United States Court of Appeals 

for the Fifth Circuit ____________ 

No. 22-30764 

____________ 

United States of America, 

Plaintiff—Appellee, 

versus

Leonard L. Grigsby; Barbara F. Grigsby, 

Defendants—Appellants. 

______________________________ 

Appeal from the United States District Court 

for the Middle District of Louisiana 

USDC No. 3:19-CV-596 

______________________________ 

Before HIGGINBOTHAM, SMITH, and ELROD, Circuit Judges.

PATRICK E. HIGGINBOTHAM, Circuit Judge: 

Today, we visit the classic congressional practice of using its taxing 

powers to achieve permissible policy goals; here, the lure of a tax credit to 

incentivize creative research. Leonard L. Grigsby and Barbara F. Grigsby appeal the judgment of the United States District Court for the Middle District 

of Louisiana which rejected research and development tax credits claimed by 

Cajun Industries LLC and upheld the resulting tax deficiency. 

We AFFIRM. 

United States Court of Appeals 

Fifth Circuit 

FILED 

November 13, 2023 

Lyle W. Cayce 

Clerk 

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2 

I. 

Cajun Industries LLC (“Cajun”) claimed tax credits for the 2013 tax 

year pursuant to § 41 of the Internal Revenue Code, 26 U.S.C. § 41. First, 

the Code provision at issue in this case, § 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.2 To constitute “qualified 

research,” the research must satisfy the four tests laid out in § 41(d)(1): “(1) 

the expense must be of the type deductible under § 174 of the Code (i.e., R 

& D expenses that are reasonable under the circumstances), (2) the research 

must be undertaken for the purposes of discovering information that is 

‘technological in nature,’ (3) the information must be ‘intended to be useful 

in the development of a new or improved business component of the 

taxpayer,’ and (4) ‘substantially all of the activities [must] constitute 

elements of a process of experimentation.’”3 Relevant here, “business 

_____________________ 

1

 26 U.S.C. § 41(b). 

2 See generally id.

3 Shami v. Comm’r, 741 F.3d 560, 563 (5th Cir. 2014) (citing 26 U.S.C. § 41(d)(1)). The full 

text of 26 U.S.C. § 41(d)(1) reads: 

(d) Qualified research defined.--For purposes of this section-- 

(1) In general.--The term “qualified research” means research-- 

(A) with respect to which expenditures may be treated as specified 

research or experimental expenditures under section 174, 

(B) which is undertaken for the purpose of discovering information-- 

(i) which is technological in nature, and 

(ii) the application of which is intended to be useful in the 

development of a new or improved business component of the 

taxpayer, and 

(C) substantially all of the activities of which constitute elements of a 

process of experimentation for a purpose described in paragraph (3). 

Such term does not include any activity described in paragraph (4). 

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3 

components” are defined as “any product, process, computer software, 

technique, formula, or invention which is to be (i) held for sale, lease, or 

license, or (ii) used by the taxpayer in a trade or business of the taxpayer.”4

However, qualified research expressly excludes so-called “funded” 

research.5

 Funded research include “any research to the extent funded by 

any grant, contract, or otherwise by another person (or governmental entity).”6 Treasury Regulations further explain that research is funded if, in any 

agreement to perform research (1) the researcher retains no substantial rights 

to their research; or (2) payment is not contingent upon the research’s success.7

A. Claimed Credits 

Cajun provides construction services throughout the Gulf Coast 

Region and engaged in over one hundred construction projects during the 

time period in question. In 2015, Cajun hired a consulting firm to evaluate its 

projects and advise whether Cajun was eligible for research credits under 

§ 41. Based on the firm’s report, Cajun, believing it was entitled to a 

$1,341,420 research credit, filed an amended Form 1120S for the 2013 tax 

year claiming the $1,341,420 credit. 

_____________________ 

26 U.S.C. § 41(d)(1). 

4 Id. § 41(d)(2)(B). 

5 Id § 41(d)(4)(H) (“(4) Activities for which credit not allowed. --The term ‘qualified 

research’ shall not include any of the following . . . (H) Funded research.--Any research to 

the extent funded by any grant, contract, or otherwise by another person (or governmental 

entity).”). 

6 Id. 

7

 26 C.F.R. § 1.41-4A(d). 

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As an S-Corporation, Cajun’s income, losses, deductions, and credits 

pass through to its shareholders for income tax purposes. At all relevant 

times, Appellant Leonard Grigsby owned a 73% interest in Cajun and was thus 

entitled to a pro rata allocation of Cajun’s tax credit, which amounted to 

$979,237. The $979,237 credit reduced Mr. and Mrs. Grigsby’s tax liability 

for 2013 and indicated the couple overpaid their federal income taxes by 

$576,756. Appellants filed an amended 2013 tax return and sought a refund 

of $576,756 plus statutory overpayment interest in the amount of $73,633.38 

(the “Contested Refund”). On September 15, 2017, the Internal Revenue 

Service (“IRS”) issued Appellants a refund of $671,071.38, comprised of the 

Contested Refund and an additional $20,652 not at issue in this case.8

 

However, on August 13, 2019, the IRS notified Appellants that the 

Contested Refund was issued erroneously and challenged Cajun’s claimed 

credit. The Commissioner demanded Appellants repay the amount and 

warned that if Appellants did not do so, the IRS would recommend “an 

action be commenced in District Court to recover the erroneous refund, as 

permitted by I.R.C. § 6532(b) and 7405.” Shortly thereafter, the United 

States initiated this suit. 

