United States Tax Court

T.C. Memo. 2023-84

MARK BETZ AND CHRISTINE BETZ,

Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

DENNIS LINCOLN AND JULIA LINCOLN,

Petitioners

v. 

COMMISSIONER OF INTERNAL REVENUE,

Respondent

—————

Docket Nos. 21587-18, 21588-18. Filed July 6, 2023.

—————

Ps in these consolidated cases are shareholders in C, 

an S corporation that designs and supplies air pollution 

control systems. As of 2014, C had extensive institutional 

knowledge and experience in supplying systems that met 

the specifications of customers in manufacturing 

industries. On its 2014 information return, C claimed a 

research credit under I.R.C. § 41 in connection with 19 

projects. C claimed the research credit in connection with 

both the costs of producing the systems it supplied and the 

wages it paid to certain of its employees for activities 

performed in connection with the projects. C did not use a 

time-tracking system for its employees’ activities and thus 

estimated the amounts of employee time spent performing 

qualified services. On their personal federal income tax 

returns for 2014, Ps claimed a flowthrough of the credit and 

later carried forward the remaining portion of the credit to 

their 2015 and 2016 returns.

Served 07/06/23
2

[*2] Held: For all 19 projects, Ps failed to carry their 

burden of establishing that the products were pilot models. 

Accordingly, C’s purported qualified research expenditures 

(QREs) for costs of production failed to satisfy I.R.C. 

§ 41(d)(1)(A) and were not creditable.

Held, further, for all 19 projects, Ps failed to carry 

their burden of establishing that the wages of certain of C’s 

employees were incurred in connection with the 

performance of qualified services. Accordingly, C’s

purported QREs for wages were not creditable.

Held, further, for five of the projects, C did not retain 

substantial rights in the results of its research under its

applicable contracts with its customers. Accordingly, C’s

purported QREs for those five projects were incurred in 

connection with funded research within the meaning of 

I.R.C. § 41(d)(4)(H) and were not creditable.

Held, further, Ps are liable for accuracy-related 

penalties under I.R.C. § 6662(a) for tax years 2014, 2015, 

and 2016.

—————

John H. Dies, Jeffrey E. Falvey, Jeremy M. Fingeret, Jefferson H. Read, 

and Matthew S. Reddington, for petitioners.

Jonathan E. Behrens, Frederic J. Fernandez, Eugene A. Kornel, and

Richard L. Wooldridge, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

NEGA, Judge: These cases involve a section 411 research credit

claimed by an S corporation engaged in the business of designing and 

supplying air pollution control systems that eliminate harmful airborne 

manufacturing byproducts. The issues for decision are (1) whether 

1 Unless otherwise indicated, statutory references are to the Internal Revenue 

Code, Title 26 U.S.C., in effect at all relevant times, regulation references are to the 

Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and 

Rule references are to the Tax Court Rules of Practice and Procedure.
3

[*3] petitioners, the groups of which include the sole shareholders of the 

S corporation, are entitled to a research credit of $501,531 for tax year 

2014 and (2) whether petitioners are liable for accuracy-related 

penalties for tax years 2014, 2015, and 2016. We hold for respondent on 

both issues.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The 

Stipulations of Facts and the attached Exhibits are incorporated herein 

by this reference. Petitioners resided in Illinois when they timely filed 

their Petitions.

I. Catalytic Products International, Inc.

Catalytic Products International, Inc. (CPI), was founded in 1969 

by Erwin Betz. In 2014 CPI was a subchapter S corporation, with the 

shares owned equally (50%) by Erwin Betz’s children, petitioner Mark 

Betz (Mr. Betz) and petitioner Julia Lincoln (Ms. Lincoln). As of 

January 2, 2014, CPI’s board of directors comprised Mr. Betz, Ms. 

Lincoln, petitioner Dennis Lincoln, and Matthew Lincoln. In 2014 CPI 

used an accrual method of tax accounting.

Beginning in 1987, when Mr. Betz joined the company, CPI 

transitioned its business away from manufacturing catalysts for 

installation in air pollution control systems, instead becoming a 

designer and supplier of custom-built air pollution control systems, 

primarily catalytic and thermal oxidizers.

II. Oxidizer Basics

In 2014 CPI supplied both catalytic and thermal oxidizers, which 

each eliminate certain environmentally hazardous airborne 

manufacturing byproducts. We will refer to these byproducts as volatile 

organic compounds (VOCs) as a convenient shorthand.2 Catalytic 

oxidizers are designed to convert VOCs into carbon dioxide and water 

vapor via a process of chemical reaction between the VOCs and a 

2 Our use of the term may not necessarily reflect whether the byproducts 

discussed herein are VOCs within the technical meaning of regulations issued by the 

Environmental Protection Agency (EPA). See 40 C.F.R. § 51.100(s) (2023).
4

[*4] catalyst.3 Thermal oxidizers are designed to achieve the same 

result but do so by using a burner to generate extremely high heat to 

incinerate VOCs, rather than using a catalytic conversion process. 

There are three separate subtypes of thermal oxidizers: 

(1) direct/straight, (2) recuperative, and (3) regenerative.

A direct/straight thermal oxidizer uses a simplistic burner to heat 

a combustion chamber; process air containing VOCs passes through the 

system and oxidizes when encountering the high temperatures. A 

recuperative thermal oxidizer adds to the concept by using a stainlesssteel heat exchanger to preheat process air, which provides for increased

energy efficiency.4 This heat exchanger usually consists of a shell and 

tube structure that operates by intaking clean, postcombustion air into 

an exterior shell that transfers heat to interior tubes carrying the

process air. A regenerative thermal oxidizer instead uses a heat 

exchanger comprising ceramic media beds, which retain heat at an even 

higher rate and thus allow for increased energy efficiency. Regenerative 

thermal oxidizers operate by intaking process air through the media, 

then reversing the postcombustion air back through the media, thus 

retaining the heat. Because of their energy efficiency, the issue of 

overtemperature, where the system’s temperature rises too high and 

degrades the heat exchanger, is a particular problem for regenerative 

thermal oxidizers. Designs of regenerative thermal oxidizers typically 

use a hot gas bypass, which diverts high temperature air out of the 

system in order to reduce temperature. As of 2014, regenerative 

thermal oxidizers were the most common type of oxidizer used in 

manufacturing industries.

A few general considerations go into the choice of a type of

oxidizer system and its basic design. One consideration is the 

aforementioned energy efficiency: Oxidizers can use considerable 

volumes of natural gas in operating the burners that heat the air. For 

cost-conscious customers, an oxidizer with reduced volume or 

performance but increased thermal efficiency (i.e., where high

3 A catalyst is a substance that triggers a chemical reaction but is not itself 

consumed in that chemical reaction. A common example is the catalytic converter in 

an automobile, which converts the VOCs present in the exhaust into carbon dioxide 

and water.

4 To illustrate the concept, heat exchangers are typically used as part of the 

heating process in residential gas furnaces. Furnaces use a burner to generate hot gas 

within a heat exchanger chamber; cold air then encounters the now-heated outer walls 

of the heat exchanger and becomes hotter before being distributed throughout the 

residence.
5

[*5] temperature is maintained without significant use of fuelconsuming burners) might be optimal. Another basic consideration is 

the concentration and type of VOCs generated by the customer’s 

manufacturing process; for certain VOCs, a catalytic reaction is less 

effective than a thermal one or would degrade the catalyst over time. 

Certain types of VOCs may also require a higher operating temperature

or residence time to oxidize, which would affect the sizing of components

and increase upfront costs.

Another consideration is whether the customer’s manufacturing 

process airflow contains other particulates or chemicals that could affect 

the oxidizer’s performance. For instance, if the process airflow 

contained silicone, oxidization would generate silicone dioxide (i.e., 

sand), which could accumulate and plug an oxidizer. Finally, the 

location and layout of a customer’s manufacturing process plays a role. 

Space constraints at the facility may dictate the choice and sizing of 

various components, while extreme temperatures or heavy winds may 

require additional insulation or structural support features for outdoor 

components.

III. CPI’s General Process

In 2014 CPI’s business model was as follows. First, CPI would 

either solicit or be contacted by a prospective customer. If unfamiliar 

with the customer, CPI personnel would sometimes visit the customer’s 

facility to review their manufacturing process and measure what VOCs

were being generated. Customers would often provide CPI with the 

necessary specifications about the process airflow at the customer’s 

facility, such as the volume of process airflow, the type of VOCs 

generated, and the airflow temperature. If the customer was unable to 

provide specifications, CPI personnel or a third party would sometimes 

test and measure the airflow at a jobsite.

CPI personnel considered an oxidizer’s design to be largely

dictated by three basic considerations: (1) the necessary level of 

destruction efficiency; (2) the process air flow volume; and (3) the 

particular VOCs generated.5 Once this information was available, CPI 

personnel would begin assembling a project proposal. CPI personnel

would input the particular VOCs and airflow volumes at issue into a 

computer spreadsheet (known internally at CPI as Bessy), which would

5 Destruction efficiency is the percentage of the VOC concentration in the 

process air that is destroyed by the oxidizer.
6

[*6] then output calculations breaking down how the VOCs would 

oxidize, including the lower explosive limit (LEL) and heat value of the 

airflow exhaust.6 Based on the particular VOCs at issue and the airflow

volume, CPI personnel would then calculate the necessary sizes of the 

various components, such as burners and fans, by using standardized 

spreadsheets or performing simple hand calculations.

Next, the now-sized components would be incorporated into a 

general arrangement design drawing and a process and instrument 

diagram (P&ID).7 On the basis of the prepared drawings, CPI personnel 

would solicit bids from subcontractors about the potential cost of 

assembly. With an estimated cost of assembly in hand and the size of 

the components preliminarily calculated, CPI personnel would come up 

with a quoted price for the customer and assemble a project proposal. 

In the project proposal, CPI would recommend a particular type of 

oxidizer based on the applicable characteristics of the process airflow

and describe its various components and features. Generally, the initial 

project proposal provided by CPI to the customer was not the final 

version. Customers often requested changes to the proposal, such as 

increases in the guaranteed efficiency of the oxidizer, additional 

guarantees or warranties, or revisions to terms and conditions.

Once a final proposal was accepted by a customer and purchase 

and sale orders exchanged, additional design drawings would be 

prepared, reviewed, and completed for various components of the 

oxidizer. The project would then be passed on to a project manager, who 

would begin issuing purchase orders to suppliers (for various 

components of the oxidizer) and to subcontractors (for fabrication and 

assembly). CPI maintained ongoing relationships with a number of 

suppliers and subcontractors. CPI would engage a subcontractor, 

typically PRE-Heat, Inc., to fabricate the physical structure of the 

system, which was generally composed of heavy, welded steel, and to 

assemble the components of the system. CPI would purchase 

components from suppliers, who would then directly provide those 

6 LEL indicates the lowest concentration of an airborne compound that is 

capable of exploding in the presence of an open ignition source. If an airflow is 

measured at a high percentage of LEL, that airflow is at greater risk of igniting; 

National Fire Prevention Association standards generally dictate that a number above 

25% of LEL is an unsafe level.

7 A general arrangement drawing portrays the physical structure of the 

assembled oxidizer, while a P&ID details how airflow, gas, and electrical signals 

interact with components of the system.
7

[*7] components to the fabricating subcontractor to be assembled as 

part of the oxidizer. For the exhaust stack, CPI would usually engage a 

separate subcontractor, typically IVI North, Inc., to fabricate the stack. 

On some projects, the subcontractor would take on greater design 

responsibility. For instance, PRE-Heat would typically handle the 

design for heat exchangers, inputting data from the particular facility 

into a proprietary program in order to determine the appropriate sizing.

CPI personnel would also begin designing the electrical control 

system of the oxidizer. Using the P&ID drawing, CPI engineers would

create an electrical schematic drawing for the control panel, showing the 

placement of the various inputs and outputs into the system and the 

requisite horsepower. Finally, CPI engineers would program a sequence 

of operations into the control system to automate its various functions. 

CPI would engage a subcontractor, typically Quantum Design, Inc., to 

build the control system panel and enclosure for the oxidizer.

While fabrication was ongoing, CPI personnel would sometimes 

conduct quality control inspections on the work of the fabricating and 

electrical subcontractors, to ensure that the fabrication conformed to 

CPI’s design drawings. Sometimes revisions would be made to an 

oxidizer’s design over the course of a project in response to feedback from 

either a subcontractor or the customer. Once an oxidizer was completed, 

CPI personnel would typically oversee assembly of a system at the 

fabrication subcontractor’s facility; the oxidizer would then be freight 

shipped to the customer’s facility. At the customer’s facility, CPI would 

either install the system itself or have personnel present to supervise

the installation. After physical installation, CPI startup personnel 

would spend time at the facility, programming the control system and 

conducting further quality testing to ensure that components conformed 

to CPI’s design drawings and operated without issues. Finally, a third 

party would generally conduct testing on the oxidizer for purposes of 

compliance with environmental regulations. On some occasions, a

tested oxidizer would perform below the destruction efficiency 

guarantee made by CPI, which would contractually require CPI to make

additional repairs or modifications to the oxidizer.

IV. The Alliantgroup Study

Alliantgroup L.P. is a tax consultancy and lobbying firm which, 

inter alia, maintains a research credit group that specializes in 

promoting section 41 credits and assisting taxpayers with all stages of 

claiming the credit. On February 20, 2015, Ms. Lincoln executed an 
8

[*8] engagement letter for Alliantgroup to conduct an R&D tax credit 

study for CPI and to provide audit defense. The engagement letter 

stated that Alliantgroup would bill at a blended hourly rate of $375; the

billed fees were capped so as not to exceed 25% of the combined state 

and net federal research credits identified by Alliantgroup. Initially, 

Alliantgroup requested from CPI a list of employees with job details, job 

costing reports, Forms W–2, Wage and Tax Statement, and payroll 

records for 2010 through 2013, and CPI’s federal and state tax returns 

for 2010 through 2013. On April 2, 2015, an Alliantgroup representative 

emailed Ms. Lincoln a list of CPI projects that they wished to discuss 

during an upcoming site visit to CPI; the list comprised 18 projects.8

On April 8, 2015, Alliantgroup personnel visited CPI’s facility; 

during the visit, Alliantgroup personnel interviewed Messrs. Betz and 

Harmsen and Ms. Lincoln. On April 9, 2015, Alliantgroup personnel 

emailed Mr. Harmsen and Ms. Lincoln a spreadsheet based on their 

discussions, which purported to allocate certain percentages of the 2014

wages paid to CPI’s employees to 19 CPI projects. The interviews with 

Messrs. Betz and Harmsen were the source of the underlying allocation 

percentages in the spreadsheet. In 2014 CPI did not have a system that 

tracked employee time. On April 10, 2015, an Alliantgroup employee 

emailed to Ms. Lincoln a pro forma Form 6765, Credit for Increasing 

Research Activities, with calculations for a potential research credit for 

CPI. The pro forma Form 6765 listed $1,983,647 as the amount of wages 

for qualified services and $5,732,211 for the cost of supplies, which 

amounted to a gross credit of $771,586 and a net credit of $501,531.

On October 26, 2015, an Alliantgroup employee provided Ms. 

Lincoln with a project summary report for the research credit study, 

which concluded that CPI was qualified to claim a section 41 credit.9 On 

December 10, 2015, Mr. Betz and Ms. Lincoln signed a copy of the 

completed study, under a field entitled “Employees Verifying 

Information.” In the study, Alliantgroup identified 19 projects with 

associated qualified research expenditures. The completed study again

stated that CPI had paid or incurred $1,983,647 in qualifying wage 

expenditures and $5,732,211 in qualifying supply expenditures, for a 

total of $7,715,858 of QREs. With respect to wage expenditures, the 

completed study stated that Alliantgroup had allocated percentages of 

8 The DuPont La Porte project, for which qualifying research expenditures 

(QREs) were eventually claimed, was not listed in this email.

9 As we discuss in further detail below, both CPI and petitioners had timely 

filed their respective tax returns for tax year 2014 in April 2015.
9

[*9] CPI’s employees’ wages paid or incurred for qualified services as 

follows:10

Employee Name 2014 R&D % Tax Year 2014

 Salaries

Tax Year 2014

 QREs

G.B. 80% $55,424 $55,424

Betz, Mark 80% 823,231 823,231

F.C. 80% 49,022 49,022

C.D. 83% 69,328 69,328

S.F. 82% 39,172 39,172

Harmsen, Scott 88% 179,302 179,302

C.H. 63% 104,297 65,707

R.J. 80% 80,863 80,863

C.J. 60% 15,209 9,125

E.M. 82% 48,050 48,050

B.O. 60% 58,000 34,800

J.O. 90% 21,038 21,038

Shaver, Robert 80% 341,534 341,534

L.S. 90% 20,706 20,706

T.S. 60% 40,186 24,112

R.T. 80% 40,992 40,992

B.W. 50% 39,038 19,519

J.Y. 90% 24,466 24,466

T.Z. 86% 37,255 37,255

Total n/a $2,087,113 $1,983,64711

For 17 of the employees, Alliantgroup allocated percentages of wages to 

particular projects; the wage QREs of those 17 employees totaled 

$818,882 (i.e., roughly 41% of the claimed wage QRE total). 

10 For brevity’s sake, we exclude from the table the CPI employees that 

Alliantgroup determined performed no qualified services in 2014. Aside from petitioner 

Mr. Betz and Messrs. Harmsen and Shaver, both of whom testified at trial, we will use 

initials to refer to particular CPI employees.

11 The wage QREs identified by Alliantgroup in fact amount to a total of 

$1,983,646; we can safely attribute the one-dollar discrepancy from the listed amount

to rounding error.
10

[*10] Alliantgroup purported to allocate the wages of two employees, 

Messrs. Betz and Shaver, evenly across all 19 projects; the wage QREs

of Messrs. Betz and Shaver totaled $1,164,765 (i.e., roughly 59% of the 

claimed wage QRE total).

With respect to supply QREs, Alliantgroup personnel reviewed 

CPI’s internal accounting records for each project. With respect to the 

base period, Alliantgroup personnel interviewed Mr. Betz and Ms. 

Lincoln and reviewed accounting statements from 1984, 1985, 1986, and 

1987 in order to determine whether CPI had gross receipts and QREs 

for those tax years. Alliantgroup ultimately calculated a fixed base 

percentage of 3.02% and average annual gross receipts of $23,782,532. 

Using those calculations, Alliantgroup again concluded in the study that 

CPI was entitled to a research credit of $771,586, calculated without an 

election under section 280C.

V. CPI Employees

In the study, Alliantgroup determined that 19 CPI employees 

performed qualified services. We provide brief job descriptions for each 

of those employees.

A. Mr. Betz

In 2014 petitioner Mark Betz was the vice president of 

engineering for CPI. Mr. Betz’s primary responsibilities were wide

ranging and included both working with customers on the sales side and 

doing application engineering.

B. Mr. Shaver

In 2014 Robert (Scott) Shaver was the vice president of sales for 

CPI. Mr. Shaver’s primary responsibilities included heading up the 

sales team, soliciting customers, and being involved at the outset in 

CPI’s chemical application engineering. Mr. Shaver left his employment 

with CPI sometime in 2016.

C. Mr. Harmsen

In 2014 Scott Harmsen was the director of engineering for CPI. 

Mr. Harmsen’s primary responsibility was supervising the engineering, 

drafting, and processing personnel at CPI, as well as being lead chemical 

application engineer. Sometime after 2014 Mr. Harmsen was promoted 
11

[*11] to president of CPI and remained in that position as of the dates 

of trial in these cases.

D. R.J.

In 2014 R.J. was a senior electrical engineer for CPI. R.J.’s

primary responsibility was designing the electrical systems and 

programming the control systems for CPI’s oxidizer systems.

E. C.D.

In 2014 C.D. was an electrical designer for CPI. C.D.’s primary 

responsibility was largely identical to R.J.’s and involved designing the 

electrical controls and programming the control systems for CPI’s 

oxidizer systems.

F. S.F.

In 2014 S.F. was a design detailer for CPI. S.F.’s responsibilities 

included creating and modifying design drawings and making 

guidelines for CPI’s systems.

G. T.Z.

In 2014 T.Z. was an engineering manager for CPI. T.Z.’s primary 

responsibilities consisted of reviewing all the design drawings, 

supervising the draftsmen, and managing the schedule and construction 

by the fabrication subcontractors.

H. L.S.

In 2014 L.S. was a fabrication specialist for CPI. L.S.’s

responsibilities consisted of overseeing and coordinating with the thirdparty fabricators, which included soliciting bids, reviewing design 

drawings, and conducting quality audits.

I. Messrs. G.B. & R.T.

In 2014 G.B. and R.T. were each draftsmen for CPI. G.B. was 

generally responsible for installation design, including preparing 

ductwork, steel, and location drawings. R.T. was generally responsible 

for drawing designs, project management, and sourcing components 

from suppliers.
12

J. Messrs. F.C., E.M., J.O., & J.Y.

In 2014 F.C., E.M., J.O., and J.Y. were each project managers for 

CPI. All four of these individuals’ primary responsibilities were

interacting with the customer, reviewing and approving drawings and

calculations, and ensuring delivery of an oxidizer to the customer’s 

facility. J.O. left his employment with CPI during 2014. 

K. Messrs. C.H., C.J., B.O., T.S., and B.W.

In 2014 C.H., C.J., B.O., T.S., and B.W. were each sales engineers

(i.e., salespeople) for CPI. Their responsibilities included putting 

together initial calculations in proposals delivered to customers and 

generally soliciting new customers. 

VI. The Projects at Issue

A. 3M Hutchinson (#13-07520)

During the years at issue 3M Company (3M) and CPI had an 

ongoing commercial relationship, which was reflected in a Master 

Equipment Supply & Services Agreement (master agreement), effective 

August 4, 2010. Clause 8.3 of the master agreement provided that

Seller may create drawings, illustrations, instructions, 

maintenance information, and other materials that relate 

to the Equipment, and if Seller retains ownership of any 

such materials, then Seller grants 3M the perpetual, 

unrestricted right to use, copy, and distribute those 

materials for 3M’s internal use. 

