Charlie . 4th Apr, 2025 12:31 PM
A recent circuit court case, Grigsby,1 emphasizes the need for taxpayers to clearly define business components when preparing and documenting their Sec. 41 research tax credit. The Fifth Circuit determined that the taxpayer failed the business–component requirement and cited that failure as one of two reasons for disallowing the research credit.
Taxpayers in other industries [outside of manufacturing and utility areas] also claimed the credit in 1981, businesses such as fast–food restaurants, baked goods, home building, publishing, banking, stock brokerage, and movie production. All claimed the credit. I think it is pretty clear that we have some cases far from the high technology research area. … We would focus on the business component, that is the most basic element or component part of a product or process, with respect to withdrawing the activities undertaken, to see if the required substantial technological improvement is found.
In Grigsby,12 the IRS sought to recover a tax refund that it issued to the defendants as shareholders of Cajun Industries LLC, an S corporation. Cajun amended its 2012 tax return to include $1.3 million in research credits based on its determination that various projects met the Sec. 41 criteria. Representative projects included infrastructure improvements such as flood control structures and site preparation for industrial plants. After initially approving the credit and issuing the refund, the IRS determined that the refund was erroneous because the claimed activities did not align with the requirements for qualified research under Sec. 41.
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