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stated only the following as counsel’s opinion concerning a
section 174 deduction:
The deductions which may be available to the partnership
under Section 174 (Research and Development) of the Internal
Revenue Code are dependent upon the acceptance by the
Internal Revenue Service or the courts of the Partnership’s
characterization of the transaction as a payment of research
and development fees to the Contractor.
It appears that counsel in fact expressed no opinion concerning
the propriety of the deduction, but instead merely stated that
the partnership would take the deduction. Although it may have
been reasonable if petitioners had overlooked certain minor
details in the summary of the letter, petitioners should have
been alerted to the importance of this claimed deduction: The
memorandum clearly stated that approximately 95 percent of the
capital contributed to the partnership would be immediately
expended under the research and development contracts. Among the
various cautionary statements in the memorandum was a discussion
concerning the risks involved in the partnership’s claiming a
deduction with respect to this expense, and the memorandum also
specifically stated that no ruling would be requested by the
partnership from the Internal Revenue Service regarding this
issue.
As support for a reliance defense, petitioners cite the
unpublished opinion of the Court of Appeals for the Ninth Circuit
in Balboa Energy Fund 1981 v. Commissioner, 85 F.3d 634 (9th Cir.
1996), affg. in part and revg. in part sub nom. without published
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