Snow v. Commissioner

Background

Edwin A. Snow was a limited partner in Burns Investment Company, which was formed to develop a new household and industrial incinerator invented by Trott. Snow contributed $10,000 for a four percent interest. In 1966 Burns had no sales while it built and tested prototypes, and an outside engineering firm did the shop work. The Commissioner disallowed Snow’s distributive share of the partnership’s net operating loss for 1966, and both the Tax Court and the Sixth Circuit upheld that disallowance, creating a disagreement with an earlier Fourth Circuit decision.

Reasoning

The Court addressed whether Section 174 of the Internal Revenue Code — which lets taxpayers deduct experimental expenditures “in connection with” a trade or business — covers a limited partner’s share of a partnership’s research losses. Relying on the statute’s text and legislative history, the Court concluded Congress meant to encourage research and experimentation, especially by small or new businesses. The Court therefore treated the partnership’s experimental spending as deductible under §174 and reversed the lower courts’ rulings, effectively allowing Snow to claim the deduction.

Real world impact

The decision makes it clearer that investors and small partnerships can deduct experimental research expenditures even before a product is on the market. That encourages early-stage innovation and reduces a tax disadvantage for startups compared with established firms. Justice Stewart did not participate in the case.