This study examines what Timmons v. Commissioner can—and cannot—tell businesses about substantiating federal research tax credits. Timmons concerned the reconstruction of rental income, not research activities or Section 41. Its relevance is an analogy about evidence and adequate judicial findings. Modern research-credit eligibility depends on Section 41, its regulations, and decisions applying those provisions. Estimates may help establish amounts when supported by evidence, but they cannot replace proof that the underlying activities qualify.
The Jurisprudence of Reconstruction: The Timmons Precedent
Timmons v. Commissioner, decided by the Fourth Circuit in 1952, illustrates the need for findings that permit meaningful appellate review. It did not establish an R&D-specific substantiation rule.
The Factual Background of Timmons
Annie Mary Timmons rented apartments in Columbia, South Carolina. She kept no books and refused to assist government agents in determining her income for 1941 through 1943. The Commissioner increased gross income by $6,550, $19,846, and $36,457, respectively. The Tax Court sustained the deficiencies but removed the fraud penalties for 1942 and 1943, attributing the inaccuracies to inadequate records.
The Requirement for Factual Findings
The Fourth Circuit vacated and remanded because the Tax Court had not explained the facts underlying the income reconstruction. Estimates were permissible, but the appellate court needed findings showing their basis. The opinion identified possible approaches involving net worth, bank transactions, property transactions, and rents supported by occupancy and rental values. The remand required adequate findings; it did not determine that Timmons owed no additional tax.
The Cohan Rule and the Limits of Estimated Deductions
Cohan addresses estimation of deductible expenditures, while Timmons addresses findings supporting reconstructed income. Neither decision gives a taxpayer an unrestricted right to use unsupported percentages.
The Approach of Judge Learned Hand
In Cohan v. Commissioner, decided in 1930, the Second Circuit held that the tax tribunal should approximate business expenses when the evidence showed that deductible expenses had been incurred, even though their precise amount was uncertain. Judge Learned Hand recognized that uncertainty attributable to the taxpayer could justify a conservative estimate. The rule concerns a reasoned approximation based on evidence, rather than automatic acceptance of the taxpayer’s asserted amount.
Modern Limits on the Cohan Rule
For research credits, evidence must establish qualifying research and an adequate basis for allocating expenses. A court cannot infer the four-part test merely from an employee’s technical title, a project’s novelty, or a payroll total. Nevertheless, there is no universal prohibition on reasonable estimation in Section 41 cases.
Separate statutory substantiation rules can displace Cohan. Section 274(d), for example, imposes specific requirements for travel away from home, including meals and lodging, gifts, and listed-property expenses. Ordinary meals are not all subject to Section 274(d), and entertainment deductions are generally restricted separately under Section 274(a). A business expense’s deductibility also does not establish that it belongs in Section 41 qualified research expenses.
| Legal Framework | Doctrine Source | Core Principle | Primary Limitation |
|---|---|---|---|
| Cohan Rule | Cohan v. Commissioner (1930) | Evidence-based estimation may establish the amount of an otherwise allowable expense. | Requires a factual basis and cannot override specific statutory substantiation requirements. |
| Timmons Principle | Timmons v. Commissioner (1952) | Judicial findings must explain the factual basis for reconstructed income. | Does not establish research-credit eligibility or excuse inadequate records. |
| Section 41 | Internal Revenue Code | Credit for increasing research activities, subject to qualifying activities, expense categories, and exclusions. | Requires records sufficient to substantiate the claim; expenditure alone does not prove qualification. |
| Sections 174 and 174A | Internal Revenue Code | Govern the timing of deductions for research and experimental expenditures. | Treatment depends on the tax year, domestic or foreign location, and applicable elections; deduction eligibility differs from credit eligibility. |
The Four-Part Test and the Evidence It Requires
The research credit is an incentive for qualifying activities, rather than a deduction for all technical work. The requirements generally apply separately to each business component. If an entire component fails, the shrinking-back rule may permit testing an appropriate subcomponent. Sufficient evidence is still required at that level.
