FedEx Prevails in R&D Credit Case – Discovery Test does not Apply

In a case that had been working its way through the system on R&D credit, Federal Express (Fedex) has settle their lawsuit with Department of Justice and retained most of its R&D credits per a stipulated settlement that will avoid trial. Most notably, the DOJ abandoned its appeal over the appropriate legal standard governing FedEx’s R&D tax credit claim involving its software systems that runs FedEx operations. DOJ was arguing that the old ‘discovery’ test would still apply to the case if FedEx chose to rely upon the 2001 Regulations standard on internal use software. Those R&D regulations contained two additional exceptions to internal use software for ‘computer services’ software and software providing ‘non-computer’ services in which that software contained new features that provided the taxpayer with a competitive advantage. FedEx sought to use these internal use software regulations, but not the ‘discovery’ test contained in those same regulations. However, the IRS had abandoned the old discovery test in the 2003 Final Regulations on the research credit and in subsequent cases such as Union Carbide.

Thus, the DOJ finally agreed to drop this issue, meaning that FedEx did not have to satisfy a discovery test in showing that it discovered information that exceeded, expanded or refined the common knowledge of a skilled software professional. Rather, FedEx under the Final R&D tax credit Regs just had to meet the technical uncertainty and process of experimentation tests without a separate discovery test. In light of this, DOJ and the taxpayer agreed to settle this case, with FedEx retaining a majority of the R&D credit claimed. 


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