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to engage, all of the surrounding facts and circumstances are
relevant to the inquiry into whether such entity has any
realistic prospect of entering into a trade or business with
respect to the technology under development. The inquiry
includes consideration of the intentions of the parties to the
contract for the performance of the research and development, the
amount of capitalization retained by the entity during the
research and development contract period, the exercise of control
by the entity over the person or organization doing the research,
the existence of an option to acquire the technology developed by
the organization conducting the research and the likelihood of
its exercise, the business activities of the entity during the
period in question, and the experience of the investors in the
entity. Absent a realistic prospect that the entity will enter a
trade or business with respect to the technology, the entity will
be treated as a passive investor, not eligible for deductions
under section 174.
As indicated previously, in Estate of Cook v. Commissioner,
T.C. Memo. 1993-581, the Court dealt with, among other things,
the entitlement of another IRC shareholder (namely, George Cook)
to a deduction for IRC's claimed 1979 research and development
expense. The Court rejected the taxpayers' contention that a
realistic prospect existed of IRC's entering into a trade or
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