776 F.3d 1330
11th Cir.2015Background
- Geosyntec, an environmental engineering consultancy, sought $1,677,432 in R&D tax credits under 26 U.S.C. § 41 for work on client projects in 2002–2005; the IRS disallowed the credits and Geosyntec sued for a refund.
- Parties selected six representative contracts for litigation: three fixed-price and three cost-reimbursable with ceilings ("capped" contracts). The district court found the capped contracts funded and the fixed-price contracts not funded; Geosyntec settled as to the fixed-price contracts and appealed only two capped contracts.
- The two contested capped contracts are: (1) the Cherry Island Contract (Delaware Solid Waste Authority) for landfill expansion (cost-reimbursement up to ~$9.99M with specified tasks and payment procedures); and (2) a WM master-services addendum (capped at $18,781) for bench tests and a treatability report.
- Section 41(d)(4)(H) excludes research "funded" by another person from qualified research; Treasury regs allocate the § 41 credit to the party who bears the financial risk of research failure—i.e., whether payment is contingent on success (§ 1.41-4A(d) and § 1.41-2(e)).
- The central question: under the actual contract terms, were payments to Geosyntec contingent on successful research such that Geosyntec bore the risk (unfunded), or were payments owed regardless of success such that the contracts were "funded" and Geosyntec ineligible for the credit?
- The Eleventh Circuit affirmed summary judgment for the United States, holding both the Cherry Island and WM capped contracts were "funded" because payment was not contingent on successful research outcomes.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Cherry Island capped contract was "funded" under § 41 | Geosyntec: contract placed failure risk on Geosyntec (fixed/capped compensation, warranty/reperformance obligations, invoice dispute rights) so payment depended on satisfactory performance | U.S.: contract reimbursed labor/costs for defined tasks regardless of research success; invoice/dispute procedures do not make payment contingent on results | Held: Funded — DSWA obligated to pay for work performed; payment not contingent on successful research |
| Whether the WM capped contract was "funded" under § 41 | Geosyntec: capped price and error/liability provisions allocate performance risk to Geosyntec, aligning with Fairchild factors for researcher risk | U.S.: WM agreed to pay for bench tests and report if properly performed; no requirement that payment wait on a finding of feasibility or successful result | Held: Funded — WM contract required payment upon proper performance, not on successful remedial outcome |
| Proper legal standard for "funded" research | Geosyntec: adopts Fairchild rule focusing on who bears risk of failure | U.S.: same standard per regs and Fairchild; applies contract terms to allocate financial risk | Held: Court applied Fairchild/ Treasury regulations: credit goes to party that bears financial risk of failure; here risk lay with clients |
| Whether invoice dispute and performance-standards provisions transform reimbursements into contingent payments | Geosyntec: dispute/quality controls mean payment depends on client acceptance, so contingent on success | U.S.: disputes are limited and temporary; provisions focus on remediation and accuracy, not withholding payment for failure of research | Held: Such provisions do not equate to the acceptance-contingent payments in Fairchild; they do not make payment contingent on research success |
Key Cases Cited
- Fairchild Indus., Inc. v. United States, 71 F.3d 868 (Fed. Cir. 1995) (establishes that the funded-research inquiry turns on who bears the financial risk of failure; if payment is only made upon acceptance of successful results, the work is funded by the client)
- MedChem (P.R.), Inc. v. Comm’r, 295 F.3d 118 (1st Cir. 2002) (taxpayer bears burden to prove entitlement to research tax credit)
- Thrasher v. State Farm Fire & Cas. Co., 734 F.2d 637 (11th Cir. 1984) (standard of review for summary judgment affirmed as applied by the court)