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To be entitled to deductions for research and experimental
expenditures, a taxpayer is not required currently to produce or
sell any product. Moreover, a taxpayer need not be currently
engaged in a trade or business in order to qualify for such
deductions. See Snow v. Commissioner, 416 U.S. 500, 503-504
(1974). Nevertheless, in Green v. Commissioner, 83 T.C. 667,
686-687 (1984), this Court stated:
For section 174 to apply, the taxpayer must still be
engaged in a trade or business at some time, and * * *
[the Court] must still determine, through an
examination of the facts of each case, whether the
taxpayer's activities in connection with a product are
sufficiently substantial and regular to constitute a
trade or business for purposes of such section. [Fn.
ref. and citations omitted.]
A taxpayer must be more than a mere investor to be entitled
to deductions for research and experimental expenditures under
section 174. See id. at 688-689, see also Levin v. Commissioner,
87 T.C. 698, 725-726 (1986), affd. 832 F.2d 403 (7th Cir. 1987).
In the case of an entity that claims deductions under
section 174, the relevant inquiry is whether the entity has any
realistic prospect of entering into a trade or business involving
the technology under development. See Spellman v. Commissioner,
845 F.2d 148, 151 (7th Cir. 1988), affg. T.C. Memo. 1986-403;
Diamond v. Commissioner, 92 T.C. 423, 439 (1989), affd. 930 F.2d
372 (4th Cir. 1991).
As these cases demonstrate, when an entity contracts out the
performance of the research and development in which it intends
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