Ruling highlights need to evaluate funded research


The Tax Court held in Edward J. Tangel and Beatrice C. Tangel, et al. v. Commissioner (T.C. Memo 2021-1), that Enercon Engineering, Inc. (Enercon), an S corporation, was not entitled to claim a credit for increasing research activities under Section 41 for research performed under contract.

The IRS previously disallowed Section 41 research credits of $929,668 for the 2018-2010 tax years and requested partial summary judgment for one of the 142 different projects included in Enercon’s research credit claims.

Enercon designs and produces integrated controls and switchgears for custom applications in the power generation industry. It was hired by Vericor Power Systems LLC (Vericor) to develop a new enclosure for turbine power generation. Under the terms of the agreement, Enercon was not permitted to use the results of the research for any purpose outside of the agreed-upon services without prior written consent from Vericor.

To prevent double claiming qualified research expenditures, Section 41(d)(4)(H) states that qualified research shall not include “[a]ny research to the extent funded by any grant, contract, or otherwise by another person (or governmental entity).” To determine whether the research is funded, the regulations require taxpayers consider all agreements entered into between the parties and if a taxpayer: 1) bears the economic risk of failure and 2) retains substantial rights in the research. The Tax Court focused on the second requirement.

Enercon took the position that it “retained the right to use, on its own future projects, the ‘institutional knowledge it glean[ed] from research’ performed for Vericor” and that Enercon met the requirements in the Regulations. The Tax Court stated that the provisions of the agreement were hostile to Enercon’s claim. The Tax Court granted partial summary judgment and concluded that, under the terms of the contract, Enercon did not retain any substantial rights to the research.

The Tangel decision emphasizes the requirement that taxpayers must evaluate all terms and conditions of an agreement to determine which taxpayer is funding the research and eligible to claim the related costs in a research credit claim.



Tax professional standards statement

This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.


More tax hot topics