B. The Representative Projects 

Before the District Court, the Parties agreed that four projects 

adequately represented Cajun’s research activities: (1) Project 13-020 (the 

“Methanex Project”); (2) Project 12-051 (the “Chevron Project”); 

(3) Project 12-001 (the “Claiborne Project”); and (4) Project 12-023 (the 

“East Bank Project”) (together, the “Representative Projects”). Thus, 

_____________________ 

8 Of the $671,071, $576,756 was “solely due” to Cajun’s tax credit and $73,663.38 stemmed 

from the statutory overpayment interest. 

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Cajun’s eligibility for the tax credit, and Appellants’ by extension, hinged on 

whether it performed qualified research while completing these projects. 

1. The Methanex Project 

In 2012, Jacobs Field Services North America, Inc. (“Jacobs”) hired 

Cajun as a subcontractor on a project to relocate a Methanex USA, LLC 

methanol plant from Chile to Louisiana. Cajun was originally tasked with creating temporary facilities at the new site. According to the Scope of Work 

provisions of the contract, Cajun’s responsibilities included: 

3.0 GENERAL SCOPE OF SERVICES (WORK) 

3.1 [Cajun] shall complete the Work and support functions 

required to effectively manage and report on the status of the 

Work as specified. 

3.2 [Cajun] shall provide all management, supervision, labor, 

consumable materials, construction equipment, construction 

aids, tools, services, testing devices, warehousing, supplies, 

inspections, insurance, fully furnished and equipped offices, 

communication devices, and all other necessary items to 

successfully accomplish the construction described by the 

Scope of Work. This includes, but is not limited to, on and off

site transportation, receiving, loading and unloading, storing, 

maintenance, and distribution of construction materials, 

installation of such materials into the Work, proper care of 

materials, testing and final construction punch list completion 

and turnover of the Work Scope as specified.9

In executing these tasks, Cajun was “solely responsible for and have 

[sic] control over construction means, methods, techniques, sequences and 

procedures and for coordinating all portions of the Work.” This included 

_____________________ 

9 “Work” was defined as the “work, services, deliverables, duties and activities to be 

performed or provided by, or on behalf of, [Cajun] under this Subcontract.” 

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obtaining approval for materials, identifying and coordinating vendors, 

offering design input, and participating in “a lot of review processes.” 

However, Jacobs retained “ultimate authority to resolve issues in the field.” 

The contract was subject to a capped price of $6,485,000 and payment 

was conditioned on Cajun’s completion of “all Work.”10 Cajun accepted 

payment “as full compensation for doing all Work and furnishing all material 

contemplated by and embraced in this Subcontract,” “for all loss or damage 

arising out of the nature of the Work,” “from any unforeseen or unknown 

difficulties or obstructions which may arise or be encountered in the 

prosecution of the Work,” and “for all risks of every description connected 

with the Work.” 

Section 26 of the contract addressed ownership of any work product 

and provided that all “Work Product prepared by [Cajun] shall be ‘works 

made for hire,’ and all rights, title and interest to the Work Product . . . shall 

be owned by [Methanex].” To the extent any “work product” was not 

considered work for hire, “or if ownership of all right, title and interest in the 

Work Product shall not otherwise vest in [Methanex],” Cajun agreed that 

ownership of said “Work Product . . . shall be automatically assigned from 

[Cajun] to [Methanex] without further consideration, and [Methanex] shall 

thereafter own all right, title and interest in the Work Product.”11 

_____________________ 

10 This price included “billed actual manhours and actual cost of other cost reimbursable 

items in accordance with the agreed labor wage rates, construction equipment rates, 

mobilization and demobilization rates as included in this Exhibit D.” Cajun was also 

entitled to additional compensation if Jacobs modified its scope of work. By the end of the 

project, the contract price rose from $6 million to approximately $90 million because of 65 

work scope modifications. 

11 The contract defined Methanex as the “Owner.” 

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The contract defined “work product” as “all documents, data, 

analyses, reports, plans, procedures, manuals, drawings, specifications, 

calculations, or other technical tangible manifestations of [Cajun]’s efforts 

(whether written or electronic) created by [Cajun] in the performance of the 

Work, including but not limited to all Documents.” In turn, “documents” 

included “any or all tracings, designs, drawings, field notes . . . specifications, 

electronic information . . . and other documents or records developed or 

acquired by [Cajun] and its suppliers or sub-subcontractors in performing the 

Work.” 

2. The Chevron Project 

In 2011, Chevron Products Company, a division of Chevron U.S.A., 

Inc., contracted with Cajun to provide construction services to expand Chevron’s Pascagoula Refinery (the “Chevron Project”). Cajun’s responsibilities 

included providing “all labor, supervision, quality control, administration, 

document control, equipment, [and] tools,” in addition to completing specific civil tasks such as surveying, excavation and backfill, installing piping, 

and performing field inspections. Appellants maintain that Cajun also offered 

“constructability reviews” of the engineer’s designs and specifications. 

However, the engineer of record, who was not a Cajun employee, retained 

“ultimate authority to resolve any issues that arose in the field.” 

The Chevron contract was a fixed-price contract and compensated 

Cajun for all work described in Exhibit B of the contract, the “Schedule of 

Compensation for Work.” Exhibit B detailed all costs covered by the contract 

price, including craft labor, non-manual, and equipment costs in addition to 

all overhead and profit. Furthermore, according to the “Pricing” section of 

the contract, Chevron paid for “performance of all Work” and the contract 

prices were “all inclusive” of Cajun’s “supply and services including without limitation; salaries and wages . . . the cost of supervision and support 

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services from personnel other than those permanently assigned to the Contract . . . employee income tax and statutory payroll deductions, social security charges, [and] all taxes (except sales and use taxes) . . . .” Cajun agreed 

that payment “constituted full payment for the performance of the Work, 

and completion of [Chevron]’s payment obligations under the Contract.” 

