- 76 - 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 accompanyingPage: Previous 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 Next
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