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the primary purpose of or with an actual and honest objective of
making a profit. The partnership had neither the objective
intent nor the capability of entering into a computer software
business.
OPINION
Petitioner has the burden of proving that respondent’s
determination is erroneous. Rule 142(a); INDOPCO, Inc. v.
Commissioner, 503 U.S. 79, 84 (1992); Rockwell v. Commissioner,
512 F.2d 882 (9th Cir. 1975), affg. T.C. Memo. 1972-133.
Petitioner contends that, even though the partnership was never
in a trade or business, it is entitled to deduct research
expenses under section 174. Section 174(a)(1) provides:
(1) In general.--A taxpayer may treat
research or experimental expenditures which are
paid or incurred by him during the taxable year in
connection with his trade or business as expenses
which are not chargeable to capital account. The
expenditures so treated shall be allowed as a
deduction.
The language “in connection with * * * [the taxpayer’s] trade or
business” has been interpreted to allow deduction of research
expenses in a business that is only prospective. Snow v.
Commissioner, 416 U.S. 500 (1974). In Kantor v. Commissioner,
998 F.2d 1514, 1518-1519 (9th Cir. 1993), affg. T.C. Memo. 1990-
380, the Court of Appeals for the Ninth Circuit stated:
Although a taxpayer need not be conducting a trade or
business at the time it incurs the research
expenditure, the taxpayer must demonstrate a “realistic
prospect” of subsequently entering its own business in
connection with the fruits of the research, assuming
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