The federal research and development tax credit under Section 41 of the Internal Revenue Code requires taxpayers to establish both qualifying research activities and the expenses attributable to them. Moore v. Commissioner, T.C. Memo. 2023-20, affirmed by the Seventh Circuit on April 30, 2024, illustrates the consequences of failing to distinguish an executive’s qualified research from broader product development and management work.
The case concerned Nevco, Inc., a manufacturer of scoreboards and related sports equipment. It reinforces existing substantiation requirements; it does not establish a universal requirement for a particular time-tracking system, prohibit all retrospective studies, or eliminate evidence-based estimates. The decisive problem was the absence of a reliable basis for determining the qualifying portion of the executive’s activities.
Statutory Foundations and the Evolution of Section 41
The research credit was introduced in 1981. Section 41 provides a credit calculated using specified rates, eligible costs, and applicable base amounts. It is not a reimbursement of every dollar spent on research. Qualified research expenses include eligible in-house expenses and qualifying contract research expenses, subject to statutory limitations.
For employee compensation, Section 41(b)(2)(B) distinguishes engaging in qualified research, directly supervising qualified research, and directly supporting qualified research. General involvement in innovation or product development does not automatically establish any of these categories.
The Four-Part Test for Research Qualification
The following table describes the framework applicable to the 2014 and 2015 years at issue in Moore. The tests generally apply separately to each business component. A failure at that level may require applying the shrinking-back rule to an eligible subset; it does not necessarily disqualify every underlying activity.
| Test Prong | Statutory Basis | Narrative Requirement |
|---|---|---|
| Section 174 Test | § 41(d)(1)(A), as applicable to the years at issue | The expenditures must satisfy the research or experimental expenditure requirements under Section 174, including activities directed at resolving uncertainty about development or improvement. |
| Technological in Nature | § 41(d)(1)(B)(i) | The research must rely on principles of physical or biological science, engineering, or computer science. |
| Business Component | § 41(d)(1)(B)(ii) | The information must be intended to be useful in developing or improving the taxpayer’s business component. |
| Process of Experimentation | § 41(d)(1)(C) | At least 80% of the relevant research activities, measured using a consistent reasonable basis, must constitute elements of experimentation for an improvement in function, performance, reliability, or quality. |
For tax years beginning after December 31, 2024, legislation changed Section 41(d)(1)(A) to refer to domestic research or experimental expenditures under Section 174A. The historical Section 174 wording remains relevant to understanding Moore, but should not be presented as the unchanged current statutory text. The credit also remains subject to exclusions and other requirements.
The Factual Matrix of Nevco, Inc. and the Moore Petitioners
Scott and Gayla Moore filed joint individual returns for 2014 and 2015. Gayla Moore was Nevco’s sole shareholder; the corporation’s relevant tax attributes passed through to her. The disputed compensation belonged to Gary Robert, Nevco’s president and chief operating officer.
The Role of the President and COO
Robert combined executive responsibilities with extensive involvement in new product development. That involvement did not establish what portion of his work met the narrower definition of qualified research. Nevco’s payroll records identified total work time, but did not identify the underlying tasks. The evidence did not supply a reliable allocation between qualifying and nonqualifying activities.
The Seventh Circuit affirmed the Tax Court’s factual findings under clear-error review. Its analysis focused on the failure to establish the nature and amount of qualified research, rather than announcing a new categorical documentation rule.
Project-by-Project Technical Analysis
The Tax Court’s discussion included five Nevco products: the Scoreboard Truss, Scorbitz, New Caney Ribbon Board, MPCX-2, and Slim Shot Clock. These examples provide context for Robert’s product-development work. They should not be read as separate categorical rulings that every activity on each product failed the four-part test.
The Scoreboard Truss System
The truss project involved scoreboard-support development. For an executive’s participation in such work, setting commercial requirements and reviewing progress must be distinguished from personally conducting or immediately supervising qualified research. Product involvement alone does not quantify qualifying services.
The Scorbitz Digital Platform
Scorbitz was another product considered in evaluating Robert’s activities. An invention or product concept does not, by itself, establish the time an individual spent on qualifying experimentation. Technical activity must be distinguished from commercial planning and other nonqualifying work. The decision should not be described as an affirmative finding that Robert performed a specific quantity of qualifying software programming.