Clause 10.2 provided that CPI “maintains all of its proprietary rights 

related to its products and manufacturing processes, including all 

product components and pre-existing product designs.” Clause 10.2 next 

stated that

3M owns all tangible and intellectual property rights in 

any goods, equipment (including the Equipment), 

apparatus, documents, drawings, computer software and 

artwork which 3M provides to Seller, Seller creates at 3M’s 

[*12]
13

expense, or Seller creates using 3M Confidential 

Information (“3M Rights”).[12]

Clause 10.2 continued, stating in relevant part that with respect 

“to any property subject to 3M Rights, Seller: (a) hereby assigns to 3M 

or its designated affiliate all of Seller’s rights, including, without 

limitation, all intellectual and tangible property rights and (b) will 

deliver that property to 3M when Seller has finished using it to fulfill 

Order(s) under the Agreement.” Finally, clause 12 provided that “[a]ny 

claim or dispute arising from or relating to the Equipment or the 

Agreement will be: (a) governed by the laws of the State of Minnesota . . . 

without regard to its conflict of laws provisions.” The terms of the 

master agreement governed all of CPI’s projects for 3M, including 3M 

Hutchinson. 

During the years at issue 3M manufactured sticky notes at a 

facility in Hutchinson, Minnesota. Before engaging CPI, 3M had used 

an aging regenerative thermal oxidizer at the Hutchinson facility, which 

it had determined to replace. As part of the bidding process on the 

project, on June 25, 2013, 3M provided CPI with an extensive and 

detailed list of required specifications for a 30,000 standard cubic feet 

per minute (SCFM) regenerative thermal oxidizer. The specifications 

provided for a 99% destruction efficiency. The specifications provided 

measurements for the minimum and maximum airflow volume and 

solvent rate at the facility and identified the VOC emissions as “a 

combination of methanol, ethyl acetate, IPA, toluene, and other common 

solvents.”

 The 3M Hutchinson project was the first regenerative thermal 

oxidizer designed by CPI.13 However, Mr. Harmsen was experienced in 

working with regenerative thermal oxidizers from prior employment, 

and he handled the applications engineering on the project. 3M

recommended particular suppliers to use for the various components of 

the oxidizer; for a number of other components, 3M also provided specific 

brands and sizes to be included. Mr. Harmsen generally considered the 

specifications to be typical. Several of the specifications required by 3M 

12 Clause 10.1 separately defined “3M Confidential Information” as including 

“all Orders placed by 3M, 3M Materials, 3M Equipment, the terms of the Agreement, 

the Parties’ relationship, and any other information about how 3M makes or sells 

products or conducts its business.”

13 Before the 3M Hutchinson project, CPI supplied regenerative thermal 

oxidizers to customers but engaged other engineers to design them.

[*13]
14

[*14] were atypical for CPI, such as using two burners instead of one, 

including manual lifts in the system, and providing for a control 

enclosure that could contain a desk. The specifications also stated that 

3M was “concerned with residue build-up on the forced draft fan wheel 

or other internal parts” and provided two options—an induced draft 

process fan with a mixing box or a forced draft process fan with a preheat 

system—to address this concern in the design.14

In July 2013 after questions by other parties bidding on the 

project, 3M issued a revised set of specifications. CPI then provided 3M 

with an initial proposal for an oxidizer system; after reviewing CPI’s 

proposal, 3M requested that several more clarifications and revisions be

incorporated into the design. In August 2013 CPI submitted a revised 

proposal for a regenerative thermal oxidizer, which 3M accepted. The 

proposal included additional technical specifications for various 

components of the oxidizer. The proposal also included a 99% 

destruction efficiency performance guarantee. In September 2013 3M 

and CPI exchanged purchase and sale orders. The final payment terms 

were a total price of $1,135,840. CPI then engaged IVI North to 

fabricate and supply an exhaust stack for the system and engaged PREHeat to fabricate and supply the oxidizer system.

In late October 2013 G.B. completed an initial general 

arrangement drawing and an initial P&ID drawing for the oxidizer. In

December 2013 C.D. completed initial electrical schematic diagrams for 

a control panel. CPI engaged Quantum Design to fabricate a main and 

remote control panel and enclosure for the oxidizer and Lantec to supply

a ceramic heat exchanger. In December 2013 CPI issued a purchase 

order to AirPro Fan & Blower Co. (AirPro) for a 300 horsepower booster 

fan, described as arrangement 3B; AirPro then submitted design 

drawings for a booster fan to CPI for approval, which were in turn 

approved by 3M’s engineering department. In April 2014, after 

reviewing CPI’s electrical schematic drawings, 3M’s electrical engineers 

discovered some discrepancies from the voltage provided for in the 

specifications. CPI then issued a change order to Quantum Design for 

some revisions to the control panel.

In April 2014 S.F. completed a general arrangement drawing for 

the oxidizer system, which was checked by J.Y. By the time S.F.

14 The difference between the two types of fans is a simple one: Induced draft 

fans provide negative pressure (i.e., pull) while forced draft fans provide positive 

pressure (i.e., push).
15

[*15] completed the general arrangement drawing, minor changes had 

already been incorporated into the drawing in prior revisions made in 

both 2013 and 2014. Those changes included (1) adding an additional 

walkway to the front of the system for accessing the gas trains;

(2) adding davit cranes to the front of the system in order to lift 

components; and (3) reworking the design of the gas trains.

Ultimately, CPI installed the system at the Hutchinson facility, 

with Mr. Harmsen and F.C. on site to supervise the installation. In

January 2015 testing was performed on the system under actual process 

conditions at the Hutchinson facility. The testing demonstrated that the 

system was not satisfying the destruction efficiency performance 

guarantee. Eventually, CPI discovered a gap under a poppet valve, 

which it resolved by welding a ring into place to eliminate the gap. In 

May 2015 3M informed Mr. Harmsen that the oxidizer had been 

measured as satisfying 99%+ destruction efficiency.

As part of the research credit study, Alliantgroup calculated that 

the following supply costs were qualified research expenditures:
16

Component Cost

Barometric damper $4,025

Booster fan (moved VFD sales est to electrical) 89,971

Burner 11,178

Ceramic media 43,862

Combustion air piping 9,451

Combustion blower 4,455

Component location 1,624

Control house 44,995

Ductwork 3,441

Electrical loose parts 5,767

Electrical panel (sales est includes VFD from BF) 91,955

Exhaust stack 50,370

Gas piping 24,461

Gas train 40,619

Hotside bypass damper 15,451

Internal assembly combustion chamber 13,995

Internally insulated ductwork 14,500

Mechanical loose parts 1,156

Total $471,275

[*16]
17

B. Akzo Nobel (#13-07645)

During the years at issue Akzo Nobel Coatings, Inc. (Akzo Nobel), 

manufactured industrial paint at a facility in Huron, Ohio. At the

facility, Akzo Nobel used reactors and tanks for mixing paint, which 

emitted some limited VOC byproducts such as xylene, a paint dilutant. 

For 30 years Akzo Nobel had used a direct thermal oxidizer to destroy 

VOCs. In 2013 Akzo Nobel put out a request for bids on a new oxidizer, 

to which CPI responded. CPI personnel visited the Huron facility, met 

with Akzo Nobel personnel, and learned the specifications for the 

project. CPI personnel then entered the specifications into a 

spreadsheet, which output a potential size of 8,000 SCFM; ultimately, 

CPI determined that the size would be 6,000 SCFM. J.O. was the project 

manager, while Mr. Harmsen was the applications engineer for the 

project.

In December 2013 CPI provided a proposal to Akzo Nobel for a 

regenerative thermal oxidizer, sized at 6,000 SCFM and with 95% 

thermal efficiency. The proposal included a 98% destruction efficiency 

performance guarantee. Akzo Nobel responded by sending to CPI a 

confirmation of purchase order for the supply and installation of a 

regenerative thermal oxidizer, for a total price of $271,000. CPI then 

engaged Lantec to fabricate and supply multilayer ceramic media and 

PRE-Heat to fabricate and supply the oxidizer system and various 

components. Akzo Nobel and CPI personnel conducted a joint hazard 

study of the oxidizer to assist Akzo Nobel personnel in learning the

equipment and understanding the safety protocols involved in operating 

the oxidizer. As a result of the hazards study, CPI made some minimal 

changes to the design of the electrical control system.

In January 2014 R.J. prepared electrical schematic drawings for 

the oxidizer’s control panel. On February 7, 2014, Mr. Harmsen and 

J.O. visited the Huron facility to meet with Akzo Nobel personnel. At 

the meeting, Mr. Harmsen took notes on various potential issues and 

sketched out a basic diagram of what the oxidizer would look like. In 

his notes, Mr. Harmsen identified several potential issues, including 

how fire suppression would be tied into the system and how to design 

the ductwork and new dampers. CPI determined to include in the 

design a flame arrestor, a component that would prevent flame 

transmission.15 CPI personnel later entered specifications into a 

15 A flame arrestor is a failsafe component that impedes airflow and thus 

essentially prevents a potential explosion from continuing past the arrestor’s location.

[*17]
18

[*18] supplier’s sizing program, which output the potential model and 

size for a flame arrestor component. Given the basic requirements of 

the system, J.O. and other CPI personnel calculated the appropriate size 

for various other components, including a media bed, burners, and a

fresh air damper.

CPI engaged MK Systems, Inc., to design and supply a booster 

fan for the oxidizer. CPI engaged Quantum Design for the fabrication 

of a control panel enclosure for the oxidizer, to be based on CPI’s drawing 

set. On February 26, 2014, R.T. visited PRE-Heat’s facility to inspect 

the fabrication of the oxidizer; in a checklist, R.T. signed off on a number 

of different elements of the oxidizer and noted that other elements were 

still work-in-progress.

On March 13, 2014, R.T. visited PRE-Heat’s facility to inspect the 

fabrication. In March 2014 R.T. prepared a general arrangement 

drawing for the oxidizer, which was checked by Mr. Harmsen. This 

drawing incorporated revisions stemming from CPI’s having determined 

what booster fan and combustion blower would be included in the 

system. R.T. subsequently revised the general arrangement drawing of 

the oxidizer in order to change the customer connection and to add a 

handrail and access ladder, respectively, in response to a request from 

Akzo Nobel.

Akzo Nobel performed the installation of the oxidizer at the 

Huron facility, with CPI personnel supervising. In September 2014 a 

third party performed emissions testing on the oxidizer and determined 

that oxidizer’s destruction efficiency was on average 97.93%, just below 

the 98% performance guarantee provided by CPI. As part of its 

warranty, CPI sent service technicians to the facility to potentially make 

adjustments. Ultimately, CPI resolved the issue by conducting its own 

testing and measuring that the parts per million (PPM) of methane in 

the exhaust was only 1.41—well below the alternate efficiency 

guarantee of 25 ppm from CPI’s proposal.16

As part of the research credit study, Alliantgroup also calculated 

that the following supply costs were qualified research expenditures:

16 This was likely due to the low sample size of VOCs at issue, which made it 

difficult to reach 98% at a given point because of the measuring issues.
19

Component Cost

Engineering add-ons $2,086

Booster fan 8,564

Burner 1,822

Ceramic media 4,410

Combustion air piping 1,194

Combustion blower 3,681

Ductwork 78

Electrical boxes 1,296

Electrical loose parts 16,212

Electrical panel 39,906

Exhaust stack 14,634

External assembly combustion chamber 90,240

Fresh air damper 2,994

Gas train 7,502

Internal assembly combustion chamber 10,088

Mechanical loose parts 1,186

Total $205,894

C. HA International (#13-07615) 

During the years at issue HA International, LLC (HAI), 

maintained a manufacturing plant in Oregon, Illinois. At the plant, HAI 

produced frac sand, a chemically infused sand that is used by the 

natural gas industry in the process of hydraulic fracturing (known more 

familiarly as fracking). A number of hazardous chemicals, including 

[*19]
20

[*20] phenolic resins, furfuryl alcohol, hexamine, and ammonia, were

injected into the sand in order to make it useful for fracking purposes.

HAI contacted CPI about potentially designing two oxidizers, as 

HAI’s scrubber equipment at the time was ineffective and had led to an 

enforcement issue with the EPA. C.J. was staffed as the sales engineer 

on the project. In early 2013 CPI employees did initial emissions testing 

at HAI’s plant. CPI employees tested the air exhaust of the plant and 

observed HAI’s manufacturing process. In an emissions study, dated 

April 18, 2013, CPI concluded that HAI’s current scrubber equipment 

was failing to achieve the required 98%+ efficiency and that the jobsite

had a number of issues, including a lack of proper ventilation and the 

buildup on equipment surfaces of resin containing VOCs. The emissions 

study also measured a number of different VOCs present in the process 

airflow, including formaldehyde, phenol, and methanol.

CPI personnel determined that recuperative thermal oxidizers

would be more appropriate than catalytic ones because of the loose sand 

generated by HAI’s manufacturing process, which could degrade a

catalyst, and HAI’s use of chemical compounds that were less 

susceptible to catalytic conversion. CPI personnel determined that 

recuperative thermal oxidizers would allow the loose sand to accumulate 

in the bottom of the machine (where it could later be cleaned out) 

without interfering with performance, whereas other oxidizers would be 

negatively affected by the sand. Considering the VOCs present, CPI 

personnel also determined that airflow’s percentage of LEL, as 

measured, was sufficiently high that the airflow into the oxidizer should 

be diluted. Accordingly, CPI included in the design a fresh air dilution 

valve, a fresh air damper, and a safety system to guard against the risk 

of explosion. In order to accommodate the existing water scrubber, CPI 

included a duct heating system that would evaporate any water vapor 

from the scrubber.

In November 2013 CPI delivered to HAI a revised proposal for the 

design of two 13,700 SCFM recuperative thermal oxidizers with 99% 

VOC destruction efficiency, with C.J. listed as the sales engineer. The 

proposal included the assumed VOC characteristics and levels of the 

process airflow. The proposal stated, inter alia, that the basis of CPI’s 

recommendation was “its experience gained through +30 units in the 

sand resin coating industry.” The referenced “+30 units” that CPI had 

previously designed were oxidizers installed for customers using resincoated sand to coat automotive components. The proposal also discussed 

several of the relevant design characteristics. In relevant part, the 
21

[*21] proposal stated that CPI proposed “to preheat the exhaust gases 

from the scrubber prior to entering the ductwork,” in order to “elevate 

the saturated air stream well above the condensate threshold to help 

reduce both water and resin buildup prior to the pollution control 

equipment.” Accordingly, the proposal also stated that CPI would 

supply a direct fired duct heater system designed to heat the water 

vapor from the scrubber exhaust. Finally, the proposal included a 99% 

VOC destruction efficiency performance guarantee.

Also in November 2013 HAI issued a purchase order to CPI for 

the oxidizer, with attached terms and conditions and a total price of 

$1,898,750. Clause 14 of the terms and conditions, entitled “Intellectual 

Property Rights,” stated as follows:

HA is entitled to all documents, drawings, specifications, 

calculations and other information carriers with respect to 

the performance of the activities of Contractor under the 

Order. HA will be solely entitled to all intellectual property 

rights (including patents) created during the performance 

of the obligations under the Order. In case the intellectual 

property rights are with both Contractor and HA, 

Contractor will assure and guarantee that HA has a full 

license to use these without any conditions for an indefinite 

period of time.

Clause 20 of the terms and conditions stated that the terms would “be 

construed in accordance with the laws of the State of Ohio without 

application of its conflict of laws provisions.” On November 18, 2013, 

CPI issued to HAI a sales order for the oxidizer.

In early January 2014 G.B. completed an initial general 

arrangement drawing for the oxidizer. R.J. completed a P&ID drawing 

for the oxidizer as well as electrical schematic drawings for a control 

panel. CPI engaged PRE-Heat to fabricate and assemble the thermal 

oxidizer and other components and Quantum Design to fabricate two 

control enclosures. On April 17, 2014, Quantum Design issued to CPI a 

project scope change form, noting several changes, including an 

increased enclosure size in order to accommodate an air conditioner.

After fabrication was completed, the oxidizer parts were shipped 

to HAI’s facility for installation. In June and July 2014 R.J. and another 

CPI employee conducted quality inspections on the oxidizer’s electrical 

systems and oversaw startup.
22

[*22] After installation, testing of the oxidizer revealed another issue 

in which several tubes in the heat exchanger overheated because of

inadequate airflow. CPI resolved the issue by replacing and rewelding 

the tubes and then replacing the baffles installed with a different air 

splitting component, in order to achieve better airflow uniformity. 

Testing of the oxidizer also revealed that vibration within the oxidizer 

had ruptured some pressure release valves. CPI resolved the issue by 

cutting down the length of the damper blades, which were causing the 

excess vibration.

As part of the research credit study, Alliantgroup calculated that 

the following supply costs were qualified research expenditures:
23

Component Cost

Booster fan $45,330

Burner 10,378

Combustion air piping 11,883

Combustion blower 3,914

Duct heater 44,986

Electrical panel 39,960

Exhaust stack 18,690

Gas train 30,443

Heat exchanger 283,951

Internal assembly combustion chamber 44,952

Mechanical loose parts 861

Seal air blower 1,833

Seal air blower piping 633

Total $537,813

D. 3M Hartford (#13-07611)

During the years at issue, 3M manufactured different types of 

tape at a facility in Hartford City, Indiana. 3M initially contacted CPI 

to assist in replacing a failing heat exchanger in one of their existing 

thermal recuperative oxidizers. The production process at the Hartford 

facility emitted VOC byproducts such as heptanes and hexanes. These 

VOCs were attached to silicone molecules, which presented an issue, as 

oxidizing the VOCs would trigger the formation of silicone dioxide (i.e., 

sand) that needed to be cleaned out of the oxidizer. Upon examination 

of the existing oxidizer, CPI personnel determined that the system was 

beyond the point of failure and recommended that 3M replace it. C.H.

was the sales engineer on the project.

[*23]
24

[*24] As with the Hutchinson project, 3M provided extensive

specifications and required criteria for a potential oxidizer, including the 

maximum exhaust temperature, type of VOCs at issue, and required 

destruction efficiency. CPI personnel considered the process airflow 

volume specification provided by 3M to be lower than the minimum 

airflow needed for the oxidizer. Accordingly, CPI personnel determined 

to include in the design a recirculation duct that would recycle cleaned 

air from the exhaust stack back to the process inlet to achieve the 

necessary minimum airflow.

In November 2013 CPI submitted a proposal to 3M for a 

recuperative thermal oxidizer, which it described as a Quadrant SRSSilicone Series. The proposal included the process airflow 

characteristics, as provided by 3M, such as the VOCs at issue and the 

range of concentrations. The proposal stated, in relevant part, that the 

proposal was based on the system’s “ability to offer assured destruction 

without worry about Silicone plugging while offering the lowest 

maintenance costs and highest uptime reliability.” The proposal also 

stated that the system was “designed to minimize the effects of SiO2

build up for fast and efficient cleanout,” by including ports to 

“accommodate future inspections and cleaning” out of the SiO2 

particulate. The proposal included a standardized page discussing the 

problem of silicone dioxide and stating that the Quadrant SRS Silicone 

Series thermal oxidizer had been developed “to provide an economical 

answer to the disastrous effects of SiO2.” CPI had developed the 

Quadrant SRS Silicone Series over a period of years and considered it to 

be a unique, proprietary technology that it could market to the specific 

industry of manufacturers using silicone coating. Also in November 

2013 CPI issued a sales order to 3M for the thermal oxidizer, for a total 

price of $1,569,700. The terms of the master agreement governed CPI’s 

contract with 3M on the Hartford project.

CPI personnel, including Mr. Betz, ran a number of calculations 

as to the sizing of components, such as the combustion blower and the 

burners. In December 2013 G.B. completed an initial general 

arrangement drawing for the oxidizer, which was checked by J.Y. In

February 2014 R.J. completed a P&ID drawing for the oxidizer. CPI 

engaged PRE-Heat for the fabrication and supply of the recuperative 

oxidizer system and components. In April 2014 R.J. completed control 

enclosure schematic drawings for the oxidizer. CPI engaged Quantum 

Design for the fabrication of control panel enclosures for the oxidizer,

based on CPI’s drawing set.
25

[*25] In June 2014 3M provided CPI with revised information about the 

process airflow volume, which allowed CPI personnel to make the 

recirculation duct component smaller. Also in June 2014 Mr. Harmsen 

contacted a 3M representative to provide notice of a scope change; 3M 

personnel had become concerned that the sand particulate would affect 

the booster fan, so CPI proposed to change to a radial blade fan that 

could handle the particulate. Also in June 2014 CPI personnel visited 

PRE-Heat to inspect the progress on the fabrication, at which point the 

oxidizer was nearly finished. After installation at the Hartford City 

facility, the oxidizer passed third-party compliance testing.

As part of the research credit study, Alliantgroup calculated that 

the following supply costs were qualified research expenditures:
26

Component Cost

Booster fan $49,746

Burner 23,226

Combustion air piping 615

Ductwork 521

Electrical loose parts 2,047

Electrical panel 64,452

External assembly combustion chamber 10,002

Field assembly 10,239

Gas train 45,880

Heat exchanger 43,710

Hot side bypass damper 19,539

Seal air blower 9,864

Barometric relief damper 4,392

Total $284,233

E. C&D Zodiac (#13-07583)

During the years at issue, Zodiac Aerospace Composites & 

Engineered Materials (C&D Zodiac) manufactured composites for 

commercial aircraft at a facility in Marysville, Washington. C&D 

Zodiac’s manufacturing process generated VOC byproducts such as 

phenol and formaldehyde. In 2013 Messrs. Betz and Harmsen visited 

the Marysville facility to measure flow rates and then delivered to C&D 

Zodiac an engineering study stating that their existing oxidizer had 

insufficient volume. Before submitting a proposal to C&D Zodiac, Mr. 

Harmsen input the measured values into a spreadsheet, which output 

the potential BTUs per pound and pounds per hour of potential VOCs in 

the process airflow, which would in turn determine the necessary size of 

[*26]
27

[*27] the oxidizer. Using various process airflow measurements, Mr. 

Harmsen determined that the oxidizer size would be smaller than he 

had anticipated and thus would allow for a more efficient heat 

exchanger and avoid the need for a hot gas bypass. C.H. was the sales 

engineer on the project.

