Main Issue:
Uncertainty
Base period
Facts:
The taxpayer is the manufacturer of chemicals and plastics
Claimed credits for 106 projects of which 5 were selected as the sample for this case
IRS argued not uncertain since confident the project would be successful
IRS argued estimation for the base period was not acceptable
Conclusion:
The court accepted oral testimony and corroborating documentary evidence to establish that QRAs occurred without specific supporting contemporaneous project reports
The taxpayer was able to use documented estimates of the expenses in the base period to come up with a reasonable determination of its fixed base percentage
The taxpayer does not have to be “uncertain” that the developed product or process will be successful to satisfy the uncertainty requirement
Consistency requirement to be applied at the separate entity level, not at the controlled group level
Supplies costs cannot be included if they would be incurred regardless of any R&D performed
Take-Away Points:
Estimation is acceptable but is based on the level and quality of corroborating oral testimony and documentary evidence
Need a close approximation of the expenses for base and credit years
Need a close approximation of the activities for the base and credit years
Taxpayers who are certain of an outcome can still qualify for the credit if they are uncertain of the path to get to that outcome
Taxpayers with multiple businesses/entities should be applying the consistency rule to each entity, not to the controlled group as a whole
Supplies QREs should be tracked separately from production costs if possible
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