3-KOAM Company, A Partnership, My Hat, Inc., Tax Matters Partner - Page 7

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                                       OPINION                                        
          Issue 1. Research and Development Expenditures                              
               Respondent determined that 3-Koam may not claim an $82,000             
          research and development deduction for 1990, because the alleged            
          agreement entered into by 3-Koam with Inkax was a sham                      
          transaction, lacking both a business purpose and economic                   
          substance.  Petitioner asserts that 3-Koam properly incurred and            
          accrued a research and development expense in 1990, and therefore           
          may deduct such amount pursuant to section 174 and the                      
          regulations thereunder.                                                     
               Respondent's determinations are presumptively correct, and             
          petitioner bears the burden of proving otherwise.  Rule 142(a),             
          Welch v. Helvering, 290 U.S. 111, 115 (1933); Durando v. United             
          States, 70 F.3d 548, 550 (9th Cir. 1995).                                   
               As a general rule, a taxpayer may deduct research or                   
          experimental expenditures paid or incurred during the taxable               
          year in connection with its trade or business.  Sec. 174(a); Snow           
          v. Commissioner, 416 U.S. 500, 504 (1974).  Section 174 not only            
          applies to expenses paid or incurred directly by the taxpayer,              
          but it also includes expenditures paid or incurred for research             
          and development carried on in the taxpayer's behalf by another              
          person or organization.  Sec. 1.174-2(a)(2), Income Tax Regs.               
               A taxpayer is generally free to structure its business                 
          transactions as it pleases, though motivated by tax reduction               
          considerations.  Gregory v. Helvering, 293 U.S. 465 (1935);                 




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