In October 2013 CPI submitted a proposal for a 9,400 SCFM 

regenerative thermal oxidizer. The proposal described the VOC levels 

and characteristics of the process airflow. The proposal also included a 

98% destruction efficiency performance guarantee. Also in October 2013 

CPI issued a sales order to C&D Zodiac for the thermal oxidizer, for a 

total price of $374,500. On November 4, 2013, the CPI project team, 

which included Messrs. Betz, Harmsen, J.O., and C.H., held an internal 

kickoff meeting to discuss the project and particular elements of the

oxidizer design. At the meeting, Mr. Harmsen discussed the inclusion 

of a duct heater in the design, in order to heat the process air to an extent 

sufficient to avoid buildup of resin condensation in the ducts.

CPI engaged Quantum Design to fabricate and supply a control 

panel enclosure for the oxidizer. In late November 2013 J.O. exchanged 

emails with David Foster, the project manager at C&D Zodiac, 

regarding minor changes to the design drawings. At J.O.’s request, Mr. 

Foster provided the earthquake rating for the Marysville area, which 

had to be accounted for in the design of the exhaust stack. In late 

November 2013 J.O. prepared an initial general arrangement drawing 

and a P&ID drawing for the oxidizer and emailed them to Mr. Foster for 

approval. After reviewing the drawing set, Mr. Foster informed J.O.

that the P&ID drawing’s placement of the Marysville facility’s print 

room was inaccurate and should be updated. In December 2013 the 

P&ID drawing was revised per C&D Zodiac’s comments.

CPI engaged Lantec to fabricate and supply multilayer ceramic 

media, PRE-Heat to fabricate and supply a regenerative thermal 

oxidizer and various components, and IVI North to fabricate and supply 

an exhaust stack. In December 2013 C.D. completed initial electrical 

schematic drawings for a control panel. On February 16, 2014, R.T.

visited PRE-Heat to inspect the oxidizer and media assembly and poppet 

valve housing. On February 26 and March 13, 2014, R.T. again visited 

PRE-Heat to inspect various components in the fabrication process.

In March 2014 R.J. provided Quantum Design with updated 

electrical schematic drawings to be revised in order to comply with thirdparty certification standards. CPI engaged Quantum Design to have its
28

[*28] technicians travel to PRE-Heat’s facility and make additional 

revisions to the control system to meet certification standards. During 

installation at the Marysville facility, CPI discovered that the control 

panel enclosure door was too close to the booster fan; CPI moved the 

control panel enclosure over to resolve the issue.

As part of the research credit study, Alliantgroup calculated that 

the following supply costs were qualified research expenditures:
29

Component Cost

Booster fan $22,668

Burner 2,165

Ceramic media 13,200

Combustion air piping 1,693

Combustion blower 3,418

Electrical boxes 1,298

Electrical loose parts 1,317

Electrical panel 68,456

Exhaust stack 19,835

External assembly combustion chamber 6,202

Field assembly 163

Fresh air damper 3,134

Gas train 7,059

Internal assembly combustion chamber 18,595

Engineering add-ons 1,781

Total $170,984

F. Teva (#14-07808)

During the years at issue, Teva Pharmaceuticals USA (Teva)

operated a pharmaceutical facility in Salt Lake City, Utah. In 2014

Teva was in the process of installing a new manufacturing line that 

required pollution control, pursuant to EPA standards. The primary 

VOC byproduct of Teva’s manufacturing process was ethanol.

 CPI was invited to bid on the project and determined that a 

catalytic oxidizer would be optimal. CPI personnel reached this 

[*29]
30

[*30] determination partly because of the limited space at Teva’s 

facility. Teva also provided CPI with specifications about the 

characteristics of the airflow exhaust at the Salt Lake City facility. In 

April 2014 CPI submitted a proposal for a catalytic oxidizer, described 

as a Vector series. The proposal included extensive specifications and a 

performance guarantee that total VOC concentration would be reduced 

by at least 98%. The proposal also stated that the system would include 

a self-cleaning ceramic guard bed; after discussions with Teva, CPI had 

determined that the guard bed would be necessary to protect the 

catalyst from other particulates in the facility’s airflow. T.S. was the 

sales engineer on the project.

In May 2014 Teva and CPI exchanged purchase and sale orders 

for the catalytic oxidizer, for a total price of $217,600. The purchase 

order attached Teva’s standard terms and conditions; clause 14 provided 

that CPI would “not use, sell, loan or publicize any of the tools, 

specifications, blueprints, designs or artwork supplied or paid for by 

Buyer for the fulfillment of this order without Buyer’s written consent.” 

Similarly, clause 15 provided that “[a]ll tools, dies, molds, printing 

plates, mechanical, etc. created for use on this order shall be the 

property of Buyer, and Buyer may withdraw them from Sellers’s 

premises on demand in writing.”

CPI personnel calculated the size of components, such as the 

catalyst bed chamber, the exhaust stack, and the burners, using the 

information about the process airflow provided by Teva. CPI engaged

PRE-Heat for the fabrication and assembly of a heat exchanger, exhaust 

stack, and various other components. In June 2014 C.D. completed 

electrical schematic drawings for a control panel enclosure. 

Subsequently, CPI engaged Quantum Design to fabricate and supply a

control panel and enclosure based on CPI’s drawings. From June to 

October 2014 CPI purchased a number of physical components and 

materials from vendors, with shipping typically made to PRE-Heat.

PRE-Heat completed fabrication and assembly of the oxidizer, at 

which point CPI personnel visited its facility to conduct “a final quality 

audit.” The quality audit included dye penetrant testing of the oxidizer 

body and testing of the control system. The oxidizer was then shipped 

to Teva’s facility in Salt Lake City. Teva personnel installed the oxidizer

at the Salt Lake City facility, with CPI personnel present to supervise. 

After installation, the oxidizer’s heat exchanger was preheating too 

high. CPI resolved this issue by modifying the control system in order 

to introduce additional fresh air into the process to bring down the 
31

[*31] temperature via a damper on the inlet side of the system fan. The 

system later passed its third-party compliance testing.

As part of the research credit study, Alliantgroup calculated that 

the following supply costs were qualified research expenditures:

Component Cost

Booster fan $8,959

Burner 1,960

Catalyst – 8800 = ECO#1 3000 11,880

Combustion air piping 1,170

Combustion blower 1,441

Electrical panel 25,626

Exhaust stack 1,141

Fresh air damper 2,744

Gas train 8,323

Heat exchanger 56,666

I Asbly combustion chamber 15500 = ECO#1 500 6,200

PIT Sitrans 963

Tee damper 3,107

Total $130,178

G. Mitsubishi (#14-07899)

During the years at issue. Mitsubishi Electric Automotive 

America, LLC (Mitsubishi), operated a facility in Mason, Ohio, that 

manufactured motor starters and other engine components for engine 

suppliers. Mitsubishi’s manufacturing process generated the chemical 

styrene as a VOC byproduct. Mitsubishi’s existing 12,000 SCFM 

catalytic oxidizer system had been supplied by CPI 14 years earlier. The 
32

[*32] catalytic oxidizer had been experiencing a buildup of condensates 

in recent years, creating a maintenance problem and reducing the 

system’s capacity to approximately 10,000 SCFM. Mitsubishi requested 

that CPI provide suggestions for a larger (either 35,000 or 25,000 

SCFCM), more efficient, and maintenance-friendly oxidizer, as it 

planned to expand the Mason facility. Using the two potential airflow 

volumes, Mr. Harmsen performed simple calculations for the potential 

size of several components.

In July 2014 CPI submitted a revised proposal for either a 35,000 

or a 25,000 SCFM regenerative thermal oxidizer. The proposal 

described the process airflow as “styrene with a heat content of 

approximately 17,000 BTU/lb.” The proposal also included a 98% 

destruction efficiency performance guarantee. In August 2014 

Mitsubishi sent CPI a purchase order for the 35,000 SCFM oxidizer, for 

a total price of $675,750. Mr. Betz prepared a P&ID drawing for the 

oxidizer that was based on CPI’s existing knowledge of the Mitsubishi 

facility and Mitsubishi’s expansion plans. C.D. completed initial

electrical schematic drawings for a control panel. S.F. completed an 

initial general arrangement drawing for the oxidizer.

CPI engaged Lantec to fabricate and supply multilayer ceramic 

media, Quantum Design to fabricate and supply the control panel 

enclosure of the oxidizer, and both Global Fab and PRE-Heat to fabricate 

and supply various components of the oxidizer. CPI engaged a general 

contractor located near Mitsubishi to perform the installation of the 

system at the facility, under the supervision of Messrs. Harmsen and 

E.M.

As part of the research credit study, Alliantgroup calculated that 

the following supply costs were qualified research expenditures:
33

Component Cost

Booster fan $31,537

Burner 44,333

Ceramic media 47,880

Combustion air piping & weather hood 2,710

Combustion blower 3,484

Electrical loose parts 2,112

Electrical panel – SEE EXCEL for details 31,067

Exhaust stack 21,870

Fresh air damper 4,142

Gas train 11,500

Mechanical loose parts 3,328

BF outlet exp jnt 967

BF VFD NEMA 1 250HP w/disconnect 15,543

Engineering add-ons 4,484

Ex stack exp jnt 1,377

Poppet valve assemblies 26,849

Total $253,183

H. 3M Monrovia (#14-07784)

During the years at issue 3M manufactured silicone rubber 

gasketing for the aerospace industry at a facility in Monrovia, 

California. Before engaging CPI, 3M used an existing recuperative 

thermal oxidizer supplied years earlier by a different oxidizer 

contractor. As of 2013 that oxidizer was no longer meeting California 

environmental regulatory standards. In February 2013 3M provided 

[*33]
34

[*34] CPI with an extensive and detailed list of required specifications 

for a 12,000 SCFM recuperative thermal oxidizer. The specifications 

included the requirements that the oxidizer “include design features 

necessary for cleaning of SiO2 dust from the heat exchanger and 

combustion chamber”. The specifications also provided information 

about the process airflow, including minimum and maximum airflow 

rates, temperatures, solvent rates, and the VOC at issue (toluene).

In April 2014 CPI submitted a revised proposal, which 3M 

accepted via a purchase order, for a total price of $1,277,400. The final 

proposal stated that CPI would supply 3M with a silicone recuperative 

oxidizer from CPI’s Quadrant SRS product line. The proposal also 

included a 99% destruction efficiency performance guarantee. CPI also 

provided 3M with general arrangement and P&ID drawings for the 

oxidizer. The terms of the master agreement governed CPI’s contract 

with 3M on the Monrovia project. Mr. Harmsen was the lead 

applications engineer on the project and assisted with project 

management.

3M had informed CPI personnel that the oxidizer would need to 

meet California state law requirements with respect to its emissions. In 

particular, the specifications provided by 3M noted the requirement for 

low nitrogen oxide-emitting burners. In May 2014 G.B. completed an 

initial general arrangement drawing for the oxidizer, which was checked 

by F.C. In June 2014 CPI personnel input the provided specifications 

into a spreadsheet, which output a possible size for the burner. CPI also 

submitted its design drawings to a third party, Larson Engineering, Inc. 

(Larson), for review; Larson reviewed the drawings for the purpose of 

determining whether they complied with California requirements with 

respect to seismic activity. Also in June 2014 Larson issued a report 

certifying the drawings as acceptable. Similarly, CPI submitted the 

design drawings to a different third-party engineer who performed 

calculations and made suggestions as to how the stack could comply with 

California requirements. In July 2014 R.J. prepared electrical 

schematic drawings for the oxidizer. Ultimately, after consulting with 

Maxon Corp., CPI’s typical burner supplier, CPI personnel included a 

low emissions burner in the design. In August 2014 CPI submitted to 

3M several design drawings, including the general arrangement 

drawing, for approval.

CPI engaged IVI North to fabricate and supply an exhaust stack, 

PRE-Heat to fabricate and supply the oxidizer and various components,

and Quantum Design to modify the existing control panel enclosure and 
35

[*35] fabricate a new control panel. In July 2014 R.J. completed 

electrical schematic drawings for a control panel enclosure. In 

September 2014 CPI and 3M conducted a joint process hazard analysis

(PHA), to review the design drawings and relevant possible safety issues 

at the Monrovia facility. Mr. Harmsen and F.C. participated on CPI’s 

side. As a result of the PHA, CPI made several design changes to the 

design drawings.

In February and March 2015 CPI submitted to 3M additional 

revised design drawings for approval. After assembly was completed, 

the oxidizer was installed at the Monrovia facility by a third-party

contractor, under the supervision of F.C. At some point after

installation, an inspection of the oxidizer by 3M found that the cone 

installed around the burners was cracking and failing; pursuant to the 

contractual warranty, CPI repaired the problem.

As part of the research credit study, Alliantgroup calculated that 

the following supply costs were qualified research expenditures:
36

Component Cost

Barometric relief damper $8,011

Burner 7,565

Combustion air blower 7,777

Combustion air piping 38,183

Control house 33,866

Davit arm 2,724

Ductwork 5,425

Electrical panel 54,920

Exhaust stack 62,068

Field assembly 12,927

Filter box 14,996

Filter box dampers 21,649

Gas train 30,690

Hardware & gasket 1,988

Heat exchanger 352,290

Process booster fan 50,352

Seal air blower 5,929

Total $711,360

I. Celanese (#14-07852)

During the years at issue, Celanese Corp. (Celanese) 

manufactured ethylene-vinyl acetate beads for use in other chemical 

manufacturing processes at a facility in Edmonton, Alberta, Canada. 

[*36]
37

[*37] The manufacturing process generated VOC byproducts of acetic 

acid, ethylene, vinyl acetate, and naphtha.

In August 2013 Celanese issued to CPI terms and conditions for 

a project, which included a clause 11 entitled “Rights in Deliverables; 

No License.” Clause 11 stated that CPI agreed “that any deliverables or

other work product arising from the Services shall be the property of 

and owned by Celanese, and shall be considered Confidential 

Information hereunder.” Clause 11 further stated in relevant part that 

CPI “hereby assigns to Celanese any and all (a) inventions, discoveries 

or improvements thereof, patentable or otherwise” and “(b) all other 

copyright and derivatives, trade secret and other proprietary rights that 

arise out of the performance of the Services or that are applicable to any 

deliverables under the Purchase Order.” Clause 11 further stated that 

any deliverables that are eligible for copyright protection “shall be 

considered “work made for hire” and Celanese will be considered the 

author of such work.” Finally, clause 11 provided that, in the event that 

such deliverables were “deemed for any reason not to be a work for hire,” 

CPI “hereby assigns all rights, title and interest in the copyright of such 

work” to Celanese.

Next, clause 12 provided restrictions on Confidential Information, 

requiring CPI to “hold the Confidential Information in strictest 

confidence” and “not disclose the Confidential Information, or cause or 

allow it to be disclosed to any third party or use the Confidential 

Information for any purpose other than as expressly contemplated by 

the Purchase Order. Clause 12 provided that CPI could “not disclose 

any Confidential Information to any third party . . . unless and until 

Celanese has furnished written consent.”

In December 2013 WorleyParsons, an engineering firm retained 

by Celanese to supervise the project, provided CPI with an extensive 

report detailing the specifications and requirements for the oxidizer. 

The report stated that Celanese required a regenerative thermal 

oxidizer with destruction efficiency of 98%; the report also provided a 

design basis for the oxidizer, which provided a number of relevant 

measurements and calculations (including a minimum winter 

temperature of −46 degrees Celsius and the various concentrations of 

VOCs in the airflow), and a drawing setting out the process flow for the 

oxidizer. The report also provided a list of Celanese’s preferred vendors 

for the various components and control systems. In addition, Celanese 

provided CPI with copies of (1) its standard engineering practices for 
38

[*38] control systems; (2) standard maintenance procedures for bolted 

joint assembly; and (3) electrical specifications.

CPI began work on a proposal. CPI identified several potential 

issues, for example, the extreme winter temperatures in Edmonton, 

which might require design changes. Using the information provided by 

Celanese and WorleyParsons, CPI personnel input the provided VOC 

levels into Bessy spreadsheets, which calculated that the LEL of the 

airflow would be 4.2%.17 That low LEL allowed CPI to omit a hot gas 

bypass from the design. Similarly, CPI personnel entered the provided 

specifications into a spreadsheet, which output the appropriate size of 

the fan components. With respect to the gas train component, on 

January 8, 2014, Mr. Betz emailed a representative at Maxon to ask 

about how to design the component for use in a minimum temperature 

of −50.8 degrees Fahrenheit. The Maxon representative responded that 

CPI should try to work with the customer to have the component meet 

−45 or −40 degrees Fahrenheit minimum temperatures instead, because 

of the difficulty in supplying components that met such low 

temperatures.

In May 2014 CPI submitted a revised proposal to Celanese. In 

the proposal, CPI stated that it “accepts Celanese terms and conditions 

8-1-2013 with the termination language detailed on page 36 of this 

proposal.” The proposal also stated in relevant part that the system was 

being “designed for outdoor installation and a temperature rating of −40

[degrees] C (−40 [degrees] F) [sic].” In June 2014 Celanese issued a 

purchase order to CPI for the oxidizer, for a total price of $897,000.18

In July 2014 S.F. completed an initial general arrangement 

drawing for the project, which was checked by F.C. Also in July 2014, 

R.J. completed P&ID drawings for the oxidizer. CPI engaged Quantum 

Design to fabricate a control panel enclosure, Lantec to supply a ceramic 

heat exchanger, and IVI North to fabricate and supply an exhaust stack

for the system, including “[e]ngineering and design (fabrication 

drawings).” In August 2014 R.J. completed initial electrical schematic 

17 CPI personnel also entered different combinations of VOCs at higher 

volumes into several alternative Bessy spreadsheets to account for a possible worstcase scenarios, which resulted in an 8% LEL.

18 In February 2015, Celanese issued a change order, memorializing an 

additional $33,000 in unplanned services to be performed by CPI. Those services 

largely related to an apparent misunderstanding between the parties as to the scope 

of CPI’s work on the electrical system.
39

[*39] drawings for a control panel. R.J. later requested that Quantum 

Design complete the final design drawings for the electrical schematics, 

in part because CPI’s work was being closely scrutinized by 

WorleyParsons. Quantum Design provided CPI with a quote to design

the control enclosure for the oxidizer. Under its terms Quantum Design 

would provide engineering design and drawings “using CPI provided 

standard templates and nameplates.” As the project progressed, 

WorleyParsons and Celanese requested revisions to the design, which 

CPI incorporated. In September 2014 R.J. traveled to Canada for 

meetings with Celanese representatives; in those meetings, Celanese 

requested a number of changes to the design of the control panel, which 

R.J. conveyed to Quantum Design.

As of early February 2015 the oxidizer was not yet assembled or 

installed. Celanese had informed CPI that it needed to meet Canadian 

building code standards for the control house component of the system, 

which delayed the project; eventually CPI and Celanese agreed to 

purchase a control house in Canada and have CPI pipe and wire it to 

meet the Canadian standards. In early April 2015 R.J. prepared a 

document that described the details of the control house. At some point 

thereafter, the oxidizer was installed at the Celanese facility by a thirdparty contractor. In March 2016 the oxidizer system underwent thirdparty emissions testing and failed the efficiency requirements. As with 

the 3M Hutchinson project, CPI discovered that a poppet valve was 

failing to seal and sent a service technician to fix it.

As part of the research credit study, Alliantgroup calculated that 

the following supply costs were qualified research expenditures:
40

Component Cost

Booster fan $22,056

Burner 6,416

Ceramic media 32,106

Cold face support 89,288

Combustion air piping 1,680

Combustion blower 4,894

Control house 4,936

Electrical loose parts 7,196

Electrical panel 95,371

Exhaust expansion joint 837

Exhaust stack 43,550

Fresh air damper, pneu. act. 4,255

Gas train 4,382

Isolation damper, pneu. act. 5,801

Manual balancing damper 1,344

Mechanical loose parts 2,732

Media chamber 28,408

Poppet housing 25,261

Poppet valve assemblies 23,044

Total $403,556

[*40]
41

J. Smalley (#14-07658)

During the years at issue, Smalley Steel Ring Co. (Smalley) 

manufactured heat-treated fasteners for aircraft engines at a facility in 

Lake Zurich, Illinois. Smalley’s heat-treating process generated oil and 

grease byproducts that burned off into visible smoke. Before contacting 

CPI, Smalley relied upon condenser equipment, evocatively known as 

Smog-Hogs, which intake and cool smoke-filled air, causing the oil and 

grease droplets to condense, before then releasing the cleaned air back 

into the manufacturing area. However, the condenser process created 

an oil byproduct that could leak, presenting a potential quality and 

maintenance problem that Smalley wished to avoid. CPI personnel 

visited the jobsite, took measurements of the airflow, and ran tests. 

Because of the variety of chemical compounds CPI found present at the 

site and constraints on using blowers at the site, CPI determined that a 

thermal oxidizer with a vertical combustion chamber would be 

optimal.19

In December 2013, after completing onsite measurements, CPI 

submitted a proposal for an 800 SCFM direct thermal oxidizer, 

described as a “smoke abatement” system, which Smalley accepted. The 

proposal stated, in relevant part, that the system would convert the oil 

smoke and mist emissions to carbon dioxide and water vapors, creating 

a “cleaner, more maintenance-free abatement system.” Also in 

December 2013 Smalley sent CPI a purchase order for the oxidizer, for 

a total price of $153,500; the purchase order attached terms and 

conditions. Clause 6 of the terms and conditions provided: 

Seller will keep confidential all information, drawings, 

specifications or data furnished by Buyer and shall not 

divulge or use such information, drawings, specifications or 

data for the benefit of any third person or entity or for any 

purpose other than the performance of this Order. Except 

as required for the performance of this Order, Seller will 

not make copies or permit copies thereof to be made 

without the prior written consent of Buyer; Seller will, 

upon completion of this Order, return such information, 

drawings, specifications and data to Buyer and make no 

further use, either directly or indirectly, of any such data 

19 A vertical combustion chamber is essentially akin to a chimney, in which hot 

air is induced to rise upward. 

[*41]
42

or of any information derived therefrom without obtaining 

Buyer’s prior written consent. 

