Leonard Charles and Kaye Layne Ekman - Page 9

                                        - 9 -                                         

          component materials of the depreciable property, the costs of               
          labor or other elements involved in its construction and                    
          installation, or costs attributable to the acquisition of the               
          property.  Sec. 1.174-2(b)(4), Income Tax Regs.  An example in              
          subparagraph (4) is that of a taxpayer who undertakes to develop            
          a new machine for use in his business.  The taxpayer expends a              
          total of $30,000 on the project, of which $10,000 represents the            
          actual costs of material, labor, etc., to construct the machine,            
          and $20,000 represents research costs that are not attributable             
          to the machine itself.  In this example, the $20,000 research               
          costs are deductible, but the $10,000 costs are not deductible              
          and must be charged to the asset account (the machine).                     
               In this case, petitioner's payment of $7,000 for the Porsche           
          engine represented the cost of an asset that was of a character             
          subject to an allowance for depreciation and that was used in               
          connection with research or experimentation.  Since the $7,000              
          was for the acquisition of such an asset, that amount is not                
          deductible as a research or experimentation expense.  Sec. 1.174-           
          2(b)(1), (2), (3), and (4), Income Tax Regs.  All other expenses            
          petitioner incurred in connection with the enhancement of the               
          engine represented deductible research or experimentation                   
          expenses, and, indeed, respondent has allowed those expenses as             
          deductions.  For the $7,000 acquisition cost, however, the Court            







Page:  Previous  1  2  3  4  5  6  7  8  9  10  11  Next

Last modified: May 25, 2011