In the case of Siemer Milling Company v. Commissioner, the court held a taxpayer engaged in the business of milling and selling wheat flour was not entitled to the R&D tax credit. The court examined seven projects, all related to the sale and production of flour, that Siemer conducted during the two years in question. The court determined the taxpayer’s activities failed to meet the process of experimentation requirement under Section 41 for all projects, while some of the projects failed the technological in nature test under Section 41.
Siemer Milling Company (Siemer) is a company based in Illinois engaged in the business of milling and selling wheat flour. Siemer has been in the wheat milling business since the 1950s and began claiming the R&D tax credit in 2004. At issue were $122,424 and $116,246 in R&D tax credits for tax years 2011 and 2012 respectively. Siemer’s Vice President of Product served as the primary witness with respect to the projects.
The court held the following with respect to each of the seven projects:
The court primarily focused on the “process of experimentation” requirement and sided with the IRS that Siemer failed to illustrate how the projects met this requirement. The court noted the testimony provided by the Vice President of Production focused on the uncertainties Siemer had sought to address as opposed to the process of experimentation used to eliminate those uncertainties. Furthermore, the R&D tax credit studies produced by Siemer’s accounting firm did not address the process of experimentation. The court stated the studies “included very little evidence of Siemer’s asserted process of experimentation.” The court relied on the explanation of the process of experimentation test in Union Carbide Corp. & Subs v. Commissioner requiring “a methodical plan involving a series of trials to test a hypothesis, analyze the data, refine the hypothesis, and retest the hypothesis so it constitutes experimentation in the scientific sense.”
Documentation is vital to successfully claiming R&D tax credits. Siemer would have been able to illustrate the qualified nature of projects with better documentation and specifics related to the four qualification requirements: 1) business component, 2) technological in nature, 3) uncertainty, and 4) process of experimentation. It is imperative that companies claiming credits spend the time to create and maintain documentation that provides proof of the scientific principles involved in the activity and details the process of experimentation used to eliminate uncertainties rather than providing broad statements. The main takeaway from this ruling is that companies should be wary of including minimalistic descriptions of their research activities to support the qualifying nature of the activities.
Earnd can help you qualify and organize documentary support to address qualification requirements as your company pursues R&D tax credits.