The federal research and development (R&D) tax credit under Internal Revenue Code Section 41 requires both substantive eligibility and adequate substantiation. Refund claims also involve procedural requirements that can prevent a court from reaching the merits. This study distinguishes those issues, examines relevant decisions, and addresses changes to research expenditure deductions and IRS filing requirements.
The Jurisdictional Framework of Koopmann v. United States
Koopmann v. United States, 150 Fed. Cl. 290 (2020), and the related Brashear decision were affirmed in No. 2021-1329 on April 11, 2022. The Federal Circuit expressly designated its disposition nonprecedential. It concerned FICA taxes on deferred compensation, not the research credit.
The appellants were retired United Airlines employees seeking refunds of taxes on retirement benefits they did not ultimately receive following the airline’s bankruptcy. Section 3121(v)(2) generally takes nonqualified deferred compensation into account for FICA at the later of service performance or the lapse of a substantial risk of forfeiture, subject to the implementing regulations. Describing this simply as taxation when benefits are paid would be incorrect.
The courts held that the appellants’ administrative refund claims were untimely and dismissed their suits for lack of jurisdiction. Their fairness arguments did not overcome the statutory deadline. The decision illustrates established refund-litigation requirements; it neither created an R&D-specific rule nor decided the validity of the IRS’s later research-credit claim procedures.
Section 6511 generally requires a refund claim within three years after filing the return or two years after paying the tax, whichever period expires later. If no return was filed, the general period is two years after payment. Separate lookback limits constrain the amount recoverable, and special statutory rules can apply. Section 7422 requires a duly filed administrative claim before a refund suit. Taxpayers must also distinguish the administrative claim deadline from the deadline for filing suit after disallowance.
| Category | Koopman Precedent (Jurisdictional) | Section 41 Requirements (Substantive) |
|---|---|---|
| Primary Requirement | A timely administrative refund claim before refund litigation; the relevant case is spelled Koopmann and the appellate disposition is nonprecedential. | Satisfy the four-part test, expense rules, and statutory exclusions. |
| Statutory Basis | Sections 6511 and 7422, together with applicable litigation requirements. | Section 41 and the research expenditure provisions applicable to the claim year. |
| Timing | Generally the later of three years after return filing or two years after payment, subject to applicable exceptions and lookback limits. | Determine qualified expenses for the proper taxable year under the applicable accounting rules. |
| Documentation Level | Identify the grounds and sufficient facts supporting the refund claim. | Maintain records sufficient to establish qualifying activities and associated expenses. |
| Judicial Discretion | Fairness alone did not excuse the untimely claims in Koopmann. | Eligibility and substantiation depend on the governing law and evidence. |
Administrative Evolution: IRS Compliance and Filing Requirements
The IRS announced Jarod Koopman’s appointment as Acting Chief Tax Compliance Officer on October 6, 2025. That personnel announcement is separate from the Koopmann litigation. The similar names do not establish a relationship between the official and the case, and an appointment does not change Section 41 eligibility requirements.
Claims that this appointment itself established industry-benchmark audit triggers, a new R&D certification system, or a particular criminal enforcement campaign are unsupported. Filing requirements should be evaluated through published IRS guidance rather than predictions about individual officials.
The December 2025 Form 6765 instructions make Section G optional for tax years beginning before 2026 and generally required for years beginning after 2025, subject to stated exceptions. These include certain qualified small businesses electing the payroll tax credit and qualifying original-return filers meeting both the $1.5 million qualified research expense limit and the $50 million average gross receipts limit. Group rules and the precise conditions in the instructions matter.
Section G’s business-component disclosure framework is distinct from the substantive 80% experimentation test. Completing a form does not itself demonstrate eligibility, and exemption from Section G does not remove the obligation to substantiate the credit.
For amended-return research credit refund claims, the IRS requires identification of the business components, the research activities for each component, and total qualified wage, supply, and contract research expenses. Since June 18, 2024, it has waived submission of individual researchers’ names and the information each person sought to discover with the initial claim, although those details may be requested during examination. Published guidance extends the transition period through January 10, 2027, with 45 days to perfect a deficient claim following IRS notification. This procedure does not extend the statutory deadline for an untimely claim.
