Thursday, March 5, 2015

TSR's Tax Cheat

Yesterday, we talked about Steve Jackson Games, Inc. v. United States Secret Service.  We saw the electronic communications are basically completely open to government search and seizure after 180 days.  Today, we are going to talk about TSR, Inc. & Subsidiary v. Commissioner of Internal Revenue.  This one’s a little less exciting, but interesting nonetheless.



As Sophia Petrillo would say,“Picture it!  It was the 1980s.  Everyone on Wall Street was doing cocaine.  Presumably everyone in Lake Geneva, WI at TSR wasn’t, but who knows?  TSR’s business was going gangbusters and they were producing all sorts of products.  But their flagship was D&D.  In this case “game designers and their editors…researched the topic upon which the game or game module was based, translated the research into the mechincs of the game and then played the prototype of the game.”  While doing this:

[o]ne objective of the new products development division was to produce a game that was accurate in technical detail and historical facts.  This was important because the people who played [TSR’s] games became immersed in the various aspects of the subject matter and setting of the game.  If the game was based on inaccurate information, word would spread among the people who played the game that the game was not realistic, and the game’s sales would suffer.

While doing research, TSR’s staff checked out their own libraries, TSR’s library, government documents, museums, among other sources.  TSR then attempted to apply the research tax credit to their business expenses.  They applied for tax credits of $420K in 1981, $972K in 1982, and $1.5m in 1983 and again in 1984.  The IRS was not amused.

The R&D tax credit basically allowed someone to claim a credit on taxes imposed for up to 25% of the expenses.  I use this in the past tense because the tax code changes all the freaking time.  I’m not a tax attorney.  I stay as far away from tax law as possible, and I don’t want to say anything tax-related that isn’t true.  Maybe it’s still this way.  I’m pretty sure there is still an R&D tax credit; I’m just unsure if it’s the same.  Anyway, TSR contended that the time and expenses incurred by its game design staff researching for historical accuracy should qualify for the tax credit.  There’s a great example of how this worked using the longbow:

The game designers identified these items and made them available (in an imaginary sense) to the game players…[A] “Dungeons & Dragons” player might acquire a long bow.  [TSR’s] employees determined how hard it was to obtain a long bow in medieval Europe, how much a long bow would cost, and how effective a long bow was as a weapon.  The employees incorporated this information into the game mechanics by mathematical formulas.  The mathematical formulas helped to determine the relative strengths and weaknesses conferred on a player by the acquisition of the item.[1]

The only problem?  The R&D tax credit did not cover “qualified research in the social sciences or humanities.”[2]  Given the word a designer does, the social sciences or humanities seems like a very broad interpretation.  Unfortunately, a broad interpretation (to include history I guess?) knocked TSR’s claim out of the park.  Alas, “Congress intended to limit [the R&D tax credit] to scientific or technological research involving the physical sciences”[3] and the “research conducted by [TSR’s employees] did not require the application of any natural, physical, or laboratory sciences…and did not result in any technological breakthrough.”[4]

Bottom line: If you’re going to cheat on your taxes, try and find a route that’s more creative than something the IRS has specifically said that you can’t do.




[1] 96 T.C. at 909 (1981).
[2] Id. at 913.
[3] Id. at 915.
[4] Id. at 920.

No comments:

Post a Comment