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is transferred to the shareholder of a tax year, the amount of the excise tax which the research is funded — not only
covered corporation in a nonrecognition will be computed, reported, and paid research contracts. In defining funded
transaction under Sec. 354 or 355). In on an annual basis. Finally, the notice research, the regulations provide two
addition, any stock issued by a target provides that no extensions will be standards under which taxpayers must
corporation that is a covered corporation permitted for reporting or paying the evaluate their research activities:
to the merging corporation in a reor- excise tax. 1. Amounts payable under an agree-
ganization under Sec. 368(a)(1)(A) by ment that are contingent on the
reason of Sec. 368(a)(2)(E) is not treated More guidance yet to come success of the research and thus
as issued for purposes of the netting rule. The excise tax is a new provision, considered to be paid for the product
Similarly, the list includes deemed and Notice 2023-2 contains initial or result of the research are not
issuances for which corresponding guidance from Treasury and the IRS. treated as funding (“risk standard”).
deemed redemptions were not treated Various issues remain, and the proposed 2. If a taxpayer retains no substantial
as Sec. 317(b) redemptions (and thus regulations and other future guidance rights in the research, then the
not repurchases). Specifically, deemed will need to be analyzed and taken into research is considered to be funded
issuances under Sec. 304(a)(1) and account by taxpayers for purposes of (“substantial-rights standard”).
deemed issuances of a fractional share determining any liability for excise tax. The application of these standards
are not treated as issued for purposes of From Ethan Harris, J.D., LL.M., and continues to be litigated, and aware-
the netting rule. Mendy Schreiber, CPA, J.D., LL.M., ness of prior case law provides helpful
Washington, D.C. context to the discussion in Perficient
Procedural rules and Grigsby.
Notice 2023-2 provides that the
excise tax is anticipated to be reported Credits Against Tax Funded-research case law and
annually on Form 720, Quarterly the risk standard
Federal Excise Tax Return, which will The research credit: The foundational case regarding the
be accompanied by an additional form Funded research funded-research exclusion and the risk
intended to help taxpayers compute the Two recent court cases involving the standard is Fairchild Industries, Inc., 71
excise tax that they will be required to research credit, Perficient Inc., No. F.3d 868 (Fed. Cir. 1995). Fairchild
attach to Form 720 (the IRS released 15467-17 (Tax Ct. 7/11/22) (response to Industries, an aerospace manufacturer,
a draft of Form 7208, Excise Tax on motion for partial summary judgment), entered into a fixed-price incentive con-
Repurchase of Corporate Stock, on Dec. and Grigsby, No. 19-00596-BAJ-SDJ tract to design and produce the T-46A
28, 2022). (M.D. La. 10/19/22), examine the Sec. aircraft, a “next generation trainer,”
The notice further provides that 41(d)(4)(H) funded-research exclusion. for use in training new pilots. Under
Treasury and the IRS expect that the These cases demonstrate the complex- the contract, the U.S. Air Force was
excise tax will be reported on the due ity of the funded-research exclusion obligated to pay for the research only
date for the Form 720 by reference rules, which continue to be a point of if Fairchild produced results that met
to the last day of the first full quarter contention between taxpayers and the the contract specifications. If it deemed
following the close of the taxpayer’s tax IRS. Discussion in Perficient and Grigsby Fairchild’s work was not acceptable,
year. The notice contains the following provides taxpayers with recent interpre- the Air Force could either (1) reject the
example: A taxpayer with a tax year tations of relevant guidance, including work, (2) require Fairchild to correct the
ending on Dec. 31, 2023, would report preceding case law. work at its own expense, or (3) accept
its stock repurchase excise tax on the Regs. Sec. 1.41-4A(d) provides a the work subject to an equitable price
Form 720 for the first quarter of 2024, general exclusion for funded research, reduction. Additionally, the contract’s
due on April 30, 2024. stating that research funded by any financing provisions provided that if
Similarly, under the notice, the grant, contract, or otherwise by another Fairchild was making satisfactory prog-
deadline for payment of the excise person, including any governmental ress, the Air Force would pay bimonthly
tax is expected to be the same as the entity, does not constitute qualified re- refundable advances, termed “progress
filing deadline for the Form 720 (as search for purposes of the research cred- payments,” calculated as a percentage
described above). Thus, consistent it. Furthermore, all agreements entered of the expenditures Fairchild actu-
with the language in Sec. 4501 relating into between the taxpayer performing ally incurred.
to determining the FMV of stock the research and other persons must be On appeal, the Federal Circuit re-
repurchases and issuances during the considered in determining the extent to versed the U.S. Claims Court decision

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