The US Tax Court’s recent decision in George v. Commissioner, T.C. Memo. 2026-10, addressed the application of the Section 41 research credit to supply qualified research expenses (QREs), focusing on whether chickens used in drug trials can qualify as “supplies.” The case provides useful insight into how courts evaluate technical uncertainty under Section 174 for purposes of the Section 41(d)(1)(A) subtest to qualified research, as well as the process of experimentation requirement under Section 41(d)(1)(C) in determining QREs.
Background
George’s of Missouri, Inc., the taxpayer’s S corporation, raises chickens from hatch to processing and handled the live production side of a large poultry operation. In commercial poultry production, “breeders” are hens that produce eggs while “broilers” are chickens raised for processing and sale. Once hatched, broilers are placed on farms and raised under tightly managed conditions, with producers managing feed composition, vaccines, and medications. To keep flocks healthy and profitable, George’s routinely tested different combinations of drugs, vaccines, feed additives, and the chickens themselves, often across entire flocks in real-world conditions, to evaluate their effectiveness. The dispute in George centered on whether these large-scale, production-level trials to develop a healthier, more uniform chicken qualified the chickens as supply QREs.
The Tax Court’s analysis
The Court examined whether the taxpayer faced the requisite uncertainty with respect to the development of a business component (here, a healthier chicken). In George, vendor testing occurred in controlled, “sterile” environments designed to eliminate external variables, whereas the taxpayer’s operations involved fluctuating temperatures, differing farm conditions, and complex biological interactions that could materially affect outcomes. The Court recognized that successful results in one real-world setting do not necessarily translate to another setting with different production environments, inputs, or biological conditions. As a result, prior success (whether in the lab or in other operational contexts) does not thereby eliminate taxpayer-specific uncertainty as to that setting. Thus, the Court found that taxpayer-specific uncertainty depends on whether the taxpayer faces uncertainty regarding performance under the specific operating conditions at issue.
The Court also addressed the type of trials performed by the taxpayer. The taxpayer did not run controlled lab tests; it raised broilers to full weight under actual production conditions to determine whether treatments worked. The Court found that this real-world testing could satisfy the technical uncertainty standard under Section 174. While additional requirements must be met for property to qualify as a “supply” for research credit purposes, satisfying the Section 174 standard allowed the taxpayer to treat the chickens as pilot models – and thus the chickens themselves, along with feed and other associated costs – as eligible inputs in the QRE analysis. That finding supports the notion that large-scale, production-level testing can qualify as experimentation under Section 174, even where it occurs outside a controlled laboratory setting.
In addition to addressing the Section 174 uncertainty standard, the Court rejected the Internal Revenue Services’ attempt to impose rigid substantiation requirements for the “substantially all” standard under the process of experimentation requirement. The taxpayer did not maintain detailed logs but prevailed by presenting credible testimony and records establishing a process of experimentation. However, the Court made clear that a taxpayer can satisfy the substantially all standard “without the mathematical precision that contemporaneous time logs would provide.” This is a particularly welcome development considering recent audit experiences, where exam teams have increasingly pushed for highly detailed contemporaneous documentation to satisfy the standard.
Key takeaway
Although we do not address all aspects of the Court’s decision, including its analysis of base-period substantiation and penalty protection, its treatment of the uncertainty and process of experimentation standards offers particularly useful guidance for taxpayers evaluating and supporting their QRE claims.
