SCOTUS Reports

Tag: Alternative Incremental Research Credit

  • Hewlett-Packard Co. v. Comm’r, 139 T.C. 255 (2012): Definition of Gross Receipts for Research Credit Calculations

    Hewlett-Packard Co. v. Comm’r, 139 T. C. 255 (2012)

    In a ruling that impacts how companies calculate the research credit under I. R. C. sec. 41, the U. S. Tax Court held that Hewlett-Packard must include nonsales income such as dividends, interest, rent, and other income in its average annual gross receipts (AAGR) for tax years 1999-2001. This decision clarifies the broad scope of gross receipts for credit calculations, ensuring that all income streams are considered, aligning with the legislative intent to incentivize research expenditure growth relative to overall income.

    Parties

    Hewlett-Packard Company and Consolidated Subsidiaries (Petitioner) v. Commissioner of Internal Revenue (Respondent).

    Facts

    Hewlett-Packard Company (HP), a Delaware corporation with principal offices in California, operates globally in technology and services. For the tax years 1999 through 2001, HP claimed research credits under I. R. C. sec. 41, using the Alternative Incremental Research Credit (AIRC) method. HP included sales income in its AAGR but excluded nonsales income such as dividends, interest, rent, and other income. The Commissioner of Internal Revenue contested this exclusion, asserting that all income should be included in AAGR calculations for determining the research credit.

    Procedural History

    Following the issuance of statutory notices of deficiency by the Commissioner, HP petitioned the U. S. Tax Court. Both parties filed cross-motions for partial summary judgment to determine whether nonsales income should be included in HP’s AAGR for the years in question. The court granted summary judgment in part to both parties, affirming the inclusion of nonsales income for 1999-2001 and excluding intercompany receipts from controlled foreign corporations for all years at issue.

    Issue(s)

    Whether, for the purposes of calculating the research credit under I. R. C. sec. 41 for the tax years 1999 through 2001, HP was required to include nonsales income, such as dividends, interest, rent, and other income, in its average annual gross receipts (AAGR)?

    Rule(s) of Law

    I. R. C. sec. 41(c)(6) defines “gross receipts” for the research credit as being reduced by returns and allowances made during the taxable year. The court interpreted this provision broadly, in line with its usage in other sections of the Internal Revenue Code, to include all income streams, not just sales receipts. The court also considered the legislative history and purpose behind the research credit, which aimed to incentivize research expenditure growth relative to overall income.

    Holding

    The U. S. Tax Court held that HP was required to include nonsales income, such as dividends, interest, rent, and other income, in its AAGR for the calculation of its research credits under I. R. C. sec. 41 for the tax years 1999 through 2001.

    Reasoning

    The court’s reasoning was grounded in statutory interpretation and legislative intent. It emphasized that the term “gross receipts” in I. R. C. sec. 41(c)(6) should be broadly construed to include all income streams, not limited to sales receipts, as evidenced by similar usage in other sections of the Internal Revenue Code. The court rejected HP’s argument that the term should be narrowly defined, citing the legislative purpose of the research credit to encourage research expenditures relative to the company’s overall income growth. The court also noted that a narrow definition could lead to disparate treatment among companies with different business models within the same industry. The court’s interpretation was supported by the Department of the Treasury’s rationale in its final regulations on the subject, despite those regulations not being applicable to the tax years in question.

    Disposition

    The court granted the Commissioner’s motion for partial summary judgment, requiring HP to include nonsales income in its AAGR for calculating research credits for the tax years 1999 through 2001. The court also granted HP’s motion in part, allowing it to exclude intercompany receipts from controlled foreign corporations from its AAGR for all years at issue.

    Significance/Impact

    This decision has significant implications for how companies calculate their research credits under I. R. C. sec. 41, emphasizing a comprehensive approach to gross receipts that includes all income streams. It aligns with the legislative intent to incentivize research expenditures relative to overall income growth, ensuring that companies cannot manipulate their credit calculations by excluding certain types of income. The ruling also provides clarity and consistency in the application of the research credit, affecting how companies structure their research budgets and report their income for tax purposes.

