The United States Court of Appeals for the 5th Circuit issued a ruling on June 9, 2009 that directs a lower court to ease interpretation of IRS rules on research credit calculation, and particularly endorses the use of reasonable estimates when precise cost figures are not available. In USA v. McFerrin, the IRS claimed that a refund it had paid for a research credit claim should be returned because the claim was not sufficiently documented. Specifically, the Service was found to have used a very narrow interpretation of the applicable rules regarding the identification of eligible activities and their related expenses. The court disagreed with the IRS position and instructed the lower court to revisit the issue.

This is a significant taxpayer victory because recent pronouncements from IRS had led many companies that could potentially gain significant benefits from the Research Credit program to forego any claims, fearing an IRS audit. The new ruling clarifies the incentive nature of this program and will hopefully encourage many more companies to apply.

The complete decision can be found at docket number 08-20377, USA v. McFerrin.

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