In the realm of the Section 41 credit for increasing research activities, the timing of substantiation and the documentation of the scientific process are perennial battlegrounds between taxpayers and the IRS. In George v. Commissioner, T.C. Memo. 2026-10, the Tax Court confronted a massive deficiency case involving a large integrated poultry producer. The central tension of the case was the retrospective nature of the credit study versus the contemporaneous business activities. As Judge Greaves noted in the opening of the opinion: “Forget the proverbial chicken or the egg; today we are called to answer which came first, the research or the research credit study?”.

This article details the facts, legal analysis, and conclusions of the court, offering vital technical insights for tax professionals regarding substantiation requirements, the "pilot model" concept under Section 174, and the calculation of the fixed base percentage.

Factual Background and the "Tangled Nest"

The petitioners were shareholders of George’s of Missouri, Inc. (GOMI), an S corporation that is part of a vertically integrated poultry business. GOMI was responsible for live production, managing hatcheries, feed mills, and farms, while related entities handled processing and sales. The poultry industry is a “high-volume, low-margin industry” driven by data analytics to ensure uniformity in broilers.

GOMI did not report research credits on its originally filed returns for the years at issue (2012–2014). Instead, the taxpayer engaged alliantgroup to conduct a research credit study, which commenced in 2014. The study identified numerous “research trials” involving feed additives, vaccines, and genetic lines intended to create an “improved poultry product”. Based on this study, GOMI amended its returns to claim substantial Qualified Research Expenses (QREs), largely comprised of feed supply costs. The IRS disallowed the credits and imposed accuracy-related penalties, arguing that the alleged trials were “merely post hoc distortions of routine data collection into the model of section 41 qualified research”.

The Taxpayer’s Request for Relief and the Business Component

The taxpayers sought redetermination of the deficiencies, arguing that GOMI’s experimentation with various additives (Salinomycin, probiotics, phytase), vaccines (HatchPak, Vaxxitek, LT), and genetics (Ross 708) constituted qualified research. The taxpayer identified the business component for these trials as an “improved poultry product”—specifically, a broiler that was healthier, more uniform, or possessed better gut health.

The Court’s Analysis of the Law

The court applied the four-part statutory test under Section 41(d): the Section 174 test, the technological information test, the business component test, and the process of experimentation test.

A critical aspect of the court’s legal analysis focused on the Section 174 test, particularly the concept of uncertainty and pilot models. The court reiterated that uncertainty exists if information available to the taxpayer does not establish the capability, method, or appropriate design of the product. Importantly, the court leveraged the 2014 amendments to Treasury Regulation § 1.174-2 regarding "pilot models." The court held that “when a taxpayer constructs a physical product for the purpose of assessing the viability of its concept—a pilot model—the construction costs can be considered costs of developing the concept of the product and thus can be deducted under section 174”.

Regarding the process of experimentation, the court scrutinized whether the taxpayer utilized a systematic trial and error methodology. The court rejected the IRS’s argument that overlapping experiments or lack of control groups automatically disqualified the research, noting that “the integration of extraneous variables was exactly the point of GOMI’s research” because they needed to test efficacy within their standard production process.

Application of Law to Facts: A "Mixed Basket"

The court’s conclusions varied by project, heavily dependent on the quality of substantiation. The judge noted that the taxpayer’s credits were “a mixed basket of eggs: some good eggs supported by contemporaneous records and some rotten eggs that petitioners could not substantiate”.

Salinomycin (Disallowed): The taxpayer claimed they were testing higher dosages. However, contemporaneous feed recipes showed GOMI continued to use standard dosages. The court found this to be “a clear example of the chicken (research credit study) coming before the egg (research)” because the objective evidence contradicted the claim of experimentation.
HatchPak and Tylan (Allowed for 2012; Disallowed for 2013):
- 2012: The court found objective uncertainty regarding whether this specific drug combination would work in GOMI’s production environment. The broilers raised were treated as pilot models; thus, the feed costs were deductible Section 174 expenditures. The court accepted that “the successful results in 2012 resolved the uncertainty in 2013,” thereby disallowing the subsequent year’s expenses under the same project.
Probiotics (Mixed Results):
- Floramax: Disallowed due to lack of substantiation. The court refused to “wing it with an estimate ungrounded in the record” regarding which flocks received the additive.
- Sporulin and Calsporin: Allowed. The court found a clear scientific method where GOMI hypothesized efficacy, tested, analyzed data, and moved to the next alternative when a product failed. The court stated this “far exceeds a simple evaluation of alternatives”.
Phytase (Disallowed): The taxpayer claimed they varied dosages to find an optimal matrix. The records showed a constant dosage of 0.4 pounds per ton. The court noted: “GOMI’s contemporaneous feed recipes do not support the claim that Dr. Greenwood varied the dosages”.
LT Vaccines (Mixed Results):
- Method of Administration: Disallowed. Witnesses could not pinpoint when trials occurred (2012 vs. 2013), making it impossible to apply the annual accounting necessary for Section 41.
- Priming: Allowed. GOMI tested priming broilers with a vector vaccine to reduce side effects of a CEO vaccine. The court accepted this as qualified research, noting that prior experience with breeders did not resolve uncertainty for broilers due to physiological differences.
Ross 708 Genetics (Allowed): The court described this as “the cleanest example of the scientific method presented in these cases”. GOMI compared a new genetic line against a control group, analyzed slaughter data, and concluded the new line yielded higher margins.

The Base Amount Calculation

A significant technical blow to the taxpayer occurred regarding the base amount calculation. GOMI elected the Alternative Simplified Credit (ASC) but failed to substantiate QREs for the base years (2009–2011). The taxpayer relied on an estimate derived from the credit years (applying a 10.23% ratio). The court rejected this, stating, “We do not apply the Cohan rule to estimate expenses... if the taxpayer provides ‘no evidence at all that would permit an informed estimate’”. Consequently, the court applied the start-up limitation under Section 41(c)(5)(B), reducing the credit to 6% of the current year QREs rather than the standard 14% calculation.

Penalties and Reasonable Cause

The IRS asserted accuracy-related penalties under Section 6662. The court declined to impose penalties, finding the petitioners relied in good faith on alliantgroup. The court distinguished this case from Betz v. Commissioner, where reliance on the same firm was deemed unreasonable. The court emphasized that “we have not established a hardline rule that reliance on alliantgroup can never be reasonable or in good faith”. The thoroughness of the study (nearly 100 pages) and the firm’s access to company data supported a finding of reasonable reliance.

Conclusion

George v. Commissioner serves as a reminder that in the poultry industry—and tax law—timing is everything. While the court was willing to accept feed costs as qualified supply expenses under the pilot model theory, credits were categorically denied where the "research credit study" contradicted contemporaneous records. As Judge Greaves concluded, “Whether the research credit study or the research itself came first remains as elusive as the chicken or the egg question”. For tax professionals, the lesson is clear: mere retrospective analysis without corroborating contemporaneous data will not survive judicial scrutiny, and a failure to substantiate the base period can drastically reduce the allowable credit.

Prepared with assistance from NotebookLM.