Investment Engineers, LTD., Robert S. McGlamery, A Partner Other than the Tax Matters Partner - Page 12

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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                                
                  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                                     
            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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