The contract designated Chevron as the owner of all work product 

generated during the project and provided: 

2.20.3. All drawings, documents, engineering and other data 

prepared or furnished by [Cajun] in performing the Work are 

considered to be [Chevron’s] work for hire and shall become 

[Chevron’s] property from the time of preparation and may be 

used by [Chevron] for any purpose whatsoever without obligation or liability whatsoever to [Cajun]. [Cajun] assigns all rights 

in the above referenced drawings, documents, engineering and 

other data to [Chevron], including copyrights. 

[. . .] 

18.4. All inventions, discoveries and improvements (patentable 

and unpatentable) that are made or conceived by [Cajun] or 

[Cajun]’s employees in performing the Services and all domestic and foreign patent rights based thereon shall belong to 

[Chevron] or an Affiliate designa1ed by [Chevron]. [Cajun]

shall promptly and fully disclose all such inventions, discoveries and improvements to [Chevron] or the designated Affiliate. 

Furthermore, Cajun agreed that all “Technical Information will be 

used only for performance of the Services for [Chevron]” and that it would 

not disclose this information without Chevron’s express written consent.12

This obligation remained in force even after the Chevron Project concluded. 

_____________________ 

12 Section 1.1.31 of the contract defined “technical information” as: 

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3. The Claiborne Project 

In September 2011, Cajun contracted with the U.S. Army Corps of 

Engineers to construct a “box culvert,” or an underground canal, as part of 

the Southeast Louisiana Urban Flood Control Project (the “Claiborne Project”). In doing so, Cajun was responsible for selecting the means and methods of construction, including equipment selection, personnel decisions, and 

“how to produce the work in accordance with the plans and specifications.” 

The Claiborne contract was a “fixed price” contract valued at 

$25,971,694.50. 

The contract incorporates various provisions of the Federal Acquisition Regulations (“FAR”), Title 48 of the Code of Federal Regulations, either “by reference” or by “full text.” Relevant here, the contract incorporates FAR 52.232. FAR § 52.232-5(f) dictates the ownership rights of any 

material generated throughout the contract’s performance and states “all 

material and work covered by progress payments made shall, at the time of 

payment, become the sole property of the Government.”13 “Work” includes 

“construction activity . . . [including] buildings, structures, and improvements of all types.”14

_____________________ 

[A]ny and all information, data and knowledge which is either made 

available to [Cajun] by [Chevron] relating to the performance of the Work, 

or developed by [Cajun] as a consequence or arising out of this Contract. 

Technical Information includes all inventions, discoveries or 

improvements (patentable or otherwise) that are made or conceived with 

by [Cajun] in performing the Work and all patent rights associated these 

inventions, discoveries or improvements. 

13 FAR § 52.232-5(f), codified as 48 C.F.R. § 52.232-5(f). 

14 Section 00700 of the contract “incorporate[s] by reference” FAR 52.202-1, which 

provides that “when a solicitation provision or contract clause uses a word or term that is 

defined in the Federal Acquisition Regulation (FAR), the word or term has the same 

meaning as the definition in FAR 2.101 in effect at the time the solicitation was 

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4. The East Bank Project 

In January 2012, the Sewerage and Water Board of New Orleans 

(“SWBNO”) awarded Cajun a construction contract to modify the flood 

protection system at the East Bank Wastewater Treatment Plant in New Orleans. Cajun’s scope of work included providing “all labor, materials, supervision, construction equipment, [and] mechanical and electrical equipment.”15

 The East Bank contract was a “firm, fixed-price contract” originally 

valued just under $24.4 million, although the contract eventually totaled 

$29.4 million due to changes in the scope of work. Cajun’s compensation included payment for “all general foremen, foremen, labor, teams and trucks 

actually engaged on such specific work for the time actually so employed at 

the rates actually paid.” Compensation also included a “fee for [Cajun’s] superintendence, general expense and profit,” which “shall be understood also 

to reimburse [Cajun] for any sub-contractor’s general expense and profit 

which [Cajun] may allow to one or more sub-contractors.” 

Cajun accepted payment as “full compensation for furnishing all the 

labor, materials, tools, equipment, etc., needed to complete the whole work 

of the contract” and also “as full compensation for all loss, damages or risks 

of every description, connected with or resulting from the nature of the work, 

_____________________ 

issued . . . .” See FAR 52.202-1, codified as 48 C.F.R. § 2.101. Thus, the reference to 48 

C.F.R. § 52.202-1 effectively incorporates all definitions provided in FAR 2.101. Section 

2.101 defines “work” as noted. 

15 Unlike the Methanex, Chevron, and Claiborne projects, Cajun was not solely responsible 

for the means and methods of executing these tasks. SWBNO hired an engineering firm, 

Burk-Kleinpeter, Inc. (“BKI”) to design the system modification(s). BKI oversaw Cajun’s 

daily construction activities and was required to approve Cajun’s means and methods and 

any materials Cajun selected for permanent features of the project. 

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or from any obstructions or difficulties encountered, of any sort or nature 

whatsoever[.]” 

 The East Bank contract contained no provisions relating to ownership 

of work product or research developed during the project. 

C. District Court Proceedings 

Throughout discovery, Appellants claimed Cajun engaged in research 

which led to the development of four new “products:” two oil refineries and 

two flood control systems. When the United States moved for summary 

judgment, the Government argued these products failed the “business 

component[s]” test and, as such, that Cajun did not perform qualified 

research. Furthermore, the Government claimed the Representative Projects 

were otherwise ineligible for the credit because they were “funded.” 

