Can Lockheed Win Against the U.S.?

After the U.S. Government renewed the tax credit for research and design, some companies are looking to pounce, but some of them want money back from the past, and Lockheed Martin (NYSE:LMT) is just one of those willing to go to court against the U.S. to get that money.

In Lockheed’s case, the company is seeking to get $13.6 million in the research tax credits for projects dating back to 2004 through 2007. The two projects in question are a space rocket launcher and a New York surveillance system. However, the issue with the U.S. isn’t about when the tax credit claims were filed — the U.S. often allows retroactive claims. There is some debate over what counts as research and what doesn’t.

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The government denied Lockheed the tax credit in May 2012 because some of Lockheed’s costs went into the design of prototypes, which the government appears to be claiming are not a part of research. On the other hand, Lockheed argues that the new and unproven designs should qualify as research.

Lockheed is not alone; other companies are also seeking retroactive tax credits for research and design. Dow Chemical Co. (NYSE:DOW) and Trinity Industries (NYSE:TRN) are two others in similar positions to Lockheed. Dow was also denied a credit to cover supply costs last year because the supplies went into finished goods that were eventually sold…

Though all 3 will have separate court cases, the Lockheed case could have a significant impact on the other 2. If Lockheed is denied the research credit because of its prototypes, the case could set a precedent over what qualifies as research and what doesn’t, giving the U.S. more strength to knock down these sorts of claims from the companies.

One unfortunate effect of these trials is that they are creating almost the opposite relationship with companies that the government had intended with the research credit, creating conflict where there is disagreement. The idea of the retroactive research credits also run opposite the intended purpose, as companies looking to get back money from the past are probably thinking about revenue, whereas they are intended to be focusing on advancing research, and the tax credit is supposed to incentivize that research.

The results of Lockheed’s court case could not only affect the company’s revenues for the year, but also the U.S. and companies involved in research and design, like Dow Chemical and Trinity Industries.

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