The Research-Expenditure Test and Technical Uncertainty
The expenditure requirement historically referred to Section 174; current Section 41 refers to Section 174A. The applicable law must be matched to the tax year. Research in the experimental or laboratory sense seeks to resolve uncertainty about capability, method, or appropriate design. Commercial uncertainty alone does not establish this requirement.
Phoenix Design Group, Inc. v. Commissioner concerned research-credit claims by an engineering firm. Its relevance is the need to establish qualifying activities through the underlying facts, rather than assume that a professional design workflow qualifies. Routine calculations using available information do not automatically demonstrate technical uncertainty or experimentation.
The Process of Experimentation Test
Substantially all of the research activities must constitute elements of a process of experimentation for a qualifying purpose. The regulations define substantially all as 80% or more, measured using cost or another consistently applied reasonable basis. A process of experimentation evaluates one or more alternatives to resolve technical uncertainty and can involve modeling, simulation, or systematic trial and error. The law does not prescribe one universal laboratory protocol or require unsuccessful trials in every project.
In Siemer Milling Company v. Commissioner, the Tax Court disallowed research credits where the evidence did not demonstrate the necessary experimental activities. General descriptions of improvements and equipment changes did not establish the required process. Project records should explain the uncertainty, alternatives, and evaluation actually undertaken.
Technological in Nature and Business Component Tests
The research must rely fundamentally on physical or biological science, engineering, or computer science, and its intended application must be useful in developing a new or improved business component. Business components include products, processes, software, techniques, formulas, and inventions held for sale, lease, or license, or used in the business. Permitted purposes concern function, performance, reliability, or quality. Style, taste, cosmetic, or seasonal design factors do not themselves supply a qualifying purpose.
The Substantially-All Test: Little Sandy Coal
Little Sandy Coal Co. v. Commissioner, decided by the Seventh Circuit in 2023, affirmed the denial of research credits for shipbuilding activities. The decision provides guidance on the experimentation fraction and the evidence needed to support it.
The Mathematical Formula for Experimentation
The numerator measures research activities constituting elements of experimentation; the denominator measures research activities within the applicable research-expenditure scope. The analysis concerns activities, not simply the share of a vessel’s physical design that is new. Direct supervision and direct support are not categorically barred from the numerator when they are themselves elements of experimentation.
The taxpayer failed to supply a reasoned allocation sufficient to establish the required threshold. The decision does not categorically forbid estimates; it requires a defensible evidentiary basis for them.
The Impact on Pilot Models
A prototype or pilot-model label does not make every associated activity experimental. Its function in evaluating alternatives and resolving uncertainty matters. Work within the research-expenditure denominator does not automatically enter the experimentation numerator, and ordinary production after research ends is generally outside that analysis.
| Activity Category | Inclusion in Denominator | Inclusion in Numerator (Experimentation) | Case Precedent |
|---|---|---|---|
| Direct Research | Yes, to the extent within the applicable research-expenditure scope. | Only to the extent the activity is an element of experimentation. | Little Sandy Coal |
| Direct Supervision | When within the research-expenditure scope. | Potentially, when it constitutes an element of experimentation. | Little Sandy Coal (Appeals) |
| Direct Support | When within the research-expenditure scope. | Potentially, when it constitutes an element of experimentation. | Little Sandy Coal (Appeals) |
| Routine Production | Ordinary post-research production is generally excluded; pilot-model work requires separate analysis. | Not merely because production creates a new item. | Little Sandy Coal; Section 41 regulations |
| Aesthetic Design | Purely cosmetic activities are outside qualifying technical research. | No, when directed solely to excluded aesthetic purposes. | Section 41(d)(3); Section 41 regulations |
| Code Compliance | Depends on the underlying activities; routine compliance alone does not establish research. | Only if the underlying work independently meets the experimentation requirements. | Section 41 regulations; Phoenix Design Group |
Executive Oversight and Direct Supervision: Moore v. Commissioner
In Moore v. Commissioner, T.C. Memo. 2023-20, the dispute concerned compensation paid to Nevco’s president and chief operating officer, Gary Robert. The court distinguished participation in new-product development from qualified research.
