An appeals court heard arguments from Union Carbide and the U.S. government on Thursday as the company fought to use a tax credit retroactively for research it did in the 1990s to improve manufacturing processes.

A decision in favor of Union Carbide would widen the scope of the research and development tax credit, part of the corporate tax code that costs U.S. taxpayers roughly $7 billion a year. Union Carbide is a subsidiary of Dow Chemical Co.

The case involves process improvements researched in 1994 and 1995. One improvement was an experimental, cost-cutting method to make polyethylene resin for dry-cleaning bags.

The company is challenging a tax judge's decision to deny the credit.

After arguments by lawyers for the company and the U.S. Internal Revenue Service, the three-judge panel in the 2nd Circuit U.S. Court of Appeals in New York did not immediately issue a decision.

In one exchange, Circuit Judge Chester Straub challenged Union Carbide lawyer Harold Heltzer and indicated there was an argument for affirming the lower court's decision.

The bottom line of your position is whenever the manufacturer wants to get this credit, it simply says, all the supplies we are using in production have something to do with our experimentation, Straub said.

Heltzer argued that the company had to meet a very serious criteria in order to get the credit.

Corporate tax breaks, in general, are under scrutiny in Washington.

Lawmakers are grappling with a tax code riddled with loopholes, but the research and development (R&D) credit enjoys broad political support.

IRS lawyer Andrew Weiner argued, The statute does not require that the court turn a blind eye to what was really going on this case. They were conducting normal manufacturing operations and they were also conducting qualified research.

Since its creation in 1981, the credit has helped support basic research. But detractors say it is a costly corporate hand-out, too broadly claimed, that does little to drive more U.S. R&D hiring and investment.

The case is Union Carbide Corp & Subsidiaries vs Commissioner of Internal Revenue in the 2nd Circuit U.S. Court of Appeals No. 11-2552

(Additional reporting By Patrick Temple-West and Ernest Scheyder)