Favorable R&D Tax Credit Case Issued – Tax Court Option in Suder v. Commissioner

R&D Tax Credit Update 2014 – New Tax Court case on R&D credits rules favorably for taxpayer on almost all aspects of the case involving development of hardware and software. The taxpayer developed telephone equipment and related software and claimed the R&D credit based on estimating time of employees, and the CEO on R&D activities. Favorable aspects of the research credit case (which help resolve some IRS hot button issues) include:

  • Senior management time including meeting time was part of the R&D idea process
  • Management ‘sign off on specs’, and staying involved in the process was qualified (vs. non-project time)
  • Senior manager time spent ‘steering the product through idea stage to alpha testing’ qualified as part of the research process
  • Manager time in ‘strategy meetings and followup product meetings, reviewing product specifications, and researching’ (networking technology) qualified
  • Above first line manager time spent ‘down in the trenches, interacting with employees regularly, giving them guidance, receiving their feedback, answering questions, and the like’ all qualified for the R&D tax credit
  • Entire section devoted to testing time – not only the developers’ unit testing qualified, but when they sent it to the lab, regression and smoke testing qualified, as did alpha and beta testing phases
  • Product managers – claimed and sustained at 100% qualified, as were all testers. Product managers also described as tracking bugs through the testing process, prioritizing issues.
  • Patents, including patent applications not yet granted were considered as evidence of R&D; particularly for executives who were listed as inventors on the patents
  • Use of estimates (Cohan rule) was allowed by the Tax Court and the SME’s testimony and way they estimated QREs for employees was credible and reasonable

The taxpayer only lost an issue dealing with including royalty income as wage income for the CEO; that was found to be unreasonable under Section 174(e) and the allowable wages for the CEO were thus reduced (but still in the millions of allowable QREs for the CEO).

The full case can be found here on our site:

Suder Case – R&D Credit – TC_Memo_2014_201

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