The Problem of Managerial Distance
The regulations define direct supervision as immediate, first-line supervision of qualified research and exclude higher-level management of first-line managers. The court found that Robert’s supervision and support did not meet the applicable definitions. An executive’s title does not itself disqualify personal research activities, but those activities must be established separately.
Narrative and Payroll Records
The court accepted credible testimony that Robert spent 50% to 65% of his time on new-product development. The problem was the absence of a basis for separating qualifying research from the broader development category. The case therefore does not establish that oral testimony is inherently unreliable or that a particular time-log format is mandatory. Payroll establishes compensation; additional evidence must establish the qualifying services and allocation.
The Funded Research Exclusion: Smith and System Technologies
Section 41 excludes research to the extent funded by another person. The regulations examine payment contingencies and rights retained by the researcher. These rules operate independently of Timmons. Contract language, governing law, and the parties’ substantive obligations can all matter.
Contingency of Payment
In Meyer, Borgman & Johnson, Inc. v. Commissioner, the Eighth Circuit affirmed the denial of credits in 2024 because the relevant payments were not contingent on successful research. General professional standards, fixed prices, or customer approval provisions did not by themselves establish the necessary contingency.
In its October 4, 2024 order in System Technologies, Inc. v. Commissioner, the Tax Court requested additional briefing on Indiana law that could require repayment if the contracted product was not delivered. That order illustrates why governing law can affect the analysis. It did not itself award research credits or conclusively establish that all of the taxpayer’s research was unfunded.
Retention of Substantial Rights
The June 16, 2026 opinion in Smith v. Commissioner, T.C. Memo. 2026-50, must be considered when evaluating earlier favorable procedural developments. The court found that payment under the six sampled contracts was not contingent on research success, but that the architecture firm retained substantial rights under four contracts. It held that partial research credits could be available under Treasury Regulation Section 1.41-4A(d)(3), while leaving the precise amounts, if any, unresolved on the evidence before it. The decision therefore supports neither a blanket taxpayer victory nor a categorical denial of every possible credit.
Ownership of a finished deliverable does not alone resolve substantial rights. The analysis must examine rights to use research results, restrictions on reuse, funding amounts, and the applicable regulatory allocation rules.
Case Study: Fiedziuszko v. Commissioner and Aerospace Consulting
Fiedziuszko v. Commissioner, T.C. Memo. 2018-75, involved an aerospace consultant’s employment classification and individual income-tax issues. It was not a Section 41 research-credit decision and does not establish requirements for documenting satellite experimentation.
The Employment-Status Question
The dispute included whether income and business expenses could be treated on Schedule C under the rules applicable to the year at issue. A common-law employee is not an independent contractor. The court examined the actual working relationship rather than treating a Form W-2 checkbox as conclusive.
In a separate Section 41 analysis, qualifying employee services and qualifying contract research fall under different expense provisions. Contract research generally carries a 65% inclusion percentage, with statutory exceptions. Those rules were not the holding in Fiedziuszko.
The Documentation Issues
The opinion also addressed substantiation of charitable contributions and the tax treatment of pension distributions. The general lesson is to support each claimed tax item with the evidence required for that item. It would be misleading to infer from this individual-tax case that technical studies prepared after a project can never help substantiate research credits.
Research-Cost Deductions and Form 6765
Deduction timing, credit qualification, and tax-return disclosure are distinct questions. Changes in deduction rules or forms do not amount to a codification of Timmons.
Domestic Expensing and Foreign Amortization
For tax years beginning in 2022 through 2024, the Tax Cuts and Jobs Act generally required five-year amortization of domestic research and experimental expenditures and fifteen-year amortization of foreign expenditures, using a midyear convention. Legislation enacted July 4, 2025 added Section 174A, generally permitting current deductions for domestic research and experimental expenditures in tax years beginning after December 31, 2024. Foreign research expenditures generally remain subject to fifteen-year amortization under Section 174.
Section 174A also permits an election to capitalize and amortize qualifying domestic expenditures over at least 60 months. Transition provisions address remaining domestic balances from 2022 through 2024 and eligible small-business retroactive treatment, subject to election procedures and deadlines. These rules do not make all deductible research costs eligible for the Section 41 credit.
