T.C. M em o . 2 0 2 1 -1

UNITED STATES TAX COURT

EDWARD J . TANGEL AND BEATRICE C. TANGEL, ET AL., 1 Pet i t io n ers v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo s . 2 7 2 6 8 -1 3 , 2 7 30 9 -1 3 , Fi l edJ an uary1 1 , 2 0 2 1
.

2 7 3 7 1-1 3 , 2 7 3 7 3 -1 3 , 2 7 3 7 4-1 3 , 2 7 3 7 5 -1 3
.

Ro b ertG. W o ni sh II, J effers o n H. Read , an d J oh n H. Di es , fo r p et i t i o n ers . Ch ri st a A. Grub er, M ay ah So l h -Cad e, Dan iel l e R. Do ld , an dTes s d eLi efd e, fo r res p o n d en t .

1 Cas es o f t h e fo l l owi ng p et i t i o n ers are co n s o l i d at edh erewi th : J effreyTan
g el an dKat h l een Tan g el , d o ck etNo . 2 7 3 0 9-1 3 ; Lawren ce E. Tan g el an dKaren S. Tan gel , d o ck etNo . 2 7 37 1 -1 3 ; Do u g l as J . Tan g el an dJ u an i t a V. Tan g el , d o ck et No . 2 7 3 7 3 -1 3 ; Nei l R. Tan gel an dGy n een W . Tan g el , d o ck et No . 2 7 37 4 -1 3 ; an d Geral dLan dry

an d Co l et t e Tan g el , d o ck et No . 2 7 3 7 5 -1 3.

Served 01/11/21- 2
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[* 2 ] M EM ORANDUM OPINION LAUBER, J u d g e: Th e p ri n ci p al qu es t i o n i n th es e co ns o l id at edcas es co n cern s p et i t i o n ers ’ en t i t l em en tt o cred i t s u n d er s ect i o n 4 1 fo r i n creas i n g res earch act i vi t i es . 2 Th e In t ern al Rev en u e Serv i ce (IRS o r res p o n d en t ) d i sal l owedres earch cred i t s o f $ 9 2 9 ,6 6 8 cl ai m eddu ri n g 2 0 0 8 -2 0 1 0 b y En erco n En g i n eeri n g , In c. (En erco n ), an S co rp o rat i o n . Th es e cred i t s fl o wedth ro u g h t o p et i t i o ners as En erco n ’ s s h areh o l d ers . En erco n cl ai m edth es e cred i t s o n th e b as i s o f “ qu al ifi edres earch ex p en s es ” al l eg ed l y i ncu rredi n co n n ect i o n wi th 1 4 2 d i fferen t p ro ject s . Res p o n d en th as m o v edfo r p art i al s u m m ary ju d g m en twi th res p ectt o o n e o f th es e p ro ject s , wh i ch En erco n u n d ert o o kfo r Veri co r Po wer Sy s t em s , LLC (Veri
co r). “ Q u al i fi edres earch ” i s d efi n edt o ex cl ud e “ [a] n y res earch t o th e ex t en tfu n d
edb y an y g ran t , co n tract , o r o th erwi s e b y an ot her p ers on (o r g ov ern m en t al en t ity ).” Sec. 4 1 (d )(4 )(H). Res p o n d en tco n ten d s th atEn erco n ’ s res earch was 1 0 0 % fu n d edb y

Veri co r b ecau s e, un d er t h e ag reem en t ex ecu t edb y th e p art i es , En erco n ret ai n ed n o “ s ub s t an ti al ri g h t s ” i n the res earch i tp erfo rm ed . See s ec.

2 Al l s t atut o ry

referen ces are t o th e In t ern al Rev en u e Co de i n effect atal l rel ev an t t i m es , an d al l Ru l e referen ces are t o the Tax Co urtRu l es o f Pract ice an d Pro cedure. W e ro u n d al l m o n et ary am o u n t s t o th e n eares td ol l ar.- 3
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[* 3 ] 1 .4 1-4 A(d )(2 ) an d (3 ), In co m e Tax Reg s . W e ag ree an dwi l l acco rd i ng l y g ran tres p o n d en t ’ s m ot i o n . Back gro u n d Th ere i s n o d i s p u t e as t o th e fo l l o wi n g fact s , wh i ch are d rawn fro m th e p et i
t i on s , th e p art i es ’ jo i n t s ti p u l at i o n s o f fact s , th e p art i es ’ m o t i o n p ap ers , an dth ei r at t ach edex h i b it s . En erco n i s an S co rp orat i o n th atd es ig n s an dp ro du ces i n t eg rat edco n tro l s an ds wi t ch g ears fo r cu s t o m ap p li cat i o n s i n th e p o wer g en erat i o n i n du s try . InFeb ru ary

2 00 9 En erco n was h i redb y Veri co r t o d ev el o p , acco rd i n g t o
ex i s t in g d es i g ns , “ a n ew en cl o s u re fo r tu rb i n e p ower g en erat i on .” En erco n was t as k edwi th p ro v i d i n g “ th e as s em b l y , i n teg rat i o n , co n tro ls , an d p ack ag i ng ” fo r o n e
n ew turb in e g en erat o r u ni tan dfo r red es i g n i n g (o r ret ro fi t t in g ) t h ree ex i s t i n g Veri
co r tu rb i n e u ni t s . Two red es i g n edu n i t s were t o b e d el i v ered t o Veri co r o n J u l y 1 5 , 2 0 0 9 ; th e n ew u n i tan dth e o th er red es i g n edu n i twere t o b e d el i v eredo n Oct o b er 1 5 , 2 00 9 . En erco n referred t o th i s wo rkas Pro jectNo . 3 7 6 88
. En erco n an dVeri co r n eg o t iat eda d et ai l ed s eto f co n tract t erm s fo r Pro ject No . 3 7 6 8 8
. Th e p art i es ’ ag reem en ti s em b o d i edp ri n ci p al l y

