-406-
relevant inquiry is whether the entity has any realistic prospect
of entering into a trade or business involving the technology
under development. Spellman v. Commissioner, 845 F.2d 148, 151
(7th Cir. 1988), affg. T.C. Memo. 1986-403; Diamond v.
Commissioner, 92 T.C. 423, 439 (1989), affd. 930 F.2d 372 (4th
Cir. 1991).157
As the foregoing cases demonstrate, when an entity contracts
out the performance of the research and development in which it
intends to engage, all of the surrounding facts and circumstances
are relevant to the inquiry whether the entity has any realistic
prospect of entering into a trade or business with respect to the
technology under development. Consideration is given to (1) the
intentions of the parties to the contract for the performance of
the research and development, (2) the amount of capitalization
retained by the entity during the research and development
contract period, (3) the exercise of control by the entity over
the person or organization doing the research, (4) the existence
of an option to acquire the technology developed by
the organization conducting the research and the likelihood of
its exercise, (5) the business activities of the entity during
the period in question, and (6) the experience of the investors
in the entity. Absent a realistic prospect that the entity will
157 See also Double Bar Chain Co., Ltd. v. Commissioner,
T.C. Memo. 1991-572; Coleman v. Commissioner, T.C. Memo.
1990-357.
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