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In the conference report accompanying the TRA 1986, the
conferees gave the Department of the Treasury responsibility for
promulgating regulations relating to the application of section 41
to research with respect to the development of internal use
software. In this regard, the conferees stated:
The conferees intend that these regulations will
make the costs of new or improved internal-use software
eligible for the credit only if the taxpayer can
establish, in addition to satisfying the general
requirements for credit eligibility, (1) that the
software is innovative (as where the software results in
a reduction in cost, or improvement in speed, that is
substantial and economically significant); (2) that the
software development involves significant economic risk
(as where the taxpayer commits substantial resources to
the development and also there is substantial
uncertainty, because of technical risk, that such
resources would be recovered within a reasonable period);
and (3) that the software is not commercially available
for use by the taxpayer (as where the software cannot be
purchased, leased, or licensed and used for the intended
purpose without modifications that would satisfy the
first two requirements just stated). The conferees
intend that these regulations are to apply as of the
effective date of the new specific rule relating to
internal-use software; i.e., internal-use computer
software costs that qualify under the three-part test set
forth in this paragraph are eligible for the research
credit even if incurred prior to issuance of such final
regulations.
Id. at II-73 through II-74, 1986-3 C.B. (Vol. 4) at 73-74.
Congress provided that these rules would be effective to guide
taxpayers until the Department of the Treasury issues regulations
pursuant to the quoted language. The Department of the Treasury
issued proposed regulations with respect to the R&E credit for
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