The U.S. Tax Court issued a ruling saying that innovations in livestock production can qualify for the research and development tax credit, establishing new case law in an emerging field.
In the ruling, issued Feb. 3, the Tax Court held in the case, George v. Commissioner, that experimentation to improve poultry health, disease resistance and growth rates constituted qualified research under Section 41 of the Internal Revenue Code, signifying the first time animal agriculture had been legally questioned and recognized for R&D credits, according to Allaintgroup, the tax consulting firm representing the plaintiff. The decision follows the Tax Court's 2022 ruling in JG Boswell Co. v. Commissioner, which had earlier validated R&D credits for row crop farming operations.
"The Tax Court deserves tremendous credit for carefully analyzing the science and innovation happening every day on American farms, ranches, and food science businesses," said John Dies, lead counsel in the George case, in a statement last Friday. "These rulings recognize that agriculture is an innovation-driven industry where producers constantly experiment to improve yields, animal health, disease resistance and sustainability. The court's decisions solidify the legislative intent of promoting innovation for livestock and crop producers nationwide."
According to Alliantgroup, the ruling means the U.S. Tax Court has now confirmed that innovations in livestock production likewise qualify for the R&D credit. It said the decision clarifies that the broader agriculture community and the tens of thousands of farmers, ranchers, growers, food science businesses and producers claiming the credit are correct to do so, and just as entitled to the benefits of the R&D tax credit as businesses in manufacturing, technology, engineering and other innovation-driven industries. In general, agribusinesses can qualify for the tax credit through innovations and experimentations performed to increase crop yield or animal performance.
Tax Court Judge Travis Greaves made a number of jokes in his ruling related to chickens and eggs. ""Forget the proverbial chicken or the egg; today we are called to answer which came first, the research or the research credit study?" he wrote, according to a
Some tax practitioners have argued over whether farmers and ranchers deserved the R&D credit, and the new Tax Court ruling finally puts that debate to rest, according to Alliantgroup. The case involved George of Missouri, Inc., one of the biggest poultry producers in the U.S. GOMI has been in business since 1922 and currently processes approximately 3.5 million birds a week. After growing from a small grocery store to live chicken sales, the company evolved into a nationwide operation supplying customers such as Kentucky Fried Chicken. Operating on margins of approximately one cent per pound of chicken, GOMI relies on data-driven experimentation with growth rates, mortality rates, and disease prevalence to stay competitive.
The company began working with Alliantgroup in 2014 to document its ongoing research activities. The Tax Court validated the company's research initiatives, including vaccine and antibiotic trials, probiotic research, genetic line experimentation and disease prevention protocols. In its ruling, the court rejected the IRS's arguments that livestock trials constitute a mere evaluation of available alternatives, and affirmed that the work done by GOMI conformed with each test for qualification of the R&D credit.
The court did disallow a portion of the tax credits claimed by GOMI, but its reasoning focused on the depth of detail in the documentation made available by the company on some of its projects.
Judge Greaves wrote that GOMI's tax credits were "a mixed basket of eggs: some good eggs supported by contemporaneous records and some rotten eggs that petitioners could not substantiate."
There had been no prior guidance on documentation requirements for these specific operations, so AlliantGroup said the Court had provided welcome guidance on where the lines should be drawn on the topic.
The IRS had also wanted to levy accuracy-related penalties on GOMI, but the court found it unnecessary to determine whether the IRS had proved its case with regard to the penalties because GOMI had acted in good faith by relying on Alliantgroup's advice. Therefore, it said GOMI wasn't liable for the Section 6662(a) accuracy-related penalties for tax years 2014 and 2016.
"Whether the research credit study or the research itself came first remains as elusive as the chicken or the egg question," Judge Greaves concluded.
The Tax Court cited the high-profile tax experts employed by Alliantgroup, including former IRS commissioners, a former tax counsel to the Senate Finance Committee and former members of Congress. Alliantgroup had assigned associate director Jeremy Troutman as the lead consultant on the research credit study. He had completed approximately 300 research credit studies by the time of the trial. The court ruling also referred to the firm's multiple on-site visits, extensive employee interviews, and comprehensive documentation and data analysis, producing a final research credit study detailing the information gathered in extensive detail.
"These Tax Court decisions represent a watershed moment for American agriculture," said former U.S. Secretary of Agriculture Mike Johanns, a strategic advisory board chairman of agriculture at Alliantgroup, in a statement. "Our farmers, ranchers, and producers are among the most innovative in the world. The Court has rightfully recognized that this innovation deserves the same federal support as research in other industries."
