-414-
Indeed, in his testimony, Kanter could not elaborate or
describe what realistic prospects IRC would have of exploiting
commercially the technology being developed. In view of the
broad scope of the existing and potential patent rights Newport
and Sloan-Kettering held, it is difficult to believe that a third
party, such as a major pharmaceutical company, would want to
license from IRC the know-how on NPT-15392 to further develop
that technology.
On the basis of the foregoing, the Court holds the Kanters
are not entitled to a deduction under section 174 for 1979 with
respect to IRC’s claimed research and development expense. See
Spellman v. Commissioner, 845 F.2d 148 (7th Cir. 1988), affg.
T.C. Memo. 1986-403; Diamond v. Commissioner, 92 T.C. 423 (1989),
159(...continued)
would likely exercise if the research turned sour, or the “call”
agreement that allowed Newport to buy the IRC stock, which likely
would occur if the development of the technology proved to be
successful. The Court also noted that all of the Schedules 10-K
filed by Newport with the Securities and Exchange Commission,
pursuant to sec. 13 or 15(d) of the Securities Exchange Act of
1934, as amended, described the research agreement, as entered
into with IRC, as being more in the nature of an investment than
a licensing of the technology. The Court further noted that,
even if IRC acquired the technology from Newport, there was no
showing that IRC had the resources to devote to the exploitation
of the technology, nor was there any obligation on the part of
IRC to compel or require capital contributions from its
stockholders. The Court concluded the investments in IRC were
nothing more than an investment in Newport that was structured to
allow the investors in IRC a deduction for their $980,000
investment through purported research and experimental deductions
that would not have been available had the investment been made
directly in Newport.
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