CRA Holdings U.S., Inc v U.S. (2019)
BACKGROUND
CRA Holdings U.S., Inc (“CRA”) v. United States (No. 15-CV-239W(F)) (2019)
Environmental engineering firm CRA claimed to have undertaken 6,100 research projects in 2002 and 2003. For these, it claimed a R&D Tax Credit refund of $419,924 in 2002, and $1,029,402 in 2003. It did so with assistance from tax consultancy Axiom. The IRS denied this claim, based on a lack of evidence. The taxpayer – in this case CRA – has the burden to demostrate compliance with each requirement. As such, claims can be disallowed if a company cannot provide sufficient supporting evidence.
BASIC FACTS
CRA initially claimed 6,100 projects, but later produced a revised list of 4,643 projects. While the company provided generalized information on all projects, the IRS was not satisfied with this. The IRS requested more information, including:
- the business component for each project,
- the nature of uncertainty,
- the particular science used (e.g. biology, chemistry, etc),
- the process of experimentation used,
- how the results of experimentation would assist in the development of a new or improved product, process or service, and
- how the claimed expenses related to each project.
However, CRA objected this information request based on burdensomeness and lack of relevancy. Instead, the company referred the IRS to Axiom’s report, which included a list of projects. It did state that it held specific information about each project, but would only make information about 10-12 projects available to the IRS for assessment. The IRS, in return, stated that 10-12 projects was not sufficient, particularly because the 6,100 projects were not grouped in any way. It also agrued that the ‘burdensomeness’ was a moot point, because the burden to demonstrate evidence already lies on the taxpayer (CRA).
In response, CRA again revised its project list, and seeked to claim 159 projects (lowering the claim to approximately $546,000). But, it still reiterated that only 10-12 sample projects were available. These were to be either randomly selected by the court, or half each selected by the IRS and CRA. The IRS again rejected this, insisting on information for all 159 projects. It argued that 10-12 cases may not provide a vast enough understanding of the company’s entire work. Instead, a larger sample size should be chozen, or, a pilot sample may be useful to estimate the final sample size.
COURT’S DECISION
Because a sufficient sampling technique could not be decided on, the court was required to make a judgement on the appropriate sample size. All 159 projects were generalized as being related to ‘new processes of contamination remedies’, but no specifics were provided. As such, the court agreed with the IRS that a small sample was not sufficient. But, it stated that information and documentation on all of CRA’s projects was also unreasonable. The court ordered that 40 projects (approximatey 25%) be chosen as a pilot sample. From this, the IRS will assess the documentation and then, if necessary, request a further sample.
LEARNINGS
There isn’t a limit on how many projects can be claimed, but, business should understand the burden of demonstrating compliance. Companies should have a documentation process in place and, if needed, be able to provide evidence as to every part of every project’s and expense’s eligibility.
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