The Four-Part Test: Lessons from Research Credit Litigation
Section 41 requires research expenditures to meet the applicable research expenditure standard, seek technological information, support development of a new or improved business component, and substantially involve a process of experimentation for a qualifying purpose. Permitted purposes include improvements in function, performance, reliability, or quality. The technological inquiry generally relies on engineering, computer science, or the physical or biological sciences.
Earlier decisions discuss Section 174 as it applied to their tax years. For taxable years beginning after 2024, the amended Section 41 expenditure cross-reference is to Section 174A. Historical opinions must be read using the law applicable to their facts rather than treated as descriptions of every current deduction rule.
Research Uncertainty and Investigative Activities
In Phoenix Design Group, Inc. v. Commissioner, T.C. Memo. 2024-113, the Tax Court found that the three trial projects did not involve qualified research. The engineering firm did not sufficiently establish the relevant uncertainty and investigative activities. Routine calculations from available information and descriptions of a general design workflow did not prove experimentation.
The case does not establish that all engineering, customization, or use of existing knowledge is ineligible. The practical question is what information was unavailable when the research began and what the taxpayer did to resolve the resulting uncertainty. A possibility of later design changes does not establish uncertainty about an entire system.
The Process of Experimentation and the Substantially All Requirement
Treasury Regulation Section 1.41-4 generally requires at least 80% of the relevant research activities to constitute elements of a process of experimentation, measured on cost or another consistently applied reasonable basis. This is not a test of how much of a product is new.
Little Sandy Coal Co. v. Commissioner, 62 F.4th 287 (7th Cir. 2023), affirmed denial of the credit for inadequate proof while rejecting categorical exclusion of direct support and supervision from the experimentation numerator. Such activities must themselves fit within the relevant research activities and have the necessary connection to experimentation. Building a prototype alone does not establish qualification.
| Component of the 80% Fraction | Inclusion in Numerator (Post-Little Sandy) | Inclusion in Denominator |
|---|---|---|
| Directly Engaged Research | To the extent the activities constitute elements of experimentation. | If within the relevant research activities. |
| Direct Supervision of Research | Potentially, when supported as part of the experimental process. | If within the relevant research activities; not automatically all supervision. |
| Direct Support of Research | Potentially, when supported as part of the experimental process. | If within the relevant research activities; not automatically all support. |
| Production of Pilot Models | Potentially, when production forms part of qualifying experimentation. | If within the relevant research activities. |
| Routine Design/Quality Control | Not merely because it accompanies a development project. | Not automatically included; routine quality control is excluded, and the applicable research expenditure rules govern the population. |
Technical Substantiation and the Adaptation Exclusion
Section 41(d)(4)(B) excludes adaptation of an existing business component to a particular customer’s requirement or need. Nevertheless, customer-specific work is not automatically excluded in its entirety: the regulations distinguish developing a component from merely adapting an existing one.
Betz v. Commissioner, T.C. Memo. 2023-84, concerned an air pollution control systems business. The court rejected broad assertions that uncertainty about an entire design persisted until final testing. The decision underscores the need to identify unresolved technical questions and demonstrate the work performed to investigate them. Final installation or acceptance testing alone does not establish that earlier production activities constituted qualified research.
The Shrinking-Back Rule
Treasury Regulation Section 1.41-4(b)(2) applies the qualification tests first to a business component and, if necessary, to its most significant subset of elements, continuing until a qualifying subset is identified or the most basic element is reached. This does not authorize selecting an arbitrary group of favorable costs.
Phoenix Design Group also considered smaller systems and components but found the necessary proof lacking. Maintaining evidence at component and subcomponent levels can support this analysis. It does not guarantee a credit or override an otherwise applicable exclusion.
Funded Research and the Allocation of Financial Risk
Section 41(d)(4)(H) excludes research to the extent funded by another person. Under the applicable regulations, payment contingent on successful research and retention of substantial rights are central issues for a research contractor. Exclusive ownership is not always necessary, but retaining no substantial rights prevents the contractor from qualifying on that basis.
In Meyer, Borgman & Johnson, Inc. v. Commissioner, No. 23-1523 (8th Cir. May 6, 2024), the court affirmed that the engineering firm’s research was funded. General professional performance requirements, including compliance with codes and freedom from negligent work, did not make payment contingent on research success.
