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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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