New Tax Court Case Confirms Burden is on Taxpayer to Substantiate Base Period for the IRC §41 Research Credit

A recent court case denied a taxpayer the Research Credit under IRC §41 since it could not substantiate proper use of the “start-up” base period to calculate its credit rather than use of the 1984-1988 base period. IRC §41 permits a taxpayer to use a base period of either 1984-1988 or, if certain criteria are met, an alternative base period intended to make the credit available to “start-up” companies that were not in business from 1984-1988. The taxpayer’s service provider calculated the R&D credit using “start-up” method, contending that there was no evidence that the taxpayer engaged in R&D activities during the 1980’s. The court determined that the government does not bear the burden of proving when R&D first started, but that the taxpayer has the burden of showing its right to any claimed tax benefit. Here, the taxpayer failed to meet this burden and was denied the credit. Dennis F. Quebe, 123 AFTR 2d 2019-XXXX (DC OH).

Many professional service providers lack the expertise to properly calculate and document the 1984-1988 base period. For a tax credit as complex as the Research Credit, it is critical to hire a fully qualified and experienced team that includes attorneys, CPAs, and engineers. The R&D tax credit experts at ICS Tax know how to properly calculate the 1984-1988 base period as well as to provide proper documentation and substantiation for the credit.

Authors: Lacey J.S. Robb, JD, LLM; Contributing Author: Alexander Bagne, JD, CPA, MBA, CCSP

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