Tell City Boatworks, Inc. v. Indiana Department of State Revenue

Tell City Boatworks, a custom shipyard on the Ohio River closely affiliated with its sister company Corn Island Shipyard, claimed an Indiana research expense tax credit for its design and construction of several first-in-class vessels during the 2010 tax year, following a five-phase design process running from pre-bid engineering through fabrication and final testing. The Department of Revenue denied the refund claim after audit and again after an administrative hearing, and Tell City appealed to the Tax Court, which reviews Department determinations de novo.

Project 112: Not Tell City's Own Business Component

For one cutter dredge (Project 112), the Court held Tell City could not claim the credit because the vessel was not its own 'business component' under IRC section 41(d)(2)(B) — the construction contract was between Corn Island and the customer, the vessel carried a Corn Island hull number, and Corn Island (not Tell City) bore financial responsibility for launch damage and paid Tell City only as a subcontractor. Tell City's claim that Corn Island had informally 'assigned' the project to it did not establish a legal assignment of contractual rights.

The Shrinking-Back Rule Could Not Be Applied

For the remaining vessels, the Court declined to apply the regulatory 'shrinking-back' rule — which allows the four qualified-research tests to be applied to a smaller subcomponent if a business component as a whole fails a test — because Tell City did not present evidence breaking its costs down by vessel subcomponent, placing the burden of that showing squarely on the taxpayer.

Business Component, Section 174, and Technological Information Tests Satisfied — Process of Experimentation Was Not

The Court found that Tell City's three remaining vessels satisfied the Business Component, Section 174 (uncertainty), and Technological Information tests, since each vessel's design accommodated genuinely uncertain requirements driven by different cranes and equipment, and the design work fundamentally relied on marine engineering principles. But applying the reasoning of Trinity Industries, Inc. v. United States, 691 F. Supp. 2d 688 (N.D. Tex. 2010), aff'd, 757 F.3d 400 (5th Cir. 2014), the Court held that Tell City had not shown that at least 80% of its research activities for any of the three vessels constituted a genuine process of experimentation, as opposed to integrating known, previously used capabilities — such as spuds, spud wells, and winch systems reused across projects — into standard barge designs modified for each customer's crane. The evidence also failed to isolate the costs or time attributable to any experimental design work versus routine construction and revisions made simply to satisfy classification-society or customer requirements.

The Court affirmed the Department's denial of Tell City's refund claim in full for the 2010 tax year.

Significance: This is a detailed, first-impression Indiana Tax Court opinion applying all four qualified-research tests to a custom manufacturer, and it illustrates how courts distinguish integrating known, previously used components into a design — even one requiring genuine engineering calculation — from the systematic trial-and-error required to satisfy the 'substantially all' process-of-experimentation threshold.