Tax Court Sides with Harper Construction Co in R&D Credit Case

Jeffrey A. Harper and Katherine M. Harper v. Commissioner, T.C. Memo. 2023-57

In a recent tax court, the Tax Court denied a motion for summary judgment from the IRS against a construction firm claiming the R&D tax credit.

The Case

Jeffrey Harper and Katherine Harper claimed credits through section 41 for a total of $46,656 and $778,610 for the tax years 2012 and 2013, respectively. The credits were claimed for work conducted through their S corporation, Harper Construction Co. (HCC). These credits were disallowed by the IRS which issued a notice of deficiency to the Harpers in 2016 and alleged the activities outlined as R&D fail to meet the definition of a “business component”. 

The Harpers promptly filed a petition, assigning errors to all parts of the IRS’ notice. As such, the matter was brought before the Court for a Partial Summary Judgment.


The IRS follows a four part test as outlined in IRC 41(d)(1), (2)(B). This four part test includes:

  1. The Section 174 Test
  2. The Discovering Technological Information Test
  3. The Business Component Test
  4. The Process of Experimentation Test

In order to meet the Business Component test, the taxpayer must intend to apply the information being discovered to develop a new or improved business component of the taxpayer. For these purposes a business component can refer to any product, process, computer software, technique, formula, or invention which is to be held for sale, lease, license or used in a trade or business of the taxpayer.

Backgrounds and Arguments

HCC is a privately owned design builder and general contractor that has worked on residential, commercial, and industrial projects. They also specialized in military design-build projects, including over 30 military housing projects.

Over the two years in question, the company reported 53 separate projects including work on the construction of aircraft hangars, maintenance facilities, military recruit barracks and living quarters, college buildings, medical clinics, instructional facilities, fitness centers, parking garages, training facilities, a 200,000-gallon solar-powered water tank, a photovoltaic renewable energy generation system, a multi-megawatt renewable energy system for use in South Africa, and a specialized energy solution in Las Vegas, Nevada.

HCC outlined activities performed for each project including system studies, design meetings, and more.

The IRS argued the construction firm’s designs and drawings failed the business component test for various reasons including:

  1. The buildings and facilities constructed by HCC never belonged to HCC, yet only these structures (and no the designs created by HCC) were “new or improved”;
  2. HCC’s designs were not “products”, as that word is intended in the statute, but rather “tangible manifestations[s] of construction services”;
  3. Neither HCC’s designs nor the facilities it constructed were ever “held for sale” by HCC;
  4. HCC did not “use” its designs in the sense intended by the statute, because Congress meant for taxpayers’ use of business components to be “meaningful” and so “affect the way a business operates to some degree”.


The Tax Court repeatedly rejected the IRS’ arguments, stating that by designing its clients’ buildings and structures, the taxpayer has conducted research that satisfies the business component test. 

In response to each alleged failing, the Tax Court found:

  1. The contention that the designs were never “new or improved”  is contradicted by the record. HCC evidently engaged in a lengthy, multi-step process of conceptual design and development for each project to achieve some level of functional improvement.
  2. The Court agrees that HCC’s designs were not “products” as the legislation most often denotes a product as a tangible or physical product. However, the designs could constitute processes, techniques, or inventions – all of which are included in the definitional list of business components.
  3. After a review of the associated contracts, HCC held firm that the facilities built by HCC were “built to be sold to the ultimate owners”. The Court ultimately determined there were no “products” to be sold, and the developed processes, techniques, and potential inventions were used in HCC’s business, removing the need to resolve ownership of the buildings and other structures. 
  4. The fourth argument hinges on the idea that “HCC’s day-to-day operations were not changed by its designs”, as alleged by the IRS, which suggests the component would require habitual availment. The Court feels the precise definition of “use” being implied by the IRS is too specific while the legislation has no indication that the word should be restricted to this definition. The Court rejected the specialized definition of the word “use”, negating this final argument.

This finding sides with the company, validating their technical work product as being the technical activity and therefore meeting the Business Component test. The court’s opinion validates design firms’ technical work product as being the technical activity Congress sought to encourage when creating the R&D tax credit and as good candidates for the credit today.

The full memo can be found here.

Are you developing new technology for an existing application? Did you know your development work could be eligible for the R&D Tax Credit and you can receive up to 14% back on your expenses? Even if your development isn’t successful your work may still qualify for R&D credits (i.e. you don’t need to have a patent to qualify). To find out more, please contact a Swanson Reed R&D Specialist today or check out our free online eligibility test.

Who We Are:

Swanson Reed is one of the U.S.’ largest Specialist R&D tax advisory firms. We manage all facets of the R&D tax credit program, from claim preparation and audit compliance to claim disputes.

Swanson Reed regularly hosts free webinars and provides free IRS CE and CPE credits for CPAs. For more information please visit us at or contact your usual Swanson Reed representative.

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