Clause 10 of the terms and conditions provided in relevant part: 

Unless Buyer and Seller otherwise agree in writing, the 

following provisions shall apply to any tools, tooling, 

patterns, equipment, materials or other properties used in 

the manufacture of the Goods for Buyer or in the 

performance of this Order, that are either supplied to 

Seller by Buyer or have been acquired by Seller and 

specifically paid for by Buyer. All such properties 

(including scrap) shall hereafter be referred to as “BuyerOwned Property”. (a) Seller shall have the right to use 

Buyer-Owned Property without payment for usage as 

required in the performance of this Order or other work for 

Buyer, but shall not use Buyer-Owned Property in the 

performance of any other work without prior written 

approval of the Buyer. Title to all Buyer-Owned Property 

shall at all times remain with Buyer. Title to all BuyerOwned Property which is procured or manufactured by 

Seller for Buyer shall be fully invested in Buyer upon 

payments for same by Buyer. 

In January 2014 CPI personnel collected samples of the oil 

condensation, coated a steel sample with the condensation, and then 

placed the sample in a furnace at the Smalley facility, in order to observe 

at what temperature the smoke emissions from the condensation were 

no longer present. CPI personnel also entered specifications into 

spreadsheets and performed calculations in order to size components, 

such as the combustion chamber and the burners. Also in January 2014

R.J. completed electrical schematic drawings for a control panel. The 

control system was designed to automatically turn the burners on and 

off according to whether Smalley’s heat furnaces were generating visible 

smoke emissions. CPI engaged Quantum Design to fabricate a control 

panel enclosure and Modern Equipment Co. (Modern Equipment) to 

fabricate and assemble the oxidizer. After the oxidizer was assembled, 

a quality audit conducted by CPI personnel revealed that Modern 

Equipment had not followed CPI’s drawings closely enough, leading to 

some components’ needing to be reassembled by CPI personnel. CPI 

personnel then installed the oxidizer at the Smalley facility. After 

installation, CPI personnel modified the control system’s sequence of 

[*42]
43

[*43] operations to account for the system’s delay in responding to 

measured temperatures.

As part of the research credit study, Alliantgroup calculated that 

the following supply costs were qualified research expenditures:

Component Cost

Burner $1,462

Combustion air piping 1,356

Combustion blower 1,374

Electrical panel 10,504

Gas train 2,337

Total $17,033

K. Isola I—IR (#14-07607)

During the years at issue Isola Laminate Systems Corp. (Isola) 

manufactured plastic and fiberglass boards at a facility in Chandler, 

Arizona. That manufacturing process generated VOC byproducts such 

as various plasticizers and phenolic resin. Before engaging CPI, Isola 

used an older thermal oxidizer (supplied previously by CPI) that had

caught fire and was no longer achieving the necessary destruction 

efficiency.

In October 2013 CPI submitted a proposal for replacing various 

components of the oxidizer. The proposal provided extensive 

specifications for the oxidizer, including sizes and manufacturers for the 

various components, and provided a 99% destruction efficiency 

guarantee. The proposal specifically noted that the design would 

incorporate several enhancements that had “proved very successful” on 

similar recent oxidizers. Finally, the proposal noted that the 

replacement components would “maintain the same footprint as the 

original making the installation as seamless as possible and providing 

little disruption to the process.” After some revisions, Isola accepted 

CPI’s proposal. In November 2013 Isola sent CPI a purchase order for 

the thermal oxidizer equipment, for a total price of $480,000.
44

[*44] CPI personnel performed calculations to determine the sizing of 

components, such as the combustion chamber and the burner. After 

sizing the fan component, CPI sought to reduce the risk of resins’

catching fire by engaging a subcontractor to make a hinged fan that 

could be easily cleaned. After installation, CPI encountered an issue 

where a leg of the system had incurred some shell fracturing due to heat. 

CPI resolved this by reinforcing the leg. The system passed its thirdparty compliance testing and was accepted by the customer.

As part of the research credit study, Alliantgroup calculated that 

the following supply costs were qualified research expenditures:

Component Cost

Booster fan $11,931

Burner 8,976

CO#1 EXP JT MB 22,656

Combustion blower 3,562

Compressed air piping 487

Electrical boxes 553

Gas train 6,986

Mechanical loose parts 293

Total $55,444

L. Isola II—SR (#14-07890)

At this plant, located at the same facility as the Isola I project,

Isola manufactured coating for plastic and fiberglass boards. CPI 

determined that a self-recuperative thermal oxidizer, in which the heat 

exchanger is separated from the combustion chamber, would be optimal. 

In June 2014 Mr. Betz completed an initial P&ID drawing for the 

oxidizer. In June 2014, CPI sent Isola a revised proposal for a 6,000 

SCFM recuperative thermal oxidizer. The proposal described the 

applicable VOCs as including acetone, MEK, butanol, PM, PMA, and 

PNB and described the maximum air temperature and maximum VOC 
45

[*45] concentration of the process airflow. The proposal provided a 99% 

destruction efficiency performance guarantee. C.H. was the sales 

engineer on the project.

In July 2014 Isola and CPI exchanged purchase and sale orders

for the thermal oxidizer, for a total price of $628,200. CPI personnel 

performed calculations as to the sizing of components, such as the 

combustion chamber and the burners. CPI revised their sizing 

calculations and design several times because of the system’s potentially 

not fitting in the allocated space of Isola’s facility. In September 2014 

R.T. completed an initial general arrangement drawing for the oxidizer, 

which was submitted to Isola for approval on September 22, 2014. CPI 

engaged PRE-Heat to fabricate and supply the oxidizer system 

(including an exhaust stack) and engaged Quantum Design to fabricate 

and supply the control panel enclosures. After installation of the 

oxidizer by the customer, CPI’s supervising startup technicians 

discovered an air pressure issue that required modifications to the 

control system programming.

As part of the research credit study, Alliantgroup calculated that 

the following supply costs were qualified research expenditures: 
46

Component Cost

(3) VFD’s $5,953

BF DPS & enclosure 307

BF inlet PSH 1,175

BF inlet PT & enclosure 880

BF outlet EXP J S/S 912

Booster fan NON insulated 10,982

Ceramic saddle 6,164

Cleanout platform and ladder 8,610

Flame safety 681

Fresh air damper & actuator 18” 4,993

Hx DPS 245

Inlet plenum w/door 3,851

Insulated inlet 14,381

Isolation dampers & act (2) 26” 7,823

Oxidizer fabrication 176,210

Oxidizer fasteners 1,206

PLC 29,760

Pre-filter 149

Press control dampers & act (2) 22” 9,440

Primary heat exchanger 55,602

Secondary heat exchanger 25,096

Secondary Hx EXP joint 3,356

Secondary Hx PIT 1,125

Secondary Hx TE 76

Thermocouples 253

Burner 10,258

Gas train 5,593

Manual shut off valve 260

Seal air blower (heat exchanger) 2,701

Engineering add-ons 79

Exhaust stack ECO #1 11,553

Total $399,674

[*46]
47

M. Goodyear Lawton (#14-07925)

During the years at issue, the Goodyear Tire & Rubber Co. 

(Goodyear) operated a tire manufacturing facility in Lawton, Oklahoma. 

As of 2014 Goodyear used an older regenerative thermal oxidizer at the 

Lawton facility, which had been experiencing regular repair issues with 

its heat exchanger because of clogging from talcum powder used in the 

manufacturing process. The primary VOC byproduct of the Lawton 

facility was ethanol. 

CPI was invited to submit a proposal to replace the existing 

oxidizer. In August 2014 CPI submitted a revised, final proposal for a 

50,000 SCFM regenerative thermal oxidizer for a total price of $827,500, 

described as a TRITON system, which Goodyear accepted. The proposal 

memorialized the characteristics of the process airflow at the Lawton 

facility, including temperature, volume, heat content, and type of VOC. 

The proposal also stated that the process airflow would be ducted to an 

existing mixer dust system to filter out particulate before it reached the 

oxidizer inlet. Finally, the proposal included a 98.5% destruction 

efficiency performance guarantee. Goodyear accepted the proposal.

After the acceptance of the proposal, Mr. Harmsen determined

that a more expensive, plug-resistant type of ceramic heat exchanger 

might be optimal for the project, as it would allow particulate to more 

easily pass through. Mr. Harmsen proposed the different heat 

exchanger to Goodyear, which agreed to incorporate it into the design at 

a higher cost. In September 2014 C.D. prepared an initial P&ID 

drawing, which was checked by F.C. Also in September 2014 S.F.

prepared an initial general arrangement drawing for the oxidizer, which 

was also checked by Mr. Costanzo.

CPI engaged IVI North to fabricate and supply various 

components of the oxidizer and Lantec to supply the multilayer ceramic 

media component. After fabrication was completed, Goodyear hired a 

crew to install the oxidizer itself at the Lawton facility. In August 2015 

Goodyear contacted CPI to inform them that the oxidizer had failed 

performance testing, reaching only 93% destruction efficiency. CPI 

resolved the issue during a subsequent inspection. 

As part of the research credit study, Alliantgroup calculated that 

the following supply costs were qualified research expenditures: 

[*47]
48

Component Cost

Booster fan $38,657

Burner 3,396

Ceramic media 2,936

Cold face support 103,840

Combustion air piping 575

Combustion blower 2,202

Control house 19,135

Electrical panel 45,642

Exhaust stack 80,275

Fresh air damper 5,302

Gas train 11,292

Mechanical loose parts 8,026

Media chamber 4,884

Poppet housing 35,496

Poppet valve assemblies 30,848

Exhaust stack expansion joint 1,195

System insulation & paint 55,000

Total $448,702

N. Wenner (#14-0800)

During the years at issue Wenner Bread Products, Inc. (Wenner), 

manufactured artisanal bread at a site in Baltimore, Maryland. During 

testing for Clean Air Act compliance, Wenner discovered that its 

specialized yeasts were emitting high levels of ethanol when in the 

[*48]
49

[*49] baking ovens. Wenner did not have a pollution control system in 

place and thus contacted CPI for a quote. Wenner provided CPI with 

specifications about the airflow and ethanol quantities. After reviewing 

the specifications, CPI determined that a catalytic optimizer would be 

appropriate, because of the high heat release caused when burning 

ethanol.

In September 2014 CPI submitted a proposal for a 3,000 SCFM 

catalytic oxidizer. The proposal included the assumed ethanol 

concentrations of the process airflow from the baking ovens. The 

proposal stated that the system would incorporate a ceramic monolith 

catalyst, which would, in relevant part, provide the ability to “wash” the 

catalyst. The proposal also stated the system would incorporate a 

ceramic guard, in order to capture fats, oils, and greases before they

reached the catalyst, which would “greatly increase catalyst life by 

prohibiting active surface area being coated with airborne droplets and 

particulate.” Finally, the proposal included a 98% destruction efficiency 

performance guarantee. In October 2014 CPI and Dennis Engineering 

Group LLC (Wenner’s engineering consultant) entered into a sales 

agreement for the purchase and sale of the oxidizer, for a total price of 

$281,700. C.H. was the sales engineer on the project.

CPI personnel input the provided VOC levels into a Bessy 

spreadsheet, which calculated that the LEL of the airflow would be 

9.68%. Because of the high heat release in the process airflow, CPI thus 

determined to include a hot gas bypass that vented air directly to the 

stack and thus avoided excessively preheating the heat exchanger. CPI 

personnel performed calculations in order to determine the optimal size 

of various components, including the fan, burner, exhaust stack, and

fresh air damper.

In October 2014 C.D. completed electrical schematic drawings for 

a control panel and CPI engaged Quantum Design to fabricate a control 

panel and enclosure. In December 2014 R.T. completed an initial

general arrangement drawing. CPI engaged PRE-Heat to fabricate and 

assemble the oxidizer system. Once it was assembled, CPI personnel 

conducted a quality audit of the oxidizer at PRE-Heat’s facility, before 

the oxidizer was shipped to the Wenner facility. CPI personnel 

supervised the installation of the system at Wenner’s facility. The 

system successfully passed emissions compliance testing by a third

party.
50

[*50] As part of the research credit study, Alliantgroup calculated that 

the following supply costs were qualified research expenditures:
51

Component Cost

BF outlet exp jnt $534

BF VFD 1,623

Booster fan 13,945

Burner 3,286

Catalyst 15,540

Catalyst – guard bed 1,400

Combustion air piping & weather hood 1,060

Combustion blower 1,523

Combustion chamber 62,714

Ductwork 4,550

Electrical panel – SEE EXCEL for details 23,890

Exhaust stack 2,468

Fresh air damper 1,723

Gas train 5,907

Heat exchanger 5,143

Mechanical loose parts 4,858

Tee damper 13,613

Total $163,778

O. East Balt (#14-07950)

During the years at issue East Balt Commissary, Inc. (East Balt), 

operated a bakery facility that specialized in making hamburger buns 

for McDonald’s restaurants. East Balt engaged CPI to resolve issues 

related to ethanol emissions produced by the baking ovens, which had 

[*51]
52

[*52] been identified as a violation of the Clean Air Act. Mr. Betz was 

the lead applications engineer on the project, and C.H. was the sales 

engineer. CPI began its initial bid proposal by visiting East Balt’s 

facility in order to measure the airflow and temperature from the baking 

oven exhaust. CPI personnel determined that a catalytic oxidizer was 

the appropriate system for the facility, in part because catalytic 

conversion was fairly effective with respect to ethanol.

In August 2014 CPI submitted a revised proposal for the design 

of a catalytic oxidizer, described as a Vector-5. The proposal described 

the baking oven exhaust as being assumed to be 2,343 and 2,560 SCFM 

for the two baking ovens, with ethanol at 15–25 lb/hr as the VOC 

byproduct. The proposal provided a 98% destruction efficiency

performance guarantee. The proposal also stated that the oxidizer 

would include a “ceramic guard bed” downstream from the burner but 

before the catalyst, which would be “optimum for ensuring all fats, oils, 

and greases are in vapor phase prior to that catalyst.” The guard bed 

would thus “greatly increase catalyst life by prohibiting active surface 

area being coated with airborne oil droplets and particulate.” In 

September 2014 East Balt and CPI exchanged purchase and sale orders

for the oxidizer, for a total price of $571,500.

In September and October 2014 C.D. completed electrical 

schematic drawings for a control panel enclosure. In October 2014 R.T.

completed an initial general arrangement drawing for the oxidizer. In 

October 2014 C.D. completed an initial P&ID drawing for the oxidizer. 

CPI engaged Quantum Design to fabricate the control panel enclosure

and PRE-Heat to fabricate and assemble the oxidizer. During the 

fabrication stage of the oxidizer, the EPA informed East Balt that a 

system that dispersed air exhaust at a higher elevation would be 

necessary. CPI extended the exhaust stack design and added structural 

support in order to prevent it from collapsing in the event of high winds.

As part of the research credit study, Alliantgroup calculated that 

the following supply costs were qualified research expenditures:
53

Component Cost

Booster fan $16,832

Burner 466

Catalyst 31,280

Combustion air piping 1,086

Combustion blower 210

Electrical panel 26,052

Expansion joints 2,560

Fresh air damper 4,612

Gas train 7,810

Hardware and gasket 196

I Asbly combustion chamber 58,747

PIT Sitrans 896

Tee damper 20,898

Total $171,646

P. M&W Ireland (#14-07718)

During the years at issue M&W Group (M&W) was the general 

contractor at an Intel Corp. facility in Leixlip, Ireland, which 

manufactured computer chips and wafers. The primary byproduct of 

the manufacturing process was liquid ammonium fluoride.

In January 2014 CPI sent a proposal to M&W for a “Trimix Waste 

Water Treatment System.” The proposal stated in relevant part that 

“this proposal captures the request made during our January 6, 2014 

conference call, for CPI to provide an exact copy to the current TRIMIX 

system that was recently completed.” The proposal closely followed 

specifications provided by Intel. The proposal made some site-specific 

[*53]
54

[*54] modifications to the previous TRIMIX system design, some of 

which were made in order for the system to meet European product 

standards. Those modifications generally involved finding components 

from Europe that were equivalent to components that CPI had used in 

the previous TRIMIX system design and then making some sizing 

adjustments to conform to the differing components. For the project, 

CPI personnel used a general arrangement design drawing for an 

ammonia removal system, originally drawn on September 25, 2009. The 

system was designed to first adjust the pH of the ammonium fluoride in 

order to separate out the fluoride from the ammonia. From there, the 

ammonia would be removed from the liquid stream into the air by an air 

stripper, with the process airflow then being blown into a catalytic 

oxidizer and converted to nitrogen oxides. The airflow would next 

encounter a secondary “selective reduction catalyst,” which would 

convert the nitrogen oxides into regular nitrogen.

In February 2014 M&W sent to CPI a purchase order for the 

oxidizer system and components, for a total price of $3,836,100. CPI 

engaged PRE-Heat to fabricate and assemble various components of the 

system. CPI engaged Murphy Matson O’Sullivan, an Irish engineering 

consulting firm, to determine the location of the oxidizer’s foundation 

and calculate the necessary depths for anchoring the system. This was 

a relevant aspect of the design, because the Leixlip facility experienced 

high winds. Using information provided by M&W as to the gallons per 

minute and VOC concentration range, CPI personnel entered 

specifications into a spreadsheet to determine the potential size of 

components and the system’s energy requirements. CPI submitted 

design drawings to M&W, which provided comments and asked for 

certain modifications. Ultimately, the system was installed at the 

Leixlip facility and passed performance testing.

As part of the research credit study, Alliantgroup calculated that 

the following supply costs were qualified research expenditures:
55

Component Cost

Booster fan – parts $160,974

Loose ship – parts 51,776

Oxidizer – parts 247,629

S4 – parts 48,648

Spares – parts 79,563

Sparge – parts 121,614

Stripper/Eff pump – parts 34,580

TRIMIX – parts 19,774

Total $764,559

Q. Enterprise (#14-07851)

During the years at issue Enterprise Products Partners L.P. 

(Enterprise) operated a natural gas production facility in Rifle, 

Colorado. Enterprise had two existing 20,000 SCFM regenerative 

thermal oxidizers that were experiencing an operational problem where 

ice built up on the system’s inlet during cold temperature periods in the 

winter. Before 2014 CPI had developed a solution to the problem of 

extreme temperature, by which airflow was recirculated back to the fan 

inlet in order to prevent condensation and freezing from low 

temperatures. CPI personnel had written an article about this solution; 

personnel at Enterprise read the article and then asked CPI to visit its 

facility and inspect its oxidizer system.

At Enterprise’s request, Messrs. Betz and Harmsen visited the 

Rifle facility to inspect the regenerative thermal oxidizers in use there. 

Enterprise also provided Mr. Harmsen with the general arrangement 

design drawing for one of the existing oxidizers. On January 2, 2014, 

Mr. Harmsen provided Enterprise with a report on the operations of the 

regenerative thermal oxidizers, including the characteristics of the 

process airflow. The report identified some pin hole leaks in the current 

system and described inadequacies with the process air fan inlet design, 

hot gas bypass damper, and fresh air fan. The report described how the 

[*55]
56

[*56] existing hotside bypass dampers, which had failed multiple times, 

differed from CPI’s standard hotside bypass damper. The report 

recommended that Enterprise install a hot gas bypass recirculation 

system, as designed by CPI, and an internally insulated VOC hot gas 

bypass. The report also included a version of the general arrangement

drawing, which Mr. Harmsen had modified by pasting in the ductwork 

component from a previous project, in order to represent how the 

oxidizers could circulate fresh air without temperature issues at the 

inlet of the oxidizer.

In June 2014 CPI sent Enterprise a proposal for the supply of 

(1) two designed hot air recirculation systems and (2) two internally 

insulated VOC hot gas bypasses. The proposal described the hot gas 

bypass recirculation system as intended to “maintain 300 F inlet 

temperatures and allow for more accurate control and adjustment to 

process changes” and “keep the inlet side of the RTO above the acid dew 

point and prevent freeze ups.” The proposal described the VOC hot gas 

bypass as intended to “direct clean hot air directly into the exhaust stack 

to de-rate the thermal efficiency of the Oxidizer.” Also in June 2014, 

Enterprise sent CPI a purchase order for the components, for a total 

price of $435,000; the purchase order attached terms and conditions. 

Clause 16 of the terms and conditions was entitled “Data Ownership” 

and provided the following:

Buyer shall, at all times, be the owner of all information 

and materials resulting from Supplier's services, including 

sketches, layouts, negatives, photographs, designs, 

blueprints, and specifications relating thereto, and of the 

work product of all services furnished or performed under 

this order, including all creative ideas included therein, by 

Supplier or any subcontractor of Supplier in connection 

with this order. Upon the completion, or in the event of the 

cancellation or termination of this order, all copies of such 

information, materials, and work product shall be returned 

and delivered to Buyer by Supplier. Buyer may copy or 

reproduce any and all such information, materials, and 

work product for any and all purposes and may use the 

same in any and all media as often as it may so desire. No 

copies or reproductions thereof shall be made or retained 

by Supplier except as authorized in writing by Buyer.

Clause 17 was entitled “Confidentiality” and stated that “[n]o 

information relative to this order concerning the purchase or use of 
57

[*57] goods or services may be published or disseminated by Supplier 

without the Buyer’s prior written consent.”

In September 2014 G.B. prepared an initial general arrangement 

drawing, which copied the general arrangement design of the existing 

oxidizer and added the proposed components. CPI engaged Global Fab

to fabricate and assemble various aspects of the components. The 

components were installed at the Rifle facility at some point in 2015.

As part of the research credit study, Alliantgroup calculated that 

the following supply costs were qualified research expenditures: 

Component Cost

Blower $52,653

Damper & ductwork 158,370

Total $211,023

R. DuPont La Porte (#14-07831)

During the years at issue, E.I. DuPont de Nemours & Co. 

(DuPont) operated a chemical manufacturing facility in La Porte, Texas. 

The manufacturing process at the facility generated VOCs such as 

methyl methacrylate and acetic acid. CPI determined that a direct 

thermal oxidizer would be optimal.

