# 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 H IGGINBOTHAM , S MITH , and E LROD , Circuit Judges

. P ATRICK E. H IGGINBOTHAM , Circuit Judge : Today, we visit the classic congressi onal practice of using its taxing powers to achieve permissible policy goal s; 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 Case: 22-30764 Document: 00516965151 Page: 1 Date Filed: 11/13/2023No. 22-30764

2 I. Cajun Industries LLC (“Cajun”) clai med 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 prov ides a tax credit for quali fi ed research activities, as de fi ned by the Code. 2 To constitute “quali fi ed research,” the research must satisfy the four tests laid out in § 41(d)(1): “(1) the expense must be of the type deduct ible 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 informa tion must be ‘intended to be useful in the development of a new or im proved business component of the taxpayer,’ and (4) ‘substantially all of the activities [must] constitute elements of a process of experimentation.’” 3 Relevant here, “business

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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 ac tivity described in paragraph (4). Case: 22-30764 Document: 00516965151 Page: 2 Date Filed: 11/13/2023No. 22-30764

3 components” are defined as “any prod uct, 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, quali fi ed research expressly ex cludes so-called “funded” research. 5 Funded research include “any re search to the extent funded by any grant, contract, or otherwise by another person (or governmental entity).” 6 Treasury Regulations further explain th at research is funded if, in any agreement to perform research (1) the researcher retains no substantial rightsto their research; or (2) payment is not contingent upon the research’s success. 7
A. Claimed Credits Cajun provides construc tion services throug hout the Gulf Coast Region and engaged in over one hund red construction projects during the time period in question. In 2015, Cajun hi red 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). Case: 22-30764 Document: 00516965151 Page: 3 Date Filed: 11/13/2023No. 22-30764

4 As an S-Corporation, Cajun’s inco me, 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 Ca jun and was thus entitled to a pro rata allocation of Cajun’s tax cr edit, which amounted to $979,237. The $979,237 credit reduce d Mr. and Mrs. Grig sby’s tax liability for 2013 and indicated the couple over paid their federal income taxes by $576,756. Appellants filed an amended 20 13 tax return and sought a refund of $576,756 plus statutory overpayment in terest 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 erroneou sly and challenged Cajun’s claimed credit. The Commissioner demanded Appe llants 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 Pa rties 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 Pr oject”); and (4) Project 12-023 (the “East Bank Project”) (together, the “Representative Projects”). Thus,

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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. Case: 22-30764 Document: 00516965151 Page: 4 Date Filed: 11/13/2023No. 22-30764

5 Cajun’s eligibility for the tax credit, and Appellants’ by extension, hinged on whether it performed qualified resear ch while completing these projects. 1. The Methanex Project In 2012, Jacobs Field Services Nort h America, Inc. (“Jacobs”) hired Cajun as a subcontractor on a projec t 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, Caju n’s responsibilities included: 3.0 GENERAL SCOPE OF SERVICES (WORK) 3.1 [Cajun] shall complete th e Work and support functions required to e ff ectively manage and repo rt on the status of the Work as speci fi ed. 3.2 [Cajun] shall provide all ma nagement, supervision, labor, consumable materials, construction equipment, construction aids, tools, services, testing devices, warehousing, supplies, inspections, insurance, fully furnished and equipped o ffi ces, communication devices, and al l other necessary items to successfully accomplish the construction described by the Scope of Work. This includes, bu t is not limited to, on and o ff 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 fi nal construction pu nch list completion and turnover of the Work Scope as speci fi ed. 9 In executing these tasks, Cajun was “ solely responsible for and have [sic] control over construction mean s, methods, techniques, sequences and procedures and for coordinating all portions of the Work.” This included

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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.” Case: 22-30764 Document: 00516965151 Page: 5 Date Filed: 11/13/2023No. 22-30764

6 obtaining approval for materials, identifying and coordinating vendors, offering design input, and participat ing in “a lot of review processes.” However, Jacobs retained “ultimate auth ority to resolve issues in the field.” The contract was subject to a ca pped 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 furnis hing 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 di ffi culties or obstructions which may arise or be enco untered in the prosecution of the Work,” and “for a ll risks of every description connected with the Work.”
Section 26 of the contract addres sed ownership of any work product and provided that all “Work Product prepared by [Cajun] shall be ‘works made for hire,’ and all righ ts, title and interest to th e Work Product . . . shall be owned by [Methanex].” To the extent any “work product” was not considered work for hire, “or if ownershi p of all right, title and interest in the Work Product shall not otherwise vest in [Methanex],” Ca jun agreed that ownership of said “Work Product . . . sh all be automatically assigned from [Cajun] to [Methanex] without further cons ideration, and [Methanex] shall thereafter own all right, title an d interest in the Work Product.” 11

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10 This price included “billed actual manhours an d actual cost of other cost reimbursable items in accordance with the agreed labor wage rates, construc tion 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 millio n to approximately $90 million because of 65 work scope modifications.

