Siemer Milling Co. v. Commissioner of Internal Revenue, 041519 FEDTAX, 21655-15

Docket Nº:21655-15
Opinion Judge:BUCH, JUDGE:
Attorney:Michael G. Goller, Amy L. Barnes, Sara Stellpflug Rapkin, and Benjamin B. Genzer, for petitioner. Jonathan E. Behrens and Nathan M. Swingley, for respondent.
Case Date:April 15, 2019
Court:United States Tax Court

T.C.Memo. 2019-37




No. 21655-15

United States Tax Court

April 15, 2019

Michael G. Goller, Amy L. Barnes, Sara Stellpflug Rapkin, and Benjamin B. Genzer, for petitioner.

Jonathan E. Behrens and Nathan M. Swingley, for respondent.



Siemer Milling Co. (Siemer) is based in Illinois and is engaged in the business of milling and selling wheat flour. During tax years ending May 31, 2011 and 2012, Siemer conducted activities for which it claimed credits for increasing research activities under section 41.1 The primary question before the Court is whether Siemer has proven that the expenses from those activities are qualified research expenses under the Code. It has not.


Siemer has been in the wheat milling business since the 1950s. During the years in issue Siemer owned and operated two mills, one in Illinois and one in Kentucky. Siemer employed millers, maintenance personnel, lab technicians, lab supervisors, a research and development manager, research and development staff, and others during the years in issue. Siemer did not have any employees with the title engineer or geneticist during the years in issue. Nor did Siemer employ anyone who held a degree in computer science or chemical and mechanical engineering during the years in issue.

I. Credit Studies

CliftonLarsonAllen, LLP (CLA), has long served as Siemer's accounting firm. CLA has prepared Siemer's returns for more than two decades and as a result is familiar with Siemer's business. For the years in issue CLA prepared Siemer's returns as well as credit studies, certified audits, and financial statements. In 2004 David North, a CLA accountant, informed Siemer that it might qualify for tax credits related to increasing research expenditures under section 41. At that time Mr. North had spent several years preparing credit studies for companies in several industries. On the basis of advice from Mr. North and CLA, Siemer engaged CLA to prepare credit studies. Siemer claimed credits under section 41 on its returns for several years from the early 2000s through the years in issue. Since 2004 CLA has prepared credit studies for Siemer. CLA had "open access" to all of Siemer's books and records while it prepared the credit studies and returns. The credit studies were prepared on the basis of a combination of interviews conducted with Siemer employees and documents provided by Siemer to CLA.

Vernon Tegeler, Siemer's current vice president of production, was particularly involved in the preparation of Siemer's credit studies. He was interviewed for the credit studies for both years in issue. He provided estimates of the amount of time spent on research projects, collected contemporaneous documents, and ensured that CLA interviewed appropriate Siemer employees for the credit studies. He oversaw the preparation of the credit studies for Siemer.

CLA also interviewed several other Siemer employees, including: Sunil Maheshwari, the director of Siemer Specialty Ingredients; Rosemary Gibbons, the research and development manager; Brent Boem, the head miller; Dave Brumleve, the chief financial officer; Jane Summer, the administrative production assistant; Joyce Stock, the vice president of finance; Carl Schwinke, the vice president of grain merchandising; and Marianne Tegeler, a laboratory supervisor.

As part of preparing the credit studies, CLA prepared a calculation of Siemer's fixed-base percentage.[2] Before the credit studies, Siemer reported a fixed-base percentage of 3%. According to Siemer, CLA used 3% as a "safe harbor" at a time when it did not intend to calculate a research credit for a taxpayer. Once Siemer engaged CLA to conduct the credit studies in 2004, Siemer filed amended returns claiming a fixed-base percentage of 0.2%. In making this calculation CLA used data estimates gathered through interviews of employees because Siemer could not find the relevant records. Siemer and CLA used estimates from Mr. Tegeler to determine the number of hours spent on research and experimentation during the base years. In later years the estimates were refined when Siemer retrieved wage information from Forms W-2, Wage and Tax Statement, and more documentation regarding expenses.

The credit studies contain wage information for the years in issue and contemporaneous documentation of the research activities for each year. The contemporaneous documentation includes a range of items such as narratives of particular experiments, sample test orders, recipes used in testing flour products, and lab results. Many of the documents are not dated, and the authors and sources of the materials are not known.

Siemer identified four projects for the tax year ending May 31, 2011: the flour heat-treatment project, the Pulsewave project, the wheat hybrids project, and the ozone project. Siemer identified five projects for the tax year ending May 31, 2012: the Littleford Day project, the whole wheat flour project, the hydration project, a continuation of the previous year's flour heat-treatment project, and a second Pulsewave project. As a general matter Siemer routinely conducted lab tests whenever it engaged in new product development. For example it conducted testing to identify the right wheat source to be milled and the right adjustments to the milling system.

II. Research Projects

All of the projects were conducted in connection with Siemer's trade or business. Siemer is in the business of milling and selling flour, and all of the projects are related to the production and sale of flour.

A. Flour Heat-Treatment Project

Siemer conducted the flour heat-treatment project to develop processes to produce (1) cake flour without the use of chlorine, (2) low-microorganism and low-bacteria flour without the use of chemicals, and (3) all-natural replacements for modified starches. The flour heat-treatment project took place in both years in issue. This project included heating flour for differing times and with various methods and testing the flour to measure its composition, functional characteristics, and level of bacteria and other microbiological material. Siemer installed its heat-treatment facilities in 2003.

B. Pulsewave Project

Siemer conducted the Pulsewave project in both tax years in issue. A Pulsewave machine operates on the principle of resonance disintegration. According to marketing materials the Pulsewave machine "reduces the particle size of various materials by the application of the physics of resonance, shock waves and vortex-generated shearing forces, as opposed to the crushing and grinding processes of conventional milling methods." Siemer conducted initial testing with a Pulsewave machine in June 2004 at the Pulsewave facility. Siemer entered into an agreement to lease its own Pulsewave machine from the manufacturer, Pulsewave LLC, on August 9, 2009. The machine was placed in service in February 2010. At that time the Pulsewave machine was a new technology for the milling industry, and Siemer was the only miller using the Pulsewave machine during the years in issue.

During the tax year ending May 31, 2011, Siemer conducted the Pulsewave project to determine whether it could increase the speed at which the Pulsewave machine operated. As a result of their testing Pulsewave LLC made physical modifications to the Pulsewave machine. Siemer claimed that the Pulsewave machine was able to operate at only 3, 600 rotations per minute (RPM), but data provided by Pulsewave LLC to Siemer from 2009 includes tests of milling applications with speeds of up to 5, 000 RPM and wheat milling tests run at speeds of up to 4, 500 RPM.

During the tax year ending May 31, 2011, Siemer was also unsure of the effect of processing different materials with the Pulsewave machine, including different grains and flour that had already been milled. To address these uncertainties Siemer used the Pulsewave machine to process different types of grain and varied load sizes. Additionally Siemer experimented with processing in the Pulsewave machine flour that had already been milled through conventional means.

During the tax year ending May 31, 2012, Siemer conducted the Pulsewave project to determine whether it could (1) adjust the moisture level in finished flour, (2) keep the oil packet in the wheat kernel intact during milling, and (3) produce an ultrafine wheat flour and an ultrafine bran flour using the Pulsewave machine. Siemer also sought to discover how the speed, rotation, and flow rate affected the milling process. Siemer tested these variables and analyzed each sample it produced. As part of the project Siemer tested the finished product's composition as well as its performance in...

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