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C. The Consequences of Petitioners' Initial Investment
JDP used the calendar year and the accrual method of
accounting to report its income on its U.S. Partnership Return of
Income, Form 1065, for calendar year 1981 (1981 partnership
return). On the 1981 partnership return, JDP deducted, among
other things, $360,000 for research and experimental
expenditures. JDP reported a net loss of $368,45214 on the 1981
partnership return, a proportionate amount of which was passed
through to each partner of JDP.
From the inception of JDP, its partners intended and
expected HJI to farm jojoba commercially on Turtleback I. For
the partners to realize a return of their investment in JDP,
commercial farming operations had to be conducted on Turtleback
I.
HJI had sole responsibility for the farming operations on
Turtleback I. The $360,000 JDP agreed to pay HJI under the R & D
Agreement was based on a fixed contract price. HJI placed the
$360,000 in its general funds. HJI used the $360,000, among
other purposes, to pay the farm lease payments to Whittaker
Jojoba, to prepare the land for farming, including installing the
irrigation system, to purchase jojoba seeds, and to plant and
14 JDP reported no income on its 1981 partnership return. In
addition to the $360,000 it deducted for research and
experimentation expenditures, JDP deducted $6,250 for legal fees,
$2,000 for accounting fees, and $202 for amortization of
organization costs.
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