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.


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