§174 — Amortization of research and experimental expenditures

Unlike the section 174 test, however, this evaluative process must follow the scientific method.

Unlike section 174, the revenue procedure does not even require that expenditures be incurred “in connection with” a trade or business.

If that understanding of the court's analysis is correct, however, we judge the analysis unsupported by the governing regulations and thus decline to follow it.

.) - 15 section 174 expense to constitute "qualified research" under section 41 . See Norwest Corp . & Subs . v . Commissioner, 110 T .C . 454, 489-490 (1998) . Section 174 does not define the phrase "research and experimental expenditures", but, similar to the definition of "supplies" in section 41(b)(2)(C), section 174(c) provides that section 174 does not apply to expenditures for "the acquisition or improvement of property to be used in connection with the research or experimentation and of

Unlike the regulations under section 174, which are silent about the means of discovering information, the conference report accompanying the TRA 1986 made it clear that a more structured method of discovery is required with respect to section 41.

As a general rule, section 174 applies to the costs of developing the concept of a product but not to the costs of building the product itself.

the taxpayer may still satisfy the test “at the level 23 The process of experimentation test (which respondent also raises) is a higher bar, which requires “essentially the same uncertainty as is required by the section 174 test” but “imposes a more structured method of discovering information than section 174 requires and may not include all actions a taxpayer takes to resolve uncertainty.” Union Carbide Corp., 97 T.C.M.

The Section 174 Test Under the section 174 test, the expenditures for research must be eligible for treatment as expenses under section 174." "Section 174 provides alternative methods ofaccounting for 'research or experimental expenditures' that taxpayers would otherwise capitalize."¹² Section 1.174-2(a)(1), Income Tax Regs., defines °Sec.

Section 174 provides alternative methods ofaccounting for "research or experimental expenditures" that taxpayers would otherwise capitalize.

Section 174 provides alternative methods ofaccounting for "research or experimental expenditures" that taxpayers would otherwise capitalize.

Section 174 provides alternative methods ofaccounting for "research or experimental expenditures" that taxpayers would otherwise capitalize.

Section 174 provides alternative methods ofaccounting for "research or experimental expenditures" that taxpayers would otherwise capitalize.

Deduction ofMaguire's Expenses Pursuant to Section 174 The petitioners argue that, even iftheir miscellaneous deductions are not authorized by sections 162 and 274, expenses attributable to Maguire are nevertheless deductible pursuant to section 174.

Section 174 provides alternative methods of accounting for "research or experimental expenditures" that taxpayers would otherwise capitalize .

903 (1991) (explaining that the phrase "research an d experimental" for purposes of section 174 refers to scientific or technological research) ; see also sec .

preciation.” Section 41(d)(1) defines “qualified research” as research that meets the requirements of subparagraphs (A), (B), and (C). One of those requirements is that expenditures with respect to qualified research may be treated as expenses under section 174. Sec. 41(d)(1)(A). Consequently, an expenditure must be a section 174 expense to constitute “qualified research” under section 41. See Norwest Corp. & Subs. v. Commissioner, 110 T.C. 454, 489-490 (1998). Section 174 does not define the ph

nd development” costs, as well as other tax risks involved in making an investment in the partnership. The document also contained an opinion letter stating that the - 6 - research and development agreement contained therein met the requirements of section 174. A copy of this document was distributed to Mr. Robnett. Potential investors were required to provide information concerning any previous experience in tax shelter investments, and the subscription agreement required investors to initial a

ny technology that was supposed to be developed by U.S. Agri. On these bases, we determined that the partnership was not entitled to a claimed loss of $1,304,819, including $1,298,627 claimed as qualified research and experimental expenditures under section 174. Petitioners contend that they invested in the partnership and claimed losses arising out of the partnership in a good faith belief that the partnership had the potential to earn a profit. They contend they exercised the due care of reaso

m F. Hammack, for respondent. P, an airline pilot, spent several years and substantial sums attempting to develop a wind-powered distillery for the production of ethanol. For 1988 through 1990, P claimed research and experimentation deductions under sec. 174, I.R.C., in the amounts of $44,905, $14,894, and $13,780 respectively. R disallowed these deductions based on a determination that P did not expend these amounts in connection with a trade or business, since P lacked a profit objective. Held

y business advertising, the litigated expenses represent a - 28 - recurring, day-to-day business expense, deductible under section 162(a) for that reason alone. In the alternative, petitioner argues that the litigated expenses are deductible under section 174. Respondent agrees that the litigated expenses are similar to some expenditures for ordinary business advertising, but he argues that not all expenditures for ordinary business advertising are deductible under section 162(a). Respondent dis

ities constitute qualified research pursuant to sec. 41, I.R.C. (the research and experimentation credit, or R&E credit). - 2 - Sec. 41(d)(1), I.R.C., sets forth four tests for qualified research: (1) The expenditures must qualify as expenses under sec. 174, I.R.C.; (2) the taxpayer must discover information which is technological in nature; (3) the taxpayer must discover information the application of which is intended to be useful in the development of a new or improved business component; and

489 B. The Discovery Test . 491 C. The Business Component Test . 495 D. The Process of Experimentation Test . 495 E. The Innovativeness Test . 498 F. The Significant Economic Risk Test. 499 G. The Commercial Availability Test . 500 4. Summary of Internal Use Software Requirements Under the Seven Tests. 500 5. United Stationers, I

Section 174--Research and Development Deductions With regard to the claimed research and development (R&D) expenses for 1995 and 1996, the notice of deficiency states: Schedule C - DMS Loss Year 9512 9612 Claimed on return $67,534 $1,421,645 Allowed per audit -0- -0- Adjustment 67,534 1,421,645 You have not shown that these expenses were ordinary a

e losses are deductible under section 1.174-1, Income Tax Regs., as "research & development expenses". However, in his post-trial brief, petitioner does not claim that the subject losses are deductible as research and experimental expenditures under section 174. Thus, petitioner has abandoned this argument. Money v. Commissioner, 89 T.C. 46, 48 (1987); Alexander v. - 17 - Commissioner, 61 T.C. 278, 288 n.6 (1973); Bernstein v. Commissioner, 22 T.C. 1146, 1152 (1954), affd. 230 F.2d 603 (2d Cir.

