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Respondent disallowed the deductions claimed for costs of
goods sold on each of the returns in issue, with the following
explanation:
It is determined that the losses reported on your 1982,
1983, and 1984 schedule K, Form 1065, U.S. Partnership
Return of Income are disallowed for the alternative
reasons listed below:
1. It has not been established that the
partnership is engaged in a trade or business
or that the partnership engaged in the
activity with the primary purpose of making a
profit.
2. It has not been established that the claimed
deductions represent an expenditure for a
related [sic] to research and development
actually undertaken.
3. It has not been established that the amounts
proven to be expended, if any, in relation to
alleged research and development are
currently deductible, and are not capital
expenditures.
4. It has not been established that you had any
amount at risk, as defined by section 465 of
the Internal Revenue Code.
5. It has not been established that the
purported transactions contained any economic
reality or substance.
In 1995, in relation to settlement negotiations with
respondent’s Appeals Division, Montelius created diskettes
supposedly demonstrating the software produced under the Research
Agreement.
ULTIMATE FINDINGS OF FACT
The research activities of the partnership lacked economic
substance. The partnership did not engage in any activity for
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Last modified: May 25, 2011