Section 41 Archives | TAX CONTROVERSY 360

Pilot models at scale: What George v. Commissioner teaches about the research credit

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 [...]

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Does Latest IRS Guidance Signal New Firm Stance on Research Credit Refund Claims?

On October 15, 2021, the Internal Revenue Service (IRS) issued a press release related to required information for valid research credit refund claims. The press release contains a link to a memorandum by two IRS employees, which will be used to evaluate such claims, and states that there will be a grace period (until January 10, 2022) before such information will be required to be included with timely filed research credit refund claims.

The guidance referred to in the press release is from the IRS’s Office of the Chief Counsel, Memorandum 20214101F (the IRS Research Memo) dated September 17, 2021, which focuses on administrative claims for refunds respect to the Internal Revenue Code (IRS) section 41 research credit.

First, we recommend reviewing the IRS Research Memo because it does a good job explaining the necessary elements to claim the credit. Second, the IRS Research Memo is a good reminder that the first requirement is to file a refund claim that is sufficiently detailed in order to give the IRS notice on both the technical and factual basis of the refund claim. In the context of the IRC Section 41 credit, the IRS Research Memo provides the following as minimum requirements for a refund claim:

Identify all the business components to which the IRC Section 41 research credit claim relates for the year for which a refund is sought.
For each business component:
- Identify all research activities performed
- Identify all individuals who performed each research activity
- Identify all the information each individual sought to discover
Provide the total qualified employee wage expenses, total qualified supply expenses and total qualified contract research expenses for the claim year (this may be done using Form 6765, Credit for Increasing Research Activities).
The refund claim must be signed under penalties of perjury attesting to the veracity of the facts and information stated therein.
Supporting facts should be in the form of a written statement and merely incorporated by reference to documents attached to the claim.
The refund claim must be filed within the period of limitations stated in IRC Section 6511. Typically, taxpayers must file a valid claim within three years of the date Form 1040 or Form 1120 was filed or two years from the time the tax was paid—whichever period expires later.

Importantly, the IRS Research Memo does not advise taxpayers on how much information the IRS believes is sufficient to make a valid claim for refund. The IRS Research Memo does, however, highlight some recent court decisions where taxpayers were denied a refund because they did not include sufficient facts in their IRC Section 41 refund claim. In those cases, the courts ruled that the refund claims were defective and untimely.

Practice Point: The IRS Research Memo is a good reminder that when it comes to refund claims, generally, more description and detail is better. Interestingly, if the taxpayer had claimed a research credit on the original return, there would be [...]

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