Opinion
14367-21 14370-21
10-06-2023
JOHN P. JANICKI & KATHERINE S. JANICKI, ET AL., Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
RONALD L. BUCH JUDGE
Pending before the Court is Petitioners' Motion for Partial Summary Judgment filed May 12, 2023.
The Internal Revenue Code allows for various credits, such as the general business credit of section 38, which includes the research credit of section 41. Those credits are subject to various limitations. For example, if the research credit flows from a pass-thru entity, the credit is limited to the tax attributable to income from that entity. I.R.C. § 41(g).
Janicki Industries, Inc., a subchapter S corporation, reported research credits under section 41 to its shareholders for 2013 through 2016 (years in issue). Shareholders John P. and Katherine S. Janicki claimed their share of research credits. Likewise, shareholders Peter W. and Susan J. Janicki claimed research credits attributable to Janicki Industries. In doing so, both couples claimed credit carryforwards in excess of the amount allowed by section 38(c). The Commissioner issued notices of deficiency denying the excess credits, from which each couple filed a petition. The Court consolidated the cases. The petitioners jointly filed a Motion for Partial Summary Judgment, arguing that the general business credit limit of section 38(c) does not apply to research credits carried forward from a prior year as a result of the section 41(g) limitation.
Shareholders in S-corporations may claim a nonrefundable research credit under sections 41(a) and section 38(a), subject to the limitations under 41(g) and 38(c). Because unambiguously requires that credits limited by section 41(g) remain subject to the section 38(c) limitation, we must deny petitioners' Motion for Partial Summary Judgment.
Background
These facts are stated solely for purposes of deciding the Janickis' motion and not as findings of fact in this case. Sundstrand v. Commissioner, 98 T.C. 518, 520 (1992), aff 'd, 17 F.3d 965 (7th Cir. 1994).
The Janickis describe Janicki Industries as a high-tech engineering company that specializes in creating state-of-the-art parts, prototypes, and tools using advanced composites and exotic metals. Janicki Industries was organized under the laws of the state of Washington and was treated as a subchapter S corporation for United States federal income tax purposes during the relevant years.
From 2013 to 2015, Janicki industries reported research expenses and credits to its shareholders. Specifically, Janicki Industries reported qualified research expenditures of $34,772,624, $34,455,467, and $26,193,864 for 2013 through 2015, respectively. Janicki Industries reported research credits of $2,260,221 for 2013, $2,239,605 for 2014, and $1,251,415 for 2015.
John and Katherine Janicki reported their share of research credits as part of the general business credit. They reported $743,677, $808,493, and $491,669 of research credits for 2013 through 2015, respectively. They added these credits to their calculation of the general business credit. Because of the limit of section 41(g), John and Katherine carried excess research credits forward.
Peter and Susan Janicki's reporting for their current year and carryforward credits were similar. They reported $764,040, $829,070, and $503,310 of research credits for 2013 through 2015, respectively. As with John and Katherine, the limitation in section 41(g) caused Peter and Susan to carry excess research credits forward.
The Commissioner adjusted the allowable research credits originating from Janicki Industries. For 2013, the Commissioner reduced the allowable credit by $2,163,187, reducing it to $97,034. For 2014 and 2015, the Commissioner reduced the allowable credit to zero.
The Commissioner also adjusted the amount of allowable general business credits for John and Katherine, as well as Peter and Susan. In the case of John and Katherine, the Commissioner reduced the amount of allowable general business credits for 2013 through 2016 to $131,978, $83,934, $92,794, and $161,335, respectively. The Commissioner made similar adjustments for Peter and Susan, reducing allowable general business credits for 2013 through 2016 to $120,841, $54,433, $135,335, and $295,481. The reduction of the credits allowed in each year, along with other adjustments, increased each couple's tax liabilities and had a corresponding effect on the amount allowed as a carryover into the subsequent year.
In letters dated April 14, 2021, the Commissioner sent each couple a notice of deficiency detailing the proposed adjustments and increased tax liabilities for all relevant years. Each of the couples filed a petition from their respective notice of deficiency challenging the proposed increases in tax for all relevant years.
After the Court consolidated these cases, all the petitioners joined together in a Motion for Partial Summary Judgment regarding the manner in which research credits carryforwards should be computed. They claim that credits that are carried forward as a result of the limit set forth in section 41(g) are not subject to the limit set forth in section 38(c).
Discussion
I. Standard for Summary Judgment
The purpose of summary judgment is to expedite litigation and avoid costly, time-consuming, and unnecessary trials. Fla. Peach Corp. v. Commissioner, 90 T.C. 678, 681 (1988). Under Rule 121(a)(2), the Court may grant summary judgment when there is no genuine dispute as to any material fact and a decision may be rendered as a matter of law. Sundstrand Corp, 98 T.C. at 520. Because the question of whether section 38(c) imposes a limit on research credits that are carried forward as a result of the limit imposed by section 41(g) is a question of law that is not encumbered by any dispute as to material facts, the question is appropriate for partial summary judgment. See Carpenter Fam. Invs., LLC v. Commissioner, 136 T.C. 373, 374 (2011) (an "issue of law" is susceptible to being "disposed by summary judgment").
