David W. Chiu - Page 22

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            to demonstrate that the claimed Schedule C expenses were paid or                             
            incurred "in carrying on any trade or business" within the                                   
            meaning of section 162(a).                                                                   
                  Although neither party argued the point on brief, we believe                           
            that petitioner's claim that these expenses were for "research                               
            and development" warrants our consideration whether the expenses                             
            may be deductible under section 174 as "research and                                         
            experimental" expenditures.  Expenditures deductible under                                   
            section 174 need only be paid or incurred "in connection with"                               
            the taxpayer's trade or business, whereas expenses deductible                                
            under section 162 must be paid or incurred "in carrying on" such                             
            trade or business.  The section 174 requirement is less strict.                              
            See Snow v. Commissioner, 416 U.S. 500 (1974); Diamond v.                                    
            Commissioner, 92 T.C. 423, 439 (1989), affd. 930 F.2d 372 (4th                               
            Cir. 1991); Green v. Commissioner, 83 T.C. 667, 686-687 (1984).                              
            Thus, section 174 might require a lesser showing than section 162                            
            of the trade or business activities actually conducted by                                    
            petitioner in 1990.  Nonetheless, we conclude that section 174                               
            does not help petitioner because the record in this case does not                            
            support the conclusion that the claimed expenses constitute                                  
            section 174 expenditures.                                                                    
                  Research and experimental expenditures generally refer to                              
            research and development costs in the experimental or laboratory                             
            sense.  Sec. 1.174-2(a)(1), Income Tax Regs.  The term includes                              

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