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February 11, 2021

Tax Court sustains Service's denial of R&E tax credits claimed for subsidiary's shipbuilding design and construction activities

In Little Sandy Coal Company, Inc. v. Commissioner (T.C. Memo. 2021-15, Dkt. No. 17431-17), the Tax Court has sustained the Service's denial of research tax credits. In support of its conclusion, the Court noted (1) the IRC Section 41(d)(1)(C) requirement that at least 80% of a taxpayer's research must constitute elements of a process of experimentation applies to activities, rather than to physical components of the product being developed or improved; (2) directly supervising or supporting research does not mean one is "engaged in" research; and (3) the costs of supplies used in developing a product are not considered expenditures for qualified research because supplies are not activities. As the taxpayer could not show that substantially all of the research activities in developing new ships constituted elements of a process of experimentation, none of the expenses constituted qualified research expenses.


Little Sandy Coal Co v Commissioner