- 75 -
3) 1, 694-695; H. Rept. 99-426, at 178 (1986), 1986-3 C.B. (Vol. 2)
1, 178, and as used by the Department of the Treasury in its
proposed regulations, section 1.41-4(e)(6), Proposed Income Tax
Regs., 62 Fed. Reg. 83 (Jan. 2, 1997). Further, respondent asserts
that we should read this and the other internal use software tests
narrowly inasmuch as they are exceptions to the general rule that
internal use software activities are not eligible for the R&E
credit. Sec. 41(d)(4)(E).
Petitioner argues that the language in the innovativeness test
is straightforward and that we should focus on its plain meaning.
Petitioner analyzes the meaning of "substantial" and "significant"
to reach the conclusion that these words connote a range of 5- to
20-percent improvement in the product or process. In support of
this conclusion, petitioner cites several statutes, regulations,
and Nabisco Brands, Inc. & Consol. Subs. v. Commissioner, T.C.
Memo. 1995-127 (applying 25 percent in the context of section
1253(b)(2) and discussing the various statutes and regulations
which define the term "substantial").
We do not believe that quantifying by way of a percentage that
which is "substantial" and "significant" will materially assist us
in determining whether the innovativeness test is satisfied.
Suffice it to say, the extent of the improvements required by
Congress with respect to internal use software is much greater than
that required in other fields. The business component test (the
third of the seven tests, which applies to all research and
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