Main Issue:
Funded Research
Facts:
The taxpayer claimed the research credit for client projects related to environmental and geological infrastructure consulting and engineering
The taxpayer claimed research expenses associated with both fixed-price and cost-plus contracts
The Appellate Court allowed the fixed-price contracts but denied the cost-plus contracts
Conclusion:
Cost-Plus contracts do not qualify
Fixed-price contracts may qualify for the credit as long as the taxpayer bears the economic risk for the research (both costs and profit)
Take-Away Point:
The taxpayer must demonstrate that progress payments under a fixed-price contract are “contingent on the success of the research”
The Fairchild case is still the seminal case regarding fixed-price contracts and should be referenced when analyzing contract language
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