- 38 -
differentiate those that are legitimate from those that are
merely designed to shelter the income of passive investors. See,
e.g., Spellman v. Commissioner, supra; Diamond v. Commissioner,
supra; Levin v. Commissioner, supra; Green v. Commissioner,
supra. For an investing partnership successfully to claim
research and experimental deductions, there must be a realistic
prospect that the technology to be developed will be exploited in
a trade or business of the partnership claiming deductions under
section 174. See Diamond v. Commissioner, supra. Mere legal
entitlement to enter into a trade or business does not satisfy
this test. Instead, "The legal entitlement must be backed by a
probability of the firm's going into business." Levin v.
Commissioner, 832 F.2d at 407.
In making this determination, we consider such facts and
circumstances as the intentions of the parties to the research
and development contract, the amount of capitalization retained
by the partnership during the research and development contract
period, the exercise of control by the partnership over the
person or organization conducting the research and development,
the existence of an option to acquire the technology developed by
the organization conducting the research and development and the
likelihood of its exercise, the business activities of the
partnership during the years in question, and the business
experience of the partners. See Cactus Wren Jojoba, Ltd. v.
Page: Previous 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 NextLast modified: May 25, 2011