This case involves what costs may be included as “qualified research expenses” eligible for the R&D tax credit when companies undertake manufacturing process improvements. Normally, all costs related to research into process innovations, including plant-scale research costs such as raw materials also used in ordinary production runs, are qualified expenses. However, the judge ruled, and the Second Circuit affirmed, that supply costs are “ordinary production costs” and that the company did not prove that the costs qualified for the credit. Click here for details on our involvement in the Second Circuit in this case.
This ruling was appealed to the U.S. Supreme Court, but on March 18, 2013, it declined to hear the appeal. The NAM and others had filed an amicus brief arguing that this ruling undermines the fair and effective implementation of the research credit and undermines tax certainty. Taxpayers should be able to rely on the plain language of tax laws and regulations, and a position taken by the IRS during the course of litigation should not be accorded significant deference by the courts. We also argued that the lower courts failed to acknowledge the nature and importance of research into process innovations that is conducted on the full scale of an operational production plant.