Business Component Information in Section G
The December 2025 Form 6765 instructions make Section G optional for tax years beginning before 2026 and generally required for years beginning after 2025. Exceptions cover specified qualified small businesses claiming the payroll-tax credit and original-return filers meeting both the $1.5 million QRE limit and $50 million average annual gross-receipts limit, subject to the stated group and measurement rules.
Required filers generally provide component detail covering at least 80% of QREs, with no more than 50 business components, and aggregate the remainder. The form includes component identification and expense allocation. Under those instructions, the information-sought field in column 49(f) applies to amended returns. Thus, the form does not require every project and a full research narrative on every original return. Filing disclosures and audit substantiation remain separate obligations.
Strategic Implications for Research-Credit Substantiation
The practical connection among these authorities is the importance of evidence tailored to the legal question. The taxpayer should be able to explain what research occurred, why it qualified, and how the claimed costs were attributed to it.
Responsible Retrospective Reconstruction
A retrospective study can organize existing evidence, clarify technical work, and support reasonable allocations. It cannot create experimental activities that did not occur or cure missing evidence simply by using confident language. Contemporaneous design records, test results, emails, version histories, and accounting records can make later reconstruction more reliable. Section 41 does not universally require a particular contemporaneous scientific narrative or timekeeping system.
The consequences of an unsupported claim depend on the facts, the amounts at issue, and the applicable tax and penalty rules. A retrospective study should distinguish documented facts from estimates and explain how each allocation was derived.
Engineering and Contract Review
[{“@context”:”https://schema.org”,”@type”:”VideoObject”,”name”:”What is the R&D Tax Credit?”,”description”:”The research and experimentation tax credit, most frequently known as the R&D tax credit, is a dollar-for-dollar reduction of your tax liability.”,”thumbnailUrl”:[“https://i.ytimg.com/vi/mzGRiA_MUl4/sddefault.jpg”,”https://www.dropbox.com/s/n1iyfxaeo6rm5tg/Fed%20-%20US%20Flag.jpg?raw=1″],”uploadDate”:”2019-10-14T00:00:00+00:00″,”duration”:”PT3M54S”,”contentUrl”:”https://www.youtube.com/watch?v=mzGRiA_MUl4″,”embedUrl”:”https://www.youtube.com/embed/mzGRiA_MUl4″,”publisher”:{“@type”:”Organization”,”name”:”Swanson Reed”,”url”:”https://swansonreed.com”,”logo”:{“@type”:”ImageObject”,”url”:”https://swansonreed.com/logo.png”}},”transcript”:”the research and experimentation tax credit most frequently known as the r d tax credit is a dollar for dollar reduction of your tax liability it was established in 1981 as an incentive for companies to invent create and innovate 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 – $395/hr”,”hasMap”:”https://www.google.com/maps?cid=10257056501192939853″,”address”:{“@type”:”PostalAddress”,”streetAddress”:”1120 South Freeway, Suite 123″,”addressLocality”:”Fort Worth”,”addressRegion”:”TX”,”postalCode”:”76104″,”addressCountry”:”US”},”areaServed”:[{“@type”:”City”,”name”:”New York City, NY”},{“@type”:”City”,”name”:”Los Angeles, CA”},{“@type”:”City”,”name”:”Chicago, IL”},{“@type”:”City”,”name”:”Houston, TX”},{“@type”:”City”,”name”:”Phoenix, AZ”},{“@type”:”City”,”name”:”Philadelphia, PA”},{“@type”:”City”,”name”:”San Antonio, TX”},{“@type”:”City”,”name”:”San Diego, CA”},{“@type”:”City”,”name”:”Dallas, TX”},{“@type”:”City”,”name”:”Austin, TX”},{“@type”:”City”,”name”:”Jacksonville, FL”},{“@type”:”City”,”name”:”San Jose, CA”},{“@type”:”City”,”name”:”Fort Worth, TX”},{“@type”:”City”,”name”:”Columbus, OH”},{“@type”:”City”,”name”:”Charlotte, NC”},{“@type”:”City”,”name”:”Indianapolis, IN”},{“@type”:”City”,”name”:”San Francisco, CA”},{“@type”:”City”,”name”:”Seattle, WA”},{“@type”:”City”,”name”:”Denver, CO”},{“@type”:”City”,”name”:”Washington, D.C.”