May Broadcasting Co. v. United States, 200 F.2d 852 (8th Cir. 1953), concerned excess profits taxes and the treatment of a corporate asset transfer. It was not an R&D tax credit decision. This study distinguishes that historical holding from the separate statutory and regulatory requirements governing modern research credits.
Reading related agreements together can help establish the facts of a tax transaction. However, neither substance over form nor a step-transaction analogy substitutes for the qualified-research, funding, rights, and substantiation requirements of Section 41.
Historical Genesis: May Seed & Nursery Company and Radio Station KMA
May Seed & Nursery Company operated KMA in Shenandoah, Iowa, as a department of its business. Agreements executed in October 1939 contemplated incorporation, an asset transfer, and Central Broadcasting Company’s acquisition of a quarter interest. Central paid $75,000 for shares and contributed $25,000 to working capital.
The Valuation Conflict: Bookkeeping and Economic Reality
The dispute concerned excess profits taxes for 1943–1945, using assets acquired in 1940. The Commissioner applied a $100,524.39 carryover basis. The Eighth Circuit accepted a $400,000 fair market value, recognizing intangible value omitted from the books, and reversed and remanded for recovery of overpayments.
| Asset Valuation Component | Commissioner’s Basis (1940) | Taxpayer’s Asserted FMV (1940) | Court’s Final Determination |
|---|---|---|---|
| Tangible Physical Values | $100,524.39 book-based amount | Included in total valuation | No separate fair-market-value allocation stated |
| Intangible Goodwill/Wavelength | No separate goodwill amount recorded | Included in total valuation | Intangible value recognized; no separate dollar allocation established |
| Total Asset Basis | $100,524.39 | $400,000.00 | $400,000.00 for the disputed computation |
The Step Transaction Doctrine and the Limits of the R&D Analogy
The court treated incorporation, asset transfer, and stock disposition as integrated steps. The planned ownership reduction mattered to the statutory control requirement for a tax-free exchange. This historical holding does not establish a separate test for determining whether research is funded.
The Three Tests of the Step Transaction Doctrine
- Binding commitment: Whether an obligation to undertake later steps existed when the first step occurred.
- Mutual interdependence: Whether the steps have independent significance or depend on completion of the overall arrangement.
- End result: Whether the steps were arranged to achieve a planned outcome.
These are general transaction-analysis concepts, not three additional Section 41 eligibility tests. In an R&D engagement, the relevant inquiry concerns enforceable payment obligations, research rights, and the activities actually performed. An integrated project description alone cannot turn guaranteed reimbursement into success-contingent compensation.
The Nebraska Case: May Broadcasting Co. v. Boehm
In May Broadcasting Co. v. Boehm, 241 Neb. 660, 490 N.W.2d 203 (1992), the Nebraska Supreme Court addressed use tax on syndicated programming purchased for KMTV. The programming arrived on film or videotape or by satellite. The court treated the programming as tangible personal property under the applicable Nebraska law.
Tangible Personal Property and Intangible Rights
Boehm concerned a different tax and legal question from the 1953 federal case. It did not decide federal research-credit eligibility or establish the federal classification of internal-use software. Nor does the decision, by itself, establish that later digital-tax legislation resulted from its holding.
Under Treasury Regulation Section 1.41-4(c)(6), internal-use software generally concerns general and administrative functions. The additional innovation threshold examines substantial, economically significant improvement, significant economic risk, and lack of commercially available software usable without qualifying modifications. Specific exceptions and dual-function rules apply. Software developed for commercial sale or qualifying third-party interaction is treated differently. State sales-tax tangibility does not determine this classification.
| Tax Jurisdiction / Context | Characterization of Media/Software | Legal Consequence |
|---|---|---|
| Nebraska Use Tax (Boehm) | Syndicated programming treated as tangible personal property | Use tax applied under the law at issue |
| Massachusetts Corporate Excise | Classification depends on the transaction and applicable sourcing rules | No universal intangible-property rule for media or advertising follows from Boehm |
| Section 41 R&D Credit (IUS) | Classification depends on intended software use and federal regulations | Additional innovation threshold may apply, subject to exceptions |
| Section 174 Amortization | Research expenditures classified by tax year and research location | Foreign research generally remains subject to 15-year amortization; Section 174A governs domestic research from 2025 |
Contemporary R&D Tax Credit Jurisprudence: Funded Research
Section 41(d)(4)(H) excludes research to the extent another person funds it. Treasury Regulation Section 1.41-4A(d), incorporated by Section 1.41-4(c)(9), examines success-contingent payments and substantial rights. The full contractual arrangement matters. A fixed price, milestone schedule, or ordinary negligence remedy alone does not establish eligibility.