11 The contract defined Methanex as the “Owner.” Case: 22-30764 Document: 00516965151 Page: 6 Date Filed: 11/13/2023No. 22-30764

7 The contract defined “work prod uct” as “all documents, data, analyses, reports, plans, procedures, manuals, drawings, specifications, calculations, or other technica l tangible manifestations of [Cajun] ’s efforts (whether written or el ectronic) created by [Cajun] in the performance of the Work, including but not limited to a ll Documents.” In turn, “documents” included “any or all tracings, designs, dr awings, field notes . . . specifications, electronic information . . . and othe r 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 Compan y, a division of Chevron U.S.A., Inc., contracted with Cajun to provide construction services to expand Chevron’s Pascagoula Refinery (the “Chevr on Project”). Cajun’s responsibilities included providing “all labo r, supervision, quality control, administration, document control, equipment, [and] tool s,” in addition to completing specific civil tasks such as surveying, excavation and backfill, installing piping, and performing field inspections. Appe llants maintain that Cajun also offered “constructability reviews” of the engi neer’s designs and specifications. However, the engineer of record, who was not a Cajun emp loyee, retained “ultimate authority to resolve any issues that arose in the field.”
The Chevron contract was a fi xed-price contract and compensated Cajun for all work described in Exhibi t B of the contract, the “Schedule of Compensation for Work.” Exhibit B deta iled all costs covered by the contract price, including craft labo r, non-manual, and equipment costs in addition to all overhead and pro fi t. Furthermore, according to the “Pricing” section of the contract, Chevron paid for “perfor mance 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 supe rvision and support Case: 22-30764 Document: 00516965151 Page: 7 Date Filed: 11/13/2023No. 22-30764

8services from personnel other than those permanently assigned to the Contract . . . employee income tax and statut ory payroll deductions, social security charges, [and] all taxes (except sale s and use taxes) . . . .” Cajun agreed that payment “constituted full paymen t 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 beused by [Chevron] for any purpose whatsoever without obligation or liability whatsoever to [Cajun]

. [Cajun] assigns all rights in the above referenced drawin gs, documents, engineering and other data to [Chevron], including copyrights. [. . .] 18.4. All inventions, discoverie s 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 a ll “Technical Information will be used only for performance of the Servic es for [Chevron]” and that it would not disclose this information withou t Chevron’s express written consent. 12 This obligation remained in force even after the Chevron Project concluded.

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12 Section 1.1.31 of the contract def ined “technical information” as: Case: 22-30764 Document: 00516965151 Page: 8 Date Filed: 11/13/2023No. 22-30764

9 3. The Claiborne Project In September 2011, Cajun contracted with the U.S. Army Corps of Engineers to construct a “b ox culvert,” or an underg round canal, as part ofthe Southeast Louisiana Urban Flood Control Project (the “Claiborne Project”). In doing so, Cajun was respon sible for selecting the means and methods of construction, including equipmen t selection, personnel decisions, and “how to produce the work in acco rdance with the plans and speci fi cations.” The Claiborne contract was a “ fi xed 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) di ctates 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 . . . [includi ng] 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] rela ting 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 Case: 22-30764 Document: 00516965151 Page: 9 Date Filed: 11/13/2023No. 22-30764

10 4. The East Bank Project In January 2012, the Sewerage and Water Board of New Orleans (“SWBNO”) awarded Cajun a construc tion contract to modify the fl oodprotection 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 “ fi rm, fi xed-price contract” originally valued just under $24.4 million, althou gh the contract eventually totaled $29.4 million due to changes in the sc ope of work. Cajun’s compensation included payment for “all general foremen , foremen, labor, teams and trucks actually engaged on such speci fi c work for the time actu ally so employed at the rates actually paid.” Compensation also included a “fee for [Cajun’s] superintendence, general expense and pro fi t,” which “shall be understood also to reimburse [Cajun] for any sub-contractor’s general expense and pro fi t which [Cajun] may allow to one or more sub-contractors.” Cajun accepted payment as “full co mpensation for furnishing all the labor, materials, tools, equipment, et c., needed to complete the whole work of the contract” and also “as full compensa tion 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 thes e 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 requir ed to approve Cajun’s means and methods and any materials Cajun selected for permanent features of the project. Case: 22-30764 Document: 00516965151 Page: 10 Date Filed: 11/13/2023No. 22-30764

