Domingo A. Lopez - Page 10




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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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