Fudim: Findings of Fact
CONTENTS:
Research and Development Activities
Time Share Condominiums
Procedural Matters
Some of the facts have been stipulated, and they are so found. Petitioners resided in Milwaukee, Wisconsin, when they filed their petition.
Research and Development Activities
Efrem V. Fudim (hereinafter petitioner) was born in the Ukraine, a part of the former Soviet Union, and holds a doctorate degree from the institute of Control Sciences of the U.S.S.R. Academy of Sciences, Moscow. In 1979, he emigrated to the United States and settled in Milwaukee. From 1979 until 1985 petitioner worked with the corporate applied research group at Johnson Controls. He is a senior member of the Institute of Electrical and Electronics Engineers and a member of the American Society of Mechanical Engineers. By December 1984, petitioner had published 38 scientific papers and been granted 39 patents by various countries.
Margarita L. Fudim (hereinafter Mrs. Fudim) holds a mechanical engineering degree from the Moscow Institute of Chemical Machine Building. The record does not reveal in what capacity Mrs. Fudim was employed prior to 1986. During 1986, 1987, and 1988, she was employed as a computer programmer at Pansophic Systems first in Oakbrook and then in Lisle, Illinois.
In 1985, petitioner formed Light Sculpting Co. (hereinafter Light Sculpting), a company primarily engaged in researching a process known as “rapid modeling” (also known as “rapid prototyping” or “desktop manufacturing”) (hereinafter rapid modeling process). The rapid modeling process utilizes ultraviolet light and light-sensitive liquid polymers to fabricate plastic objects directly from instructions provided by a computer-aided design system. Because it is difficult for the light to penetrate thick layers of polymers (thereby requiring multi-layers to be formed), petitioner also attempted to perfect the rapid modeling process by looking for alternatives (i.e., heat, ultrasonic energy) to solidify the parts when relatively thick models were to be formed.
Petitioner obtained two U.S. patents on the rapid modeling process he developed. The first was issued on June 21, 1988, and the second on January 31, 1989. The first patent describes the rapid modeling process as follows:
An improved method of forming three-dimensional objects comprises irradiating an uncured photopolymer by transmitting an effective amount of photopolymer solidifying radiation through a radiation transmittent material which is in contact with the uncurred photopolymer. The transmittent material is a material which leaves the irradiated surface capable of further crosslinking so that when a subsequent layer is formed it will adhere thereto. Using this method multilayer objects can be made.
Use of the rapid modeling process allows industrial engineers to skip the expensive and time-consuming step of making models by either machining, casting, or molding. Instead, they can produce a model from computer data which first creates a mask, which in turn is used to direct the light rays to contour the polymer with a high degree of accuracy. Modeling by this process takes minutes rather than months.
As a result of his research, petitioner and Light Sculpting have been featured in numerous articles in both scientific and popular publications, and a number of major corporations (i.e., ALCOA, DuPont, Ford, Chrysler, and United Technologies) have become interested in petitioner’s rapid modeling process. In 1992, petitioner was acknowledged by the United States Senator from Wisconsin, as a “mover and shaker in the high-tech industry of Wisconsin”.
During the years in issue, Light Sculpting was petitioner’s sole trade or business. For the years in issue, an addition to his research activities, petitioner did some consulting work for which he was paid, on average, $1,500 a day. He also was paid a small amount for writing and reviewing scientific articles. Petitioner reported the following income and deductions for Light Sculpting on Schedule C.
1986 1987 1988
Consulting Fees………………$17,220 $53,604 $63,842
Modeling Process…………….. 2,950 20,161
Scientific Papers……………… 590 300
Gross Receipts……………… 17,810 56,554 84,302
Cost of Goods Sold………….. 12,706 8,739
Gross Income………………. 43,848 75,563
Deductions……………………. 14,783 25,344 27,528
Net Income………………….. 3,027 18,504 48,035
Petitioner did not claim any research credits attributable to his Light Sculpting activities for 1983, 1984, and 1985. Although the parties stipulated that petitioner claimed a research credit for 1986, we are unable to find an entry for that credit on his 1986 income tax return. However, because of this stipulation, we shall decide whether he is entitled to a research credit for 1986. Petitioner did claim research credits of $2,890 and $6,176, on his income tax returns for 1987 and 1988, respectively. These research credits were computed based on the amount petitioner paid for supplies, wages to Mrs. Fudim and their daughter Natalia Fudim (hereinafter Natalia), and petitioner’s net self-employment income.
Included in the supplies deducted on Schedule C were those expended in researching the rapid modeling process totaling $430, $2,295, and $3,863 for 1986, 1987, and 1988, respectively. Supplies used in research consisted of the photopolymer itself, alcohol or other solvents to wash it out, photo masks to control the light, the light source itself (bulbs, starters, etc.), fans to cool the light source, photometers to measure light intensity, and timers.
Petitioner employed Mrs. Fudim and Natalia as part-time workers. Mrs. Fudim, a mechanical engineer and computer programmer, assisted petitioner from May through December 1987 with designing, drafting, and performing experiments. She was paid $16 an hour for 600 hours of work (a total of $9,600), of which petitioner claims she spent 480 hours (80 percent) on research and development.[2] Natalia was paid between $6.40 and $8.00 an hour, for a total of $4,800, $5,900, and $9,859, in 1986, 1987, and 1988, respectively.[3] Petitioner claims that Natalia spent 83.33, 69.81, and 80.00 percent of her time in 1986, 1987, and 1988, respectively, on research and development. Petitioner also claims that, in 1986, he spent 305.5 hours consulting and 3,000 hours in researching and developing his rapid modeling process (90.76% of his total time). For 1987 and 1988, he claims that he devoted at least 80 percent of his time on research and development.[4]
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Time Share Condominiums
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Procedural Matters
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—-footnotes—-
[2] Petitioner issued a Form W-2 reporting that Mrs. Fudim was paid wages in 1987 of $9,600. She reported these wages on her 1987 joint income tax return.
[3] Petitioner issued Natalia Forms W-2 reporting these amounts. Petitioner claimed a dependency exemption for Natalia for all years in issue.
[4] At trial, petitioner produced summaries, but no contemporaneous records, of the time he, Mrs. Fudim and Natalia spent on research and development. He claims he threw the contemporaneous records away after respondent completed the initial audit of his books.
