The Historical Genesis of the Altoona Industrial Landscape

To fully contextualize the application of modern tax incentives within Altoona, Pennsylvania, it is imperative to understand the profound historical and geographical forces that forged the city’s commercial ecosystem. Unlike many eastern American cities that grew organically around natural navigable waterways, Altoona was a deliberately engineered settlement, founded in 1849 by the Pennsylvania Railroad (PRR) to serve a singular, highly technical purpose. During the mid-nineteenth century, the Allegheny Ridge presented a formidable geographic barrier to westward expansion and the establishment of a continuous transportation network across the Commonwealth of Pennsylvania. Prior to the founding of Altoona, the transit of goods required an arduous journey utilizing the Allegheny Portage Railroad, an early infrastructure system that hoisted canal boats over the mountainous terrain using a primitive and highly inefficient series of stationary steam engines and inclined planes.

Recognizing the urgent economic necessity for an unbroken, high-capacity rail line connecting the commercial hubs of Philadelphia and Pittsburgh, the PRR established Altoona at the eastern foothills of the Allegheny Ridge to serve as the primary staging ground for an unprecedented feat of civil engineering. Through rigorous topographical analysis and innovative track design, engineers completed the Horseshoe Curve in 1854. This monumental piece of infrastructure, located just west of Altoona, utilized a massive 220-degree curve to artificially lengthen the rail route, thereby achieving a gradual, navigable grade of 1.8 percent that permitted heavy freight and passenger trains to ascend the mountains without the use of stationary engines. The completion of the Horseshoe Curve, now a designated National Historic Landmark, fundamentally altered American logistics, reducing the travel time between Philadelphia and Pittsburgh from an exhausting three days to a mere fifteen hours.

Following the successful conquest of the Allegheny Ridge, Altoona rapidly evolved into the industrial and technological nerve center of the Pennsylvania Railroad. The PRR established the Altoona Works, a massive industrial complex that eventually grew to become the largest railroad repair and locomotive manufacturing facility in the world. By the 1920s, the Altoona Works comprised over 125 distinct buildings spread across 218 acres, employing an astonishing workforce of over 16,000 individuals. This industrial boom attracted massive waves of European immigrants, who formed a diverse, highly skilled blue-collar community dedicated to the mechanical arts, metallurgy, and industrial fabrication. The PRR cultivated an environment of continuous technical innovation within the city. The Altoona Works featured dedicated testing departments where specialized engineers designed custom machinery to test the tensile strength of steel plates and evaluate the thermodynamic efficiency and viscosity of lubrication oils. Demonstrating an early commitment to workforce development and continuing education, the PRR established the Mechanic’s Library in Altoona in 1853, widely recognized as the first industrial library in the United States.

However, the latter half of the twentieth century brought severe economic headwinds to Altoona’s heavy industrial base. Following the conclusion of World War II, the rapid expansion of the interstate highway system, the advent of commercial aviation, and the railroad industry’s fundamental transition from labor-intensive steam locomotives to more efficient diesel-electric engines severely diminished the demand for the massive Altoona steam shops. The subsequent bankruptcy of the PRR and the consolidation of the northeastern rail network into Conrail, and eventually the Norfolk Southern Railway, resulted in massive workforce reductions and a period of profound economic decline for the city.

Despite these challenges, Altoona’s deeply ingrained culture of manufacturing, mechanical engineering, and logistical expertise provided a resilient foundation for economic reinvention. Over recent decades, the city has successfully diversified its economic base, transitioning into food processing, retail technology, advanced materials fabrication, and significantly into the healthcare and higher education sectors. The expansion of institutions such as Penn State Altoona and the UPMC Altoona healthcare system has stabilized the region, while the construction of Interstate 99 eliminated the city’s relative road isolation, integrating Altoona into modern, high-speed supply chains. Today, the modern industries operating on the footprint of the old railroad empire continue the city’s legacy of innovation, rendering them prime candidates for both federal and state Research and Development tax incentives.

The United States Federal Research and Development Tax Credit Framework

The federal Credit for Increasing Research Activities, universally referred to as the R&D tax credit, was established by the United States Congress to incentivize domestic businesses to invest heavily in technological innovation, thereby maintaining the nation’s competitive advantage in the global market. Codified under Section 41 of the Internal Revenue Code (IRC), the credit provides a highly lucrative, dollar-for-dollar reduction in a taxpayer’s federal income tax liability based on the volume of qualified research expenses (QREs) incurred during the taxable year that exceed a statutorily defined base amount.

