Rodney M. Fujiyama and Vicki Ann Fujiyama - Page 6




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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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