Appellants responded that Cajun had also developed “processes” 

that amounted to business components, in addition to the “products” 

identified during discovery. Appellants claimed their new “processes” 

encompassed the various “construction means and methods” Cajun used to 

perform on its contracts and develop these products. Appellants also 

disputed that the Representative Projects were funded, and maintained that 

Cajun retained substantial rights to its “research results.” Alternatively, 

Appellants contended that the contracts were contingent upon Cajun’s 

provision of deliverables and were not funded, as set out in 26 C.F.R. § 1.41-

4A(d). 

The District Court granted the United States’s motion for summary 

judgment on three bases. First, the District Court rejected Appellants’ 

“processes” argument pursuant to Federal Rule of Civil Procedure 37(c)(1) 

because this argument was inconsistent with Cajun’s prior discovery 

disclosures which, instead, “unequivocally state that, as to each 

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Representative Project, Cajun developed a ‘product.’”16 The District Court 

further found that Appellants’ construction processes claim failed for lack of 

specificity because Appellants “fail[ed] to specifically identify even one new 

or improved process that resulted from Cajun’s work on the Representative 

Projects.” 

Second, the District Court found that Appellants’ briefing “fail[ed] to 

cite any evidence or offer any argument establishing that Cajun’s work on the 

Representative Projects resulted in new ‘products.’” Because the excluded 

evidence of any construction processes was the “only evidence (and

argument) offered to establish the business component element of their 

QRTC claim,” the court concluded the Representative Projects failed to 

establish a business component. 

Third, as an alternative basis for its holding, the District Court held 

that the Representative Projects were “funded.” In particular, the District 

Court determined that the Methanex, Chevron, and Claiborne Projects failed 

the substantial rights prong of the “funded research exclusion,” and that the 

East Bank contract was funded because Cajun was fully compensated for any 

research performed or risk incurred.

Appellants timely appealed. This Court has jurisdiction under 28 

U.S.C. § 1291. 

_____________________ 

16 “If a party fails to provide information or identify a witness as required by Rule 26(a) or 

(e), the party is not allowed to use that information or witness to supply evidence on a 

motion, at a hearing, or at a trial, unless the failure was substantially justified or is 

harmless.” FED. R. CIV. P. 37(c)(1).

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II. 

We review a district court’s grant of summary judgment de novo, 

applying the same standard as the district court.17 Grants of summary 

judgment may be affirmed for any reason raised to the district court and 

supported by the record, and we are not bound by the grounds articulated by 

the district court.18 Decisions to exclude evidence under Federal Rule of Civil 

Procedure 37 are reviewed for abuse of discretion.19

III. 

Appellants advance three arguments on appeal. None are persuasive. 

A. Burden on Summary Judgment 

The District Court granted summary judgment after finding 

Appellants did not “offer competent evidence or argument establishing that 

Cajun performed qualified research,” namely on the business components 

element. Appellants argue that this improperly placed the burden on 

Appellants as the non-moving party at summary judgment. 

It is well established that the IRS’s assessment of tax liability may be 

presumed correct so long as it is not “without rational foundation and 

excessive.”20 The Government satisfies this burden by “specify[ing] the 

_____________________ 

17 Roberts v. City of Shreveport, 397 F.3d 287, 291 (5th Cir. 2005). 

18 Chevron U.S.A., Inc. v. Traillour Oil Co., 987 F.2d 1138, 1146 (5th Cir. 1993). 

19 CQ, Inc. v. TXU Min. Co., L.P., 565 F.3d 268, 277 (5th Cir. 2009). 

20 United States v. Janis, 428 U.S. 433, 441 (1976); Portillo v. Comm’r, 932 F.2d 1128, 1133 

(5th Cir. 1991) (“[W]e begin with the well settled principle that the government’s 

deficiency assessment is generally afforded a presumption of correctness . . . The tax 

collector’s presumption of correctness has a herculean muscularity of Goliathlike reach, 

but we strike an Achilles’ heel when we find no muscles, no tendons, no ligaments of fact.”) 

(internal citations omitted); Sealy Power, Ltd. v. Comm’r, 46 F.3d 382, 386 (5th Cir. 1995) 

(“A determination of deficiency issued by the Commissioner is generally given a 

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amount of the deficiency or provid[ing] the information necessary to 

compute the deficiency.”21 Once an assessment is presumed correct, the 

burden shifts to the taxpayer to rebut the presumption.22 Importantly, the 

taxpayer bears this burden regardless of whether the case is a refund suit 

_____________________ 

presumption of correctness, which operates to place on the taxpayer the burden of 

producing evidence showing that the Commissioner’s determination is incorrect.”). 

21 Sealy, 46 F.3d at 386. At oral argument, Appellants’ counsel argued that the IRS 

assessment was insufficient because it did not result from an administrative proceeding. 

However, Appellants provided no citations for this proposition and the Court has found 

none in support of this position. To the contrary, this Court in Portillo recognized that 

“there is no prescribed form for a deficiency notice,” Portillo, 932 F.2d at 1132 (citing 

Donley v. Comm’r, 791 F.2d 383 (5th Cir. 1986)), and such notice must merely evince “a 

thoughtful and considered determination that the United States is entitled to an amount 

not yet paid,” id. (quoting Scar v. Comm’r, 814 F.2d 1363, 1369 (9th Cir. 1987)). 

