R&D Tax Credit Case Law: Key Court Decisions - Swanson Reed

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Apple Computer, Inc. v. Commissioner – Determined that income from employee stock option spreads constituted wages eligible for the R&D tax credit.
Bayer Corp. v. United States – Addressed the qualification of internal-use software and the application of the discovery rule under pre-2003 regulations.
Betz v. Commissioner – Involved the strict substantiation of Qualified Research Expenses (QREs) and whether supply costs were directly used in the conduct of qualified research.
Cleveland v. Commissioner – Examined whether an individual investor’s activities constituted a “trade or business” for deducting Section 174 research expenses.
Coors Porcelain Co. v. Commissioner – Analyzed the deduction of research and experimental expenses under Section 174 versus the requirement to capitalize them.
Ekman v. Commissioner – Addressed whether the taxpayer was actively engaged in a trade or business for Section 174 purposes regarding engine development.
Eustace v. Commissioner – Ruled that off-the-shelf software modified for internal use did not meet the high threshold of innovation required for the credit.
Fairchild Industries, Inc. v. United States – Established that research is not “funded” (and is thus eligible for the credit) if payment is strictly contingent on the success of the research.
FedEx Corp. v. United States – Held that the company’s internal-use package tracking software qualified for the R&D tax credit because it met the high threshold of innovation.
Fudim v. Commissioner – Addressed the substantiation requirements for rapid prototyping research and whether the taxpayer’s time and expenses were adequately documented.
Geosyntec Consultants, Inc. v. United States – Examined whether capped contracts shifted the financial risk of failure to the taxpayer, thus avoiding the funded research exclusion.
Glassley v. Commissioner – Determined that passive investors in a partnership were not engaged in a trade or business under Section 174.
Green v. Commissioner – Ruled that a partnership merely intending to license an invention, rather than manufacture it, was not engaged in a trade or business for Section 174 deductions.
Harper v. Commissioner – Addressed the strict substantiation and nexus requirements needed to directly link employee activities to qualified research projects.
Kantor v. Commissioner – Concluded that a partnership lacked a realistic prospect of entering a trade or business, leading to the disallowance of Section 174 deductions.
Kilroy v. Commissioner – Examined the deductibility of mining exploration and development expenses under Section 174.
Kollsman Instrument Corp. v. Commissioner – Analyzed the funded research exclusion and the specific contractual terms of government defense contracts.
Kyocera AVX Components Corp. v. United States – Evaluated whether certain expenses, such as production materials, qualified as QREs or were merely routine manufacturing costs.
Leon Max, Inc. v. Commissioner – Ruled that a fashion brand’s fit-testing activities were aesthetic rather than technological, failing the fundamental R&D credit requirements.
Little Sandy Coal Co., Inc. v. Commissioner – Denied the credit because the taxpayer failed to evaluate “substantially all” of the pilot model vessel’s elements under a process of experimentation.
Lockheed Martin Corp. v. United States – Held that defense research contracts were not considered funded research because payment remained contingent on successful performance.
Louw v. Commissioner – Denied R&D credits entirely due to a lack of contemporaneous documentation and failure to adequately substantiate employee time.
Mayrath v. Commissioner – Ruled that expenses for building a custom luxury home were personal and did not qualify as experimental Section 174 expenses.
Meyer, Borgman & Johnson, Inc. v. Commissioner – Concluded that a structural engineering firm’s fixed-fee contracts were funded research because the firm did not retain substantial rights to the designs.
Nickeson v. Commissioner – Denied Section 174 deductions because the R&D partnerships were formed primarily for tax shelter purposes rather than a bona fide trade or business.
Norwest Corp. v. Commissioner – Ruled that the bank’s internal-use software development did not involve significant economic risk, failing the innovation test.
Phoenix Design Group, Inc. v. Commissioner – Addressed the sufficiency of evidence required to substantiate qualified research expenses for architectural and design engineering.
Populous Holdings, Inc. v. Commissioner – Allowed the credit by ruling that the architectural firm retained substantial rights in its designs, meaning the research was not excluded as “funded.”
Research, Inc. v. United States – Examined whether routine engineering modifications qualified as a genuine process of experimentation.
Scoggins v. Commissioner – Ruled that the taxpayers had a realistic prospect of entering a trade or business, allowing their Section 174 deductions.
Scott Moore v. Commissioner – Explored the boundaries of the process of experimentation test in the context of custom product development and engineering.
