Investment Engineers, LTD., Robert S. McGlamery, A Partner Other than the Tax Matters Partner - Page 11

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                  Respondent disallowed the deductions claimed for costs of                               
            goods sold on each of the returns in issue, with the following                                
                  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                                     
                  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                                         
                  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                             
                                     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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