In May 2014 CPI sent DuPont a revised proposal, which DuPont 

accepted. The proposal was more detailed than was CPI’s normal 

practice and included extensive specifications for the various 

components of the system. The proposal included a 99.9% destruction 

efficiency performance guarantee. The proposal stated that the system 

would incorporate “a low emissions burner specially designed to process 

mixed gases” which would be sized for 6 million BTU/hour. Also in May

2014 CPI issued a sales order to DuPont for the thermal combustor, 

which noted that no fabrication would begin until approval 

documentation was received from DuPont. The sales order was for a

total price of $769,900.

Ultimately, CPI purchased a high intensity fuel-gas burner for 

the system. DuPont provided CPI with the VOC levels for two particular

process airflows at the La Porte facility. CPI personnel input the 
58

[*58] provided VOC levels for the first airflow, primarily consisting of

methanol and acetates, into a Bessy spreadsheet, which calculated that 

the LEL of the airflow would be 62.5%. CPI personnel then input the 

provided VOC levels for the second airflow, primarily consisting of 

nitrogen from a tank farm at the facility, into a Bessy spreadsheet, 

which calculated that the LEL of the airflow would be 330.4%. Because 

of the high LEL, CPI personnel determined that the oxidizer would need 

to burn the process airflow directly, without mixing it with additional 

oxygen. CPI personnel entered the provided specifications into another 

spreadsheet to determine the sizing of components, such as the process

fan.

In August 2014 R.T. completed an initial general arrangement 

drawing for the system, which was checked by F.C. The extremely large 

size of the exhaust stack was somewhat unusual for CPI and was outside 

their design capability. Accordingly, CPI engaged IVI North to both 

design and fabricate a stack to a number of provided sizing and feature

specifications.

With respect to the electrical system, CPI was responsible for 

designing only the burner control and management system, with the 

remainder of the oxidizer’s operations being programmed by DuPont

into its existing control system at the La Porte facility. The design of 

the burner control system went through an extensive design review with 

DuPont. R.J. started from CPI’s standardized P&ID drawings but 

eventually made a number of revisions at DuPont’s request. The process 

of revising CPI’s standardized designs for the various components of the 

system was similarly extensive, with DuPont offering multiple 

revisions. The oxidizer was installed by DuPont at the La Porte facility 

at some point in 2015 or 2016 and subsequently passed third-party 

compliance testing.

As part of the research credit study, Alliantgroup did not include

any supply costs associated with the DuPont project in its qualified 

research expenditures calculations.

S. Reclaimed Energy (#14-07981)

During the years at issue Superior Oil Co., Inc.’s Reclaimed 

Energy Division (Reclaimed Energy) operated a facility in Connersville, 

Indiana. At the facility, Reclaimed Energy recycled used chemical 

solvents from other manufacturing processes and distilled them down to 

clean elements. Because of that business model, Reclaimed Energy’s 
59

[*59] process involved a wide variety of VOCs. Reclaimed Energy was 

a longtime customer of CPI and, in 2014, already used two CPI-supplied 

catalytic oxidizers at its facility. Because of that customer relationship, 

CPI already had a significant amount of institutional knowledge and 

information about the Connersville facility and the process airflow. CPI 

personnel determined that the existing catalytic oxidizers lacked 

sufficient capacity during high VOC emission periods.

CPI personnel determined that a new regenerative thermal 

oxidizer would be appropriate, sized at 15,000 SCFM. In September 

2014 CPI submitted a proposal for a 15,000 SCFM regenerative thermal 

oxidizer, described as a Triton 15.95. The proposal included the 

characteristics of the process airflow, including the volume, 

temperature, heat value, and maximum estimated VOC load. The 

proposal also included a 98% destruction efficiency performance 

guarantee. Reclaimed Energy then sent to CPI a purchase order for the

oxidizer, for a total price of $449,800. Using the known characteristics 

of Reclaimed Energy’s process airflow, Messrs. Betz and Harmsen 

calculated the sizes of various components, such as the fan and fresh air 

damper, basing them upon the volume, air pressure, and inlet 

temperature. In October 2014 Mr. Betz completed a P&ID drawing for 

the oxidizer; the P&ID drawing was based on a previous one completed 

for Reclaimed Energy with modifications. Also in October 2014 S.F.

completed an initial general arrangement drawing for the oxidizer,

which was checked by T.Z.

CPI engaged Lantec to fabricate and supply the multilayer 

ceramic media component, Global Fab to fabricate and assemble various 

components of the oxidizer, and IVI North to fabricate and supply an 

exhaust stack. In October and November 2014 C.D. completed various 

electrical schematic drawings. In November 2014, Quantum Design 

made a number of suggested revisions to the drawings, to which CPI 

agreed. CPI then engaged Quantum Design to fabricate and supply the

control panel and enclosures. In early 2015 S.F. and other CPI 

employees completed a number of other design drawings for components 

of the oxidizer. A number of components of the oxidizer were ordered 

from suppliers in 2015. Ultimately, the oxidizer was installed by 

Reclaimed Energy at the Connersville facility at some point in 2015.

As part of the research credit study, Alliantgroup calculated that 

the following supply costs were qualified research expenditures:
60

Component Cost

BF outlet exp joint $681

BF VFD 6,060

Booster fan 17,124

Burner 1,097

Ceramic media 22,695

Cold face support 8,798

Combustion air piping 5,112

Combustion blower 2,450

Duct from CC to stack 3,349

Electrical loose parts 1,260

Electrical panel 37,407

Exhaust stack 41,085

Exhaust stack flex 875

Fresh air damper, pneu. act. 4,142

Gas train 11,765

Hardware and gaskets 3,076

Hot gas bypass damper – insulated 13,088

Inlet transition duct 979

Mechanical loose parts 3,918

Media chamber 92,627

Poppet housing 19,019

Poppet valve assemblies 35,270

Total $331,877

VII. Tax Reporting

On April 20, 2015, CPI filed a Form 1120S, U.S. Income Tax 

Return for an S Corporation, for tax year 2014. On Form 6765 for tax 

year 2014 CPI reported a research credit of $501,531 under section 41 

after electing a reduced credit under section 280C(c).20 Schedules K–1, 

Shareholder’s Share of Income, Deductions, Credits, etc., were issued to 

petitioners Mark Betz and Julia Lincoln, reporting $250,765 as a 

research credit on line 13. On April 15, 2015, petitioners Mark and 

Christine Betz and petitioners Julia and Dennis Lincoln jointly filed 

Forms 1040, U.S. Individual Income Tax Return, for tax year 2014. On 

their Form 3800, General Business Credit, Mr. and Mrs. Betz reported 

20 CPI also claimed a deduction of $171,489 for research and development.

[*60]
61

[*61] a research credit of $250,766, of which they claimed $128,898 on 

line 54 of their Form 1040. On their Form 3800, Mr. and Mrs. Lincoln 

reported a research credit of $250,765, of which they claimed $122,651 

on line 54 of their Form 1040.

Mr. and Mrs. Betz jointly filed Form 1040 for tax year 2015. On 

Form 3800 they reported a carryforward of the research credit of 

$104,708, of which they claimed $58,198 on line 54 of their Form 1040. 

Mr. and Mrs. Lincoln jointly filed a Form 1040 for tax year 2015. On 

Form 3800 they reported a carryforward of the research credit of 

$129,682, of which they claimed $31,718 as part of their other credits 

total on line 54 of their Form 1040.

Mr. and Mrs. Betz jointly filed Form 1040 for tax year 2016. On 

Form 3800 they reported a carryforward of the research credit of 

$46,510, of which they claimed $43,780 on line 54 of their Form 1040. 

Mr. and Mrs. Lincoln jointly filed Form 1040 for tax year 2016. On Form 

3800 they reported a carryforward of the research credit of $97,964, of 

which they claimed $32,866 on line 54 of their Form 1040.

The 2014 Form 1120S and the 2014, 2015, and 2016 Forms 1040 

for both couples were prepared by the accounting firm Porte Brown LLC. 

Jeffery R. Smiejek, a partner at Porte Brown, signed all seven returns 

as preparer. Porte Brown prepared the original underlying Form 6765, 

which reported the section 41 credit, by transcribing the numbers from 

the pro forma Form 6765 that Alliantgroup delivered to petitioners on 

April 10, 2015. On November 2, 2015, Alliantgroup emailed Porte 

Brown a brief memo describing the research credit’s requirements and 

attaching spreadsheets with the claimed wage and supply costs.

VIII. The Notices of Deficiency and Petitions

On July 26, 2018, respondent issued to petitioners Mark and 

Christine Betz a notice of deficiency, which made the following 

determinations:

Year Deficiency Penalty § 6662

2014 $128,898 $25,779.60

2015 58,198 11,639.60

2016 43,780 8,756.00
62

[*62] On July 26, 2018, respondent also issued to petitioners Julia and 

Dennis Lincoln a notice of deficiency, which made the following 

determinations:

Year Deficiency Penalty § 6662

2014 $121,083 $24,216.60

2015 31,718 6,343.60

2016 32,866 6,573.20

Each couple timely filed a Petition with this Court.

OPINION

I. Jurisdiction and Burden of Proof

Where a notice of deficiency issued to an S corporation 

shareholder includes adjustments to both S corporation items and other 

items unrelated to the S corporation, we have jurisdiction to determine 

the correctness of all adjustments in the shareholder-level deficiency 

proceeding. See Johnson v. Commissioner, No. 19973-18, 160 T.C., slip 

op. at 11 (Jan. 25, 2023) (citing Winter v. Commissioner, 135 T.C. 238, 

245–46 (2010)). We thus have jurisdiction to determine the correctness 

of both respondent’s adjustments to petitioners’ pro rata shares of CPI’s 

claimed research credit and any other determinations in the notices of 

deficiency.

The Commissioner’s determinations as expressed in the notice of 

deficiency are presumed correct, and the taxpayer bears the burden of 

proving that they are erroneous. Rule 142(a)(1); Welch v. Helvering, 290 

U.S. 111, 115 (1933); VHC, Inc. v. Commissioner, 968 F.3d 839, 841 (7th 

Cir. 2020), aff’g T.C. Memo. 2017-220. Credits are a matter of legislative 

grace, and taxpayers must demonstrate their entitlement to credits

claimed. See Feigh v. Commissioner, 152 T.C. 267, 270 (2019) (citing

INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992)); see also United 

Stationers, Inc. v. United States, 163 F.3d 440, 443 (7th Cir. 1998). 

Petitioners have neither alleged nor established that they meet the 

requirements of section 7491(a) as necessary to shift the burden of proof 

to respondent on any factual issues.
63

[*63] II. Section 41 Research Credit

A. Basic Structure

Section 38 provides taxpayers with a current-year business credit 

that includes a credit for research expenses as determined under section 

41(a). Section 41(a)(1) specifies that the research credit shall be an 

amount equal to 20% of the excess of the taxpayer’s qualified research 

expenses (QREs) over the base amount. QREs are limited to amounts 

“paid or incurred by the taxpayer during the taxable year in carrying on 

any trade or business.”21 § 41(b)(1); see § 7701(a)(25). QREs may be 

either in-house research expenses or contract research expenses. 

§ 41(b)(1). In-house research expenses include (1) “any wages paid or 

incurred to an employee for qualified services performed by such 

employee” and (2) “any amount paid or incurred for supplies used in the 

conduct of qualified research.” Id. para. (2)(A)(i) and (ii). Qualified 

services are defined as either (1) “engaging in qualified research” or (2) 

“engaging in the direct supervision or direct support of research 

activities which constitute qualified research.” Id. subpara. (B); see

Treas. Reg. § 1.41-2(c) (defining “direct supervision” and “direct 

support”). If at least 80% of the services an employee performed during 

the taxable year were qualified services, then the taxpayer may treat 

100% of that employee’s wages as being paid or incurred for qualified 

services. Treas. Reg. § 1.41-2(d)(1) and (2).

To constitute qualified research, a research activity must satisfy 

a four-part statutory test. § 41(d)(1). If the research activities 

corresponding to a particular product as a whole fail to satisfy the fourpart test, we may re-apply the test to subsets of the product. See Treas. 

Reg. § 1.41-4(b)(2) (providing the “shrinking-back rule”). Several 

statutory exclusions, see § 41(d)(4), set forth categories of activities that 

are excluded from the definition of qualified research (and thus cannot 

be creditable), see § 41(d)(1) (flush language) (“[Qualified research] does 

not include any activity described in paragraph (4).”); see also Eustace v. 

Commissioner, 312 F.3d 905, 908 (7th Cir. 2002) (“Sections 41(d)(1) and 

(d)(4) are independent rules, which deserve, and have received, 

independent constructions.”), aff’g T.C. Memo. 2001-66, 81 T.C.M. 

21 For an accrual method taxpayer such as CPI, a liability is incurred and taken 

into account for the taxable year in which (1) all the events have occurred that establish 

the fact of the liability; (2) the amount of the liability can be determined with 

reasonable accuracy; and (3) economic performance has occurred with respect to the 

liability. See VECO Corp. & Subs. v. Commissioner, 141 T.C. 440, 459 (2013); see also

§ 461(h); Treas. Reg. § 1.461-1(a)(2)(i).
64

[*64] (CCH) 1370. One such exclusion provides that “[a]ny research 

related to the adaptation of an existing business component to a 

particular customer’s requirement or need” is excluded from the 

definition of qualified research. § 41(d)(4)(B).

The base amount for purposes of section 41 is equal to the product 

of the average of the taxpayer’s annual gross receipts for the four 

preceding years, multiplied by a fixed-base percentage.22 § 41(c)(1). The 

fixed-base percentage is generally the percentage calculated by dividing 

(1) the taxpayer’s aggregate QREs for tax years beginning after 

December 31, 1983, and before January 1, 1989, by (2) the taxpayer’s 

aggregate gross receipts for those same tax years. Id. para. (3)(A). The 

fixed-based percentage cannot exceed 16%. Id. subpara. (C). The base 

amount cannot be less than 50% of the QREs for the credit year. Id.

para. (2).

In the case of an S corporation, the amount of a claimed section 

41 credit is allocated among the shareholders pro rata. See Treas. Reg. 

§ 1.41-7(a)(1)(i); see also §§ 1366(a)(1)(A), 1377(a)(1). Each S corporation 

shareholder may then claim the section 41 credit on his or her income 

tax return in an amount “equal to the amount of tax attributable to that 

portion” of the taxable income “allocable or apportionable” to their 

shareholder interest. § 41(g). To the extent an S corporation 

shareholder’s pro rata portion of the section 41 credit for the taxable 

year exceeds this limitation, that shareholder may carry forward the 

unused amount of credit to a future taxable year. Id. subsec. (g).

B. Substantiation Principles

Section 6001 requires, inter alia, that taxpayers keep records in 

compliance with the rules and regulations prescribed by the Secretary 

of the Treasury. Accordingly, taxpayers are required to “keep such 

permanent books of account or records . . . as are sufficient to establish 

the amount of gross income, deductions, credits, or other matters 

required to be shown” on a tax return. Treas. Reg. § 1.6001-1(a). With 

respect to the research credit, the taxpayer specifically “must retain 

records in sufficiently usable form and detail to substantiate that the 

expenditures claimed are eligible for the credit.” Treas. Reg. § 1.41-4(d). 

To substantiate wages paid or incurred for qualified services, the

taxpayer need not necessarily maintain and produce contemporaneous 

22 Respondent did not address petitioners’ calculation of the base amount in his 

posttrial briefing, and we thus deem that issue conceded.
65

[*65] time-tracking records for its employees. See Union Carbide Corp.

& Subs. v. Commissioner, T.C. Memo. 2009-50, 97 T.C.M. (CCH) 1207, 

1268 (“[Treasury Regulation § 1.41-4(d)] does not require that a 

taxpayer substantiate its research credit claim with any particular types 

of documents . . . .”), aff’d, 697 F.3d 104 (2d Cir. 2012); Fudim v. 

Commissioner, T.C. Memo. 1994-235, 67 T.C.M. (CCH) 3011, 3012

(accepting “testimony and other evidence in the record” as basis for 

Cohan rule estimate of time spent in performing qualified services

(citing Cohan v. Commissioner, 39 F.2d 540, 544 (2d Cir. 1930)); see also 

United States v. McFerrin, 570 F.3d 672, 679 (5th Cir. 2009).

However, we do not apply the Cohan rule to estimate wages paid 

or incurred if the taxpayer fails to make a threshold showing that a 

particular employee performed activities that constituted qualified 

services with respect to a business component. See Shami v. 

Commissioner, 741 F.3d 560, 568 (5th Cir. 2014) (“[T]he Cohan rule is 

not implicated unless the taxpayer proves that he is entitled to some 

amount of tax benefit[;] [i]n the context of the § 41 credit, a taxpayer 

would do so by proving that its employee performed some qualified 

services.”), aff’g in relevant part T.C. Memo. 2012-78; Moore v. 

Commissioner, T.C. Memo. 2023-20, at *11 (“Even if some of 

[employee’s] activity on these three products was qualified research, we 

have no basis for estimating how much of his time was so spent.”); see 

also Mendes v. Commissioner, 121 T.C. 308, 316 (2003) (“Even under 

Cohan, there must be sufficient evidence in the record to provide a basis 

upon which an estimate may be made.” (citing Vanicek v. Commissioner, 

85 T.C. 731, 742–43 (1985))); Coors Porcelain Co. v. Commissioner, 52 

T.C. 682, 697–98 (1969), aff’d, 429 F.2d 1 (10th Cir. 1970).

If a business component as a whole fails any of the four qualified 

research tests, the taxpayer must still show that a particular employee

performed qualified services with respect to a particular subset of the 

component, in order to implicate Cohan. See Eustace, 81 T.C.M. (CCH) 

at 1372, 1374 (rejecting taxpayers’ attempt to invoke Cohan rule when 

they lacked “the substantiation necessary to tie salaries to activities at 

the subcomponent level” and merely “delineated the employees and 

activities” believed to qualify for research credit); Trinity Indus., Inc. v. 

United States, 691 F. Supp. 2d 688, 693 (N.D. Tex. 2010) (declining to 

apply shrinking-back rule because taxpayer “offered no evidence of the 

costs associated with any subset” of the product), aff’d in part and 

remanded, 757 F.3d 400 (5th Cir. 2014). Finally, the U.S. Court of 

Appeals for the Seventh Circuit—to which an appeal in this case would 

lie, absent stipulation to the contrary, see § 7482(b)(1)(A), (2)—has 
66

[*66] previously described the Cohan rule as “rarely compulsory” and 

suggested it is not applicable where the expenses at issue are of a sort 

where the taxpayer should have been able to produce some form of 

substantiating evidence, see Lerch v. Commissioner, 877 F.2d 624, 628, 

629 n.9 (7th Cir. 1989) (quoting Williams v. United States, 245 F.2d 559, 

560 (5th Cir. 1957) (describing estimate without reasonable basis as 

“unguided largesse”)), aff’g T.C. Memo. 1987-295; see also Buelow v. 

Commissioner, 970 F.2d 412, 415 (7th Cir. 1992) (affirming this Court’s 

decision not to apply Cohan rule where taxpayer failed to question 

knowledgeable trial witnesses about expenses at issue), aff’g T.C. Memo. 

1990-219.

More recently, the Seventh Circuit has had occasion to address

the substantiation burden that taxpayers claiming the research credit 

must bear. See Little Sandy Coal Co. v. Commissioner, 62 F.4th 289, 

308 (7th Cir. 2023), aff’g T.C. Memo. 2021-15. In Little Sandy Coal Co., 

the Seventh Circuit encountered a similar research credit claim by a 

taxpayer that relied on trial testimony as substantiation for its 

estimated QREs; the Seventh Circuit characterized the taxpayer’s 

evidentiary showing as asking this Court “to take on faith” that the 

allocations of its employees’ wages were only for activities constituting 

qualified research. Id. In affirming this Court’s decision that the 

taxpayer had failed to show entitlement to the credit, the Seventh 

Circuit emphasized that “shortcut estimates of experimentation-related 

activities will not suffice . . . [s]omething more, such as documentation 

of time spent on such activities, is necessary.” Id.

Petitioners largely relied on the trial testimony of Messrs. Betz 

and Harmsen to carry their substantiation burden. We found Messrs. 

Betz and Harmsen to be credible with respect to the basic facts of CPI’s

business process and the technical background of oxidizers, with which 

they are evidently highly familiar. However, we found their testimony 

at times to be vague, in conflict with the record, and lacking in credibility

with respect to their self-serving characterizations of some of the work 

performed by CPI on specific projects. See Conti v. Commissioner, 99 

T.C. 370, 375 (1992) (“It is our task to decide the credibility of any lay or 

expert witness based upon objective facts, the reasonableness of the 

testimony, the consistency of the statements made by the witness, and, 

in some cases, the demeanor of the witness.”), aff’d and remanded, 39 

F.3d 658 (6th Cir. 1994); see also Lerch v. Commissioner, 877 F.2d at 631 

(“The Tax Court may disregard uncontradicted testimony by a taxpayer 

where it finds that testimony lacking in credibility.”). We will note
67

[*67] below where our observations of the trial witnesses are 

particularly relevant to our findings and conclusions.

C. Qualified Research

To constitute qualified research, research must satisfy a four-part 

statutory test:

Sec. 41(d). Qualified research defined. . . .

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

means research—

(A) with respect to which expenditures may be 

treated as expenses 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).

The four-part test is applied separately to each business 

component. Id. para. (2)(A). A “business component” is defined in 

relevant part as a product or process that the taxpayer either (1) holds 

for sale, lease, or license or (2) uses in its trade or business. Id. subpara. 

(B). Any plant process, machinery, or technique for commercial 

production of a business component is itself treated as a separate 

business component from the underlying product. Id. subpara. (C).

Here, the business components claimed by petitioners are the oxidizer 

systems or components of oxidizer systems supplied to CPI’s customers.

As noted above, if a business component as a whole fails any of 

the qualified research tests, the regulations provide a fallback position

for taxpayers in the form of the shrinking-back rule. See Treas. Reg. 

§ 1.41-4(b)(2). The shrinking-back rule instructs us to re-apply the fourpart test to the business component at its “most significant subset of 

elements.” Id. If that too fails, we generally drill down to a more 
68

[*68] granular subset of the business component, until either (1) a 

subcomponent satisfies the tests or (2) the most basic level of the 

component fails to satisfy the tests. Id.

