- 73 -
existing definition of "substantially all" in the regulations under
section 41 with respect to qualified wages.
Congress indicated in the conference report accompanying the
TRA 1986 those elements which constitute a process of
experimentation. They include the developing, testing, and
analyzing of hypotheses. They do not include activities performed
after commercial production or implementation or otherwise set
forth in section 41(d)(4). See H. Conf. Rept. 99-841 (Vol. II),
supra at II-72, 1986-3 C.B. (Vol. 4) at 72. However, in the case
of internal use software, exceptions are made for the modifications
of commercially available software. See infra.
Thus, at least 80 percent of the activities engaged in by a
taxpayer with respect to the preproduction or implementation
development of a product must involve the development, testing, and
analysis of hypotheses that are designed to eliminate technical
uncertainty as to the development of that product. This then
raises the issue of which activities in a project are to be
examined together and which are to be examined separately for
purposes of section 41. Congress has provided us with some
guidance in a so-called shrinking back test:
The term business component means a product,
process, computer software, technique, formula, or
invention that is to be held for sale, lease, or license,
or is to be used by the taxpayer in a trade or business
of a taxpayer. If the requirements described * * * [in
the first four tests under section 41] are not met with
Page: Previous 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 NextLast modified: May 25, 2011