The administration and calculation of the federal R&D tax credit are inherently complex, requiring a rigorous, deeply technical analysis of a taxpayer’s engineering, manufacturing, software development, and scientific research activities against strict legislative criteria. Historically, taxpayers also benefited from the provisions of IRC Section 174, which allowed businesses to immediately deduct all research and experimental (R&E) expenditures in the year they were incurred. However, the landscape of R&D tax administration underwent a paradigm shift following the enactment of the Tax Cuts and Jobs Act (TCJA) of 2017. For tax years beginning after December 31, 2021, the TCJA mandates that all Section 174 R&E costs can no longer be expensed immediately; instead, they must be capitalized and amortized over a period of five years for domestic research, and fifteen years for foreign research.

It is of critical importance for corporate taxpayers and tax practitioners to understand that the definition of Section 174 R&E costs is significantly broader than the definition of Section 41 QREs. While all expenses claimed toward the Section 41 tax credit must inherently qualify as Section 174 expenses, the reverse is not true; not all Section 174 expenses are eligible for the Section 41 credit. This statutory bifurcation creates a highly complex compliance environment wherein taxpayers must meticulously categorize their developmental costs, amortizing the broader pool of operational R&D expenses while simultaneously calculating the highly specific tax credit on the narrower, strictly defined pool of qualifying employee wages, consumable supplies, and third-party contractor costs.

The Statutory Four-Part Test

To qualify for the federal R&D tax credit under IRC Section 41, the specific activities performed by a taxpayer must satisfy a stringent, sequential evaluation known as the “Four-Part Test,” as defined under IRC Section 41(d)(1). This test acts as a rigid gatekeeper; the failure of an activity to meet any single criterion completely disqualifies the associated expenses from credit eligibility. The parameters of this test are detailed in the subsequent table and narrative analysis.

Beyond the foundational Four-Part Test, the Internal Revenue Code explicitly excludes numerous categories of activities from eligibility, regardless of the scientific rigor applied by the taxpayer. Under Section 41(d)(4), statutorily excluded activities encompass any research conducted after the beginning of commercial production of the business component, the adaptation of an existing business component to a particular customer’s requirement, the duplication or reverse-engineering of an existing business component without introducing novel functionality, ordinary surveys and market research, research conducted outside the United States, and funded research. The funded research exclusion is particularly treacherous; if a taxpayer performs R&D under a contract where they do not bear the financial risk of failure (e.g., a time-and-materials contract rather than a fixed-price contract) or where they do not retain substantial rights to the resulting intellectual property, the research is considered funded and is wholly ineligible for the credit.

Furthermore, the development of internal-use software (IUS)—software developed primarily for the taxpayer’s internal administrative or operational functions rather than for commercial sale or external customer interaction—is subject to a significantly higher threshold of scrutiny. To qualify, IUS must satisfy an additional three-part “High Threshold of Innovation” test, proving that the software is highly innovative (resulting in substantial cost reductions or speed improvements), that its development involves significant economic risk, and that the software cannot be commercially purchased off-the-shelf.

The Commonwealth of Pennsylvania State R&D Tax Credit Landscape

Complementing the federal statute, the Commonwealth of Pennsylvania offers a robust state-level R&D tax credit program designed specifically to stimulate economic growth, retain highly skilled technical labor, and encourage corporate taxpayers to increase their technological expenditures within the state’s geographic borders. Created by Act 7 of 1997, the R&D tax credit provision is codified under Article XVII-B of the Tax Reform Code of 1971. The state credit largely mirrors the federal definition of qualified research, incorporating the IRC Section 41 Four-Part Test, but imposes unique geographical mandates, administrative application procedures, and strict financial caps.

Crucially, to qualify for the Pennsylvania R&D tax credit, all claimed research expenses must be incurred for qualified research and development physically conducted within the Commonwealth of Pennsylvania. The credit can be applied to offset various state tax liabilities, including the Corporate Net Income Tax (CNIT) and the Personal Income Tax (PIT). The Pennsylvania Department of Revenue administers the program under a strict legislative cap, currently authorizing a maximum of $60 million in R&D tax credits annually, with no sunset provision currently enacted. Due to the high volume of innovative activity within the state, the program is consistently oversubscribed. Consequently, all timely filed applications are reviewed simultaneously, and the total requested credit pool is subjected to a prorated distribution. For instance, during the 2024 tax cycle, large businesses received an award prorated to approximately 41.1 percent of their eligible claim amount.

