USA v. Grigsby, No. 22-30764 (5th Cir. 2023)
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Cajun Industries LLC (“Cajun”) claimed tax credits for the 2013 tax year pursuant to § 41 of the Internal Revenue Code, 26 U.S.C. Section 41. First, the Code provision at issue in this case, Section 41 offers a tax credit for “qualified research expenses” including wages and expenditures incurred in pursuit of qualified research.1 The Internal Revenue Code provides a tax credit for qualified research activities, as defined by the Code. Appellants appealed the district court’s judgment which ejected research and development tax credits claimed by Cajun Industries LLC and upheld the resulting tax deficiency.
The Fifth Circuit affirmed. The court explained that Appellants’ argument that all contracts “for the product or result” are not funded improperly conflates “amounts payable under any agreement that are contingent on the success of the research” with contracts for products or services. This argument ignores the operative portion of the sentence: “amounts payable under any agreement that are contingent on the success of the research.” Structurally, the phrase “and thus considered to be paid for the product or result of the research” merely describes or modifies “amounts payable . . . contingent on the success of the research.” It does not, as Appellants urge, stand on its own to establish an additional type of contract “not treated as funding.” Further, the court explained that Appellants are not entitled to the research credit merely because SWBNO could not claim the credit. The Regulations do not require that a tax credit be allocated in every contract.
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