## Facts

- Tax and Accounting Software Corporation (TAASC) was an S-corporation that developed and sold tax and accounting software for professionals.
- In 1993–1994, TAASC developed four software products designed to automate and integrate data conversion, financial statement preparation, and transfer of data into tax-preparation software.
- TAASC’s products were commercially “innovative” in combining useful functions, but TAASC did not face substantial technical uncertainty about whether the products could be built using existing programming methods.
- TAASC’s shareholders claimed the Internal Revenue Code § 41 research credit for expenses incurred developing the four products.
- The IRS disallowed the credit, asserting the expenditures did not meet § 41’s “discovering information” and “process of experimentation” requirements.
- The shareholders filed a federal refund suit; the district court granted summary judgment for the taxpayers.

## Issues

1. Whether developing market-novel commercial software, without serious doubt about feasibility using existing methods, is research “undertaken for the purpose of discovering information” that is technological in nature under IRC § 41(d)(1)(B).
2. Whether TAASC’s software-development activities satisfied § 41(d)(1)(C)’s requirement that “substantially all” activities constitute a “process of experimentation” for a qualified purpose.

## Decision

- The Tenth Circuit reversed the district court’s summary judgment for the taxpayers.
- The court held TAASC’s activities did not satisfy § 41’s “discovering information” requirement.
- The court held TAASC’s activities did not meet the “process of experimentation” requirement.
- The case was remanded with instructions consistent with upholding the IRS’s disallowance of the claimed research credits.

## Legal Principles

- For § 41 purposes, “discovering information” requires efforts directed toward technological knowledge beyond what is already known or readily available; commercial novelty alone is insufficient.
- Qualified research generally requires substantial technical uncertainty and work aimed at resolving that uncertainty, not merely implementing known techniques to achieve a commercial design.
- A “process of experimentation” under § 41 contemplates a systematic method of evaluating alternatives to resolve technical uncertainty; routine design execution, coding, debugging, and functional testing are not enough when feasibility is not in doubt.
- Courts construe the § 41 credit as a targeted incentive for genuinely experimental, technology-advancing research rather than routine product development.

## Conclusion

The Tenth Circuit denied § 41 research credits for TAASC’s commercial software development because the projects involved no meaningful technological discovery and lacked a qualifying, systematic process of experimentation directed at resolving substantial technical uncertainty.


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