The Criteria That Must Be Satisfied For Expense Treatment Under Section 174.......................................51 1.

The Criteria That Must Be Satisfied For Expense Treatment Under Section 174.......................................51 1.

We reach the same conclusion in the section 174 context.

These four tests are (i) the section 174 test, (ii) the technological information test, (iii) the business component test, and (iv) the process of experimentation test.10 We take each of these tests in turn.

UE XIII. Whether Kanter Is Entitled to Research and Development and Business Expense Deductions Related to Immunological Research Corp. for 1979 . . . . . . . . . . . . . . . . . . . . 396 FINDINGS OF FACT OPINION A. Trade or Business Requirement of Section 174 . . . 404 B. The Parties’ Arguments . . . . . . . . . . . . . . 407 C. Analysis . . . . . . . . . . . . . . . . . . . . . 408 ISSUE XIV. Whether Kanter Received Unreported Partnership Income During 1978 . . . . . . . . . . . . . . . 415 F

The Court supported its holding by consulting the legislative history of section 174 and concluding that Congress intended to level the playing field “between old and oncoming businesses and the like.” Id.

80s to reduce the cost of commencing and engaging in the farming of jojoba by claiming, inaccurately, that capital expenditures in jojoba plantations might be treated as research or experimental expenditures for purposes of claiming deductions under section 174.” Id. In November 1998, Mr. Clancy, acting in his capacity as tax matters partner of San Nicholas, consented to entry of decision against the partnership. Subsequently, in December 1998, the Court entered decision against San Nicholas pur

tition for readjustment of partnership - 2 - items under Code section 6226.1 After concessions,2 the issues for decision are: (1) Whether I-Tech is entitled to deduct research or experimental expenses of $2,591,225, $2,834,032, and $1,497,317 under section 174 in its tax years 1984 through 1986, respectively; and (2) whether I-Tech is precluded from deducting guaranteed payments of $79,867, $179,501, and $91,221 under sections 162 and 707(c) in its tax years 1984 through 1986, respectively.3 1Un

spondent argues that Research II is not engaged in a trade or business but also states that Research II is entitled to amortize the organizational expenses under sec. 709(b). As there appears to be no dispute over the issue, we will address only the sec. 174 research and development deduction. - 3 - At the time the petition in this case was filed, Research II was a limited partnership with its principal place of business in Towson, Maryland. Petitioner, Dennis W. Townsend, Research II's tax matt

667, 686-687 (1984), this Court stated: For section 174 to apply, the taxpayer must still be engaged in a trade or business at some time, and * * * [the Court] must still determine, through an examination of the facts of each case, whether the taxpayer's activities in connection with a product are sufficiently substantial and regular to constitute a trade or business for purposes of such sec

667, 686-687 (1984), this Court stated: For section 174 to apply, the taxpayer must still be engaged in a trade or business at some time, and * * * [the Court] must still determine, through an examination of the facts of each case, whether the taxpayer's activities in connection with a product are sufficiently substantial and regular to constitute a trade or business for purposes of such sec

667, 686-687 (1984), this Court stated: For section 174 to apply, the taxpayer must still be engaged in a trade or business at some time, and * * * [the Court] must still determine, through an examination of the facts of each case, whether the taxpayer's activities in connection with a product are sufficiently substantial and regular to constitute a trade or business for purposes of such sec

667, 686-687 (1984), this Court stated: For section 174 to apply, the taxpayer must still be engaged in a trade or business at some time, and * * * [the Court] must still determine, through an examination of the facts of each case, whether the taxpayer's activities in connection with a product are sufficiently substantial and regular to constitute a trade or business for purposes of such sec

667, 686-687 (1984), this Court stated: For section 174 to apply, the taxpayer must still be engaged in a trade or business at some time, and * * * [the Court] must still determine, through an examination of the facts of each case, whether the taxpayer's activities in connection with a product are sufficiently substantial and regular to constitute a trade or business for purposes of such sec

667, 686-687 (1984), this Court stated: For section 174 to apply, the taxpayer must still be engaged in a trade or business at some time, and * * * [the Court] must still determine, through an examination of the facts of each case, whether the taxpayer's activities in connection with a product are sufficiently substantial and regular to constitute a trade or business for purposes of such sec

667, 686-687 (1984), this Court stated: For section 174 to apply, the taxpayer must still be engaged in a trade or business at some time, and * * * [the Court] must still determine, through an examination of the facts of each case, whether the taxpayer's activities in connection with a product are sufficiently substantial and regular to constitute a trade or business for purposes of such sec

667, 686-687 (1984), this Court stated: For section 174 to apply, the taxpayer must still be engaged in a trade or business at some time, and * * * [the Court] must still determine, through an examination of the facts of each case, whether the taxpayer's activities in connection with a product are sufficiently substantial and regular to constitute a trade or business for purposes of such sec

667, 686-687 (1984), this Court stated: For section 174 to apply, the taxpayer must still be engaged in a trade or business at some time, and * * * [the Court] must still determine, through an examination of the facts of each case, whether the taxpayer's activities in connection with a product are sufficiently substantial and regular to constitute a trade or business for purposes of such sec

