This fairly nuanced Tax Court opinion defines the scope of gross receipts for calculating research tax credits under Sec. 41. The case demonstrates that a thoughtful examination of return calculations, and what is included and excluded from those calculations, can yield significant tax savings. However, since the issue raised in this case was addressed by regulations defining gross receipts for Section 41 published after the tax years involved in the case, the direct application of this holding in current years is limited.
A vast over-simplification of the issue at controversy is as follows: Hewlett Packard sought to exclude dividends, interest, investment and other “non-sales” income from the definition of gross receipts that it used to calculate qualifying tax credits. HP wanted to reduce the total gross receipts in the calculation because the rate at which qualifying expenses became eligible for the credit increased in direct relation to the percentage of gross receipts represented by those expenses. Said differently, HP accumulated credits at a higher percentage once the qualifying expenses passed 1%, then 1.5% and finally, 2% of the gross receipts. Qualifying expenses in excess of 2% of HP’s gross receipts generated credits at the rate of 3.75% as opposed to 2.65% if the expenses were less than 1.5% of gross receipts. Thus, a lower gross receipts base meant that HP reached percentage of expenses threshold, and the higher credit percentage, more quickly.
The government argued to the contrary – a position consistent with the later promulgated regulations mentioned above. The Tax Court agreed with the government. It ruled that HP’s dividends, interest, rent, and other income must be included in total gross receipts for purposes of the calculation. You can add it all up yourself if you care to read the opinion below.
Read the opinion here:
Hewlett Packard v. Commissioner, 139 T.C. No. 8 (2012)