June 10th, 2011

The Internal Revenue Service June 9 renewed its stance that taxpayers cannot make or revoke an election for the alternative simplified research credit after they file their tax returns, bringing disappointment from practitioners interviewed by BNA.

IRS’s decision, announced in final rules (T.D. 9528), offers little help to taxpayers struggling with the complexities of calculating the credit, particularly those dealing with acquisitions and dispositions that can change a company’s circumstances late in the tax year, stakeholders said.

The rules finalize temporary and proposed rules (T.D. 9401, REG-149405-07) set to expire in a few days. Those rules were issued in June 2008. The new guidance leaves in place a variety of other rules on the election and calculation of the alternative credit under tax code Section 41.

Practitioners raised another code section in criticizing the decision, however—Section 9100, which allows taxpayers to apply for relief from deadlines in making tax elections.

Lack of Section 9100 Relief Seen Disappointing

“I’m disappointed that no [tax code] Section 9100 relief is available with respect to the extension of time to make or revoke an election for the simplified alternative credit,” Jim Shanahan, a partner in the Washington National Tax practice at PricewaterhouseCoopers LLP, told BNA June 9.

Shanahan said the June 9 final rules appear to go against the agency’s long history of allowing such relief for taxpayers who have acted reasonably and in good faith.

“I’m just not aware of any circumstance that would suggest the R&D credit provides a circumstance that would be different,” Shanahan, who has been working on R&D issues since 1982, said. “I’m puzzled and disappointed, because it is such a harsh rule and there was no real explanation given as to why the government denies relief for these credit elections.”

Acquisitions Seen as Issue

Both he and David Hudson, a principal in the Business Tax Services group at Ernst & Young LLP, Washington, D.C., said in separate interviews that determining whether the alternative simplified credit is the right choice is extremely complicated and taxpayers may not know the best course of action before a return is filed. The situation is often made more complex by acquisitions and dispositions, both practitioners said.

“An acquisition could dramatically change what kind of credit you need,” Hudson, who worked on earlier research credit regulations in the government before coming to E&Y, told BNA.

Hudson said he did not expect the government to change its mind when it finalized the rules. He said IRS likely views its rules as taxpayer-favorable since taxpayers can change their elections every year as long as they do so on a timely filed return, and “every year you get to assess and determine what’s best.”

SOFTEC Criticizes Rules

Also criticizing the government’s decision was Mark Nebergall, president of the Software Finance & Tax Executives Council (SOFTEC), Washington, D.C., who testified at an IRS hearing on the temporary and proposed rules in 2008.

“We were disappointed” in IRS’s decision, Nebergall said, noting that SOFTEC believes allowing taxpayers to claim the simplified credit is “a reasonable request. It affects all taxpayers.” A significant issue, he said, is that taxpayers attempting to claim the credit for 2007 were “cut off” by the date an earlier set of rules came out.

The rules, which are of importance for business consulting small companies and large altogether, are effective June 10, 2011, when they will appear in the Federal Register.