667, 686-687 (1984), this Court stated: For section 174 to apply, the taxpayer must still be engaged in a trade or business at some time, and * * * [the Court] must still determine, through an examination of the facts of each case, whether the taxpayer's activities in connection with a product are sufficiently substantial and regular to constitute a trade or business for purposes of such sec

667, 686-687 (1984), this Court stated: For section 174 to apply, the taxpayer must still be engaged in a trade or business at some time, and * * * [the Court] must still determine, through an examination of the facts of each case, whether the taxpayer's activities in connection with a product are sufficiently substantial and regular to constitute a trade or business for purposes of such sec

667, 686-687 (1984), this Court stated: For section 174 to apply, the taxpayer must still be engaged in a trade or business at some time, and * * * [the Court] must still determine, through an examination of the facts of each case, whether the taxpayer's activities in connection with a product are sufficiently substantial and regular to constitute a trade or business for purposes of such sec

667, 686-687 (1984), this Court stated: For section 174 to apply, the taxpayer must still be engaged in a trade or business at some time, and * * * [the Court] must still determine, through an examination of the facts of each case, whether the taxpayer's activities in connection with a product are sufficiently substantial and regular to constitute a trade or business for purposes of such sec

667, 686-687 (1984), this Court stated: For section 174 to apply, the taxpayer must still be engaged in a trade or business at some time, and * * * [the Court] must still determine, through an examination of the facts of each case, whether the taxpayer's activities in connection with a product are sufficiently substantial and regular to constitute a trade or business for purposes of such sec

667, 686-687 (1984), this Court stated: For section 174 to apply, the taxpayer must still be engaged in a trade or business at some time, and * * * [the Court] must still determine, through an examination of the facts of each case, whether the taxpayer's activities in connection with a product are sufficiently substantial and regular to constitute a trade or business for purposes of such sec

667, 686-687 (1984), this Court stated: For section 174 to apply, the taxpayer must still be engaged in a trade or business at some time, and * * * [the Court] must still determine, through an examination of the facts of each case, whether the taxpayer's activities in connection with a product are sufficiently substantial and regular to constitute a trade or business for purposes of such sec

667, 686-687 (1984), this Court stated: For section 174 to apply, the taxpayer must still be engaged in a trade or business at some time, and * * * [the Court] must still determine, through an examination of the facts of each case, whether the taxpayer's activities in connection with a product are sufficiently substantial and regular to constitute a trade or business for purposes of such sec

667, 686-687 (1984), this Court stated: For section 174 to apply, the taxpayer must still be engaged in a trade or business at some time, and * * * [the Court] must still determine, through an examination of the facts of each case, whether the taxpayer's activities in connection with a product are sufficiently substantial and regular to constitute a trade or business for purposes of such sec

667, 686-687 (1984), this Court stated: For section 174 to apply, the taxpayer must still be engaged in a trade or business at some time, and * * * [the Court] must still determine, through an examination of the facts of each case, whether the taxpayer's activities in connection with a product are sufficiently substantial and regular to constitute a trade or business for purposes of such sec

667, 686-687 (1984), this Court stated: For section 174 to apply, the taxpayer must still be engaged in a trade or business at some time, and * * * [the Court] must still determine, through an examination of the facts of each case, whether the taxpayer's activities in connection with a product are sufficiently substantial and regular to constitute a trade or business for purposes of such sec

667, 686-687 (1984), this Court stated: For section 174 to apply, the taxpayer must still be engaged in a trade or business at some time, and * * * [the Court] must still determine, through an examination of the facts of each case, whether the taxpayer's activities in connection with a product are sufficiently substantial and regular to constitute a trade or business for purposes of such sec

667, 686-687 (1984), this Court stated: For section 174 to apply, the taxpayer must still be engaged in a trade or business at some time, and * * * [the Court] must still determine, through an examination of the facts of each case, whether the taxpayer's activities in connection with a product are sufficiently substantial and regular to constitute a trade or business for purposes of such sec

667, 686-687 (1984), this Court stated: For section 174 to apply, the taxpayer must still be engaged in a trade or business at some time, and * * * [the Court] must still determine, through an examination of the facts of each case, whether the taxpayer's activities in connection with a product are sufficiently substantial and regular to constitute a trade or business for purposes of such sec

667, 686-687 (1984), this Court stated: For section 174 to apply, the taxpayer must still be engaged in a trade or business at some time, and * * * [the Court] must still determine, through an examination of the facts of each case, whether the taxpayer's activities in connection with a product are sufficiently substantial and regular to constitute a trade or business for purposes of such sec

667, 686-687 (1984), this Court stated: For section 174 to apply, the taxpayer must still be engaged in a trade or business at some time, and * * * [the Court] must still determine, through an examination of the facts of each case, whether the taxpayer's activities in connection with a product are sufficiently substantial and regular to constitute a trade or business for purposes of such sec

667, 686-687 (1984), this Court stated: For section 174 to apply, the taxpayer must still be engaged in a trade or business at some time, and * * * [the Court] must still determine, through an examination of the facts of each case, whether the taxpayer's activities in connection with a product are sufficiently substantial and regular to constitute a trade or business for purposes of such sec

667, 686-687 (1984), this Court stated: For section 174 to apply, the taxpayer must still be engaged in a trade or business at some time, and * * * [the Court] must still determine, through an examination of the facts of each case, whether the taxpayer's activities in connection with a product are sufficiently substantial and regular to constitute a trade or business for purposes of such sec

667, 686-687 (1984), this Court stated: For section 174 to apply, the taxpayer must still be engaged in a trade or business at some time, and * * * [the Court] must still determine, through an examination of the facts of each case, whether the taxpayer's activities in connection with a product are sufficiently substantial and regular to constitute a trade or business for purposes of such sec

The expenditures so treated shall be allowed as a deduction." Section 1.174-2(a)(2), Income Tax Regs., indicates that section 174 applies "not only to costs paid or incurred by the taxpayer 2 Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.