i n a d o cu m en tth ey refer t o as th e “ Term s an dCo n d i t i o n s.” Veri co r was th e p ri m ary draft er o f t h i s d o cu m en t ; as far as th e reco rdrev eal s , i t i s a v ers i o n o f Veri co r’ s s t an dardco n tract . Aft er recei v i n g Veri co r’ s p ro po s ed Term s an d Co n di t i o n s o n Feb ru ary 7 ,- 4
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[* 4 ] 2 0 0 9 , En erco n s en tVeri co r an o ffer l et t er d at edFeb ru ary 1 1 , 2 0 0 9 . Th i s
o ffer l et t er s u m

m ari zedEn erco n ’ s u n d ers t an d i ng o f t h e p ro ject , i n cl ud i n g th e t ech n i cal s p eci fi cat i o n s i twas b ei n g h i redt o m eetan dth e l eg al req ui rem en t s
co n tai n edi n th e Term s an dCo n d i t i o n s . Veri co r accep t edEn erco n ’ s o ffer an ds ub m i t tedt o En erco n a s eri es o f p u rch as e o rd ers . Th e fi rs t s u ch o rd er, l ab el edthe “ Gen eral Pu rch as e Ord er,” was fo r $ 9 5 1 ,9 5 4 an dd es cri b ed th e fo ur u n i t s En erco n h adag reed t o p ro duce o r red es i g n . As th e p ro

jectp ro g res s ed , Veri co r s ub m i tt ed t o En erco n ad d i t i o n al p u rch as e o rd ers fo r ad di t i o n s o r m o di fi cat i o n s, i n th e n atu re o f “ ch an g e o rd ers ,” ran g i n g i n
co s tfro m $ 1 ,3 7 1 t o $ 1 1 9 , 6 8 3
. Th e Gen eral Pu rch as e Ord er an d t h e ch an g e o rd ers i n co rp o rat e b y

referen ce t he p rev i o u s ly

n eg o ti at ed Term s an d Co n di t i o n s . Al l t o l d , Pro jectNo
. 3 7 6 8 8 i s as so ci at edwi th 1 9 p u rch as e o rd ers t o t al in g $ 1,4 2 3 ,8 4 7
. Parag rap h 1 5 o f t h e Term s an dCo nd i t i o n s , cap t i o ned“ Des i gn s , Drawi n g s
an d Dat a,” i s the m o strel ev an tp ro v i s i o n fo r p u rp o s es o f t h e i n s tan t m o t i o n . Referri n g t o En erco n as th e “ Sel ler” an dVeri co r as the “ Bu y er,” i t s tat es : A. W i th res p ect t o Art i cl es fo r wh i ch an y t ech n i cal i nfo rm at i on , wri t t en , o ral o r o th erwi s e, (i ) h as b een s up p l iedt o Sel l er b y o r o n b eh al f o f Bu y er; o r (i i ) Sel l er h as d es i g n edat Bu y er’ s ex p en s e; o r (i i i ) Sel l er h as d es i gn eds p eci fi cal l y t o m eetBu y erfu rn i s h edt ech n i cal req u i rem en t s (h erei naft er d es ig n at ed“ In
fo rm at i o n ”), Sel l er, i n co n s id erat i on o f Bu y er’ s fu rn i s hi n g o f s u ch In fo rm at i o n an d/o r d es i g n fu n d in g , ag rees th ati twi l l n o t- 5
- u se, o r as s i sto th ers i n u s i n g , s u ch In fo rm at i o n , d es i g n fu n d i ng o r t o ol i n g t o d ev el o p o r s el l s uch Art i cl es (o r s i m i l ar i n t erch an g eab le o r s ubs t i tu t e Art i cl es , o r p art s th ereo f) t o an y o n e o th er th an Bu y er, ei th er as p ro du ct i o n , s p are o r rep ai redArt i
cl es , wi th o ut Bu y er’ s p ri o r wri t t en co n s en t . Sel l er s h al l n o tu se o r d i scl o s e s uch In fo rm at i o n ex cep ti n th e p erfo rm an ce o f Ord ers fo r Bu y er, an d , up o n Bu y er’ s req u es t , s u ch In fo rm at i o n an dal l co p i es th ereo f s h al l b e ret u rn edt o Bu y er. If Sel l er d ev el op s , s el l s th e Art i cl es h ereu n d er, o r as s i s t s o th ers i n d o i n g s o , (o r s i m i l ar i n t erch an g eab l e o r s ubs t i tu te Art i cl es , o r p art s th ereo f) t o an y on e o th er t han Bu y er, t he b u rd en s h al l b e o n Sel
l er t o es t ab l i sh th atBu y er’ s In fo rm at i o n , fu n d i n g o r t o o l i ng was n o tu s ed
. B. In fo rm at i o n p rep aredb y Sel l er s p eci fi cal ly

i n co nn ect i o n wi th p erfo rm an ce o f t h i s Ord er, i n cl ud i n g o ri g i n al wo rk s o f au th o rs h i p creat ed by

Sel l er, are co n si dered “ wo rk s m ad e fo r h ire” wi th in th e m ean i n g o f t h e U.S. Co p yri g h t Laws . Bu y er s h al l b e d eem edth e au th o r o f s u ch wo rk s . If an y s u ch wo rki s d et erm i n edb y a co u rto f co m

p et en tjuri s d ict i on n o tt o b e a wo rk m ad e fo r h i re, t h i s Ord er s h al l o p erat e as an i rrev o cab le as s i g n m en t t o Bu y er o f al l ri gh t , t i tl e an di n t eres ti n an d t o s u ch wo rk
. C. Wh ere s u ch i n fo rm at i o n i s fu rn i sh edt o Sel l er’ s s up p li ers fo r u se i n p erfo rm an ce o f Bu y er’ s Ord ers , Sel ler s h al l i n s ertth e s ub s t an ce o f t h i s p arag rap h 1 5 i n al l s u ch o rd ers t o Sel l er’ s s ub co n tract o rs .

