United Therapeutics Corp. v. Comm'r of Internal Revenue

• Decision Date: 17 May 2023
• Docket Number: 10210-21
• Parties: UNITED THERAPEUTICS CORPORATION, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

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160 T.C. No. 12

UNITED THERAPEUTICS CORPORATION, Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

No. 10210-21

United States Tax Court

May 17, 2023

Thomas H. Dupree, Jr., Lucas C. Townsend, Saul Mezei, and John F. Craig III, for petitioner.

Brandon S. Cline, Anna L. Boning, and Naseem Jehan Khan, for respondent.

OPINION

TORO, Judge

P is a biotechnology company. For each of the tax years 2011 through 2014, P claimed both the research credit under I.R.C. § 41 and the orphan drug credit under I.R.C. § 45C. Some of P's expenses during those years qualified as both qualified clinical testing expenses under I.R.C. § 45C and qualified research expenses under I.R.C. § 41. For those expenses, P elected to claim the orphan drug credit under I.R.C. § 45C.

In determining the research credit for 2014, P elected to use the alternative simplified credit calculation under I.R.C. § 41(c)(5) and the reduced credit under I.R.C. § 280C(c)(3). When calculating the credit under I.R.C. § 41(c)(5), P excluded qualified clinical testing expenses from both its 2014 qualified research expenses and its average qualified research expenses for the three preceding tax years (2011 through 2013).

R audited P's return and ultimately issued a Notice of Deficiency determining that P overstated its research credit for 2014 by improperly excluding from its computations the expenses P treated as qualified clinical testing expenses for 2011 through 2013.

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P timely petitioned our Court for redetermination. The case is before us for decision under Rule 122. R maintains that I.R.C. § 45C(c)(2) requires the result reflected in the Notice of Deficiency. P contends that, because of changes in I.R.C. § 41 since its original enactment, I.R.C. § 45C(c)(2) is a dead letter and has no application here.

Held: The text and structure of I.R.C. §§ 41 and 45C(c)(2) as they existed for 2014 require the result reflected in the Notice of Deficiency.

In this deficiency case involving the tax year 2014, we consider a question of first impression: Must expenses that are used to determine the orphan drug credit under section 45C^[1] also be taken into account in determining certain elements of the research credit under section 41, with the result that a taxpayer claiming both credits receives a reduced research credit? The Commissioner of Internal Revenue maintains that section 45C(c)(2) requires this result. United Therapeutics Corporation (United Therapeutics) contends that section 45C(c)(2) is a dead letter (often referred to as deadwood) and has no application here.

Resolution of the case turns on a question of statutory interpretation. Sections 41 and 45C provide credits (originally enacted as temporary credits) that Congress extended and amended many times

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over a number of years. The specific question before us is whether we should give effect to section 45C(c)(2) based on the ordinary meaning of its terms or whether we should ignore the provision altogether as a no-longer-effective rule that Congress neglected multiple times to remove from the Code. In interpreting clear statutory text, we normally do not assume that Congress made a mistake in drafting, and we certainly do not assume that it made the same mistake repeatedly. We see no reason to depart from that practice here. We therefore apply section 45C(c)(2) in accordance with its ordinary meaning and, as explained in more detail below, find in favor of the Commissioner.

Background

The parties submitted this case fully stipulated under Rule 122. The facts below are based on the pleadings and the parties' Stipulation of Facts (including the Exhibits attached thereto). The parties' Stipulation of Facts with accompanying Exhibits is incorporated herein by this reference.

United Therapeutics, a biotechnology company, is a Delaware public benefit corporation. When it timely filed the Petition in this case, United Therapeutics maintained principal places of business in Silver Spring, Maryland, and Durham, North Carolina.

United Therapeutics focuses primarily on the development and commercialization of unique products to address the unmet medical needs of patients with chronic and life-threatening conditions. During the 2014 tax year and the preceding three tax years (2011 through 2013), the company conducted research and development on potential treatments for pulmonary arterial hypertension (which ultimately leads to heart failure and death) and neuroblastoma (a rare form of brain cancer that predominantly affects children and infants), among other diseases.

For each of the tax years 2011 through 2014, United Therapeutics computed and claimed both the research credit under section 41 and the orphan drug credit under section 45C. Some of the company's expenses during those years qualified both as qualified clinical testing expenses under section 45C and as qualified research expenses under section 41. With respect to those expenses, United Therapeutics elected to claim the orphan drug credit under section 45C.

