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IRC and RIC had their respective principal places of
business in Sterling, Virginia, when the respective petitions
were filed in the instant cases. Both IRC and RIC were cash
basis taxpayers; each reported on its respective 1984 information
return that it had no income but claimed a deduction for research
and development expenses (IRC--$241,700; RIC--$631,000). RIC
claimed a $289 deduction for other expenses.
A. Systems Impact, Inc.
In 1984, Systems Impact, Inc. (hereinafter sometimes
referred to as Systems), was a nonpublicly traded C corporation
seeking to develop interactive educational videodiscs, a
relatively new technology at the time. Videodiscs are discs
which contain information which users may access with a videodisc
player. The videodisc player transmits the information contained
in the videodisc to a computer monitor for display.
Systems sought to exploit the videodisc technology as an
educational aid. Systems’ videodiscs were about the size of a
78-rpm phonograph record; they contained information about
various subjects including fractions, algebra, and earth science.
As used in an educational setting, teachers could monitor student
learning while the videodiscs presented the information to the
students. Based on their observations, teachers could tailor the
presentation of the information to what they perceived to be the
needs of the students. For instance, if the class did not appear
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