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OPINION
I. Section 174 Deductions
Section 174 generally allows as a current deduction research
or experimental expenditures which are paid or incurred by the
taxpayer in connection with the operation of a trade or business.
An entity, such as a partnership, may deduct these expenses even
when the expenditures paid or incurred for research or
experimentation are carried on in its behalf by another person or
organization. See sec. 1.174-2(a)(2), Income Tax Regs. A
partnership need not be engaged in a trade or business at the
time of the expenditure in order to qualify for a deduction under
section 174(a)(1). See Snow v. Commissioner, 416 U.S. 500
(1974). However, during the years in issue there must have been
a “realistic prospect” that the entity in question would enter a
“trade or business” involving the technology being developed.
Diamond v. Commissioner, 92 T.C. 423, 439 (1989), affd. 930 F.2d
372 (4th Cir. 1991). “If those prospects are not realistic, the
expenditures cannot be ‘in connection with’ a business of the
taxpayer” for the purpose of satisfying section 174. Spellman v.
Commissioner, 845 F.2d 148, 149 (7th Cir. 1988), affg. T.C. Memo.
1986-403. Whether activities in connection with a product are
sufficiently substantial and regular to constitute a trade or
business for purposes of section 174 is a factual determination.
See Green v. Commissioner, 83 T.C. 667, 687 (1984). The
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