Tangel V Commissioner (2021)


Tangel v. Comm’r, Docket No. 27309-13 (U.S.T.C. Jan. 11, 2021)

Enercon Engineering, Inc. claimed R&D tax credits for research performed through 2008-2010. Enercon was hired by Vericor to develop a new enclosure for turbine power generation. The IRS filed a motion for partial summary judgment with respect to the expenses incurred by Enercon while providing services to Vericor. The IRS brought this forth as the research expenses were funded and are therefore not eligible for research tax credits.

Specifically, this case looked at how substantial rights apply to a taxpayer working on behalf of another company.

Basic Facts

Under Section 41(d)(4)(H), qualified research expenses are defined to exclude any research that is funded by a grant, contract, or other person or entity. Exceptions to this apply when the taxpayer retains substantial rights to the research. Enercon and Vericor negotiated a detailed set of contract terms which restricted Enercon’s use or disclosure of technical information, except in the case of the performance of work for Vericor. Paragraph 15 had expansive definitions for research rights that ranged from rights to technical information to the tooling created to develop the products for Vericor. The paragraph further prohibited Enercon from using the research for any purpose other than Vericor’s project without prior consent.

The IRS disallowed research credits of approximately $930,000 claimed during 2008 – 2010 by Enercon. The IRS’ stance was that the contract removed any substantial rights from Enercon to the research performed. Enercon petitioned this, arguing that paragraph 15 was a standard non-disclosure agreement and so they retained the right to use institutional knowledge gathered during the project for future uses. 

Court’s Decision

Following thorough examination of the contract, the court ruled in favor of the IRS. Their decision was based on the unequivocal nature of the language of the Terms and Conditions. While the petitioner’s argued that the substantial rights were not specifically written in and could be “read-in”, the court ruled that such a right in this case is more properly characterized as an “incidental benefit to the taxpayer” and thus does not meet the substantial rights requirement. They maintained that the results of all research performed to fulfill the contract were retained by Vericor and were therefore not qualified research expenditures for Enercor. Further, Enercor would be held to the conditions of the contract and would be unable to re-use the results of its research without getting Vericor’s prior written consent.


It has been well established that a taxpayer is only entitled to research tax credits under Section 41 if they retain substantial rights in their research. With this in mind, it is crucial for taxpayers to evaluate the extent in which their company retains the substantial right to the research performed when funded through a third party. Taxpayers should carefully consider the rights they are explicitly granted in contracts prior to claiming R&D tax credits. Further, careful consideration of the rights explicitly granted during contract drawing could lead to favorable outcomes for the taxpayer.

Click here to read the full case.

Want to know more about claiming R&D tax credits? Connect with our R&D tax experts today.

Who We Are:

Swanson Reed is one of the U.S.’s largest Specialist R&D tax advisory firms, offering tax credibility assessments, claim preparation, and advisory services. We manage all facets of the R&D tax credit program, from claim preparation & audit compliance to claim disputes. 

Swanson Reed regularly hosts free webinars and provides free IRS CE and CPE credits for CPAs. For more information please visit us at www.swansonreed.com/webinars or contact your usual Swanson Reed representative.

Recent Posts