The IRS issued CCA 201650012, which addresses the pre-2015 research tax credit regulations that apply to internal use software (“IUS”).
This guidance addresses the question as to whether the two prior IUS regulations, which the IRS had indicated that taxpayers could choose which regulation to rely on, can be applied piecemeal or if they have to be applied in total. This issue was previously addressed in the FedEx case, where the district court concluded that the prior IUS regulations could be applied piecemal.
Contrary to the holding in FedEx, in CCA 201650012, the IRS concludes that:
[I]n this case, Taxpayer can choose to apply either all of the IUS provisions of T.D. 8930 or all of the IUS provisions of the 2001 NPRM for purposes of the three-part high threshold of innovation test, but cannot apply the legislative history to create rules in the absence of regulations. Accordingly, if Taxpayer chooses to apply T.D. 8930, it must apply all of T.D. 8930 for purposes of the three-part high threshold of innovation test, including the common knowledge of skilled professionals standard.