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Under section 174, a taxpayer may deduct research or
experimental expenditures. To be eligible to claim this
deduction, the taxpayer must pay or incur the expenditures during
the taxable year in connection with his or her trade or business.
Sec. 174(a)(1). Furthermore, section 174 does not apply to
expenses that are for acquiring or improving land or depreciable
property even though the land or property is to be used in
connection with a research or experimentation activity. Sec.
174(c).
The Supreme Court, in Snow v. Commissioner, 416 U.S. 500
(1974), clarified the meaning of the term "in `connection with
his trade or business". In Snow, the Supreme Court compared the
"in `connection with his trade or business * * *" language of
section 174 with the "in carrying on a trade or business"
language of section 162 (Emphasis added); the latter section
allows an immediate deduction for ordinary and necessary business
expenses. The Court concluded that in contrast with section 162,
section 174 does not require that the taxpayer be currently
producing or selling any product in order to claim a deduction.
Following Snow v. Commissioner, supra, this Court has held
that the trade or business requirement is not eliminated under
section 174. Rather, section 174 requires that the taxpayer's
activities be aimed at engaging in a trade or business at some
point. Green v. Commissioner, 83 T.C. 667, 686 (1984).
Petitioner contends that he entered into the Windmill
Distillery activity for profit and should, therefore, be allowed
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Last modified: May 25, 2011