Tax Legal Services · Primary-source case analysis

Snow: Pre-Revenue Research Could Qualify Under Historical Section 174

By Aneeta Mishra and Timothy Chan

Published August 13, 2026

Snow v. Commissioner concerned a limited partner’s share of expenses from a partnership formed to develop a special-purpose incinerator before the project generated sales.

The venture was actively developing a product

The inventor devoted substantial time to the project, an engineering firm performed shop work, and prototypes were built and tested. The partnership reported no sales in the year at issue.

The lower courts required an existing operating business

The Tax Court and Sixth Circuit denied the deduction because the partnership had not yet reached production or sales and therefore was not carrying on a trade or business under their reading.

Historical section 174 used broader connection language

The Supreme Court emphasized Congress’s incentive for research by small and growing businesses and held that qualifying experimental expenditures could be in connection with a trade or business before current sales existed.

Current law materially changed the timing of research-cost recovery

For tax years governed by later amendments, specified research or experimental expenditures may require capitalization and amortization, with additional domestic and foreign research distinctions and later legislative changes. Snow’s 1974 deduction result cannot be applied without checking the operative tax-year rules.

Key takeaways

• Separate qualifying research activity from startup, acquisition, and production costs.
• Document the project, technical uncertainty, personnel, contracts, and location of the work.
• Determine which version of section 174 governs the tax year.
• Coordinate capitalization, amortization, credit, and method-change consequences.