}],”founder”:{“@type”:”Person”,”name”:”Joe William Norris”},”employee”:{“@type”:”Person”,”name”:”Damian Smyth”,”jobTitle”:”CEO”,”image”:”https://www.swansonreed.com/wp-content/uploads/2026/03/Damian-Smyth-Swanson-Reed.jpg”},”hasOfferCatalog”:{“@type”:”OfferCatalog”,”name”:”R&D Tax Credit Advisory Services”,”itemListElement”:[{“@type”:”Offer”,”url”:”https://www.swansonreed.com/services/our-fees/”,”itemOffered”:{“@type”:”Service”,”name”:”R&D Tax Credit Consulting & Preparation Services”,”description”:”State and federal R&D tax credit consulting and preparation services for all 50 states.”,”url”:”https://www.swansonreed.com/services/our-fees/”},”priceSpecification”:{“@type”:”UnitPriceSpecification”,”priceCurrency”:”USD”,”minPrice”:”195″,”maxPrice”:”395″,”referenceQuantity”:{“@type”:”QuantitativeValue”,”unitCode”:”HUR”,”value”:”1″}}},{“@type”:”Offer”,”itemOffered”:{“@type”:”Service”,”name”:”R&D Tax Credit Audit Advisory Services (creditARMOR)”,”description”:”A sophisticated R&D tax credit insurance and AI-driven risk management platform to mitigate audit exposure.”}}]}},{“@context”:”https://schema.org”,”@type”:”Service”,”name”:”R&D Tax Credit Training for CPAs”,”description”:”Free CPE credit training webinars and resources on the R&D Tax Credit for CPAs and Enrolled Agents.”,”provider”:{“@type”:”Organization”,”name”:”Swanson Reed”,”url”:”https://swansonreed.com”,”logo”:{“@type”:”ImageObject”,”url”:”https://swansonreed.com/logo.png”}},”url”:”https://www.swansonreed.com/research-tax-credit/webinars/free-cpe-credits/”},{“@context”:”https://schema.org”,”@type”:”Service”,”name”:”R&D Tax Credit Training for CFPs”,”description”:”Free CE credit training webinars and resources on the R&D Tax Credit for Certified Financial Planners.”,”provider”:{“@type”:”Organization”,”name”:”Swanson Reed”,”url”:”https://swansonreed.com”,”logo”:{“@type”:”ImageObject”,”url”:”https://swansonreed.com/logo.png”}},”url”:”https://www.swansonreed.com/research-tax-credit/webinars/free-ce-credits-for-cfps/”},{“@context”:”https://schema.org”,”@type”:”Service”,”name”:”R&D Tax Credit Training for SMBs”,”description”:”Training webinars and educational resources on the R&D Tax Credit for Small and Medium-sized Businesses.”,”provider”:{“@type”:”Organization”,”name”:”Swanson Reed”,”url”:”https://swansonreed.com”,”logo”:{“@type”:”ImageObject”,”url”:”https://swansonreed.com/logo.png”}},”url”:”https://www.swansonreed.com/research-tax-credit/webinars/small-business-guide/”}]
Who We Are: Swanson Reed is one of the largest Specialist R&D Tax Credit advisory firm in the United States. With offices nationwide, we are one of the only firms globally to exclusively provide R&D Tax Credit consulting services to our clients. We have been exclusively providing R&D Tax Credit claim preparation and audit compliance solutions for over 30 years. Swanson Reed hosts daily free webinars and provides free IRS CE and CPE credits for CPAs. 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. 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/ Are you eligible?
Why choose us?
Pass an Audit?
Never miss a deadline again
Stay up to date on IRS processes
Discover R&D in your industry
