Nicholas E. Eustace, et al. - Page 3




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          Unless otherwise indicated, all section references are to the               
          Internal Revenue Code for the years in issue, and all Rule                  
          references are to the Tax Court Rules of Practice and Procedure.            
          After concessions, the issue is whether petitioners are entitled            
          to the section 41 research credit.                                          
                                  FINDINGS OF FACT                                    
               When the petitions were filed, each petitioner or                      
          petitioner’s representative resided in Illinois or Indiana.                 
          Petitioners were the shareholders of Applied Systems, Inc.                  
          (Applied Systems), an S corporation founded, in 1980, to produce            
          computer software for independent insurance agencies.                       
               Applied Systems had five departments:  Programming (i.e.,              
          product development), customer services, sales, marketing, and              
          operations.  The programming department had four groups, each               
          headed by a vice president:  The Agency Manager (TAM),                      
          Forms/Interface Module (FIM), rating module, and advanced                   
          engineering.  Of Applied Systems’ 450 employees, 26 worked on the           
          TAM module, 25 on FIM, and 131 on the rating module.  Petitioners           
          claim that Applied Systems paid its employees $2,139,888,                   
          $2,363,089, and $3,694,097 of wages relating to the research                
          credit during 1990, 1991, and 1992, respectively.                           
               Applied Systems produced software for processing client and            
          insurance policy information, invoices, insurance claims,                   
          standard insurance forms, word processing, marketing, and                   






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