Siemer Milling Company v. Commissioner of Internal Revenue

 April 15, 2019 | David Buch, Judge | United States Tax Court | Docket No. 21655-15

 

Short Summary

Siemer Milling Company, a family-owned business that mills and sells wheat flour, claimed research tax credits for several projects it conducted in 2011 and 2012. The IRS reviewed these claims and denied the credits, saying that the company’s activities and expenses didn’t qualify as “qualified research” under the tax law. Siemer Milling challenged this decision in the United States Tax Court, arguing that its work on product and process improvements met the requirements for the credit. In the end, the Tax Court agreed with the IRS and disallowed the credits, finding that Siemer hadn’t provided enough evidence to show its activities met all the necessary tests for qualified research. However, the court did find that Siemer acted reasonably by relying on its accountants, so no penalties were assessed. 

Key Issues

• Did Siemer Milling’s activities truly qualify for the federal research tax credit?

  The court needed to decide if the projects Siemer Milling carried out, such as developing new flour products and experimenting with milling techniques, met the strict standards for the research tax credit. This meant looking at whether the company’s work involved a genuine process of experimentation, was intended to solve technical uncertainties, and relied on scientific principles, as required by the tax code. 

• Did Siemer provide enough detailed evidence to back up its research credit claims?

  For a business to receive the research tax credit, it must provide clear and credible records showing which activities were conducted, what uncertainties were being addressed, and how much was spent on qualifying research. The court had to consider if Siemer’s documentation like project notes, interviews, and wage summaries, was enough to prove that its activities met all the legal requirements.

• Should Siemer Milling be penalized for claiming research credits that were denied?

  Even if a business’s tax credit claims are denied, the IRS can only assess penalties if the company acted carelessly or without reasonable cause. The court had to determine whether Siemer Milling had a valid reason for making its claims, such as relying on expert accountants and following professional advice, or if it was negligent in the way, it approached the tax rules.

Primary Holding

The court decided that Siemer Milling Company was not entitled to the research tax credits it claimed for 2011 and 2012. The main reason was that Siemer did not provide enough evidence to show its projects met all the strict requirements for qualified research under the tax law. Specifically, the court found that Siemer’s activities often lacked a clear process of experimentation or did not rely on scientific principles as required. In many cases, the company’s documentation did not clearly demonstrate what technical uncertainties were being addressed or how the projects met the legal standards. 

However, the court also held that Siemer Milling was not liable for IRS penalties. The court recognized that Siemer had relied in good faith on the expertise of its long-time accounting firm when claiming the credits. Since the company provided full access to its records and sought professional advice, the court found that it acted reasonably and with good intentions, even though the credit claims were ultimately denied. 

Specific Rulings

1. Disallowance of Research Tax Credits:

   • Ruling: The court ruled that Siemer Milling was not entitled to the research tax credits it claimed for the 2011 and 2012 tax years.
   • Reasoning: The court explained that Siemer did not provide enough detailed evidence to show its projects qualified as “research” under the law. In particular, many of the company’s activities did not involve a true process of experimentation or reliance on scientific principles, and the documentation was often too vague or incomplete to prove otherwise.
     
     

2. Adequacy of Documentation and Evidence:

   • Ruling: The court decided that Siemer’s supporting documentation was insufficient to back up its research credit claims.
     
   • Reasoning: The court found that while Siemer provided some records and summaries, these were often undated or lacked clear details about the research process, technical challenges, or how the activities met the tax code’s requirements. As a result, the court could not determine that the claimed expenses truly related to qualified research.
     
     

3. Liability for IRS Penalties:

   • Ruling: The court found that Siemer was not liable for accuracy-related penalties even though the credits were denied.
   • Reasoning: The court acknowledged that Siemer acted in good faith by relying on experienced accountants, provided open access to its records, and followed professional advice. Because the company genuinely tried to comply with the tax law and did not intentionally disregard the rules, the court decided that penalties were not appropriate.

Helpful Takeaways for Taxpayers

• Keep detailed records for all research activities.

  Having organized, specific, and up-to-date documentation is crucial when claiming the research tax credit. This means not just saving summaries or general notes, but keeping thorough records of what was tested, the challenges you faced, who worked on each step, and the actual results of your experiments. If you ever face an IRS audit, these detailed records can be the deciding factor between a successful claim and a denial. Good documentation shows you took the rules seriously and helps support your story.

• Make sure your research activities meet all the IRS requirements.

  The research tax credit has several specific tests, like demonstrating a process of experimentation, solving technical uncertainties, and using scientific methods. Not every project qualifies, even if it feels new or innovative to your business. For example, routine product improvements, quality control testing, or adapting existing products for specific customers usually do not count. Reviewing IRS guidelines and matching your activities to these rules can save you from problems later.

• Rely on professional advice but double-check the details.

  It’s smart to work with qualified accountants or tax advisors when dealing with complicated credits like this. However, their advice is only as good as the information you give them. Make sure your advisors get all the facts about your projects and your documentation is accurate and complete. It also helps to understand, at least in a basic way, what the IRS looks for in qualified research. This way, you can catch any mistakes or gaps before they become an issue.

• Be proactive in addressing potential weaknesses in your claim.

  If you notice that some parts of your documentation are missing, unclear, or incomplete, take action before filing your claim. This could mean going back to clarify project notes, collecting additional records, or seeking expert input on whether your projects meet the IRS definition of qualified research. Being proactive helps strengthen your claim and shows you’re committed to compliance. 

• A good-faith effort matters if the IRS disagrees with your claim.

  Even if your credit is denied, showing that you acted honestly and did your best to follow the rules can protect you from penalties. The court in this case recognized that working with experienced professionals, sharing all relevant information, and trying to follow the law in good faith is important. If you can show you made a genuine effort to comply, you’re less likely to face extra costs or penalties, even if the IRS ultimately sees things differently.