Populous Holdings, Inc v Commissioner (2019)


Populous Holdings, Inc (“Populous”) v. Commissioner of Internal Revenue (Docket No. 405-17) (2019)

Populous is an architecture firm, claimed R&D tax credit for activities in 2010 and 2011. The IRS denied the claim of $132,539 for the 2011 tax year and $151,494 in carryforward credits from 2010. The basis for this denial was that the research was funded.


Under Section 41(d)(1)(H), companies conducting research and development must hold the burden of financial risk, to claim the tax credits. Typically, the company – in this case Populous – holds the financial risk when two conditions are met: (1) payment is contingent on the success of the research and (2) the company retains substantial rights in the research. To simplify, this means that Populous could NOT claim if a third party was paying for its research. It could claim only if the payment was for a final product (i.e. payment was not guaranteed if the product was not made to requirements), AND, Populous held substantial research rights.

In this instance, the IRS claimed that the research was funded: Populous did not have enough financial risk and lacked sufficient rights.



The court thoroughly examined the contract between Populous and the third party involved (the companies paying for the final products). Previous cases Fairchild Industries, Inc. v. United States and Geosyntec Consultants, Inc. v. United States were used as reference. Both these cases help to explain that they key point is “who bears the cost of the research if [the research] is unsuccessful”. And, these cases also helped to specify clauses to look for in the contract, including:

  • payment procedures,
  • quality and performance standards,
  • termination clauses, and,
  • warrant and default provisions,
  • the right to review and approve design documents,
  • invoice dispute provisions, and
  • revision obligations and covering related costs.

No contracts stated that research was required, which the court clarified means Populous was not being paid for its research. Instead, the companies were paying fixed prices for final products. As such, payments were contingent on Populous’ successful research, it it therefore held the financial risk.


The court looked to Lockheed Martin Corp. v. United States and found that the contracts held no provisions that

  • restricted Populous from using the research it performed,
  • Populous needed to pay for the use of research, and
  • the right to use the research was exclusive.

So, again, the court found that Populous retained sufficient rights to its research and results.


Many companies engage in R&D activities with third party contracts in place. This case is a huge win for those companies. It is, however, an example of how to scrutinize those contracts to ensure all Qualified Reasearch Expenditure eligibility requirements are met.

Click here to read the full case.

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