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items under Code section 6226.1 After concessions,2 the issues
for decision are: (1) Whether I-Tech is entitled to deduct
research or experimental expenses of $2,591,225, $2,834,032, and
$1,497,317 under section 174 in its tax years 1984 through 1986,
respectively; and (2) whether I-Tech is precluded from deducting
guaranteed payments of $79,867, $179,501, and $91,221 under
sections 162 and 707(c) in its tax years 1984 through 1986,
respectively.3
1Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
2The amounts claimed by I-Tech on its tax returns differ
from the amounts disallowed by respondent in the notice of final
partnership administrative adjustment (FPAA). The amounts
disallowed in the FPAA are consistent with respondent’s
settlement position in this case as entered into with respect to
some limited partners. Respondent, for purposes of uniformity,
adhered to this position in the FPAA. Consequently, the amounts
disallowed for research or experimental deductions, guaranteed
payments, and management and overhead expenses are less than the
amounts claimed on the partnership tax returns.
A “no change” agreement accepting the partnership’s return
as originally filed for the year 1987 was made in conjunction
with I-Tech’s consent to adjustments on Forms 870-P(AD),
Settlement Agreement for Partnership Adjustments, for the years
1984, 1985, and 1986.
3I-Tech also deducted management and overhead expenses of
$87,489 in 1984, $279,980 in 1985, and $217,460 in 1986.
Respondent determined that these expenses had to be capitalized.
Respondent determined that I-Tech’s management and overhead
deductions for 1984 would be allowed over a 36-month period, the
1985 deductions would be allowed over a 24-month period, and the
1986 deductions would be increased for amortization additions
from capitalized costs in 1984 and 1985. Since petitioner did
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