To protect and foster emerging innovation from startup enterprises, the Pennsylvania statute mandates a $12 million set-aside from the total $60 million cap exclusively reserved for “Qualified Small Businesses” (QSBs). The definition of a QSB under Pennsylvania law is highly specific and differs significantly from federal small business definitions. A Pennsylvania QSB is defined as any for-profit corporation, limited liability company, partnership, or sole proprietorship that maintains a net book value of assets totaling less than $5 million at the beginning or the end of the tax year in which the qualified research expenses are incurred. The financial benefits of obtaining QSB status are substantial. While standard large businesses receive a 10 percent credit rate on their Pennsylvania-sourced QREs that exceed their calculated base amount, entities that meet the QSB asset test benefit from a lucrative 20 percent credit rate on their excess QREs.

The application process for the Pennsylvania R&D tax credit is rigid and unforgiving of administrative errors. Taxpayers must determine their total Pennsylvania QREs for the current tax year and calculate their base amount, which is defined as the greater of 50 percent of the current-year Pennsylvania QREs or the average of the Pennsylvania QREs from the prior four tax years. Applicants must submit their claim, alongside a copy of their as-filed federal Form 6765, through the Pennsylvania Department of Revenue’s online filing system, known as myPATH. The application window opens annually on August 1, and all applications must be successfully submitted no later than December 1 for expenses incurred in the prior tax year. The Department of Revenue then processes the applications and issues formal award notifications by May 1 of the following year.

While the Pennsylvania R&D tax credit is non-refundable, it provides excellent long-term utility. Excess credits can be carried forward for up to fifteen years to offset future tax liabilities. Furthermore, a highly unique and advantageous feature of the Pennsylvania program is the ability to monetize unused credits. Tax credits awarded in 2003 and later may be officially sold or assigned to third-party buyers. Taxpayers lacking immediate tax liability can file an application with the Department of Community and Economic Development (DCED) to assign their credits to an entity with tax liability, thereby generating immediate cash flow to reinvest into their research operations.

Altoona Industry Case Studies: Applied R&D Tax Credit Analysis

The theoretical frameworks of the federal and Pennsylvania R&D tax credits find practical application within the diverse, technologically rich economy of Altoona. The following case studies deeply dissect the specific industries that define the city’s modern industrial landscape. Each study examines the historical development of the sector within Altoona, identifies the core mechanical and scientific research activities currently undertaken, and provides a detailed legal analysis of how these specific activities fulfill the rigorous statutory requirements of the United States federal and Pennsylvania state R&D tax credit laws, supported by relevant administrative guidance and tax court jurisprudence.

Case Study: Advanced Locomotive Engineering and the Norfolk Southern Juniata Shops

The legacy of the Pennsylvania Railroad’s Altoona Works survives and thrives today through the continued operations of the Norfolk Southern Railway’s Juniata Locomotive Shop. Originally planned in 1886 and completed in 1890 to alleviate severe industrial overcrowding at the older Altoona Machine Shops, the Juniata facility was initially dedicated to building massive steam locomotives from scratch. The facility transitioned through the eras of rail propulsion, completing its last new locomotive in 1946 before pivoting entirely to heavy maintenance and modernization. Today, the Juniata Shops operate as the largest and most sophisticated locomotive repair and modernization facility in North America. The retention of this massive complex in Altoona, currently employing hundreds of specialized craft workers, is directly tied to the generational transmission of highly specialized mechanical engineering skills within the local Blair County workforce, rendering it the strategic hub for Norfolk Southern’s continental fleet maintenance.

While standard locomotive maintenance, routine repairs, and general overhauls are statutorily excluded from the R&D tax credit under the “adaptation” and “commercial production” exclusions of IRC Section 41(d)(4), the engineers and machinists at the Juniata Shops engage in highly complex “locomotive modernization” programs that heavily qualify for tax incentives. A primary engineering initiative involves the comprehensive teardown of legacy Direct Current (DC) traction locomotives, completely reverse-engineering the chassis, and rebuilding them into highly efficient, computer-controlled Alternating Current (AC) traction machines. This monumental task requires the custom design of new electronic microprocessor control systems, the integration of advanced emissions-reduction technologies to achieve compliance with stringent updated Environmental Protection Agency (EPA) standards, and the fabrication of novel structural steel mounts to physically fit new, significantly heavier AC components into the confined spaces of older, 1990s-era carbodies.