In claiming its research credit for the 2014 tax year, United Therapeutics elected to use the alternative simplified credit calculation

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under section 41(c)(5) and the reduced credit under section 280C(c)(3).^[2]When calculating the credit under section 41(c)(5), the company excluded the expenses it had treated as qualified clinical testing expenses for purposes of section 45C from both its 2014 qualified research expenses and its average qualified research expenses for the three preceding tax years (2011 through 2013). In total for 2014, United Therapeutics claimed that it incurred $42,062,405 of qualified research expenses within the meaning of section 41. And it claimed that its average qualified research expenses for the three preceding tax years (2011 through 2013) were $22,605,492. Accordingly, it claimed an adjusted research credit of $2,799,129 for 2014.^[3]

The Commissioner audited United Therapeutics and ultimately issued a Notice of Deficiency. The Commissioner determined that United Therapeutics overstated its research credit by improperly excluding from its computations expenses it treated as qualified clinical testing expenses for tax years 2011 through 2013.

The parties have stipulated that if (as United Therapeutics contends) the company properly excluded its qualified clinical testing expenses from the calculation of its average qualified research expenses for the three years immediately preceding its tax year 2014 under section 41(c)(5), then its average qualified research expenses for those years (2011 through 2013) would be $22,605,492. Using that amount, United Therapeutics' research credit under section 41 for tax year 2014 would be $2,799,129.

The parties have also stipulated that if (as the Commissioner contends) United Therapeutics must include its qualified clinical testing expenses for 2011 through 2013 in the calculation of its average qualified research expenses for those years, then its average qualified research expenses would be $49,257,244. Using that amount, United

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Therapeutics' research credit under section 41 for tax year 2014 would be $1,586,474.

Discussion

Section 38 permits taxpayers to claim a variety of business credits against federal income tax. Among those credits are the section 41 research credit and the section 45C orphan drug credit. United Therapeutics claimed both credits for the 2014 tax year, raising the question of how the two credits relate to each other. We begin with a brief discussion of the history of the two credits and how they interact.

I. The Research Credit

Congress introduced the "credit for increasing research activities" as part of the Economic Recovery Tax Act of 1981 (ERTA), Pub. L. No. 97-34, § 221(a), 95 Stat. 172, 241. "The credit was intended to 'stimulate a higher rate of capital formation and to increase productivity'" by incentivizing taxpayers to undertake new research. See Hewlett-Packard Co. & Consol. Subs. v. Commissioner, 139 T.C. 255, 258-59 (2012) (first quoting S. Rep. No. 97-144, at 76-77 (1981), as reprinted in 1981-2 C.B. 412, 438-39; and then quoting H.R. Rep. No. 97-201, at 111 (1981), as reprinted in 1981-2 C.B. 352, 358), aff'd, 875 F.3d 494 (9th Cir. 2017). In general, the credit was equal to a percentage of the amount by which a taxpayer's "qualified research expenses" for the credit year exceeded its average qualified research expenses for the three preceding tax years. ERTA § 221(a). Consistent with its name, therefore, the credit rewarded taxpayers who increased their research expenditures year over year. The credit was temporary and initially applied only to amounts paid or incurred after June 30, 1981, and before January 1, 1986. Id. § 221(d), 95 Stat. at 247.

In the years following its enactment, Congress extended the credit multiple times and, in at least one instance, allowed it to expire for a year before reinstating it prospectively.^[4] When we say that Congress "extended the credit," we mean that Congress made the benefit applicable to expenses incurred in a period not originally covered by the statute. See In re Grand Jury Subpoenas Duces Tecum, 78 F.3d 1307, 1311-12 (8th Cir. 1996) (holding that the Independent Counsel Reauthorization Act of 1987 was validly reenacted when "Congress

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passed [a public law] amend[ing] the sunset provision . . . of the 1987 Act by substituting the year 1994 for the year 1987"). Without these extensions, taxpayers would not have been entitled to any research credit in years following 1986 for incurring the types of expenses the credit is intended to incentivize. Congress finally made the research credit permanent (that is, it removed the provision that limited its application to specific time periods) in 2015.^[5]

Congress also modified the research credit a number of times after its initial enactment, including by moving the credit to different Code sections, changing...