We now turn to the four-part test. Respondent concedes that 

CPI’s claimed activities in 2014 satisfied two parts: the technological 

information test and the business component test. We thus largely focus 

on the first requirement in section 41(d)(1) that respondent does 

challenge: the section 174 test.23

1. Section 174 Test

To be qualified, research must be research “with respect to which 

expenditures may be treated as expenses under section 174.”

§ 41(d)(1)(A). We have previously interpreted section 41(d)(1)(A) as 

incorporating the section 174 requirements on both the nature of the 

activity and the nature of the expenditure. See Norwest Corp. & Subs.

v. Commissioner, 110 T.C. 454, 491 (1998) (interpreting section 

41(d)(1)(A) as requiring “the taxpayer to satisfy all the elements for a 

deduction under section 174”); Union Carbide Corp., 97 T.C.M. (CCH)

at 1255 (analyzing both whether taxpayer’s activities “constitute 

research and development within the meaning of section 174” and 

whether the costs of those activities “may be treated as expenses under 

section 174”). To satisfy the section 174 test, the taxpayer thus must 

show (1) that the claimed research expenditures would be eligible for a 

deduction under section 174 and (2) that the claimed research activities 

constituted research and development within the meaning of section 

174. See Norwest Corp., 110 T.C. at 491; Union Carbide Corp., 97 T.C.M. 

(CCH) at 1274 (“[The taxpayer] cannot avoid the restrictions of section 

174 by arguing that section 174 is relevant only for determining whether 

activities constitute qualified research and has no bearing on whether 

the costs of those activities may be QREs.”). If we conclude that the 

taxpayer has failed to satisfy the section 174 test at “the level of a 

product” as a whole, the taxpayer may still satisfy the test “at the level 

23 The process of experimentation test (which respondent also raises) is a 

higher bar, which requires “essentially the same uncertainty as is required by the 

section 174 test” but “imposes a more structured method of discovering information 

than section 174 requires and may not include all actions a taxpayer takes to resolve 

uncertainty.” Union Carbide Corp., 97 T.C.M. (CCH) at 1256.
69

[*69] of the component or subcomponent of the product.”24 Treas. Reg. 

§ 1.174-2(a)(5) (providing a section 174-specific shrinking-back rule).

On its own, section 174 operates as a narrow, elective exception 

to the general capitalization rules. See §§ 263(a)(1)(B), 263A(c)(2); 

INDOPCO, Inc. v. Commissioner, 503 U.S. at 84 (“[D]eductions are 

exceptions to the norm of capitalization . . . .”); see also Donald C. 

Alexander, Research and Experimental Expenditures Under the 1954 

Code, 10 Tax L. Rev. 549, 549–52 (1955) (contrasting pre-1954 

treatment of research costs with section 174); David S. Hudson, The Tax 

Concept of Research or Experimentation, 45 Tax Law. 85, 112–20 (1991)

(discussing the origins of section 174 as a practical solution to the 

accounting difficulty of allocating and capitalizing research costs). 

Section 174(a)(1) allows taxpayers to elect a current-year deduction for 

“research or experimental expenditures which are paid or incurred by 

[the taxpayer] during the taxable year in connection with [its] trade or 

business.”25 See Spellman v. Commissioner, 845 F.2d 148, 149 (7th Cir. 

1988), aff’g T.C. Memo. 1986-403; see also Treas. Reg. § 1.174-1. The 

corresponding regulations define “research or experimental 

expenditures” as those that “represent research and development costs 

in the experimental or laboratory sense” including costs “incident to the 

development or improvement of a product.” Treas. Reg. § 1.174-2(a)(1). 

The regulations further provide:

Expenditures represent research and development costs in 

the experimental or laboratory sense if they are for 

activities intended to discover information that would 

eliminate uncertainty concerning the development or 

improvement of a product. Uncertainty exists if the 

information available to the taxpayer does not establish 

the capability or method for developing or improving the 

product or the appropriate design of the product.

24 The applicable regulatory preamble describes this rule as “intended to 

ensure that section 174 eligibility is preserved in instances in which a basic design 

specification of the product may be established, but there is uncertainty with respect 

to certain components of the product.” T.D. 9680, 2014-32 I.R.B. 254, 256; see, e.g.,

Caltex Oil Venture v. Commissioner, 138 T.C. 18, 34 (2012) (consulting regulatory 

preamble to resolve ambiguity in regulatory text). 

25 Congress has since amended section 174 to eliminate the option of a currentyear deduction and provide instead for mandatory amortization of research and

development expenditures for taxable years starting after December 31, 2021. See Tax 

Cuts and Jobs Act of 2017, Pub. L. No. 115-97, § 13206, 131 Stat. 2054, 2111–13.
70

[*70] Id.

We apply a two-step test with respect to whether a taxpayer’s 

activities constituted research and development within the meaning of 

section 174. First, the taxpayer must show that the information 

available to it did not establish (1) that the taxpayer was capable of 

developing or improving the product; (2) the method by which the 

taxpayer would develop or improve the product; or (3) the appropriate 

design of the product. See Treas. Reg. § 1.174-2(a)(1); see also Max v. 

Commissioner, T.C. Memo. 2021-37, at *29. If information was not 

available to the taxpayer with respect to establishing either capability, 

method, or appropriate design, then uncertainty existed. See Union 

Carbide Corp., 97 T.C.M. (CCH) at 1255. In applying this first step, we 

examine the information objectively available to the taxpayer, rather 

than the taxpayer’s subjective understanding of that information. Id. 

(“Whether an uncertainty exists is an objective test that depends on the 

information available to the taxpayer.” (citing Mayrath v. 

Commissioner, 41 T.C. 582, 590–91 (1964), aff’d, 357 F.2d 209 (5th Cir. 

1966))); see Max, T.C. Memo. 2021-37, at *30 (finding no uncertainty 

where appropriate design may have been subjectively unknown to

taxpayer but taxpayer “already ha[d] the information necessary to 

address that unknown”). Second, if uncertainty existed, the taxpayer 

must still show that it undertook investigative activities that were 

“intended to discover information that would eliminate uncertainty.” 

Treas. Reg. § 1.174-2(a)(1); see Max, T.C. Memo. 2021-37, at *30–31. In 

Little Sandy Coal Co. v. Commissioner, 62 F.4th at 298, the Seventh 

Circuit recently clarified the nature of the uncertainty required by 

section 174:

Generic uncertainty is inherent in constructing or 

manufacturing a product. That involves questions like: 

Will this tire fit? What kind of screws are needed to attach 

this panel? Or will this weld hold up this truss? But 

“uncertainty” in Section 174 means something more. . . . 

Expenses incurred merely to determine whether a product 

is built to satisfy a client’s desired specifications—without 

any indication that the expenses were incurred to improve 

or develop the concept of the product—do not qualify.

Continuing, the Seventh Circuit looked to the ordinary meaning of 

“development,” as used in Treasury Regulation § 1.174-2(a)(1), and 

concluded that the term requires some “advancement in technology or 

product concept” as opposed to “mere construction.” Little Sandy Coal 
71

[*71] Co. v. Commissioner, 62 F.4th at 298. The Seventh Circuit noted

the difficulty in establishing uncertainty at the level of a product as a 

whole, emphasizing that “a manufacturer may not simply ‘add a few new 

bells and whistles’ on a pre-existing product and claim uncertainty as to 

the whole.” Id. at 299. Finally, the Seventh Circuit noted that, “[i]f 

summed up in one word, expenses deductible under [s]ection 174 must 

be ‘investigative.’” Id. (quoting Union Carbide Corp., 97 T.C.M. (CCH) 

at 1255).

The section 174 test implicates one more relevant limitation. 

Expenditures paid or incurred for “ordinary testing or inspection of 

materials or products for quality control (quality control testing)” are 

not deductible under section 174. Treas. Reg. § 1.174-2(a)(6)(i). Quality 

control testing includes “testing or inspection to determine whether 

particular units of materials or products conform to specified 

parameters” but “does not include testing to determine if the design of 

the product is appropriate.” Id. subpara. (7).

2. Supply QREs

We first focus on whether the claimed supply QREs for all 19 

projects would be eligible for a deduction under section 174, as a 

category of expenditure. The record demonstrates that the claimed

supply QREs correspond to payments made by CPI to various 

subcontractors and suppliers for the costs of fabricating, assembling, 

and supplying components of the oxidizers. CPI does not itself fabricate, 

assemble, or manufacture any components at its own facility. The 

“supply” label used by petitioners is thus partially a misnomer here, as 

the claimed supply QREs appear to encompass not only payments CPI 

made to its suppliers for the cost of supplies (i.e., physical components) 

but also certain payments made to its subcontractors for services (e.g.,

payments labeled in CPI’s accounting system as for “assembly” of 

components).26 See § 41(b)(2)(C) (defining “supplies” as “any tangible 

property” other than land, improvements to land, and depreciable 

property).

26 Petitioners do not contend that the cost of the services the subcontractors 

performed on the projects constituted contract research expenses incurred by CPI, nor 

did the Alliantgroup study identify any contract research expenses as part of the credit 

amount claimed. See § 41(b)(3)(A) (providing a limited credit for contract research 

expenses for research performed by another). Given our conclusions below, we need 

not speculate as to what amount of the claimed supply QREs would actually be 

creditable in full.
72

[*72] Section 174 provides a deduction only for “‘expenditures of an 

investigative nature expended in developing the concept of a model or 

product’, as opposed to the construction or manufacture of the product 

itself.” Union Carbide Corp., 97 T.C.M. (CCH) at 1255 (alteration in 

original) (quoting Mayrath, 41 T.C. at 590); see Little Sandy Coal Co. v. 

Commissioner, 62 F.4th at 298 (distinguishing between generic 

construction uncertainty and uncertainty as to the underlying concept 

of a model or product); Kollsman Instrument Corp. v. Commissioner, 

T.C. Memo. 1986-66, 51 T.C.M. (CCH) 463, 466 (distinguishing between 

nondeductible production activities and deductible research activities), 

aff’d, 870 F.2d 89 (2d Cir. 1989). Consequently, a deduction under 

section 174 is generally not available with respect to costs of production, 

and claimed QREs incurred in the actual production of a product 

typically fail the section 174 test. See Max, T.C. Memo. 2021-37, at *30–

31.

The relevant exception, as set forth in the regulations, is for costs 

incurred in constructing a prototype or “pilot model,” which is defined 

as “any representation or model of a product that is produced to evaluate 

and resolve uncertainty concerning the product.” Treas. Reg. § 1.174-

2(a)(4); see Little Sandy Coal Co., T.C. Memo. 2021-15, at *38–39. The 

regulations note that “a fully-functional representation or model of the 

product or . . . component of the product” can still be a pilot model if 

produced to evaluate and resolve uncertainty. See Treas. Reg. § 1.174-

2(a)(4). Expenditures incurred for the actual construction of a pilot 

model are generally deductible under section 174, even if the model itself 

is ultimately sold to customers. See Treas. Reg. § 1.174-2(a)(1) (“The 

ultimate success, failure, sale, or use of the product is not relevant to a 

determination of eligibility under section 174.”); see also id. subpara.

(11) (example 7). To qualify for the pilot model exception, the taxpayer

must show that (1) uncertainty existed (i.e., an objective lack of 

information) as to capability, method, or appropriate design of a product,

(2) it constructed “a representation or model” of the product, and (3) its 

purpose in constructing the representation or model was to “evaluate 

and resolve uncertainty” about capability, method, or appropriate 

design. See Little Sandy Coal Co., T.C. Memo. 2021-15, at *41 (“[T]he

classification of a product as a pilot model turns on the taxpayer’s 

purpose in producing it.”); see also Little Sandy Coal Co. v. 

Commissioner, 62 F.4th at 303 (“[T]he creator’s intent matters.”). Once

objective uncertainty is eliminated with respect to the underlying 

product, any further costs of production do not qualify under section 174. 

See Treas. Reg. § 1.174-2(a)(1), (11) (example 3).
73

[*73] In their pretrial memorandum, petitioners initially asserted that, 

because each oxidizer was “uniquely designed for the particular 

application on which it is being designed,” each oxidizer was a pilot 

model, with costs of its production qualifying under section 174 until the 

oxidizer was “running in a manner which meets the project 

requirements.” However, petitioners failed to explicitly contend in their 

posttrial briefing that the oxidizers were pilot models. Petitioners did 

make on brief the broader, more general argument that the supply costs 

were for materials “used in the development process, prior to the end of 

uncertainty of appropriate design [sic].” Similarly, in their posttrial 

briefing, petitioners referenced on one occasion that the supplies were 

“utilized in the development of the prototypes.” Despite petitioners’

failure to explicitly brief the pilot model exception, we find that 

petitioners’ more generalized contentions that the supply costs were 

QREs necessarily raises this issue for decision.27 See Purple Heart 

Patient Ctr., Inc. v. Commissioner, T.C. Memo. 2021-38, at *35 n.10 

(questioning taxpayer’s failure to explicitly brief issue but “nonetheless” 

addressing issue as “entwined” with other issues properly raised by 

taxpayer).

In any event, we conclude that petitioners have failed to carry 

their burden of establishing that the oxidizer systems at issue were pilot 

models. The record demonstrates that the supply QREs related to the 

cost of producing functional systems for CPI’s customers. Accordingly, 

in order to satisfy the section 174 test, petitioners are required to show

that the supply QREs related to the cost of producing pilot models. 

While the regulations note that a fully functional representation or 

model can qualify as a pilot model, the taxpayer must establish that its

purpose in producing that representation or model was to evaluate and 

resolve uncertainty about the product (i.e., to obtain unavailable 

information necessary to establish capability, method, or appropriate 

design). Treas. Reg. § 1.174-2(a)(1), (4); cf. Natkunanathan v. 

Commissioner, T.C. Memo. 2010-15, 99 T.C.M. (CCH) 1071, 1074

(“Expenditures made to develop and deliver functional products for use 

by customers do not usually constitute ‘research and development * * *

in the experimental or laboratory sense.’”), aff’d, 479 F. App’x 775 (9th 

Cir. 2012). Petitioners have failed to make such a showing.

27 We typically treat a failure to adequately argue a point on brief as a 

concession. See Petzoldt v. Commissioner, 92 T.C. 661, 683 (1989); see also Mendes,

121 T.C. 308 at 312–13 (“If an argument is not pursued on brief, we may conclude that 

it has been abandoned.”).
74

[*74] Instead, we conclude that the various projects were not 

“representation[s] or model[s]” as a whole and that CPI’s purpose in 

incurring their production costs was not to evaluate and resolve 

uncertainty. First, any suggestion that CPI’s various subcontractors 

and suppliers were constructing or supplying representations or models 

is wholly unsupported by the record. A representation or a model is

generally defined as an accurate stand-in for something else. 

Representation, Oxford English Dictionary (3d ed. 2009), 

https://www.oed.com/view/Entry/162997 (last updated March 2023)

(“Something which stands for or denotes another symbolically . . . .”); 

Model, Oxford English Dictionary (3d ed. 2002), 

https://www.oed.com/view/Entry/120577 (last updated December 2022)

(“Something which accurately resembles or represents something else, 

esp. on a small scale . . . .”); accord Representation, Webster’s New World 

College Dictionary (5th ed. 2016) (defining in relevant part as “a 

likeness, image, picture, etc.”); Model, Webster’s New World College

Dictionary (5th ed. 2016) (“[A] preliminary representation of something, 

serving as the plan from which the final, usually larger, object is to be 

constructed . . . .”). The subcontractors and suppliers were not 

constructing representations or models that stood in for the final 

product in discovering information about whether a design was 

appropriate; instead, they were constructing the final product itself. See 

Little Sandy Coal Co., T.C. Memo. 2021-15, at *42–43 (observing that 

example in regulations “draws a distinction between a model of a 

product and the product itself” (citing Treas. Reg. § 1.174-2(a)(11)

(example 3))).

CPI’s process confirms the proposition. If the oxidizers were pilot 

models, one might expect CPI to have conducted early-stage “testing to 

determine if the design of the product [was] appropriate” and then to 

have modified the design as necessary. Treas. Reg. § 1.174-2(a)(7), (11)

(example 3). However, the record demonstrates that testing of the 

oxidizers as a whole occurred either at the subcontractor’s facility before

shipping or at the customer’s facility after installation. At this late 

stage, CPI’s design drawings were typically finalized, having already

incorporated revisions earlier in the project in response to feedback from 

the customer and/or the subcontractors. Further, by the time testing 

occurred, CPI had incurred tens (sometimes hundreds) of thousands of 

dollars of costs in ordering specially sized components, in reliance upon 

the design drawings. If CPI still lacked information as to the 

appropriate design of each oxidizer as a whole (i.e., the oxidizer’s basic 

design specification), incurring such costs would have been economically 

irrational in the extreme. See Little Sandy Coal Co., T.C. Memo. 
75

[*75] 2021-15, at *35 (observing that any defects found in late-stage, 

postconstruction testing would not have caused taxpayer to “scrap” the 

entire project and start over); Treas. Reg. § 1.174-2(a)(11) (example 4). 

We do not accept the circular argument that CPI incurred the 

substantial costs of implementing its designs with the purpose of 

discovering information about whether those designs as a whole were

appropriate. We conclude that the claimed supply QREs incurred in the 

actual production of the oxidizers were not deductible under section 174. 

Having failed the section 174 test, these costs were not “incurred for 

supplies used in the conduct of qualified research” and thus are not 

creditable QREs. See § 41(b)(2)(A)(ii).

This conclusion would not necessarily mean the end of the 

inquiry. As noted above, the section 174 regulations provide a

shrinking-back rule, which would instruct us to next analyze whether 

any particular components or subcomponents of the oxidizer systems 

were pilot models, discretely constructed with the purpose of evaluating 

and resolving uncertainty. See Treas. Reg. § 1.174-2(a)(5). However, 

petitioners have failed to carry their burden of establishing that any 

particular components or subcomponents were pilot models. 

Consequently, we conclude that none of CPI’s claimed supply costs are 

QREs, and we will partially sustain on this basis respondent’s 

determination that petitioners are not entitled to a research credit.

3. Wage QREs

We now turn to the issue of whether the claimed wage QREs 

satisfy the section 174 test. As a category of expenditure, such wages 

are potentially deductible under section 174 if paid or incurred during 

the taxable year.28 However, we must still determine whether the 

employee activities underlying the claimed wage QREs constituted 

“research and development” within the meaning of section 174. To 

recap, petitioners must show that (1) information was not available to 

CPI establishing the appropriate design of the oxidizers and (2) CPI

undertook investigative activities intended to discover such information.

Respondent argues that CPI employees’ activities were not 

intended to discover information that would eliminate uncertainty 

regarding the development of the systems. Respondent focuses on the 

28 For an accrual method taxpayer such as CPI, wages are generally incurred

and taken into account for the taxable year in which they are earned by the employee

providing services. See § 461(h)(2)(A)(i); see also Burlington N. R.R. Co. v. 

Commissioner, 82 T.C. 143, 148 (1984).
76

[*76] fact that CPI had extensive experience in supplying commercially 

viable oxidizer systems to customers and had developed substantial 

industry-specific knowledge before 2014. Respondent also notes that 

CPI guaranteed the performance of its systems to customers and never 

failed such a guarantee; respondent thus suggests that CPI did not lack 

information with respect to the appropriate design of its systems.29

Petitioners counter that CPI faced uncertainty as to the 

appropriate design of each system even beyond the initial starting point 

of each system’s commercial production, because the appropriate design 

of each system could not be established until after that system cleared 

various onsite tests. Petitioners suggest that uncertainty existed, 

because “[i]n all of these projects, the prospect of revising or altering the 

design of the overall system existed.” Petitioners also point to several

projects where the oxidizer supplied by CPI failed postinstallation 

testing and argue that “the appropriate design was not determined until 

after the design failed onsite testing.”

The parties thus dispute whether CPI was uncertain as to the 

appropriate design for all 19 projects. At the outset, we must reject 

petitioners’ blanket assertions that uncertainty existed with respect to 

the products as a whole simply because of the mere “prospect of revising 

or altering the design” before completion of onsite testing. The

applicable regulations distinguish between objective uncertainty as to 

the design of a product as a whole (i.e., its basic design specification) and 

objective uncertainty as to the design of a particular component or 

subcomponent. See Treas. Reg. § 1.174-2(a)(5). As alluded to above,

conducting postproduction testing on a product does not establish that 

its appropriate design as a whole “remained uncertain before those tests 

were successfully completed.” Little Sandy Coal Co., T.C. Memo. 2021-

15, at *53. Any failure of an oxidizer system to pass testing might have 

resulted in some additional information-discovering activities with

respect to a redesign of a particular component or subcomponent (with 

corresponding wage QREs then being potentially creditable) but would

not have required CPI “to scrap the entire [oxidizer] and start afresh.” 

See id.

Our determination of whether the activities underlying the wage 

QREs satisfied the section 174 test must necessarily be more granular, 

examining the activities of CPI employees. The parties did not agree to 

29 The record supports respondent’s factual contention that CPI ultimately 

satisfied the provided performance guarantees for all 19 projects.
77

[*77] a sample of CPI’s projects for 2014, thus placing at issue all 19

projects for which CPI claimed the research credit.30 See § 41(d)(2)(A); 

cf. Little Sandy Coal Co., T.C. Memo. 2021-15, at *3, *20 (effecting 

parties’ agreement to select only 4 of 11 projects as samples). We thus 

must determine whether the wage QREs associated with each project 

satisfied the section 174 test, at the level of both the projects as a whole 

and particular subcomponents that petitioners identified at trial.31

a. 3M Hutchinson (#13-07520)

This project involved CPI’s design and supply of a 30,000 SCFM 

regenerative thermal oxidizer for a 3M facility that manufactured sticky 

notes. Petitioners suggest that CPI was uncertain as to the appropriate 

design for the 3M Hutchinson project as a whole until the oxidizer 

passed onsite testing. Petitioners emphasize that this was the first 

regenerative thermal oxidizer designed by CPI.