“ Art i cl es ” i s d efi n ed el s ewh ere i n th e d o cu m en t as “ go o ds an d/ o r s erv i ces b ei n g p ro cu redan dd es cri b edo n th e face o f t he Pu rch as e Ord er.” 3 [* 5 ]

3 Th i s d efi n i t i o n o f “ Art i cl es ” ap pears i n g ray i t al i ci zedfo n tan d i s h ardt o readi n rep ro duct i o n . Pet i t io n ers s u gg es t th at“p ro cu red ” s h o u l d read as “p ro v i d
ed ” an dth at“ face” s ho u l dreadas “ fact .” Al th o u gh th e l at t er s ug g es t i o n wo u l d p ro duce a rat h er o d d s en t en ce, o u r i n t erp ret at i o n o f t h e ag reem en two u ldb e t h e s am e i f p et i t i o ners ’ read i n g were ad o pt ed
.- 6
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[* 6 ] In i t s o ffer l et t er t o Veri co r, En erco n s u m m ari zedParag rap h 1 5 o f th e Term s an d Co n d i t i o n s as fo l l o ws : Des i g n s , Drawi n g s , an d Dat a
• Al l i n fo rm at i o n an dequ ip m en ts up p l iedb y Veri co r rem ai n i n Veri co r’ s o wn ers h i p
• Al l i n fo rm at i o n , equi p m en t, et c g en erat edas a res ul to f th i s o rd er are o wn edb y

Veri co r o n l y -- “ wo rk s fo r h i re”
• Al l En erco n ’ s s ub s upp l i ers m u s trecei v e s am e cl au s e En erco n t im el y

fi l edFo rm s 1 1 2 0 S, U.S. In co m e Tax Retu rn fo r an S Co rp o rat i o n , fo r 2 00 8 -2 0 1 0
. On th o s e ret u rn s En erco n cl ai m edt o t al res earch cred i t s
o f $ 9 29 ,6 6 8 , wh i ch were p as s edth ro u g h t o p et i t i o n ers . En erco n cal cu l at edth es e cred i t s o n th e b as i s o f “ qu al i fi edres earch ex p en s es ,” s ee s ec. 4 1(b ), al l eg ed l y i n cu rredo n 1 4 2 s ep arat e p ro ject s , i n cl u d i n g Pro

jectNo
. 3 7 6 8 8 . In t im el y n o t i ces o f d efi ci en cy

i s s u edt o p et i t i o ners , th e IRS d i s al l o wedal l fl o w-t h ro u gh res earch cred
i t s t h ey h adcl ai m ed , d et erm i n in g th atth ey h adn o tp ro vi d ed s uffi ci en t d o cu m en tat i on t o es t ab l i s h thatthe req u i rem en t s o f s ect io n 4 1 h ad b een m et . Pet i t i o ners t i m el y

p et i t i on edthi s Co u rtfo r red et erm i n at i o n o f t he d efi ci en ci es . On Sep t em

b er 1 2 , 2 0 1 7 , res p o n d en tfi l eda m ot i o n fo r p art i al s u m m ary ju d g m en tl i m i t edt o Pro

jectNo . 3 76 8 8 . Res p o n den tco n ten d s th at(1 ) t h e res earch En
erco n p erfo rm edi n ex ecu ti n g th i s p ro jectwas 1 0 0 % fu n d edb y Veri co r wi th i n th e- 7
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[* 7 ] m ean i n g o f s ect i o n 4 1 (d )(4 )(H), an d(2 ) p et i t i o n ers h av e n o t s ub s tan t i at edthe
am ou n to f qu al i fi edres earch ex p en s es i n cu rredo n thi s p ro ject
. In earl y 2 0 18 , wh il e res p o n d en t ’ s m o t i o n was p en d i n g , th e p art i es s el ect ed a rep res en t at i v e s am

p l e o f p ro ject s t o b e t ri ed
. Two ad d i t i o n al p ro ject s are t o b e
ev al u at eds ep arat el y : Pro jectNo . 3 47 8 8 (b ecau s e o f i t s l arg e s i ze) an dPro ject No
. 3 7 6 8 8 (b ecau s e o f t h e i n s t an t m o t i o n). Th e res ol u t i o n o f t h i s m o ti o n d o es n o t affect p et i t i o n ers ’ en t i t l em en tt o cred i t s fo r an y p ro j ectex cep tPro

ject No . 3 7 6 8 8
. Di s cu ss i o n A. Su m

m ary J u dg m en tSt an d ard Th e p u rp os e o f s u m

m ary ju d g m en t i s t o ex p ed it e l i t i g at i o n an d av o i dco st l y , u n n eces sary , an dt i m e-co n s u m in g tri al s . See FPL Grp ., In c. & Sub s . v . Co m m i s s i on er, 1 1 6 T.C. 7 3 , 7 4 (2 0 0 1). W e m ay g ran tp art i al s u m

m ary ju dg m en treg ard
i n g an is s u e as t o wh ich there i s n o g en u i n e d is p u t e o f m at eri al fact an da d eci s i o n
m ay b e ren d eredas a m at ter o f l aw. Ru l e 1 2 1 (b ); El ec. Art s , In c. v . Co m m i s s i o n er, 1 1 8 T.C. 2 2 6 , 2 3 8 (2 0 02 ). Th e qu es t i o n wh et h er Pro jectNo . 3 7 6 8 8 i n v o l v es

