Appeal of Abramson (Abramson Teiger Architects, LLP)

Appeal of Abramson, 2024-OTA-636, decided by Administrative Law Judge Veronica I. Long, is a nonprecedential Office of Tax Appeals (OTA) opinion denying a petition for rehearing of OTA's December 14, 2023 opinion, which had sustained the Franchise Tax Board's denial of research credits claimed by the partners of Abramson Teiger Architects, LLP (ATA) for the 2013 through 2017 tax years. Because the rehearing opinion recounts and reaffirms the original opinion's reasoning in detail, it provides a full record of why ATA's claim failed.

Grounds for Rehearing

Under California Code of Regulations, title 18, section 30604 and Revenue and Taxation Code section 19334, a rehearing may be granted only for defined grounds -- among them, that the record contains insufficient evidence to support the original opinion, or that the opinion is contrary to law. ATA's partners argued both grounds, contending that OTA had misattributed an argument to them, made factual assumptions unsupported by the record, wrongly concluded their timekeeping records could not support the shrinking-back rule, and failed to shift the burden of proof to FTB despite offering credible evidence.

Why the Underlying Denial Stood

OTA reaffirmed that ATA's evidence -- principally the testimony of one of its architects and its timesheet records -- did not establish that substantially all of ATA's claimed research hours involved a process of experimentation, as IRC section 41(d)(1)(C) requires. The timesheet entries described work only in generic terms, such as "team meeting to review drawings and discuss week's schedule," "design meeting," and "go through keynotes for plans," without distinguishing between design elements that involved genuine technical uncertainty and routine elements, such as landscaping or roofing-material selection, that would not. OTA held that credible testimony alone, even when offered in good faith, does not excuse a taxpayer from the underlying obligation to substantiate that the described activities in fact satisfied the qualified research tests, citing its own prior determination on similarly conclusory testimony in Appeal of First Solar, Inc., 2023-OTA-532P.

OTA also rejected the argument that its shrinking-back rule analysis was flawed, explaining that the rule allows evidence to be used to estimate the qualified expenses associated with a subset of a business component only after a taxpayer has first identified which specific activities constituted a process of experimentation; because ATA's project-and-phase-level recordkeeping never isolated qualifying activities with sufficient precision, there was no subset to shrink back to. Finally, OTA held that the burden of proof never shifted to FTB, because California does not conform to IRC section 7491's federal burden-shifting rule for credible taxpayer evidence, and ATA -- not FTB -- bore the burden throughout of proving entitlement to the credit.

Significance

Abramson reinforces that a taxpayer's own project-tracking system, however detailed in hours, must also describe the substance of the work performed with enough specificity to let OTA determine whether a genuine process of experimentation occurred; generic administrative descriptions of design meetings, standing alone, will not satisfy the "substantially all" requirement even when corroborated by sincere witness testimony.