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the use of a structured process of experimentation through the
continuous development of hypotheses that require testing and
analysis until the method for reaching the objective is discovered.
Congress did not specify that any particular number of hypotheses
be developed by the taxpayer, but the more hypotheses that are
developed, tested, and analyzed, the more likely the project will
satisfy the process of experimentation test.
This test also requires that "substantially all" of the
activities constitute elements of a process of experimentation.
This requirement raises two questions: (1) What does the term
"substantially all" mean? and (2) what activities come within the
elements of a process of experimentation?
Respondent contends that "substantially all" means at least 80
percent, referring to section 1.41-2(d)(2), Income Tax Regs., which
defines the term "substantially all" with respect to qualified
wages under section 41 as meaning at least 80 percent of the wages
paid or incurred by the taxpayer for the employee. Petitioner does
not dispute respondent's proposed 80-percent test.
We agree with respondent and hold that in the context of
section 41, the term "substantially all" refers to at least 80
percent of the activities that constitute elements of a process of
experimentation. This interpretation is consistent with the
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