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the Ninth Circuit explained that the Supreme Court's decision in
Snow v. Commissioner, 416 U.S. 500 (1974), left unclear the
extent to which research must be "in connection with" a trade or
business for purposes of qualifying for an immediate deduction
under section 174. However, in the instant case, the partnership
was neither engaged in a trade or business nor conducting
research and development, either directly or indirectly.
Additionally, the experience in jojoba research and development
of the general partner of Blythe II, Mr. Kellen, was
questionable, at best, as evidenced by conflicting statements in
the offering. Also, it is apparent from the evidence presented
in this case that Mr. Kellen had minimal involvement in the
partnership. Petitioners are precluded from relying upon a "lack
of warning" as a defense to negligence, when there is no evidence
that a reasonable investigation was ever made and the offering
materials contained many warnings of the tax risks associated
with the investment.
On this record, the Court finds that petitioners did not
exercise the due care of reasonable and ordinarily prudent
persons under the circumstances. Consequently, the Court holds
that petitioners are liable for the negligence additions to tax
under section 6653(a)(1) and (2) for each of the years at issue.
Respondent is sustained on this issue.
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