Neither a fixed-price label nor a generic warranty decides the issue. Courts examine the agreements and applicable law, including whether payment depends expressly or by clear implication on successful research. The claim that every contract must contain particular explicit wording overstates the rule. Likewise, denial of an IRS summary judgment motion would not, by itself, establish entitlement to the credit.
A practical contract review should examine payment, acceptance, rework, termination, and intellectual property provisions together with actual performance. Contract descriptions must reflect the genuine allocation of risk and rights.
Research Expenditure Deductions After the 2025 Legislation
The Tax Cuts and Jobs Act required capitalization and amortization of research or experimental expenditures for tax years beginning after 2021: generally five years for domestic expenditures and fifteen years for foreign expenditures, using a midpoint convention. Describing that regime as the unavoidable future treatment of all domestic research is outdated.
Public Law 119-21, enacted July 4, 2025, added Section 174A. Domestic research or experimental expenditures paid or incurred in tax years beginning after December 31, 2024, generally qualify for current deduction. An election to capitalize and amortize qualifying domestic expenditures over at least 60 months is also available. Foreign research expenditures remain subject to Section 174’s fifteen-year amortization rules.
Transition provisions permit eligible taxpayers to accelerate recovery of remaining domestic balances from 2022–2024. Separate small-business retroactive relief has eligibility and deadline conditions; it should not be assumed to remain available indefinitely. Revenue Procedure 2025-28 provides implementing procedures for elections and accounting method changes. A placeholder such as “Rev. Proc. 2024-xx” is not usable authority.
Coordinating Deductions and Research Credits
The research expenditure deduction and Section 41 credit have different scopes. Deductible research costs and qualified research expenses need not match exactly. Taxpayers should explain and reconcile differences, including expense categories, exclusions, and contract research limitations. Section 280C coordinates deductions with the research credit, including the reduced-credit election where applicable.
| Future Application Challenge | Strategy for Mitigation |
|---|---|
| Domestic Deduction Timing | Apply Section 174A and evaluate available treatment of remaining historical domestic balances. |
| Documentation Consistency | Reconcile research expenditure schedules with Section 41 costs; explain legitimate differences instead of forcing an exact match. |
| Foreign Research Treatment | Distinguish fifteen-year amortization from the separate Section 41 exclusion for foreign research. |
| Administrative Consent | Use applicable enacted-law procedures, including Revenue Procedure 2025-28, and verify the relevant election or method-change deadlines. |
Implications for Future R&D Tax Credit Applications
Connecting Project Records to Activities
Project totals alone may not explain which activities qualify. A useful study connects business components, technical uncertainties, alternatives evaluated, personnel activities, and claimed costs. Contemporaneous engineering records, design revisions, test results, and reliable cost allocations can make that connection clearer.
There is no universal rule that every claimant must maintain a particular hourly logging system. The regulations require records sufficiently usable and detailed to substantiate entitlement. Unsupported percentages are vulnerable, while the acceptability of estimates or reconstructed evidence depends on their foundation and the applicable law.
Documenting a Systematic Evaluation
Documentation should explain the alternatives, the evaluation method, the results, and any resulting revisions. Modeling, simulation, or systematic trial and error may support experimentation. Merely naming a hypothesis or recording a final successful design does not establish the required process.
Code compliance is neither an automatic qualification nor a categorical bar. The underlying work must satisfy the same technical uncertainty and experimentation requirements. Records explaining why an alternative failed can be useful, but failure is not a condition of the credit.
Procedural and Professional Responsibilities
Taxpayers and advisers should separately review technical eligibility, cost substantiation, contract funding, return disclosures, and refund deadlines. An adviser’s study or independent review may assist but does not replace evidence. A protective claim requires a legally sufficient basis and timely filing; it should not be confused with an unsupported placeholder amendment.
Final Thoughts
The cases address distinct questions: Koopmann illustrates refund filing deadlines; Little Sandy Coal addresses experimentation and proof; Phoenix Design Group and Betz examine the evidence of qualifying activities; and Meyer, Borgman & Johnson addresses funded research. They do not collectively establish a new certification regime or eliminate every reasonable allocation method.
A defensible research credit claim combines qualifying activities, supportable expenses, appropriate contract analysis, and compliance with applicable filing procedures. Research expenditure treatment must also reflect the 2025 statutory changes. The strongest practical approach is to preserve reliable evidence during development and reconcile the tax analysis to the work actually performed.
