- 34 -
about the details of the two agreements that he hastily signed on
December 31, 1982. Utah I's liability under the R&D agreement
was extinguished by Kellen's concurrent execution of the license
agreement between Utah I and U.S. Agri. Therefore, the record
here indicates that the amounts paid to U.S. Agri by Utah I were
not even paid pursuant to a valid R&D agreement but were passive
investments in a farming venture under which the investors'
potential return was to be in the form of royalty pursuant to a
licensing agreement.
Since Utah I did not directly or indirectly engage in
research or experimentation, we hold that petitioner is not
entitled to a deduction for these expenditures under section 174.
B. Requirement of a Trade or Business
In addition, we hold that the activities of Utah I did not
constitute a trade or business. To be entitled to deductions for
research and development expenditures, a taxpayer need not be
currently producing or selling any product. Snow v.
Commissioner, 416 U.S. 500, 503-504 (1974); LDL Research & Dev.
II, Ltd. v. Commissioner, 124 F.3d 1338 (10th Cir. 1997), affg.
T.C. Memo. 1995-172. However, "the taxpayer must still be
engaged in a trade or business at some time, and we must still
determine, through an examination of the facts of each case,
whether the taxpayer's activities in connection with a product
Page: Previous 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 NextLast modified: May 25, 2011