11 or from any obstructions or di ffi culties 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 th ese products failed the “business component[s]” test and, as such, th at Cajun did not perform qualified research. Furthermore, the Government claimed the Representative Projects were otherwise ineligible for the cr edit 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. Appella nts claimed their new “processes” encompassed the various “constructio n means and methods” Cajun used to perform on its contracts and deve lop these products. Appellants also disputed that the Represen tative Projects were fund ed, and maintained that Cajun retained substantial rights to its “research results.” Alternatively, Appellants contended that the contra cts were contingent upon Cajun’s provision of deliverables and were not fu nded, as set out in 26 C.F.R. § 1.41- 4A(d). The District Court granted the Unit ed States’s motion for summary judgment on three bases. First, the District Court rejected Appellants’ “processes” argument pursuant to Fede ral Rule of Civil Procedure 37(c)(1) because this argument was inconsis tent with Cajun’ s prior discovery disclosures which, instead, “unequ ivocally state that, as to each Case: 22-30764 Document: 00516965151 Page: 11 Date Filed: 11/13/2023No. 22-30764

12 Representative Project, Ca jun developed a ‘product.’” 16 The District Court further found that Appellants’ constructi on 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 Ca jun’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 it s 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 “fun ded 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 jurisd iction under 28 U.S.C. § 1291.

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16 “If a party fails to provide information or i dentify a witness as required by Rule 26(a) or (e), the party is not allowed to use that in formation or witness to supply evidence on a motion, at a hearing, or at a trial, unless th e failure was substantially justified or is harmless.” F ED

. R. C IV

. P . 37(c)(1). Case: 22-30764 Document: 00516965151 Page: 12 Date Filed: 11/13/2023No. 22-30764

13 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 di strict court and supported by the record, and we are no t bound by the grou nds 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 su mmary judgment after finding Appellants did not “offer competent evid ence 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

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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 we ll 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 Case: 22-30764 Document: 00516965151 Page: 13 Date Filed: 11/13/2023No. 22-30764

14 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 Commi ssioner’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 no t 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 pr inciple that taxpayers must demonstrate their entitlement to any refund, deduction, or credi t 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, an d 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 sect ion 41 must retain records in sufficiently usable form and detail to substantiate that the expenditures claimed are eligible for the credit.”). Case: 22-30764 Document: 00516965151 Page: 14 Date Filed: 11/13/2023No. 22-30764

15 initiated by the taxpayer or a collec tion suit brought by the Government. 23 Thus, ultimately, “[t]he burden and th e 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 wa s entitled to the presumption of correctness. This burden is a low on e; the assessment must merely “advise the taxpayer that the [IRS] has determ ined that a deficiency exists for a particular year,” and “specify the amou nt 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 asse ssment was not entitled to the presumption of correctness, the Go vernment still met its burden of

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23 Carson v. United States , 560 F.2d 693, 696 (5th Cir. 1977) (“This burden applies whether the proceeding is in Tax Court for redeterminati on 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. 1 991) (internal citation omitted); see also Sealy , 46 F.3d at 386 (same).

26 The Letter recounted that Appellants request ed 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 $73,663.3 8 in statutory interest and an additional, undisputed, refund of $20,652. It further ex plained that the $576,756 refund was “solely due to information” reported on Appellants’ am ended 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 Rese arch 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.” Case: 22-30764 Document: 00516965151 Page: 15 Date Filed: 11/13/2023No. 22-30764

16 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; alte rnatively, because taxpayers must demonstrate their entitlement to credits, the Government could have pointed out that the evidence in th e record was insufficient to support Appellants’ claim that they performed qualified research. 28 The Government did so by providin g approximately forty exhibits— including excerpts from the Representative Projects’ contracts, Appellants’ 2013 amended tax return, and corporat e representative depositions from parties to the Methanex, Chevron, Clai borne, and the East Bank Projects— that refuted Appellants’ entitlement to the credit. At that point, the District Court was correct in offering Appella nts the opportunity to rebut this evidence and thus create a genuine issue of fact. Th e District Court did not err on this basis.

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27 F ED

. R. C IV

. 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)). Case: 22-30764 Document: 00516965151 Page: 16 Date Filed: 11/13/2023No. 22-30764

17 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 prod uct, 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 re fi neries and two fl ood control systems. At summary judgment, however, Appellants claimed Cajun also created new business processes, a separate type of business component, which Appellants de fi ne as the “means and methods of construction,” “the mea ns and methods of performing [] construction services ,” and “construction processes.”
The District Court found that the a sserted products and processes didnot satisfy the business components test because Appellants put forth no evidence of the alleged products, any asse rtions of new construction processes were inconsistent with their prior di sclosures and excludable under Federal Rule of Civil Procedure 37, and notwit hstanding those inconsistencies, Appellants did not speci fi cally identify the new constr uction processes at issue. 32

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29 26 U.S.C. § 41(d)(1)(B).

