Although we have not previously had occasion to consider the applicability of § 41(d)(4)(H)'s funded research exclusion, the Federal Circuit has, and the parties rely heavily on that court's seminal opinion. See Fairchild Indus., Inc. v. United States, 71 F.3d 868 (Fed.Cir.1995), modified (Feb. 23, 1996). Upon review, we conclude that the district court was correct in its interpretation of § 41 and affirm its entry of summary judgment against Geosyntec.
Fairchild Industries, Inc. v. U.S., 71 F.3d 868, 872 (1995); see also Treas Reg § 1.41-4A(d). Taken together, the regulations present "mirror image rules" to determine whether the researcher or the client is entitled to claim the credit.
Together, 26 C.F.R. §§ 1.41-2(e) and 1.41-4A(d) provide "mirror image" rules "for determining when the customer for the research, rather than the researcher, is entitled to claim the tax credit." Fairchild Indus., Inc. v. United States, 71 F.3d 868, 870 (Fed. Cir. 1995), modified (Feb. 23, 1996). Fairchild interpreted 26 C.F.R § 1.41-5, which was redesignated as § 1.41-4A in 2001.
To determine whether research is "funded," the Tax Regulations direct the Court to focus on the underlying contract(s). 26 C.F.R. § 1.41-4A(d)(1) ("All agreements (not only research contracts) entered into between the taxpayer performing the research and other persons shall be considered in determining the extent to which the research is funded."); see Tangel, 2021 WL 81731 at *4; Fairchild Indus., Inc. v. United States, 71 F.3d 868, 870 (Fed. Cir. 1995) ("In an accordance with Treasury Regulation § 1.41-2(e)(2) the contractual arrangement is the factor that determines who is entitled to the tax benefit[.]"), modified (Feb. 23, 1996).
That latter regulation provides that, if a customer's payment is contingent on the success of the research, the customer may not claim the expense as a research expense because the customer is paying "for a product or result rather than the performance of the research." Treas. Reg. § 1.41-2(e); see also Fairchild Indus., Inc. v. United States, 71 F.3d 868, 870 (Fed. Cir. 1995). Thus, the research credit may be claimed by the person "who bears the financial risk of failure of the research to produce the desired product or result."
MBJ highlights provisions that allow termination for not substantially performing, such as: "This Agreement may be terminated by either party upon not less than seven days' written notice should the other party fail substantially to perform in accordance with the terms of this Agreement through no fault of the party initiating the termination." According to MBJ, its contracts are like the one approved in Fairchild Industries, Inc. v. United States, 71 F.3d 868, 874 (Fed. Cir. 1996). The court there held that the taxpayer's research was not funded and thus qualified for the credit.
Accordingly, a key factor under the relevant contracts for the Projects is determining whether payment is for the product resulting in research or whether payment is for performing the research. Cf., Fairchild v. U.S. 71 F.3d 868, 870 (Fed. Cir. 1995) and Geosyntec Consultants Inc. v. United States, 776 F.3d 1330, 1336 (11th Cir. 2015).
In such circumstances the party performing the research is entitled to the credit because it bears the risk of failure. See sec. 1.41-2(e)(2), Income Tax Regs.; see also Fairchild Indus., Inc. v. United States, 71 F.3d 868, 870 (Fed. Cir. 1995). Petitioners do not contend that Vericor's payments to Enercon were "contingent on the success of the research," so this first factor does not apply here.
In contrast, if the taxpayer will be paid only if it succeeds in its research for the other party, the taxpayer's research will not be considered funded. See Fairchild Indus., Inc. v. United States, 71 F.3d 868, 873 (Fed. Cir. 1995). "The statute is designed so that those who will bear the risk of financial loss can include the tax credit in their calculation of investment risk."
We turn to whether the Court of International Trade correctly barred the Commission from cumulating the injurious impact of sales at LTFV of the several electronic forms of HIC FPD. Determination of the reasonableness of the Commission's combined injury analysis starts with interpretation of the statute. Matters of statutory interpretation receive plenary review on appeal. Fairchild Indus., Inc. v. United States, 71 F.3d 868, 872 (Fed. Cir. 1995). However, "if the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency's answer is based on a permissible construction of the statute."