Shami v. Commissioner – Denied credits to a hair-care product manufacturer because executives’ wages lacked substantiation and they didn’t directly perform or supervise technical research.
Siemer Milling Co. v. Commissioner – Ruled that a flour milling company’s product development was routine and failed the technological process of experimentation test.
Sierracin Corp. v. Commissioner – Examined whether certain aerospace manufacturing and testing costs qualified as research and experimental expenditures.
Spellman v. Commissioner – Denied Section 174 deductions because the partnership functioned only as a passive investor rather than being actively engaged in a trade or business.
Suder v. Commissioner – Allowed R&D credits for a telecommunications company but adjusted the CEO’s compensation for QRE purposes down to a reasonable amount.
Sun Microsystems, Inc. v. Commissioner – Held that the value of stock options exercised by employees qualified as wages for the purpose of claiming the R&D credit.
Tangel v. Commissioner – Addressed the substantiation of QREs and the application of aggregation rules for commonly controlled groups of corporations.
Tax & Accounting Software Corp. v. United States – Ruled that software development failed the credit requirements because it did not discover information that was technological in nature under the prevailing regulations.
TG Missouri Corp. v. Commissioner – Held that production molds sold to customers qualified as supply QREs because they were completely consumed in the research process.
Trinity Industries, Inc. v. United States – Allowed the credit for first-in-class ships because the unique design and building process inherently required a process of experimentation.
Union Carbide Corp. & Subsidiaries v. Commissioner – Clarified that pilot model testing in chemical manufacturing qualifies for the credit if it seeks to resolve genuine technical uncertainty.
United States v. McFerrin – Established that taxpayers can use reasonable estimates (the Cohan rule) to calculate R&D credits if they can prove qualified research activities actually occurred.
United Stationers, Inc. v. United States – Denied the credit for internal-use software because it merely adapted existing technology and failed the discovery test.
Wicor, Inc. v. United States – Ruled that a utility company’s implementation of an integrated computer system was routine and did not qualify for the R&D credit.
Zacks v. United States – Addressed statute of limitations issues specifically related to retroactive R&D credit claims and tax amendments.
Zink v. United States – Denied Section 174 deductions due to the taxpayer lacking an actual trade or business or a realistic prospect of entering one.
George v. Commissioner – Addressed whether a partnership’s activities were substantial enough to constitute a trade or business for Section 174 deductions.
Maxitrol Co. v. Commissioner – Examined the substantiation of QREs and the legal distinction between qualified research and routine quality control testing.
Quebe v. United States – Denied the credit because the electrical contractor’s research was deemed “funded” as they did not retain substantial rights to the research outcomes.
Sampson v. Commissioner – Addressed foundational issues of whether certain early-stage development expenses met the threshold for Section 174.
Little Sandy Coal Co. v. Commissioner – Reaffirmed the denial of the credit due to the taxpayer’s failure to apply the process of experimentation to “substantially all” of the pilot model’s elements.
Procter & Gamble Co. v. United States, 733 F. Supp. 2d 857 (S.D. Ohio 2010) – Analyzed the strict requirements for internal-use software and the application of the high threshold of innovation test.
United States v. Dow Chemical Co., 674 F.3d 1356 (Fed. Cir. 2012) – Clarified the “discovery” test and process of experimentation requirements for chemical research under prior regulatory law.
Dynetics, Inc. v. United States, 121 Fed. Cl. 158 (2015) – Evaluated fixed-price contracts to determine if the financial risk of failure remained with the taxpayer to avoid the funded research exclusion.
Grigsby v. United States, 85 F.4th 258 (5th Cir. 2023) – Ruled that a construction contractor failed the process of experimentation test because they relied on known engineering principles without facing true technical uncertainty.
Intermountain Electronics Inc. v. Comm’r, No. 11019-19 (T.C. Order 2024) – A Tax Court order denying summary judgment on the complex factual issue of whether the taxpayer’s research was funded by its clients.
System Technologies Inc. v. Comm’r, No. 12211-21 (T.C. Order 2024) – A procedural Tax Court order addressing evidence, discovery, and substantiation standards for Section 41 QRE eligibility.
Smith v. Comm’r, Nos. 13382-17, 13385-17, 13387-17 (T.C. Order 2024) – A Tax Court order dealing with the strict documentation and substantiation needed to validate and defend R&D credit claims.
CHA Holdings Inc. v. Comm’r, No. 27453-21 (T.C. Stipulated Decision 2024) – A stipulated decision representing a finalized settlement between the taxpayer and the IRS regarding disputed R&D credit claims.