- 27 -
expenditure having some relationship to research and
experimentation is deductible under section 174(a). The Supreme
Court's decision in Snow v. Commissioner, supra, "makes it
important to determine whether the prospects for developing a new
product that will be exploited in a business of the taxpayer are
realistic". Spellman v. Commissioner, 845 F.2d. 148, 149 (7th
Cir. 1988), affg. T.C. Memo. 1986-403. Unless there is a
realistic prospect that the taxpayer will ultimately engage in a
trade or business that exploits the developed technology, a
research and experimental expenditure cannot be said to have been
paid or incurred "in connection with" a trade or business.
Harris v. Commissioner, 16 F.3d 75, 81 (5th Cir. 1994), affg.
T.C. Memo. 1990-80, supplemented by 99 T.C. 121 (1992); Zink v.
United States, supra at 1023; Spellman v. Commissioner, supra at
148-149; Diamond v. Commissioner, 92 T.C. 423, 439 (1989), affd.
930 F.2d 372 (4th Cir. 1991).
The management of investments, however, is not a trade or
business, regardless of how extensive or complete the portfolio
or how much time is required to manage such investments. Green
v. Commissioner, 83 T.C. 667, 689 (1984). This Court and other
Courts have scrutinized claimed research and development
expenditures to distinguish those that are legitimate from those
that are merely designed to shelter the income of passive
investors. See, e.g., Diamond v. Commissioner, supra; Levin v.
Commissioner, 87 T.C. 698 (1986), affd. 832 F.2d 403 (7th Cir.
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