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IRS stands down in research tax credit case

The IRS has agreed not to contest a motion which would allow a company to exclude amounts accrued from controlled foreign subsidiaries (CFS) that were members of its controlled group in calculating its research credit.

The IRS has agreed not to contest a motion which would allow a company to exclude amounts accrued from controlled foreign subsidiaries (CFS) that were members of its controlled group in calculating its research credit.

Hewlett Packard, a US technology company, filed a motion in the Tax Court in the case of Hewlett-Packard Co v Commissioner, for summary judgment on the intercompany gross receipts issue. Although the IRS did not object to the characterisation of the CFS aspect of the issue, the agency is still opposed to the portion of HP's motion that relates to the definition of gross receipts, and specifically whether gross receipts should include dividends, interest, rents, royalties and other income.

Recently there has been significant litigation surrounding the computation of research credits. The courts are beginning to address the ambiguity in the statutory language of section 41 of the Internal Revenue Code, which governs issues pertaining to research credits.

In July 2010, the US District Court for the Southern District of Ohio ruled in favour of the taxpayer in Procter & Gamble Co. and Subsidiaries v United States, a case that stood for the proposition that all members of a controlled group should be conceived of as a single taxpayer when calculating the research credit.

Tax practitioners praised the outcome of the cases, and the willingness of courts to hear the arguments and issue rulings that will provide helpful guidance to taxpayers.

The IRS has also released settlement guidelines on research credit cases. The Appeals Office is continuing to coordinate the issue.

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