These modernization activities clearly satisfy the federal Four-Part Test. The permitted purpose is established by the intent to drastically improve the tractive effort performance, mechanical reliability (as AC motors feature fewer moving parts), and environmental quality of the existing locomotive business component. The Juniata engineers face profound technological uncertainty regarding the spatial integration of new high-voltage inverters within legacy frames, as well as uncertainty regarding the thermal management and heat dissipation of the new, higher-capacity electrical loads. To eliminate this uncertainty, the engineering teams engage in a rigorous process of experimentation, utilizing Computer-Aided Design (CAD) to model chassis modifications, performing finite element analysis (FEA) to ensure the structural integrity of the altered steel frame under extreme hauling stress, and conducting iterative physical prototyping of complex electrical wiring harnesses. The entire process relies fundamentally on the hard sciences of mechanical engineering, electrical engineering, and metallurgy.

From a tax jurisprudence perspective, the modernization of the very first prototype locomotive in a new class, prior to fleet-wide commercial rollout, directly invokes the legal concept of a “pilot model.” Under Treasury Regulation § 1.41-4(a)(5)(ii), a pilot model is legally defined as any representation or model of a business component that is utilized to evaluate and resolve technical uncertainties during the developmental process. In the recent and highly relevant United States Tax Court order for Intermountain Electronics, Inc. v. Commissioner (2024), the court evaluated whether the heavy production expenses incurred to develop custom electrical equipment pilot models for the mining and oil industries qualified for the credit. The ruling provided critical insights into the tax treatment of immense production costs for large-scale industrial pilot models, establishing that if the pilot model is fundamentally built to test hypotheses and resolve technical uncertainty, the raw materials and specialized wages expended in its creation may qualify as QREs under both Section 174 and Section 41. Applying this precedent to Norfolk Southern, the materials—including raw steel, custom wiring, and prototype inverters—and the specialized labor utilized by the Juniata engineers to build and test the first AC-converted prototype of a specific locomotive class would be highly eligible for both the federal R&D tax credit and the Pennsylvania state credit.

Case Study: Food Science, Extrusion Thermodynamics, and Boyer Candy Company

The commercial history of the Boyer Candy Company represents the entrepreneurial resilience of Altoona’s citizens during the depths of the Great Depression. Founded in 1936 by brothers Bill and Bob Boyer as a desperate means of supplementing their family’s income, the company began its operations in their mother’s residential kitchen, making fudge and nut raisin clusters. As demand grew, the brothers faced a severe technical challenge: they attempted to cover whipped marshmallow with chocolate, but the marshmallow continually lost its structural integrity and collapsed. Their sister, Emily, introduced an engineering workaround by utilizing paper cupcake wrappers to hold the confection during the chocolate-coating process. This rudimentary process innovation resulted in the Mallo Cup, widely recognized as the world’s first cup candy. Today, Boyer Candy operates a massive, privately-owned manufacturing facility in downtown Altoona, employing hundreds of workers and utilizing over 45,000-pound loads of chocolate monthly to produce an excess of two million Mallo Cups every single day.

The modern confectionery industry relies heavily on complex food science and industrial engineering. In 2018, the New England Confectionery Company (Necco), based in Massachusetts, declared bankruptcy, threatening the permanent extinction of the Clark Bar—an iconic candy created in Pittsburgh in 1917 featuring a highly specific spun taffy and peanut butter core. Seeking to save a beloved Pennsylvania brand, Boyer Candy purchased the rights, recipes, and original manufacturing equipment, subsequently relocating the heavy machinery to their Altoona facility. However, the integration process presented massive, unexpected technical hurdles. The purchased Necco machinery was obsolete and severely degraded, and the original 1917 recipe did not translate linearly to the specific atmospheric and environmental conditions of the Altoona plant. Boyer’s food scientists and mechanical engineers were forced to engage in an intensive, six-month R&D initiative to entirely reverse-engineer the Clark Bar’s precise formulation and mechanical crunch.

