Eighth Circuit affirms structural engineering decision


The U.S. Court of Appeals for the Eighth Circuit has affirmed the Tax Court’s decision in Meyer, Borgman & Johnson, Inc. v. Commissioner (No. 23-1523), ruling that the structural engineering firm was not entitled to a Section 41 research credit claim because its research was funded.


The taxpayer addressed by the decision contracted with customers to create structural designs for building projects and claimed research credits associated with creating the designs for its September 2010, 2011 and 2013 tax years. On summary judgement, the Tax Court ruled in favor of the IRS, finding that the taxpayer’s research constituted funded research under Section 41(d)(4)(H) because, under the contract terms, payment was not contingent upon the success of the research. The Tax Court reasoned that, although the contract terms addressed conformity with building and design codes and expressed customer requirements, the contracts lacked the level of specificity regarding the results of the research required to comply with these requirements. The taxpayer filed an appeal, claiming that its right to payment was contingent on the success of its research and its contracts included inspection, acceptance, and quality assurance provisions.


The Eighth Circuit rejected the taxpayer’s claims, citing precedential case law that examined the funded research exclusion. Due to the lack of specificity in the taxpayer’s contracts, the Eighth Circuit reasoned that the taxpayer’s contracts were comparable to those in Dynetics, Inc. & Subsidiaries v. United States, 121 Fed. Cl. 492 (2015) and Geosyntec Consultants, Inc. v. United States, 776 F.3d 1330, 1341 (11th Cir. 2015), in which the courts ruled that the research was funded. It distinguished the taxpayer’s contracts from those in Fairchild Industries, Inc. v. United States, 71 F.3d 868 (Fed. Cir. 1996), in which the Federal Circuit held that the research was not funded. The Eighth Circuit found that none of the taxpayer’s contracts expressly (or by clear implication) require payment to be contingent on the success of the research, stating that the taxpayer agreed to adhere to professional standards and that requirements to comply with pertinent codes and regulations or perform pursuant to a general standard of care does “not mandate success.”


Further, the Eighth Circuit explained that the taxpayer’s contracts do not include the specificity of Fairchild, where the taxpayer “had to succeed at each step,” in part because the contracts do not include provisions that require a refund of payments already received if specific benchmarks are not met.


Grant Thornton Insight:


The Eighth Circuit’s decision reinforces the importance for taxpayers that perform research pursuant to customer contracts to adequately document specific provisions in the contracts that may be used to substantiate their research credit claim. Contracts with express provisions such as detailed technical specifications and acceptance criteria, including any requirements that the research must be successful for the taxpayer to receive payment, may better substantiate that the research being performed is not funded.



Content disclaimer

This content provides information and comments on current issues and developments from Grant Thornton Advisors LLC and Grant Thornton LLP. It is not a comprehensive analysis of the subject matter covered. It is not, and should not be construed as, accounting, legal, tax, or professional advice provided by Grant Thornton Advisors LLC and Grant Thornton LLP. All relevant facts and circumstances, including the pertinent authoritative literature, need to be considered to arrive at conclusions that comply with matters addressed in this content.

For additional information on topics covered in this content, contact a Grant Thornton professional.

Grant Thornton LLP and Grant Thornton Advisors LLC (and their respective subsidiary entities) practice as an alternative practice structure in accordance with the AICPA Code of Professional Conduct and applicable law, regulations and professional standards. Grant Thornton LLP is a licensed independent CPA firm that provides attest services to its clients, and Grant Thornton Advisors LLC and its subsidiary entities provide tax and business consulting services to their clients. Grant Thornton Advisors LLC and its subsidiary entities are not licensed CPA firms.



Tax professional standards statement

This content supports Grant Thornton Advisors LLC’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. It is not, and should not be construed as, accounting, legal, tax, or professional advice provided by Grant Thornton Advisors LLC. If you are interested in the topics presented herein, we encourage you to contact a Grant Thornton Advisors LLC tax professional. 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.

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, tax, or professional advice provided by Grant Thornton Advisors LLC. 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 a Grant Thornton Advisors LLC tax professional 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 Advisors LLC 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.

Grant Thornton Advisors LLC and its subsidiary entities are not licensed CPA firms.


More tax hot topics