By notice of final partnership administrative adjustment (FPAA) respondent determined the following adjustments to the partnership return of income of Utah I: (1) Disallowance of a claimed loss for 1982 in the amount of $1,304,819, including $1,298,627 claimed as qualified research and experimental expenditures under section 174; and (2) disallowance of a claimed loss of $50,482 for 1983.

After concessions by the parties,1 the issues for decision are: (1) Whether pursuant to section 174, 3-Koam may deduct research and development expenses allegedly incurred in 1990.2 We hold it may not, except to the extent allowed by respondent.3 (2) Whether pursuant to section 166, 3-Koam may claim a $30,000 bad debt deduction in 1990.

By notice of final partnership administrative adjustment (FPAA) respondent determined the following adjustments to the partnership return of income of Cactus Wren for the taxable year 1983: (1) Disallowance of $164,057 claimed as qualified research and development expenditures under section 174; and (2) disallowance of $10,500 claimed as a deduction for tax counseling fees.

(3) Whether petitioner is liable for self-employment tax for the taxable year 1988 from his activities with Ticketline. We hold that he is. (4) Whether the costs associated with petitioner's nutritional information system are deductible pursuant to section 174. We hold that they are not. (5) Whether petitioner is liable for the addition to tax pursuant to section 6651(a)(1) for failure to file timely Federal income tax returns for the taxable years 1988 and 1989. We hold that he is. (6) Whether

on line 27a, "Other expenses". -4- In the notice of deficiency, respondent disallowed petitioners' $165,000 deduction for research and development expenses based on the determination that expenses for purchasing racehorses are not deductible under section 174. OPINION Issue 1. Research and Development Expense Deduction Section 174(a) allows a deduction for research or experimental expenditures that are paid or incurred during the taxable year in connection with a trade or business. Section 174(c

Accordingly, if the Service were to challenge the Partnership’s deduction under Code Section 174 on [a] similar theory in the light of all of the facts and circumstances, and the Partnership was not able to show that the amounts paid to Isle for research and development were approximately equal to their value, then it is possible that the Partnership could be denied a deduction for a portion of the amounts paid to Isle.

To determine whether an activity is qualified research, we employ a four-part test: (1) the section 174 test, (2) the technological information test, (3) the business component test, and (4) the process of experimentation test.

What Extent) Mr. Robert Engaged in Qualified Research Under section 41(d), four requirements must be met in order for an activity to be “qualified research.” First, the research expenditures 9 [*9] must be eligible to be treated as expenses under section 174. § 41(d)(1)(A). Under section 174(a)(1), “[a] taxpayer may treat research or experimental expenditures which are paid or incurred by him during the taxable year in connection with his trade or business as expenses which are not chargeable t

Section 41 Credit for Increasing Research Activities When Congress added the section 41 qualified research expenses credit to the Code in 1981, it aimed to spur business investments in technological research, finding that the motivation of section 174 was insufficient.

xpenses were paid in connection with Genecure’s research and development activity such that they are deductible under section 174(a)(1) as incidental costs. See Treas. Reg. § 1.174-2(a)(1) (“The term research or experimental expenditures, as used in section 174, . . . generally includes all such costs incident to the development . . . of a product.”). Moreover, to the extent we sustain the disallowance of deductions for actual research and development expenses, we note that such expenses are lim

(continued...) - 23 - One case cited by SJW does address the meaning of the phrase “in carrying on.” In Snow v. Commissioner, 416 U.S. 500 (1974), the Supreme Court considered the taxpayer’s deduction of research and development expenditures under section 174. That provision allows a deduction for certain expenditures paid or incurred “in connection with” a trade or business during the taxable year. Sec. 174(a)(1). The Court concluded that the taxpayer was entitled to the deduction even though

(continued...) - 23 - One case cited by SJW does address the meaning of the phrase “in carrying on.” In Snow v. Commissioner, 416 U.S. 500 (1974), the Supreme Court considered the taxpayer’s deduction of research and development expenditures under section 174. That provision allows a deduction for certain expenditures paid or incurred “in connection with” a trade or business during the taxable year. Sec. 174(a)(1). The Court concluded that the taxpayer was entitled to the deduction even though

(continued...) - 23 - One case cited by SJW does address the meaning of the phrase “in carrying on.” In Snow v. Commissioner, 416 U.S. 500 (1974), the Supreme Court considered the taxpayer’s deduction of research and development expenditures under section 174. That provision allows a deduction for certain expenditures paid or incurred “in connection with” a trade or business during the taxable year. Sec. 174(a)(1). The Court concluded that the taxpayer was entitled to the deduction even though

Section 174 Deduction Petitioners assert in the alternative that the purported expense for uncompensated services is deductible under section 174. Section 174(a)(1) provides that a taxpayer may deduct "research or experimental expenditures which are paid or incurred by him during the taxable year in connection with his trade or business". As used i

Self-created patents, however, often have minimal tax bases as section 174 permits taxpayers to immediately deduct their annual research and development expenses rather than capitalize those costs into -14- [*14] the patent's tax basis.

vided and Schmeets's testimony, we find the premium payments were an expense incurred in H & M's business of developing the two inventions, and it is entitled to deduct $486 in tax years 2004 and 2005. See sec. 1.162-1(a), Income Tax Regs.; see also sec. 174; Snow v. Commissioner, 416 U.S. 500, 503-04 (1974). 3. Other Insurance H & M also claimed deductions in 2004 and 2005 for premiums paid on long-term care insurance coverage for Schmeets and his wife. Schmeets testified that H & M paid these

For each taxable year 1999 to 2002, pursuant to section 280C(c)(3), HP elected to reduce its section 41 credit by the amount equal to the maximum rate of tax under section 11(b)(1) multiplied by the section 41 credit, rather than reduce its section 174 expense deduction.