This developmental effort involved redesigning the extrusion nozzles to handle the taffy core without shearing it, meticulously calibrating the cooling tunnel thermodynamics to prevent the milk chocolate from blooming (a chemical separation of cocoa butter), and constantly adjusting the moisture content of the spun taffy to achieve the exact sheer force required when the candy is bitten by a consumer. These activities clearly establish a permitted purpose (improving a manufacturing process and product formulation) and seek to eliminate profound uncertainties regarding the thermodynamic variables (temperature, ambient humidity, cooling time) required to replicate the candy on a new, high-speed production line. The process of experimentation involved exhaustive batch testing, where food scientists systematically altered the viscosity of the peanut butter core and the speed of the conveyor belts, recording the organoleptic outcomes until the target texture, flavor profile, and shelf-life stability were achieved, relying entirely on the principles of food science, chemistry, and thermodynamics.

The integration of a new product line inherently requires the extensive consumption and destruction of raw materials during testing. In the landmark Second Circuit Court of Appeals case Union Carbide Corp. v. Commissioner (2012), the court intensely scrutinized the eligibility of supply costs used during industrial process research. The court established a critical precedent: while supplies consumed in the ordinary course of commercial production are strictly ineligible, if the supplies are intrinsically linked to the experimental process—and the manufacturing process has not yet reached commercial viability—the materials may qualify as QREs. For Boyer Candy Company, the thousands of pounds of chocolate, peanuts, sugar, and packaging materials consumed, tested, and subsequently scrapped as waste during the arduous six-month Clark Bar pilot testing phase would qualify as supply QREs under federal law. Furthermore, depending on the current corporate valuation, if Boyer Candy Company’s net book value of assets remains under the $5 million statutory threshold, they could elect treatment as a Qualified Small Business (QSB) under Pennsylvania law, allowing them to claim the premium 20 percent state tax credit rate on these extensive formulation expenditures, generating massive tax savings.

Case Study: Retail Technology, Alternative Fuel Infrastructure, and Sheetz, Inc.

The corporate evolution of Sheetz, Inc. reflects a continuous trajectory of technological adoption and operational innovation. Founded in 1952 by Bob Sheetz as a small, humble dairy store in Altoona, the family-owned business has grown into an absolute titan of the convenience store and fuel retail industry. Throughout the decades, Sheetz revolutionized the sector by pioneering the Made-To-Order (MTO) food service model and aggressively integrating touchscreen ordering systems in the early 1990s, long before such technology was an industry standard. Today, the company operates an expansive, multi-disciplinary innovation hub in Altoona, driving the corporation’s rapid transformation from a traditional petroleum retailer into a highly digitized, alternative-energy logistics and technology company.

As the global automotive market transitions toward electrification, Sheetz has positioned itself as an aggressive early adopter of Electric Vehicle (EV) infrastructure, establishing over 650 EV fast-chargers across 95 store locations, recently surpassing the milestone of two million individual charging sessions. Rather than relying solely on black-box, third-party operators, the software engineering and IT teams based at the Altoona innovation center are developing custom, proprietary software architectures to integrate EV charging natively into the Sheetz consumer and energy ecosystem. Working in tandem with advanced platforms like Driivz, Sheetz engineers are designing highly complex, custom Application Programming Interfaces (APIs) and dynamic load-balancing algorithms that interface directly with the stores’ internal energy grids. This R&D involves developing complex logic code that dynamically throttles EV charger power output based on real-time energy demands from the store’s high-efficiency HVAC, intensive refrigeration systems, and lighting grids to prevent catastrophic peak-load grid penalties from utility providers. Furthermore, the development teams are constructing proprietary mobile application architectures to securely track real-time EV charging sessions, instantly integrate loyalty rewards, and issue digital receipts across a fragmented hardware network.

These software engineering initiatives easily meet the Four-Part Test, as they rely strictly on computer science to eliminate uncertainties regarding the optimal architectural framework required to securely connect external high-voltage EV chargers, third-party APIs, and legacy internal Point-of-Sale (POS) mainframes without introducing data latency or cybersecurity vulnerabilities. The engineers engage in iterative agile development—writing code, conducting rigorous unit testing for load-balancing logic under simulated high-traffic grid conditions, debugging, and refining the algorithms.

