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participant agreements between Norwest and Bank One, and Norwest
and EDS, are void of any reference to such a contingency. Had
Norwest been dissatisfied with a development milestone, it could
have terminated the agreements at that point and taken the SBS
release as it then existed--but Norwest could not have recovered
the payments it had already made. Thus, the requirements of
section 1.41-2(e)(2)(iii), Income Tax Regs., are satisfied.
We hold that the expenses paid or incurred by Norwest in the
development of the SBS customer module constitute qualified
research under section 41. The only remaining issue then is which
expenses of EDS and Norwest in the SBS customer module project
constitute qualified research. In this regard, respondent contends
that Norwest's installation and customization activities, and the
subsequent testing after it received the releases of SBS from EDS,
do not constitute qualified research. Respondent specifically
relies on section 41(d)(4)(D)(v), which excludes from qualified
research any routine or ordinary testing or inspection for quality
control. Respondent asserts that installation and customization,
and the testing activities related to those processes, are routine
or ordinary testing procedures in the software field and thus must
be excluded from qualified research.
While respondent's characterizations may be accurate in some
contexts, they are not accurate in the context of the SBS project.
The customer module's unique feature was its ability to interact
with other modules to permit the easy sharing of data and
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