Lockheed Martin Corporation v. United States, 210 F.3d 1366 (fed. Cir. 2000)
Case no. 99-5039
This is an appeal in the U.S. Federal Court of Appeals where Lockheed Martin Corporation appeals the decisions made denying their attempt to introduce late filed expenses in its tax refund suit and granting the government’s motion for summary judgment in that Lockheed Martin was not entitled to a tax credit refund for research expenses.
Lockheed Martin Corporation had numerous fixed price contracts during the 1982 to 1988 tax years. In 1991, they filed refund claims for 1984 to 1998 claims. The IRS disallowed these refund claims because the research performed under the contracts was not “qualified research” because it was funded by the government. Lockheed Martin filed an appeal for this decision asking the court to consider evidence regarding these expenses and other expenses uncovered during discovery. The Court of Appeals denied the motion because Lockheed Martin could not verify the legal or factual bases for its refund claim at trial. Both parties agreed to have the issue resolved by referencing four programs that represented 65% of the expenses claimed and they extended the court’s determination whether Lockheed Martin retained substantiation rights under the contracts in the suit. The Court of Federal Claims found that the SICBM, Titan IV and SLAT programs were all under the same contract and LM did not retain substatntial rights in its research for any of these major programs because
- the government had an unlimited right to have access and use for this data,
- LM had sought prior approval from the State before conducting research
- the government had ultimate power over LM and could require them to transfer title to a subject invention if they failed a patent application
- LM was required to pay the government for its research results
The appeal covers several issues:
- Claim Variance – LM believes the Court erred in denying its motion to order the government to consider additional research expenses not discovered until trial. The Court stated that their decision was correct because LM wrote their claims broadly, they predicated their refund claims on specific expenses which together formed the factual basis for the claims. No other expenses should be allowed to be introduced after the experimentation period of limitation to the filing of a claim. This inclusion of additional expenses would create a variance in expenses from LM’s factual claims.
- Substantial Rights – LM believes they are entitled to a research expense tax credit because they meet the “substantial rights” test as they retained the rights to use the research results for their business. The government states that LM does in fact retained the right to use this information but does not believe that this right does not rise to the level of a “substantial” right. This Opinion rejects the government’s argument because they are saying that “substantial rights” only includes scenarios in which the taxpayer is the sole owner of the research and which no other party as the rights to this research, including patented inventions. Under the provision titled “Recovery of Nonrecurring Costs on Commercial Sales” LM was required to pay for that right. LM argues, under this provision, should be entitled to use its research in its business without paying for that right. This provision is a cost recovery provision and it requires the contractor to bear a portion of the government’s costs related to the research or development that is produced and the products relating to the research. This revision only applies when the taxpayer plans on selling the research to third parties which LM did not intend to do.
In summary, LM retained the right to used its research from the Major Programs contracts without having to pay for the right to use the results of their research. The Court of Federal Claims erred in its decision because “funding” in LM’s case does not fall under the exclusions. The Court correctly denied LM’s motion for pretrial order clarifying the scope of the claim however the court reversed the decision in regards to granting the government’s motion for summary judgment that Lockheed Martin did not full with the funded exclusion for increasing research credit.
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