Internal-use software and the research credit: Formal guidance needed to address long-standing issues

September 2013


As has been the case for several years, regulations on the exception from the definition of “qualified research” for internal-use software under Section 41(d)(4)(E) are listed on the 2013-2014 IRS/Treasury Priority Guidance Plan (commonly known as the business plan).

In a related development, the government on August 29 abandoned its appeal of the 2009 decision of the US District Court for the Western District of Tennessee holding that FedEx Corporation could rely on the internal-use software rules in final regulations issued in 2001 without also applying the stringent “discovery” test in those regulations.

Observation: While conceding the taxpayer’s victory in FedEx, the government may continue to assert its arguments regarding which rules should apply to research credit claims related to internal-use software. This will be the situation until the IRS finalizes a single set of clear rules applicable to this important area.

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