For each taxable year 1999 to 2002, pursuant to section 280C(c)(3), HP elected to reduce its section 41 credit by the amount equal to the maximum rate of tax under section 11(b)(1) multiplied by the section 41 credit, rather than reduce its section 174 expense deduction.

tment of the partnership items under section 6226(a) (1).2 The issues for determination are: (1) Whether the payoff amounts are a tax year 2000 or a tax year 2001 partnership item, (2) whether the payoff amounts are qualified research expenses under section 174, (3) whether the payoff amounts to controlled corporations are ordinary and necessary business expenses under section 162, (4) whether the transaction should be recharacterized as a constructive distribution to Gary Kornman (Kornman) , an

called Contra Cóáta Jojolia Rese rcli Partners. ThiUparther hip, which we shall ref er o a t Co tra Costa p rtne hip, file'd a rt nership tai return for its 1983 tax year on which it dedueted $437, 500 in researdh and experimental expenditures under section 174 . On her own 1983 tax return, Bang reported a deduction of $12, 500 for her share of the $437,,500 sdeduction that the artnership had claimed. The 1983 tax return was due on April 15 198 . eSee sec. 6072. TÉe IRS issued a Notice lof Final

In contrast, only a passive trade or business is required for deductibility of research and development costs under section 174 ("in connection with a trade or business").

In contrast, only a passive trade or business is required for deductibility of research and development costs under section 174 (“in connection with a trade or business”).

atio.n of the commencement'of a .trade or business . Nor can we,- .on this record, determine'what such a trade or business would be . -Petitioners also do not argue that ResEnt involves research or experimental expenditures that are,deductible under section 174 . Nor can we, .on this-record, .determine what such research expenditures would be . We are 'left, then, with the question of'whether-ResEnt is an activity that involves the conduct of a :trade or'business under section-162, an issue we .

Expenditures covered by section 174 include only costs for "research and developmen t * * * in the experimental or laboratory sense ." Sec .

lacked evidence demonstrating that the C .P .A. "conducted any independent investigation to determine whether the specific research and development proposed to be conducted by or on behalf of the partnership would have qualified for deductions under section 174 ." Id . As was the case in Christensen , petitioners' C .P .A., Mr . Miller, did not testify at trial .' Nor did he provide petitioners with a written opinion concerning their investment i n CCJRP . As a consequence, the specific nature o

ent was "reduced to $213,750 (75 units at $2,850 per unit) from $541,500 (190 units at $2,850 per unit) ." - 6 - private placement memorandum warned "that there is little published authority dealing with the specific types of expenditures which will qualify as research or experimental expenditures within the meaning of Section 174" and that "There are various theories under which such deductions might be disallowed or required to be deferred ." After addressing various theories on which the Int

UE XIII. Whether Kanter Is Entitled to Research and Development and Business Expense Deductions Related to Immunological Research Corp. for 1979 . . . . . . . . . . . . . . . . . . . . 396 FINDINGS OF FACT OPINION A. Trade or Business Requirement of Section 174 . . . 404 B. The Parties’ Arguments . . . . . . . . . . . . . . 407 C. Analysis . . . . . . . . . . . . . . . . . . . . . 408 ISSUE XIV. Whether Kanter Received Unreported Partnership Income During 1978 . . . . . . . . . . . . . . . 415 F

ies of the partnerships were "another example of efforts by promoters and investors in the early 1980's to reduce the cost of commencing and engaging in the farming of jojoba by claiming, inaccurately, that capital expenditures in jojoba plantations might be treated as research or experimental expenditures for purposes of claiming deductions under section 174 ." * * * [Fn .

UE XIII. Whether Kanter Is Entitled to Research and Development and Business Expense Deductions Related to Immunological Research Corp. for 1979 . . . . . . . . . . . . . . . . . . . . 396 FINDINGS OF FACT OPINION A. Trade or Business Requirement of Section 174 . . . 404 B. The Parties’ Arguments . . . . . . . . . . . . . . 407 C. Analysis . . . . . . . . . . . . . . . . . . . . . 408 ISSUE XIV. Whether Kanter Received Unreported Partnership Income During 1978 . . . . . . . . . . . . . . . 415 F

UE XIII. Whether Kanter Is Entitled to Research and Development and Business Expense Deductions Related to Immunological Research Corp. for 1979 . . . . . . . . . . . . . . . . . . . . 396 FINDINGS OF FACT OPINION A. Trade or Business Requirement of Section 174 . . . 404 B. The Parties’ Arguments . . . . . . . . . . . . . . 407 C. Analysis . . . . . . . . . . . . . . . . . . . . . 408 ISSUE XIV. Whether Kanter Received Unreported Partnership Income During 1978 . . . . . . . . . . . . . . . 415 F

UE XIII. Whether Kanter Is Entitled to Research and Development and Business Expense Deductions Related to Immunological Research Corp. for 1979 . . . . . . . . . . . . . . . . . . . . 396 FINDINGS OF FACT OPINION A. Trade or Business Requirement of Section 174 . . . 404 B. The Parties’ Arguments . . . . . . . . . . . . . . 407 C. Analysis . . . . . . . . . . . . . . . . . . . . . 408 ISSUE XIV. Whether Kanter Received Unreported Partnership Income During 1978 . . . . . . . . . . . . . . . 415 F

rtionate. The Court finds petitioners’ testimony and the evidence presented credible and is satisfied that they 5The Supreme Court, in Snow v. Commissioner, 416 U.S. 500 (1974), held that Congress intended the phrase “in connection with”, as used in sec. 174, to have a broad legislative objective and provide an economic incentive; therefore, it should be interpreted broadly. - 10 - negotiated the refinancing of their personal residence in order to finance their home improvements. Respondent pres

However, prospective investors should be aware that there is little published authority dealing with the specific types of expenditures which will qualify as research or experimental expenditures within the meaning of Section 174, and most of the expenditures contemplated by the Partnership have not - 7 - been the subject of any prior cases or administrative determinations.

