Geosyntec Consultants, Inc. v United States (2015)
Geosyntec Consultants, Inc. (“Geosyntec”) v. United States, 776 F.3d 1330 (11th Cir. 2015)
Geosyntec is an engineering consultancy, specializing in environmental studies, restoration and resource assessment. The company claimed a R&D tax refund of $1,677,432 for 2002, 2003, 2004 and 2005 tax years. During these years, it entered into a number of contracts with clients. The IRS disallowed the tax credit refund because it claimed the work was funded, from these contracts.
Six contracts were brought to the court for review: three fixed-price contracts; and, three cost-plus contracts (also known as ‘capped contracts’, where it was paid for labor and expenses, plus a mark-up, subject to an agreed upon maximum amount). The court initially said that the three capped contracts were funded, and therefore any expenses that occurred were ineligible. But, Geosyntec challenged this ruling; it claimed it held risk in two of the three.
According to Fairchild Industries Inc v U.S., the entity or person who can claim (i.e. the company or its client), is whoever holds the financial risk. This means that the client can claim the R&D credit if they are required to pay, regardless of whether the research is successful or unsuccessful. Conversely, if the client is only paying for a finished product, the company can claim, because it’s taking the risk.
In both contracts, Geosyntec was given several tasks, each with subtasks that were priced separately, with a capped total on the project. Clients had the authority to request additional tasks or alter tasks. And, additional compensation was available in certain circumstances, such as if statutory, administrative or state authority requirements meant more work was needed. Invoices were created by Geosyntec and approved or denied by the clients. The company claimed that it held financial risk because it would only be paid for expenses incurred and tasks completed, not for research. It said that if it were to go over budget it would not be reimbursed for this, and that it would not be able to profit from the research performed.
Firstly, the court found that Geosyntec’s risk arguments were moot. The court was only looking at whether payments were contingent on the success of the research; the cost of performance and profitability were irrelevant. And, compensation was available in certain circumstances. Also, neither contract stated that tasks had to be successful, just that they had to be performed. For example, one task was to run laboratory tests and provide the client with a report, but nothing was said about the test results having to be successful. As another example, one task was to design a landfill expansion and provide services during construction (both which required R&D work). But, Geosyntec didn’t have to install or implement this design, and it wasn’t subject to testing or inspection before acceptance.
Because no payments were contingent on project success, the court decided that Geosyntec did not have the necessary risk needed to claim the R&D Tax Credit refund.
Any company claiming this credit should look closely at who holds financial risk, specifically, whether payment is contingent on success. While it’s not always black and white, this question helps to confirm, or deny, eligibility.
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