22 Portillo, 932 F.2d at 1133 (“This presumption is a procedural device that places the 

burden of producing evidence to rebut the presumption on the taxpayer.”). The 

presumption is consistent with the general principle that taxpayers must demonstrate their 

entitlement to any refund, deduction, or credit as well as the taxpayer’s record-keeping 

obligations imposed by the Revenue Code. See id. at 1134 (“The taxpayer clearly bears the 

burden of proof in substantiating claimed deductions.”); United States v. McFerrin, 570 

F.3d 672, 675 (5th Cir. 2009) (“Tax credits are a matter of legislative grace, are only 

allowed as clearly provided for by statute, and are narrowly construed.”); 26 U.S.C. § 6001 

(“Every person liable for any tax imposed by this title, or for the collection thereof, shall 

keep such records, render such statements, make such returns, and comply with such rules 

and regulations as the Secretary may from time to time prescribe.”) (emphasis added); 26 

C.F.R. § 1.6001-1(a) (“Except [for farmers and wage-earners], any person subject to tax 

under subtitle A of the Code . . . or any person required to file a return of information with 

respect to income, shall keep such permanent books of account or records, including 

inventories, as are sufficient to establish the amount of gross income, deductions, credits, or 

other matters required to be shown by such person in any return of such tax or 

information.”) (emphasis added); 26 C.F.R. § 1.41-4(d)(“Recordkeeping for the research 

credit. A taxpayer claiming a credit under section 41 must retain records in sufficiently 

usable form and detail to substantiate that the expenditures claimed are eligible for the 

credit.”). 

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initiated by the taxpayer or a collection suit brought by the Government.23

Thus, ultimately, “[t]he burden and the presumption, which are for the most 

part but the opposite sides of a single coin, combine to require the taxpayer 

always to prove by a preponderance of the evidence that the Commissioner’s 

determination was erroneous.”24 

The IRS assessment in this case was entitled to the presumption of 

correctness. This burden is a low one; the assessment must merely “advise 

the taxpayer that the [IRS] has determined that a deficiency exists for a 

particular year,” and “specify the amount of the deficiency or provide the 

information necessary to compute the deficiency.”25 The IRS’s August 13, 

2019, letter to Appellants (the “Letter”) met these requirements.26 Thus, 

the burden shifted to Appellants to refute the IRS’s determination. 

Therefore, the District Court properly required Appellants to introduce 

evidence on this point to establish a genuine dispute meriting trial. 

Moreover, even if the IRS’s assessment was not entitled to the 

presumption of correctness, the Government still met its burden of 

_____________________ 

23 Carson v. United States, 560 F.2d 693, 696 (5th Cir. 1977) (“This burden applies whether 

the proceeding is in Tax Court for redetermination of a deficiency or in district court upon 

a refund claim or a government counterclaim.”). 

24 Id. at 695–96. 

25 Portillo, 932 F.2d at 1132 (5th Cir. 1991) (internal citation omitted); see also Sealy, 46 F.3d 

at 386 (same). 

26 The Letter recounted that Appellants requested a tax credit of $576,756 for the 2013 tax 

year and received a total refund of $671,071.38, which was comprised of Appellants’ 

$576,756 claimed research credit plus $73,663.38 in statutory interest and an additional, 

undisputed, refund of $20,652. It further explained that the $576,756 refund was “solely 

due to information” reported on Appellants’ amended return which, in turn, was based on 

Cajun’s Amended Form 1120S. Because the IRS “determined that Cajun Industries, LLC 

& Subsidiaries is not entitled to the Research Credit claimed,” the Letter concluded that 

the “refund resulting from the Research Credit should not have been allowed and the 

refund paid to [Appellants] was erroneous.” 

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production at summary judgment. As the moving party, the Government 

needed to show that there was no genuine dispute as to any material fact and 

that it was entitled to judgment as a matter of law.27 The Government could 

do so by submitting evidence negating the existence of some material element 

of Appellants’ claim or defense; alternatively, because taxpayers must 

demonstrate their entitlement to credits, the Government could have 

pointed out that the evidence in the record was insufficient to support 

Appellants’ claim that they performed qualified research.28

The Government did so by providing approximately forty exhibits—

including excerpts from the Representative Projects’ contracts, Appellants’ 

2013 amended tax return, and corporate representative depositions from 

parties to the Methanex, Chevron, Claiborne, and the East Bank Projects—

that refuted Appellants’ entitlement to the credit. At that point, the District 

Court was correct in offering Appellants the opportunity to rebut this 

evidence and thus create a genuine issue of fact. The District Court did not 

err on this basis. 

_____________________ 

27 FED. R. CIV. P. 56(a). 

28 See Little v. Liquid Air Corp., 952 F.2d 841, 847 (5th Cir. 1992), on reh’g en banc, 37 F.3d 

1069 (5th Cir. 1994) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986)). 

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B. Business Components Determination 

Research must satisfy the so-called “business components” test in 

order to qualify for the tax credit.29 The business components test requires 

that research be “undertaken for the purpose of discovering information (i) 

which is technological in nature, and (ii) the application of which is intended 

to be useful in the development of a new or improved business component 

of the taxpayer.”30 The test must be applied separately to each business 

component, defined as “any product, process, computer software, 

technique, formula, or invention which is to be (i) held for sale, lease, or 

license, or (ii) used by the taxpayer in a trade or business of the taxpayer.”31 

During discovery, Appellants stated that they developed four new 

“products:” two oil refineries and two flood control systems. At summary 

judgment, however, Appellants claimed Cajun also created new business processes, a separate type of business component, which Appellants define as 

the “means and methods of construction,” “the means and methods of performing [] construction services,” and “construction processes.” 

The District Court found that the asserted products and processes did 

not satisfy the business components test because Appellants put forth no evidence of the alleged products, any assertions of new construction processes 

were inconsistent with their prior disclosures and excludable under Federal 

Rule of Civil Procedure 37, and notwithstanding those inconsistencies, Appellants did not specifically identify the new construction processes at issue.32 

_____________________ 

29 26 U.S.C. § 41(d)(1)(B). 

30 Id. 

31 Id. § 41(d)(2)(B). 

32 See FED. R. CIV. P. 37(c)(1) (“If a party fails to provide information or identify a 

witness as required by Rule 26(a) or (e), the party is not allowed to use that information or 

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Appellants now argue that the District Court’s determinations were 

in error. 

