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(6) the significant economic risk test (the software
development must involve 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
(7) the commercial availability test (the software must not
be 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 tests (5)
and (6))).
These seven tests, however, must be applied with an
understanding of some of the terminology used by Congress which is
not defined. To understand these tests, we will rely on the
ordinary meaning of the language used in the statute, see
Commissioner v. Soliman, 506 U.S. 168, 174 (1993); United States v.
American Trucking Associations, Inc., 310 U.S. 534, 543-544 (1940),
as well as the legislative history surrounding the promulgation of
the TRA 1986, see Landgraf v. USI Film Prods., 511 U.S. 244 (1994);
Trans City Life Ins. Co. v. Commissioner, 106 T.C. 274, 299 (1996).
A. The Section 174 Test
The section 174 test requires that the research expenditures
qualify as expenses under section 174. Section 174 generally
allows as a current deduction research and experimental
expenditures which are paid or incurred by the taxpayer in
connection with the operation of a trade or business. Section 174
does not define the phrase "research and experimental", but the
applicable regulations require that the expenditures represent
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