In Uncategorized on 12/05/2022 at 20:22

I’m a great fan of summary judgment (“summary J”). It’s a discovery device too seldom used. It gives discovery of your client’s case (how strong does her/his story look in cold print?). It gives a fast and cheap look at your adversary’s case (what’s their story? And it’s great for cross-examination if you get that far). And it gives discovery of the most important person in the case: the judge. What does the judge think is the most important fact in dispute in the case?

But summary J should never be wasted to try to avoid caselaw that is squarely against you. IRS does this in Gale E. Stephens & Anne M. Stephens, Docket No. 9920-21, filed 12/5/22.  Gale and Anne own a couple Sub Ss (hi, Judge Holmes) that design and sell custom air flow systems. I don’t know what those are, either. But each one is different, and Gale & Anne have to design each one, get customer approval and tweak to suit, sign a contract, and then get components fabricated by third parties. Then Gale & Anne build the system. Gale & Anne claim the cost of the fabricated parts are research expenditures and take Section 41 write-offs for wages of personnel and “panels, hinges, screws, nuts, valves, monitors, and ducts” used by third party manufacturers who build the components. Order, at p. 2. But only supplies, and not wages, are under the microscope here.

IRS says these supplies “were purchased to build air flow systems that [Sub Ss] were contractually obligated to build,  they were purchased regardless of whether qualified research was being conducted.  Additionally, the Commissioner argues that because the supplies were not used in an investigative nature, and instead for the actual construction of products (i.e., the airflow systems) with the purpose of fulfilling contractual obligations, the section 174 test is not met.” Order, at p. 3.

Judge Ronald L. (“Ingenuity”) Buch finds caselaw that says the fact that the Sub Ss were contractually obligated to produce the systems doesn’t mean that research wasn’t involved. And the fact that the supplies went into a product that was sold to customers doesn’t disqualify the supplies as being purchased for research.

But Judge Buch makes it clear: “The fact that supplies were purchased for the purpose of constructing a final product for delivery to a customer does not preclude those supplies from being qualified research expenditures. Whether they are, in fact, qualified research expenditures is a question to be resolved at trial.” Order, at p. 7.

For some caselaw on what is and what isn’t, see my blogposts “Little Sandy Coal – No Credit,” 2/11/21, and “The Stretch,” 4/15/19, both involving cases Judge Buch cites.


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