Tax Court memo reinforces importance of high-quality documentation

Tax Hot Topics

In a recent memorandum opinion, the U.S. Tax Court addressed the question of whether a taxpayer’s research trials constituted qualified research for purposes of the research credit, concluding that the answer depends on the quality of a taxpayer’s documentation.

In George v. Commissioner, T.C. Memo 2026-10, the Tax Court analyzed several of the taxpayer’s poultry research trials and concluded that some qualified for the research credit but others did not, primarily due to the taxpayer’s lack of quality documentation. 

The taxpayer in this case is the sole shareholder of George’s of Missouri, Inc. (GOMI), an S corporation affiliate of George’s, Inc. George’s, Inc. and its affiliates (collectively, “George’s”) are a Midwest‑based chicken producer and the largest vertically integrated chicken producer in the U.S., handling the full supply chain, including farms, hatcheries, and broiler production. GOMI is responsible for the live production of chickens, from the incubation of eggs through their transportation for slaughter.

GOMI claimed the research credit for its 2012 through 2014 tax years and passed the credits through to the taxpayer by filing amended returns at both the entity and shareholder levels. The research credit claims related to seven research trials that GOMI conducted to develop improved broiler chickens by reducing or eliminating health issues, and the claimed qualified research expenditures (QREs) consisted solely of supply expenses.

The Tax Court evaluated several technical aspects of the credit claims, including whether the research trials were qualified research and the nature of the taxpayer’s QREs.

After analyzing each of the seven research trials, the Tax Court determined that four constituted qualified research activities, in whole or in part. The court found that the taxpayer adequately substantiated satisfaction of the four‑part test for those trials through credible testimony and contemporaneous documentation.

By contrast, the court determined that research trials lacking quality contemporaneous documentation were nonqualified because the poor-quality documentation did not establish project timelines, identify research flocks, or document the investigative activities performed (e.g., changes in drug dosage).

The Tax Court also addressed whether the taxpayer’s failure to claim wage QREs precluded its ability to claim supply QREs and the taxpayer’s computation of its base period QREs. While wages were included in overhead costs that the taxpayer allocated to trial runs for purposes of its books and records, the estimated overhead costs were removed from the supply QREs. Ruling in favor of the taxpayer, the court determined that the taxpayer’s decision to claim supply QREs without claiming the related wage QREs did not invalidate its credit claim. 

The court rejected the taxpayer’s estimate of its base period QREs, which was derived using a ratio of credit year QREs, because the taxpayer failed to provide documentation with sufficient evidence to make an informed estimate. As a result, the Tax Court was unable to apply the Cohan rule to estimate base period QREs and applied the statutory 6% credit rate in computing the credit claims.