | Petitioner | Laboratories | 4 selected | Total |
| companies | ||||
| 1936 | 198,147 | 782,317 | 539,694 | 1,520,158 |
| 1937 | 255,342 | 996,442 | 1,194,486 | 2,446,270 |
| 1938 | 273,184 | 1,125,711 | 1,586,275 | 2,985,170 |
| 1939 | 322,176 | 1,257,304 | 2,167,212 | 3,746,692 |
| 1940 | 386,684 | 1,460,281 | 2,457,498 | 4,304,463 |
The petitioner made the following unit sales of vacoliters during the fiscal years shown:
| Fiscal year | Unit sales |
| 1936 | 190,989 |
| 1937 | 254,709 |
| 1938 | 267,467 |
| 1939 | 323,580 |
| 1940 | 383,226 |
The petitioner's tax returns for the fiscal years 1936 through 1940 revealed the following profit and loss information:
| Fiscal year | ||||
| ended | Net sales | Cost of | Gross | Royalties |
| November 30 | goods sold | profit | ||
| 1936 | 1 $ 147,689.71 | $ 54,217.61 | $ 93,472.10 | $ 19,310.51 |
| 1937 | 1 198,160.60 | 80,373.74 | 117,786.86 | 26,438.84 |
| 1938 | 217,035.35 | 99,792.73 | 117,242.62 | 31,141.15 |
| 1939 | 252,134.41 | 113,452.06 | 138,682.35 | 35,336.03 |
| 1940 | 295,998.99 | 124,785.09 | 171,213.90 | 39,748.27 |
| Fiscal year | Total | ||
| ended | income less | Expenses | Net |
| November 30 | cost of | income | |
| goods sold | |||
| 1936 | $ 114,523.50 | $ 57,434.63 | $ 57,088.87 |
| 1937 | 153,462.00 | 74,334.89 | 79,127.11 |
| 1938 | 147,697.91 | 86,251.02 | 61,446.89 |
| 1939 | 174,060.89 | 89,279.48 | 84,781.41 |
| 1940 | 211,146.95 | 105,044.48 | 106,102.47 |
The petitioner's excess profits net income, for the years 1941 through 1946, and the timely payments of excess profits tax it made for the years 1942 through 1946, were as follows:
| Fiscal year ended November 30 | Excess profits | Excess profits |
| net income | tax paid | |
| 1941 | $ 104,588.68 | |
| 1942 | 250,971.79 | $ 76,933.31 |
| 1943 | 208,302.94 | 95,893.99 |
| 1944 | 197,174.64 | 90,280.84 |
| 1945 | 333,494.92 | 198,916.87 |
| 1946 | 130,758.21 | 2,691.67 |
*1036 The petitioner is entitled to use an excess profits credit based on income pursuant to section 713, I. R. C. 1939. Its actual excess profits net income for the base period years was as follows:
| Fiscal year ended | Excess profits |
| November 30 | net income |
| 1937 | $ 78,062.53 |
| 1938 | 66,127.59 |
| 1939 | 89,043.61 |
| 1940 | 104,892.47 |
| Average | 84,532.00 |
The petitioner's average base period net income under section*259 713 (f) was $ 97,415.90. Its constructive average base period net income as determined by the Commissioner was $ 100,648. The petitioner claimed a constructive average base period net income of $ 226,557.36 in its applications for relief under section 722 for the taxable years.
A fair and just amount representing normal earnings to be used by the petitioner as a constructive average base period net income is $ 110,000.
OPINION.
The Commissioner not only concedes that the petitioner qualifies for relief under section 722 (b) (4) and that the push-back rule applies but has allowed the petitioner some of the relief claimed by computing constructive average base period net income and a larger resulting credit than the petitioner would receive without the benefit of section 722. The Commissioner makes no argument that the applications for relief filed by the petitioner were not broad enough to cover the various contentions made in this case.
The notices of partial allowances and partial disallowances do not disclose just what caused the Commissioner to grant some relief or what his computations were leading to that relief. However, his counsel has made statements from which the information*260 in the rest of this paragraph is gleaned. The Commissioner recognized that the new plant, occupied in June 1938, gave the petitioner increased capacity for production and changed the method of production from an all-hand to an all-machine method, but concluded that there was no proof that capacity was a sales-limiting factor during the base period and granted no relief on that basis. He considered the petitioner's claim of expansion of its sales territory to include some countries to the south of the United States but, since there was no evidence of the petitioner's ability to develop a profitable market in those countries during the base period, he did not take that factor into account in reconstructing base period earnings. He was convinced that the machine processes installed in the new plant eliminated some of the causes of defective solutions and improved the stability of *1037 the solutions "as was true to an even lesser extent by reason of the coated stopper" and that the petitioner would have had some additional sales on account of the improved stability of its product. He took those sales into account in constructing the average base period net income upon which *261 he allowed the relief.
