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letter). The Caplan letter discussed various Federal income tax
principles and opined regarding the application of those
principles to the Jojoba investment. Caplan & Resnick based its
opinion on the representations made by Jojoba’s general partner,
which the firm claimed it independently verified by personally
interviewing officers of Agri-Research, visiting a typical
experimental jojoba plantation, and reviewing various documents,
including the PPM, the research and development agreement, the
license agreement, and documentation concerning the acquisition
of rights to the use of real property upon which the research
would be conducted. The Caplan letter specifically addressed the
deductibility of research and development expenditures under
section 174 and concluded:
Because of the scarcity of judicial opinions and
legislative enactments regarding section 174 and
because * * * [Jojoba] may incur expenses which are not
presently contemplated, it is not possible to guarantee
the deductibility of certain expenditures as research
and development expenses. The General Partner intends
to conduct the * * * [Jojoba] business such that, to
the extent possible, substantially all * * * [Jojoba’s]
expenditures for research and development qualify under
section 174.
Before making the investment in Jojoba, petitioner discussed
with Mr. Mihara Jojoba’s profit potential and the research and
development deduction that Jojoba anticipated claiming.
Although Mr. Mihara had no expertise regarding jojoba as a
marketable commodity, research and development expenditures
generally, or the requirements of section 174 when he brought
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