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To resolve this issue, we must look to the statute granting
deductions for expenses related to R&D and the cases interpreting
it. Section 174(a)(1) provides:
SEC. 174(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.
To qualify for a deduction, the expenditures must be (1)
qualifying, (2) paid or incurred in connection with the
taxpayer’s trade or business, and (3) reasonable. Sec. 174(e);
sec. 1.174-2, Income Tax Regs. R&D expenditures which are not
deductible under section 174(a) must be charged to a capital
account. Sec. 1.174-1, Income Tax Regs.
The term “research or experimental expenditures” as used in
section 174 means expenditures “incurred in connection with the
taxpayer’s trade or business which represent research and
development costs in the experimental or laboratory sense.” Sec.
1.174-2(a)(1), Income Tax Regs. Section 174 allows a taxpayer to
claim a deduction for expenditures paid or incurred for research
carried on in his behalf by another person or organization. Sec.
1.174-2(a)(8), Income Tax Regs.
In this case, respondent does not argue or allege that the
expenses in question are not “research and development costs in
the experimental or laboratory sense” or that the amounts claimed
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