“ fu nd edres earch ” d ep en d s o n th e p ro p er i n terp ret at i o n o f t h e ag reem en t b et ween En erco n an dVeri co r. W e co ncl u de t h atth i s qu es ti o n i s ap p ro p ri at e fo r s umm ary ad ju d i cat i o n . Gi v en o ur co n cl us i o n th atEn erco n ’ s res earch was 1 0 0 % “ fu n d ed ,”
we n eedn o tad dres s res p o n d en t ’ s arg u m en ts ab o u t s ub st an t i at i on .- 8
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[* 8 ] B. St atu t o ry

an dReg u l at o ry

Fram ewo rk Sect io n 4 1 al l o ws a cred i tt o t ax p ay ers wh o i ncreas e th ei r res earch ex p en ses ab o ve a b as e am o u n t . Sec. 4 1(a), (c). “ Q u al i fi edres earch ex p en s es ” i n cl u d e i n h o u s e res earch ex p en s es an dco n tract res earch ex p en s es . Sec. 4 1 (b )(1 ). “ In -h o u s e
res earch ex p en s es ” i ncl u d e wag es p ai d t o em p lo y ees wh o en g ag e i n (o r d i rect l y
s up erv i s e) q u al i fi edres earch an dam o u nt s p ai do r i n cu rredfo r s up p l i es u s edi n th e
co n du ct o f qu al ifi edres earch . Sec. 4 1 (b )(2 ). “ Co n tract res earch ex p en s es ” are
am ou n t s p ai db y

a t ax p ay er t o a p ers o n o th er t h an an em p l o y ee t o p erfo rm

qu al i
fi edres earch
. See s ec. 4 1 (b )(3 ). Wh en a co n tract o r s u ch as En erco n p erfo rm s res earch i n fu lfi l l i n g a co n t ract wi th i t s cu st o m er, each p art y m ay h av e a p o s si bl e cl ai m t o th e res earch cred i t : En erco n’ s cred i t wo u l db e b as edo n i t s i n -h o u s e res earch ex p en s es an dVeri co r’ s
wo u l db e b as edo n i ts co n tract res earch ex p en s es . To p rev en td oub l e cl ai m i n g o f th e cred i tan d to d et erm in e wh i ch co n tract i n g p art y i s en t i tl ed t o t h e cred it , th e
s t atu te p ro v i d es th atqu al i fi edres earch d oes n o t i n cl u d e “ fu n d edres earch .” Sec. 4 1 (d )(4 )(H). “ Fu n d ed res earch ” i s d efi n edas “ [a] ny res earch t o th e ex t en t fu n d ed b y an y g ran t , co nt ract , o r o th erwi s e b y an o th er p ers o n (o r g o v ern m en tal en t i ty ).” Ib i d . No cred i ti s al l o wedt o a co nt ract o r t o th e ex ten ti t s res earch i s fu n d edb y a th i rd p art y .- 9
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[* 9 ] Th e reg u l at i o n s g o vern i n g “ fu n d edres earch ” ap p ear i n s ect i on 1 .4 1 -4 A(d ), In co m e Tax Reg s . 4 To d et erm i n e wh et h er res earch i s “ fu n d ed ,” t h e reg u l at i o n s d i rect o u r fo cu s t o th e ag reem en t (s ) ex ecu t edb y th e co n tract i n g p art i es : “ A l l ag reem en t s (n o to nl y

res earch co n tract s ) en t eredi n t o b et ween th e t ax p ay er p erfo rm i n g th e res earch an do th er p ers o n s s hal l b e co n s i d eredi n d et erm i n i n g t h e ex t en tt o wh i ch the res earch i s fu n d ed .” Id . s ub para. (1 ). Th e reg u l at i o n s s p eci fy two m ai n fact o rs as rel ev an t i n as cert ai n i n g wh et h er
res earch i s “ fu nd ed .” Fi rs t , “ [a] m o u n t s p ay ab l e u n d er an y ag reem en tth atare co n t i ng en to n th e s u cces s o f t h e res earch * * * are n o ttreat edas fu n d i n g.” Ib i d . In
s u ch ci rcu m s tan ces the p art y p erfo rm in g th e res earch i s en t it l edt o t h e cred i tb ecau s e i tb ears th e ri s ko f fai l u re. See s ec. 1
. 4 1 -2 (e)(2 ), In co m e Tax Reg s .; s ee al s o Fai rch i l d In du s ., In c. v . Un it edSt at es , 7 1 F.3 d 8 6 8 , 8 7 0 (Fed . Ci r. 1 9 9 5 ). Pet i t i on 4 Th e Dep art m en t o f t h e Treas u ry (Treas u ry ) i n i ti al l y

