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Sec. 41(d)(1), I.R.C., sets forth four tests for
qualified research: (1) The expenditures must qualify as
expenses under sec. 174, I.R.C.; (2) the taxpayer must
discover information which is technological in nature;
(3) the taxpayer must discover information the
application of which is intended to be useful in the
development of a new or improved business component; and
(4) substantially all of the research activities must
constitute elements of a process of experimentation.
In the conference report accompanying the Tax Reform
Act of 1986 (TRA 1986), Pub. L. 99-514, 100 Stat. 2085,
H. Conf. Rept. 99-841 (Vol. II), at II-73 through II-74
(1986), 1986-3 C.B. (Vol. 4) 1, 73-74, Congress set forth
three additional tests for qualified research under sec.
41, I.R.C., for the development of internal use software:
(1) The software must be innovative; (2) the software
development must involve significant economic risk; and
(3) the software must not be commercially available.
The parties agree that in order for the
representative internal use software activities to
constitute qualified research for purposes of the tax
credit, all seven tests must be satisfied.
1. Held: The three additional tests for qualified
research in the development of internal use software
enunciated in the conference report accompanying the TRA
1986 require a higher threshold of technological
advancement and functional improvement than is necessary
in other fields of research.
2. Held, further: One of the eight representative
internal use software activities, the development of the
Strategic Banking System's (SBS) customer module,
satisfies all seven tests and constitutes qualified
research pursuant to sec. 41, I.R.C. SBS was a concerted
effort at advancing the state of technology in the field
of computer science and pushed existing technology to new
heights.
3. Held, further: N failed to establish that the
remaining seven representative internal use software
activities constitute qualified research.
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