Procter & Gamble Co. v. United States, 733 F. Supp. 2d 857 (S.D. Ohio 2010)

Background

United States (“The Government”) claims that Procter and Gamble (P&G) and its subsidiaries improperly excluded receipts from intercompany transfers with the foreign members of its controlled group when determining “Gross Receipts” for the purpose of calculating its research tax credit.

During IRS’ Audit, they issued a notice of proposed adjustment which reversed its prior position that all receipts from intercompany transfers be excluded.  Because of this, the IRS states that P&G’s calculate are incorrect because foreign member s of controlled groups should be included in Gross Receipts.  Procter and Gamble argue that this revision contracts the IRS’ own regulations.

The sole issue in this case is a legal one: whether a taxpayer must include the results of its intercompany transactions within its “Gross Receipts” for the purposes of determining the amount of its research credit.

Basic Facts

• P&G and its affiliates are in the manufacture and and sale of consumer products in the US and throughout the  world operating under a variety of brand names including Charmin, Crest, Pringles, Pantene, Pampers and Bounty
• P&G’s subsidiaries regularly engage in intercompany transactions with one another.  These subsidiaries regularly engaged in in the manufacture and sale of specific P&G products
• P&G also owned additional subsidiaries who sold P&G products and belonged to P&G’s “controlled group of corporations”
• P&G engaged in extensive research activities throughout this time which consisted of activities related to the development and improvement of products and technologies.  P&G claimed research tax credits on its tax returns for the expenses incurred for this research.
• When calculating research, P&G treated all members of its “controlled group of corporations” as a single taxpayer, which was used in P&G’s previous tax returns.
• After the IRS requested P&G’s Gross Receipts and how they got there, the IRS issued a written determination which stated that P&G were correct.
• In 2006, the IRS Chief Counsel revised the agency’s position on Gross Receipts; however this rule only applies to receipts from foreign subsidiaries and not to receipts from domestic subsidiaries.
• In 2007, the IRS now claimed that intercompany transactions with foreign members should no longer be excluded from Gross Receipts and therefore P&G’s Gross Receipts and Base Amount were incorrect.
• The IRS said P&G’s domestic sales continued to be excluded from Gross Receipt as well.
• In turn, P&G’s research credit decreased as their Base Amount and Gross Receipts increased.
• P&G paid that additional tax that was owed and then filed a civil action seeking a refund on those aforementioned amounts.
• P&G’s decision to not include intercompany transfers with its international members is consistent with the credit’s intended effect.  The research credit is intended to reward research expenditures by measuring the expenditures against Gross Receipts.  By including international transactions, this would double count transactions and would create irrelevant measurements.

Court’s Decision

Based on the evidence provided on record, the Court finds that there is no material for trail and the Plaintiff (P&G) is entitled to judgment as a matter of law relating to the Gross Receipts research credit issue.  In turn, the Plaintiff’s motion for partial summary judgment is granted and the Defendant’s cross motion for partial summary judgment is denied.

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