Union Carbide Corp. & Subsidiaries v. Commissioner, 697 F.3d 104

UCC conducted three research projects at two Hahnville, Louisiana plants during 1994–1995 tax-credit years.
Projects: Amoco anticoking, UCAT-J catalyst, and sodium borohydride to reduce acetaldehyde in crude butadiene.
Tax Court held costs for supplies used in the anticoking and UCAT-J projects were not creditable as qualified research expenses.
Sodium borohydride project was not qualified research under §41(d) for lack of post-testing analysis.
Tax Court reasoned those costs were ordinary production costs for finished goods and not “supplies used in the conduct of qualified research.”
Taxpayer appealed asserting Treasury Regulations and §41(b)(2)(A)(ii) permit a broader credit; court affirmed Tax Court, denying broader credits and upholding the ordinary-production-cost limitation, while acknowledging the conduct of the research was qualified for anticoking and UCAT-J.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether costs for supplies used in production would have occurred without research are creditable	UCC argues the plain meaning of 'used in the conduct of qualified research' includes all supplies used in production undertaken for research.	Commissioner contends such supplies are indirect/ordinary costs not 'used in the conduct of qualified research'; only incremental costs qualify.	No; costs must be used in conducting qualified research, not merely in ordinary production.
Is the phrase 'used in the conduct of qualified research' plain or ambiguous, and how should it be interpreted	UCC asserts plain meaning supports broad credit for all supplies used in production.	Language viewed in context indicates limits; regulation and purpose support excluding ordinary production costs.	The phrase is interpreted in context to exclude ordinary production costs; statute ambiguous but regulatory purpose supports narrowing interpretation.
Role of Treasury Regulations and agency interpretation in §41(b)(2)(A)(ii)	Agency interpretation could support broader credit; regulatory text allows wider interpretation.	Agency interpretation is permissible and aligns with congressional purpose to reward incremental research costs.	Commissioner’s interpretation is rational and consistent with legislative history and purpose; deference accorded under Chevron.

Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (U.S. 1984) (agency deference in statutory interpretation)
Barnhart v. Sigmon Coal Co., Inc., 534 U.S. 438 (U.S. 2002) (plain meaning and context in statutory interpretation)
Cabell v. Markham, 148 F.2d 737 (2d Cir. 1945) (dictionary definitions not controlling for statutory meaning)
Frank G. v. Bd. of Educ. of Hyde Park, 459 F.3d 356 (2d Cir. 2006) (contextual interpretation of terms in a contract/ statute)
O’Neil v. Ret. Plan for Salaried Emps. of RKO, Inc., 37 F.3d 55 (2d Cir. 1994) (interpretation within integrated agreements)