United States v. Davenport (2012)

Main Issue:

• Internal Use Software / Process of Experimentation

Facts:

• 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

Conclusion:

• 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