However, from a tax compliance perspective, Sheetz faces a unique regulatory hurdle. Because much of Sheetz’s software connects back-end operational systems and manages internal store energy grids, it directly invokes the Internal Use Software (IUS) provisions under Treasury Regulation § 1.41-4(c)(6). The IRS dictates that IUS generally cannot qualify for the R&D credit unless it satisfies an arduous “High Threshold of Innovation” test. This standard requires the taxpayer to prove that the software is highly innovative (meaning it results in a substantial and measurable reduction in operational cost or improvement in processing speed), that its development involves significant, quantifiable economic risk of failure, and that the software cannot be commercially purchased off-the-shelf. Given that Sheetz’s custom load-balancing algorithms must interoperate with their specific, proprietary mix of store energy hardware and legacy POS systems, the software is inherently not commercially available and requires massive capital risk to develop internally. The successful documentation and deployment of this bespoke software architecture allows Sheetz to claim the substantial wages of its software developers, database administrators, and IT architects at its Altoona innovation center as prime QREs for both the federal and Pennsylvania R&D tax credits.

Case Study: Clinical Trials, Medical Artificial Intelligence, and UPMC Altoona

Following the mid-century contraction of the railroad and heavy manufacturing industries, the healthcare and higher education sectors—often referred to as the “eds and meds” economy—emerged as the foundational pillars of Altoona’s modern economic stability. At the forefront of this sector is UPMC Altoona, a massive 335-bed acute-care teaching hospital that serves as the vital tertiary medical care center for a sprawling 20-county region in central Pennsylvania. Boasting a designated adult Level II Trauma Center, a highly specialized Thrombectomy-Capable Stroke Center, and deep clinical integration with the UPMC Hillman Cancer Center and the UPMC Heart and Vascular Institute, the hospital acts as the absolute epicenter for advanced clinical medicine and medical research in the region.

Beyond providing standard patient care, UPMC Altoona operates as a highly active site for cutting-edge medical research and clinical trials, particularly in the fields of oncology and cardiology. Medical researchers, principal investigators, and pharmacologists at the Altoona facility are actively engaged in rigorous Phase I through Phase III clinical trials, systematically testing the efficacy, optimal dosing schedules, and complex physiological interactions of novel chemotherapies, immunotherapies, and next-generation cardiovascular devices. Furthermore, reflecting the rapid digitization of medicine, UPMC has heavily invested in Artificial Intelligence (AI) and machine learning technologies to revolutionize clinical trial execution. Researchers evaluate AI algorithms designed to mine massive, fragmented, and unstructured electronic health records (EHRs) to rapidly identify eligible patient cohorts for highly specific precision medicine trials, attempting to resolve the profound technical uncertainties surrounding algorithmic diagnostic bias and clinical data fragmentation.

These clinical and computational activities seamlessly align with the statutory definitions of qualified research. The permitted purpose is the development or improvement of clinical trial methodologies, advanced screening algorithms, or novel therapeutic treatment protocols. Researchers seek to eliminate biological uncertainties regarding complex drug interactions in specific patient demographics, or computational uncertainties regarding the accuracy of Natural Language Processing (NLP) models when parsing dense medical texts. The process of experimentation involves the highly structured execution of double-blind clinical trials or the iterative training, testing, and validation of machine learning models against massive clinical datasets, relying entirely on the sciences of biology, pharmacology, and computer science.

However, for major healthcare entities and teaching hospitals, the most critical legal and compliance hurdle in claiming R&D tax credits is navigating the “Funded Research Exclusion” under IRC Section 41(d)(4)(H). The tax code is unforgiving: if UPMC Altoona conducts a clinical trial that is funded entirely by an external pharmaceutical company (the sponsor), and the sponsor retains all rights to the resulting drug patents and pays UPMC a fixed fee regardless of whether the trial succeeds or fails in proving efficacy, UPMC is legally barred from claiming the R&D credit for that work. In such scenarios, the external sponsor claims the credit. Conversely, if UPMC Altoona initiates an internally funded research study—such as the development of their proprietary AI screening tool or the pioneering of a novel surgical technique—where the hospital directly bears the financial risk of the project’s failure and legally retains the intellectual property rights to the resulting algorithms or procedures, the wages of the principal investigators, data scientists, and clinical trial coordinators would be fully eligible QREs. Meticulously navigating clinical trial contract terms—specifically differentiating between milestone-based payments, fixed-fee structures, and time-and-materials contracts—is paramount for healthcare institutions in Altoona seeking to maximize their federal and Pennsylvania R&D tax credits.

