* Case a test of how broadly R&D credits can be claimed
* Judges unanimously affirm ruling from U.S. Tax Court
* Involved credit for manufacturing process improvement
By Patrick Temple-West and Ernest Scheyder
WASHINGTON/NEW YORK, Sept 7 In a tax decision
with broad impact for manufacturing companies, a U.S. appeals
court ruled on Fr iday that Dow Chemical Co could not
retroactively claim research and development tax credits for
improving how it made an existing product.
The case pitted the largest U.S. chemicals maker against the
Internal Revenue Service, which often fights with companies over
the R&D credit. The IRS had argued that a unit of Dow improperly
claimed the credit for normal manufacturing operations.
A three-judge panel at the 2nd Circuit Court of Appeals
unanimously upheld an earlier U.S. Tax Court ruling that said
Union Carbide Corp, the Dow unit, could not claim the R&D credit
for manufacturing process improvements more than a decade old.
The IRS commissioner's "interpretation is entirely
consistent with the purpose of the research tax credit," Judge
Edward Korman wrote in the court's opinion.
Manufacturing and chemical companies were watching the case
and backing Dow. Only $8 million of R&D claims were at issue,
but the case was seen as a key test of how broadly companies can
claim the R&D credit, tax professionals said.
"All manufacturers have a vested interest in this case, not
just chemical, but really anyone who incurs R&D that's related
at all with production process," said Jeff Malo, a director with
tax advisory firm WTP Advisors.
Dow said it was "disappointed" by the ruling and is
considering its options. Shares in the multinational,
Michigan-based company closed up 2.7 percent at $30.33 amid
broadly mixed trading on Friday on the New York Stock Exchange.
"Plant-related process research and development plays a
central role in helping manufacturers achieve cost and
efficiency savings," said Dow spokeswoman Nancy Lamb.
She added that "the availability of the tax credit is
important to encourage and enable manufacturers to make these
substantial R&D investments."
CRITICS QUESTION CREDIT
Opponents of the R&D credit, created by Congress in 1981,
say it has become a costly corporate handout that does little to
further the goal of driving more R&D hiring and investment.
The U.S. Chamber of Commerce, the country's largest lobbying
group for businesses, backed Dow.
Automotive and defense companies "have a huge interest in
this," said Michael Solomon, a tax lawyer at Fenwick & West.
The case involves research conducted in 1994 and 1995 to
improve the way existing products were made. Dow wanted to apply
the credit retroactively to cover costs for supplies, even
though it ended up selling the finished goods.
One improvement was an experimental, cost-cutting method to
make polyethylene resin for dry cleaning bags with fewer
materials. Using the new process, Dow sold enough resin to
customers to make 125 million dry cleaning bags.
Giving Dow the credit to cover supply costs it would have
incurred anyway in the normal course of doing business "simply
creates an unintended windfall," Korman wrote.
In a concurring opinion, Judge Rosemary Pooler wrote that
Congress may have intended the tax law to include supplies as
qualifying for the research tax credit, but lawmakers did not
write the law specifically enough.
The IRS did not respond to a request for comment.
The case could go next to the Supreme Court, but tax lawyers
said that was unlikely.
The case is: Union Carbide Corp & Subsidiaries v
Commissioner of Internal Revenue in the 2nd Circuit U.S. Court
of Appeals No. 11-2552.