Deere & Co v Commissioner (2009)


Deere & Co. v. Commissioner, 133 T.C. 11 (2009)

Deere & Co manufactured and distributed agricultural equipment, commercial and consumer equipment, and a broad range of equipment for construction and forestry. Although its principal office was in Illinois, it had branches in Germany, Italy and Switzerland. These European branches were involved in the development of numerous products.

In the company’s 2001 R&D Tax Credit claim, it calculated its average annual gross receipts (averaged from the last four years’ gross receipts) totalled as $11,737,809,783. This total included only the U.S branch’s gross receipts. This average annual gross receipts amount is used to calculate the company’s base amount; qualifying research expenses over this amount can be claimed.

In response, the IRS issued a notice of deficiency, saying that Deere & Co should be disallowed the credits. It argued that the company should have included gross receipts from the foreign branches. This average would have been $13,373,420,885.


It’s important to note that in 1996, a new section of the R&D tax credit was enacted that allowed taxpayers to use an alternative, three-tiered formula calculation method. And, in 1999, Congress changed the definition of foreign research to “any research conducted outside the United States, the Commonwealth of Puerto Rico, or any possession of the United States”. It said, “in the case of a foreign corporation, there shall be taken into account only gross receipts which are effec­tively connected with the conduct of a trade or busi­ness within the United States, the Commonwealth of Puerto Rico, or any possession of the United States”.

So, in 2001, when Deere & Co calculaed its R&D tax credit claim, it used this method and did not include its foreign gross receipts. It argued that it didn’t include these because there was no clear definition of gross receipts, and the structure of the statute and legislative history demonstrate that the R&D credit has an historic domestic focus. To simplify, it argued that the R&D credit allowance is for work undertaken within the U.S., so only U.S. gross receipts are relevant, and because there is no clear definition the company shouldn’t be disallowed the credits.


The court disagreed with Deere & Co. Congress has excluded research from outside the U.S. as qualifying research, to ensure foreign research was not claimed. But, as above, foreign gross receipts are to be taken into account if they are connected with the business/trade. The court therefore found that the company should have included these foreign gross receipts. Deere & Co was disallowed the credits, because of its calculation error.

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