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incurred on the taxpayer's behalf by another person or
organization. Stankevich v. Commissioner, T.C. Memo. 1992-458;
sec. 1.174-2(a), Income Tax Regs.
1. The Expenditures Must Be for Research or Experimentation
The term "research or experimental expenditures" as used in
section 174 means expenditures incurred in connection with the
taxpayer's trade or business which represent research and
development costs in the experimental or laboratory sense. Sec.
1.174-2(a)(1), Income Tax Regs. This regulation further
provides:
The term [research or experimental expenditures]
includes generally all such costs incident to the
development of an experimental or pilot model, a plant
process, a product, a formula, an invention or similar
property, and the improvement of already existing
property of the type mentioned. The term does not
include expenditures such as those for the ordinary
testing or inspection of materials or products for
quality control or those for efficiency surveys,
management studies, consumer surveys, advertising, or
promotions. * * *
We have found the above definition "to be reasonable and
consistent with the intent of the statute to limit deductions to
those expenditures of an investigative nature expended in
developing the concept of a model or product." Mayrath v.
Commissioner, 41 T.C. 582, 590 (1964) (emphasis in original),
affd. without discussion on this issue 357 F.2d 209 (5th Cir.
1966).
In the instant cases, petitioners contend that HJI was
conducting valid research or experimentation on behalf of JDP
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