Union Carbide R&D Tax Credit Case will not be heard by the Supreme Court

On March 18th, 2013, the Supreme Court declined to review a Second Circuit decision, affirming the Tax Court decision, finding that the taxpayer was entitled to a R&D tax credit for only additional supplies that were used to perform research.

The Union Carbide case should be viewed closely by taxpayers considering taking R&D tax credits relating to supply costs associated with process improvement projects.    One of the examples in this case describes a process improvement project attempting to remove a byproduct from the manufacturing process that harms the equipment and diminishes production yield.  However, as part of the research project, the company was producing salable materials.  The company included the salable materials as qualified research supply costs.  The Second Circuit found that these costs were not eligible for the R&D tax credit and at best were indirect research costs excluded from the definition of qualified research expense under Reg. 1.41-2(b)(2).

Companies should evaluate closely what raw materials should be included as eligible supply costs associated with a process improvement project.  These companies should also carefully evaluate what supply cost relate to initial trails on production equipment for new products.  Supply costs relating to the development of new products is a significant difference in facts and circumstances from the Union Carbide case.  These types of supply costs generally will continue to qualify for the R&D tax credit.

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