30 Id

.
31 Id . § 41(d)(2)(B).

32 See F ED

. R. C IV

. P. 37(c)(1) (“If a party fails to provide information or identify a witness as required by Rule 26(a) or (e), the p arty is not allowed to us e that information or Case: 22-30764 Document: 00516965151 Page: 17 Date Filed: 11/13/2023No. 22-30764

18 Appellants now argue that the Distri ct Court’s determinations were in error. 1. Business Components: Products Appellants argue they presented sufficient evidence that Cajun developed four business component prod ucts and cite to the “Taxpayers’ Response to Proposed Statement of Fact s” (the “Response”) as support. However, cited provisions primar ily describe Cajun’s “means and methods,” i.e., their processes, and not the products. While Appellants may be correct that their construction pr ocesses 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 cons titute business components. 2. Business Components: Processes Appellants further assert the Distri ct 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 fi nal 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 sep arate business component (and not as part of the business component being produced).”).

34 CQ, Inc. , 565 F.3d at 277. Case: 22-30764 Document: 00516965151 Page: 18 Date Filed: 11/13/2023No. 22-30764

19 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 justi fi ed or is harmless.” 35 To evaluate whether a Rule 26 violation was ha rmless, and “thus whether the district court was within its discretion in allowi ng the evidence to be used at trial,” this Court weighs four factors: (1) th e importance of the evidence; (2) the prejudice to the opposing party of in cluding 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 deve loped new construction processes is important because it provided Appella nts with a wholly new basis by which to claim the tax credit. By ra ising this argument for the fi rst time at summary judgment, Appellants e ff ectively asserted a new de fense that was neither disclosed nor explored during discovery. Mo reover, as the District Court noted, “evidence of Cajun’s new construction pr ocesses is plainly important to [Appellants] insofar as it is the only evidence ( and argument) o ff ered 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 re fl ects that Cajun’s initial discovery responses described the busi ness components for the Representative Projects as “products.” Appella nts’ supplemental di sclosures likewise describe the Projects as producing “pro duct[s].” By raising the processes argument at summary judgment, Appellant s deprived the Government of the opportunity investigate this claim.

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35 F ED

. R. C IV

. P. 37(c)(1).

36 Texas A&M Rsch. Found. v. Magna Transp., Inc ., 338 F.3d 394, 401–02 (5th Cir. 2003). Case: 22-30764 Document: 00516965151 Page: 19 Date Filed: 11/13/2023No. 22-30764

20 Third, although the District Cour t 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 di scovery against prov iding a timely resolution of the case. 37 Finally, Appellants failed to explain their change in argument before the District Court and, before this Cour t, deny that any change occurred. In doing so, Appellants direct the Court to their “pretrial brie fi ng” as evidence that Appellants’ position has remained consistent. However, the cited pretrial brie fi ng is the Parties’ Joint Pretrial Order, which was fi led over one month after the Government moved for summary judgment and three weeks after Appellants responded raising the construction process argument for the fi rst time. Appellants have not directed the Court to any pr evious statements indicating that the claimed business co mponents involved processes. This explanation is thus unpersuasive. Given these facts, the District Cour t 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 evalua ted the merits of Appellants’ claim. Ultimately, the District Court determin ed that Appellants put forth “vague” and “conclusory” statements regarding their construction processes without identifying “even one new or improved process th at resulted from Cajun’s work on the Representative Projects.”

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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). Case: 22-30764 Document: 00516965151 Page: 20 Date Filed: 11/13/2023No. 22-30764

21 The District Court did not abuse its discretion in excluding evidence of Cajun’s construction processes. Al ternatively, Appellants did not offer sufficient evidence to create a genu ine dispute as to whether Cajun’s products or processes constituted bu siness 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 Quali fi ed research excludes “funded” research projects. 38 Funded research include “any research to the exte nt funded by any grant, contract, or otherwise by another person (or governmental entity).” 39 To determine whether research was funded, courts must fi rst 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 th at “the Methanex, Chevron, and Claiborne Projects each fail the ‘sub stantial rights’ prong of the ‘funded

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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 agr eement providing for the research, the research is treated as fully funded for purposes of sect ion 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 an y 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.”). Case: 22-30764 Document: 00516965151 Page: 21 Date Filed: 11/13/2023No. 22-30764