p ro m u l g at ed reg u l at i on s ad dres s i n g “ qual i fi edres earch ” i n 1 98 9 . See T.D. 8 25 1 , 1 9 8 9 -1 C.B. 3 . Th e reg u l at i o n g o v ern i n g “ fu n d edres earch ” o ri g i n al l y ap p eared as s ec. 1 .4 1 -5 (d ), In co m e Tax Reg s ., wh i ch was cap t i o n ed“ Qu al ifi edres earch fo r t ax ab l e y ears b eg in n i n g b efo re J an u ary 1 , 1 9 8 6 .” See T.D. 8 25 1 , 1 9 8 9 -1 C.B. at9 -1 0 . As p art o f rev i s edreg u l at i o ns i s su ed i n 2 0 0 0 , Treas u ry red es ig n at eds ec. 1 .4 1 -5 as s ec. 1 .4 1-4 A , In co m e Tax Reg s . See T.D. 8 9 3 0 , 2 0 0 1 -1 C.B. 4 3 3 , 4 49 . Al th o u g h s ec. 1 .4 1-4 A , In co m e Tax Reg s . , ret ai n s i t s o ri g i n al cap t i on , p arag rap h (d ) t h ereo f i s ap p li cab l e fo r t h e t ax y ears ati s s u e. See s ec. 1 .4 1 -4 (c)(9 ), In co m e Tax Reg s . (“ Qu al i fi edres earch d o es n o ti ncl u de an y res earch t o th e ex ten tfu n d edb y an y g ran t , co n tract , o r o th erwi s e * * * . To d et erm i n e t h e ex ten t t o wh i ch res earch i s s o fu n ded , § 1 .4 1 -4 A(d ) ap p l i es .”).- 1 0 -

[* 1 0 ] ers d o n o t co n t en dth atVeri co r’ s p aym en t s t o En erco n were “ co n t i n g en to n th e s u cces s o f t he res earch ,” s o t h i s fi rs t fact o r d o es n o tap p l y h ere. Seco n d , th e reg ul at i o n s p ro v i de t h ata t ax p ay er i s en t i t ledt o th e cred i to n l y i f i t“ ret ai n s s ub st an t ial ri g h t s i n th e res earch
. ” Sec. 1 .4 1 -4 A(d )(3 )(i ), In co m e Tax Reg s. “ If a t ax p ay er p erfo rm i n g res earch fo r an o th er p ers o n ret ai n s n o s ub s t an t ial ri gh t s i n res earch u n der t h e ag reem en tp ro v id i n g fo r t h e res earch , th e res earch i s treat ed as fu l l y

fu n d ed * * * , an dn o ex p en ses p ai do r i n cu rred b y th e t ax p ay er i n p erfo rm i n g th e res earch are q u al i fi edres earch ex p en s es .” Id . s ub p ara. (2 ). Th i s
wo u l db e t ru e, fo r ex am

p l e, “ i f th e t ax p ay er p erfo rm s res earch u n d er an ag reem en t th atco n fers o n an o th er p ers o n t h e ex cl u si v e ri g h tt o ex p l o i tth e res u l t s o f t h e res earch .” Ib i d . A t ax p ay er l i kewi s e “ d o es n o tret ai n s ub s tan t i al ri g h t s i n th e res earch i f t h e t ax p ay er m

u s tp ay fo r t h e ri g h t t o u s e t h e res u l t s o f th e res earch .” Id
. s ub p ara. (3 )(i ). “ In ci d en t al b en efi t s t o th e t ax p ay er fro m p erfo rm an ce o f t h e res earch (fo r ex am

p l e, i n creas edex p eri en ce i n a fi el do f res earch ) d o n o t co n s t i tu te
s ub s t an t i al ri g h t s i n t h e res earch .” Id
. s ub p ara. (2 ). If a t ax p ay er p erfo rm i n g res earch fo r an o th er p ers o n d o es ret ai n s ub st an t i al ri gh t s i n th e res earch , th e res earch i s n ev ert h el es s d eem ed fu n d ed“ t o the ex t en t o f th e p aym en t s (an dfai r m ark etv al u e o f an y p ro p erty ) t o wh i ch th e t ax p ay er b eco m es en t i t l edb y p erfo rm i ng th e res earch .” Id . s ub p ara. (3 )(i ). If th e t ax p ay er’ s- 1 1 -

[* 1 1 ] t o t al res earch ex p en s es ex ceed th e am o u n to f “ fu nd i n g ” as th u s d et erm i n ed , th e t ax p ay er m ay

b e en t i t ledt o an al l o cat ed p art i al cred i t . See i d . s ub p aras . (3 )(i i ), (6 ), Ex am p l e (1 ). Th i s d et erm i n at i o n i s m ad e p ro jectb y p ro j ect . See i d . s ub p ara. (3 )(i i i ). Th e fo cu s o f t h e cu rren t d i s p u t e i s wh ether En erco n ret ai n ed“ s ub s t an t i al ri gh t s” i n th e res earch i tp erfo rm edi n fu l fi l l i n g i t s co n tract wi th Veri co r. As th e reg u l at i o n d i rect s , we co n s i d er t h i s qu es t i o n b y ex am i n i n g th e p art i es ’ co n tract . See Lo ckh eedM art i n Co rp . v . Un it edSt at es , 2 1 0 F.3 d 1 3 66 , 1 3 7 6 (Fed . Ci r. 2 0 0 0 ) (“ Th e reg u lat i o n ’ s fo cu s o n th e t ax p ay er’ s ri g h tu n d er t he res earch ag reem en t s
m ak es i tcl ear t h atth e d et erm i n at i on wh et h er t h e t ax pay er h adth e ri g htt o u s e t h e
res u l ts o f i t s res earch wi th o u tp ay i n g fo r t h at ri g h tm u s t b e d et erm i n edb y

referen ce t o th e res earch ag reem en t s .”), rev ’ g 4 2 Fed . Cl
. 4 8 5 (1 9 9 8 ); s ee al s o Fai rch i l dIn du s ., In c., 7 1 F.3 dat8 7 0 (s t at i n g th at“ th e co n tract u al arran g em en t ” i s th e fact or t h atd et erm in es wh i ch p art y i s en t i t ledt o th e cred i t ). C. An al y s i s Th e ag reem en tg o v ern i n g th e res earch ap pears i n th e Term s an d Co n d i t i o n s th atVeri co r s en tEn erco n i n Feb ru ary 2 00 9 . En erco n accep tedth es e Term s an d Co n d i t i o ns i n i t s o ffer l et ter d at ed Feb ru ary 1 1 , 2 0 0 9 . Parag rap h 1 5 o f t h atd o cu -- 1 2 -