Research is fully funded where the researcher retains no substantial rights. Where substantial rights remain but payments constitute funding, expenses may qualify only to the extent permitted after reducing them for that funding. Consequently, the analysis is not always an all-or-nothing determination.
Smith v. Commissioner: Contract Interpretation and the Later Merits Opinion
The December 2024 Smith order denied the IRS’s summary-judgment motion because disputed issues remained, including interpretation of contracts governed by foreign law. That procedural result did not establish blanket eligibility or a general rule that creators always retain intellectual-property rights.
The subsequent opinion, Smith v. Commissioner, T.C. Memo. 2026-50, filed June 16, 2026, found that payments under none of the six contracts were contingent on research success. The firm retained substantial rights under four contracts. The court held that partial credits could be available under the funding regulations, but lacked sufficient evidence to determine their amounts, if any. This materially qualifies any account describing the earlier order simply as a taxpayer victory.
System Technologies: Financial Risk and Contract Remedies
In its January 2025 order in System Technologies, Inc. v. Commissioner, docket No. 12211-21, the Tax Court denied the IRS’s motion for partial summary judgment on funded research. The purchase arrangements were governed by Indiana law. The court considered remedies for total breach, including repayment, and concluded that the warranty provisions did not eliminate those remedies and the payments were contingent on success.
The order addressed the funding issue presented by those agreements. It was not a determination that all claimed activities and expenses satisfied every credit requirement, and it should not be generalized to contracts with different obligations or remedies.
The following comparison describes disputed propositions and their limitations; it is not a statement of a universal IRS policy or a single shared holding.
| Factor of “Unfunded” Research | IRS Position (Traditional) | Tax Court Position (System Tech/Smith) |
|---|---|---|
| Financial Risk | The IRS disputed whether the agreements made payment contingent on success | Contract terms and governing law matter; the outcomes differed |
| Intellectual Property | The IRS disputed retention of substantial rights | Smith’s 2026 opinion found substantial rights under four of six contracts |
| Payment Structure | The IRS challenged claimed success contingency | Milestones alone do not prove contingency; Smith found none under its six contracts |
| Breach of Contract | The effect of warranty terms and remedies was disputed in System Technologies | Indiana remedies for total breach supported the funding outcome in that order |
Technical Analysis of Sections 174, 174A, and 41
For tax years beginning in 2022–2024, the Tax Cuts and Jobs Act generally required research expenditures to be capitalized and amortized over five years domestically or fifteen years abroad, using the midpoint convention. The 2025 legislation changed the domestic rules.
For tax years beginning after December 31, 2024, Section 174A generally permits immediate deduction of domestic research or experimental expenditures. Taxpayers may instead elect capitalization and amortization over at least 60 months beginning when benefits are first realized. Foreign research remains subject to Section 174’s 15-year treatment.
Transition provisions allow qualifying remaining domestic 2022–2024 balances to be recovered in the first tax year beginning after 2024 or over that year and the following year. Separate retroactive relief for eligible small businesses had filing deadlines, including July 6, 2026, subject to earlier refund limitation periods. That date has passed as of this study. Revenue Procedure 2025-28 explains the procedures.
Research deductions and research credits have different scope. Denial of a credit does not, by itself, determine whether an expenditure must be capitalized, deducted, or treated under another Code provision. Section 280C coordinates the credit with deductions and capitalized amounts.
The historical Section 174 column heading below is retained, but its entries distinguish current Section 174A treatment from the former domestic amortization rule. Treatment remains subject to the facts and applicable elections.
| Expenditure Type | Section 174 (Amortization) | Section 41 (Tax Credit) |
|---|---|---|
| Direct R&D Wages | Domestic qualifying costs generally deductible under Section 174A from 2025; foreign costs generally amortized over 15 years | Potentially eligible for qualified services, subject to statutory conditions |
| Supplies used in R&D | Applicable research-cost treatment depends on location and year | Potentially eligible; land and depreciable property are excluded from supplies |
| Rent/Lease of Computers | Research-related costs require allocation under applicable rules | Qualifying computer-use payments may be eligible; ordinary equipment rent is not automatically a QRE |
| Overhead/Indirect Costs | Properly allocable research costs may be included | General overhead is not a separate QRE category |
| Patent Acquisition | Acquiring an existing patent is excluded from research expenditures; capitalization rules apply separately | Purchase price is not a QRE; distinguish costs of obtaining a patent on one’s own invention |
| Foreign R&D Wages | Generally 15-year amortization | Research outside the United States, Puerto Rico, and U.S. possessions is excluded |
Mathematical Implications for the R&D Tax Credit
For the ordinary incremental portion of the regular research credit, the calculation is:
Credit = 20% × max(0, current-year QREs − base amount).