The New Caney Ribbon Board
The New Caney Ribbon Board was among the development examples examined. Claims for an executive’s wages require evidence of the services performed and their connection to qualified research. The size or complexity of a display alone cannot establish that connection.
The MPCX-2 Handheld Device
The MPCX-2 was also part of the product-development evidence. Assessing a product’s usefulness is not automatically equivalent to evaluating technical alternatives through qualified experimentation. The relevant inquiry remains the employee’s actual activities and the supported allocation of compensation.
The Slim Shot Clock
The Slim Shot Clock provides a further example of the distinction between developing a product and substantiating an individual’s qualified services. A new design does not establish that all executive decisions relating to that design qualify for the research credit.
The Legal Thresholds: Supervision, Support, and the “One-Up” Rule
Treasury Regulation § 1.41-2(c)(2) defines direct supervision as immediate, first-line supervision of qualified research. Higher-level oversight of first-line managers does not qualify merely because the executive has technical expertise. This limitation predates Moore. “One-up” is an informal description of the regulation, rather than a separate statutory test.
Direct support is a distinct category under Treasury Regulation § 1.41-2(c)(3). It can encompass assistance to researchers or their immediate supervisors, but excludes general administrative services and activities that only indirectly benefit research. Job titles and organizational charts help explain responsibilities, but actual services control the analysis.
| Wage Category | Qualification Status in Moore | Judicial Reasoning |
|---|---|---|
| Direct Performance | Robert’s disputed wages were disallowed. | The evidence did not establish a usable allocation to qualified research within his broader product-development work. |
| Direct Supervision | No qualifying direct supervision was established for the disputed compensation. | Executive oversight did not establish immediate supervision of qualified research under the regulation. |
| Direct Support | No qualifying direct support was established for the disputed compensation. | The evidence did not establish services meeting the direct-support requirements. |
Distinguishing the Two “Substantially All” Tests
The research-activity test in Section 41(d)(1)(C) and Treasury Regulation § 1.41-4(a)(6) concerns the proportion of research activities constituting elements of experimentation for a business component. It is separate from the employee-wage rule in Section 41(b)(2)(B) and Treasury Regulation § 1.41-2(d)(2).
Under the employee-wage rule, when at least 80% of an employee’s wages are properly allocable to qualified services, all of that employee’s services may be treated as qualified. Below that threshold, an adequately substantiated qualifying portion can still be included. Failure to reach 80% does not automatically disqualify all wages.
Moore should therefore not be reduced to an employee failing an 80% threshold. The evidentiary failure prevented a reliable allocation. An estimate requires a factual foundation; invoking estimation principles does not supply missing evidence of qualified activities or their extent.
Comparative Analysis: Moore vs. Little Sandy Coal
Little Sandy Coal Co. v. Commissioner, 62 F.4th 287 (7th Cir. 2023), involved research-credit claims for 11 vessels, with a tanker barge and a dry dock used as representative projects at trial. The court affirmed the denial because the taxpayer failed to substantiate the experimentation requirement. Novelty and broad allocations did not establish the necessary activity proportions.
The appellate court disagreed with aspects of the Tax Court’s reasoning. The decision is not a categorical exclusion of production labor or pilot-model construction. The taxpayer also failed to provide enough evidence to apply shrinking back to particular subcomponents.
| Legal Issue | Moore v. Commissioner | Little Sandy Coal v. Commissioner |
|---|---|---|
| Primary Focus | Substantiation of an executive’s qualified services and associated compensation. | Substantiation of research activities constituting experimentation. |
| Outcome | Disallowance of the disputed executive compensation. | Denial of the disputed vessel research credits. |
| Key Lesson | Connect employee activities to qualifying research and a supportable wage allocation. | Support activity proportions and any eligible subcomponent analysis with evidence. |
The Evolution of Form 6765
Form 6765 contains expanded disclosures, but the IRS changes should not be described as a direct codification of Moore or as proof that the case caused each new requirement. The form governs filing disclosures; Section 41 and its regulations govern substantive eligibility.
New Disclosure Requirements
Under the December 2025 instructions, Section G is optional for tax years beginning before 2026 and generally required for years beginning after 2025, subject to exceptions. These include qualified small businesses electing the payroll tax credit, and original-return filers meeting both the $1.5 million QRE ceiling and the $50 million average annual gross-receipts ceiling, applying the prescribed aggregation rules.