1. Business Components: Products 

Appellants argue they presented sufficient evidence that Cajun 

developed four business component products and cite to the “Taxpayers’ 

Response to Proposed Statement of Facts” (the “Response”) as support. 

However, cited provisions primarily describe Cajun’s “means and 

methods,” i.e., their processes, and not the products. While Appellants may 

be correct that their construction processes led to the final product, the 

Revenue Code requires this Court to evaluate each business component 

separately.33 

Accordingly, Appellants have not created a genuine dispute as to 

whether the four products constitute business components. 

2. Business Components: Processes 

Appellants further assert the District Court erred in excluding their 

construction processes argument because the “development processes and 

techniques” used on the Representative Projects were “almost inextricably 

intertwined with the tangible deliverables,” the final product. 

We are not persuaded that the District Court’s decision to exclude 

Appellants’ construction processes claim was an abuse of discretion.34

_____________________ 

witness to supply evidence on a motion, at a hearing, or at a trial, unless the failure was 

substantially justified or is harmless.”).

33 26 U.S.C. § 41 (d)(2)(A); see also id. § 41(d)(2)(C) (“Special rule for production 

processes.--Any plant process, machinery, or technique for commercial production of a 

business component shall be treated as a separate business component (and not as part of 

the business component being produced).”). 

34 CQ, Inc., 565 F.3d at 277. 

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Federal Rule of Civil Procedure 37(c)(1) provides that “if a party fails to provide information . . . as required by Rule 26(a) or (e), the party is not allowed 

to use that information . . . to supply evidence on a motion, at a hearing, or at 

a trial, unless the failure was substantially justified or is harmless.”35 To evaluate whether a Rule 26 violation was harmless, and “thus whether the district 

court was within its discretion in allowing the evidence to be used at trial,” 

this Court weighs four factors: (1) the importance of the evidence; (2) the 

prejudice to the opposing party of including the evidence; (3) the possibility 

of curing such prejudice by granting a continuance; and (4) the explanation 

for the party’s failure to disclose.36 

First, the argument that Cajun developed new construction processes 

is important because it provided Appellants with a wholly new basis by which 

to claim the tax credit. By raising this argument for the first time at summary 

judgment, Appellants effectively asserted a new defense that was neither disclosed nor explored during discovery. Moreover, as the District Court noted, 

“evidence of Cajun’s new construction processes is plainly important to [Appellants] insofar as it is the only evidence (and argument) offered to establish 

the business component element of their QRTC claim.” 

Second, this omission was highly prejudicial to the Government given 

the procedural posture of the case. The record reflects that Cajun’s initial 

discovery responses described the business components for the Representative Projects as “products.” Appellants’ supplemental disclosures likewise 

describe the Projects as producing “product[s].” By raising the processes argument at summary judgment, Appellants deprived the Government of the 

opportunity investigate this claim. 

_____________________ 

35 FED. R. CIV. P. 37(c)(1). 

36 Texas A&M Rsch. Found. v. Magna Transp., Inc., 338 F.3d 394, 401–02 (5th Cir. 2003). 

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Third, although the District Court acknowledged that reopening discovery would mitigate prejudice to the Government, the case was “more 

than three years old” and one month from trial. The District Court was entitled to weigh the value of reopening discovery against providing a timely resolution of the case.37

Finally, Appellants failed to explain their change in argument before 

the District Court and, before this Court, deny that any change occurred. In 

doing so, Appellants direct the Court to their “pretrial briefing” as evidence 

that Appellants’ position has remained consistent. However, the cited pretrial briefing is the Parties’ Joint Pretrial Order, which was filed over one 

month after the Government moved for summary judgment and three weeks 

after Appellants responded raising the construction process argument for the 

first time. Appellants have not directed the Court to any previous statements 

indicating that the claimed business components involved processes. This 

explanation is thus unpersuasive. 

Given these facts, the District Court did not abuse its discretion in 

excluding Appellants’ arguments about construction processes. However, 

even if the District Court abused its discretion, the error was harmless 

because the court nonetheless evaluated the merits of Appellants’ claim. 

Ultimately, the District Court determined that Appellants put forth “vague” 

and “conclusory” statements regarding their construction processes without 

identifying “even one new or improved process that resulted from Cajun’s 

work on the Representative Projects.”

_____________________ 

37 A district court has “broad discretion in all discovery matters,” and “such discretion will 

not be disturbed ordinarily unless there are unusual circumstances showing a clear abuse.” 

Kelly v. Syria Shell Petroleum Dev. B.V., 213 F.3d 841, 855 (5th Cir. 2000) (internal citation 

omitted). 

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The District Court did not abuse its discretion in excluding evidence 

of Cajun’s construction processes. Alternatively, Appellants did not offer 

sufficient evidence to create a genuine dispute as to whether Cajun’s 

products or processes constituted business components. Without a viable 

business component, the Representative Projects are not eligible for the tax 

credit, and the Government is entitled to summary judgment as a matter of 

law. 

C. Funding Exclusion 

Qualified research excludes “funded” research projects.38 Funded research include “any research to the extent funded by any grant, contract, or 

otherwise by another person (or governmental entity).”39 To determine 

whether research was funded, courts must first evaluate “all agreements (not 

only research contracts) entered into between the taxpayer performing the 

research and other persons.”40 Research is funded if: (1) the researcher retains no substantial rights in its research; 41 or (2) payment is not contingent 

upon the research’s success.42 

The District Court determined that “the Methanex, Chevron, and 

Claiborne Projects each fail the ‘substantial rights’ prong of the ‘funded 

_____________________ 

38 26 U.S.C. § 41 (d)(4)(H). 

