Government Wins Research Tax Credit Court Case

The government recently prevailed in McFerrin v. United States. The case involved a taxpayer that claimed research tax credits for his company’s work in making chemicals for sale to customers. The taxpayer hired aliantgroup to prepare a research tax credit study to capture its research costs.

It appears that the study was prepared using a cost-center approach, which is a perfectly legitimate method for preparing research tax credit studies. The court noted that of the several entities that the taxpayer owned, the taxpayer was not able to demonstrate what entity or employees worked on what projects. The court also took issue with the taxpayer’s use of reasonable estimates. The court seemed to be expecting project-based records, even though project-based records are not required (as has been admitted by the IRS).

The court, perhaps because it is a general district court and not a court with any particular knowledge of taxes or tax law, cited to the (old) IRS Audit Techniques Guide in support of its position (although the guide is not the law and cannot be cited in court), cited only one of the court case that addresses documentation requirements (i.e., Eustice and not Fudim), and cites to the heightened documentation standards in the Norwest and Research cases even though those cases are not generally appropriate for the issues that they were cited for.

After the taxpayer spent six days in court to introduce documents in support of its research tax credit claims, the court concluded that the taxpayer did not retain sufficient records to support its claims. This is surprising given that he court opinion even cites (in a footnote) the fact that Congress has made it clear (repeatedly) that there is no higher documentation standard for research tax credits.

The taxpayer has appealed the decision.