Trinity Industries v. United States (2014)

Main Issue:

• Supplies expense
• “Substantially all” rule

Facts:

• Credits claimed for development of special order ships
• Claimed all expenses associated with the construction and development of first article / prototype ships which were then sold
• IRS argued that non-experimental aspects of the ship development were not included as a qualified expense

Conclusion:

• If at least 80% of the project is part of the process of experimentation, all costs associated with the project were eligible for the credit
• Prototypes sold to third parties were also considered eligible expenses
• Court allowed 2 of the 6 ships to be considered qualified for the credit

Take-Away Point:

• Supplies can be substantial and if they are, need to make sure you have the analysis to prove that 80% of the project was part of a process  of experimentation