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Petitioner contends that the expenditures here in issue
qualify under the statutory standard. Respondent argues, first,
that the expenditures in issue were not "research and
experimental expenditures" and, secondly, that Utah I did not
exercise sufficient direction or control over U.S. Agri to be
actively involved in a trade or business in connection with
jojoba production or jojoba technology research. Respondent also
argues that Utah I had no realistic prospect of engaging in a
trade or business related to jojoba farming and could at most act
as a passive investor because of the existence of the exclusive
license. Accordingly, respondent concludes that petitioner did
not pay or incur "research or experimental expenditures" in
connection with a "trade or business". We agree with respondent.
The term "research or experimental expenditures" as used in
section 174 means "expenditures incurred in connection with the
taxpayer's trade or business which represent research and
development costs in the experimental or laboratory sense." Sec.
1.174-2(a)(1), Income Tax Regs. This regulation further
provides:
The term [research or experimental expenditures]
includes generally all such costs incident to the
development of an experimental or pilot model, a plant
process, a product, a formula, an invention, or similar
property, and the improvement of already existing
property of the type mentioned. The term does not
include expenditures such as those for the ordinary
testing or inspection of materials or products for
quality control or those for efficiency surveys,
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