Tax Court Rejects Shipbuilder’s Claim For $1.1M Research Credit

Tax Court Rejects Shipbuilder’s Claim For $1.1M Research Credit

Posted by Hannah Feingold on 03.03.21

Costs incurred by a shipbuilding company in developing several vessels are not qualified research expenses that would allow the business's parent company to claim a $1.1 million research tax credit, the U.S. Tax Court said Thursday.

The expenses incurred by Little Sandy Coal Co. Inc.'s subsidary, Corn Island Shipyard Inc., in its four projects do not constitute qualified research expenses under Internal Revenue Code Section 41(b), the Tax Court said in a memorandum opinion. That the percentage of the physical elements of one of the projects that differ from products previously built by the business exceeds 80% does not qualify expenses for the research credit, according to the opinion. 

Specifically, an 80% experimentation test in the regulations governing the research tax credit applies to activities and not physical parts of a product, the Tax Court said. The court came to the same conclusion regarding a dry dock developed by the company, saying that the novelty of the dry dock does not itself mean that the business conducted experimentation within the meaning of the qualified research expense statute. 

Those findings apply to 11 projects that the Little Sandy Coal Co. claimed entitled it to a $1.1 million tax credit under an agreement between the Internal Revenue Service and the business, the court said. 

The case is Little Sandy Coal Company Inc. v. Commissioner of Internal Revenue, docket number 17431-17, in the U.S. Tax Court. 

--Article by Theresa Schliep for Law360 Legal News & Analysis, editing by Vincent Sherry.

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