Best Practices: Kyocera R&D Court Case: Why Documentation Matters More Than Ever

The Kyocera Case: What Every Tax Team Should Know

The Kyocera AVX Components Corporation R&D court case highlights a painful but important truth. Without strong documentation, even a legitimate R&D credit claim can collapse.

For companies pursuing the R&D tax credit, the case offers practical lessons about what the IRS and courts expect today. This post breaks down what happened, where the process failed, and how tax teams can build a stronger, defensible R&D credit process moving forward.

What Happened in the Kyocera Case?

Kyocera originally claimed a $398,985 R&D credit on its 2018 return. Later, after engaging PwC for a multi-year study, it filed an amended return increasing the claim to $1.7 million.

The IRS denied the amended claim, arguing that Kyocera had failed to provide sufficient proof of qualified research activities. Kyocera then filed a refund suit in District Court.

The core issue was documentation. PwC’s study relied almost entirely on interviews with 36 SMEs to represent the activities of 1,200 employees. There was:

• No time tracking
• No retained contemporaneous project documentation
• No invoice-level validation of supply or contract research costs
• No original survey responses or interview materials produced during discovery

As a result, the court granted summary judgment in favor of the government. The case was later refiled in Tax Court.

Key Lessons for Tax Teams

The Kyocera case highlights six critical lessons for companies pursuing the R&D tax credit.

1. Interviews Alone Are Not Enough

The IRS and courts require documentary evidence, not just SME recollections. Interviews can supplement documentation, but they cannot replace it. As one MASSIE best practice says: “Pave the road with documentation, fill the potholes with interviews.”

If your process relies primarily on SME input, your credit is vulnerable.

2. Choose SMEs Strategically

SMEs must have first-hand knowledge of the qualified activities they are describing. They should not opine on large groups of employees or on activities outside their immediate area of responsibility.

When preparing your study:

• Select SMEs who can speak directly to the research they performed or supervised.
• Ensure they can support their statements with contemporaneous technical documentation wherever possible.
• Avoid asking SMEs to estimate time for employees they do not manage or oversee.

3. Percentages Are Not Proof

The IRS is not satisfied with statements like “I spent 40 percent of my time on R&D.” They expect activity-level evidence that shows what work was done and how it aligns with the four-part test.

This means:

• Linking qualified research activities to specific business components and matching activities to an employee’s time.
• Demonstrating a process of experimentation.
• Providing project artifacts (design documents, test results, iterations) to support SME statements.

For practical strategies on building stronger documentation, see Optimizing Your R&D Tax Credit Process Using Today’s Technology.

4. Preserve Contemporaneous Technical Documentation

One of the most damaging aspects of the Kyocera case was the absence of contemporaneous technical documentation. The IRS argued that destroying or failing to retain this information violated recordkeeping requirements.

Tax teams must work with engineering and IT to:

• Preserve technical documentation, emails, project tracking data and notes, and other relevant materials.
• Avoid unnecessary purging of historical records related to R&D projects.
• Create clear policies for retaining documentation that supports credit claims.

5. Define Business Components Thoughtfully

The IRS focuses heavily on how companies define business components. Broad or vague components are difficult to defend. Each component must be clearly defined and shown to meet the four-part test.

During your study, take the time to:

• Define business components at the appropriate level of granularity.
• Demonstrate the scientific or technological uncertainty involved.
• Document how each component underwent a process of experimentation.

6. Understand How Job Titles Are Viewed

Certain job titles and departments are presumed to be nonqualifying unless proven otherwise. For example:

• Upper-level management is typically treated as performing direct supervision, not direct research.
• Support functions must have clear evidence of contributing to qualified activities.

If including time for employees in these categories, be prepared to provide robust evidence of their involvement in the research process.

For tips on preparing SMEs and aligning their input with IRS expectations, see How to Train SMEs for R&D Tax Documentation.

Why This Case Signals a Larger Trend

The Kyocera case is part of a broader pattern. The IRS is raising its expectations for documentation across all aspects of the R&D credit. As seen in recent cases like Little Sandy Coal and Park-Ohio, companies that rely too heavily on interviews or unsupported estimates are at serious risk.

Tax teams must adapt their processes now to align with this new reality. That means:

• Building strong documentation practices.
• Selecting and educating SMEs carefully.
• Preserving contemporaneous technical documentation
• Demonstrating activity-level detail for each business component.

Bottom Line

The Kyocera case underscores a simple truth. If your R&D credit process cannot produce contemporaneous documentation to support your claims, your credit is vulnerable.

Building a strong, defensible R&D credit process takes time and cross-functional collaboration. But the investment pays off when it protects the credit your company has earned.

If your team would like to review your current documentation process or explore ways to strengthen it, we are here to help.

Jamie Bond

As Director of Tax Credits at MASSIE, Jamie is dedicated to setting her clients up for success by delivering supportable work and focusing on building strong client relationships to ensure the best results. With over 11 years of experience in R&am...