David M. and Teri L. Saykally v. Commissioner of Internal Revenue. 247 Fed. Appx. 914. 9th Cir. T.C. Memo. 2003-152

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Background

Saykally v. Commissioner T.C. Memo. 2003-152

This tax court memo concerns the Saykally family and the following issues are up for debate:

  1. Whether petitioners are entitled to deduct expenses claimed for research and development for taxable years 1995 and
    1996 in the respective amounts of $67,534 and $1,421,645;
  2. Whether petitioners are entitled to deduct certain expenses on their Schedules C, Profit and Loss From Business, for
    the taxable years 1994, 1995, and 1996;
  3. Whether petitioners are liable for accuracy-related penalties pursuant to section 6662 for the taxable years 1994,
    1995, and 1996.

Basic Facts

Saykally has extensive experience in the computer software industry. After a falling out with a previous marketing company for which research and business had been conducted, research was then solely responsible by Saykally. During 1995 and 1996, CPSG, Inc., by and through its wholly owned subsidiaries, paid $67,543 and $1,361,006 of research and development costs on behalf of petitioner.

Deductions generally have the burden of proof fall on the taxpayer to provide evidence to support these deductions. If the Court finds that Saykally is not entitled then CPSG would be so entitle and because CPSG abdondend this argument, there is no opinion to this issue. The next issue addressed is whether petitioners are entitled to deduct certain expenses. At the time Saykally incurred the R&D expenditures, he did not have the objective intent to enter into a future business of his own with the developed technolog but rather to conduct business with other companies and license this to an existing business and there is no evidence on record that Saykally intended to use this research for his own business.  The last issue is whether petitioners are liable for accuracy related penalties. There is no evidence to support the deductions claimed and for the other deductions in regards to R&D, the petitioner testified that they sought advice from a tax professional so the penalties associated with deductions for this would not be appropriate in this case.

Findings

This Opinion finds that respondent’s imposition of a penalty for an erroneously claimed double deduction was substantially justified, they do not find petitioners’ argument that respondent failed to identify which deductions were denied persuasive and they find that at the time this case was filed, the Saykally’s did not engage in research that had the intention of engaging in their own business with the developed technology from research.

Click Here to view the full case: David M. and Teri L. Saykally v. Commissioner of Internal Revenue. 247 Fed. Appx. 914 (9th Cir. 2007)

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