Tax Court defines gross receipts for the research credit

BY SALLY P. SCHREIBER, J.D.

The Tax Court on Monday clarified that nonsales income is included in gross receipts for purposes of the Sec. 41 research credit (Hewlett-Packard Co., 139 T.C. No. 8 (2012)). The Tax Court granted partial summary judgment to the IRS, holding that for purposes of calculating average annual gross receipts under the Sec. 41 research credit, nonsales income, consisting of dividends, interest, rent, and other income, must be included.

HP computed its research credit using the alternative incremental computation method (AIRC) of Sec. 41(c)(4), which calculates the credit as fixed percentages of qualified research expenditures based on a company’s average annual gross receipts. “Gross receipts” is not defined in Sec. 41, except to exclude returns and allowances and gross receipts from a foreign corporation whose income is not effectively connected to the United States.

As the Tax Court noted, final regulations the IRS had issued defining gross receipts as including nonsales income did not apply to the years at issue. However, the court held that the IRS’s logic in adopting a broad definition of gross receipts, as explained in the regulations’ preamble, equally applied to pre-effective date years. 

HP argued that the exclusion of returns and allowances from gross receipts was evidence of Congress’s intent to limit gross receipts to sales receipts. It also argued that a definition in Black’s Law Dictionary defining “gross receipts” as the total amount of money a business taxpayer receives during the year for goods sold or services performed should be adopted as the definition in this case.

The Tax Court, however, noted that the dictionary cited a regulation in support of its definition that actually contradicted that definition: Temp. Regs. Sec. 1.448-1T(f)(2)(iv) includes in gross receipts income from all outside sources and is not limited to sales income. Furthermore, the court noted that gross receipts are generally defined broadly in the Code, and it rejected HP’s contention that gross receipts and sales are used interchangeably in Sec. 41.

Finally, the court explained the principle of statutory construction that dictates that, where Congress explicitly enumerates exceptions, courts are prohibited from implying additional exceptions. Therefore, the court could not add an exception to the definition of gross receipts beyond the returns and allowances exception specifically mentioned in the statute.

Sally P. Schreiber ( sschreiber@aicpa.org ) is a JofA senior editor.

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