In a Motion file with the Tax Court on Monday December 6, 2010, the IRS agreed that Hewlett-Packard Co. does not need to include amounts accrued from its controlled foreign subsidiaries (CFSs) in computing its gross receipts for purposes of the Research Credit, which is an issue resolved with the recent Proctor & Gamble motion on the same topic.
Another issue before the Tax Court in this recent Motion is HP’s argument that it need not include dividends, interest, rents, royalties, and other income as gross receipts for purposes of calculating the section 41 research credit based on the common meaning of gross receipts. HP argues that these types of income sources are not ‘the kind of income that management normally considers in setting annual research budgets . . . Because the omitted receipts at issue here include passive receipts that do not relate to HP’s core business, the policy behind the Research Credit does not support Respondent’s position that all receipts should be included in “gross receipts” for purposes of calculating the Research Credit.’
Thus, HP is seeking to only include Line 1(c) gross receipts in its research credit calculation as the only relevant gross receipts, arguing that the base period calculation and its intent was to review a taxpayer’s receipts from the sales of products resulting from the R&D efforts and comparing only those receipts against its annual R&D spend in arriving at the fixed base percentage. If granted, this Motion would signal a significant change from the traditional method of including Lines 1(c) (gross receipts/sales less returns and allowances), 4 (dividends), 5 (interest), 6 (gross rents), 7 (gross royalties) and 10 (other income).
Also interestingly, the IRS does not allege that HP should have included in its calculation receipts reported by HP on Line 8 (capital gain net income) or Line 9 (net gain from the sale/exchange of a trade or business). Sometimes, IRS agents have argued that Lines 8 and 9 should be included; thus, the recent motion signals the Service’s acknowledgment that these line items need not be included in the gross receipts calculation.