United States v. Davenport (2012)

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Main Issue:

  • Internal Use Software / Process of Experimentation


  • Taxpayer claimed the research credit for the implementation and customization of an ERP system
  • IRS argued that the research failed to meet the Uncertainty Test, Process of Experimentation test, and exception for IUS tests


  • Court rejected the taxpayer’s claim that the implementation and customization of a third-party ERP involved Uncertainty or a Process of Experimentation
  • Only the original developer of the software (J.D. Edwards) would have Uncertainty at the outset of the research

Take-Away Point:

  • Taxpayer needs to establish that it engaged in a process of experimentation and the uncertainty existing at the outset of the research
  • Customization of third-party software (especially financial software) will rarely qualify for the research credit if no related proprietary software development

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