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The offering identified William Kellen (Mr. Kellen) as the
general partner and U.S. Agri as the contractor for the R & D
program under an R & D agreement. Additionally, a license
agreement between Blythe I and U.S. Agri granted U.S. Agri the
exclusive right to utilize technology developed for Blythe I for
40 years in exchange for a royalty of 85 percent of all products
produced. The offering included copies of both the R & D
agreement and the license agreement. The R & D agreement was
executed concurrently with the license agreement.
According to its terms, the R & D agreement expired upon the
partnership's execution of the license agreement. Since the two
were executed concurrently, amounts paid to U.S. Agri by the
partnership were not paid pursuant to a valid R & D agreement but
were passive investments in a farming venture under which the
investors' return, if any, was to be in the form of a royalty
pursuant to the licensing agreement. Thus, as this Court held in
Utah Jojoba I Research v. Commissioner, T.C. Memo. 1998-6, the
partnership was never engaged in research or experimentation,
either directly or indirectly. Moreover, this Court found in
Utah Jojoba I Research v. Commissioner, supra, that U.S. Agri's
attempts to farm jojoba commercially did not constitute research
and development, thereby concluding that the R & D agreement was
designed and entered into solely to decrease the cost of
participation in the jojoba farming venture for the limited
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