Tax & Accounting Software Corporation v. United States, 301 F.3d 1254 (10th Cir. 2002)


U.S. Court of Appeals, 10th circuit. Tax & Accounting Software Corporation v. US 301 F.3d 1254

Tim Kloehr and Sheryl Kloehr own Tax & Accounting Software Corporation which is an Oklahoma corporation that makes and sells computer software for its customers including the four products at issue: EasyACCT, EasyMICR, Professional Tax System, and EasyTEL. They filed a tax refund suit for 1993 and 1994. They acquired research and development credits developing these products and they were denied these credits. Tim Kloehr faced tax deficiencies of $123,764 in 1993 and $192,510 in 1994. The main argument up for debate in this case is what constitutes “qualified research.”

Basic Facts

Qualified research has 5 separate requirements

  1. research much qualify as an expense
  2. the research must be conducted to acquire and discover information
  3. must be technological in nature
  4. the application of information must be used to develop or improve a product
  5. must have a “process of experimentation”

The government conceded that Tax & Accounting Software Corporation’s projects passed the 1st, 2nd and 4th requirements.  The “process of experimentation” and “discovering information” requirements are up for debate. The “discovering information” requirement means that the taxpayer must show they discovered new information and must be separate from the product that is actually developed.  The evidence presented shows that Tax & Accounting Software Corporation did demonstrate that they passed this “discovering information” test. For the “process of experimentation,” both parties argued in regards to the definitions they thought fit best. The government relied on past legislative history while Tax & Accounting Software Corporation relied on other legislation. The Court found that TAASC could not be allowed this credit because they did not follow all requirements, mainly the feasibility issue, for the “process of experimentation.”

Court’s Decision

The judgment of the district court is REVERSED, and the case REMANDED.

Click Here to view the full case: Tax & Accounting Software Corporation v. United States, 301 F.3d 1254 (10th Cir. 2002).

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