Tax Court Stresses Documentation Requirement for R&D Tax Credit Eligibility

On April 15, 2019, the United States Tax Court ruled in favor of the commissioner in Siemer Milling Company (Siemer Milling) v. Commissioner of Internal Revenue, finding that Siemer Milling lacked sufficient documentation to support the R&D credits claimed. The case reiterates the critical importance of substantively documenting qualifying activities providing eligibility to claim the R&D tax credit.

In Siemer, the Court disallowed approximately $238,670 dollars in R&D credits claimed by Siemer Milling (taxpayer) during tax years 2010 and 2011. This disallowance was due in large part to the taxpayer’s failure to retain and provide supporting documentation demonstrating how the company’s activities met all four tests necessary to constitute qualified research expenses.

Background (Presented Facts)

Siemer Milling Co. (Siemer) is based in Illinois and is engaged in the business of milling and selling wheat flour. During tax years ending May 31, 2011 and 2012, Siemer conducted activities for which it claimed. During the years in issue Siemer owned and operated two mills, one in Illinois and one in Kentucky. Siemer employed millers, maintenance personnel, lab technicians, lab supervisors, a research and development manager, research and development staff, and others during the years in issue. Siemer did not have any employees with the title engineer or geneticist during the years in issue. Nor did Siemer employ anyone who held a degree in computer science or chemical and mechanical engineering during the years in issue.

Key Holding:

Failure to Establish "Process of Experimentation"(e.g. Flour Heat-Treatment Project)

- "it is not clear how it set out to do that and whether that process was a true process of experimentation"

-"... documents in the record nor the testimony offered at trial proves that Siemer [taxpayer] had a methodical plan involving a series of trials to test a hypothesis, analyze the data, refine the hypothesis, and retest the hypothesis so that it constitutes experimentation in the scientific sense"

Failure to Establish "Technical Uncertainty"(e.g. Pulsewave Project)