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TD 8930 – Background
On January 2, 1997, the IRS and Treasury published in the Federal Register (62 FR 81) a notice of proposed rulemaking (REG-209494-90, 1997-1 C.B. 723) under section 41 describing when computer software that is developed by (or for the benefit of) a taxpayer primarily for the taxpayer’s internal use can qualify for the credit for increasing research activities (the 1997 proposed regulations). Comments responding to the 1997 proposed regulations were received and a public hearing was held on May 13, 1997.
On December 2, 1998, the IRS and Treasury published in the Federal Register (63 FR 66503) a notice of proposed rulemaking (REG-105170-97, 1998-50 I.R.B. 10) under section 41 relating to the credit for increasing research activities (the 1998 proposed regulations). The 1998 proposed regulations propose rules and examples relating to
- the definition of gross receipts for purposes of computing the base amount under section 41(c),
- the application of the consistency rule in computing the base amount,
- the definition of qualified research under section 41(d),
- the application of the exclusions from the definition of qualified research,
- the application of the shrinking-back rule, and
- the election of the alternative incremental credit.
The 1998 proposed regulations also propose certain technical amendments to the existing regulations. Comments responding to the 1998 proposed regulations were received and a public hearing was held on April 29, 1999.
In the 1999 Act, Congress extended the credit for a five-year period. The Conference Report accompanying the 1999 Act included the following language addressing the proposed regulations:
In extending the research credit, the conferees are concerned that the definition of qualified research be administered in a manner that is consistent with the intent Congress has expressed in enacting and extending the research credit. The conferees urge the Secretary to consider carefully the comments he has and may receive regarding the proposed regulations relating to the computation of the credit under section 41(c) and the definition of qualified research under section 41(d), particularly regarding the “common knowledge” standard. The conferees further note the rapid pace of technological advance, especially in service-related industries, and urge the Secretary to consider carefully the comments he has and may receive in promulgating regulations in connection with what constitutes “internal use” with regard to software expenditures. The conferees also wish to observe that software research, that otherwise satisfies the requirements of section 41, which is undertaken to support the provision of a service, should not be deemed “internal use” solely because the business component involves the provision of a service. The conferees wish to reaffirm that qualified research is research undertaken for the purpose of discovering new information which is technological in nature. For purposes of applying this definition, new information is information that is new to the taxpayer, is not freely available to the general public, and otherwise satisfies the requirements of section 41.
Employing existing technologies in a particular field or relying on existing principles of engineering or science is qualified research, if such activities are otherwise undertaken for purposes of discovering information and satisfy the other requirements of section 41.
The conferees also are concerned about unnecessary and costly taxpayer record keeping burdens and reaffirm that eligibility for the credit is not intended to be contingent on meeting unreasonable record keeping requirements. H.R. Conf. Rep. No. 106-478, at 132 (1999).
After considering the comments received, the statements made at the public hearings, and the legislative history for the research credit, the proposed regulations are adopted as revised by this Treasury decision.