The petitioner contends that the relief granted by the Commissioner is inadequate since it is entitled to a much larger credit. It asked for a finding as follows:
49. If petitioner had completed the development of its stopper coating in 1937 instead of 1939, if petitioner had introduced and commenced selling blood containers in 1937 instead of 1939, if petitioner had created the position of medical director and filled it in December, 1937, instead of December, 1939, if petitioner had completed its new plant and occupied it in June, 1936, instead of June, 1938, if petitioner had created the position of advertising manager and filled such position in April, 1935, instead of April, 1937, if petitioner had acquired additional foreign sales territory by amended contract of December 31, 1936, instead of December 31, 1938, and if petitioner had expanded its sales force by the end of 1937 to the extent that it was expanded by the end of 1939, petitioner would have attained a level of net sales of at least the sum of $ 600,000 by the end of its base period, or November 30, 1940, of which $ 500,000 net sales would have resulted from domestic business and $ 100,000 net*262 sales from foreign business. Such a level of net sales would have resulted without taking into account or giving any effect to any events or conditions occurring or existing after December 31, 1939. [R. 886-891, Ex. 74.] Based upon the foregoing assumptions, and with the additional assumption that petitioner had commenced business in 1928 instead of 1930, petitioner would have attained a level of net sales by the end of its base period of $ 650,000. [R. 887-888.]
The following summary is from its opening brief:
Thus, the crowded conditions in the old plant, its inadequate design as a place to manufacture intravenous solutions, the designing and construction of a modern, efficient plant, are all tied together with the efforts petitioner was making to the end that the principal limitations upon the acceptance of its product might be effectively overcome. The Record establishes that until these problems were overcome petitioner's selling efforts were necessarily hampered, and indeed were limited.
The petitioner was not only well established but, coupled with its licensee, it occupied a dominant position in the industry at the beginning of the base period, and its request for *263 a finding that it commenced business either during or immediately prior to the base period has been denied because it is without merit.
The petitioner claims that its transfuso-vac was a new product which it introduced in the base period and the base period earnings do not reflect the earnings normally to be expected from that product. It is not necessary to decide whether the introduction of this product during the base period might otherwise be a qualifying factor under section 722 (b) (4) since the evidence does not show that the petitioner's base period net income was an inadequate standard of *1038 normal earnings because of the introduction of that product in the latter part of the base period. The evidence does not show what additional earnings might reasonably have been expected from the earlier introduction of that product, and without such evidence the matter merits no further discussion. Events occurring after December 31, 1939, cannot be considered in this latter connection.
The old plant was a poor one, inferior in many ways to the new plant, but the petitioner was obtaining its share of the existing market and the evidence does not justify a finding that its sales*264 were limited because it could not produce in the old plant as much product as it could sell. The record does not show that an earlier appointment of an advertising manager and a medical director, or the earlier expansion of its sales force, alone, would have had any substantial effect upon earnings during the base period. The petitioner had begun to investigate foreign markets, but what it did in that respect during the base period has no effect upon the computation of CABPNI under section 722.
The principal argument of the petitioner is based upon the elimination of precipitation in the solutions which it sold for intravenous injections. It claims that precipitation was finally eliminated from those solutions in August 1939 and, assuming that this result had been accomplished 2 years earlier, its sales and profits at the close of the base period would have been much greater than the Commissioner determined in his computation of CABPNI. It says:
The perfection of the product was a logical first step before the expansion of the sales department and the expansion into new markets which were contemplated and which actually resulted after the product was perfected.
The petitioner*265 was trying to the best of its ability during the base period to overcome precipitation which occurred to some extent in its product. The elimination of precipitation was highly desirable and undoubtedly tended to improve the product. However, the competitors of the petitioner were plagued with the same or a related similar problem. There was resistance by some physicians to the use of intravenous solutions because of precipitation in those solutions. However, this resistance affected the entire industry and, as previously stated, the petitioner was obtaining its share of the existing market and its losses due to precipitation were small. The petitioner, no doubt, had to keep trying to eliminate precipitation for fear that the solution of this problem by competitors would adversely affect its sales.
The Commissioner apparently based the partial relief which he allowed primarily upon the elimination by the petitioner of precipitation in its product. The record shows that it was not the policy of the petitioner to advertise or call the attention of customers to the fact *1039 that precipitation in its product had been eliminated. Furthermore, the petitioner has not demonstrated*266 that its elimination of precipitation in its product in 1939 gave it a valuable selling advantage over its competitors. Its licensee did not eliminate precipitation until 1941. The record falls far short of justifying a finding that the petitioner's sales during the base period would have reached the figures contended for by it had the gradual solution of this problem of precipitation, which was taking place during the base period, been pushed back 2 years. It is not at all clear that the petitioner would have captured any very substantially larger portion of the market if its elimination of precipitation had occurred 2 years earlier. However, had it solved the precipitation problem 2 years sooner, it would have had that much additional time and opportunity to increase its market. The record as a whole justifies the allowance of a constructive base period net income of $ 110,000.
The petitioner filed claims for relief under section 721 (a) (2) (C), the Commissioner denied those claims and the petitioner, in the petitions, assigns as error the Commissioner's failure to allow relief under that section for the years 1942 through 1945. The record contains evidence relating to this*267 subject, the parties filed requests for findings of fact with respect to it, and the petitioner indicated that it was claiming relief under section 721 (a) (2) (C) in the alternative if it did not receive adequate relief under section 722. However, the petitioner's briefs contain no argument on the subject. The Court concludes, from the fact that the petitioner is no longer arguing the point, that the contentions made in the petitions with respect to section 721 (a) (2) (C) have been abandoned. Consequently, no findings of fact have been made and, even if the petitioner has not abandoned these contentions, they are decided against it for failure properly to prosecute.
Reviewed by the Special Division.
Decisions will be entered under Rule 50.
Footnotes
1. Before discounts.↩