- 62 -
requirements of Rev. Proc. 69-21 are satisfied. Rev. Proc. 69-21,
1969-2 C.B. at 303, states that "The costs of developing software
* * * in many respects so closely resemble the kind of research and
experimental expenditures that fall within the purview of section
174 * * * as to warrant accounting treatment similar to that
accorded such costs under that section."37 Respondent notes that
his concession of the section 174 test "does not mean, however,
37 The 1983 proposed regulations under sec. 174 provided
extensive language and examples relating to the treatment of the
development of computer software. The proposed regulations
provided that the term "research or experimental expenditures"
included the costs for developing "new or significantly improved
computer software. The term does not include costs paid or
incurred for the development of software the operational
feasibility of which is not seriously in doubt." Sec. 1.174-
2(a)(3), Proposed Income Tax Regs., 48 Fed. Reg. 2799 (Jan. 21,
1983). This language appears to have been derived from the House
report accompanying ERTA, which discussed the treatment of
computer software development under the R&E credit (under then
sec. 44F). H. Rept. 97-201, at 114 (1981), 1981-2 C.B. 352, 360.
The treatment of computer software in the 1983 proposed
regulations was criticized by commentators because the proposed
regulations treated computer software differently than other
products, imposing a more difficult test. 54 Fed. Reg. 21225
(May 17, 1989). The 1989 proposed regulations removed the
controversial language and stated that computer software was to
be treated the same as other products. Id. at 21227.
Although Notice 87-12, 1987-1 C.B. 432, indicated that the
IRS intended to issue regulations further explaining the
treatment of computer software under sec. 174, no regulations
were forthcoming. The 1993 proposed regulations only indicated
that no additional conditions were to be imposed on computer
software development activities, and that taxpayers could
continue to rely upon Rev. Proc. 69-21, 1969-2 C.B. 303. The
1994 final regulations are silent altogether. Sec. 1.174-2,
Proposed Income Tax Regs., 58 Fed. Reg. 15821 (Mar. 24, 1993).
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