Tax Point to present on recent R&D Court cases at Boston tax Institute seminar

Posted by Jeffrey Feingold on 05.28.12

This March, the US Tax Court clarified acceptable versus unacceptable documentation with regard to time spent by owners/officers in qualified research and development activities included in calculation of the Federal R&D tax credit. You can see the decision from Basim Shami and Rania Ardah, Et Al v. Commission at (or just go to and click on NEWS). In summary, the court looked at estimates provided by the petitioners and determined that they were unacceptable because they lacked any basis other than oral testimony made by those petitioners. Roughly $30m in wages were disallowed, meaning about $2m in claimed credits were denied by the Court. What does this mean for taxpayers using estimates of their employees, owners, and officers' time spent in qualified R&D efforts? Simply that having credible evidence (not SOLELY oral testimony) and a basis for estimates can make the difference if audited. One challenge taxpayers, and their CPAs, have when looking at an R&D tax credit is the type of documentation necessary to substantiate the time and effort spent to develop new or improved products or processes. While the I.R.C. and Treasury Regulations don't in themselves provide sufficient stand-alone guidance, court cases have given taxpayers direction, and with Shami and several other recent Court decisions, clarity has increased with regard to qualifying R&D activities and the essential required documentation. In the Shami case, company owners estimated time spent on qualified activities which were documented through an interview process. According to the court documents, no other basis was provided and additional interviews with witnesses even contradicted statements made by the petitioners, Shami and McCall. The court concluded that testimony provided "was insufficient to establish the time Mr. Shami or Mr. McCall spent performing any specific service." Important message for taxpayers: while companies of all sizes take advantage of the research tax credit and derive benefits that are important to their finances, small and mid-sized businesses are most at risk for not developing the right documentation. As a company grows, so do processes and documentation; small and mid-sized businesses, however, are at risk because the development necessary to create structure and standards may not have been implemented. What should a business glean from this case? Simply that creating a process for documenting time and effort of all individuals involved in the R&D process is important and could save thousands of dollars - or millions, in the case or Shami - if the R&D tax credit is later audited. How to properly document an R&D tax credit claim, in light of the Shami case and other recent Court rulings, will be covered in depth at Tax Point Advisors' upcoming R&D seminar at The Boston Tax Institute, June 11, 2012, at the Hyatt Summerfield Suites, Waltham, MA. Contact the Boston Tax Institute for registration and other details:

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