Case Study: Civil Infrastructure, Metallurgy, and Altoona Pipe & Steel / GD&F

The heavy industrial and metallurgical legacy of Altoona is proudly preserved and advanced by heritage firms specializing in massive civil engineering infrastructure and advanced steel fabrication. A prime example is Altoona Pipe & Steel, which began in 1891 as a humble scrap facility operating with a single horse and cart. Through five generations of continuous leadership, the company has evolved into a major structural steel fabricator and railcar repair enterprise, symbolically occupying the exact site of the old PRR locomotive shops in the heart of Altoona. Operating parallel to the steel industry is Gwin, Dobson & Foreman (GD&F), a firm founded in 1954 in Altoona that has grown into a highly respected, award-winning civil engineering powerhouse heavily focused on complex water, wastewater, and municipal infrastructure projects across the state.

These firms do not engage in standard, repetitive construction; rather, they undertake highly complex, custom-engineered projects that require massive amounts of applied research. For instance, GD&F designed and engineered the Altoona Westerly Wastewater Treatment Facility’s Biological Nutrient Removal (BNR) upgrade. This monumental project involved the development of a novel “Hybrid BNR Process” that uniquely combined a 5-Stage Bardenpho system with a Virginia Initiative Plant design. The civil and environmental engineers had to design a highly experimental step-feed system to dynamically divert massive volumes of wet weather storm flow, ensuring the preservation of the delicate process bio-mass without requiring costly supplemental carbon additions. Simultaneously, Altoona Pipe & Steel engages in the highly technical fabrication of massive structural steel components, utilizing advanced CAD software and precision metallurgy to ensure that custom-fabricated architectural and industrial structures meet immense, dynamic load-bearing and stress-tolerance requirements.

The design of first-in-class wastewater biological treatment processes and custom-fabricated steel structures clearly establishes a permitted purpose. The engineering teams must resolve profound uncertainties regarding fluid dynamics, biological mass retention during extreme weather events, or the tensile limits and failure points of complex steel welds. To eliminate these uncertainties, they utilize hydraulic flow modeling, structural stress simulations (such as finite element analysis), and iterative prototyping of mechanical flow systems, relying on civil engineering, mechanical engineering, environmental science, and metallurgy.

However, the engineering of large, single-purpose municipal infrastructure and heavy industrial components frequently faces intense IRS scrutiny regarding whether the design activities constitute “qualified research” or merely routine engineering. In the highly influential case Little Sandy Coal Company, Inc. v. Commissioner (2023), the Seventh Circuit Court of Appeals evaluated a taxpayer claiming the R&D credit for the design of first-in-class marine vessels and dry docks. The central legal dispute surrounded the “Substantially All” requirement of Section 41(d)(1)(C), which mandates that at least 80 percent of a taxpayer’s research activities (the numerator) must constitute elements of a process of experimentation against total research activities (the denominator).

The appellate court delivered a mixed ruling. It affirmed that the wages for employees engaging in the “direct supervision” or “direct support” of qualified research are valid QREs and must be included in both the numerator and the denominator of the 80 percent fraction calculation. However, the court ultimately ruled against the taxpayer because they lacked meticulous documentation providing a “principled way” to determine exactly what portion of the shipbuilders’ time was spent on experimental pilot modeling versus routine, commercial ship construction. For civil engineering firms like GD&F and fabricators like Altoona Pipe & Steel, the Little Sandy Coal ruling serves as a definitive, critical warning. While the design of a novel BNR wastewater plant or a custom steel bridge clearly involves experimentation, the firms must utilize rigorous, contemporaneous time-tracking software to definitively separate the hours spent modeling the experimental biological flow systems from the hours spent on routine CAD drafting or standard site grading. If properly documented and legally segregated, the immense engineering wages dedicated to these infrastructure innovations heavily qualify for both federal and Pennsylvania R&D tax credits.

Tax Controversy, Administrative Appeals, and Procedural Documentation

The realization and retention of the immense financial benefits detailed in the case studies above are wholly contingent upon meticulous administrative compliance and aggressive defense during tax controversy proceedings. In recent years, both the federal Internal Revenue Service and the Pennsylvania Department of Revenue have drastically increased the substantiation and documentation requirements for claiming the R&D tax credit, transitioning from a framework of general estimates to one of exact precision.