39 Id. 

40 26 C.F.R. § 1.41-4A(d)(1). 

41 Id. § 41-4A(d)(2)(“If a taxpayer performing research for another person retains no 

substantial rights in research under the agreement providing for the research, the research 

is treated as fully funded for purposes of section 41(d)(4)(H), and no expenses paid or 

incurred by the taxpayer in performing the research are qualified research expenses.”). 

42 Id. § 1.41-4A(d)(1)(“Amounts payable under any agreement that are contingent on the 

success of the research and thus considered to be paid for the product or result of the 

research (see § 1.41–2(e)(2)) are not treated as funding.”). 

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research’ exclusion because in each instance Cajun transferred all rights to 

any new or improved ‘construction processes’ to its contracting counterpart.” The Court found that the East Bank contract was funded because 

“SWBNO plainly paid Cajun for whatever alleged research Cajun may have 

performed.” 

On appeal, Appellants dispute this finding and argue (1) that Cajun 

retained substantial rights in its research, and (2) that the Representative 

contracts were “contingent” upon delivery of a product and, as such, are not 

funded as defined by Treasury Regulation 26 C.F.R. § 1.41-4A(d). 

1. Methanex, Chevron, and Claiborne Projects 

Researchers cannot claim the tax credit if they retain no “substantial 

rights in research under the agreement providing for the research.”43 A 

researcher retains no “substantial rights” if the agreement or contract 

“confers on another person the exclusive right to exploit the results of the 

research.”44 Whether Cajun retained substantial rights to its research is 

determined by the contracts for each Representative Project.45 

Even assuming Cajun satisfied the business components test, by the 

express terms of the Methanex, Chevron, and Claiborne contracts, Cajun 

gave up its rights to any research performed under the contracts. Pursuant to 

section 26 of the Methanex contract, Methanex retained “all rights, title and 

interest” in any “work product” prepared by Cajun. The provision applies 

to all “works made for hire” as well as any work “not considered a work 

_____________________ 

43 26 C.F.R. §1.41-4A(d)(2). 

44 Id. 

45 Id. § 1.41-4A(d)(1) (“All agreements (not only research contracts) entered into between 

the taxpayer performing the research and other persons shall be considered in determining 

the extent to which the research is funded.”). 

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made for hire.” By contracting away “all right, title and interest” in its work 

product, Cajun gave up its rights to all “documents, data, analyses, reports, 

plans, procedures, manuals, drawings, specifications, calculations, or other 

technical tangible manifestations of [Cajun]’s efforts (whether written or 

electronic)” created while performing the contract, as well as “any or all 

tracings, designs, drawings, field notes, requisitions, purchase orders, 

specifications, electronic information . . . and other documents or records 

developed or acquired by [Cajun] and its suppliers or sub-subcontractors in 

performing the Work.” 

Similarly, Cajun assigned to Chevron “all rights” to any “drawings, 

documents, engineering and other data prepared or furnished by [Cajun]” 

under the Chevron contract. These items became “[Chevron’s] property 

from the time of preparation and may be used by [Chevron] for any purpose 

whatsoever without obligation or liability whatsoever to [Cajun].” Furthermore, the contract also states that Chevron owns all “inventions, discoveries 

and improvements (patentable and unpatentable) that are made or conceived 

by [Cajun] or [Cajun’s] employees” during the Project. Cajun was permitted 

to use this information “only for performance of the Services for [Chevron],” and pledged not to disclose such information “to any third party without [Chevron’s] express written consent.” Importantly, this obligation persists “notwithstanding the termination of this Contract.” 

Finally, by incorporating various provisions of the Federal Acquisition 

Regulations, the Claiborne contract provides that “all material and work covered by progress payments made shall, at the time of payment, become the 

sole property of the Government.”46 “Work” is defined broadly and includes 

_____________________ 

46 FAR § 52.232-5(f), codified as 48 C.F.R. § 52.232-5. 

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“construction activity,” “buildings, structures, and improvements of all 

types.” 

Ultimately, “it is hard to see what rights—much less what substantial 

rights” Cajun retained in its undefined research.47 After assigning away all 

rights to work developed during each Representative Project, Cajun retained 

no substantial rights in its research.48

2. East Bank Project 

Treasury Regulation 26 C.F.R. § 1.41-4A(d) defines “funded” 

research.49 Relevant here, the Regulation explains that “amounts payable 

under any agreement that are contingent on the success of the research and 

thus considered to be paid for the product or result of the research (see § 

1.41–2(e)(2)) are not treated as funding . . . .”50

_____________________ 

47 Tangel v. Comm’r of Internal Revenue, 121 T.C.M. (CCH) 1001, 2021 WL 81731, at *6 

(T.C. 2021) (internal quotations omitted). 

48 Appellants argue Cajun retained substantial rights to its research because “there is 

nothing [in the contracts] that precludes Cajun from performing the same types of activities 

and utilizing the same means and methods on other projects, or building other flood 

structures, or modifying refineries.” However, Appellants provided no specific examples 

of these “means and methods,” leaving the district court and this Court to guess what 

Cajun could bring to future projects aside from additional experience in its field. 

“[I]ncreased experience in a field of research” does not constitute substantial rights to 

research. 26 C.F.R. § 1.41-4A(d)(2). 

49 26 C.F.R. § 1.41-4A(d). 

50 Id. § 1.41-4A(d)(1). Together, 26 C.F.R. §§ 1.41-2(e) and 1.41-4A(d) provide “mirror 

image” rules “for determining when the customer for the research, rather than the 

researcher, is entitled to claim the tax credit.” Fairchild Indus., Inc. v. United States, 71 F.3d 

868, 870 (Fed. Cir. 1995), modified (Feb. 23, 1996). Fairchild interpreted 26 C.F.R § 1.41-5, 

which was redesignated as § 1.41-4A in 2001. See Credit for Increasing Research Activities, 

66 Fed. Reg. 280, 295 (2001). Section § 1.41-4A addresses when a researcher can claim the 

credit, whereas § 1.41-2(e) addresses when the payor to a contract can (or cannot) claim it. 

