TG Missouri Corporation v. Commissioner, 133 T.C. 278 ( T.C. 2009)
Background – Case No. 8333-06.
This is a case filed in the United States Tax Court. The sole issue in this case is whether production molds TG Missouri Corporation sold to its customers are assets subject to depreciation for purposes for their tax years. Another issue is whether the amounts paid to third party toolmakers for the molds would count as “cost of supplies” for qualified research expenses when calculating research credits for 1997, 1998 and 1999.
TG Missouri is in the business of creating and manufacturing products such as steering wheels, air bags and body side molding for the automotive industry. After receiving the contract request, TG Missouri consults with the customer to develop a production mold and they are only entitled to payment if they successfully build a mold and the customers accepts these products to build the mold. TG Missouri would sometimes construct the tool themselves or consult with a third party. The petitioner and third party then work together to design and build the mold. After the third party toolmaker finishes constructing the production mold, the petitioner purchases the mold. This process generally takes around 24 to 36 months to develop, design, construct and test the mold.
TG Missouri filed its 1997-99 Corpartion Income Tax Returns and in the 1998 and 1999 returns, they capitalized and depreciated the costs paid to third party toolmakers but included the costs paid to third party toolmakers as qualified research for research credits. In 1997 they claimed $2,316,601 in research credits and used $48,675 of this amount in 1997 and carried for $2,267,926 in 1998. In 2006, the Commissioner of Internal Revenue mailed a notice of deficiency for 1998 and 1999 because they beclieved the costs incurred in purchasing the prodcution molds from third parties did not count towards research expenses for calculating research credit. In response, TG Missouri filed a petition claiming that the costs incurred in 1997, 1998 and 1999 qualify as research expenditures. When this case was called before the trail court, both parties moved pursuant to Rule 122 to submit this case fully stipulated, which saves time and money for both sides.
- The production molds that the petitioner sold to its customers are not not subject to depreciation allowances because the petitioner does not have any economic interest in production molds it has sold.
- TG Missour properly included the costs of production of molds it purchased from third parties as the cost of supplies; therefore, the respondent’s adjustments to TG Missouri’s 1998 and 1999 returns are erroneous and are not sustained.
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