Union Carbide Corp and Subsidiaries v. Commissioner
Download the complete brief here: T.C. Memo 2009-50
UNITED STATES TAX COURT
UNION CARBIDE CORPORATION AND SUBSIDIARIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 11119-99.
Filed March 10, 2009.
R determined deficiencies in P’s Federal income tax for 1994 and 1995. Pursuant to a negotiated agreement, P was allowed research credits under sec. 41, I.R.C., for 1994 and 1995. In an amended petition P now seeks additional research credits for 106 projects conducted at its manufacturing plants. To resolve this action expeditiously, P and R agreed to try five of the largest projects underlying P’s research credit claim.
Held: Two of the five projects constitute qualified research under sec. 41(d), I.R.C.
Held, further, P has established that it included all activities that were similar to the two qualified research projects in its calculation of its base amount under sec. 41(c)(4), I.R.C.
Held, further, P has established that it incurred $1,045 of additional qualified research expenditures (QREs) for wages paid to specific plant employees for qualified services performed during the two qualified research projects. The remaining expenditures for which P claims additional research credits are not QREs because they were incurred in the production of goods for sale, not in the conduct of qualified research.
Held, further, P improperly included production costs in its base amount. However, because P’s error caused P to overestimate its base amount, we find P’s error to be harmless and accept P’s calculation of its additional base period QREs with several adjustments.
Harold J. Heltzer, Alex E. Sadler, Robert L. Willmore, Peter B. Work, and Allen D. Madison, for petitioner.
Jill A. Frisch, Daniel A. Rosen, Lyle B. Press, Alex Shlivko, and Jenny D. Boissonneault, for respondent.
FINDINGS OF FACT
I. OVERVIEW
A. Petitioner
B. Procedural History
II. CLAIM PROJECTS
A. The Olefins Production Process
B. The Amoco Anticoking Project
C. The Spuds Project
D. The Sodium Borohydride Project
E. UOP GA-155 Project
F. The UCAT-J Project
III. CLAIMED COSTS
A. Cost Documentation Used
B. Costs of the Amoco Anticoking Project
C. Costs of the Spuds Project
D. Costs of the UOP GA-155 Project
E. Costs of the Sodium Borohydride Project
F. Costs of the UCAT-J Project
IV. BASE PERIOD PROJECTS
A. Scope of the Trial
B. Base Period Projects
V. BASE PERIOD QRES
A. Documentation
B. Ms. Toivonen’s Costing Methodology
C. Ms. Toivonen’s Conclusions
D. Disputed Calculations
OPINION
I. THE EXPERTS
A. Petitioner’s Expert Witnesses
B. Respondent’s Expert Witnesses
II. WHETHER THE CLAIM PROJECTS CONSTITUTE QUALIFIED RESEARCH
A. The Qualified Research Tests
B. The Claim Projects
III. BASE PERIOD ACTIVITIES
A. Whether Petitioner Must Include Activities Conducted By the Entire Consolidated Group
B. Acquisitions and Dispositions
C. Polypropylene Runs
D. Whether Petitioner Included All Activities Similar to the Claim Projects on Its List of Identified Runs
IV. CLAIMED COSTS
V. BASE PERIOD QRES
A. Alleged Flaws in Ms. Toivonen’s Costing Methodology
B. Alleged Errors in Ms. Toivonen’s Calculations
C. Documents Ms. Toivonen Relied Upon
D. Consistency Requirement
E. Whether Ms. Toivonen Calculated the Cost of “Qualified Research” Activities
VI. CONCLUSION
MEMORANDUM FINDINGS OF FACT AND OPINION
GOEKE, Judge: Respondent determined deficiencies in petitioner’s Federal income tax of $20,481,520 and $140,732,254 for 1994 and 1995, respectively. In its petition, as amended, petitioner alleges that it is entitled to additional research credits under section 41[1] of approximately $3,656,091 and $4,726,664 for 1994 and 1995, respectively (claimed credits).[2]
The claimed credits are based on 106 projects it conducted in various units within six manufacturing plants during 1994 and 1995 (credit years). For purposes of resolving this action expeditiously, the parties have agreed to try five of the largest projects[3] underlying petitioner’s affirmative research credit claims (claim projects).[4]
The issue before the Court is whether petitioner is entitled to additional research credits under section 41 for 1994 or 1995.[5] Resolution of this issue requires us to determine:
(1) Whether any of the claim projects constitute qualified research under section 41(d);
(2) whether any of the claim projects constitute qualified research, whether petitioner included all activities that were similar to the claim projects in its calculation of its base amount under section 41(c)(4);
(3) if any of the claim projects constitute qualified research under section 41(d), whether the claimed costs of supplies and wages attributable to those projects (claimed costs) are qualified research expenditures under section 41(b) (QREs); and
(4) if any of the claimed costs are QREs, whether petitioner included all similar costs in its base amount calculation.
—– footnotes —–
[1] Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
[2] In its original petition, petitioner claimed as affirmative adjustments additional research credits of $4,808,671 and $5,851,619 for 1994 and 1995, respectively. After amending its petition, petitioner has conceded that an additional project does not satisfy the requirements of sec. 41(d). This concession does not affect our discussion of petitioner’s claims and will be addressed in the parties’ Rule 155 computations.
[3] The term “projects” is used for convenience.
[4] Petitioner withdrew a sixth project before trial.
[5] All other issues in this case were resolved by agreement of the parties or our previous Opinion in Union Carbide Foreign Sales Corp. v. Commissioner, 115 T.C. 423 (2000).
