Accounting
The Tax Court weighs risk and the R&D credit in two cases
If research is considered to be “funded research” within the meaning of Section 41(d)(4)(H), then it is not eligible for the research credit. Research is considered to be funded if payment is not contingent on the success of the research.
Two recent cases before the Tax Court — Systems Technologies Inc. and Smith, et al. — flesh out the meaning of funded research by turning to local law in their analysis of whether the research was funded or not.
In both cases, the Tax Court denied the Internal Revenue Service’s motion for summary judgment.
System Technologies, located in Indiana, engineers and manufactures industrial finishing systems, primarily for use in the automotive industry. The purchase agreements for these systems generally require payments as the projects are underway. Those agreements are also subject to a choice-of-law provision requiring that they be construed under and governed by Indiana law.
The Tax Court said that Indiana law would require Systems Technologies to refund payments to a customer “if Systems Technologies fails to deliver the product. Accordingly, ultimate payment to Systems Technologies is contingent on the success of the research and is not funded,” the court found. Therefore the motion for partial summary judgment was denied.
In the Smith case, Adrian Smith, Carlisle Gill, and Robert Forest were shareholders of Adrian Smith + Gordon Gill Architecture LLP, a company that provides innovative architectural design services to clients worldwide. AS+GG claimed research credits based on a number of projects for tax years 2008, 2009 and 2010 of roughly $3,000,000, $550,000 and $500,000, respectively. The projects included several buildings that were, at the time of their design, intended to be the tallest in the world. Of the research projects at issue, each contract contained choice-of-law provisions that supported their contention that the funding exclusion did not apply to the research projects.
To determine whether the research is funded, Reg. Section 1.41-4A(d) provides that amounts payable under any agreement that are contingent on the success of the research are not treated as funded. In such circumstances the party performing the research is entitled to the credit because it bears the risk of failure. The regulations also provide that a taxpayer is entitled to the credit only if it “retains substantial rights in the research.”
“The taxpayer argued that the contracts were each incorporated under the laws of various foreign countries such as Dubai, Saudi Arabia, and the U.K., so the governing foreign laws in those countries is relevant in the court’s funding analysis,” said Dean Zerbe, national managing director at Alliant and former senior counsel to the Senate Finance Committee.
“We find [taxpayer’s] arguments to be somewhat compelling with respect to the rights retained under the [Masdar HQ] agreement and [the IRS] does not rebut these arguments in its reply. Accordingly, we do not find summary judgment … to be appropriate to whether AS+GG performed funded research related to the Masdar HQ project,” the Court stated, denying summary judgment regarding one of the projects.
“Ultmately, the decisions in Smith, et al. and System Technologies, Inc. are a positive result for taxpayers going forward, with the
Tax Court continuing to give significant weight to the choice of law provisions within contracts,” said Zerbe. “Contractual funding analysis has now been shifted back towards a traditional contract analysis.”
Bloomberg via Getty Images
Amid the agency’s turmoil this year, the Internal Revenue Service has some good news from 2024 regarding service and collections.
The agency helped taxpayers on 62.2 million occasions in FY24, up 3.2% over the prior fiscal year, and took in a new high in revenue, according to its latest annual
IRS toll-free customer service lines provided live telephone assistance to almost 20 million callers during the fiscal year, up some 11% from 2023. At Taxpayer Assistance Centers, the agency helped more than 2 million taxpayers in person, an increase of almost 26% over FY2023.
For the first time, revenue collected exceeded $5 trillion ($5.1 trillion), an increase of almost 9% compared to the prior fiscal year total.
The Data Book gives a fiscal year overview of the agency’s operations, including returns received, revenue collected, taxpayer services provided, tax returns examined (audits), efforts to collect unpaid taxes and other details. Among other FY24 highlights, the IRS:
- Launched more digital tools than it had during the previous 20 years. Online offerings saw more than 2 billion electronic taxpayer assistance transactions, 47% more than in FY23. The most popular features were requests for transcripts and Where’s My Refund? Overall, IRS.gov registered nearly 690 million individual visits with 1.7 billion page views.
- Processed more than 266 million returns and other forms from individuals, businesses and tax-exempt organizations; received almost 4.6 billion information returns; and issued close to $553 billion in refunds.
- Closed 505,514 tax return audits, resulting in $29 billion in recommended additional tax.
The net collections — federal taxes that have been reported or assessed but not paid and returns that have not been filed — totaled almost $77.6 billion, an increase of 13.6% compared to FY23. The agency collected more than $16 billion through installment agreements, an increase of more than 12% compared to the prior fiscal year.
The Data Book also covers statistics on Direct File, taxpayer attitude surveys about satisfaction with the IRS and “acceptable” levels of cheating on taxes, and applications for tax-exempt status, among other topics.
Total postsecondary spring enrollment grew 3.2% year-over-year, according to a report.
The National Student Clearinghouse Research Center published the latest edition of its
The report found that undergraduate enrollment grew 3.5% and reached 15.3 million students, but remains below pre-pandemic levels (378,000 less students). Graduate enrollment also increased to 7.2%, higher than in 2020 (209,000 more students).
(Read more:
Community colleges saw the largest growth in enrollment (5.4%), and enrollment increased for all undergraduate credential types. Bachelor’s and associate programs grew 2.1% and 6.3%, respectively, but remain below pre-pandemic levels.
Most ethnoracial groups saw increases in enrollment this spring, with Black and multiracial undergraduate students seeing the largest growth (10.3% and 8.5%, respectively). The number of undergraduate students in their twenties also increased. Enrollment of students between the ages of 21 and 24 grew 3.2%, and enrollment for students between 25 and 29 grew 5.9%.
For the third consecutive year, high vocational public two-years had substantial growth in enrollment, increasing 11.7% from 2023 to 2024. Enrollment at these trade-focused institutions have increased nearly 20% since pre-pandemic levels.
Jordan Vonderhaar/Photographer: Jordan Vonderhaar/
The Internal Revenue Service has released
The Inflation Reduction Act of 2022 amended Sec. 55 to impose the CAMT based on the “adjusted financial statement income” of an “applicable corporation” for taxable years beginning in 2023.
Among other details, proposed regs provide that “applicable corporation” means any corporation (other than an S corp, a regulated investment company or a REIT) that meets either of two average annual AFSI tests depending on financial statement net operating losses for three taxable years and whether the corporation is a member of a foreign-parented multinational group.
Prior to the publication of any final regulations relating to the CAMT, the Treasury and the IRS will issue a notice of proposed rulemaking. Notice 2025-27 will be in IRB: 2025-26, dated June 23.
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DLTR, WFC, CEG and more
IRS paints a strong picture from fiscal 2024 in annual Data Book
New 2023 K-1 instructions stir the CAMT pot for partnerships and corporations
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