Sharon D. Kantor, Robert E. Kantor v. Commissioner of Internal Revenue

This case presents the question of whether research expenditures made by a partnership in order to develop a new technology were incurred in connection with its own trade or business, within the meaning of 26 U.S.C. § 174 , where the partnership had contracted another firm to conduct the research and had granted that firm the opportunity to obtain for a nominal sum the exclusive right to market the technology. The Tax Court held they were not, and thus were not deductible as current expenses. We affirm this determination. The appellants also contend that the Tax Court lacked jurisdiction because of a defect in the notice of deficiency and challenge the Tax Court’s imposition of negligence penalties. We conclude the notice of deficiency was adequate, affording jurisdiction,. but reverse the imposition of the negligence penalties.

I.

In 1981, appellants invested in PCS, Ltd., an Arizona limited partnership, whose stated purpose was to develop and exploit adaptations of an existing computer program called PRO-IV for use on various computer systems. On its tax return for that year, PCS, Ltd., claimed a $3.15 million deduction for research and experimentation expenses pursuant to 26…