Patrick F. and Arlene G. Sheehy - Page 6

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          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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