- 45 -
ever be capable of entering into a trade or business with respect
to any technology that might be developed. Under the terms of
the license agreement, Utah I was deprived of control over any
technology U.S. Agri might have developed.8 Kellen's actions
were consistent with investor activity and not the activity of a
person engaged in a trade or business.
"A taxpayer that funds research by another party in return
for royalties is clearly no more than an investor making a
capital contribution to the trade or business of another." LDL
Research & Dev. II, Ltd. v. Commissioner, 124 F.3d at 1346. It
is clear that Utah I funded alleged "research activities" of U.S.
Agri with the expectation of royalties from the sale of the
jojoba beans. The promotional videotape prepared by Pace, and
distributed to potential investors in jojoba limited partnerships
serviced by U.S. Agri, heavily emphasized the potential for a
high rate of return from an investment in "liquid gold" or
jojoba.
As the contractor for Utah I, U.S. Agri was the only entity
engaged in a trade or business related to jojoba farming. Pace
8 As the Court of Appeals for the Fifth Circuit noted in
Harris v. Commissioner, 16 F.3d 75,79 (5th Cir. 1994), affg. T.C.
Memo. 1990-80, supplemented by 99 T.C. 121 (1992): "those cases
in which a section 174 deduction was upheld may be distinguished
by one dispositive factor: In each of the cases allowing the
deduction, the entity that incurred the research expenses
actually managed and actually controlled the use or marketing of
the research".
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