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A taxpayer may be precluded from engaging in a trade or
business with respect to the developed technology if the taxpayer
disposes of all incidents of ownership in the technology by
granting an exclusive license to a third party in exchange for a
royalty interest. Diamond v. Commissioner, supra at 438; Levin
v. Commissioner, 87 T.C. at 725-728; Green v. Commissioner, supra
at 689. "It is the licensee, rather than the licensor, who earns
profits from the sale of the product; the licensor merely
collects royalties from the licensee. Thus, by granting an
exclusive license, the licensor is deprived of control over the
manufacture, use and sale of the product, and the licensee is the
one engaged in the trade of business of exploiting the developed
technology." Medical Mobility Ltd. Partnership I v.
Commissioner, T.C. Memo. 1993-428. As a mere passive investor,
the partnership will not be entitled to a deduction under section
174(a) for research and experimental expenditures. Zink v.
United States, supra at 1022-1023; Diamond v. Commissioner, supra
at 443.
In Green v. Commissioner, supra, a partnership entered into
a research and development agreement under which it divested
itself of all ownership rights in the technology to be produced
under the agreement. We held that the taxpayer's partnership
could not have engaged in a trade or business as it had disposed
of all of the incidents of ownership by assigning all its rights
in the technology to a third party. Green v. Commissioner, supra
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