8th Circuit Affirms Tax Court, Denies R&D Credit for Being Funded

Meyer, Borgman & Johnson, Inc. v. Commissioner, No. 23-1523 (8th Cir. May 6, 2024). Full decision of the 8th Circuit available here.

The U.S. Court of Appeals for the Eighth Circuit affirmed a decision of the Tax Court that the taxpayer was not entitled to research tax credits because the taxpayer’s research was “funded” within the meaning of section 41(d)(4)(H).


Meyer, Borgman, & Johnson, Inc., a structural engineering firm, sought R&D tax credits for its expenses incurred in creating documents for the structural design of building projects. The taxpayer claimed approximately $190,000 in tax credits for the years ending September 30, 2010, 2011, and 2013. The credits were denied by the Commissioner on the basis that the research was “funded”. The Tax Court ruled that the taxpayer had no financial risk as payment was to be made regardless.

The taxpayer argued that the Tax Court erred as payment for their research was in fact contingent on the success of its research. Furthermore, they argued that their contracts have a fixed price which is not generally considered to be funded work – statement supported by Case Law: Populous Holdings, Inc. v. Commissioner 2019 WL 130325266, at *2 (T.C. Dec. 6, 2019) (non-precedential order by Tax Ct. R. 50(f)). 


 26 U.S.C. § 41(d)(4)(H) states that “Any research to the extent funded by any grant, contract, or otherwise by another person (or governmental entity)” is not qualified research. The legislation clarifies that taxpayers who are paid to conduct research – such as through a contract – must have rights to use the IP and must be paid on a basis that indicates payment for the research is contingent on the success of the research.

This specification is essential as it clarifies who is at financial risk for the research taking place. If a taxpayer is paid regardless of the outcome or success of the research, there is no financial risk involved. However, if payment is contingent on the success of the research, financial risk falls on that taxpayer.


The Eighth Circuit affirmed the Tax Court’s decision and stated that the Taxpayer’s contracts lacked the specificity required to prove financial risk. In particular, they specified that the contracts lack the express terms that courts have identified as important to establish payment was contingent on the success of the research and highlighted Dynetics, 121 Fed. Cl. at 505 and Little Sandy Coal Co., Inc. v. Commissioner, 62 F.4th 287, 298 (7th Cir. 2023).

Dynetics was used as an example because the Taxpayer’s contracts did not include rejection language nor did it limit payment to work that was accepted. Little Sandy Coal Co was used as this case law provides a description of qualified research, (holding that “qualified research” does not include “testing to determine if the design of the product is appropriate,” cannot just be “any design or modification to meet customer specifications,” but must remove uncertainty “related to the ‘development or improvement’ of the product”

In summary, the Taxpayer’s contracts had verbiage outlining general economic risk of investing resources without a commitment to be paid, but that the risk was not contingent on the success of the research itself. Requirements to comply with pertinent codes and regulations or to perform pursuant to a general standard of care does “not mandate success” (citing Geosyntec Consultants, Inc. v. United States, 776 F.3d 1330, 1341 (11th Cir. 2015)). 

Are you developing new technology for an existing application? Did you know your development work could be eligible for the R&D Tax Credit and you can receive up to 14% back on your expenses? Even if your development isn’t successful your work may still qualify for R&D credits (i.e. you don’t need to have a patent to qualify). To find out more, please contact a Swanson Reed R&D Specialist today or check out our free online eligibility test.

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