William v. Scoggins Joyce M. Scoggins Robert W. Christensen Carrie L. Christensen v. Commissioner Internal Revenue Service

This case presents the question of whether research expenditures made by a partnership, that was formed in order to develop new technology, were incurred in connection with the partnership’s trade or business, so as to be deductible expenses under 26 U.S.C. § 174 . William Scoggins and Robert Christensen were the sole partners in the partnership. They also formed a corporation in which they held the majority interest. The partnership contracted with the corporation to do the research to develop the new technology, but the partnership retained ownership of any technology developed. The partnership agreed to pay to the corporation up to $500,000 to do the research and, in addition, gave the corporation a nonexclusive license to market the technology for a 15-month period and also an option to acquire the technology for $5 million after the license expired.

The Tax Court held that the partnership was not entitled to claim the $486,000 it expended for the research during the 1985 and 1986 tax years. It upheld the deficiencies the Commissioner of Internal Revenue (“Commissioner”) assessed against the two partners and the penalties assessed for substantial underpayment of tax under 26…