The base amount generally uses the fixed-base percentage multiplied by average annual gross receipts for the preceding four years, with a minimum of 50% of current-year QREs. Startup, aggregation, and acquisition or disposition rules may alter the computation. Section 41(f)(3) requires specified historical adjustments for relevant business acquisitions and dispositions; these are statutory rules, not a consequence of May Broadcasting.
The alternative simplified credit generally equals 14% of current-year QREs exceeding 50% of average QREs for the preceding three years, with a special 6% rule when any of those years has no QREs. Section 280C elections and other limitations affect the final benefit.
Process of Experimentation and the Elimination of Uncertainty
Research-credit eligibility requires technological work directed toward a permitted business-component improvement and a qualifying process of experimentation. Novelty, complexity, or professional skill alone is insufficient.
Routine Engineering and Investigatory Activity
Phoenix Design Group, Inc. v. Commissioner, T.C. Memo. 2024-113, illustrates the consequences of failing to substantiate qualifying uncertainty and experimentation in engineering work. Ordinary calculations using available information do not automatically demonstrate experimental research. The question is what technical uncertainty existed and how alternatives were evaluated to resolve it, not whether the project was commercially demanding.
| Element of Experimentation | Required Evidence | Common Pitfall |
|---|---|---|
| Initial Uncertainty | Evidence of uncertainty about capability, method, or appropriate design at the outset | Describing commercial challenges without technical uncertainty |
| Alternatives Evaluated | Records or credible testimony explaining alternatives, evaluation, and results | Relying only on final drawings |
| Technological Basis | Evidence of reliance on engineering, computer science, or physical or biological science | Claiming aesthetic or market-preference work |
| 80% Rule | A reasonable, supported calculation of qualifying experimental activities | Using arbitrary percentages or equating newness with experimentation |
Little Sandy Coal Co. v. Commissioner, decided by the Tax Court in 2021 and affirmed by the Seventh Circuit in 2023, rejected unsupported estimates and reliance on new vessel designs. The substantially-all test concerns activities for the relevant business component, measured on cost or another consistently applied reasonable basis. It does not simply require that 80% of every project’s total spending qualify.
Contemporaneous records are valuable, but no universal requirement mandates a particular timekeeping system or a separately titled uncertainty memorandum. Credible reconstruction can support a claim when grounded in evidence. Estimation cannot establish qualifying activities that the taxpayer has failed to prove.
Substantiating Research-Credit Refund Claims
IRS procedures require a sufficiently specific refund claim; the available guidance describes review by IRS personnel, not automatic rejection before any human review. A May Broadcasting analogy does not cure missing filing information.
Under the IRS’s updated research-credit refund FAQs, taxpayers must identify the relevant business components, describe research activities for each, and provide total qualified wage, supply, and contract research expenses. Since June 18, 2024, individual names and the information each individual sought to discover are waived at initial filing, though they may be requested during examination. The transition period providing 45 days to perfect a deficient claim extends through January 10, 2027. Taxpayers must also follow applicable return instructions and filing deadlines.
Lessons from Union Carbide and Eustace
The discussion of Union Carbide and Eustace in the 2010 Tax Adviser article illustrates the importance of evidentiary foundations. Testimony and reasonable estimates can help establish amounts when qualifying activity has been demonstrated. A court may reject an allocation when the underlying evidence is inadequate. A witness’s choice to call work “research” or “programming” is not itself the legal test.
An R&D study should connect technical evidence to expense calculations. It should explain the work accurately, distinguish nonqualifying tasks, and identify the basis for allocations rather than merely repeat statutory language.
Implications for R&D Tax Credit Applications
Contractual Drafting and Governing Law
- Choice of law: Assess enforceable obligations under the law actually governing the agreement. Selecting a jurisdiction alone does not create eligibility.
- Research rights: Explain the rights to use results in future business activities. Incidental experience is not necessarily a substantial right.
- Payment and milestones: Examine acceptance standards, termination, refunds, warranties, and payment obligations. Contract descriptions should accurately reflect the commercial arrangement.
