HP loses tax case over valuing U.S. research credit

WASHINGTON, Sept 24 Mon Sep 24, 2012 6:26pm EDT

WASHINGTON, Sept 24 (Reuters) - Hewlett-Packard Co on Monday lost a legal bid to expand its benefits from the research tax credit after the U.S. Tax Court ruled the company could not exclude certain types of income when calculating the tax break.

It was unclear from the court documents how much in taxes HP would now owe, but according to the ruling, the amounts under dispute involved tens of millions of dollars.

HP had challenged an Internal Revenue Service ruling on the matter. The IRS had said the computer maker owed taxes in cases where it tried to claim the credit between 1999 and 2003. The IRS had said HP improperly excluded income from dividends, interest, rent and other sources in calculating the credit.

The Tax Court, which hears most corporate tax disputes, disagreed with HP and backed the IRS.

The tax break is one of the most politically popular benefits for corporations in the tax code, supported by Democrats and Republicans.

At the same time, some critics say it benefits rich companies that would likely do the research without it.

The credit was originally based on a percentage of total research spending, but Congress altered it to a formula based, in part, on gross receipts from a set period of time.

By minimizing gross receipts, HP effectively boosted the value of the research credit.

"By reducing the gross receipts for the four years prior to the credit year they would be able to reduce their base amount and increase their credit," said Michael Rashkin, author and tax attorney in Silicon Valley who previously worked for Apple Inc.

"HP was trying to stretch the definition of the statute to match the real world, but the court only looked to the statute," said Rashkin, who reviewed the case.

A spokesman for HP declined to comment.

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