Audio Technica, Inc V Commissioner (2020)
Audio Technica vs. Comm’r., Case: 5:16-cv-02052-JRA; (Fed. Dist. Ct. Northern OH)
Audio Technica, Inc. makes high-end audio equipment and contends that it was entitled to a tax credit for increasing research and development activities under section 41 for the 2002-2005, 2006-2010, and 2011 tax years. The IRS issued a notice of deficiency stating that Audio Technica was not entitled to the credit amounts it claimed. In response, Audio Technica filed a petition for review with the United States Tax Court. This was ruled on and then appealed at the District Court of Appeals.
Under Section 41(c)(3)(A), the R&D tax credit is available when taxpayers increase certain research expenses overtime. This increase is measured against research costs from a previous 5-year period and taken as a percentage of gross receipts during those years. This fixed-based percentage is multiplied across the average gross receipts for the most recent 4 years to obtain a base amount. A taxpayer is entitled to a credit equal to twenty percent of the amount that its qualified research expenses for the year exceeding this base amount.
Audio Technica reached a settlement with the court with the following outcomes:
- 2002-2005: listed the dollar amounts of an agreed-upon deficiency by tax year
- 2011: stated the total dollar amount of Audio Technica’s research credit
With respect to the 2006-2010 tax years, Audio Technica paid the amount owed to the IRS and subsequently sued the Northern District of Ohio for a refund. They filed a motion which stopped the government from claiming that the .92% fixed-base percentage did not apply in this case, as they had already previously agreed to it’s accuracy in the 2002-2005 and 2011 rulings. The court eventually ruled in favor of Audio Technica and directed them to propose a supplemental judgement, which was later agreed to. As requested, Audio Technica filed a proposed final judgment, which noted that the fixed-base percentage from the Tax Court proceedings was .92% and calculated the total amounts for R&D tax credits it was owed in certain of the tax years at issue
The government appealed the ruling stating that Audio Technica had improperly filed to stop the government regarding the 0.92% fixed-base percentage. The court ruled in favor of Audio Technica again, as the government still failed to provide any proof that would have shown a different fixed-base percentage.
The calculations involved with research tax credits can be convoluted, and so it is important to accurately track the values used to determine percentages and credit amounts. Having a sufficient history of evidence is the best way to ensure you receive the credits you are entitled to.
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