Moore v. Comm’r, T.C. Memo. 2023-20| February 23, 2023 |Colvin, J. | Dkt. No. 18632-19

Summary: Petitioner Gayla Moore was the sole owner of Nevco, Inc. (Nevco), a subchapter S corporation, during the tax years in issue (2014 and 2015). Nevco claimed the section 411 credit for increasing research activities (research credit) on its 2014 and 2015 Forms 1120S, U.S. Income Tax Return for an S Corporation. The credit flowed through to Gayla Moore and Scott Moore’s individual income tax returns. Nevco manufactured scoreboards and other types of equipment for sports venues. Mr. Moore was the vice president of Nevco. From 2004 to 2006 an outside consultant advised on Nevco’s personnel and inventory requirements. The consultant was hired as chief operating officer from 2006 to 2016 and served as president and COO during 2014 and 2015. He focused a majority of his time on new product development. He had a base compensation $85,092 in 2014 and $178,956 in 2015, and he received various bonuses during those years. Nevco also employed engineers, and the president and COO was the direct supervisor of a few. The engineers engaged in qualified research during 2014 and 2015. They developed a number of new sports-venue-related products for Nevco, and the president and COO made various executive decisions regarding the design and development. The Tax Court describes, at length, five of the products – Scoreboard Truss, Scorbitz, New Caney Ribbon Board, MPCX–2, and a Slim Shot Clock.

The Moores filed their 2014 and 2015 joint income tax returns on Forms 1040, U.S. Individual Income Tax Return. Nevco filed its 2014 and 2015 income tax returns on Forms 1120S. Nevco claimed research credits on those returns, which flowed through to the Moores individual income tax returns for 2014 and 2015. Nevco used the base period 1984 to 1988 to calculate the fixed-base percentage for its 2014 regular research credit. Nevco used the alternative simplified credit method to calculate its 2015 research credit. An accounting firm prepared the Moores’ Forms 1040 and Nevco’s Forms 1120S for both 2014 and 2015. The IRS determined deficiencies in the Moores’ income tax of $68,263 for 2014 and $141,945 for 2015.

Key Issue: Whether (and if so to what extent) Nevco is entitled to a research credit under section 41 for compensation paid to the president and COO during 2014 and 2015?
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