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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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Last modified: May 25, 2011