[* 1 2 ] m en t, cap t i o n ed“ Des i gn s , Drawi n g s an d Dat a,” i s the k ey p ro v i s i o n fo r o u r p u rp os es . Parag rap h 1 5 (A) d efi n es “ In fo rm at io n ” as a t erm o f art . Its ay s th at“ In fo rm at i o n ” m ean s “ an y

t ech n i cal i n fo rm at i o n ” t hat(i ) Veri co r h as s up pl i edt o En erco n ; (i i) En erco n h as d es i gn edatVeri co r’ s ex p en s e; o r (i i i ) En erco n h as d es i g n ed
s p eci fi cal l y

t o m eetVeri co r’ s t ech n i cal req u i rem en t s . En erco n ag rees th at , i n co n s i derat i o n o f Veri co r’ s “ fu rn i s h i n g o f s uch In fo rm at i o n an d/ o r d es ig n fu n d i n g ,” En erco n wi l l n o tu s e (o r as s i s to t h ers i n u s i n g ) “ s u ch In fo rm at i o n , d es i g n fu n d i n g , o r t o o l i n g t o d ev el o p o r s el l ” Art i cl es (o r s i m i l ar i t em s) wi th o u t Veri co r’ s “p ri o r wri t ten co n s en t .” “ Art i cl es ” i s el s ewh ere d efi nedt o m ean th e “ g o o d s an d/ o r s erv i ces b ei n g p ro cu redan dd es cri b ed ” i n th e p u rch as e o rd ers . Parag rap h 1 5 (A) g o es o n t o p ro v id e t h atEn erco n “ sh al l n o tu s e o r d i s cl o s e
s u ch In fo rm at i o n” ex cep ti n th e p erfo rm an ce o f wo rk fo r Veri co r. Up o n Veri co r’ s req u es t , “ s u ch In fo rm at io n an dal l co p i es th ereo f s h al l b e retu rn ed ” t o Veri co r. If En erco n s h o ul d d ev el o p o r s el l Art i cl es (o r s i m i l ar i t em s ) t o an y o n e o th er th an Veri co r, th e b u rd en i s o n En erco n “ t o es t ab l i s h that* * * [Veri co r’ s] In fo rm at i o n , fu n d in g o r t o ol i n g was n o tu s ed .” Th es e p ro v i s i o n s are q u i t e h o s t i l e t o p et i t io n ers ’ cl ai m th atEn erco n ret ai n ed

“ s ub s t an t i al ri g ht s” i n th e res earch i t p erfo rm edfo r Veri co r. Parag rap h 1 5 (A) ex
-- 1 3 -

[* 1 3 ] p l i ci t l y

s t at es th at En erco n m ay

n o tu s e o r as s i s to th ers i n u s i n g, fo r th e p u rp os e o f d ev el o p i n g o r s el l i n g Art i cl es o r s i m i l ar i t em s , “ an y t ech ni cal i n fo rm at i o n ” t h atEn erco n h as d es ig n edat Veri co r’ s ex p en s e o r t o m eetVeri co r’ s t ech n i cal req u i rem en t s . Th is p ro h i b i t i o n i s n o t l im it edt o “ t ech n i cal i n fo rm at i o n ” b u tal s o i n cl u d es “ t o o l i n g ” t h atEn erco n d ev el o p s i n ex ecu t i n g the co n tract . 5 Co n cei v ab l y , s o m e res earch thatEn erco n p erfo rm edm i g h tb e u s efu l i n d ev el o p i n g p ro du ct s o ther t h an Art i cl es o r s i m i l ar i t em s . Bu t th e l at t er h al f o f Parag rap h 1 5 (A) i n cl u d es a b ro ad er p ro h i b it i on , s t at i n g th atEn erco n “ s h al l n o tu s e
* * * s u ch In fo rm at i o n ex cep ti n th e p erfo rm an ce o f Ord ers fo r Bu y er, an d , up o n Bu y er’ s req u es t , s u ch In fo rm at i o n an dal l co p i es th ereo f s h al l b e ret u rn ed t o Bu y er.” Th i s t ex tp rev en t s En erco n , wi th o u tVeri co r’ s p ri or wri t t en co ns en t , fro m
u s i n g th e res u l t s o f i t s res earch fo r an y p urp o s e o u t s i d e o f Pro

ject No . 3 7 6 8 8
. Parag rap h 1 5 (B) o f t h e Term s an d Co n di t i o n s co n t ai n s an ad d i t io n al p ro h i
b i t i o n. Itp ro v i d es th at“ In fo rm at i o n p rep aredb y Sel l er s peci fi cal l y

i n co n nect i o n wi th p erfo rm an ce o f t h i s Ord er, i n cl ud i n g o ri g in al wo rk s o f au th o rs h i p creat edb y Sel l er, are co ns i dered ‘ wo rk s m ad e fo r h i re’ wi th in th e m ean i n g o f t he U.S. Co p y 5 Th e Term s an d Co nd i t i o n s al s o b ar En erco n fro m re-u si n g an y

