Academic journal article Journal of Accountancy

Internal-Use Software and the Research Credit

Academic journal article Journal of Accountancy

Internal-Use Software and the Research Credit

Article excerpt

Taxpayers who claim the incremental research credit, particularly for internal-use software, must meet a new "discovery" test. In United Stationers, Inc. v. United States (no. 92 C 6065, N.D. Ill., October 17, 1997), an office products wholesaler was denied the research credit for internal-use software in part because its projects did not discover any technological information, venture into new fields or develop a new realm of computer science.

United Stationers had developed the software to automate certain business operations, including document management, order processing and invoicing, marketing and inventory control. The court considered whether

* United Stationers undertook the software projects to discover information that was "technological in nature."

* Substantially all the research activities constituted elements of a process of experimentation.

* The projects involved internal-use software.

* The software was innovative.

* The projects involved significant economic risk.

Judge Norgle, emphasizing the discovery element of the technology test, concluded there was no evidence United Stationers had discovered any information of a technological nature or even intended to expand or refine existing principles of computer science. According to Norgle, United Stationers had "merely applied, modified and, at most, built upon preexisting technological information." Further, he said the projects lacked an essential element of an experimental process--some degree of technological uncertainty at the outset about whether the programs would work--as contrasted with whether they would produce the anticipated economic benefits. …

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