Boeing, manufacturers press U.S. IRS on R&D tax rule changes

By Patrick Temple-West WASHINGTON (Reuters) - Boeing Co and other manufacturers asked the U.S. Internal Revenue Service on Wednesday to scrap parts of a proposed rewrite of the federal tax deduction for corporate research and development that they said could make it harder to claim it. Warning of possible costly legal fights ahead, a lawyer for the aerospace company said Boeing Co is worried the changes as proposed could prevent it from deducting the R&D costs for an airplane if, for example, separate engine parts were upgraded. First proposed in September, the IRS' rewrite of the R&D tax break for companies would make it applicable to a wider array of expenses, including more manufacturing process-oriented costs. The proposal was initially seen by many manufacturers and food processors as helpful, but some have since found problems they want addressed. "This proposed regulation ... in the hands of an (IRS) revenue agent might become the next challenge that Boeing will have to spend hundreds of thousands of dollars on defending," said Duane Webber, a lawyer with Baker & McKenzie for Boeing. A spokesman for accounting firm Ernst & Young LLP, which was representing some undisclosed manufacturing clients, also asked the IRS to drop plans to change eligibility requirements. An official from the Treasury Department, which must approve final rule changes, said the IRS will weigh the concerns of companies. "That will probably be our number one thing to discuss ... seeing whether it applies in a way that we didn't intend," Alexa Claybon, a lawyer in Treasury's Office of Tax Policy, told Reuters after the hearing. She said the IRS's goal is to finish the rules by June. TWO TYPES OF R&D TAX BREAKS There are two R&D tax breaks. One is a deduction and the other is a credit. A business must claim the deduction, which has been on the books longer, before it can claim the credit, which has more stringent eligibility requirements. The credit has been a source of frequent court disputes between the IRS and companies such as Lockheed Martin Corp , Dow Chemical Co and Bayer AG . Boeing previously said it liked the IRS's proposed rules. In a quarterly regulatory filing in October, Boeing said: "The regulations are generally taxpayer favorable and provide clarity." A spokeswoman for Boeing declined to comment on Wednesday. (Editing by Kevin Drawbaugh. Editing by Andre Grenon)