June 10, 2009

FedEx Corporation v. United States: Taxpayer Can Pick & Choose Between Regulations

Houston Tax Attorney Blog

Houston Tax Attorney

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In FedEx Corporation v. United States, Dkt. No. 08-2423, the U.S. District Court for the Western District of Tennessee concluded that FedEx could rely on the internal use software provisions in the 2001 Final Regulations and the taxpayer-favorable discovery test in the 2003 Final Regulations in computing its research tax credit. The taxpayer did not have to pick and rely on just one set of regulations.

The facts and procedural history are as follows:

  • FedEx Corporation (“FedEx”) is in the worldwide transportation business.
  • FedEx’s management identified a need for a new computer business system with better revenue controls to ensure timely and accurate billing and to eliminate “revenue leakage.”
  • No existing clientserver system was capable of processing data at volumes comparable to FedEx transaction volumes, so FedEx embarked on a research project to develop a new and innovative technology.
  • The technological challenges associated with the project were too great to overcome and FedEx abandoned the project in 2001.
  • FedEx included the expenses for the project in its research tax credits for 1997 through 2000.
  • The IRS disallowed the research tax credits and FedEx brought suit to obtain the resulting tax refunds.

FedEx’s position was based on the internal use software provisions in the 2001 Final Regulations and the taxpayer-favorable discovery test in the 2003 Final Regulations. The 2001 Final Regulations did not provide for internal use software.

The IRS argued that FedEx could not apply a portion of the 2001 Final Regulations and a portion of the 2003 Final Regulations. Instead, the IRS argued that the 2001 Final Regulations applied–and they did not provide for internal use software. The 2001 Final Regulations included a discovery test that was much more difficult to qualify for (and which the IRS had previously conceded that the test did not comply with Congress’ intent).

In this circumstance, the court concluded that FedEx could rely on the internal use software provisions in the 2001 Final Regulations and the taxpayer-favorable discovery test in the 2003 Final Regulations.

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