  • Deere & Co. v. Comm’r, 133 T.C. 246 (2009): Inclusion of Foreign Branch Gross Receipts in Research Credit Calculation

    Deere & Co. v. Commissioner, 133 T. C. 246 (2009) (United States Tax Court, 2009)

    The U. S. Tax Court ruled that Deere & Co. must include foreign branch gross receipts in calculating its average annual gross receipts for the research credit, impacting how multinational corporations compute tax credits. This decision clarifies the scope of gross receipts for the alternative incremental research credit, emphasizing that all income from foreign branches must be included, even if not directly related to U. S. operations. The ruling affects the tax planning strategies of companies with international operations seeking to leverage the research and experimentation (R&E) tax credit.

    Parties

    Deere & Company and Consolidated Subsidiaries (Petitioner) v. Commissioner of Internal Revenue (Respondent). Petitioner, a consolidated group of corporations, was the appellant in this case before the United States Tax Court.

    Facts

    Deere & Company, a U. S. corporation, operated through foreign branches in Germany, Italy, and Switzerland. For the tax year ending October 31, 2001, Deere claimed a credit for increasing research activities under Section 41 of the Internal Revenue Code, electing the alternative incremental research credit method prescribed by Section 41(c)(4). In calculating this credit, Deere excluded the gross receipts from its foreign branches for the four preceding taxable years from the computation of its average annual gross receipts, asserting that these receipts should not be included in the calculation under Section 41(c)(1)(B).

    Procedural History

    The Commissioner of Internal Revenue issued a notice of deficiency disallowing Deere’s research credit claim for the tax year ending October 31, 2001, arguing that Deere incorrectly excluded the gross receipts of its foreign branches from the calculation. Deere filed a petition with the United States Tax Court contesting the deficiency. Both parties filed motions for summary judgment. The Tax Court granted the Commissioner’s motion and denied Deere’s motion, upholding the inclusion of foreign branch gross receipts in the computation of the research credit.

    Issue(s)

    Whether Deere & Company is required to include in the calculation under Section 41(c)(1)(B) of its average annual gross receipts for the four taxable years preceding the tax year at issue the total annual gross receipts from its foreign branch operations in Germany, Italy, and Switzerland.

    Rule(s) of Law

    Section 41(c)(1)(B) of the Internal Revenue Code defines the base amount for the research credit as the product of the fixed-base percentage and the average annual gross receipts of the taxpayer for the four taxable years preceding the credit year. Section 41(c)(6) specifies that, for a foreign corporation, only gross receipts effectively connected with the conduct of a trade or business within the United States are considered. However, no similar exclusion is provided for unincorporated foreign branches.

    Holding

    The Tax Court held that Deere & Company must include in the calculation under Section 41(c)(1)(B) the total annual gross receipts from its foreign branches in Germany, Italy, and Switzerland for the four taxable years preceding the tax year ending October 31, 2001, when computing the alternative incremental research credit under Section 41(c)(4).

    Reasoning

    The court reasoned that the structure and legislative history of Section 41 did not support Deere’s position to exclude foreign branch receipts. The court rejected Deere’s argument that the term “gross receipts” should be interpreted to exclude foreign branch receipts based on the historic domestic focus of the research credit, emphasizing that Congress’s intent was to promote research conducted in the United States, not to limit the scope of gross receipts to U. S. operations. The court noted the absence of any statutory provision similar to Section 41(c)(6) for unincorporated foreign branches, indicating Congressional intent to include all gross receipts in the calculation. The court also dismissed Deere’s claim that including foreign branch receipts would discriminate against U. S. corporations, as no compelling evidence supported this assertion. The court further found that the aggregation rule under Section 41(f) did not justify excluding foreign branch receipts, as it applies to prevent artificial increases in research expenditures but does not address the inclusion or exclusion of gross receipts.

    Disposition

    The Tax Court granted the Commissioner’s motion for summary judgment and denied Deere’s motion, affirming the inclusion of foreign branch gross receipts in the calculation of Deere’s research credit for the tax year ending October 31, 2001.

    Significance/Impact

    This decision establishes that multinational corporations must include gross receipts from all foreign branches in calculating the research credit, impacting tax planning strategies for companies with international operations. It clarifies the scope of “gross receipts” under Section 41(c)(1)(B) and may lead to adjustments in how companies claim the research and experimentation tax credit. The ruling has implications for the tax treatment of foreign income and may influence future legislative or regulatory actions regarding the inclusion of foreign source income in domestic tax calculations.