On the federal level, taxpayers must retain highly organized, contemporaneous documentation that explicitly bridges the gap between the financial costs claimed and the specific technical uncertainties resolved by the engineering staff. In the critical tax court decision Moore v. Commissioner (2023), an S-Corporation brazenly claimed 65 percent of its Chief Operating Officer’s total wages as QREs, arguing that the executive provided “direct supervision” of the R&D department under the provisions of Section 41(b)(2)(B)(ii). The Tax Court sided entirely with the IRS and disallowed the executive’s wages completely. The court firmly established that general corporate management functions, budgetary oversight, and administrative meetings do not qualify as direct supervision; furthermore, the taxpayer completely failed to produce corroborating emails, technical meeting minutes, or engineering schematics proving the COO was directly involved in the actual scientific evaluation of the new products. This ruling underscores that Altoona businesses cannot base R&D credit claims on prestigious job titles or high-level estimates; they must trace actual, daily employee activities directly to the scientific method. Furthermore, the IRS is currently implementing sweeping structural changes to Form 6765 (Credit for Increasing Research Activities), effective for tax year 2024, which will force taxpayers to comprehensively disclose the specific business components researched, the exact technical uncertainties faced, and the precise allocation of wages per project directly on the face of the tax return, eliminating any room for vague reporting.

On the state level, claiming the Pennsylvania R&D credit requires annual, unyielding adherence to strict procedural deadlines. Because the program is capped at $60 million, any administrative error or late filing can result in total denial for that annual tax cycle. When disputes arise over eligibility or the calculation of QREs, Pennsylvania provides a formal administrative appeals process. Historically, corporate taxpayers faced highly compressed, unforgiving timelines that led to systemic friction with state auditors. However, recognizing the need for a more equitable system, the Commonwealth fundamentally reformed its tax appeals architecture with the enactment of Act 123 of 2024, which went into full effect on January 27, 2025.

Act 123 significantly expanded taxpayer rights by extending the rigid deadline for taxpayers to appeal assessment decisions to the Pennsylvania Board of Finance and Revenue (BF&R) from 60 days to 90 days, with the legal mechanism to request an additional 30-day extension for cause. Most importantly, the legislation established a formal, no-cost “mediated settlement conference” process directly within the BF&R framework. This revolutionary change allows taxpayers—such as a small Altoona manufacturing firm facing a disallowed R&D claim—to engage in a private, informal, and binding dispute resolution process with the Department of Revenue, entirely bypassing the need for protracted, highly expensive litigation in the Commonwealth Court. By the end of 2025, early state data indicated the profound success of this reform, noting that 45 percent of mediated cases resulted in an amicable, agreed-upon resolution, and overall appeals to the Commonwealth Court plummeted from 457 in the prior year to just 378. This modernized, business-friendly tax administration ensures that Altoona’s innovative companies can defend their rightful tax incentives without being crushed by administrative litigation costs.

Final Thoughts

The sweeping industrial narrative of Altoona, Pennsylvania, is ultimately defined by technological resilience and rapid engineering adaptation. From its genesis as the geographic linchpin of the Pennsylvania Railroad’s conquest of the Allegheny Mountains to its modern, diversified iteration as a regional hub for advanced manufacturing, food science, retail technology, and clinical healthcare, the city’s underlying economy relies heavily on the foundational principles of engineering and scientific experimentation.

The United States federal and Pennsylvania state Research and Development tax credits offer incredibly potent financial mechanisms to underwrite the massive capital costs of this continuous innovation. As demonstrated through the sophisticated operations of Norfolk Southern, Boyer Candy Company, Sheetz, UPMC, and local civil engineering heritage firms, a vast array of highly technical activities occurring daily within Blair County fulfills the stringent statutory requirements of IRC Section 41 and Pennsylvania Article XVII-B. However, realizing and retaining these immense capital incentives requires acute awareness of rapidly evolving tax case law—such as the vital precedents set by Little Sandy Coal, Union Carbide, and Moore—and rigid, uncompromising adherence to the procedural documentation mandates of the IRS and the newly reformed Pennsylvania Board of Finance and Revenue. By meticulously aligning their internal engineering processes with strategic, proactive tax compliance, Altoona’s diverse industries can fully leverage these statutory credits to fuel their growth and maintain their competitive advantage in the modern global economy.

The information in this study is current as of the date of publication, and is provided for information purposes only. Although we do our absolute best in our attempts to avoid errors, we cannot guarantee that errors are not present in this study. Please contact a Swanson Reed member of staff, or seek independent legal advice to further understand how this information applies to your circumstances.