Moore v. Commissioner of Internal Revenue, No. 23-2681 (7th Cir. 2024)

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Scott and Gayla Moore, a married couple, claimed a tax credit under Section 41 of the Internal Revenue Code for research expenses for the 2014 and 2015 tax years. The Moores treated the salary and bonus of Gary Robert, the President and COO of Nevco, Inc., as Section 41 expenses. Nevco, a Subchapter S corporation, was solely owned by Gayla Moore, and thus all of its tax attributes flowed to her. The Moores argued that Robert spent a significant amount of time conducting or supervising research.

The United States Tax Court held a trial and found that the record did not support the Moores' claim that Robert spent any given fraction of his time conducting or directly supervising "qualified" research. The court noted that Robert lacked written records of how he spent his time, which is a requirement under 26 C.F.R. §1.41–4(d). Furthermore, Robert could not estimate how much of his time was devoted to "qualified" research, as defined by Section 41(d)(1). The court also found that Robert did not engage in either "direct supervision" or "direct support" of Nevco’s director of engineering, whose salary the Commissioner of Internal Revenue was willing to treat as a "qualified research" expense.

The United States Court of Appeals for the Seventh Circuit affirmed the Tax Court's decision. The Court of Appeals found that the Tax Court's inability to answer the questions of whether Robert's research was "qualified" and how much time he devoted to it was not a legal error, but a factual finding. The Court of Appeals reviewed this finding for clear error and found none. The Court of Appeals also noted that the Moores bore the burdens of production and persuasion, and thus the Tax Court's conclusion was dispositive against them.

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In the United States Court of Appeals For the Seventh Circuit ____________________ No. 23-2681 SCOTT MOORE and GAYLA MOORE, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. ____________________ Appeal from the United States Tax Court. No. 18632-19 — John O. Colvin, Judge. ____________________ ARGUED MARCH 27, 2024 — DECIDED APRIL 30, 2024 ____________________ Before EASTERBROOK, JACKSON-AKIWUMI, and LEE, Circuit Judges. EASTERBROOK, Circuit Judge. Section 41 of the Internal Revenue Code, 26 U.S.C. §41, provides a tax credit for “quali ed” research expenses. Nevco, Inc., which makes scoreboards and related gear for athletic events, engaged in research to improve its products. When Scott Moore and Gayla Moore—a married couple ling jointly—took a §41 credit for tax years 2014 and 2015, they treated the salary and bonus of Gary Robert, the rm’s President and COO, as §41 expenses. Nevco was 2 No. 23-2681 a Subchapter S corporation, so all of its tax attributes owed to Gayla Moore, its sole owner. The Tax Court held a trial and found that the record did not support a nding that Robert spent any given fraction of his time conducting or directly supervising “quali ed” research. T.C. Memo 2023-20. One reason was that Robert lacked written records of how he spent his time, despite the record-keeping requirement in 26 C.F.R. §1.41–4(d). (Nevco has payroll records, but they log how much time employees work, not the tasks they perform or supervise.) Another was that Robert could not estimate, even approximately, how much of his time was devoted to “quali ed” research, a term de ned by §41(d)(1). Still a third was that Robert did not engage in either “direct supervision” or “direct support” (§41(b)(2)(B)(ii)) of Dave Paslay, Nevco’s director of engineering, whose salary the Commissioner of Internal Revenue has been willing to treat as a “quali ed research” expense. We discuss only the second of these reasons; otherwise the Tax Court’s opinion speaks for itself. The Moores insist that Robert spent a lot of time conducting or supervising research. The Commissioner acknowledges as much. But was it “quali ed” research? And, if it was, how much of Robert’s time was devoted to it? Without answers to those questions, no one can calculate the credit properly. The §41(a)(1) credit is limited to 20% of the increase over a base amount. (Section 41(a)(2) and (a)(3) allow credits that do not depend on an increase over a base, but the Moores do not rely on those provisions.) To do the math, one needs accurate details. The Tax Court found it impossible to answer the “was it quali ed?” and “how much?” questions. The Moores call this a legal error, but it was a nding of fact under the approach No. 23-2681 3 used to di erentiate fact from law in U.S. Bank, N.A. v. Village at Lakeridge, LLC, 583 U.S. 387, 395–96 (2018). (That is to say, the nding is case-speci c rather than based on resolving a dispute about what a legal rule provides.) As a factual nding, it is reviewed for clear error, and we do not see any error at all, let alone a clear one. Section 41 allows a credit for increases in research that is “technological in nature” (§41(d)(1)(B)(i)) and “substantially all of the activities of which constitute elements of a process of experimentation” (§41(d)(1)(C)). Regulations de ne what “elements of a process of experimentation” entail, but we need not get into those weeds. It is enough to say, as the Tax Court found, that none of the evidence shows what fraction of the research involved “experimentation”—even the trialand-error kind made famous by Thomas Edison. Without knowing how much of Robert’s research was “quali ed”, the Tax Court could not determine how much it had increased over a base amount. The problem is not simply the lack of written records (though that is a big problem); it is that Robert could not even estimate how much of his research involved “experimentation” either in a colloquial sense or under the regulations’ speci cations. And because the Moores bore the burdens of production and persuasion, the Tax Court’s conclusion is dispositive against them. AFFIRMED

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