105 F.4th 183
4th Cir.2024Background
- United Therapeutics, a biotechnology company, claimed both the § 41 research credit and the § 45C orphan drug credit on its 2014 federal tax return.
- The IRS Commissioner issued a notice of deficiency, stating United Therapeutics improperly calculated its tax liability by excluding "overlapping expenses" from the base period for the research credit, reducing its tax bill by over $1.2 million.
- Overlapping expenses are those eligible for both credits; Congress included a coordination provision in § 45C to prevent double-counting.
- Paragraph 1 of § 45C(c) prohibits double-counting expenses for the same tax year. Paragraph 2 requires that overlapping expenses, already claimed for the orphan drug credit in previous years, be included when computing the base period for future research credits.
- United Therapeutics argued that changes to the statute in 1989 made Paragraph 2 defunct, so they excluded prior years’ overlapping expenses.
- The Tax Court disagreed, finding United Therapeutics should have included those expenses per the ordinary meaning of the coordination provision, resulting in an appeal to the Fourth Circuit, which affirmed the Tax Court’s decision.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does Paragraph 2 of § 45C(c) (coordination provision) still require base period inclusion of overlapping expenses after 1989 amendments? | The 1989 removal of the definition for "base period research expenses" renders Paragraph 2 a dead letter. | Paragraph 2 operates under its ordinary meaning; nothing makes it a nullity. | Paragraph 2 remains operative; ordinary meaning governs. |
| Should United Therapeutics have included overlapping expenses from prior years when calculating its base for the § 41 research credit? | No, because the term "base period research expenses" is obsolete. | Yes, because the term refers to the ordinary "benchmark" years regardless of definition repeal. | Yes, overlapping expenses must be included as base expenses. |
| Can IRS regulations or the statute’s history override the plain statutory text of Paragraph 2? | Regulatory headings and history support repeal by implication. | Statutory text is clear; regulations can’t override unambiguous statute. | Statutory text controls; predecessor laws/regulations don't change this. |
| Does the "consistency rule" in IRS regulations conflict with Section 45C(c)(2)? | Consistency rule precludes treating overlapping expenses differently in different years. | Consistency rule only means same definition applies, not same treatment of all expenses. | No conflict; both rules can be harmonized. |
Key Cases Cited
- Geosyntec Consultants, Inc. v. United States, 776 F.3d 1330 (11th Cir. 2015) (explains purpose and calculation of the research credit)
- Catalyst Pharm., Inc. v. Becerra, 14 F.4th 1299 (11th Cir. 2021) (orphan drug credit context)
- Lamie v. U.S. Tr., 540 U.S. 526 (2004) (statutory interpretation starts with existing text, not predecessor statutes)
- Loughrin v. United States, 573 U.S. 351 (2014) (principle that omission/inclusion of statutory language is intentional)
- Trinity Indus., Inc. v. United States, 757 F.3d 400 (5th Cir. 2014) (consistency rule for the research credit)