However, prospective investors should be aware that there is little published authority dealing with the specific types of expenditures which will qualify as research or experimental expenditures within the meaning of Section 174, and most of the expenditures contemplated by the Partnership have not been the subject of any prior cases or administrative determinations.

1.469-1T(e)(3)(vi)(B) as incidental to an activity of holding property for investment, that–- (i) Involve the conduct of a trade or business (within the meaning of section 162); (ii) Are conducted in anticipation of the commencement of a trade or business; or (iii) Involve research or experimental expenditures that are deductible under section 174 * * * .

80s to reduce the cost of commencing and engaging in the farming of jojoba by claiming, inaccurately, that capital expenditures in jojoba plantations might be treated as research or experimental expenditures for purposes of claiming deductions under section 174.” Id. In November 1998, Mr. Clancy, acting in his capacity as tax matters partner of San Nicholas, consented to entry of decision against the partnership. Subsequently, in December 1998, the Court entered decision against San Nicholas pur

80s to reduce the cost of commencing and engaging in the farming of jojoba by claiming, inaccurately, that capital expenditures in jojoba plantations might be treated as research or experimental expenditures for purposes of claiming deductions under section 174.” Id. In November 1998, Mr. Clancy, acting in his capacity as tax matters partner of San Nicholas, consented to entry of decision against the partnership. Subsequently, in December 1998, the Court entered decision against San Nicholas pur

As a result of the final resolution of Utah I (wherein claimed section 174 research and experimental expenses and losses similar to those claimed by Blythe II were disallowed), the tax deficiencies relating to petitioners’ investment in Blythe II are conceded by petitioners.

However, prospective investors should be aware that there is little published authority dealing with the specific types of expenditures which will qualify as research or experimental expenditures within the meaning of Section 174, and most of the expenditures contemplated by the Partnership have not been the subject of any prior cases or administrative determinations.

The General Partner anticipates that a substantial portion of the capital contributions of the Limited Partners to the Partnership will be used for research and experimental expenditures of the type generally covered by Section 174 of the Code.

However, prospective investors should be aware that there is little published authority dealing with the specific types of expenditures which will qualify as research or experimental expenditures within the meaning of Section 174, and most of the expenditures contemplated by the Partnership have not been the subject of any prior cases or administrative determinations.

motion in both dockets to (1) substitute Joan C. Benz for Frank Colenda as tax matters person and (2) change captions to reflect this substitution. - 2 - buy all the assets of S-1 and S-2 in exchange for stock in A. S-1 and S-2 each deducted under sec. 174, I.R.C. 1954, the amounts each assertedly paid to A to conduct the research and development activities. Held: Neither S-1 nor S-2 is entitled to a deduction under sec. 174, I.R.C. 1954, because the amounts S-1 and S-2 allegedly paid to A were

motion in both dockets to (1) substitute Joan C. Benz for Frank Colenda as tax matters person and (2) change captions to reflect this substitution. - 2 - buy all the assets of S-1 and S-2 in exchange for stock in A. S-1 and S-2 each deducted under sec. 174, I.R.C. 1954, the amounts each assertedly paid to A to conduct the research and development activities. Held: Neither S-1 nor S-2 is entitled to a deduction under sec. 174, I.R.C. 1954, because the amounts S-1 and S-2 allegedly paid to A were

80s to reduce the cost of commencing and engaging in the farming of jojoba by claiming, inaccurately, that capital expenditures in jojoba plantations might be treated as research or experimental expenditures for purposes of claiming deductions under section 174.” Id. In November 1998, Mr. Clancy, acting in his capacity as tax matters partner of San Nicholas, consented to entry of decision against the partnership. Subsequently, in December 1998, the Court entered decision against San Nicholas pur

that— (i) Involve the conduct of a trade or business (within the meaning of section 162); (ii) Are conducted in anticipation of the commencement of a trade or business; or (iii) Involve research or experimental expenditures that are deductible under section 174 * * * To be engaged in a trade or business within the meaning of section 162, a “taxpayer must be involved in the activity with continuity and regularity and * * * the taxpayer’s primary purpose for engaging in the activity must be for in

The Court supported its holding by consulting the legislative history of section 174 and concluding that Congress intended to level the playing field “between old.

In connection with its activities, Jojoba planned to deduct research and development expenditures under section 174, which, it expected, would generate tax benefits for its investors.

In connection with its activities, Jojoba planned to deduct research and development - 5 - expenditures under section 174, which, it expected, would generate tax benefits for its investors.

return. In the notice of deficiency, respondent disallowed the deduction for the net loss. - 6 - Discussion Petitioners claim they are entitled to a deduction for the net loss reported on the Schedule C under the authority of either section 162 or section 174. In general, a taxpayer is entitled to deductions for “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business”. Sec. 162(a). Furthermore, a taxpayer is generally entitled to ded

0's to reduce the cost of commencing and engaging in the farming of jojoba by claiming, inaccurately, that capital expenditures in jojoba plantations might be treated as research or experimental expenditures for purposes of claiming deductions under section 174." Id. As a result of Blythe II's TEFRA proceeding, petitioners were assessed tax deficiencies of $9,006 for 1982 and $503 for 1983, plus interest. Subsequently, respondent issued notices of deficiency to petitioners, for 1982 and 1983, fo

0's to reduce the cost of commencing and engaging in the farming of jojoba by claiming, inaccurately, that capital expenditures in jojoba plantations might be treated as research or experimental expenditures for purposes of claiming deductions under section 174." Id. As a result of Utah I's TEFRA proceeding, petitioner was assessed a tax deficiency of $10,459 for 1982, plus interest. Subsequently, respondent issued a notice of deficiency to petitioner for 1982 for affected items, determining tha

In connection with its activities, Jojoba planned to deduct research and development - 5 - expenditures under section 174, which, it expected, would generate tax benefits for its investors.

