District Judge Edward Korman

The Tax Court denied Union Carbide Corp. (UCC) a credit for supplies used in qualified research under 26 USC §41. Costs for supplies used by UCC for its “Amoco anticoking project” and “UCAT-J project” were “raw materials used to make finished goods that would have been purchased regardless of whether [UCC] was engaged in qualified research.” UCC’s research on its “sodium borohydride project” did not qualify as an experiment because UCC did not perform post-test analyses or data comparisons. The Second Circuit affirmed. The costs for which UCC sought a research credit were “at best, indirect research costs” excluded from Treasury Regulations §1.41-2(b)(2)’s definition of “qualified research expenses.” The circuit was satisfied that in formulating and construing §1.41-2(b)(1)—setting out expenditures that do not qualify as “inhouse research expenses”—the Internal Revenue commissioner rationally determined that “supply costs are ‘indirect research expenditures’ if they would have been incurred regardless of any research activities.” Such was the case with all UCC’s three projects, where production processes were fully completed, and the projects subsequently discontinued for various reasons.