Jeffrey A. Harper and Katherine M. Harper v. Commissioner of Internal Revenue

May 10, 2023 | Copeland, United States Tax Court Judge | Docket No. 26176-16

Short Summary 

Harper v. Commissioner involves Jeffrey and Katherine Harper, who owned and operated Harper Construction Co., a business specializing in design-build construction projects. The dispute arose after the IRS denied the Harpers’ claims for over $800,000 in federal R&D tax credits, arguing that their company’s activities did not meet the requirements for qualified research, particularly the “business component” rule. The case focused on whether the unique designs and engineering work performed by the company for various construction projects could count as research under the tax law. The Tax Court declined to grant the IRS’s request for an early ruling, deciding that there was enough uncertainty about whether the Harpers’ projects met the legal standard to let the case continue for further review. 

Key Issues 

• Does design-build construction work qualify as “research” for the R&D tax credit? 

  The court needed to decide if the types of activities performed by Harper Construction Co., like developing unique building designs, solving engineering problems, and managing specialized construction challenges, fit the legal meaning of “qualified research.” This is important because not every activity that involves new ideas or problem-solving automatically counts as research under the law. The law has specific requirements, so the court had to look at whether the work truly aimed to discover new technological information and involved a process of experimentation. 

• What counts as a “business component” for R&D credit purposes? 

  For a taxpayer to claim the R&D tax credit, their research must relate to a “business component,” which the law defines as a product, process, software, technique, formula, or invention that the business holds for sale, lease, license, or uses in its own operations. The IRS argued that Harper Construction’s building designs were not really “business components” because the company did not own or sell the buildings. The court needed to interpret whether the company’s original designs, new construction methods, or engineering solutions could qualify as business components, even if they weren’t physical products sold to others. 

• Did the company “use” or “hold for sale” its designs or inventions in the way the law requires? 

  Another key question was about how the company used its designs and solutions. The law requires that the business component created by the research must either be held for sale, lease, or license, or used in the business’s own operations. The IRS argued that Harper Construction’s designs didn’t meet this standard because they weren’t repeatedly sold or used in an ongoing way. The court had to consider whether using the designs to build projects for clients was enough to meet the legal requirement, or if a more habitual or repeated use was necessary. 

Primary Holding 

The court decided not to grant the IRS’s motion for partial summary judgment against the Harpers. In simple terms, the judge refused to make an early ruling that Harper Construction Co.’s design-build work did not qualify for the R&D tax credit. The court explained that there was not enough clear evidence to say, as a matter of law, that the company’s activities failed the “business component” requirement. The judge recognized that HCC’s unique designs, new processes, and engineering solutions could potentially fit the legal definition for qualified research. The court also rejected the IRS’s argument that the company needed to use its designs in an ongoing or habitual way, clarifying that simply using the designs in its construction projects might be enough under the law. Because important questions and facts remained unresolved, such as whether the work was truly new or improved, and how it was used, the court determined that a full trial would be necessary to sort out these details. As a result, the case would move forward for further review rather than being decided in the IRS’s favor at this stage. 

Specific Rulings

1. Business Component Requirement for R&D Tax Credit 

   • Ruling: The court refused to rule, at this early stage, that Harper Construction Co.’s design-build projects did not meet the “business component” requirement for the R&D tax credit. 
   • Reasoning: The judge explained that HCC’s work included unique designs, engineering solutions, and new processes, which could possibly qualify as business components under the tax law. The court could not say, based solely on the existing record, that these activities were clearly outside the scope of the R&D credit. Because there was still a real possibility that HCC’s work could fit the legal definition, a full trial would be needed to decide the facts.
     
     

2. Interpretation of “Use” in the Law 

   • Ruling: The court rejected the IRS’s argument that HCC had to use its designs or inventions in an ongoing, habitual, or repeated way to qualify for the R&D tax credit.
     
   • Reasoning: The court stated that the law only requires the taxpayer to “use” the business component in its trade or business; it does not require habitual or ongoing use. Simply using the designs in the construction of each project could be enough to meet the requirement. There was no clear evidence that HCC’s use of its designs failed this standard, so the IRS could not win on this point without more facts.

Helpful Takeaways for Taxpayers

• Unique designs and innovative processes can potentially qualify for the R&D tax credit. 

  This case shows that even companies outside of the typical “high-tech” sector, like those in construction, may be eligible for the R&D tax credit if they engage in activities that involve solving technical problems or developing new solutions. If your business is tackling unique project requirements, designing one-of-a-kind systems, or figuring out better ways to deliver your services, these efforts could be considered “qualified research.” It’s important not to overlook your eligibility just because your work isn’t traditional laboratory research. Documenting your approach to new technical challenges can help you support your claim. 

• The “business component” requirement is broader than just products you sell. 

  The court made it clear that the law doesn’t limit the R&D credit to businesses that develop products for sale. If your team is inventing new methods, creating unique processes, or engineering improvements used within your own operations, those innovations may also count as business components. This is valuable for service providers, contractors, and other companies that typically deliver custom projects. If you’re developing something new to use in your business, even if you’re not selling it directly, make sure you keep records of what you created and how it improves your work. 

• Simply using a new design or technique in your business may be enough. 

  The decision highlights that “use” doesn’t have to mean repeatedly or habitually selling the same thing. If your business applies a new or improved design, method, or technical solution in a project, even just once, that can potentially meet the law’s requirements. What matters is that you used the outcome of your research or development efforts in your business operations. Be prepared to show how these innovations were put into practice, even if each project is different. 

• Thorough documentation and project-specific details are critical. 

  One reason the court didn’t rule against the taxpayer right away was because there were still open questions about what exactly the company did and how the research was used. This underscores the importance of keeping good records. When you document the unique aspects of each project, the technical challenges faced, and the steps your team took to overcome them, you build a stronger case for your R&D tax credit. Clear, organized evidence is your best defense if the IRS questions your claim. 

• Don’t give up on an R&D tax credit claim just because your industry is not “high tech.” 

  The outcome of this case is encouraging for businesses in construction, engineering, and other “non-traditional” fields. The court showed that these companies shouldn’t automatically rule themselves out from claiming the R&D credit. If your team is developing custom solutions, addressing engineering uncertainties, or pushing the boundaries of what’s possible in your field, you may qualify. Always review your work with the credit in mind and seek professional advice if you’re unsure about eligibility.