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agencies). Diamond would manage and update policies to reflect
customer transactions.
5. Evaluations/R&D
Applied Systems’ evaluations/R&D work consisted of
evaluating and developing, by the creation of short routines,
compatibility between TAM and third–party hardware and software
products.
II. Credit Claimed
On its 1990, 1991, and 1992 tax returns (i.e., Forms 1120S,
U.S. Income Tax Returns for an S Corporation), Applied Systems
did not claim any research credit. On December 30, 1993, Applied
Systems hired a new tax manager, who determined that Applied
Systems should claim research credits relating to the years in
issue. The tax manager interviewed employees and delineated the
employees and activities that he believed qualified for the
research credit. On June 24, 1994, and August 30, 1995, Applied
Systems submitted amended returns, relating to the 3 years in
issue, to claim the respective research credit “that was
erroneously omitted from the original filing of the Form 1120S.”
On the amended returns, Applied Systems claimed research credits
of $235,536, $127,426, and $289,449, relating to the wages of 227
employees in 1990, 1991, and 1992, respectively. Petitioners,
pursuant to amended pleadings filed in April 1997, added the
wages of 21 employees (i.e., $635,371) to their claim.
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