IRS, Lockheed fight over R&D “rocket science” tax break

WASHINGTON, Fri Jan 25, 2013 — Lockheed Martin Corp. is challenging the U.S. government in court over $13.6 million in research tax credits in a case that tests the often hazy line between research and production, with future R&D claims by other companies possibly at stake.

The aerospace group argued in December in U.S. District Court that the Internal Revenue Service had wrongly rejected research tax credits Lockheed claimed for two projects: a space rocket launcher and a New York City surveillance system.

The IRS disallowed Lockheed’s claims in May 2012. Lockheed has challenged the IRS’ position that some retroactive R&D credit claims were impermissible because they involved costs not for research, but for making prototypes resulting from research.

Lockheed said in its court filing that some of the credits were claimed for prototypes, but argued that the designs were new and unproven and should qualify as research.

“With Lockheed, you have the actual question of whether this is rocket science,” said William Schmalzl, a partner at the law firm Mayer Brown with clients facing similar issues.

The case also draws attention to the timing of R&D credit claims. Lockheed’s 2012 claims on the rocket launcher and surveillance system projects were both made retroactively for tax years 2004 through 2007, according to its court filing.

While retroactive claims are frequently allowed, they tend to attract closer IRS scrutiny, tax lawyers said.

When a credit is sought retroactively, “you really aren’t relying on it as an incentive” to do research, Schmalzl said.

Maryland-based Lockheed, a top Defense Department supplier, declined to comment. The IRS also declined to comment.