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In the notice of deficiency, respondent disallowed
petitioners' $165,000 deduction for research and development
expenses based on the determination that expenses for purchasing
racehorses are not deductible under section 174.
OPINION
Issue 1. Research and Development Expense Deduction
Section 174(a) allows a deduction for research or experimental
expenditures that are paid or incurred during the taxable year in
connection with a trade or business. Section 174(c) excepts from
this treatment any amounts expended for "the acquisition or
improvement of land, or for the acquisition or improvement of
property to be used in connection with the research or
experimentation and of a character which is subject to the
allowance under section 167" (relating to depreciation deductions
for property used in a trade or business or held for the production
of income).
Racehorses are property of a character subject to the
allowance for depreciation. Sec. 1.167(a)-6(b), Income Tax Regs.
("Livestock acquired for * * * breeding * * * purposes may be
depreciated"); see also Gamble v. Commissioner, 68 T.C 800, 812
(1977); Kirk v. Commissioner, 47 T.C. 177, 188 (1966). Section
1.174-2(b)(4), Income Tax Regs., provides, in part, that amounts
expended for research or experimentation do not include the costs
attributable to the acquisition of the property. Section 174(c)
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