Eustace v. Commissioner. 313 F.3d 905 (7th Cir. 2002) aff’g, T.C. Memo 2001-66.


T.C. Memo 2001-66

This tax court memo concerns Applied Systems, a subchapter S corporation that develops and sells software that independent agencies would use to manage their businesses.  In the 1990s they improved their software packages and the investors want to take a tax credit for the research and development expenses incurred in these years. The Tax Court concluded that Applied Systems did not pass two tests required to receive the tax credit because the research was not designed to dispel uncertainty about the technological possibility of developing software of this kind. T.C. Memo 2001-66 (2001).

Basic Facts

Applied Systems performed normal software development throughout this time. They made adaptations and changes to several features however none of these were groundbreaking and pioneering and they could be found in other developers’ products.  The Tax Court decided that Applied Systems failed the “process of experimentation” and the “discovering information” requirements.

Applied Systems did not argue this in court and supplied no further evidence or documentation that could prove this. Applied Systems asked the Court to use the proposed regulations for the definition of “discovering information” however proposed regulations do not have any legal effect and the proposed regulations refer to taxable years ending on or after December 21, 2001 so Applied Systems would not qualify for this regulation.  Applied Systems also asked the court to disregard another court case document that was brought up (Wicor and United Stationers) yet the definitions they are arguing for are not relevant to their case. Applied Systems developed software to sell to customers while the previous two cases, the taxpayer contracted with a consulting firm to develop a program they would use for their own benefit.

Court’s Decision

Regardless of what court case documents have been consulted, simple software development does not qualify for research tax credit.  The judgment of the Tax Court is AFFIRMED.

Click Here to view the full case: Eustace v. Commissioner. 313 F.3d 905 (7th Cir. 2002) aff’g, T.C. Memo 2001-66.

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