Petitioners’ argument overlooks key facts. CPI submitted its 

final, revised proposal to 3M on August 30, 2013, and 3M accepted the 

proposal via a purchase order issued on September 3, 2013. Acceptance 

of the proposal by 3M was a key date in the development of the basic

design of the oxidizer. The proposal, which relied upon and addressed a 

detailed set of specifications provided by 3M, demonstrated that CPI 

already had considerable information available to it with respect to the 

appropriate design. For instance, the proposal observed that the 

exhaust from the Hutchinson facility “is understood to come from the 2L 

Coating Line at a volume of 18,000–25,000 SCFM at 125 F to 175 F and 

contains a combination of methanol, ethyl acetate, IPA, toluene, and 

other common solvents at loadings of 245–1750 lb/hr.” The proposal 

further provided for a 99% destruction efficiency performance 

30 Absent an agreement between the parties, project sampling improperly 

relieves the taxpayer of its burden of proving entitlement to the research credit 

claimed. See Bayer Corp. v. United States, 850 F. Supp. 2d 522, 538, 545–46 (W.D. Pa. 

2012).

31 Petitioners allocated wage QREs project by project and did not further allege

or brief the amounts of wage QREs relating to specific components or subcomponents;

given petitioners’ “all or nothing” litigation strategy on this point, we could decline to 

go deeper than the level of the 19 projects as a whole. Cf. Little Sandy Coal Co. v. 

Commissioner, 62 F.4th at 303 (affirming this Court’s decision not to apply shrinkingback rule where taxpayer failed to document research activities corresponding to 

project subcomponents). However, the trial testimony in this case addressed 

particular components and subcomponents on some of the projects, and, for the sake 

of completeness, we believe it appropriate to perform a shrinking-back rule inquiry, to 

the extent the limited record allows us to do so.
78

[*78] guarantee. As Mr. Harmsen later testified: “The majority of the 

[3M Hutchinson] oxidizer design was decided upon with the 99 percent 

destruction efficiency and the air flow rate and the VOCs that [we] are 

talking about.” Further bearing this out, CPI prepared initial general 

arrangement and P&ID drawings for the oxidizer soon after acceptance 

of the proposal, in October 2013. While minor revisions were 

subsequently made to those drawings in late 2013 and 2014, the basic 

design specification of the oxidizer did not change as a result of those 

revisions.32 We find that information available to CPI in 2013 

established the appropriate design of the oxidizer as a whole.

Consequently, corresponding wage expenditures for any 

theoretical investigative activities with respect to the oxidizer as a whole 

would have been incurred in 2013, rather than 2014, the taxable year at 

issue. See § 174(a)(1) (requiring that expenditures be “paid or incurred

. . . during the taxable year”), § 41(b)(1). We conclude that the 

appropriate design of the oxidizer as a whole had already been 

established by information gathered in 2013; thus the product as a 

whole fails the section 174 test. We look next to whether the shrinkingback rule is applicable with respect to particular components or 

subcomponents.

At trial, Mr. Harmsen identified a number of further “difficulties” 

that CPI encountered “during the design and development” of the 3M 

Hutchinson project, some of which related to particular components of 

the oxidizer design. These identified difficulties included (1) 3M’s 

preference for an induced draft fan; (2) 3M’s preference for a two-burner 

system; and (3) 3M’s discovery of discrepancies in the electrical design. 

With respect to the induced draft fan, CPI already had extensive 

specifications provided by 3M that provided information about the 

necessary fan design. In July 2013 Mr. Harmsen used those 

specifications to initially calculate the size of the fan as 23 inches. The 

final proposal then further detailed key elements of fan design, 

including the horsepower, temperature rating, and arrangement of the 

fan. In December 2013 CPI then provided that information to a fan 

supplier, AirPro, which provided design drawings for a 300 horsepower 

booster fan component. Those design drawings were then incorporated 

into the final oxidizer design. The record is unclear as to (1) what 

32 When prompted at trial to describe what subsequent changes were made to 

the design, Mr. Harmsen described (1) the addition of a walkway to the front of the 

oxidizer, (2) moving the gas trains to the back of the oxidizer, and (3) adding crane 

davits in order to lift components off the oxidizer.
79

[*79] additional, unavailable information CPI needed to determine the 

appropriate fan design and (2) what investigative activities particular 

CPI employees undertook in 2014.

With respect to the two-burner feature, CPI similarly already had 

extensive specifications provided by 3M, specifying the brand of burner 

to be used and various operational requirements. Mr. Harmsen further 

testified that the particular burner size was determined by 3M’s choice 

of brand (Maxon Kinemax). In February 2014 CPI purchased two fourinch Kinemax burners to be shipped to Pre-Heat. Petitioners did not 

produce further evidence establishing (1) what additional, unavailable 

information CPI needed to determine the appropriate design of the 

burners and (2) what investigative activities particular CPI employees 

undertook with respect to the burners in 2014. Cf. Union Carbide Corp., 

97 T.C.M. (CCH) at 1261 (finding no uncertainty as to appropriate 

design where manufacturer designed and supplied component and 

taxpayer presented no evidence of adaptation).

Finally, with respect to the change in the electrical components, 

we find that CPI employees did not perform any investigative activities 

that would constitute research and development. To the contrary, Mr. 

Harmsen’s testimony established that 3M’s electrical engineer simply 

noticed certain discrepancies where the design drawings differed from 

the specifications and requested specific changes. In response, CPI 

directed Quantum Design to make those changes. At the shrunk-back 

component level, we conclude that petitioners have failed to satisfy the 

section 174 test.

We conclude that petitioners have failed to carry their burden of 

establishing that they satisfied the section 174 test with respect to the 

claimed wage QREs on the 3M Hutchinson project.

b. Akzo Nobel (#13-07645)

This project involved CPI’s design and supply of a 6,000 SCFM 

regenerative thermal oxidizer for an industrial paint manufacturer. 

CPI’s final proposal was accepted in December 2013. Consequently, as 

with 3M Hutchinson, any theoretical investigative activities performed 

by CPI before submission of the final proposal corresponded to wage 

QREs that were not incurred in tax year 2014. Given that the proposal 

memorialized many of the already-determined basic design

considerations and specifications (e.g., type of oxidizer, airflow volume, 

VOCs at issue), we conclude that any objective uncertainty as to the 
80

[*80] design of the oxidizer as a whole was resolved before 2014, and 

thus petitioners have failed to satisfy the section 174 test.

In contrast, petitioners have established that they performed 

some investigative activities in 2014 at the shrunk-back component 

level. Namely, Mr. Harmsen and J.O.’s meeting with Akzo Nobel 

personnel in February 2014 appears to constitute research and 

development within the meaning of the section 174 regulations. Mr. 

Harmsen documented that meeting in contemporaneous notes, which 

demonstrate that he and J.O. elicited further information and 

specifications from Akzo Nobel about necessary design features for 

oxidizer components, particularly the flame arrestor component. 

However, allocating an estimated amount of wages to the activities of 

Messrs. Harmsen and J.O., pursuant to the Cohan rule, would be futile, 

because we alternatively hold that the activities performed on the Akzo 

Nobel project were not part of a process of experimentation, as required 

by section 41(d)(1)(C). See Union Carbide Corp., 97 T.C.M. (CCH) at 

1256 (observing that process of experimentation test “requires the use 

of the scientific method” and “imposes a more structured method of 

discovering information than section 174”); Treas. Reg. § 1.41-4(a)(5)(i) 

(setting out process of experimentation test’s requirements); see also 

Eustace v. Commissioner, 312 F.3d at 907 (“Experimentation is a subset 

of all steps taken to resolve uncertainty; otherwise searching for a place 

to park a car would be a ‘process of experimentation’.”). We thus more 

broadly conclude that CPI’s activity with respect to the flame arrestor

component did not constitute qualified services.

Further, petitioners have failed to demonstrate any additional 

investigative activities that CPI personnel performed to resolve design 

uncertainty with respect to the flame arrestor or any other shrunk-back 

components of the oxidizer. We conclude that petitioners have failed to 

carry their burden of establishing that they satisfied the section 174 test 

with respect to the claimed wage QREs on the Akzo Nobel project.

c. HA International (#13-07615)

This project involved CPI’s design and supply of two 13,700 SCFM 

recuperative thermal oxidizers for a manufacturer of fracking sand. At 

trial Mr. Betz identified several potential uncertainties as to the 

appropriate design of the oxidizers as a whole, including the potential 

for phenolic resin buildup and the presence of water and sand 

particulates in the process airflow.
81

[*81] However, the record demonstrates that by November 6, 2013, 

when CPI delivered to HAI a final proposal for the oxidizers, CPI had 

extensive information available to it that established the appropriate 

design of the oxidizer as a whole. In early 2013 CPI personnel had 

visited HAI’s facility and had received emissions testing information as 

to the facility’s air exhaust. That testing informed CPI of the airflow 

volume at the facility and the particular VOCs at issue, both of which

dictated the basic design specification of the oxidizer. Cf. Siemer Milling 

Co. v. Commissioner, T.C. Memo. 2019-37, at *33–34 (concluding that 

project failed section 174 test where taxpayer already had prior year 

testing information resolving uncertainty). CPI also had extensive

generalized information available to it as to the appropriate design of a 

system that dealt with sand particulate. As its proposal to HAI stated, 

CPI had previously designed “+30 units in the sand resin coating 

industry” and was highly experienced in dealing with the sand 

particulate issue. Cf. Max, T.C. Memo. 2021-37, at *33 (concluding that 

section 174 test was not satisfied where taxpayer regularly encountered 

the claimed uncertainty in past and had developed standardized 

solutions to it). To resolve the sand issue, CPI included in the November 

2013 proposal hinged access doors to allow HAI to periodically clear sand 

out of the bottom of the combustion chamber. We conclude that objective 

uncertainty did not exist with respect to the appropriate design of an 

oxidizer as a whole that could satisfy the customer’s needs and resolve 

the sand particulate issue. See Union Carbide Corp., 97 T.C.M. at 1262 

(looking to taxpayer’s “significant experience” in previously using 

component to resolve issue and finding no uncertainty under section 

174).

The November 2013 proposal similarly addressed other 

“uncertainties” as to the appropriate design identified by Mr. Betz. The 

proposal stated that the oxidizer would include a “direct fired duct 

heater system” that was “designed to help reduce both water and resin 

build up prior to” the oxidizers. At trial Mr. Shaver credibly testified 

that CPI had encountered the resin buildup issue before 2014 and had 

previously developed this particular design solution. We find that 

information was available to CPI establishing the appropriate design of 

the oxidizer as a whole during the proposal stage, before 2014.

We next look to the shrinking-back rule. At trial Mr. Betz 

discussed space constraints at the HAI facility, which required that the 

high horsepower booster fan be placed close to the oxidizer. That 

proximity posed problems, as the air from the fan would come out in a 

high-velocity jet aimed at the center of the oxidizer’s heat exchanger, 
82

[*82] degrading the heat exchanger’s performance and running the risk 

of pipe components’ burning up because of a lack of cooling airflow. Mr. 

Betz testified that CPI addressed this issue by including baffles and 

deflection plates in the design, both of which are components that can 

dissipate and redirect airflow. Even assuming arguendo that this 

implicated objective uncertainty, petitioners failed to establish that 

investigative activities were performed by CPI employees in 2014 with 

respect to the fan/baffle sheet components.33

Mr. Betz also identified a pair of issues with components that 

emerged during postinstallation testing. First, a quality audit 

performed by L.S. on the oxidizer, as installed at HAI’s facility in 2014,

revealed that several tubes in the heat exchanger had overheated 

because of inadequate airflow and broken free from the heat 

exchanger.34 CPI replaced and rewelded the tubes and then installed a 

different air splitting component (a turning vane) that more evenly 

dispersed air throughout the heat exchanger. The second issue that 

emerged during postinstallation testing was ruptured pressure release 

valves from excess vibration. CPI resolved the issue by cutting down 

the length of the damper blades.

The decisions to add the turning vane and cut down the damper 

blades may well have implicated objective uncertainty and investigative

activities. However, on the record before us, we are unable to bridge the 

vast evidentiary gap petitioners left. Aside from Mr. Betz’s vague 

testimony, petitioners’ failure to produce evidence as to what 

investigative activities were performed with respect to the turning vane 

and damper blades prevents us from applying the shrinking-back rule. 

See Eustace, 81 T.C.M. (CCH) at 1374; Trinity Indus., Inc., 691 F. Supp. 

2d at 693; see also United States v. Davenport, 897 F. Supp. 2d 496, 517–

18 (N.D. Tex. 2012) (declining to apply shrinking-back rule and 

concluding that “even if the court had concluded that some of the 

expenses claimed” were for qualified research, taxpayers failed to 

33 We note that the project proposal (finalized in 2013) stated that baffle sheets 

would be included in the oxidizer, thus suggesting that information was already 

available to CPI with respect to this component before 2014.

34 We note that any wage expenditures incurred in connection with conducting 

the quality audit would appear to be for quality control testing and thus would fail to 

satisfy the section 174 test. See Treas. Reg. § 1.174-2(a)(6)(i), (7) (providing that 

section 174 deduction is not available with respect to expenditures for “testing or 

inspection to determine whether particular units of materials or products conform to 

specified parameters”). Petitioners fail to identify how much (if any) of L.S.’s wage 

QREs correspond to this testing.
83

[*83] provide evidence tying costs to specific subcomponents). Even if 

petitioners had established that activities performed with respect to 

these two components satisfied the section 174 test, they also failed to 

identify the activity-performing CPI employees and thus did not provide 

a reasonable basis for estimating the amount of corresponding wage 

QREs. See Eustace, 81 T.C.M. (CCH) at 1374 (declining to apply the

Cohan rule where taxpayers failed to substantiate employee’s wages at 

subcomponent level); see also Shami v. Commissioner, 741 F.3d at 569

(“[T]he Tax Court was entitled to decline to make an estimate if it found 

that [the taxpayers] had not provided a reasonable basis on which to 

make one.”). We conclude that petitioners have failed to carry their 

burden of establishing that they satisfied the section 174 test with 

respect to the claimed wage QREs on the HAI project.

d. 3M Hartford (#13-07611)

This project involved CPI’s design and supply of a 25,000 SCFM 

recuperative thermal oxidizer for a 3M facility that manufactured tape. 

The final proposal for the project was accepted by 3M in 2013. As with 

the 3M Hutchinson project, the final project proposal incorporated and 

addressed detailed specifications provided by 3M and thus 

demonstrated that considerable information was already available to 

CPI with respect to the appropriate design of the oxidizer as a whole.

In addition, with respect to the 3M Hartford project as a whole, 

petitioners argued on brief that “CPI developed proprietary technology 

to design this silicone oxidizer with vertical tubes and a larger heat 

exchanger.” Petitioners failed to mention that this proprietary, 

industry-specific technology—its Quadrant SRS Silicone series—had

been developed by CPI, in the words of Mr. Harmsen, over a period of 

“close to 20 years.” Consequently, CPI had a plethora of information 

available to it with respect to the basic design specification of an oxidizer 

that worked well in the presence of silicone dioxide. The vertical 

orientation of the oxidizer, which petitioners identified as a key design 

feature addressing silicon dioxide, was well understood by CPI and had 

been used by CPI in designs for many years before 2014. We find that 

information was available to CPI establishing the appropriate design of 

the oxidizer as a whole in 2013, before tax year 2014.

At the shrunk-back component level, Mr. Harmsen identified a 

design change made to the recirculation duct component; he testified 

that 3M provided CPI with more precise specifications about the process 

airflow, which CPI was able to use to make the duct component smaller
84

[*84] at 3M’s request. The record demonstrates that Mr. Harmsen

performed basic calculations to determine the duct size that were based 

on the revised airflow specifications provided by 3M. The basic 

calculations performed by Mr. Harmsen were not investigative activities

within the meaning of the section 174 regulations. See Max, T.C. Memo. 

2021-37, at *30 (finding that information was subjectively unknown to 

taxpayer with respect to appropriate sizing of component but concluding 

that the taxpayer “already ha[d] the information necessary to address 

that unknown”); see also Little Sandy Coal Co. v. Commissioner, 62 

F.4th at 298 (characterizing a sizing question as implicating only generic 

construction uncertainty). Petitioners did not produce additional 

credible evidence as to what investigative activities were performed 

with respect to the duct component.

With respect to the burner and gas train components, Mr. 

Harmsen also identified an instance where 3M requested that CPI 

determine whether the oxidizer could run the process combustion air as 

fuel for the burner. CPI input the provided specifications into 

standardized spreadsheets, which output the estimated fuel costs and 

sizes for a burner that used either combustion air or raw gas. Mr. 

Harmsen testified that CPI ultimately determined that using the 

combustion air would be countereffective, as the silicone dioxide 

byproduct would plug the burner. However, the record establishes that, 

to the extent uncertainty may have existed with respect to this issue, it 

was resolved in 2013, before the tax year at issue. The final project 

proposal, which was accepted by 3M in November 2013, contained

footnotes in the sections discussing the burner and gas train 

components, stating: “Burner system changed to raw gas, 11/12/13” and 

“Combustion air eliminated and Gas train modified to accommodate raw 

gas burner, 11/12/13.” Petitioners have thus failed to establish that 

uncertainty existed in 2014 with respect to the burner and gas train 

components designs.

Finally, in June 2014 3M and CPI executed a scope change to the 

project proposal, replacing the proposed backward inclined blade style 

fan with a radial blade style fan. Again, however, petitioners did not 

produce evidence of what investigative activities were performed by CPI 

employees with respect to any uncertainty. To the contrary, Mr. 

Harmsen testified that 3M personnel instigated the change because of

their concerns about how the fan would handle particulates.
85

[*85] We conclude that petitioners have failed to carry their burden of 

establishing that they satisfied the section 174 test with respect to the 

claimed wage QREs on the 3M Hartford project.

e. C&D Zodiac (#13-07583)

This project involved CPI’s design and supply of a 9,400 SCFM 

regenerative thermal oxidizer for an aircraft composite manufacturer. 

CPI’s final proposal for the project was accepted by C&D Zodiac in 

October 2013. The record establishes that, as of October 2013, when 

CPI tendered its final project proposal to C&D Zodiac, CPI had the 

necessary information with respect to the appropriate design of the 

product as a whole. In October 2013 CPI obtained detailed 

measurements and calculations from the process airflow, which Mr. 

Harmsen was able to use to make determinations about the oxidizer size 

and the necessity of additional features. After acceptance of the final 

proposal, in November 2013, C&D Zodiac provided some additional 

information to CPI that necessitated minor changes to the design. We 

conclude that any objective uncertainty was resolved in 2013, rather 

than 2014.

At the shrunk-back component level, petitioners failed to 

establish that investigative activities were performed in 2014. Mr. 

Harmsen identified an instance where CPI moved the location of 

thermocouples on the oxidizer from the top of the oxidizer to its back 

wall.35 The record contains only a rough handwritten drawing of the 

new location, made by J.O. in February 2014. Neither the drawing nor 

Mr. Harmsen’s vague testimony established what investigative 

activities CPI performed with respect to the thermocouples.

We conclude that petitioners have failed to carry their burden of 

establishing that they satisfied the section 174 test with respect to the 

claimed wage QREs on the C&D Zodiac project.

f. Teva (#14-07808)

This project involved CPI’s design and supply of a 1,500 SCFM 

regenerative thermal oxidizer for a pharmaceutical pill manufacturer. 

Petitioners presented comparatively little trial testimony with respect 

to CPI’s work on the Teva project. Petitioners presented some 

photographic evidence and testimony about dye penetrant testing 

35 A thermocouple is a device that measures temperature inside an oxidizer.
86

[*86] conducted on the oxidizer. Mr. Betz characterized that testing as 

intended to confirm that the subcontractor’s assembly was “being made 

as per our drawings.” Taking that uncontroverted testimony as credible, 

the purpose of the testing was thus to determine whether the oxidizer, 

as fabricated and assembled, conformed to the design, not to determine 

whether the design itself was appropriate. See Max, T.C. Memo. 2021-

37, at *35 (concluding that testing conducted to determine whether 

components met taxpayer’s “established parameters” for product was 

excluded quality control testing); Natkunanathan, 99 T.C.M. (CCH) at 

1074 (observing that any testing conducted by taxpayer to “ensure 

compliance with customer specifications” was excluded quality control 

testing). We find that the dye testing constituted excluded quality 

control testing, not research and development within the meaning of the 

section 174 regulations.36 See Treas. Reg. § 1.174-2(a)(7) (“[T]esting or 

inspection to determine whether particular units of materials or 

products conform to specified parameters is quality control testing.”).

We now turn to petitioners’ evidence relating to shrunk-back

components of the design. Mr. Betz identified the site-specific 

requirement that the oxidizer transmit no more than a “certain amount 

of vibration” to Teva’s pharmaceutical facility. Petitioners produced 

photographs of vibration spring components that were installed on the 

oxidizer to mitigate this concern.37 However, petitioners did not produce 

further evidence establishing what investigative activities were 

performed by particular CPI employees with respect to the spring 

components. Merely identifying a project difficulty and the eventual 

design solution, without bridging the gap with evidence as to what

investigative activities were performed, does not satisfy petitioners’ 

burden.

Mr. Betz also discussed an issue where postinstallation testing 

showed that the heat exchanger was preheating the airflow at too high 

a level, a flaw which CPI corrected by modifying the control system to 

introduce fresh diluting air. Again, however, petitioners did not

establish what investigative activities were performed by particular CPI 

employees with respect to the heat exchanger. We conclude that 

36 Even if the testing were research and development within the meaning of 

the section 174 regulations, we would still conclude that petitioners have failed to 

provide a reasonable basis for the Court to apply the Cohan rule, given the absence of 

evidence in the record as to which particular CPI employees conducted the testing.

37 The record is unclear as to when the vibration spring components were 

installed.
87

[*87] petitioners have failed to carry their burden of establishing that 

they satisfied the section 174 test with respect to the claimed wage 

QREs on the Teva project.

g. Mitsubishi (#14-07899)

This project involved CPI’s design and supply of a 35,000 SCFM 

regenerative thermal oxidizer. Petitioners suggest that CPI personnel 

conducted investigative activities in calculating the various component 

sizes of the oxidizer. We again reject their assertion. CPI already had 

the necessary information, from both the customer and CPI’s own 

existing knowledge of the facility (where it had previously installed a 

catalytic oxidizer), to determine the basic design specification of the 

oxidizer as a whole. See Max, T.C. Memo. 2021-37, at *30–31 (finding 

that taxpayer already had information necessary to determine 

appropriate size of design element before performing iterative size 

testing). Mr. Harmsen then used that information to perform basic

calculations for components, both by hand and by inputting it into a 

computer spreadsheet. As noted above, performing simple calculations 

on already-available information or data does not itself constitute an 

investigative activity within the meaning of the section 174 regulations. 

