Norman H. Fawson and Mary Jane B. Fawson - Page 10

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          that U.S. Agri’s attempts to farm jojoba commercially did not               
          constitute research and development.  We concluded that the R&D             
          agreement was designed and entered into solely to decrease the              
          cost of participation in the jojoba farming venture for the                 
          limited partners through large up-front deductions for                      
          expenditures that were in reality capital contributions.  We                
          further found that the partnership was not involved in a trade or           
          business and had no realistic prospect of entering into a trade             
          or business with regard to any technology that was supposed to be           
          developed by U.S. Agri.  On these bases, we determined that the             
          partnership was not entitled to a claimed loss of $1,304,819,               
          including $1,298,627 claimed as qualified research and                      
          experimental expenditures under section 174.                                
               Petitioners contend that they invested in the partnership              
          and claimed losses arising out of the partnership in a good faith           
          belief that the partnership had the potential to earn a profit.             
          They contend they exercised the due care of reasonable and                  
          ordinarily prudent persons under the circumstances, taking into             
          account their experience and the nature of the investment.  They            
          further argue that at the time they claimed the deductions at               
          issue the law relating to the deductibility of research and                 
          development expenses under section 174 was still unclear and that           
          there were no warning signs that they would not be entitled to              
          the claimed deduction.  We, however, do not find that the                   

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