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research and development costs "in the experimental or laboratory
sense". Sec. 1.174-2(a)(1), Income Tax Regs. The regulations
further provide:
Expenditures represent research and development costs in
the experimental or laboratory sense if they are for
activities intended to discover information that would
eliminate uncertainty concerning the development or
improvement of a product. Uncertainty exists if the
information available to the taxpayer does not establish
the capability or method for developing or improving the
product or the appropriate design of the product.
Whether expenditures qualify as research or experimental
expenditures depends on the nature of the activity to
which the expenditures relate, not the nature of the
product or improvement being developed or the level of
technological advancement the product or improvement
represents.
T.D. 8562, 1994-2 C.B. 30, 31.36 "Product" refers to any pilot,
model, process, formula, invention, technique, patent, or similar
property. Sec. 1.174-2(a)(2), Income Tax Regs.
On brief, respondent concedes that the expenditures associated
with all eight of the sample internal use software activities "may
be treated as expenses under I.R.C. � 174" (emphasis added), the
language used in section 41(d)(1)(A). Respondent asserts that it
is the Commissioner's policy not to disturb a taxpayer's method of
accounting with regard to computer software expenditures if the
36 The 1994 regulations under sec. 174 are effective for
all taxable years after Oct. 3, 1994. Because the amendments
provided in the 1994 regulations only clarify the definition of
research or experimental expenditures, retroactivity was
unnecessary. 59 Fed. Reg. 50159, 50160 (Oct. 3, 1994).
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