Patrick F. and Arlene G. Sheehy - Page 3

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          "Manufacturing Recyclable containers".  They also indicated that            
          petitioner materially participated in the operation of the                  
          business.  Petitioners reported no income on the Schedule C, nor            
          did they deduct any expenses other than the $50,000 "Product                
          Development" expense.                                                       
               The Commissioner's notice of deficiency disallowed two                 
          different research and development deductions, each for $50,000.            
          The first, taken in 1992 in connection with horse-breeding                  
          activities, was conceded by respondent.  The second, taken in               
          1992 in connection with the investment in RCC, is still in                  
          contention.  The remaining items contained in the notice of                 
          deficiency have been conceded by the parties or are statutory               
          adjustments dependent upon the outcome of the RCC issue.                    
               Petitioners contend they are entitled to deduct the $50,000            
          they paid to RCC in 1992 under section 174(a).2  Section 174(a)             
          allows a taxpayer to "treat research or experimental expenditures           
          which are paid or incurred * * * in connection with his trade or            
          business as expenses which are not chargeable to capital account.           
          The expenditures so treated shall be allowed as a deduction."               
          Section 1.174-2(a)(2), Income Tax Regs., indicates that section             
          174 applies "not only to costs paid or incurred by the taxpayer             


               2  Unless otherwise indicated, all section references are to           
          the Internal Revenue Code in effect for the years in issue, and             
          all Rule references are to the Tax Court Rules of Practice and              
          Procedure.                                                                  




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