Recent federal U.S. court rulings could bode well for manufacturers and mold makers seeking to claim research and development tax credits.
In a Nov. 23 ruling, the U.S. Tax Court in St. Louis found in favor of auto molder TG Missouri Corp. part of Toyoda Gosei Co. Ltd. of Japan stating that it could claim injection mold tooling as part of its R&D tax credits.
The ruling rejected the Internal Revenue Service position that tooling did not qualify because it lasts for more than a year, and because the molds were owned by TG Missouri's customers, although they were used and co-developed by TG.
The ruling could have lasting impact on a variety of companies that use molds and record the cost of those molds as part of their R&D tax credits.
TG Missouri of Perryville, Mo., molds interior and functional trim parts for the auto industry. It included the cost it incurred to develop, design, engineer and run new injection mold tooling as part of its R&D tax credit package in 1998 and 1999.
In 2006, the IRS audited TG and declared that the molds did not qualify, denying the company $5 million in tax credits, according to court documents. Toyoda Gosei officials were not immediately available to discuss the case.
IRS denied the credits because TG did not own the molds its customers traditionally pay for tooling in the auto industry, although they are held and used by the molders and because research tax credits are not aimed at long-term equipment, but rather original development costs. Because injection mold tooling has a useful life exceeding one year and is used in full-time production, the federal tax agency had disallowed them, court records stated.
TG argued that it spent its own money to develop and run the molds, listing them as supplies for essential new product development. At the same time, it claimed the long-term production life of the molds did not disqualify the costs of creating them.
This decision may have a wide-ranging impact on all industries in determining supply costs that are eligible for the R&D tax credit, said Dean Zerbe, national director of accountants and tax consulting group Alliantgroup LP of Washington, in a written statement on the court action.
Another case that should help firms fighting the IRS over R&D tax credits involved chemical company KMCO Inc. of Crosby, Texas, according to Alliantgroup. In June, the U.S. Fifth Circuit Court of Appeals in Houston ruled in favor of Arthur McFerrin, whose chemical company KMCO had been ordered to repay R&D tax credits. The court said the IRS had interpreted tax law too tightly and did not allow for employees' institutional knowledge and testimony.
Tooling is at the heart of other plastics industry tax disputes, including an ongoing case involving toolmaker and molder Tech Molded Plastics Inc. of Meadville, Pa.
Mark Hanaway, director of marketing and sales for the family-owned business, said it is too soon to tell what impact the TG Missouri and McFerrin cases may have on its appeal for R&D tax credits, but he is hopeful it could spell relief for the company and other small firms.
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