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of deficiency, conceded petitioners' entitlement to a deduction
of various expenses for research or experimentation on the
subject engine: $3,050 for cam development, $2,120 for piston
development, $4,135 for engine block development, and $2,000 for
cylinder head development, totaling $11,305. Respondent
maintains that the $7,000 paid by petitioner for the damaged
Porsche 928 S4 engine does not constitute a research or
experimentation expense on the ground that the engine constituted
the acquisition of another's patent, model, production, or
process under section 1.174-2(a)(1), Income Tax Regs., and,
therefore, the cost of the engine is not deductible. Respondent
further contends that the engine was an asset used in connection
with research or experimentation under section 1.174-2(b)(1),
(2), and (4), Income Tax Regs., and, therefore, could not be
expensed but could only be depreciated. However, respondent
further contends that no depreciation should be allowed because
the engine was not placed in service during 1991.
Petitioners contend that the $7,000 cost of the engine
constitutes a research or experimentation expense that is fully
deductible in 1991 under section 174(a) or, alternatively, under
section 179, or, as a final alternative, that the cost of the
engine may be depreciated under section 167.
Deductions are a matter of legislative grace, and the
taxpayer must satisfy the specific statutory requirements claimed
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