- 16 -
appeared commercially promising, the corporation would
definitely exercise its option, and, if the corporation declined
to exercise the option, the project partnership and the limited
partnership would be left with the right to develop an asset
whose costs would not appear to justify additional investment.
See id. at 440-441.
The Court of Appeals for the Fourth Circuit affirmed our
opinion, stating:
The question is not whether it is possible in
principle, or by further contract, for these
partnerships to engage in a trade or business, but
whether, in reality, the project partnership * * *
possessed the capability in the years before the court
to enter into a new trade or business in connection
with the proposed * * * [technology]. The answer to
the question of reality must be found in economic
reality, which is revealed more by the direction of
the money than by the complexion of the principle.
[Diamond v. Commissioner, 930 F.2d at 375.]
In Harris v. Commissioner, T.C. Memo. 1990-80, we held that
Research I, a partnership of which Mr. Townsend was a general
partner, was not entitled to deductions under section 174 for
amounts paid to CemCom for research and development services
which are similar to the research and development services
provided by CemCom to Research II under the terms of the
research and development agreement. Research I and CemCom had
also entered into an agreement, similar to the technology
transfer agreement between Research II and CemCom, under which
CemCom was granted the option to license the technology it
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