Norwest Corporation and Subsidiaries - Page 100

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               respect to a product, etc. but are met with respect to                 
               one or more elements thereof, the term business component              
               means the most significant set of elements of such                     
               product, etc. with respect to which all requirements are               
               met.                                                                   
                    Thus, the requirements are applied first at the                   
               level of the entire product, etc. to be offered for sale,              
               etc. by the taxpayer.    If  all  aspects  of  such                    
               requirements are not met at that level, the test applies               
               at the most significant subset of elements of the                      
               product, etc.  This "shrinking back" of the product is to              
               continue until either a subset of elements of the product              
               that satisfies the requirements is reached, or the most                
               basic element of the product is reached and such element               
               fails to satisfy the test.  Treasury regulations may                   
               prescribe rules for applying these rules where a research              
               activity relates to more than one business component.                  
          H. Conf. Rept. 99-841 (Vol. II), supra at II-72 through II-73,              
          1986-3 C.B. (Vol. 4) at 72-73.  We conclude that the shrinking back         
          test must be examined on a case-by-case basis to determine which            
          activities are part of the same product or process, and which are           
          so discrete as to warrant a separate evaluation.                            
               E.  The Innovativeness Test                                            
               The innovativeness test requires that the software be                  
          innovative "as where the software results in a reduction in cost,           
          or improvement in speed, that is substantial and economically               
          significant".  Id. at II-73, 1986-3 C.B. (Vol. 4) at 73.  The               
          parties disagree over the meaning of the innovativeness test.               
          Respondent contends that the legislative history of section 41              
          mandates that we require a "high threshold of innovation", the              
          phrase that appears in the House and Senate reports accompanying            
          the TRA 1986, S. Rept. 99-313, at 694-695 (1986), 1986-3 C.B. (Vol.         




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