The research tax credit is set to expire once again. Under current law, the research tax credit is only available for expenses incurred before December 31, 2009. The House Ways and Means committee has released a summary of its Tax Extenders Act of 2009, which proposes to extend several expiring tax provisions, including the research tax credit. If passed, the Act would extend the research tax credit for one more year.

In TG Missouri Corp. v. Commissioner, 133 T.C. 13, the U.S. Tax Court recently found that property purchased from a third party qualifies as a supply expense for purposes of the research tax credit even though the taxpayer retains possession of the property. TG Missouri Corp is in the business of of manufacturing injection-molded products, such as steering wheels, air bags, and body side molding for the automotive industry. TG Missouri Corp hired a third party toolmaker to make production molds. It then sold the molds to its clients, but retained possession of the molds so that it could manufacture parts for its clients — the owners of the molds — using the molds. The government concluded that the molds were depreciable property in the hands of TG Missouri Corp and, therefore, are not qualified research expenses. The court considered the depreciation rules outside of the context of the research tax credit in concluding that the depreciation rules are the same for purposes of the research tax credit.

The U.S. Tax Court recently issued its opinion in Deere & Co. et. al. v. Commissioner, 133 T.C. 11 (2009), holding that the taxpayer must include its foreign branch income in its research tax credit calculation. Deere & Co. received income from its branches in Germany, Italy and Switzerland. Deere & Co. filed a consolidated tax return to report its combined income. Deere & Co. did not include its foreign branch receipts in the calculation for its U.S. research tax credit, believing that the research tax credit calculation does not require the inclusion of income from its foreign branches. The calculation for the research tax credit is, in part, based on the taxpayer’s average gross receipts for the four year period leading up to the year in which the taxpayer claims the credit. The Code does not specify whether foreign branch income is to be included in the calculation. Deere & Co. argued that the research tax credit is a domestic credit and that the calculation, and the credit in general, is structured such that foreign activities are to be excluded from consideration. The court rejected this argument, concluding that Congress would have specifically excluded foreign branch income from the calculation if it intended the amount to be excluded.