In response to a recent summary judgment order in Geosyntec Consultants Inc. v. United States addressing the issue of whether a contractors’ research and experimental activities are considered “funded” for purposes of assessing research tax credit (RTC) claims, Dr. Shaun Ledgerwood and Mr. Darrell Chodorow published an article in the September 2014 issue of Tax Notes presenting an alternative approach based on the economics of risk and reward allocation for contracts. The authors were economic consultants for the taxpayer in Geosyntec in its pretrial negotiations with the IRS.
The Economic Recovery Tax Act of 1981 (ERTA) established a RTC, allowing a taxpayer to claim a credit of 20 percent for qualified research expenses in a given tax year. Congress has continually extended this credit, despite frequent disputes including whether contractors’ research should be funded. Although the current legislature has not yet renewed the credit, it is expected that it will be retroactively renewed (and perhaps made permanent) after the 2014 midterm elections.
In the article, the authors argue that while Geosyntec helped to clarify the proper implementation of the funding standards, it does not fully assess how different contractual terms allocate the risk of failure among the parties in contracts requiring qualified research expenditures. The authors demonstrate an approach that could bring logical cohesion to future RTC cases, allowing for the rightful ability of a researcher and its clients to claim the credits for qualified research expenditures based on concrete indications of intent expressed in the underlying contract.
The article, “An Economic Evaluation of ‘Funding’ for Research Tax Credits,” is available for download below.