1. R&D Credit: 2015 Hot Topics 2015 Houston TEI Seminar June 25th, 2015

2. IRS Circular 230 Required Notice--IRS regulations require that we inform you that to the extent this communication contains any statement regarding federal taxes, that statement was not written or intended to be used, and it cannot be used, by any person (i) for the purpose of avoiding federal tax penalties that may be imposed on that person, or (ii) to promote, market or recommend to another party any transaction or matter addressed herein.

3. Agenda 2015 R&D Credit Hot Topics New Software regulations
January 2015, was the release of the new software regulations and it expanded definition for software development
Patent Legal Fees
The Suder case allowed patent legal fees, but historically this have been disallowed. What is the possible benefit?
174 Reasonable Compensation disallowance
The Suder case also allowed the IRS to disallow “high-level” wages. How can this affect your risk measurement for UTP and/or FIN 48?
IRS Exam
What are the challenges now that the IRS has even less resources to cover taxpayers? How can you escalate nationally?
Quick review of 174 expenses qualification and being sold or used in the business

4. New Software Regulations

5. Overview of Changes
Software developed to be commercially sold, leased or licensed, or otherwise marketed to third parties; or
(New) Software developed to enable a taxpayer to interact with third parties or allow third parties to interact with taxpayer’s systems.
Software developed for a hardware product.
IRS Possible Issues
Software that is sold but to a customer but is still located on the taxpayer’s location.
Software developed for the primarily for a taxpayer’s general and administrative functions that support its business.
This is even software development done for some other member within a taxpayer’s control group.
General and Administrative Functions
Financial Management
Human Resources Management
Supports Services
Marketing

6. Dual-Function G&A Software
Key Examples
ERP Software
Dual-Function G&A Software
Website Development
Free Website Services

7. Observations from Submitted Comments
Regulations Hearing April 17th in Washington DC
Effective Date needs to be retrospective as well as prospective
Third party exclusion can be applied broadly
Dual-function should be eliminated

8. Industries/Activities impacted
Internet Hosting
Website Developing
Insurance
Banking
Financial Transactions (payroll, credit cards, etc.)
Online ordering
ERP implementations
Internal IT departments

9. Patent Legal Fees

10. Competing Authority
FSA
Suder
TC Memo

11. Arguments FSA (2001) Suder (2014)
Patent employees, in-house or outside do not directly perform or support qualified research
“Acquiesced” on whether such cost qualified under section 41
Credit is not available merely because it satisfies 174
Suder (2014)
Report contract research expenses to two law firms for “patent research and patent prosecution”
(a)(1) “includes cost of obtaining a patent, such attorneys’ fees”
Substantiated the QREs

12. Going forward Authority priority
Suder applies the “reasonable compensation” test 174(e) and properly applies (a)(1)
If you apply one you should be able to apply the other
Tax Court finding out weighs the FSA/CCA
... Chief Counsel Advice memoranda consist of written advice issued from any national office component of the IRS Office of Chief Counsel to IRS field personnel. Chief Counsel Advice encompasses advice or instructions that convey legal interpretations or positions of the IRS or the IRS Office of Chief Counsel concerning revenue provisions or laws relating to the assessment and collection of any liability under a revenue provision.
Patent Fees can make up a large expense for high intellectual property based products or processes

13. Reasonable Compensation

14. What is the Issue?
“Under section 174(e) a taxpayer may deduct a research and development expenditure only to the extent that the amount thereof is reasonable under the circumstances”
Mr. Suder’s wages account for approximately 80% of the QREs claimed
Found that his compensation was unreasonable
Only 20% of his wages claimed were considered reasonable.
Then only 75% of those wages were considered qualified.

15. Determining Reasonableness
Employee’s Qualification
Nature, extent and scope of the employee’s work
Size and complexities of the business
Comparison of salaries paid with gross income and net income
Prevailing general economic conditions
Comparison of salaries with distributions to stockholders
Rate of compensation for comparable positions
Wages of other CEOs, given most weight in determination
Salary policy of the taxpayer to all employees

16. FIN 48/UTP impact High level executives IRS will scrutinize
Can apply to lower level too?!
Relates to option compensation as well
Exam does look at titles
R&D VP Example

17. IRS Exam

18. Example of Expectations
Issue: R&D Credits
Spent time and resources capturing documentation and projects
Expected the IRS will review that information first before spending time doing “interviews”
IRS Engineer receives documentation, but immediately requests interviews and said it is standard procedure
Do you acquiesce and allow them interviews?

19. To interview or not to interview?
R&D Credit Documents
To interview or not to interview?
Do the courts value contemporaneous documentation or oral testimony greater?
If there is a document showing or explaining the process of experimentation, why perform a interview on the same topic?
Interviews during exam should only be used if the documentation is not sufficient? Engineering and agent should give reason as to the necessity of such interviews.
With fewer resources, the IRS should be willing to utilize what has been provided instead of interviewing

20. Who can you call?

21. Nick Panko
Vice President

22. Nick Panko-Bio Nick Panko Vice President, CFO Services Background:
Nick Panko, Vice President at CFO Services, has worked exclusively within R&D credits over the last 15 years. In that time-frame he has worked with numerous industries and size of companies, including Fortune 500 companies. Nick assists clients in the areas of service innovation, client relations, strategy consulting, advising/managing other ‘R&D’ engagement managers/project consultants at CFO Services, and integrating internal process capabilities for clients seeking every degree of services related to R&D credits. He has numerous experience working through exams of the R&D credit for his clients and communicates with IRS executives on improvements for reducing contentious exams on the R&D credit. Clients work with Nick because of his experience and level of attention he brings to each client.
Nick’s background includes ‘plant operation’ experience at multiple manufacturing facilities and a management consultant role within a “Big 4” firm. Nick holds a Bachelor’s degree in Chemical Engineering, Enrolled Agent License, and a Master’s degree in Business Administration.