“ des i g n fu n d in g . ” Th e m ean in g o f th i s p h ras e i s n oten t i rel y cl ear: Itco u ldm ean “p ay m en t s fo r d es i gn s ” u n der t h e co n tract o r “ d es i g n s th ath av e b een p ai dfo r” u n d er th e co n tract . Onei th er i n t erp ret at io n thi s p hras e i s h o s ti l e t o p et i t io n ers ’ cl ai m th atEn erco n ret ai n ed“ s ubs t an t i al ri g h t s .”- 1 4 -

[* 1 4 ] ri g h tLaws ” an dthatVeri co r “ s h al l b e d eem ed th e au th o r o f s u ch wo rk s .” Th i s p ro vi s i o n wo u ldap p ear t o ap p l y t o s uch co p yri gh t ab l e m at eri al s as t ech n i cal drawi n gs , co m

p u ter p ro g ram s , d at ab as es , s p read s h eet s, rep o rt s, an d m an u al s creat edb y En erco n i n fu l fi ll m en to f i t s ag reem en twi th Veri co r. See 1 1 M el v i l l e B. Ni m m er & Dav i dNi m

m er, Ni m m er o n Co p yri g h t , s ecs . 7 0 3, 7 2 5 , 9 2 2 (rev . ed
. 2 0 2 0 ). In th e ev en t an y “ In fo rm at i o n p rep aredb y * * * [En erco n] s p eci fi cal l y i n
co n nect io n wi th [i t s] p erfo rm an ce” i s d et erm in edb y a co u rtn o tt o b e “ a wo rk
m ad e fo r h i re,” t h e p u rch as e o rd er “ s h al l o p erat e as an i rrev o cab l e as s i gn m en tt o
* * * [Veri co r] o f al l ri g ht , t i t l e an di n t eres ti n an d t o s u ch wo rk .” Th e ag reem en tg o v ern i n g th e res earch th u s p ro v i d es th atEn erco n m ay n o t
u s e, ex cep ti n i t s p erfo rm an ce o f t h e co n tract fo r Veri co r, “ an y t ech ni cal i n fo rm at i on ” o r “ t o o l i ng ” d ev el o p edfo r Veri co r, an d t h atan y t ech n i cal drawi n g s o r o t h er
co p y ri g h t ab l e m at eri al s d ev el o p edb y En erco n b el on g t o Veri co r. Al l “ In fo rm at i on ” d ev el o p edfo r Veri co r an d“ al l co p i es th ereo f” m u s tb e ret u rn edt o Veri co r at Veri co r’ s req u es t . En erco n i n i t s o ffer l et ter reco g n i zedth es e res tri ct i o ns , ackn o wl ed g i n g th at “ [a] l l i n fo rm at i o n , equ i p m en t , et c g en erat edas a res u l to f t h i s
o rd er are o wn edb y

Veri co r o n l y .” Th atb ei n g s o , i ti s h ardt o s ee wh atri gh t s --m u ch l es s wh at“ s ub s t an t i al ri gh t s”--En erco n co u l db e v i ewedas ret ai n in g i n th e res earch i tp erfo rm ed
. Rat h
-- 1 5 -

[* 1 5 ] er, t h i s i s a s i tu at i o n wh ere “ th e t ax p ay er p erfo rm [ed ] res earch u n d er an ag reem en tth atco nfer[red ] o n an o th er p ers on th e ex cl u s i v e ri g h tt o ex p l o i tth e
res u l ts o f t h e res earch .” Sec. 1 .4 1 -4 A(d )(2 ), In co m e Tax Reg s. Th e t ax pay er i n th es e ci rcu m s t an ces d i d“ no tp erfo rm [] qu al i fi edres earch b ecau s e t h e res earch i s treat ed as fu l l y

fu n d ed
. ” Ib id
. D. Pet i t i o ners ’ Arg um en t s Pet i t i o ners co n t en dth atParag rap h 1 5 (A) o f t h e Term s an d Co nd i t i o ns s i m p l y s et s fo rt h “ a s tan d ardn o n -d i s cl o s u re ag reem en t,” p rev en t i n g En erco n fro m d i s s em i n at in g the t ech ni cal i n fo rm at i o n an d s p eci fi cat io n s th atVeri co r s upp l i ed t o
en ab le En erco n t o ex ecu t e th e co n tract . Bu t th i s i n t erp ret at i o n i g n ores m u ch o f th e rel ev an tco n tract t ex t. Sub d i v i s i o n (i ) d o es d efi n e “ In fo rm at i o n” t o i n cl u d e t ech n i cal i n fo rm at i o n “ s up p l i edt o Sel l er b y o r o n b eh al f o f Bu y er.” Bu ts ub d i v i
s i on s (i i ) an d (i i i ) d efi n e t h i s t erm al s o t o i n cl u de t ech n i cal i nfo rm at i o n th at“ Sel l er h as d es i g n edatBu y er’ s ex pen s e” o r t h at“ Sel ler h as d es i gn eds p eci fi cal ly t o m eet Bu y er-fu rn i s h edt ech n ical req ui rem en t s .” An d th i s p arag rap h co v ers m o re t h an t ech n i cal i n fo rm at i o n , b arri n g En erco n fro m u s i n g “ t o o l i n g ” d ev el o p eddu ri n g th e
co n tract as wel l as “ d es i gn fu n d i n g .” Parag rap h 1 5 (A) cl earl y co v ers the res u l ts o f
an y res earch En erco n p erfo rm s i n th e co u rs e o f fu l fi l li n g th e co nt ract .- 1 6 -

