Rev. Rul. 73-324, 1973-2 C.B. 72

Synthetic gas research and ex­perimental costs . A natural gas company’s payments to an industry association of which it is a member to help fund, under an agreement with the Department of Interior, an organization to develop a coal gasification program for the pro­duction of synthetic gas are re­search and experimental expendi­tures for the purposes of section 174 of the Code.

Rev. Rul. 73-324

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

The taxpayer, a domestic corpora­tion, is engaged primarily in the busi­ness of purchasing, transporting by pipeline, and selling natural gas to utility companies and industrial and residential consumers.

In 1971, the United States Depart­ment of the Interior entered into an “agreement” with an association of which the taxpayer is a member. The association represents companies en­gaged in the same business as the tax­payer and is exempt from tax under section 501 of the Code.

The agreement between the Depart­ment of the Interior and the associa­tion arises as a result of a growing energy supply problem in the United States. One possible solution to the problem involves coal gasification, which is a process by which coal and hydrogen are made to react to form a synthetic gas which can be used in the nation’s pipelines to supplement natural gas.

The agreement provides for the creation and mutual funding of an or­ganization to provide a research plan to develop a coal gasification program. The funding of the program will be apportioned between the association and the Department of the Interior. The association will raise its share of the funding through payments from its membership, including the taxpay­er, and other interested parties which are not members of the association.

The amounts paid by the taxpayer and others to the association, in con­nection with the program, will be maintained as a separate fund to be used only in support of the program and are not refundable.

Section 174(a)(1) of the Code pro­vides, in general, that a taxpayer may treat research or 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 174(b) of the Code pro­vides, in part, that a taxpayer may elect under certain circumstances to defer and deduct ratably research or experimental expenditures over a pe­riod of not less than 60 months.

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).

Rev. Rul. 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 of the Code.

Accordingly, based upon the above described facts, amounts paid or in­curred by the taxpayer under the agreement for the development of the coal gasification research program are research or experimental expenditures for purposes of section 174 of the Code.