Research Credit Disallowed Due to Lack of Supporting Documentation

June 26, 2019

By Ryan Vaughan

In the recent Siemer Milling Company v. Commissioner (T.C. Memo 2019-37, 4/15/2019), the United States Tax Court found in favor of the IRS, disallowing a Research Credit claim for the 2011 and 2012 tax years, ruling that the taxpayer failed to provide adequate supporting evidence.  The Tax Court found the record did not establish that the taxpayer had a methodical plan to test, analyze, refine, and retest the hypothesis to constitute experimentation.

Additionally, the Research Credits related to certain projects were disallowed based on the technological in nature test, because the taxpayer failed to establish the technical principles on which the research activities relied.  The Tax Court found in favor of the taxpayer on other issues; agreeing the projects were business components and confirming the development or improvement of a single business component can span multiple years.  Although the Research Credit was disallowed, the Tax Court did determine that the taxpayer was not subject to the section 6662 accuracy-related penalties due to the credit disallowance.  Citing Neonatology Assocs. v. Commissioner, the Tax Court noted that no penalty shall be imposed under Internal Revenue Code Section 6662 where a taxpayer reasonably relied in good faith on the advice of a competent tax professional.

Mazars Insight

The Siemer ruling demonstrates the importance of proper documentation of Research Credit activities.  The Tax Court’s emphasis on documentation highlights the importance of maintaining the necessary client records to support all aspects of a Research Credit’s four-part test, specifically the technological in nature and process of experimentation aspects. The ruling emphasizes the importance of taxpayer-generated documentation exhibiting the process undertaken to support the Research Credit. Furthermore, reliance on competent professionals may mitigate potential penalties when the credit or a portion thereof is denied.

Please contact your Mazars USA LLP professional for additional information.

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