Jim Gadwood discussed the consent motion filed by the Internal Revenue Service (IRS) in the Fourth Circuit on June 12 to vacate and remand its victory in Kellett v. Commissioner, a case of note to the tax community for holdings on the difference between costs under sections 162 and 174 and on the validity of Rev. Proc. 2000-50, 2000-2 C.B. 601. In Kellett, the Tax Court determined that a taxpayer who built an interactive database in the expectation of monetizing the project in tax years after it went live couldn't deduct expenses incurred before the product opened for business notwithstanding that the taxpayer satisfied the requirements in Rev. Proc. 2000-50 for currently deducting software development costs. Gadwood said the consent motion's reference to "software development costs" and the way the taxpayer framed the issue in a prior filing with the Fourth Circuit suggests that the IRS ended up conceding that Kellett could rely on the revenue procedure. "Reading between the lines, I suspect that what happened is, once the Service lost on the issue of whether there needed to be an active trade or business to rely on the revenue procedure . . . the result of that was that it became clear the taxpayer did, in fact, satisfy the literal language of the revenue procedure." Thus, the IRS probably conceded that taxpayers satisfying Rev. Proc. 2000-50 should be entitled to rely on it, he noted. Gadwood acknowledged that he would have preferred a Fourth Circuit decision overruling the Tax Court's ruling on the application of Rev. Proc. 2000-50, but that it looks like vacatur of that ruling may be the best result that will be forthcoming.