Payments made directly or indi­rectly by a utility corporation to a non-profit research and develop­ment organization formed to de­velop a model that will benefit the utility field are deductible as re­search and experimental expendi­tures.

Rev. Rul. 73-20

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1 Also released as Technical Information Release 1220, dated December 15, 1912.

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Advice has been requested whether, under the circumstances described be­low, certain payments qualify as re­search and experimental expenditures pursuant to section 174 of the Internal Revenue Code of 1954.


M, a domestic utility corporation, is a member of X, a non-profit trade association.

In order to engage in a research and development project in the utility field, M and other utility companies organized and became members of Y, a non-profit company formed to pro­mote and collect funds for the project. Further, M, and the other utility companies formed and became mem­bers of Z, a non-profit research and de­velopment organization to build and operate the project.

M and the other utility companies, as members of Y and Z, are required to make annual payments based on a formula taking into account the quantity of electricity they sell and the revenues derived therefrom. The amounts paid and to be expended for the research and development project will be treated by M for ac­counting and rate making purposes as research and development costs and as operating expenses.

M, in making the required pay­ments under the formula, has the choice of paying the funds directly to either X, Y, or Z. If payment is made to X, such funds will be trans­ferred by X to Y and then to Z, and if the funds are paid to Y, the funds will be transferred to Z. In either cage the transfer to Z will be reduced by certain operating and administrative expenses incurred by Y in connection with the project. Thus, the purpose of X and Y is to act as an intermedi­ary for the funds and to provide a recipient familiar to the participants in the project.

The research performed by Z is of an investigative nature that is intend­ed to develop the concept of a model that will benefit the utility field. M will not, as a result of its payments, acquire ownership in land or depre­ciable property.

Section 174(a)(1) of the Code pro­vides, in general, that a taxpayer may treat research and experimental ex­penditures that are paid or incurred by him during the taxable year in connection with his trade or business as expenses that are not chargeable to capital account. The expenditures so treated shall be allowed as a de­duction.

Section 1.174-2(a)(2) of the In­come Tax Regulations provides, in part, that the provisions of this sec­tion apply not only to costs paid or incurred .by the taxpayer for research and experimentation undertaken di­rectly by him but also to expenditures paid or incurred for research or ex­perimentation carried on in his behalf by another person or organization (such as a research institute, founda­tion, engineering company, or similar contractor).

Revenue Ruling 69-484, 1969-2 C.B. 38, holds that payments made by an airline transportation company to an airline manufacturer that will de­sign, develop, fabricate, and test pro­totype aircraft constitute research and experimental expenditures under sec­tion 174(a) of the Code.

Accordingly, in the instant case, the amounts paid or incurred by M in connection with the project, including the amounts paid to Y for operating and administrative expenses, are re­search and experimental expenditures for purposes of section 174 of the Code.

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