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that the research is successful. See Zink v. United
States, 929 F.2d 1015, 1023 (5th Cir. 1991); Spellman
v. Commissioner, 845 F.2d 148, 149 (7th Cir. 1988). We
hold that a taxpayer demonstrates such a prospect by
manifesting both the objective intent to enter such a
business and the capability of doing so. See Spellman,
845 F.2d at 150-51; Levin v. Commissioner, 832 F.2d
403, 406-07 (7th Cir. 1987); see also United Fibertech,
Ltd. v. Commissioner, 976 F.2d 445, 446 (8th Cir. 1992)
(per curiam); Diamond v. Commissioner, 930 F.2d 372,
375 (4th Cir. 1991).
In Kantor v. Commissioner, supra, the Court of Appeals for the
Ninth Circuit affirmed our conclusion that the partnership
involved there had no realistic prospect of engaging in its own
trade or business in connection with the development of software
at the time it incurred the research expenditures in dispute.
The Court of Appeals agreed that the evidence in that case
established that the partnership “had neither the objective
intent nor the capability of entering such a business.” Id. at
1519. We reach the same conclusion here.
In Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987), the
Supreme Court reviewed prior cases, including Snow v.
Commissioner, supra, and stated that “to be engaged in a trade or
business, the taxpayer must be involved in the activity with
continuity and regularity and * * * the taxpayer’s primary
purpose for engaging in the activity must be for income or
profit. A sporadic activity, a hobby, or an amusement diversion
does not qualify.” It is established that tax deductions cannot
be based on “the expedient of drawing up papers to characterize
the transactions in question as something contrary to the
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