II. Section 41 Research Credit a. Research Credit, Generally
Section 41 allows taxpayers to claim a credit for a portion of qualified research expenditures made during the year. Taxpayers take this credit through the general business credit under section 38. I.R.C. §38(b)(4). The general business credit includes several credits, and the amount of the current year general business credit is equal to the sum of all applicable credits the taxpayer may take. I.R.C. § 38(b). Section 38(c) limits the total amount of the general business credit a taxpayer can take, and any excess is not refundable. I.R.C. § 39(a)(1). A taxpayer may, however, carry any excess back one year and forward as much as twenty years. I.R.C § 39(a).
b. Research Credit, Pass-Thru Limitation
Special rules apply for pass-through entities. Pass-through entities generally pass their items, and the tax consequences of those items, through to their owners. See, e.g., I.R.C §§ 702(a), 1366(a). This principle applies equally to the research credit. See, e.g., I.R.C. §§ 702(a)(1), 1366(a)(1)(A).
Section 41(g) imposes a limit on the amount of research credit an individual can claim from a pass-through entity. To determine the amount of allowable credit for such an individual, one must first separately compute the amount of tax attributable to that person's interest in the entity. I.R.C. § 41(g). The amount of that individual's research credit flowing from the pass-thru entity is limited to the amount of tax attributable to the income that likewise flowed from that entity. Id.
The question before us is what happens to any excess credit that is disallowed as a result of the section 41(g) limitation.
c. Research Credit, Pass-Thru Limitation Carryforward
Section 41(g) provides that the disallowed credit "may be carried to other taxable years under the rules of section 39." Thus, any amount limited by section 41(g) is added to the general business credit carryforward under section 39 for the following year.
The parties differ on what happens next. The Commissioner argues that the amount of the carryforward determined under section 39 is factored into the general business credit under section 38(a). Thus, when determining the amount of the allowable credit under section 38(a), the limit imposed by section 38(c) applies. The petitioners argue that 41(g) carryforwards are available the following year, even if it would result in a credit greater than the amount allowed by section 38(c). The result, they argue, is that credits carried forward as a result of section 41(g) may be taken in the carryforward year up to the section 41(g) limitation, even if it exceeds the section 38(c) limitation.
III. Section 41(g) Carryforwards Are General Business Credit Carryforwards
The issue in this Motion is whether research credit carryforwards generated by section 41(g) are separate from the general business credit carryforwards. The plain language of the statute instructs that research credit carryforwards for pass-through entities are included in general business credit carryforwards. The Janickis advance an alternative interpretation, which, if adopted, permits an owner of an interest in a passthrough to take research credit carryforwards without respect to the limitations in the statute for the general business credit. The statutes are at odds with the Janickis' interpretation.
The section 38(c) limit applies to all general business credit carryforwards, including those caused by the limit imposed by section 41(g).
When interpreting a statute, we begin by analyzing the text of the statute, which we interpret according to its plain meaning. CRI-Leslie, LLC v. Commissioner, 147 T.C. 217, 224 (2016). Section 38(a) allows "a credit against the tax imposed by this chapter for the taxable year an amount equal to the sum of (1) the business credit carryforwards carried to such taxable year, (2) the amount of the current year business credit, plus (3) the business credit carrybacks carried to such taxable year." Current year business credits include the research credit. I.R.C. § 38(b)(4). But the amount allowed by section 38(a) is limited by section 38(c).
A credit limited by section 38(c) is not lost. Section 39 allows it to be included in the calculation of a business credit carry back or carryforward. Section 39(a)(1) provides, in relevant part:
If the sum of the business credit carryforwards to the taxable year plus the amount of the current year business credit for the taxable year exceeds the amount of the limitation imposed by subsection (c) of section 38 … such excess
(to the extent attributable to the amount of the current year business credit) shall be (A) a business credit carryback to the taxable year preceding the unused credit year, and (B) a business credit carryforward to each of the 20 taxable years following the unused credit year, and … shall be taken into account under the provisions of section 38(a) in the manner provided in section 38(a).
A plain reading of the statute tells us that section 41(g) carryforwards are subject both to the 41(g) and the 38(c) limitation. The limitation in section 41(g) reads as follows:
the amount determined under subsection (a) for any taxable year shall not exceed an amount . . . equal to the amount of tax attributable to that portion of a person's taxable income which is allocable or apportionable to the person's interest in such trade or business or entity.
The flush language of 41(g) goes on to state that:
If the amount determined under subsection (a) for any taxable year exceeds the limitation of the preceding sentence, such amount may be carried to other taxable years under the rules of section 39; except that the limitation of the preceding sentence shall be taken into account in lieu of the limitation of section 38(c) in applying section 39.
This latter passage allows the credits limited by section 41(g) to be included in, and added to, the credits carried back and forward pursuant to section 39.
Once that amount is included in the credits eligible for carryback or carryforward under section 39, the Code tells us precisely what to do with them. Section 38(a) allows a credit that includes amounts carried back to the current year or carried forward to the current year. At this point, taxpayers operate under the normative rules, which include the limit of section 38(c).
IV. Conclusion
Research credits carried forward as a result of the limit of section 41(g) remain subject to the limitation in section 38(c). Accordingly, it is
ORDERED that Petitioners' Motion for Partial Summary Judgment filed May 12, 2023, is denied.