22 research’ exclusion because in each instance Cajun transferred all rights to any new or improved ‘construction pr ocesses’ 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 fi nding and argue (1) that Cajun retained substantial rights in its rese arch, and (2) that the Representative contracts were “contingent” upon deliver y of a product and, as such, are not funded as de fi ned 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 ri ghts” 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, Chevro n, and Claiborne contracts, Cajun gave up its rights to any research performed under th e contracts. Pursuant to section 26 of the Methanex contract, Me thanex retained “all rights, title and interest” in any “work product” prepar ed by Cajun. The provision applies to all “works made for hire” as well as any work “not considered a work

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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.”). Case: 22-30764 Document: 00516965151 Page: 22 Date Filed: 11/13/2023No. 22-30764

23 made for hire.” By contracting away “all right, title and interest” in its work product, Cajun gave up it s 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 no tes, requisitions, purchase orders, specifications, electronic information . . . and other documents or records developed or acquired by [Cajun] and it s suppliers or sub-subcontractors in performing the Work.” Similarly, Cajun assigned to Chev ron “all rights” to any “drawings, documents, engineering and other data prepared or furnished by [Cajun]” under the Chevron contract. These it ems became “[Chevron’s] property from the time of preparation and may be used by [Chevron] for any purpose whatsoever without obligation or liab ility whatsoever to [Cajun].” Furthermore, the contract also states that Ch evron owns all “inventions, discoveries and improvements (patentabl e and unpatentable) that are made or conceived by [Cajun] or [Cajun’s] employees” duri ng the Project. Cajun was permittedto 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 consen t.” Importantly, this obligation persists “notwithstanding the termination of this Contract.” Finally, by incorporating various pr ovisions of the Federal Acquisition Regulations, the Claiborne contract prov ides 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 de fi ned broadly and includes

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46 FAR § 52.232-5(f), codified as 48 C.F.R. § 52.232-5. Case: 22-30764 Document: 00516965151 Page: 23 Date Filed: 11/13/2023No. 22-30764

24 “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 unde fi ned research. 47 After assigning away all rights to work developed during each Representative Projec t, 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 pa id for the product or result of the research (see § 1.41–2(e)(2)) are not trea ted as funding . . . .” 50

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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 fr om 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 di strict 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 cu stomer 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 § 1.41-4 A 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 Case: 22-30764 Document: 00516965151 Page: 24 Date Filed: 11/13/2023No. 22-30764

25 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 Proj ect was not funded because payment was contingent upon Cajun delivering a “res ult 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.” Thes e arguments miss the mark. Appellants’ argument that all contra cts “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 ag reement that are contingent on the success of the research.” Structurally, th e 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 es tablish 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 Ea st 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’ brie fing admits “payments to Cajun

_____________________ payment is contingent on the success of the re search” because “the expense is considered paid for the product or result rather than th e performance of the research.” 26 C.F.R. § 1.41-2(e)(2). In doing so, “the regulations implement allocati on 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. Case: 22-30764 Document: 00516965151 Page: 25 Date Filed: 11/13/2023No. 22-30764

26 Industries were not contingent upon whether Cajun Industries conducted research activities.” Consequent ly, 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 allo cated 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 fu lly 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

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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).

53 Fairchild , 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 us ed in § 41 and Treasury Regulation § 1.41– 4A(d).”). Case: 22-30764 Document: 00516965151 Page: 26 Date Filed: 11/13/2023No. 22-30764

27 agreed that the Regulations allocate the tax credit to the pa rty bearing the risk of unsuccessful research, Cajun was compen sated 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 re sulting from the nature of the work, or from any obstructions or difficultie s encountered, of any sort or nature whatsoever . . . .” Finally, the East Bank Project was fu nded for the simple reason that Cajun was compensated for all expendit ures incurred and claimed when it sought the tax credit. According to Ca jun’s IRS Form 6765, Cajun claimed the research credit entirely for “w ages” 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 compensati on 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

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55 Although Appellants’ brief claims that “Caj un Industries included portions of employee wages, contractor costs, and supply costs incurr ed for various construction projects as part of the computation of the R&D tax credits,” thei r tax filings indicate otherwise. In its Form 6567, Cajun left blank spots next to the “c ost 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, indicati ng 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). Case: 22-30764 Document: 00516965151 Page: 27 Date Filed: 11/13/2023No. 22-30764

28 IV. Based upon the record before the Di strict Court and arguments made on appeal, the Court finds that the Repr esentative 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

. Case: 22-30764 Document: 00516965151 Page: 28 Date Filed: 11/13/2023