LPL sues IRS over software development deductions

LPL Financial is seeking millions of dollars in tax refunds that the firm argues were "erroneously denied" by the IRS on the basis that the company's services make it ineligible for an exemption.

In a lawsuit filed Aug. 24 in San Diego federal court, LPL requested more than $5.4 million in income-tax refunds on the company's payments for the years 2012 to 2014 by citing the deductibility of certain domestic manufacturing income under Section 199 of the tax code. Through amended tax returns LPL filed in 2016 and 2017, the company sought deductions for the development of its former financial advisor desktop software, BranchNet, which it replaced with ClientWorks as LPL's core operating platform several years ago.

LPL "designed, developed, updated, produced, and implemented the BranchNet software by employing and contracting with software developers in the United States," according to the lawsuit. "Plaintiff's software developers wrote machine-readable code for the BranchNet software and performed upgrades and updates to the BranchNet software on a continual basis. Plaintiff's production of its BranchNet software within the United States was substantial in nature given the complexity, redundancy, scale, and scope of the BranchNet software and that substantially all of the work to develop the BranchNet software was performed by Plaintiff's employees and independent contractors in the United States."

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Bloomberg Tax first reported the lawsuit. Representatives for the IRS, which reached an agreement with LPL in 2021 to award the company 60% of the separate research tax credits for BranchNet it had sought in the same amended returns, didn't immediately respond to requests for comment. Representatives for the agency told Financial Advisor Magazine that the IRS has a policy against commenting on pending litigation.

The company had appealed an initial refusal by the agency to allow either of the tax breaks before reaching the settlement on the research tax credits under Section 41 of the code. In three August 2021 letters to LPL from the agency's Independent Office of Appeals that are included in the lawsuit, an IRS appeals team manager told the company it had included "gross receipts derived from services" as part of the domestic production deduction.

LPL filed a related but different case in U.S. Tax Court last year attempting to qualify for tax refunds under the same deduction for 2015 and 2016, according to another filing in the case. The company has argued it eliminated any revenue related to services from its calculations.