0's to reduce the cost of commencing and engaging in the farming of jojoba by claiming, inaccurately, that capital expenditures in jojoba plantations might be treated as research or experimental expenditures for purposes of claiming deductions under section 174. Id. As a result of Jojoba Hawaii's TEFRA proceeding, and its agreement to be bound, petitioners were assessed tax deficiencies of $5,000 for 1982, $508 for 1983, $294 for 1984, and $346 for 1985, plus interest. Subsequently, respondent i

earch and development” costs, as well as other tax risks involved in making an investment in the partnership. The document also contained an opinion letter stating that the research and development agreement contained therein met the requirements of section 174. A copy of this document was distributed to petitioner, but she did not thoroughly review it. Potential investors were required to provide information concerning any previous experience in tax shelter investments, and the subscription agr

earch and development” costs, as well as other tax risks involved in making an investment in the partnership. The document also contained an opinion letter stating that the research and development agreement contained therein met the requirements of section 174. Potential investors were required to provide information concerning any previous experience in tax shelter investments, and the subscription agreement required investors to initial a statement that the investor had been advised to consul

upra. - 6 - the cost of commencing and engaging in the farming of jojoba by claiming, inaccurately, that capital expenditures in jojoba plantations might be treated as research or experimental expenditures for purposes of claiming deductions under section 174." Id. As a result of Blythe I's TEFRA proceeding, petitioner and his wife were assessed tax deficiencies of $10,340 for 1982 and $394 for 1983, plus interest. Subsequently, respondent issued a notice of deficiency to petitioner and his wife

174, 98 Stat 704, with the current rule deferring the deduction until recognized by the related recipient. A more restrictive view of constructive receipt may be appropriate under the current statutory scheme, which only defers the deduction until the year of payment rather than disallowing it entirely. - 11 - through proper corporate procedu

0's to reduce the cost of commencing and engaging in the farming of jojoba by claiming, inaccurately, that capital expenditures in jojoba plantations might be treated as research or experimental expenditures for purposes of claiming deductions under section 174." Id. As a result of Blythe II's TEFRA proceeding, petitioners were assessed tax deficiencies of $8,858 for 1982 and $201 for 1983, plus interest. Subsequently, respondent issued notices of deficiency to petitioners for 1982 and 1983 for

ed approximately 20 years before Congress enacted sec. 263A in the Tax Reform Act of 1986, Pub. L. 99-514, sec. 803, 100 Stat. 2350. Petitioner also cited the following cases which concerned the research and experimental expenditures deduction under sec. 174 and years in issue from 1976 through 1984: Harris v. Commissioner, T.C. Memo. 1990-80 (tax years 1979-1982), affd. 16 F.3d 75 (5th Cir. 1994); Estate of Cook v. Commissioner, T.C. Memo. 1993-581 (tax years 1976- 1982); Research Two Ltd. Pshi

upra. - 6 - the cost of commencing and engaging in the farming of jojoba by claiming, inaccurately, that capital expenditures in jojoba plantations might be treated as research or experimental expenditures for purposes of claiming deductions under section 174." Id. As a result of Blythe II's TEFRA proceeding, petitioners were assessed tax deficiencies of $20,933 for 1982 and $1,006 for 1983, plus interest. Subsequently, respondent issued a notice of deficiency to petitioners, for 1982 and 1983,

0's to reduce the cost of commencing and engaging in the farming of jojoba by claiming, inaccurately, that capital expenditures in jojoba plantations might be treated as research or experimental expenditures for purposes of claiming deductions under section 174." Id. As a result of Blythe II's TEFRA proceeding, petitioners were assessed tax deficiencies of $8,858 for 1982 and $201 for 1983, plus interest. Subsequently, respondent issued notices of deficiency to petitioners for 1982 and 1983 for

ent is not entitled to fuel tax credits for some of the years in issue. See Rules 142(a), 240(a). Similarly, on the record presented, petitioners have failed to establish that Management is entitled to deduct research and development expenses under section 174. Among other things, the Court is not satisfied that expenditures were actually incurred in the amounts claimed for research or experimentation. See sec. 1.174-2(a)(1), Income Tax Regs. There is evidence of numerous irregularities in the H

ent is not entitled to fuel tax credits for some of the years in issue. See Rules 142(a), 240(a). Similarly, on the record presented, petitioners have failed to establish that Management is entitled to deduct research and development expenses under section 174. Among other things, the Court is not satisfied that expenditures were actually incurred in the amounts claimed for research or experimentation. See sec. 1.174-2(a)(1), Income Tax Regs. There is evidence of numerous irregularities in the H

ent is not entitled to fuel tax credits for some of the years in issue. See Rules 142(a), 240(a). Similarly, on the record presented, petitioners have failed to establish that Management is entitled to deduct research and development expenses under section 174. Among other things, the Court is not satisfied that expenditures were actually incurred in the amounts claimed for research or experimentation. See sec. 1.174-2(a)(1), Income Tax Regs. There is evidence of numerous irregularities in the H

ent is not entitled to fuel tax credits for some of the years in issue. See Rules 142(a), 240(a). Similarly, on the record presented, petitioners have failed to establish that Management is entitled to deduct research and development expenses under section 174. Among other things, the Court is not satisfied that expenditures were actually incurred in the amounts claimed for research or experimentation. See sec. 1.174-2(a)(1), Income Tax Regs. There is evidence of numerous irregularities in the H

