Appeal of Pino

Appeal of Pino, 2020-OTA-375P, decided by Administrative Law Judge Josh Lambert on the written record, is a precedential Office of Tax Appeals (OTA) opinion addressing the evidentiary showing needed to substantiate a California research credit claim for informal agricultural consulting. C.R. Pino and C. Pino, the sole members of Fair Haven Distributing, LLC, dba Sonoma Produce Marketing, appealed the Franchise Tax Board's (FTB) denial of pass-through research credit refunds of $53,472 for 2013 and $69,466 for 2014, based on wages Fair Haven's owner-husband and office-manager-wife devoted to advising growers.

The Claimed Projects

Fair Haven was a produce brokerage that bought fruits and vegetables from West Coast growers for resale to East Coast wholesale and retail customers; it did not grow any produce itself and had no formal contracts with the farms it worked with. Its research study, prepared by alliantgroup, described four projects: improving blueberry growth conditions and sorting with Family Tree Farms; developing smaller cauliflower and specific potato sizes for Blue Apron meal-kit recipes with Colorful Harvest; improving cantaloupe growth methods with Access Organics; and extending fig shelf life with Maywood Farms. The study attributed the analysis to interviews with the husband, together with a review of purchase orders, invoices, email correspondence, and photographs.

Insufficient Substantiation

The only contemporaneous documentation actually in the record was a single 2014 email confirming a cauliflower order for Blue Apron and three shipping invoices -- evidence that corroborated ordinary buying-and-shipping activity, not any process of experimentation concerning growth methods. A non-contemporaneous travel calendar referenced "field trials" and "researching" transportation alternatives without describing what those activities involved. OTA found the study's own language conclusory, repeatedly stating that the owner "evaluated alternative methods" or "utilized principles of hard sciences" without identifying what alternatives were tested, what hypothesis was formed, or how any particular scientific principle was applied -- language OTA found materially indistinguishable from the taxpayer's unsuccessful showing in Siemer Milling Co. v. Commissioner, T.C. Memo. 2019-37.

OTA also found the business component test unmet as to two of the four projects: because Fair Haven never bought or resold any figs or blueberries during the years at issue, appellants failed to show the growth processes for those crops were held for sale, lease, or license, or used in Fair Haven's own trade or business, as IRC section 41(d)(2)(B) requires. For the cantaloupe and cauliflower projects, invoices did establish that Fair Haven held those products for sale, but appellants still failed to show that at least 80 percent of the underlying activity constituted a systematic, hypothesis-driven process of experimentation rather than ordinary agricultural know-how applied to buying decisions.

Significance

Pino illustrates that a research credit study's narrative conclusions cannot substitute for contemporaneous evidence, and that a taxpayer whose business is buying and reselling a product -- rather than developing or improving it -- must independently establish that the product or process was actually held for sale or used in its own trade or business. The opinion applies and extends the reasoning of Appeal of Swat-Fame, Inc., 2020-OTA-046P, to the agricultural context.