- 6 -
might be, as petitioners argue, that RCC is involved in the
business of developing recyclable containers with the intention
of manufacturing them. Then again, it might not. It is up to
petitioners to prove that they engaged indirectly through RCC in
research or experimentation. This they have not done. It is
also up to petitioners to prove that their expenditure was paid
or spent in connection with their own trade or business. The
controlling inquiry in determining whether an expenditure under
section 174 was made "in connection with" a taxpayer's trade or
business is whether the taxpayer is "'actively involved in the *
* * [research project] as a trade or business.'" LDL Research &
Dev. II, Ltd. v. Commissioner, 124 F.3d 1338, 1342 (10th Cir.
1997) (quoting Nickeson v. Commissioner, 962 F.2d 973, 978 (10th
Cir. 1992), affg. Brock v. Commissioner, T.C. Memo. 1989-641),
affg. T.C. Memo. 1995-172. As stated by the Court of Appeals for
the Ninth Circuit:
The language of * * * [section 1.174-2(a)(2), Income
Tax Regs.] makes clear that a taxpayer may enjoy the
section 174 deduction for research conducted by another
entity. Read in isolation, the regulation might
suggest that the * * * [taxpayer] is entitled to the
deduction even though it engaged the research firm to
conduct its research. The regulation, however, does
not eliminate the trade or business requirement of
section 174. If a * * * [taxpayer] engages another
firm to conduct its research, it must satisfy the trade
or business requirement in some other way, such as by
manufacturing or marketing the resulting technology.
* * *
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