United States v Beltecno Inc & Subs (2009)
United States v. Beltecno Inc. & Subs. (“Beltecno”), 104 AFTR 2d 2009-5929 (WD WA 2009)
Cabinet manufacturer Beltecno filed amended tax returns in 2005 and 2006, and claimed $12,117 in R&D tax credit for 2001, and $124,772 for 2002. Both were paid by the IRS, without it performing any investigations. The IRS also refunded Beltecno another $37,231, as it determined the company has miscalculated its uniform capitalization reserves for 2001, and was therefore owed this extra amount.
However, in 2007, the IRS audited the company, and found that the tax refunds issued to Beltecno were in error. So, it demanded a return of funds (totaling $174,120, plus interest). The reasoning was that Beltecno did not record its research expenses, and therefore there was no correlation between its projects and QREs.
The IRS sent Beltecno an explanation (Form 866-A) and requested the funds, but the company didn’t pay. In 2009, the IRS therefore took the company to court over this $174,120.
It’s allowed two years after making an erroneous refund to bring suit, and must establish:
- that the refund was paid to the taxpayer (i.e. Beltecno),
- what the amount was,
- a timely recovery action, and
- that Beltecno isn’t entitled the refund.
Here, the first two points were easily assessed. The payments were made to Beltecno in 2007, and the case was in 2009, so the two year window was also sufficient. Because the company failed to keep records of its R&D expenditure, the final requirement was also met.
Beltecno argued that the IRS’ claims should be dismissed because the IRS failed to provide sufficient evidence. The company argued that without evidence from the IRS, it’d have to undertake an expensive and time consuming discovery. It referred to Mahoney v U.S. and McLennan v U.S., where the United States was the defendant in both cases, and as such had to provide “concrete and positive evidence” as to why the taxpayer could/should not receive a tax refund. However, in this case the IRS is seeking to return funds, not refusing them in the first place. So, the ultimate burden of evidence is on the taxpayer (Beltecno).
The court referred to Ahmanson Foundation v. United States, where it found that the IRS only needs to prove its claim has substance and was made in good faith. It’s Beltecno’s burden to prove the amount it’s entitled to. Similarly, as seen in Tax & Accounting Software Corp v United States, the tax credits are a privilege granted by the government, and the taxpayer should maintain adequate records. The court was satisfied that the IRS’ Form 866-A proves that its claim has substance, and that it’s acting in good faith. The case was therefore not dismissed, and Beltecno was to return the funds.
Regardless of whether companies are claiming the tax year just ended, or filing amended returns, they should keep adequate documentation of the R&D projects and allocation of QREs. It’s their burden to provide evidence, should the IRS audit, deny claims, or request a return of funds.
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