Section of Taxation Publications
  VOL. 56
NO. 3
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 Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.
Agencies to the Rescue: Applying Patent Law to the Research and Experimentation Credit Issues in Eustace v. Commissioner
Jeffrey L. Light


In Eustace v. Commissioner, the Tax Court held that the taxpayer did not qualify for the research and experimentation credit in relation to commercial software development because it did not meet the test under section 41(d). Section 41(d) describes the four-part test for determining whether activities constitute qualified research. It was enacted by Congress to strike a balance between “society’s need for technological innovation” and the desire to “eliminate any taxpayer abuse.” On appeal, the Seventh Circuit affirmed, holding that the taxpayer’s alleged experimentation was mere tinkering and did not result in any new knowledge in computer science. Further, the court rejected the taxpayer’s contention that the more lenient standard contained in Proposed Regulation section 1.41-4 should be applied because it has no legal effect. The proposed regulations differ from the current regulations in that the proposed regulations eliminate the requirement that the recipient of the credit discover a new technology or make a significant refinement to an existing technology. The court overlooked an important opportunity by not considering the proposed regulations and the rules of other agencies, such as the United States Patent and Trademark Office (USPTO), which have resolved similar problems of properly rewarding inventors. The court could have integrated the Treasury rules with the rules of other agencies and past court precedents. This in turn would have led to more predictable and more objective standards for taxpayers, regardless of how high the bar is set.

Part I of this Note discusses the background of the research and experimentation tax credit. Part II describes the facts of Eustace. Part III summarizes the opinions of the Tax Court and the Seventh Circuit. Part IV analyzes the Seventh Circuit’s decision. Part V concludes that greater deference to agency rules is desirable where the agency has extensive experience with the issue in question.


Published by
Section of Taxation, American Bar Association
With the Assistance of
Georgetown University Law Center


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