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section 174 means "expenditures incurred in connection with the
taxpayer's trade or business which represent research and
development costs in the experimental or laboratory sense." Sec.
1.174-2(a)(1), Income Tax Regs. This regulation further
provides:
The term [research or experimental expenditures]
includes generally all such costs incident to the
development of an experimental or pilot model, a plant
process, a product, a formula, an invention, or similar
property, and the improvement of already existing
property of the type mentioned. The term does not
include expenditures such as those for the ordinary
testing or inspection of materials or products for
quality control or those for efficiency surveys,
management studies, consumer surveys, advertising or
promotions. [Id.] * * *
Respondent claims that the amounts paid to HTP and MBP by
Yuma Mesa and Cactus Wren do not fall within the purview of the
quoted regulation and are not deductible under section 174.
Respondent contends that the amounts expended by Yuma Mesa and
Cactus Wren were incurred only in connection with a farming
enterprise and that the objective of the limited partnerships was
to develop commercial plantations for the farming of jojoba
through the work of AI. Respondent argues that the activities of
AI were, at most, field trials and more likely were simply
farming activities directed towards maximizing the potential
production of the jojoba plantations. Moreover, respondent
contends that on plantation II no research whatsoever was
performed by AI. Petitioners contend that AI, pursuant to its
management contract with HTP and MBP, conducted valid research or
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