The United States District Court, Western Division, Tennessee, recently issued a ruling in favor of the claimant, FEDEX, and providing further clarification on the research tax credit. The motion filed by FEDEX pertained to the legal standards governing the research credit with regards to internal use software.
The initial guidance in determining QREs (qualified research expenditures)
The 2003 Final Regulations did not address internal use software, so the IRS specified that taxpayers could rely on its guidance in the 2001 superseded regulations in a 2004 Announcement. The IRS argued that if FEDEX used the guidance found in the 2001 regulations regarding internal use software that it was also bound by the "discovery test." FEDEX argued that the IRS had abandoned the "discovery test" because it was inconsistent with Congressional intent and as such they could use the guidance on internal use software in the 2001 regulations and the "discovery test" would not need to be followed.
The court agreed with FEDEX and ruled completely in their favor. The case established the following positive results:
• The "discovery test" is dead
o This case and recent rulings in the McFerrin and Union Carbide have killed the "discovery test."
• Taxpayers can rely on the use of the favorable provisions in the 2001 regulations for claiming research tax credits for the development of internal use software.
