In a recent Appellate decision in Audio Technica v. U.S., the Appellate court overturned a district court decision on defining the fixed base percentage for the taxpayer Audio Technica and its R&D tax credit claim. Audio Technica claimed the R&D tax credit for years 2006-2010 and the case was scheduled for trial in the Tax Court but was settled with IRS prior to trial. In those details, the parties settled upon a correct fixed base percentage to use in computing Audio Technica’s base period.
In later years, Audio Technica used that fixed base in calculating its R&D tax credit yet the IRS challenged this computation. The taxpayer argued that judicial estoppel applied to prevent the IRS from challenging the fixed base percentage in auditing the R&D tax credit claim. Judicial estoppel as a principle applies to prevent two different courts/judges from adopting contrary positions if that position has already been resolved by the first decision.
However, the Sixth Circuit Court of Appeals decided that judicial estoppel did not apply in this case in that the case was settled prior to trial and thus the judge did not render an opinion or decide upon this R&D fixed base percentage issue; it was buried in the settlement details and was never ‘adopted’ by the court when the judge approved the settlement.
In the most R&D tax credit cases are settled, typically at the Exam or Appeals level, we’d recommend drafting the settlement documents as detailed as possible including a schedule showing how the fixed base percentage, gross receipts and overall base period was computed; those documents could be attached as an exhibit to a closing agreement for example and that would likely preclude the IRS from re-litigating some of those issues in future audits. We don’t believe this case stands for the proposition that every R&D tax credit item has to be litigated at trial to be binding; that would go against the ‘doctrine’ of judicial efficiency to not clog up the Tax Court with cases that should have been settled before trial.
 No. 19-3469 (6th Cir. 2000).