- 38 -
Yuma Mesa and Cactus Wren were wholly consistent with investor
activity, not the activity of people engaged in an active trade
or business.
After reviewing the record in the instant cases, we agree
with respondent that Yuma Mesa and Cactus Wren did not pay the
contract fees for research or experimentation to be conducted by
HTP and MBP on behalf of the limited partnerships. Rather, for
the reasons discussed above, we conclude that the moneys the
limited partnerships remitted to HTP and MBP for the putative
research or experimentation, in actuality, were paid for the
limited partners' right to participate in the jojoba farming
enterprise being operated by AI in Yuma, Arizona. In our view
the R&D agreements were designed and entered into solely to
provide a mechanism to disguise the capital contributions of the
limited partners as currently deductible expenditures and thus
reduce the cost of their participation in the farming venture.
Accordingly, we hold that petitioners did not incur
deductible losses for research or experimentation expenditures
under section 174. Respondent is sustained on this issue.
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