A second court has ruled against Dow Chemical Co. in its effort to obtain a research and development tax credit.
Dow is seeking the credit for supplies it purchases to make finished goods, when research is being conducted at the same time.
A three-judge panel of the U.S. Court of Appeals for the Second Circuit in New York upheld Sept. 7 a previous ruling from the U.S. Tax Court that those supplies do not qualify for a R&D tax credit because they would have been purchased regardless of any research that might have been conducted.
The case stems from an Internal Revenue Service ruling that Union Carbide Corp. was not entitled to $8 million in R&D tax credits during the 1994 and 1995 tax years for supplies the company had purchased for production of goods in three separate instances where it also was conducting research projects at production plants in Hahnville, La.
UCC had argued it was entitled to the credit because the company improved the way existing products were made during the course of production. UCC was purchased by Dow Chemical in 2001.
“Affording a credit for the costs of supplies that the taxpayer would have incurred regardless of any qualified research it was conducting simply creates an unintended windfall,” said the three-judge panel in its 11-page decision.
“We agree with the Tax Court that the costs for which UCC seeks a research credit are ‘at best, indirect research costs excluded from the definition of [qualified research expenses] under section 1.41-2(b)(2) [of the Treasury Regulations].' “
“As the commissioner argues, [UCC] was entitled to a credit for only those additional supplies that were used to perform the research [because the] raw materials used to make finished goods that would have been purchased regardless of whether UCC was engaged in qualified research.”
Section 41(d)(2)(C) of the U.S. tax code provides that when a taxpayer seeks a research credit related to its production process, the production process must be divided into two business components, one that relates to the process and another that relates to the product, noted the court.
“This indicates that Congress intended to allow taxpayers research credits for research performed to improve their production processes, but ... did not intend for all of the activities that were associated with the production process to be eligible for the research credit if the taxpayer was performing research only with respect to the process, not the product,” said the panel in its opinion.