Analysis: Dow court case pushes limit of R&D tax credit

Tue Mar 27, 2012 7:42am EDT
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By Patrick Temple-West and Ernest Scheyder

WASHINGTON/NEW YORK (Reuters) - Dow Chemical Co is challenging the U.S. Internal Revenue Service in a rare court case over expanding the research and development tax credit to cover the costs of supplies used to improve the ways existing products are made.

Oral arguments are set for Thursday at the 2nd U.S. Circuit Court of Appeals in New York in a case that pits Union Carbide, a wholly owned subsidiary of Dow (DOW.N: Quote), against the IRS.

A win for Dow would widen the scope of the R&D credit - a mainstay of the corporate tax code that costs U.S. taxpayers roughly $7 billion a year - at a time when corporate tax breaks, in general, are under scrutiny in Washington.

As lawmakers grapple with the enormous U.S. budget deficit and a tax code riddled with loopholes, the R&D credit continues to enjoy broad political support, but it has critics.

Far from being just about lab coats and microscopes, the credit today is part of the economic mainstream. It can be claimed by all sorts of companies, from chicken farmers and fast-food packagers to brewers and wineries, according to the many tax consulting shops that promote it to the private sector.

Since its creation in 1981, the credit has helped support basic research. But detractors say it has become a costly corporate hand-out, too broadly claimed, that does little to further the goal of driving more U.S. R&D hiring and investment.

Dow is arguing that traditional manufacturers with older but popular products - it produces ethylene, a basic chemical used to make plastics - deserve the credit just as much as high-tech companies creating the next big cellphone or cancer drug.

The IRS is arguing, according to court documents, that to allow the R&D credit to be claimed as Dow wants "would transform the research credit into a manufacturing subsidy."   Continued...

Dow Chemical Chief Executive Andrew Liveris speaks during the CERAWEEK energy conference in Houston March 8, 2012. REUTERS/Richard Carson