Accordingly, § 1.41-2(e)(2) explains that payors cannot claim expenses for 

research contracts “if an expense is paid or incurred pursuant to an agreement under which 

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Appellants offer three reasons why the East Bank Project was not 

funded. First, Appellants rely on 26 C.F.R. § 1.41-4A(d) and 26 C.F.R. § 

1.41-2(e) to argue the East Bank Project was not funded because payment was 

contingent upon Cajun delivering a “result or product,” the refineries and 

flood systems. Second, and relatedly, Appellants maintain they are entitled 

to the credit simply because SWBNO, the payor on the East Bank Project, 

was not. Finally, Appellants argue that the Project was not funded because it 

was “inherently risky.” These arguments miss the mark. 

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.” 

More to the point, § 1.41-4A(d)(1) only concerns agreements 

contingent upon the success of research. Simply put, the East Bank contract 

was not contingent on the success of the research because Appellants admit 

that “none of Cajun Industries’ payment was for merely conducting 

research.” Indeed, Appellants’ briefing admits “payments to Cajun 

_____________________ 

payment is contingent on the success of the research” because “the expense is considered 

paid for the product or result rather than the performance of the research.” 26 C.F.R. § 

1.41-2(e)(2). In doing so, “the regulations implement allocation of the tax credit to the 

person that bears the financial risk of failure of the research to produce the desired product 

or result.” Fairchild, 71 F.3d at 870. 

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Industries were not contingent upon whether Cajun Industries conducted 

research activities.” Consequently, this argument lacks merit. 

Furthermore, 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.51

Third, Appellants assert the East Bank Project was not funded 

because it was a fixed price contract and “inherently risky.” This argument 

stands on more solid ground and finds some support in a line of cases 

including Fairchild Industries, Inc. v. United States and Geosyntec Consultants, 

Inc. v. United States.

52 Fairchild explained that sections 1.41-2 and 1.41-4A 

“implement allocation of the tax credit to the person that bears the financial 

risk of failure of the research to produce the desired product or result.”53

Because fixed price contracts may not fully compensate researchers if their 

research is unsuccessful, the researcher bears the financial risk of failure, and 

fixed price contracts are more likely to be deemed unfunded. 

However, Fairchild and Geosyntec do not stand for the proposition that 

all fixed price contracts are per se not funded. Indeed, Geosyntec found that 

the fixed price contract at issue was funded.54 Furthermore, even if this Court 

_____________________ 

51 See 26 C.F.R. § 1.41-A(d)(2) (addressing a scenario in which “a taxpayer performing 

research for another person retains no substantial rights in the research and if the payments 

to the researcher are contingent upon the success of the research, neither the performer nor 

the person paying for the research is entitled to treat any portion of the expenditures as 

qualified research expenditures.”) (emphasis added). 

52 Fairchild, 71 F.3d at 870; Geosyntec Consultants, Inc. v. United States, 776 F.3d 1330 (11th 

Cir. 2015). 

53Fairchild, 71 F.3d at 870. 

54 Geosyntec, 776 F.3d at 1339 (“[W]e find that both the Cherry Island Contract and the 

WM Contract were ‘funded’ as that term is used in § 41 and Treasury Regulation § 1.41–

4A(d).”). 

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agreed that the Regulations allocate the tax credit to the party bearing the risk 

of unsuccessful research, Cajun was compensated for all risks associated with 

the East Bank Project. According to the express terms of the contract, Cajun 

accepted payment “as full compensation for all loss, damages or risks of 

every description, connected with or resulting from the nature of the work, 

or from any obstructions or difficulties encountered, of any sort or nature 

whatsoever . . . .” 

Finally, the East Bank Project was funded for the simple reason that 

Cajun was compensated for all expenditures incurred and claimed when it 

sought the tax credit. According to Cajun’s IRS Form 6765, Cajun claimed 

the research credit entirely for “wages” incurred in pursuit of qualified 

services.55 However, Cajun was compensated under the East Bank contract 

for “all general foremen, foremen, labor, [and] teams” as well as Cajun’s 

“superintendence, general expense and profit.” Cajun accepted this 

payment as “full compensation for furnishing all the labor, materials, tools, 

equipment, etc., needed to complete the whole work of the contract.” 

Therefore, Cajun was fully compensated for all wages and labor, making 

these expenditures funded under any plain meaning of the term.56

_____________________ 

55 Although Appellants’ brief claims that “Cajun Industries included portions of employee 

wages, contractor costs, and supply costs incurred for various construction projects as part 

of the computation of the R&D tax credits,” their tax filings indicate otherwise. In its Form 

6567, Cajun left blank spots next to the “cost of supplies” category. To the extent 

Appellants argue Cajun claimed the credit for the difference between compensation 

received and wages paid, Appellants bore the burden of demonstrated this value before the 

District Court and on appeal. They provided no such calculations.

56 See also 26 C.F.R. § 1.41-4A (Example 1, indicating if a researcher is wholly compensated 

for otherwise qualified expenditures, the researcher is not entitled to the credit, 

notwithstanding any rights retained in the research).

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IV. 

Based upon the record before the District Court and arguments made 

on appeal, the Court finds that the Representative Projects yielded no viable 

business components and were funded. Appellants are ineligible for the 

research tax credit provided by 26 U.S.C. § 41. Therefore, the District 

Court’s grant of summary judgment is AFFIRMED. 

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