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experimentation under section 41) requires only a "new or improved"
function, whereas the innovativeness test (which applies only to
internal use software development) requires change "that is
substantial and economically significant". H. Conf. Rept. 99-841
(Vol. II), supra at II-73, 1986-3 C.B. (Vol. 4) at 73 (emphasis
added). We therefore agree with respondent that only a "high
threshold of innovativeness" will satisfy this requirement.
F. The Significant Economic Risk Test
The significant economic risk test requires that the software
development involve significant economic risk "as where the
taxpayer commits substantial resources to the development and also
there is substantial uncertainty, because of technical risk, that
such resources would not be recovered within a reasonable period".
Id. Petitioner contends that the significant economic risk test
requires that only a 20-percent risk need exist, because of
technical uncertainty, to prevent the taxpayer from recovering its
investment within a reasonable period of time. Petitioner reaches
this conclusion on the basis of the same analysis it used with
respect to the innovativeness test. Respondent, on the other hand,
emphasizes the magnitude of the technical risk as a key factor in
analyzing the internal use activities under this test.
Again, we find significant Congress' requirement of a
substantial uncertainty. In both the contexts of the regulations
under section 174 and the explanation of the process of
experimentation test provided in the conference report accompanying
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