Attorney-at-Law

IT’S REALLY GROSS

In Uncategorized on 09/24/2012 at 18:30

Gross receipts, that is, when reckoning Average Annual Gross Receipts (AAGR) for Section 41 research tax credits.

That’s the lesson for Hewlett-Packard Company and Consolidated Subsidiaries, 139 T.C. 8, filed 9/24/12, Judge Goeke teaching the lesson.

This is not a replay of Foppingadreef and the Netherlands-US flimflam (see my blogpost “We Don’t Need No Stinkin’ Factors”, 5/15/12, Judge Goeke’s previous shootdown of a H-P ploy). No doubt H-P did research, but AAGR is a threshold that the researchers must cross before they can take the credit. Because the aim is to reward research that H-P otherwise wouldn’t have undertaken, the AAGR tries to exclude research that would have been undertaken, credit or no credit. The theory is that entities budget for research as a function of gross receipts, so by basing credit for new research on a threshold set at a function of gross receipts, the credit applies only to the new research, not the “anyway” research. This method also ties research into sales growth.

H-P tries to lower the threshold by not taking into account intercompany distributions (OK, says IRS, and so stipulates), and excluding nonsales income, like dividends, interest, rent, and other income, in computing AAGR (not OK with IRS or Judge Goeke).

H-P argues that only income from sales should be included in AAGR. “HP submits that by specifically excluding ‘returns and allowances’, a phrase connoting a merchant business association, Congress evinced a clear intention to limit gross receipts to solely sales receipts. Similarly, citing a Black’s Law Dictionary entry, HP asserts that the generally accepted definition of “gross receipts” focuses on sales or services income. See Black’s Law Dictionary 772 (9th ed. 2009) (defining ‘gross receipts’ as ‘The total amount of money or other consideration received by a business taxpayer for goods sold or services performed in a taxable year, before deductions. * * * [Sec.] 448; * * * [sec.] 1.448-1T(f)(2)(iv) [Temporary Income Tax Regs., 52 Fed. Reg. 22764 (June 16, 1987)].’).

“We are unpersuaded by HP’s contentions. Nowhere in the Code has the isolated term ‘gross receipts’ been construed as narrowly as HP suggests. On the contrary, an examination of the Federal income tax laws reveals that Congress widely embraces the notion of a broad, inclusive definition for the term. See, e.g., secs. 165(g)(3)(B), 993(f), 1244(c)(1)(C). Indeed, when adopting that term in a provision, Congress often qualifies the term’s comprehensive definition through specific exclusions or limitations to accommodate the relevant statutory scheme. See, e.g., secs. 448(c)(3)(C), 509(a)(2)(A)(ii), 1362(d)(3)(B) and (C).14 If, as proffered by HP, Congress intended to further limit the definition of ‘gross receipts’ in section 41, it undoubtedly recognized the constructional convention by which it had traditionally done so in numerous provisions.

“Further, HP’s attempt to equate the common meaning of ‘gross receipts’ with the narrow definition Black’s Law Dictionary is unavailing. Specifically, the definition provided in Black’s Law Dictionary is undermined by the cited authorities, section 448 and section 1.448-1T(f)(2)(iv), Temporary Income Tax Regs., supra, from which the definition was purportedly derived.” 139 T. C. 8, at pp. 17-18. (Footnotes omitted).

So Black strikes out. And so does H-P.

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