Court Opinion

ID: 9964830
Source: CourtListenerOpinion
Date Created: 2024-04-30 22:01:28.678847+00
Date Added: 2024-06-11T08:25:44.055778
License: Public Domain

In the
    United States Court of Appeals
                 For the Seventh Circuit
                    ____________________

No. 23-2681
SCOTT MOORE and GAYLA MOORE,
                                            Petitioners-Appellants,
                                 v.

COMMISSIONER OF INTERNAL REVENUE,
                                              Respondent-Appellee.
                    ____________________

              Appeal from the United States Tax Court.
               No. 18632-19 — John O. Colvin, Judge.
                    ____________________

     ARGUED MARCH 27, 2024 — DECIDED APRIL 30, 2024
               ____________________

   Before EASTERBROOK, JACKSON-AKIWUMI, and LEE, Circuit
Judges.
    EASTERBROOK, Circuit Judge. Section 41 of the Internal Rev-
enue Code, 26 U.S.C. §41, provides a tax credit for “qualiﬁed”
research expenses. Nevco, Inc., which makes scoreboards and
related gear for athletic events, engaged in research to im-
prove its products. When Scott Moore and Gayla Moore—a
married couple ﬁling jointly—took a §41 credit for tax years
2014 and 2015, they treated the salary and bonus of Gary Rob-
ert, the ﬁrm’s President and COO, as §41 expenses. Nevco was
2                                                  No. 23-2681

a Subchapter S corporation, so all of its tax attributes ﬂowed
to Gayla Moore, its sole owner. The Tax Court held a trial and
found that the record did not support a ﬁnding that Robert
spent any given fraction of his time conducting or directly su-
pervising “qualiﬁed” research. T.C. Memo 2023-20.
    One reason was that Robert lacked written records of how
he spent his time, despite the record-keeping requirement in
26 C.F.R. §1.41–4(d). (Nevco has payroll records, but they log
how much time employees work, not the tasks they perform
or supervise.) Another was that Robert could not estimate,
even approximately, how much of his time was devoted to
“qualiﬁed” research, a term deﬁned by §41(d)(1). Still a third
was that Robert did not engage in either “direct supervision”
or “direct support” (§41(b)(2)(B)(ii)) of Dave Paslay, Nevco’s
director of engineering, whose salary the Commissioner of In-
ternal Revenue has been willing to treat as a “qualiﬁed re-
search” expense. We discuss only the second of these reasons;
otherwise the Tax Court’s opinion speaks for itself.
   The Moores insist that Robert spent a lot of time conduct-
ing or supervising research. The Commissioner acknowl-
edges as much. But was it “qualiﬁed” research? And, if it was,
how much of Robert’s time was devoted to it? Without an-
swers to those questions, no one can calculate the credit
properly. The §41(a)(1) credit is limited to 20% of the increase
over a base amount. (Section 41(a)(2) and (a)(3) allow credits
that do not depend on an increase over a base, but the Moores
do not rely on those provisions.) To do the math, one needs
accurate details.
    The Tax Court found it impossible to answer the “was it
qualiﬁed?” and “how much?” questions. The Moores call this
a legal error, but it was a ﬁnding of fact under the approach
No. 23-2681                                                    3

used to diﬀerentiate fact from law in U.S. Bank, N.A. v. Village
at Lakeridge, LLC, 583 U.S. 387, 395–96 (2018). (That is to say,
the ﬁnding is case-speciﬁc rather than based on resolving a
dispute about what a legal rule provides.) As a factual ﬁnd-
ing, it is reviewed for clear error, and we do not see any error
at all, let alone a clear one.
    Section 41 allows a credit for increases in research that is
“technological in nature” (§41(d)(1)(B)(i)) and “substantially
all of the activities of which constitute elements of a process
of experimentation” (§41(d)(1)(C)). Regulations deﬁne what
“elements of a process of experimentation” entail, but we
need not get into those weeds. It is enough to say, as the Tax
Court found, that none of the evidence shows what fraction
of the research involved “experimentation”—even the trial-
and-error kind made famous by Thomas Edison. Without
knowing how much of Robert’s research was “qualiﬁed”, the
Tax Court could not determine how much it had increased
over a base amount. The problem is not simply the lack of
written records (though that is a big problem); it is that Robert
could not even estimate how much of his research involved
“experimentation” either in a colloquial sense or under the
regulations’ speciﬁcations. And because the Moores bore the
burdens of production and persuasion, the Tax Court’s con-
clusion is dispositive against them.
                                                      AFFIRMED