Research & Development Tax Credit Courtroom Case
[You can get a copy of this court case at http://www.titanarmor.com/news]
On January 29th, 2010, the U.S. District Court’s Northern District of Texas issued an Order in Trinity Industries, Inc. v. U.S. The particulars in this particular case once again reiterated the gain of contemporaneous documentation for R&D tax credit claims. Even though the case ended up being a win for taxpayers on some R&D Credit problems, Trinity Industries lost a considerable amount of their R&D Tax Credit advantage due entirely to their own lack of project-level records.
In the case, the Court evaluated each of six initiatives to figure out their extent of qualified study activities. Because Trinity Industries could not segregate its actual qualified exploration charges from non-qualified charges, the Court had been compelled to depend exclusively on IRC section 41(d)(1)(C) and Treasury Regulations section 1.41-4(a)(2)(iii), identified as the “Substantially All” requirement.
The Substantially All requirement says that 80 percent or more of a taxpayer’s competent study activities on a venture must amount to factors of a process of trials. In the event that the venture fails the Substantially All requirement, the taxpayer can apply the “Shrink-Back” rule, as defined in Treasury Regulations section 1.41-4(b)(2). The Shrink-Back rule allows the taxpayer to evaluate each subcomponent of the venture, as a stand-alone business component. This enables the taxpayer to record competent research expenses on at least their primary research and development pursuits within a venture.
Mainly because Trinity Industries did not possess the needed contemporaneous documentation, the Court could not utilize the Shrink-Back rule and had to evaluate each task according to Substantially All. Eventually, this particular procedure backed an R&D Credit for only two of the six projects under examination. Of the assignments that did not qualify, the Court took these positions:
“While the Court would readily accept that a significant portion of the costs was part of a process of experimentation, it has substantial uncertainty regarding the 80% threshold. In the face of that uncertainty . . . Trinity has failed to meet its burden of proof. The Court therefore finds that Trinity is not entitled to any QRE credit for the [project].”
“There were clearly some qualified research costs incurred in the design and construction of the [project]. But . . . [the] Court finds that less than 80% of the costs incurred were part of a process of experimentation. The Court therefore finds that Trinity is not entitled to any QRE credit for the [project].”
Trinity Industries” shortage of contemporaneous paperwork precluded them from making the most of their gain within the R&D Tax Credit regulations. As just stated, the US Tax Court supported the IRS’ expectation for contemporaneous documentation of the federal Research and Development Tax Credit. For extra information and facts on this specific situation and also the IRS’ current Audit Technique Guidelines, head over to www.titanarmor.com/taxpros.
Want to find out more about R&D Tax Credits, then visit Titan Armor’s site on how to choose the best research and development tax credit service for your needs.
