By Tom Ochsenschlager, J.D., CPA
The IRS recently released a Field Attorney Advice (FAA) memo that denied a taxpayer’s claim for a research tax credit involving five instances where the taxpayer’s customers funded the research. The FAA indicated its conclusion as based on its review of the terms of the contracts the taxpayer had with its customers regarding termination clauses, ownership of the deliverable, payment terms, acceptances/inspections and warranties.
The IRS examination concluded that the payments from the customers were not contingent on the success of the research and the terms of the payments for the research did not permit the taxpayer to use the results of the research. The IRS found that, under these conditions, the contracts were “funded research” and that the taxpayer could not claim the research credit under Section 41.