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T.C. Memo. 1993-621; Goldman v. Commissioner, 39 F.3d 402, 407
(2d Cir. 1994), affg. T.C. Memo. 1993-480; Freytag v.
Commissioner, supra.
The facts pertinent to the present case relating to the
structure, formation, and operation of San Nicholas are as found
above and as discussed in Utah Jojoba I Research v. Commissioner,
T.C. Memo. 1998-6. The offering memorandum identified U.S. Agri
as the contractor under the R&D contract. In addition, a license
agreement between San Nicholas and U.S. Agri granted U.S. Agri
the exclusive right to use all technology developed for the
partnership for 40 years in exchange for a royalty of 85 percent
of the products produced from such technology. The R&D contract
and the license agreement were executed concurrently.
According to its terms, the R&D contract expired upon the
partnership’s execution of the license agreement. Because the
two contracts were executed concurrently, amounts paid by the
partnership to U.S. Agri were not paid pursuant to a valid R&D
contract but rather were passive investments in a farming venture
under which the investors’ return, if any, was to be in the form
of royalties pursuant to the license agreement. Thus, as the
Court held in Utah Jojoba I Research v. Commissioner, supra, the
partnership was never engaged in research or experimentation,
either directly or indirectly. Moreover, the Court found that
U.S. Agri’s attempt to farm jojoba commercially did not
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