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purpose for engaging in the R&D was to create the developed
technology that could be licensed to CPSG, Inc. for use in CPSG,
Inc.’s existing business.17 For example, petitioner testified as
follows:
Q: Okay. And had no further development had
taken place, what would have happened to CPSG?
A: It would have been literally out of business.
Our [software] products would have been 1992 ilk.
I’m sure you appreciate just reading the trade
press how quickly technology moves in this
industry, and it would have had obsolete products
that they could no – not only could they not have
sold them to any new customers, their own customer
base would have immediately started looking for
alternative technology. A large part of the
revenue for these companies came from customer
support, customer upgrade kinds of revenue, and if
they hadn’t – if they hadn’t had any improvement
to the product, the customers would have no reason
to spend that money, so CPSG would have simply
been out of business.
* * * * * * *
Q: How did you decide whether to do * * * [the
development work] as an employee of CPSG or –- or
as your Schedule C?
A: * * * I was concerned that CPSG really didn’t
have any leverage in a discussion with Computer
Power Group. If they cancelled the marketing
agreement, if they cancelled the sublicense –- or
the submarketer agreement, Computer –- CPSG was
out of business.
So, my thought was to create some
intellectual property ownership outside of
Computer Power Software Group, and the idea being
17CPSG, Inc.’s initial return position was to deduct the R&D
expenditures on its tax return. CPSG, Inc. ultimately amended
its return, eliminating the deduction, which petitioners then
claimed on their individual tax return.
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