Opinion ID: 760150
Heading Depth: 3
Heading Rank: 2

Heading: Process of Experimentation

Text: 26 Section 41(d)(1)(C) provides that qualified research involve substantially all of the activities which constitute elements of a process of experimentation. 26 U.S.C. § 41(d)(1)(C). The district court, again looking to dictionary definitions and legislative history for guidance, held that this test requires qualifying research to have significant design uncertainty from its outset. See United Stationers II, 982 F.Supp. at 1285. The court then found USI's claim of uncertainty not persuasive: while the aspired benefits of the projects were in doubt, the development of the means that would allow [USI] to potentially achieve those benefits was not. Id. (citation omitted). USI now challenges both the district court's legal interpretation of this process of experimentation test and its factual findings regarding design uncertainty in the eight projects. We reject both challenges. 27 USI again begins with its plain reading of the subsection. According to USI's dictionary, an experiment is ... a test, trial, or tentative procedure, an act or operation for the purpose of discovering something unknown or of testing a principle, supposition, etc. Appellant's Br. at 23 (citing R ANDOM H OUSE C OLLEGE D ICTIONARY 465 (rev. ed.1984)). The projects fit squarely within this definition, USI claims, because software development involves debugging, a process of testing and correcting computer programs. We find this argument unpersuasive. Debugging programs amounts simply to fine-tuning computer operating instructions. Although we are reluctant to establish bright-line rules--s 41 cases will always be highly fact-intensive--we think that a process of experimentation involves something more than simply debugging a computer program. See Norwest, p 52,758, at 4669, 1998 WL 341634 (computer programming project did not qualify because it merely required conducting good coding and eliminating bugs through testing). 28 The legislative history of § 41(d)(1)(C) bolsters this conclusion. The Conference Report explains the meaning of the process of experimentation test: 29 The term process of experimentation means a process involving the evaluation of more than one alternative designed to achieve a result where the means of achieving that result is uncertain at the outset. This may involve developing one or more hypotheses, testing and analyzing those hypotheses (through, for example, modeling or simulation), and refining and discarding the hypotheses as part of a sequential design process to develop the overall component. 30 Thus, for example, costs of developing a new or improved business component are not eligible for the credit if the method of reaching the desired objective (the new or improved product characteristics) is readily discernible and applicable as of the beginning of the research activities, so that true experimentation in the scientific or laboratory sense would not have to be undertaken to develop, test, and choose among viable alternatives .... [E]ngineers who design a new computer system, or who design improved or new integrated circuits for use in computer or other electronic products, are engaged in qualified research because the design of those items is uncertain at the outset and can only be determined through a process of experimentation relating to specific design hypotheses and decisions as described above. 31 H.R. C ONF. R EP. N O. 99-841, at II-72 (1986). USI would have us hold that this Report dictates a per se credit for software development. This suggestion, however, ignores the Report's mention of only systems design (not software design) as well as its focus on overcoming design uncertainty through a systematic--almost scientific--methodology. The Report suggests that qualifying research must from its outset involve some technical uncertainty about the possibility of developing the product. See Norwest, p 52,758, at 4655, 1998 WL 341634 (discussing the required uncertainty); cf. TSR, 96 T.C. at 920-21, 1991 WL 110430. 32 USI and amicus again caution that this articulation of the relevant standard is too narrow. We are not persuaded, however, and conclude that USI's projects did not involve a process of experimentation as envisaged by Congress. The eight projects involved the modification of a commercially-available software package to fit USI's particular operational needs. Most of the project summaries include general statements about the uncertainty of actually realizing the anticipated operational efficiencies and resultant economic benefits. None of the summaries, however, describes any technical uncertainty about actually developing the programs. Compare Norwest, p 52,758, at 4670, 1998 WL 341634 (programming project did not constitute qualified research because, in part, it did not involve technical risk). Nor were there any doubts about the ability of computers to perform the invoicing, billing and marketing tasks. That is, there was simply no technical uncertainty from the outset. We therefore conclude that USI's development of the eight programs did not involve a process of experimentation and that the district court did not clearly err in concluding that the projects did not involve the level of uncertainty necessary to clear this hurdle.