Norwest Corporation and Subsidiaries - Page 85

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          3.  The Seven Tests                                                         
               The parties agree that the combination of section 41 and the           
          conference report accompanying the TRA 1986 results in a total of           
          seven tests that taxpayers must satisfy to obtain the R&E credit            
          with respect to qualified research in the development of internal           
          use software:34                                                             
               (1) The section 174 test (the research expenditures must               
          qualify as expenses under section 174);35                                   
               (2) the discovery test (the research must be undertaken for            
          the purpose of discovering information which is technological in            
          nature);                                                                    
               (3) the business component test (the research must be                  
          undertaken for the purpose of discovering  information  the                 
          application of which is intended to be useful in the development of         
          a new or improved business component of the taxpayer);                      
               (4) the process of experimentation test (substantially all of          
          the activities which constitute elements of a process  of                   
          experimentation must relate to a new or improved function,                  
          performance, reliability, or quality);                                      
               (5) the innovativeness test (the software must be innovative           
          (as where the software results in a reduction in cost, or                   
          improvement in speed, that is substantial and economically                  
          significant));                                                              


               34   Tax credits are a matter of legislative grace, and the            
          taxpayer bears the burden of proving entitlement to the credits.            
          Rule 142(a); Interstate Transit Lines v. Commissioner, 319 U.S.             
          590, 593 (1943); Segel v. Commissioner, 89 T.C. 816, 842 (1987).            
               35   Sec. 41(d)(1)(A) provides that "qualified research"               
          means research "with respect to which expenditures may be treated           
          as expenses under section 174".  We believe that the statutory              
          phrase "may be treated as expenses under section 174" means that            
          the expenditures must "qualify" for the deduction under sec. 174.           
          See infra.                                                                  





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