Opinion
7805-16
10-13-2022
MEYER, BORGMAN & JOHNSON, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Mark V. Holmes, Judge
This case was on the September 18, 2017 St. Paul Minnesota trial calendar. Both parties moved for summary judgment to decide whether Meyer, Borgman & Johnson, Inc. (MBJ), was entitled to IRC section 41 research credits. We granted the Commissioner's motion and ordered that the parties submit decision documents or file a status report on their progress to settlement or trial. MBJ instead moved for reconsideration of the summary-judgment order.
All section references are to the Internal Revenue Code in effect for the years at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure unless we say otherwise.
We apply the standards of the district courts under Federal Rule of Civil Procedure 60(b) to such motions. Bedrosian v. Comm'r, 144 T.C. 152, 156 (2015). The moving party must show "unusual circumstances or substantial error." Knudsen v. Comm'r, 131 T.C. 185, 186 (2008) (citing Estate of Quick v. Comm'r, 110 T.C. 440, 441 (1998)).
MBJ argues that our previous findings contain substantial errors of fact. It mainly argues that its contracts' terms were specific and complex which made them contingent and therefore not funded under IRC section 41. It claims that it didn't raise this argument in its previous motion and it is not rehashing old arguments.
We first provide a quick refresher on the legal background of this motion. Section 41 provides a general business credit, which includes the research credit. To obtain the research credit, the taxpayer's research must be a "qualified research expense." See I.R.C. § 41(a)(1). The regulations provide that "funded" research is not a qualified research expense. See Treas. Reg. § 1.41-4A(d). But research that is "contingent on the success of the research" is not funded. Id.
We look at Fairchild Industrial, Inc. v. United States, 71 F.3d 868 (Fed. Cir. 1995) to determine whether payment was contingent on the success of the research. We must determine who "bears the research costs upon failure" of the research. Id. at 873. "When payment is contingent on performance, such as the successful research and development of a new product or process, the researcher bears the risk of failure." Id. We look at the contract and its terms holistically. Id. at 870 (quoting Treas. Reg. § 1.41-A(d)(1)).
Although, as MBJ claims, its arguments here are different from its previous arguments, it loses for the same reasons. MBJ fails to point to any express terms in the contracts which show that payment was contingent on the success of its research. Id. at 873. MBJ disagrees and lists express terms from its contracts. The issue with the terms that MBJ highlights is that they don't reach the specificity and complexity of Fairchild's explicit terms. Id. Instead, the terms in MBJ's contracts are very similar to those in Geosyntec Consultants, Inc. v. United States, 776 F.3d 1330 (11th Cir. 2015). As the Eleventh Circuit summarized:
unlike the Fairchild contract, the project [at issue in Geosyntec] did not require installation and integration of specific elements; each task was not subject to complex contract specifications; and Geosyntec's work was not subject to inspection and testing before acceptance. Rather, the design was left almost entirely to Geosyntec's professional expertise, informed by Geosyntec's own research . . . .Id. at 1340 (citation omitted).
We completely agree with MBJ that its work as a structural engineering firm requires extreme attention to detail and accurate measurements. It even requires conformance with detailed building and design codes. The problem is that MBJ's contracts give MBJ the flexibility to determine and create these details and measurements. The contracts themselves lack the level of specificity on the results of any research that MBJ must undertake to comply with those codes. And in any event we need to look at the contract, not MBJ's professional obligation to conform to the relevant building codes, to determine whether payment was contingent on successful research. See Id.
Perhaps a more important consideration is that the contract in Fairchild "explicitly placed solely on Fairchild the risk of failure of every line item of [the research]." Id. at 873. While MBJ's contracts do provide a method of acceptance and rejection, it's not to the specificity of Fairchild, who "had to succeed at each step" of its research. Geosyntec Consultants, 776 F.3d at 1340. This aligns with Geosyntec, where a general right to review and approve, or reject, the researcher's work product wasn't sufficient to show contingency. Id. at 1338, 3141.
MBJ also makes other arguments, such as that its contracts are fixed-price agreements. We already dealt with these arguments in our previous motion, and we reiterate that we look at the contract holistically. It is therefore
ORDERED that petitioner's motion for reconsideration is denied. It is also
ORDERED that on or before December 16, 2022 the parties submit decision documents or file a status report on their progress toward settlement or trial.