Update on the IRC Section 41
Research Tax Credit
Michael A. Krajcer, JD, CPA
Office: (440) 331-0714
Mobile: (216) 308-1564
1

Interpretation – The Courts

Regulation – IRS/Treasury

Legislation – Congress/President
2

FedEx v. United States

TG Missouri Corporation v. Commissioner

Trinity Industries Inc. v. United States

Deere v. commissioner

Procter & Gamble v. United States
3
FedEx v. United States, 103 A.F.T.R. 2d 2009-2722 (W.D. Tenn. 6/9/09)



Taxpayer developing Internal Use Software, wants to rely on the
qualification tests found in the 2001 final regulations, but modified to
recognize the elimination of the “Discovery Test” pursuant to the 2003 final
regulations.
IRS argued that its Announcement 2004-9 precluded the taxpayer from
doing so.
Holding:
◦ For the taxpayer
◦ Announcement 2004-9 is not due substantial deference since it is contrary to the IRS’
stated intent in adopting the 2003 regulations and contrary to the IRS’ stated
understanding of Congressional intent
4
TG Missouri Corporation v. Commissioner, 133 T.C. 278 (Nov. 12,
2009)



Taxpayer contracted for production molds it would use to make
automotive parts for its customers. The molds were held as inventory until
complete, then sold to the related customer.
The IRS argued that the cost of the molds could not qualify as supply QREs,
since they were “property of a character subject to depreciation”.
Holding:
◦ The court held for the taxpayer, stating that the particular taxpayer and such
taxpayer’s use of the property must be referenced when determining if the
property is in fact “property of a character subject to depreciation”.
5
Trinity Industries Inc. v. United States, 691 F. Supp.2d 688 (Jan. 29, 2010)

Issues:
◦ Business Component Test – made-to-order prototypes
◦ Substantially All Test

Holding:
◦ For the taxpayer


Research conducted for a particular customer will qualify for the research credit

Where the taxpayer provided sufficient evidence that “substantially all” (i.e. 80%) of a project’s
activities qualified, then all the costs of the project were allowed in calculating the credit.
Note:
◦ Had the taxpayer retained documentation to verify that something less than
“substantially all” of a project qualified, the court would have followed the “shrinking
back” theory to allow the qualified portion of the project.
6
Deere v. Commissioner, 133 T.C. 246 (Oct. 22, 2009)


Taxpayer argued that the gross receipts of foreign branches should be
excluded from the calculation of the credit, similar to the exclusion
specifically granted to foreign corporation gross receipts that are not
effectively connected with the conduct of a trade or business within the
United States.
Holding:
◦ Noting that the "silence of Congress is strident," the Tax Court found that if
Congress had wanted to exclude income from foreign branches from gross
receipts, it would have done so explicitly.
7
Procter & Gamble v. United States, 733 F. Supp. 2d 877 (June 25,
2010)



The taxpayer excluded receipts from intercompany transactions, including
foreign subsidiary amounts, for purposes of calculating “Gross Receipts”.
The IRS argued that for foreign subsidiaries, IRC Section 41(f) applies only
to research expenditures, not gross receipts.
Holding:
◦ For the taxpayer:
◦ The district court rejected the IRS's argument concluding that for a controlled
group of corporations, both QREs and Gross Receipts should be determined on a
single-taxpayer basis.
8
IRS/Treasury Department issue final regulations regarding election of
the Alternative Simplified Credit




Taxpayers cannot make or revoke an election for the ASC after they
file their original tax returns.
No Section 9100 relief is available.
TD 9528; 76 FR 33994
Effective June 9, 2011
9
Administration Proposal:


Permanent Credit
Increase ASC rate from 14% to 17%
Congressional Bills:


S. 1577: Greater Research Opportunities with Tax Help Act of 2011
(GROWTH Act)
◦ Permanent Credit
◦ Increase ASC rate from 14% to 20%
H.R. 1693: Research and Development Tax Credit Extension Act of
2011
◦ Permanent Credit
◦ Increase ASC rate from 14% to 17%
10
Michael A. Krajcer, JD, CPA
•
Over 25 years experience in tax consulting and tax controversy resolution
•
B.B.A in Accounting, Kent State University
•
J.D., Cleveland Marshall College of Law
•
13 years with the IRS
•
Previous leader of Ernst &Young’s IRS Practice and Procedure Group in Cleveland
and member of E & Y’s National Tax Practice, and VP at National City Bank
•
Adjunct professor, Cleveland Marshall College of Law
11