* * * Included amongst the referenced common-law materials is 1 Restatement, Trusts 2d, section 174 (1959), which reads: “The trustee is under a duty to the beneficiary in administering the - 45 - trust to exercise such care and skill as a man of ordinary prudence would exercise in dealing with his own property”.

ent is not entitled to fuel tax credits for some of the years in issue. See Rules 142(a), 240(a). Similarly, on the record presented, petitioners have failed to establish that Management is entitled to deduct research and development expenses under section 174. Among other things, the Court is not satisfied that expenditures were actually incurred in the amounts claimed for research or experimentation. See sec. 1.174-2(a)(1), Income Tax Regs. There is evidence of numerous irregularities in the H

ent is not entitled to fuel tax credits for some of the years in issue. See Rules 142(a), 240(a). Similarly, on the record presented, petitioners have failed to establish that Management is entitled to deduct research and development expenses under section 174. Among other things, the Court is not satisfied that expenditures were actually incurred in the amounts claimed for research or experimentation. See sec. 1.174-2(a)(1), Income Tax Regs. There is evidence of numerous irregularities in the H

ent is not entitled to fuel tax credits for some of the years in issue. See Rules 142(a), 240(a). Similarly, on the record presented, petitioners have failed to establish that Management is entitled to deduct research and development expenses under section 174. Among other things, the Court is not satisfied that expenditures were actually incurred in the amounts claimed for research or experimentation. See sec. 1.174-2(a)(1), Income Tax Regs. There is evidence of numerous irregularities in the H

ent is not entitled to fuel tax credits for some of the years in issue. See Rules 142(a), 240(a). Similarly, on the record presented, petitioners have failed to establish that Management is entitled to deduct research and development expenses under section 174. Among other things, the Court is not satisfied that expenditures were actually incurred in the amounts claimed for research or experimentation. See sec. 1.174-2(a)(1), Income Tax Regs. There is evidence of numerous irregularities in the H

ent is not entitled to fuel tax credits for some of the years in issue. See Rules 142(a), 240(a). Similarly, on the record presented, petitioners have failed to establish that Management is entitled to deduct research and development expenses under section 174. Among other things, the Court is not satisfied that expenditures were actually incurred in the amounts claimed for research or experimentation. See sec. 1.174-2(a)(1), Income Tax Regs. There is evidence of numerous irregularities in the H

ent is not entitled to fuel tax credits for some of the years in issue. See Rules 142(a), 240(a). Similarly, on the record presented, petitioners have failed to establish that Management is entitled to deduct research and development expenses under section 174. Among other things, the Court is not satisfied that expenditures were actually incurred in the amounts claimed for research or experimentation. See sec. 1.174-2(a)(1), Income Tax Regs. There is evidence of numerous irregularities in the H

that: (1) Involves the conduct of a trade or business (within the meaning of section 162); (2) is conducted in anticipation of the commencement of a trade or business; or (3) involves research or experimental expenditures that are deductible under section 174.9 Sec. 1.469-4(b)(1), 9Sec. 1.469-1T(e)(3)(vi)(C), Temporary Income Tax Regs., 53 Fed. Reg. 5703 (Feb. 25, 1988), references paragraph (e)(2) for the definition of “trade or business activity.” Paragraph (e)(2) references sec. 1.469-1(e)(2

ent is not entitled to fuel tax credits for some of the years in issue. See Rules 142(a), 240(a). Similarly, on the record presented, petitioners have failed to establish that Management is entitled to deduct research and development expenses under section 174. Among other things, the Court is not satisfied that expenditures were actually incurred in the amounts claimed for research or experimentation. See sec. 1.174-2(a)(1), Income Tax Regs. There is evidence of numerous irregularities in the H

Development Issue Respondent disallowed the $26,676 deduction petitioners claimed for research and development costs for computer software, because petitioners did not establish that they accounted for the costs in a consistent manner as required by section 174. Specifically, respondent determined that in prior years petitioner had capitalized and amortized the costs of computer software; however, in 1990, petitioner expended $26,676 and deducted the entire amount in the year it was paid. Petiti

Although neither party argued the point on brief, we believe that petitioner's claim that these expenses were for "research and development" warrants our consideration whether the expenses may be deductible under section 174 as "research and experimental" expenditures.

Section 174(c) and section 1.174-2(b)(1), Income Tax Regs., provide generally, in pertinent part, that expenditures for the acquisition of property that is subject to an allowance for depreciation under section 167 are not deductible under section 174, irrespective of the fact that the property may be used by the taxpayer in connection with research or experimentation.

Remaining for decision is whether the partnership is entitled to deductions claimed under section 174 in the amounts adjusted by respondent.

n extension. Their 1992 income tax return was due April 15, 1993, but was filed on April 27, 1993. Thus, petitioners are 5 Petitioner has characterized his Presto activities as “research and development”, apparently in an attempt to bring them under sec. 174. Even if we were to find that his activities came within that rubric (which we do not), petitioner is not helped. He has not demonstrated a “realistic prospect” of subsequently entering a business in connection with the fruits of the researc

Accordingly, if the SerQice were to challenge the Partnership's deduction under Code Section 174 on [a] similar theory in the light of all of the facts and circumstances, and the Partnership was not Able to show that the amounts paid to Isle for research and development were approximately equal to their value, then it is possible that the Partnership could be denied a deduction for a portion of the amounts paid to Isle.