TAX COURT OPINION

Case: John L. Popolis & Deidre D. Popolis
Docket Number: 8278-10S
Judge: Goeke
Opinion Type: bench
Filed: 06/27/2011
Pages: 7

UNITED STATES TAX COURT WASHINGTON, DC 20217 JOHN L. POPOLIS & DEIDRE D. POPOLIS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) ) ) ) ) O R D E R Docket No. 8278-10S. Pursuant to Rule 152 (b) , Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit herewith to petitioners and to respondent a copy of the pages of the transcript of the trial in the above case before Judge Joseph Robert Goeke at Tampa, Florida, on June 10, 2Ó11, containing his oral findings of fact and opinion rendered at he conclusion of the trial. In accordance with the oral findings of fact and opinion, a decision will be entered for petitioners. (Signed) Joseph Robert Goeke Judge Dated: Washington, D.C. June 27, 2011 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 3 BENCH OPINION BY JUDGE ROBERT JOSEPH GOEKE, JOHN L. POPOLIS and DEIDRE D. POPOLIS v. COMMISSIONER DOCKET NO.: 8278-10S DATE: June 10, 2010 . THE COURT:t The Court has decided to render oral findings of fadt and opinion in this case and the following represent the Court's oral findings of fact and opinion. The oral findings of fact and opinion shall not be relied upon as precedent in any other case. This case was heard pursuant to the provisions of Sectidn 7463 of the Internal Revenue Code in effect at the time the petition was filed. Pursuant to Section 7463(b) the decision to be entered is not reviewable by any other court. Section re erences after this are to the Internal Revenue Code in effect for the years in issue, and the Rule references are to the Tax Court Rules of Practice and Procedure. The presen case is before the Court based upon our jurisdiction to review deficiencies determined by Respondent after the issuance of a Notice of Deficiency and a timely petition before the Court. The Petition r and his spouse filed such a petition in the pres nt case in a timely manner to Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 4 contest Respondent' determination of a deficiency in Federal Income Tax for the year 2005 in the amount of $2,712. Respondent s deficiency determination is based upon the disa lowance of a deduction claimed by the Petitioner in the amount of $9,403, and related omputational adjustments to Petitioner's itemized deductions. During the year 2005, Petitioner developed an invention called the Glo-Rod AKA Pop. This invention related to what Petitioner believed would be a better light bulb. To pursue this invention the Petitioner paid $9,103 to a firm which would create production samples of Petitioner's invention for use in marketing. Petitioner entered into a contract in 200/ for this purpo e and paid the $9,403 during the taxable year 2005. Early in 200 Petitioner determined that his invention was not going to be co mercially successful. On the Federal Inco e Ta , he filed jointly with his wife for 2005, the Petitioner claimed $9,403 as legal and professional fe s on Schedule E. Petitioner's contract provided for the filing of a provisional application for a patent on the invention, and such a provisional application was filed in 2006 pursuant to the contract Petitioner entered into. However, the Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 5 next stage, United States patent, was never applied for because the Petstioner determined that his invention was not edonomically feasible. Respondent has disallowed the expense, determining that Petitioner was not in a trade or business relative to the invention and that Petitioner¾; not entitled to research in experimental expenditures under Syction 174. We believe Section 174 is the proper fogus of our analysis in this case and that the other s ctions cited in Respondent's trial memorandum do ot form a basis for a deduction to the Petitioner, a$ Respondent asserts. However, we believe the analysis under Section 174 merits careful scrutiny as we will éxplain herein. Section 17 (a) (1) provides as a general rule that a taxpayer may ëlect to treat research or experimental expendi ures which are paid or incurred by him during the taxable year in connection with his trade or business as lexpenses which are not chargeable to a capital account . Such expenses are treated as deductible in the tadable year in which they are paid. Under Section 1.174-2 (a) (2) of the Treasury Regulations, expenses provided by Section 174- (a) (1) are not to only apply to costs paid E incurred by the taxpayer directly, but may also apply to expenditures Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 6 paid or incurred fo research or experimentation carried on on behalf of the taxpayer by another person or organization. T at is the nature of the expenses in the present case. The issue is whether these expenses are "in connection with a trade or business." We believe the outcome of this case is dictated by the Supreme Court's analysis of a very similar issue in the seminal case on Section 174, Snow v. Commissioner, 416 U.S. 500 (1974). In Snow the taxpayer was a limit d partner in an enterprise to develop an invention, and «EEt during the year in question in Snow thelinvention was not sold or marketed. But it was anticipated that the invention ultimately would be sold or marketed. The Supreme Court's analysis focyses on the distinction between the meaning of the term trade or business in the context of Section 1 4 as opposed to Section 162, and other places where t at phrase is used in the Internal Revenue Code. The S preme Court determined that Congress establish S ction 174 to allow small or pioneering businesses the opportunity to develop their products, and that the term trade or business did not // require actual sales or marketing of the product during the year when the activity was being developed. In the present case the Petitioner's Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 7 invention did not result in any actual sales, as the Petitioner determined in early 2006 that his invention was not going to be successful. Nevertheless the Petitioner in good faith incurred expenses which are in the nature of research and development expenses in 2005. Clearly, the development of a prototype is a research and development type of expense. At the time Petitioner incurred this expense he did anticipate trat the product would be successful and would lead to a marketable business which would actually make income for him and his wife. There's no question that this case involves a profit motive. Given that and the fact that Petitioner acted in good faith to develop hia product, the fact that his product did not yield ultimately a trade or business, is not in itself a bar to a deduction under Section 174. The question is whether Petitioner had an imminent intention to develop a trade or business, and applying the analysis of the Supreme Court in Snow we find that in 2005 Petitioner did incur research and development expenses in the amount of $9,403. As a result of our analysis a decision will be entered for the Petitioner in this case. This concludes the Court's oral findings of fact and opinion in this case. Heritage(Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 • 25 (Whereupori, at 9:17 a.m., the bench opinion in the above-entitled matter was concluded.) 8 // // // // // // // // // // // // // // // // // // // // // // // Heritage Reporting Corporation (202) 628-4888