Main Issue:
Internal Use Software
“Innovative” test standard
Facts:
The taxpayer claimed IUS R&D relying on the original 1986 definition of the innovative test – “significant increase in speed or decrease in costs”
IRS argued that the taxpayer needed to meet the “high threshold of innovative test” that was in the 2001 regulations – “software was intended to be unique or novel”; in essence applying the “discovery test” that requires a taxpayer to “obtain knowledge that exceeds, expands, or refines the common knowledge…”
Conclusion:
The court rejected the government's argument that the legal standard for IUS included the “high threshold of innovation” and “discovery” test standards
Take-Away Point:
When evaluating a credit including IUS, applying the proper innovative test is critical
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