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and, consequently, under section 174 JDP is entitled to deduct
the contract fee it paid HJI for such research or
experimentation. Respondent contends, on the other hand, that
HJI used the funds JDP paid it to create a valuable capital asset
in the form of a jojoba plantation, including expenditures for
lease payments, site preparation such as ripping the land,
plowing, discing, and purchasing and installing an irrigation
system, and for planting the jojoba seeds. Respondent argues
that such expenditures were made for the improvement of land to
which JDP could gain a property interest and, hence, under
section 174(c) the expenditures are not allowable.
Petitioners counter, however, that JDP did not acquire an
ownership interest in the land, jojoba plants, or equipment used
on Turtleback I, or in any other property, as a result of the
disputed expenditures. Petitioners assert that under section
1.174-2(a)(1), Income Tax Regs., any costs HJI incurred to build
the jojoba plantation on Turtleback I are deductible as costs
associated with building "a pilot model". Petitioners assert
further that respondent's expert Parr acknowledged that HJI
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