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be treated as having been performed by IRC and RIC; (2) IRC and
RIC could have and would have entered the marketplace with the
technology so developed, but for Systems’ acquisition of IRC and
RIC; and (3) IRC and RIC spent the necessary funds in 1984.
We agree with respondent that IRC and RIC did not pay the
research expenses in connection with their respective trades or
businesses, and so neither S corporation is entitled to its
claimed section 174 deduction (see supra notes 3 and 5).
Section 174(a)(1)16 permits a taxpayer to currently deduct
research or experimental expenditures which the taxpayer pays or
incurs during the taxable year in connection with the taxpayer’s
trade or business. (For these purposes, the taxpayers in the
instant cases are IRC and RIC, even though they are pass-through
entities.)
For IRC and RIC to be entitled to their claimed section 174
deductions, the record must show that (1) IRC and RIC made
payments to Systems, (2) these payments were made in order to
16Sec. 174(a)(1) provides as follows:
SEC. 174. RESEARCH AND EXPERIMENTAL EXPENDITURES.
(a) Treatment As Expenses.--
(1) In general.--A taxpayer may treat
research or experimental expenditures which are
paid or incurred by him during the taxable year in
connection with his trade or business as
expenses which are not chargeable to capital
account. The expenditures so treated shall be
allowed as a deduction.
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