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with respect to the project. However, the patent could not be
exploited because know-how and the right to manufacture the
product could not be transferred out of Israel without the
Israeli Government’s approval. Furthermore, in the event that I-
Tech did not exploit the technology, the rights to such
technology would pass to the Israeli Government at the end of 5
years. The PPM warned prospective investors that “there is no
assurance” that the Israeli Government would grant approval to
transfer know-how outside of Israel.
We are unconvinced that there was, during the years in
issue, any realistic prospect that I-Tech would exploit any
discoveries in a trade or business. We find that I-Tech served
as a financing vehicle set up to fund five Israeli R&D companies
in exchange for a stream of royalty payments convertible into
equity interests in the R&D companies or their affiliates.
We hold that I-Tech is not 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.
II. Guaranteed Payments
Respondent determined that deductions taken as guaranteed
payments of $79,867 in 1984, $179,501 in 1985, and $91,221 in
1986 were nondeductible. Petitioner did not make any argument
regarding these deductions in his original brief. In
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