Tax

Listen to this article

7^th Circuit Court of Appeals

Case Name: Scott Moore v. CIR

Case No.: 23-2681

Officials: Easterbrook, Jackson-Akiwumi, and Lee, Circuit Judges.

Focus: Tax

Scott and Gayla Moore, a married couple, sought a tax credit under Section 41 of the Internal Revenue Code for research expenses incurred during the 2014 and 2015 tax years. The Moores included the salary and bonus of Gary Robert, the President and COO of Nevco, Inc., as research expenses under Section 41. Nevco, operating as a Subchapter S corporation, was solely owned by Gayla Moore, meaning all its tax attributes flowed to her. The Moores contended that Robert dedicated a substantial amount of time to conducting or overseeing research activities.

Following a trial, the United States Tax Court concluded that the evidence did not support the Moores’ assertion regarding Robert’s allocation of time to “qualified” research. The court highlighted Robert’s lack of written records detailing his time allocation, as mandated by 26 C.F.R. §1.41–4(d). Additionally, Robert was unable to provide an estimate of the portion of his time devoted to “qualified” research as defined by Section 41(d)(1). Moreover, the court determined that Robert did not directly supervise or support Nevco’s director of engineering, whose salary the Commissioner of Internal Revenue was willing to classify as a “qualified research” expense.

The Seventh Circuit upheld the Tax Court’s decision. The Court of Appeals regarded the Tax Court’s failure to ascertain whether Robert’s research activities met the criteria for “qualified” status and the extent of his time allocation as factual determinations rather than legal errors. After reviewing these findings for clear error, the Court of Appeals found none. Additionally, the Court of Appeals emphasized that the burden of production and persuasion lay with the Moores, making the Tax Court’s conclusion conclusive against them.

Affirmed.

Decided 04/30/24

Full Text