Nicholas E. Eustace, et al. - Page 11




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                                       OPINION                                        
          I.  Definition of Qualified Research                                        
               Pursuant to section 41(d)(1), “qualified research” must                
          meet, in pertinent part, the discovery and process of                       
          experimentation tests.                                                      
               A.  The Discovery Test                                                 
               Qualified research must be undertaken for the purpose of               
          discovering information which is technological in nature.  Sec.             
          41(d)(1)(B)(i).  In this case, “qualified research” is research             
          that is undertaken to discover information that goes beyond the             
          current state of knowledge in the computer science field.  Sec.             
          41(d)(1)(B); United Stationers, Inc. v. United States, 163 F.3d             
          440, 444 (7th Cir. 1998); Norwest Corp. v. Commissioner, 110 T.C.           
          454, 493 (1998).  In the context of section 41(d)(1)(B)(i),                 
          “discovery demands something more than mere superficial newness;            
          it connotes innovation in underlying principle.”  United                    
          Stationers, Inc. v. United States, supra at 444.                            
               B.  The Process of Experimentation Test                                
               Substantially all of the activities of qualified research              
          must constitute elements of a process of experimentation for a              
          purpose that relates to a new or improved function, performance,            
          reliability or quality.  Sec. 41(d)(1)(C), (d)(3)(A).  In section           
          41(d)(1)(C), “substantially all” means at least 80 percent of the           
          activities that constitute a process of experimentation.  Norwest           






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