The U.S. Court of Appeals for the Seventh Circuit has upheld the Tax Court’s decision in Scott Moore and Gayla Moore v. Commissioner (No. 23-2681) ruling that wages paid to an S Corporation’s chief operating officer (COO) cannot be included in computing the company’s Section 41 research credit claim because the taxpayer failed to adequately substantiate time spent on qualified research and did not engage in direct supervision or support.
The taxpayer appealing the Tax Court decision is the sole shareholder of Nevco, Inc., a manufacturer of scoreboards and related gear for athletic events taxed as an S-Corporation. In its research credit claim for the 2014 and 2015 tax years, the taxpayer included the salary and bonus of the COO as a qualified research expenditure.
The Tax Court’s ruling was primarily based on inadequate documentation, finding that, although Nevco retained payroll records, such records did not log the tasks performed by an employee, and the COO lacked written records regarding his time. Further, the COO was unable to estimate, even approximately, the amount of time he spent performing qualified research. The Tax Court also concluded that the COO did not engage in either direct supervision or direct support of qualified research. The taxpayer challenged the Tax Court’s ruling, arguing that its findings were a legal error.
The Seventh Circuit rejected the taxpayer’s claim, stating that the Tax Court’s ruling was based on a case-specific finding of fact. In reviewing the factual finding, the Seventh Circuit did not “see any error at all, let alone a clear one.” The Seventh Circuit highlighted the inability of the COO to estimate how much of his research involved experimentation as the key issue, while also acknowledging the lack of written records.
Grant Thornton Insight:
The opinion of the Seventh Circuit demonstrates the consequences of a failure to retain sufficient evidence and contemporaneous documentation to substantiate a research credit claim and the qualified activities performed. Without adequate documentation, the courts have no basis to estimate an individual’s time spent performing qualified research. It is important for taxpayers to substantiate research credit claims with contemporaneous documentation and written records.
Content disclaimer
This content provides information and comments on current issues and developments from Grant Thornton Advisors LLC and Grant Thornton LLP. It is not a comprehensive analysis of the subject matter covered. It is not, and should not be construed as, accounting, legal, tax, or professional advice provided by Grant Thornton Advisors LLC and Grant Thornton LLP. All relevant facts and circumstances, including the pertinent authoritative literature, need to be considered to arrive at conclusions that comply with matters addressed in this content.
For additional information on topics covered in this content, contact a Grant Thornton professional.
Grant Thornton LLP and Grant Thornton Advisors LLC (and their respective subsidiary entities) practice as an alternative practice structure in accordance with the AICPA Code of Professional Conduct and applicable law, regulations and professional standards. Grant Thornton LLP is a licensed independent CPA firm that provides attest services to its clients, and Grant Thornton Advisors LLC and its subsidiary entities provide tax and business consulting services to their clients. Grant Thornton Advisors LLC and its subsidiary entities are not licensed CPA firms.
Tax professional standards statement
This content supports Grant Thornton Advisors LLC’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. It is not, and should not be construed as, accounting, legal, tax, or professional advice provided by Grant Thornton Advisors LLC. If you are interested in the topics presented herein, we encourage you to contact a Grant Thornton Advisors LLC tax professional. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein.
The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal, tax, or professional advice provided by Grant Thornton Advisors LLC. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact a Grant Thornton Advisors LLC tax professional prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton Advisors LLC assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.
Grant Thornton Advisors LLC and its subsidiary entities are not licensed CPA firms.
More tax hot topics
No Results Found. Please search again using different keywords and/or filters.
Share with your network
Share