Union Carbide v. Commissioner (2012)

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Main Issue:

  • Uncertainty
  • Base period


  • Taxpayer is 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 project would be successful
  • IRS argued estimation for the base period was not acceptable


  • Court accepted oral testimony and corroborating documentary evidence to establish that QRAs occurred without specific supporting contemporaneous project reports
  • 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
  • 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 that are certain of an outcome can still quality for the credit if they are uncertain of the path to get to that outcome
  • Taxpayers with multiple business / 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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