| whether the engineers
had to redesign the additional piles required for the foundation.
The taxpayer's activities in using professional experience and business
codes to design the foundation did not meet the Process of Experimentation
Test because the activities did not resolve technological uncertainties
through an experimental process. Constructing the test pile also did
not meet the Process of Experimentation Test because it was not an
evaluative process.
(VI) Example 6. A taxpayer is in the business of providing
building and construction services, including the construction of
warehouses, strip malls, office buildings, and other commercial structures.
For one of its projects to construct an office building, the taxpayer
was uncertain how to design the layout of the electrical systems.
The taxpayer's employees held on-site meetings to discuss different
options, such as running the wire under the floor or through the ceiling,
but did not actually experiment by installing wire in different locations.
The taxpayer used computer-aided simulation and modeling to produce
the final electrical system layout. While in some cases computer-aided
simulation and modeling may be an experimental process, in this case,
it was not an experimental process because the taxpayer did not use
the computer-aided simulation and modeling to evaluate different alternatives
in a scientific manner. The taxpayer's activities did not satisfy
the Process of Experimentation Test because it did not conduct an
experimental process of evaluating alternatives to eliminate a technological
uncertainty.
(VII) Example 7. A taxpayer is an oil and gas operator
that recently acquired rights to drill in an area in which it had
not previously operated. The taxpayer decided to use horizontal drilling
in this area, but it had never drilled a horizontal well and was uncertain
how to successfully execute the horizontal drilling. At the time the
taxpayer began horizontal drilling, the technology to drill horizontal
wells was established. The taxpayer selected technology from existing
commercially available options to use in its horizontal drilling program.
The taxpayer's activities did not satisfy the Process of Experimentation
Test because evaluating commercially available options does not constitute
a process of experimentation.
(VIII) Example 8. A taxpayer is an oil and gas operator
that recently acquired rights to drill in an area in which it had
not previously operated. The taxpayer decided to use horizontal drilling
in this area. The taxpayer had drilled a horizontal well before in
a different formation and at different depths. However, it had never
drilled a horizontal well in this formation or at the required depths
and was uncertain how to successfully execute the horizontal drilling.
The taxpayer utilized its existing technology to perform its horizontal
drilling operations in this area and the existing technology was successful.
The taxpayer's activities did not satisfy the Process of Experimentation
Test because the taxpayer merely used its existing technology and
did not perform any experimentation to evaluate alternative any drilling
methods.
(IX) Example 9. A taxpayer sought to discover cancer
immunotherapies. The taxpayer was uncertain as to the appropriate
design of the proteins to be used as a drug candidate. The taxpayer
identified several alternative protein constructs and used a process
to test them. The taxpayer's process involved testing the constructs
using in vitro functional assays and binding assays, and either modifying
the designs or discarding them and repeating the previous steps. The
taxpayer took the resulting products from the in vitro testing and
tested the drug candidate in living organisms. This process evaluated
the various alternatives identified by the taxpayer. The taxpayer's
activities satisfied the Process of Experimentation Test.
(2) Application of the Four-Part Test to business components.
The Four-Part Test is applied separately to each business component
of the taxpayer. Any plant process, machinery, or technique for commercial
production of a business component is treated as a separate business
component from the business component being produced.
(3) Shrink-back rule. The Four-Part Test is first applied
at the level of the discrete business component used by the taxpayer
in a trade or business of the taxpayer. If the requirements of the
Four-Part Test are not met at that level, then they are applied at
the next most significant subset of elements of the business component.
This shrinking back of the product continues until either a subset
of elements of the product that satisfies the requirements of the
Four-Part Test is reached, or the most basic element of the product
is reached and such element fails to satisfy any part of the Four-Part
Test.
(4) Software development as qualified research. In
determining if software development activities constitute qualified
research, the comptroller shall consider the facts and circumstances
of each activity.
(A) Application of Four-Part Test to software development
activities.
(i) A taxpayer must prove that a software development
activity is qualified research and meets all the requirements of the
Four-Part Test under paragraph (1) of this subsection, even if the
activity is likely to qualify as described in subparagraph (B) of
this paragraph.
(ii) A taxpayer may prove that a software development
activity described as unlikely to qualify in subparagraph (C) of this
paragraph, is qualified research by providing evidence that the activity
meets all the requirements of the Four-Part Test under paragraph (1)
of this subsection.
(B) Software development activities likely to qualify.
Types of activities likely to qualify include, but are not limited
to:
(i) developing the initial release of an application
software product that includes new constructs, such as new architectures,
new algorithms, or new database management techniques;
(ii) developing system software, such as operating
systems and compilers;
(iii) developing specialized technologies, such as
image processing, artificial intelligence, or speech recognition;
and
(iv) developing software as part of a hardware product
where the software interacts directly with that hardware in order
to make the hardware/software package function as a unit.
(C) Software development activities unlikely to qualify.
Types of activities unlikely to qualify include, but are not limited
to:
(i) maintaining existing software applications or products;
(ii) configuring purchased software applications;
(iii) reverse engineering of existing applications;
(iv) performing studies, or similar activities, to
select vendor products;
(v) detecting flaws and bugs directed toward the verification
and validation that the software was programmed as intended and works
correctly;
(vi) modifying an existing software business component
to make use of new or existing standards or devices, or to be compliant
with another vendor's product or platform;
(vii) developing a business component that is substantially
similar in technology, functionality, and features to the capabilities
already in existence at other companies;
(viii) upgrading to newer versions of hardware or software
or installing vendor-fix releases;
(ix) re-hosting or porting an application to a new
hardware such as from mainframe to PC, or software platform, such
as Windows to UNIX, or rewriting an existing application in a new
language, such as rewriting a COBOL mainframe application in C++;
(x) writing hardware device drivers to support new
hardware, such as disks, scanners, printers, or modems;
(xi) performing data quality, data cleansing, and data
consistency activities, such as designing and implementing software
to validate data fields, clean data fields, or make the data fields
consistent across databases and applications;
(xii) bundling existing individual software products
into product suites, such as combining existing word processor, spreadsheet,
and slide presentation software applications into a single suite;
(xiii) expanding product lines by purchasing other
products;
(xiv) developing interfaces between different software
applications;
(xv) developing vendor product extensions;
(xvi) designing graphic user interfaces;
(xvii) developing functional enhancements to existing
software applications/products;
(xviii) developing software as an embedded application,
such as in cell phones, automobiles, and airplanes;
(xix) developing software utility programs, such as
debuggers, backup systems, performance analyzers, and data recovery;
(xx) changing from a product based on one technology
to a product based on a different or newer technology; and
Cont'd... |
