Dynetics Inc. and Subsidiaries v. United States (2015)

Main Issue:

• Funded Research

Facts:

• Taxpayer claimed the research credit for client projects related to developing unmanned systems used in national security
• Taxpayer claimed research expenses associated with cost-plus fixed fee, fixed-price level of effort, and time and materials contracts
• The Court determined that all the contracts were funded

Conclusion:

• Generally, only fixed-price contracts may qualify for the research credit
• Standard fixed-price contracts may qualify for the credit as long as the taxpayer bears the economic risk for the research (both costs and profit) and maintains substantial rights to the technology developed
• Fixed-price level of effort contracts (such as hours worked) will likely be challenged if the payments are based on level of effort rather than the result of the research

Take-Away Point:

• The taxpayer must demonstrate that progress payments under a fixed-price contract are “contingent on successful performance”
• “Course of dealing” or inspection or warranty clauses are not sufficient to establish that payments are contingent upon successful research
• The Fairchild case is still the seminal case regarding fixed-price contracts and should be referenced when analyzing contract language