[* 1 6 ] Pet i t i o ners ch aract eri ze p arag rap h 1 5 (B) o f t h e Term s an d Co nd i t io n s as p ert ai n i n g t o ri g h t s “ to an y p at en t s o r co p yri g h t s th atm ay ari se o u to f t h e p ro

ject ,”
as s ert i n g th atth ere i s n o ev i d en ce t h at“ ei th er p art y i s cl ai m i ng p at en to r o th er i nt el l ectu al p ro p ert y

ri gh t s .” Bu tParag rap h 1 5 (B) m ak es n o referen ce t o p at en t s , an d i td o es n o t m at t er wh eth er Veri co r act u al l y s ub m i t t edco p yri g h tcl ai m s t o th e Co p yri g h tOffi ce. W e ex am i n e t h e p art i es ’ ag reem en t t o d i s cern “ th e ex t en tt o wh i ch th e res earch i s fu n d ed
. ” Sec. 1 .4 1 -4 A(d )(1 ), In co m e Tax Reg s . Parag rap h 1 5 (B) m ak es cl ear t h atEn erco n ret ai n edn o “ s ub s t an t ial ri g h ts ” t o an y t ech n i cal drawi n gs o r o th er co pyri g h t ab le m at eri al . An d th i s t ex tl i teral l y co v ers n o tju s t

“ o ri g i n al wo rk s o f au th o rs h i p ,” b u tan y “ In fo rm at i o n p rep aredb y Sel l er s p eci fi
cal l y i n co n n ect i o n wi th p erfo rm an ce” ev en i f d et erm i nedb y a co u rtn o tt o b e a

“ wo rk m ad e fo r h ire.” Ackn o wl ed g i n g th at th e ag reem en teffect s “ an ex p res s t ran s fer o f s o m e ri gh t s” t o Veri co r, p et i t i o ners u rg e t h at En erco n ret ai n edth e ri gh tt o u s e, o n i t s
o wnfu tu re p ro

ject s , th e “ in s ti tu t i o n al kn o wl ed g e i tg l ean [ed ] fro m res earch ” p erfo rm edfo r Veri co r. Bu t m ere “ [i ] n ci d en t al b en efi t s * * * fro m p erfo rm an ce o f t h e
res earch ,” s u ch as h av i n g a m o re ex p eri en cedo r kno wl ed g eab l e s t aff, d o n o tco n s t itu t e “ s ub s tan t i al ri g h t s .” Id . s ub p ara. (2 ). An di t d o es n o th el p p et it i o n ers th at En erco n co u l dre-u s e t h e res u l t s o f i t s res earch b y g et ti ng Veri co r’ s “p ri o r wri t t en- 1 7 -

[* 1 7 ] co ns en t .” Hav in g t o s ecu re p erm i ss i o n t o u s e th e res earch , wi th n o
co n di t i o n s l i m it i n g th e o th er p art y ’ s ab il i ty t o wi th ho l dco n s en t , p rev en t s En erco n fro m p o ss es s i n g s ubs t an t i al ri g h t s . See Dyn et i cs , In c. & Sub s . v . Un i t edSt at es , 1 2 1 Fed . Cl . 4 9 2, 5 21 (2 0 1 5 ) (“ Dyn et i cs d o es n o tad dres s the o b v i o u s qu es t i o n o f h o w i t co u ldh av e s ub st an t i al ri g h ts i n th e res u l t s o f t he res earch , i f i tn eed edth e g o v ern m en t ’ s ‘ au th o ri zat io n ’ t o u se t h o s e res u lt s . ”). Fi n al l y , p et i t i o n ers err i n rel y i n g o n Lo ckh eedM art i n Co rp . v . Un i t ed St at es , 2 1 0 F.3 d1 3 6 6 (Fed . Ci r. 2 0 0 0 ), rev ’ g 4 2 Fed . Cl . 4 8 5 (1 9 9 8 ). Th e Go v ern m en ti n th atcas e “ co n ced e[d ] th atth e co n tract p ro vi s i o n s g [a] v e * * * [t h e t ax p ay er] th e ri gh tt o u s e i t s res earch i n i t s b u s i nes s .” Id
. at1 3 7 6 . Th e Co u rto f Fed
eral Cl ai m s h el dth atth e t ax p ay er n ev ert h el es s d i dn o tret ai n “ s ub s t an t i al ri g h t s ” i n the res earch b ecau s e, und er Fed eral ex p o rtco n tro l l aws referen ced i n t h e co n tract s , i t s fu n ct i o n al ab i l i ty t o u s e t h e res earch res ul t s was co n s id erab l y res tri ct ed
. Lo ckh eedM art i n Co rp ., 4 2 Fed . Cl
. at4 9 2 , 4 9 8. Th e Fed eral Ci rcu i trev ers edo n th atp o i n t, n ot in g th atth es e l eg al req u i rem en t s were u n rel at edt o th e ag reem en tth e p art i es h adex ecu t ed . Lo ckheed M art i n Co rp ., 2 1 0 F.3 dat1 3 7 5 -1 3 76 . Th e Fed eral Ci rcu i tth u s h el d , as we h o l d h ere, t h at th e p art i es ’ ag reem en tco n tro l s i n d et erm i n i n g wh et h er t h e t ax p ay er p erfo rm i n g th e res earch h as ret ai n ed“ s ub s t an t i al ri gh t s .” See s ec. 1 .4 1 -4 A (d )(1 ), In co m e Tax- 1 8 -

[* 1 8 ] Reg s . Fo r t h e reas o n s s t at edab ov e, t h e Term s an dCo n d i t i o n s n eg o t i at edb y Veri co r an dEn erco n s h o w th atEn erco n ret ai n edn o s u ch ri gh t s . To refl ectthe fo reg o i n g , Ano rd er wi l l b e i s s u edg ran t i n g
res p o nd en t ’ s m o t i o n fo r p art i al s u m m ary ju dg m en t .