David M. and Teri L. Saykally - Page 1

                                 T.C. Memo. 2003-152                                  

                               UNITED STATES TAX COURT                                

                    DAVID M. AND TERI L. SAYKALLY, Petitioners v.                     
                    COMMISSIONER OF INTERNAL REVENUE, Respondent                      
                 COMPUTER POWER SOFTWARE GROUP, INC., Petitioner v.                   
                    COMMISSIONER OF INTERNAL REVENUE, Respondent                      

               Docket Nos. 555-00, 1821-00.     Filed May 27, 2003.                   
                    P has extensive technical expertise in the                        
               computer software industry. P’s wholly owned                           
               corporation, C, was engaged in the marketing of                        
               software products.  P and C entered into an agreement                  
               whereby P agreed to have research and development (R&D)                
               done in order to create developed technology.  Under                   
               the agreement, P would own the developed technology and                
               license it to C in exchange for royalties.  P intended                 
               that C would market the developed technology to its                    
               customers.  P deducted his 1995 and 1996 R&D                           
               expenditures on Schedules C.  R disallowed P’s R&D                     
               deductions on the ground that they were not incurred in                
               a trade or business.                                                   
                    Held:  At all times, P intended to market the                     
               developed technology through C.  P did not have the                    
               objective intent to use the developed technology in an                 
               activity that would constitute his own trade or                        

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