Navigating the Deduction and Credit Differences
- Classify expenditures: Separate research costs from purchases of existing assets and other capital expenditures.
- Track location and timing: Reconcile domestic and foreign research, current costs, and remaining historical balances.
- Segment business components: Link qualifying work and expenses to identifiable products, processes, software, or other statutory components.
- Apply current rules: Review Section 174A transition elections and Section 280C coordination. Section 1202 concerns a separate stock-gain exclusion and does not govern these research-cost deductions.
The Role of Estimates and Supporting Records
After-the-fact studies are not categorically prohibited. Their strength depends on reliable underlying records, informed testimony, and defensible calculations. Maintaining evidence during development reduces the risk that later explanations omit important details or overstate qualifying work.
The following materials are useful examples, not universally mandatory document titles or formats.
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within the united states here at swanson read the biggest problem we see as specialized r d tax advisors is self-censorship companies believing they are not eligible for the r d tax credit when in reality the irs has a very broad definition of what it considers r d does your company design engineer or manufacture its own products do you look to improve the functionality performance or reliability of these products do you create new or improved processes in order to make things better faster or cheaper do you develop prototypes or computer generated models or do you develop software technology or other intellectual property if you answered yes to any of the previous questions your company may qualify for the r d tax credit congress has created a four-part test to help you identify activities that would be considered qualified research your work must satisfy these four main requirements it must be technological in nature a process of experimentation there must be technical uncertainty and a permitted purpose let’s go through these one by one one technological in nature this means the process of experimentation used to discover such information fundamentally relies on principles of the physical or biological sciences engineering or computer science two process of experimentation this is defined as a systematic process designed to evaluate one or more alternatives to achieve a result where the capability or method of achieving that result or the design of that result is uncertain the beginning of the research three technical uncertainty as a taxpayer you must intend to discover information that would eliminate uncertainty concerning the development or improvement of the business component and four permitted purpose it is a qualified purpose if research relates to a new or improved function increased performance enhanced reliability or enhanced quality it is not a qualified purpose if research relates to aesthetics meaning style taste cosmetics or seasonal design companies that are benefiting from the credit are typically receiving a minimum in the tens of thousands of dollars of federal tax credits each year so don’t pass up this chance to significantly lower your tax liability and improve your cash flow call swanson read representative today for an assessment”},{“@context”:”https://schema.org”,”@type”:”AccountingService”,”name”:”Swanson Reed”,”description”:”One of the largest Specialist R&D Tax Credit advisory firms in the United States, exclusively providing R&D Tax Credit claim preparation and audit compliance solutions for over 30 years.”,”url”:”https://www.swansonreed.com”,”logo”:”https://swansonreed.com/logo.png”,”image”:”https://www.swansonreed.com/wp-content/uploads/2025/03/Swanson-Reed-Specialist-RD-Tax-Credit-Advisors-is-the-largest-in-the-United-States.jpg”,”telephone”:”+1-800-986-4725″,”email”:”damian@swansonreed.org”,”priceRange”:”$195 – 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What is the R&D Tax Credit? The Research & Experimentation Tax Credit (or R&D Tax Credit), is a general business tax credit under Internal Revenue Code section 41 for companies that incur research and development (R&D) costs in the United States. The credits are a tax incentive for performing qualified research in the United States, resulting in a credit to a tax return. For the first three years of R&D claims, 6% of the total qualified research expenses (QRE) form the gross credit. In the 4th year of claims and beyond, a base amount is calculated, and an adjusted expense line is multiplied times 14%. Click here to learn more. Never miss a deadline again
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R&D Tax Credit Preparation Services Swanson Reed is one of the only companies in the United States to exclusively focus on R&D tax credit preparation. Swanson Reed provides state and federal R&D tax credit preparation and audit services to all 50 states. If you have any questions or need further assistance, please call or email our CEO, Damian Smyth on (800) 986-4725. Feel free to book a quick teleconference with one of our national R&D tax credit specialists at a time that is convenient for you. R&D Tax Credit Audit Advisory Services creditARMOR is a sophisticated R&D tax credit insurance and AI-driven risk management platform. It mitigates audit exposure by covering defense expenses, including CPA, tax attorney, and specialist consultant fees—delivering robust, compliant support for R&D credit claims. Click here for more information about R&D tax credit management and implementation. Our Fees Swanson Reed offers R&D tax credit preparation and audit services at our hourly rates of between $195 – $395 per hour. We are also able offer fixed fees and success fees in special circumstances. Learn more at https://www.swansonreed.com/services/our-fees/
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