01-4222 Eustace, et al. v. CIR

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“Applied Systems has not tried to show that its software embodies any leap in information technology or that there was any doubt about the technological ability to produce software of this kind. But it contends that º41 does not set so high a standard and that industrious development of software through a process of trial and error meets the statutory standard. The difficulty with this position is that the Tax Court did not get its legal views out of thin air. This court announced them in United Stationers, and Wicor declined an opportunity to revisit the subject. United Stationers held that software development satisfies the statutory technological information requirement only if ‘the research is intended to expand or refine existing principles of computer science’ and the resulting information is ‘of broad effect’ (163 F.3d at 444). As for experimentation, we held that the taxpayer must formulate and test hypotheses in order to dissipate uncertainty about the possibility of success, a standard that fine-tuning (or debugging) of computer programs does not satisfy. Id. at 445-46.”

“Although the word ‘experiment’ has many shadings in common speech, we held that as used in º41 it has the scientific sense of forming and testing hypotheses rather than the lay (or even engineering) sense of trial and error. Galileo engaged in experiments about acceleration when he rolled balls down an inclined plane. An auto manufacturer trying different nozzles from those on hand to find the one that applies the smoothest coat of paint is not engaged in ‘experimentation’ under this view, nor is a software developer trying different methods to implement a feature accompanied by maximum execution speed and minimum demand on system resources such as RAM. Tinkering differs from experimentation in the vocabulary of research-and º41 is about research, and thus about use of the scientific method.”

Affirmed.

Appeal from the United States District Court Tax Court, Foley, J., Easterbrook, J.