Section E includes business-component counts and officer wages. Section G separates wages for direct research, supervision, and support. Its component detail generally follows the 80%/Top 50 approach, with remaining components aggregated; it does not require a separate detailed entry for every project. Column 49(f)’s discovery-information description currently applies to amended returns. This filing threshold is distinct from both substantive 80% tests.
Implications for Future R&D Tax Credit Applications
A practical implication of these cases is to make the connection between research activities, employees, and expenses explicit. Descriptions should explain the technical work and the basis of any allocation, rather than relying on titles, overall development budgets, or a product’s novelty.
The Limits of Retrospective Studies
A retrospective R&D study is not automatically invalid. Its reliability depends on the evidence available and the method used to connect that evidence to qualifying activities and expenses. Interviews are more useful when corroborated by project records, dated communications, design changes, test results, and other business records. Maintaining records during the work can reduce later uncertainty.
Strategic Use of the Shrink-Back Rule
Where a business component fails the qualification requirements, Treasury Regulation § 1.41-4(b)(2) provides for applying the tests to its most significant subset, continuing as appropriate. Taxpayers need evidence for that subset and its associated costs. Merely renaming an entire project as a smaller component does not establish eligibility.
Executive Participation and Supported Allocations
Moore establishes no 10% safe harbor or standard executive allocation. A president, CEO, or COO may perform qualifying services, but the claim must reflect the actual work. A conservative-looking percentage is not a substitute for evidence, and higher-level management cannot be converted into direct supervision simply by changing its description.
Broader Context: Moore v. Commissioner vs. Moore v. United States
Moore v. United States, 602 U.S. 572 (2024), concerned different taxpayers and the mandatory repatriation tax. The Supreme Court upheld taxation of shareholders on attributed income realized by a foreign corporation. It did not decide research-credit substantiation or broadly resolve whether realization is constitutionally required in every income-tax setting.
The decision discussed established pass-through taxation principles, but it should not be characterized as a ruling that rescued the R&D credit or resolved every constitutional issue concerning S corporations and partnerships.
Documentation Best Practices in the Post-Moore Era
The following practices can strengthen substantiation. They are practical recommendations, rather than a new mandatory documentation format imposed by Moore.
| Documentation Pillar | Description of Post-Moore Expectation |
|---|---|
| Contemporaneous Time Tracking | Keep task and project records where practicable, or maintain other reliable evidence supporting wage allocations. A particular software system is not mandatory. |
| Technical Uncertainty Narratives | Explain the development uncertainty, available information, and alternatives evaluated, using records appropriate to the work. |
| Trial-and-Error Logs | Preserve design iterations, models, simulations, tests, and results that show how alternatives were evaluated. Failed trials are not a universal prerequisite. |
| Organizational Mapping | Document actual research, immediate supervision, and direct-support responsibilities, including changes during the year. |
Supporting evidence should explain both what the team did and how the claimed expenses relate to that work. Preserve successful and unsuccessful investigations as relevant, and distinguish experimentation from routine production, general administration, and commercial activity.
The Future of R&D Tax Credits in the USA
The research credit remains available to eligible taxpayers that satisfy the governing requirements. Moore is a useful substantiation lesson, but it does not justify predictions that the credit is available only to large organizations with sophisticated compliance systems.
Impact on Small Businesses and S-Corps
Small businesses may have employees who combine technical work with management duties. Their documentation should distinguish those roles using records appropriate to the business. An S corporation’s pass-through treatment does not eliminate the need to substantiate the underlying company-level activities and costs.
The Role of R&D Tax Consultants
Consultants can help evaluate eligibility, organize existing records, explain allocation methods, and identify documentation gaps. A useful R&D study should connect conclusions to verifiable evidence. Moore does not prohibit a particular consulting fee arrangement or establish that retrospective consulting services are no longer viable.
Final Thoughts
Moore demonstrates why extensive product-development involvement does not, by itself, substantiate an executive’s research-credit wages. Taxpayers should establish qualifying activities, identify the services each employee performed, and support the expense allocation. The decision reinforces these existing requirements without creating a universal ban on estimates or a mandatory timekeeping format.
Read alongside Little Sandy Coal and the applicable filing instructions, the practical lesson is to maintain evidence that supports the claim at the relevant activity, employee, and business-component levels. Clear records and defensible methods provide a stronger basis than broad assumptions about innovation.