Cf. id. at *31. Petitioners have not established that CPI employees 

undertook investigative activities with respect to the design of the 

oxidizer as a whole.

We next look to the shrinking-back rule. At trial Mr. Harmsen 

testified that the oxidizer’s poppet valve went out of alignment and came 

unscrewed. Mr. Harmsen testified that CPI initially addressed the issue 

by temporarily welding connections, before eventually replacing the 

valve and shaft system completely. Such activities do not appear to be 

research and development within the meaning of the section 174

regulations. See Siemer Milling Co., T.C. Memo. 2019-37, at *33 

(concluding that section 174 test was not satisfied by activities “more 

akin to mechanical maintenance”). Further, Mr. Harmsen did not 

address in his testimony (1) when the valve issue was discovered; (2) 

which CPI employees performed activities; or (3) whether any activities 

were investigative. Mr. Harmsen’s testimony was the primary evidence 

that petitioner produced regarding the valve issue. Even if petitioners 

had established that the valve component satisfied the section 174 test, 

petitioners nonetheless have not provided a reasonable basis for the 

Court to estimate the amount of creditable wage QREs. See Shami v. 

Commissioner, 741 F.3d at 569 (affirming this Court’s decision not to 

apply Cohan where taxpayer failed to produce reasonable evidentiary 
88

[*88] basis for estimate). We conclude that petitioners have failed to 

carry their burden of establishing that they satisfied the section 174 test 

with respect to the claimed wage QREs on the Mitsubishi project.

h. 3M Monrovia (#14-07784)

This project involved CPI’s design and supply of a 12,000 SCFM 

recuperative thermal oxidizer. Petitioners did not present credible 

evidence establishing uncertainty as to the design of the oxidizer as a 

whole (i.e., the basic design specification). To the contrary, Mr. 

Harmsen testified to the following: 

3M has a good idea of what their process can do. So they 

know their VOCs, they know their ranges very well. They 

know the extent of their equipment they used to buy to 

make this thing. So they know what their design criteria 

needs to be, that doesn’t get iterated very much.

Mr. Harmsen’s characterization of the basis of design accords 

with the record, particularly with the extensive design specifications 

that 3M provided to CPI at the outset of the project. We find that the 

information provided by 3M established the design of the oxidizer as a 

whole.

With respect to shrunk-back components, Mr. Harmsen described

the 3M Monrovia design as using a unique particulate-capturing device

that would intake airflow during the startup and shutdown phases of 

the system to capture silicone dust and silicone dioxide. Mr. Harmsen 

noted that the idea for the particulate-capturing device was jointly 

conceived by himself and personnel from 3M. However, Mr. Harmsen

did not elaborate on what investigative activities were performed to 

determine the design of the particulate-capturing device.

Mr. Harmsen further testified that, on account of California

environmental regulations with respect to nitrogen oxides and carbon 

monoxides, the burner system (and its fuel emissions) was the design’s 

“driving factor.” Mr. Harmsen testified that CPI personnel talked to 

Maxon about the requirements for a low nitrous oxide burner, which was 

then incorporated into the design. Discussions with Maxon 

representatives might well have involved investigative activities within 
89

[*89] the meaning of the section 174 regulations.38 Once again,

however, petitioners failed to elaborate as to which particular CPI 

employees were involved with respect to the burner and its fuel 

emissions.

Petitioners did not establish that particular CPI employees 

performed investigative activities with respect to any other shrunk-back 

components of the oxidizer. We conclude that petitioners have failed to 

carry their burden of establishing that they satisfied the section 174 test 

with respect to the claimed wage QREs on the 3M Monrovia project.

i. Celanese (#14-07852)

This project involved CPI’s design and supply of a 20,000 SCFM 

regenerative thermal oxidizer. In December 2013 the engineering firm 

engaged by Celanese, WorleyParsons, provided CPI with extensive 

design specifications and requirements. That information in turn 

dictated the basic design specification of the oxidizer. We thus conclude 

that CPI did not undertake investigative activities with respect to the 

oxidizer as a whole. We now turn to the question of whether the section 

174 test was satisfied at the shrunk-back component level.

At trial Mr. Harmsen identified the cold temperatures at the 

Edmonton facility as a design difficulty.39 With respect to the cold 

temperatures, petitioners established that objective uncertainty existed

as to how to design the gas train component. The record contains an 

email from Mr. Betz to a Maxon representative asking about how to 

meet Celanese’s cold temperature specifications in designing the gas 

train. We further find that Mr. Betz’s email activity was an 

investigative activity within the meaning of the section 174 regulations. 

See Treas. Reg. § 1.174-2(a)(1). However, allocating a de minimis,

estimated amount of wages to Mr. Betz’s email activity, pursuant to the 

Cohan rule, would be futile; we alternatively hold that Mr. Betz’s email

38 However, such activities would likely not satisfy the process of 

experimentation test. See Siemer Milling Co., T.C. Memo. 2019-37, at *24 (citing 

Treas. Reg. § 1.41-4(a)(8) (example 5) (“[E]valuation of products available from vendors 

is not a process of experimentation.”)).

39 Mr. Harmsen also vaguely alluded to difficulties relating to Canadian 

building code and product standards, which the record suggests may have involved 

whether the control house was subject to building code standards. Petitioners did not 

establish (1) what information was unavailable to CPI with respect to the Canadian 

rules, nor (2) what investigative activities were undertaken by CPI employees with 

respect to those rules.
90

[*90] activity was not part of a structured process of experimentation

and thus fails to clear the higher bar of section 41(d)(1)(C). See Siemer 

Milling Co., T.C. Memo. 2019-37, at *36 (describing taxpayer’s testing 

of third-party product “more akin to evaluating available products on 

the market . . . than a true process of experimentation”); Union Carbide 

Corp., 97 T.C.M. (CCH) at 1256 (observing that process of 

experimentation test “requires the use of the scientific method” and 

“imposes a more structured method of discovering information than 

section 174”); see also Eustace v. Commissioner, 312 F.3d at 907. We

thus more broadly conclude that petitioners did not carry their burden 

of establishing that CPI’s activity with respect to the gas train 

component constituted qualified services.

Petitioners have failed to demonstrate any additional 

investigative activities that CPI personnel performed with respect to the 

gas train or other shrunk-back components of the oxidizer. We conclude 

that petitioners have failed to carry their burden of establishing that 

they satisfied the section 174 test with respect to the claimed wage 

QREs on the Celanese project.

j. Smalley (#14-07658)

This project involved CPI’s design and supply of an 800 SCFM 

direct thermal oxidizer for an aircraft engine fastener manufacturer. 

The Smalley project involved the customer’s concern about preventing 

visible smoke emissions, rather than eliminating particular VOCs. 

Because this objective was unusual for CPI, CPI did not have

information available as to what temperatures would cause emissions 

to be visible in the process airflow. To gather that information, CPI 

conducted simulation testing at the Smalley facility in 2014, using steel 

samples coated with the facility’s condensation byproduct, which were 

then placed in a furnace at the Smalley facility. By setting the furnace 

to particular temperatures, CPI personnel were able to observe when

smoke emissions from the condensation were present. Using the testing 

results, CPI personnel then programmed the oxidizer’s control system 

to automatically turn the burner on and off according to whether the 

facility’s furnaces were operating at the observed temperatures that had

created visible smoke. We find that this testing constituted research 

and development within the meaning of the section 174 regulations.40 

See Treas. Reg. § 1.174-2(a)(1) (“[A]ctivities [must be] intended to 

40 We note that programming of the control system itself was not an 

investigative activity within the meaning of the section 174 regulations.
91

[*91] discover information that would eliminate uncertainty concerning 

the development or improvement of a product.”)

However, assuming arguendo that the testing would satisfy the 

process of experimentation test, petitioners did not produce evidence 

sufficient to provide the Court with a reasonable basis to approximate 

the wage QREs corresponding to these activities, pursuant to the Cohan

rule. Petitioners did not produce any evidence as to which employees 

performed the testing, leaving a potential Cohan rule estimate as little 

more than a stab in the dark. See Shami v. Commissioner, 741 F.3d at 

568 (observing that applying Cohan rule to an employee’s wage QREs 

requires a threshold showing by taxpayer that “its employee performed 

some qualified services”); Moore, T.C. Memo. 2023-20, at *10–11; CRA

Holdings US, Inc. v. United States, No. 15-CV-239, 2018 WL 4001675, 

at *8 (W.D.N.Y. Aug. 22, 2018) (concluding that Cohan rule was 

inapplicable in discovery where taxpayer failed to provide “specific 

information to document the actual time [the taxpayer’s employees] 

spent in performing qualified services”); see also Coors Porcelain Co., 52 

T.C. at 698 (observing that taxpayer’s failure to produce evidence 

rendered it “impossible” to differentiate section 174 research 

expenditures from nondeductible costs). We see no reason petitioners 

could not have elicited testimony from their trial witnesses on this point.

See Buelow v. Commissioner, 970 F.2d at 415; Kollsman Instrument 

Corp., 51 T.C.M (CCH) at 467 (declining to apply Cohan rule where 

taxpayer was unable to present trial witnesses knowledgeable about the 

expenses at issue). We thus decline to excuse petitioners’ failure to do 

the necessary evidentiary spadework before trial.

In addition, Mr. Betz identified a design difficulty due to the 

oxidizer’s proposed location in the middle of the Smalley facility 

building; because of that location, a fan could not be used to blow process 

airflow into the oxidizer. Accordingly, CPI determined to use a vertical 

combustion chamber that would allow hot air to naturally rise through 

the oxidizer. However, the record establishes that CPI had determined 

the basic design specification of the vertical oxidizer before submitting 

a project proposal to Smalley in late 2013. That project proposal 

described the vertical combustor process at length and provided sizes for 

its components. We conclude that any investigative activities were 

performed in 2013 and thus do not satisfy the section 174 test in 2014.

At the shrunk-back component level, petitioners did not establish 

that investigative activities were performed in 2014 by CPI employees.

We conclude that petitioners have failed to carry their burden of 
92

[*92] establishing that they satisfied the section 174 test with respect 

to the claimed wage QREs on the Smalley project.41

k. Isola I (#14-07607)

This project involved CPI’s design and supply of several

replacement parts for an existing 7,000 SCFCM recuperative thermal 

oxidizer. Petitioners also spent relatively little trial testimony 

discussing this project. The record demonstrates that CPI had extensive 

information available to it as to the appropriate design of those parts by 

the time the final revised proposal was accepted by Isola on November 

12, 2013. Most significantly, CPI had previously supplied the existing 

oxidizer at the Isola facility and thus had extensive information 

available with respect to its design. Petitioners failed to establish that 

particular CPI employees performed investigative activities with 

respect to the design of the replacement parts. We conclude that

petitioners have failed to carry their burden of establishing that they 

satisfied the section 174 test with respect to the claimed wage QREs on 

the Isola I project.

l. Isola II (#14-07890)

This project involved CPI’s design and supply of a 6,000 SCFM 

recuperative thermal oxidizer. As with Isola I, CPI already possessed 

extensive information about the Isola facility and its process airflow. 

Also as with Isola I, petitioners spent relatively little trial testimony 

addressing this project. Petitioners did not establish (1) that objective 

uncertainty existed as to the oxidizer as a whole or (2) what 

investigative activities particular CPI employees undertook to resolve 

any theoretical uncertainty.

We thus move on to the shrunk-back component level. At trial 

Mr. Betz identified a postinstallation issue with the control system 

component, where testing revealed that the system was pushing some 

hot air out of the ovens. However, the record bears out that this was 

ordinary testing for quality control and thus not research and 

development. See Treas. Reg. § 1.174-2(a)(7). While CPI did modify the 

41 Alternatively, we hold that petitioners failed to carry their burden of 

establishing that the testing was part of a methodical plan that constituted a process 

of experimentation. Cf. Siemer Milling Co., T.C. Memo. 2019-37, at *9–10, *38

(concluding that taxpayer’s heat treating of grain samples at “varying times and 

temperatures” to determine functionality lacked a hypothesis and “methodical plan” 

and thus was not part of a process of experimentation).
93

[*93] control system after discovering the air pressure issue, petitioners 

have failed to establish that testing itself was intended to gather 

information about the appropriate design of the oxidizer, rather than to 

simply test whether the system conformed to the design and met quality 

standards. See id. para. (a). Similarly, petitioners have failed to 

demonstrate what investigative activities CPI employees performed

after the testing to determine the necessary modifications to the control 

system’s sequence of operations.

In addition, Mr. Betz’s trial testimony did not establish that 

further investigative activities were performed with respect to any other

shrunk-back component of the oxidizer. We conclude that petitioners 

have failed to carry their burden of establishing that they satisfied the 

section 174 test with respect to the claimed wage QREs on the Isola II

project.

m. Goodyear Lawton (#14-07925)

This project involved CPI’s design and supply of a 50,000 SCFM 

regenerative thermal oxidizer. Petitioners did not establish (1) that 

objective design uncertainty existed as to the oxidizer as a whole or 

(2) what investigative activities particular CPI employees undertook to 

resolve that uncertainty.

That leaves the shrinking-back rule. Petitioners suggest that CPI 

encountered “technical challenges with effectively distributing the 

temperature with only a single burner, creating proper seals on the 

poppet valves and strict shipping constraints.” At trial, Mr. Harmsen 

similarly testified that CPI was “worried about distribution of 

temperature with a single burner inside of a combustion chamber” 

because of the large size of the oxidizer. We found Mr. Harmsen to lack 

credibility with respect to this contention at trial.42 Mr. Harmsen did 

not testify as to (1) when that concern arose; (2) what information was 

unavailable with respect to the appropriate design of the burner 

component; or (3) what actions were taken by CPI employees to gather 

additional information for the design. The record is similarly silent on 

this point.

42 We note that, in contrast to Mr. Harmsen’s characterization, the final project 

proposal stated that CPI’s burner design “provides the high velocity which creates a 

tremendous amount of turbulence and leads to the excellent temperature uniformity 

for which TRITON RTO’s are known,” suggesting that information was already 

available to CPI with respect to a design that achieved temperature uniformity.
94

[*94] Next, Mr. Harmsen testified that CPI was concerned about 

getting the poppet valves to seal, because of their large size. Again, 

neither Mr. Harmsen’s testimony nor the record establishes (1) when 

the concern arose; (2) what information was unavailable; and (3) what 

actions were taken by CPI employees to gather additional information.

Finally, Mr. Harmsen testified that the possibility of oversizing 

the oxidizer was a design challenge, as freight trucks might not be able 

to carry a too-wide oxidizer. We fail to see how this issue establishes 

that CPI lacked information as to the appropriate design of the oxidizer. 

To the contrary, Mr. Harmsen’s testimony suggests that information 

was readily available to CPI with respect to the typical capacity of 

freight trucks, and CPI personnel simply kept this information in mind 

when determining the oxidizer’s size.

We conclude that petitioners have failed to carry their burden of 

establishing that they satisfied the section 174 test with respect to the 

claimed wage QREs on the Goodyear Lawton project.

n. Wenner (#14-0800)

This project involved CPI’s design and supply of a 3,000 SCFM 

catalytic oxidizer for an artisanal bread manufacturer. After contacting 

CPI, Wenner provided CPI with specifications about the airflow and 

ethanol quantities at its facility. CPI personnel then entered those 

specifications into a spreadsheet that provided heat release and LEL 

levels. Those outputs in turn dictated CPI’s design choice to use a 

catalytic oxidizer, rather than a thermal one.

We thus agree with petitioners’ suggestion that information was 

not initially available to CPI to establish the appropriate design of the 

oxidizer as a whole. However, we disagree that CPI undertook activities 

intended to discover such information. Wenner provided CPI with the 

key information and specifications, which were then entered into 

spreadsheets in a rote fashion. The output of the spreadsheets then 

dictated CPI’s ensuing design choices. We conclude that petitioners 

have failed to carry their burden of establishing that the product as a 

whole satisfied the section 174 test. We look next to whether the 

shrinking-back rule is applicable.

At trial, Mr. Betz identified several design challenges that relate 

to components, including (1) the need to control high temperatures and 

(2) the concern that baking oils and fats would degrade the catalyst. 

With respect to the temperatures, CPI included an internal hot gas 
95

[*95] bypass in the design, which avoided overheating the heat 

exchanger by outputting hot air directly from the catalyst bed to the 

stack. However, petitioners failed to establish (1) what information was 

unavailable to CPI with respect to the hot gas bypass or (2) what 

investigative activities were undertaken by CPI employees.

With respect to the baking oils and fats, CPI similarly included a 

catalyst guard in the design, which reacted to and vaporized the oils and 

fats before they encountered the catalyst itself. Again, however, 

petitioners failed to establish (1) what information was unavailable to 

CPI with respect to the hot gas bypass or (2) what investigative activities 

were undertaken by CPI employees.

We conclude that petitioners have failed to carry their burden of 

establishing that they satisfied the section 174 test with respect to the 

claimed wage QREs on the Wenner project.

o. East Balt (#14-07950)

This project involved CPI’s design and supply of a 5,000 SCFM 

catalytic oxidizer for a hamburger bun manufacturer. Before submitting 

a project proposal, CPI personnel initially visited the East Balt facility

to measure the airflows from the baking ovens. Absent the 

measurements concerning the airflows, information was not available to 

CPI establishing the appropriate design as a whole. As we have found, 

airflow volume and VOC concentrations were some of the considerations 

that dictated a project’s basic design specification. In addition, we find 

that measuring these airflows was an investigative activity within the 

meaning of the section 174 regulations. However, even assuming that 

this activity also satisfied the process of experimentation test, 

petitioners’ evidentiary imprecision would prevent us from applying the 

Cohan rule to estimate the amount of wages that corresponded to this 

activity; accordingly, petitioners have failed to establish which CPI 

employees performed the measuring activities.43 See Shami v. 

Commissioner, 741 F.3d at 568.

43 The closest petitioners came to providing a reasonable basis for applying the 

Cohan rule was Mr. Betz’s testimony, where he repeatedly used the collective pronoun 

“we” with respect to the taking of the measurements. But as the Court had ample 

opportunity to observe at trial, Mr. Betz’s frequent uses of “we” referred to CPI, rather 

than to himself and any other identifiable individuals. The record is entirely silent as 

to which employees performed the measurements at the East Balt facility.
96

[*96] Next, we look to the shrinking-back rule. At trial, Mr. Betz 

identified an issue that occurred during the fabrication process, where 

CPI needed to increase the height of the exhaust stack in response to 

concerns from the EPA. To account for the increased size, CPI added a 

platform around the exhaust stack to the design in order to stabilize the 

stack during high wind periods. However, once again, petitioners failed 

to establish what information was unavailable with respect to the 

structural support and wind speed and (2) what activities particular CPI 

employees undertook to gather that information. To the contrary, Mr. 

Betz testified that CPI had already accounted for a potential high wind 

speed of 90 miles per hour when determining structural support for an 

oxidizer in the Chicago area; it is unclear what other information CPI 

needed to design the exhaust stack platform.

Petitioners did not credibly establish (1) that information was 

unavailable and (2) that particular CPI employees undertook 

investigative activities with respect to any other shrunk-back 

components of the oxidizer. We conclude that petitioners have failed to 

carry their burden of establishing that they satisfied the section 174 test 

with respect to the claimed wage QREs on the East Balt project.

p. M&W Ireland (#14-07718)

This project involved CPI’s supply of a wastewater treatment 

system to an Intel Corp. facility in Ireland. The proposal accepted by 

M&W (Intel’s general contractor) stated that CPI would “copy exactly” 

a previous wastewater treatment system supplied by CPI to Intel. The 

proposal further included several minor, site-specific design changes, 

some of which were necessitated by the need for the system components 

to meet European product standards (known as CE). CPI thus modified 

the design to include components from European suppliers. Petitioners 

suggest that these site-specific requirements required CPI to engage in 

an iterative process to determine a design that included components 

that were in compliance with European standards. At trial Mr. 

Harmsen testified that, on account of the European standards, CPI “had 

to go out and figure out and find parts and pieces that were CE 

approved” and then redesign the system to fit those approved 

components. An objective lack of information as to how to meet the 

European product standards could theoretically constitute an 

uncertainty within the meaning of the section 174 regulations. 

However, petitioners have not established (1) that information about the 

European product standards was unavailable to CPI or (2) that CPI 

employees conducted any relevant investigative activities. We find that 
97

[*97] the information previously available to CPI (i.e., the information 

from its previous project with Intel) established the basic design 

specification of the project. See Little Sandy Coal Co. v. Commissioner, 

62 F.4th at 299 (“[A] manufacturer may not simply ‘add a few new bells 

and whistles’ on a pre-existing product and claim uncertainty as to the 

whole.”).

In addition, at the shrunk-back component level, petitioners have 

not established that CPI employees performed any investigative

activities. We conclude that petitioners have failed to carry their burden 

of establishing that they satisfied the section 174 test with respect to the 

claimed wage QREs on the M&W Ireland project.44

q. Enterprise (#14-07851)

This project involved CPI’s design and supply of two hot air 

recirculation systems and two internally insulated VOC hot gas 

bypasses. The record firmly establishes that, as of 2014, CPI had 

information available to it establishing the basic design specification of 

both products, each of which was a commonly used component in CPI’s

systems. Before 2014 CPI was particularly experienced in resolving the 

outdoor low temperature issues that Enterprise was facing, to the extent 

that CPI personnel had published an industry-facing article discussing 

its standard hot air recirculation solution. Cf. Union Carbide Corp., 97 

T.C.M. (CCH) at 1261 (concluding that information was available to 

taxpayer under section 174 in part because of taxpayer’s experience in 

using particular component to solve design issue). CPI’s generalized

experience with the low temperature issue was bolstered by the sitespecific information that Messrs. Betz and Harmsen obtained from their 

inspection of the Rifle facility’s existing oxidizers in 2013. From that 

inspection, CPI determined that the oxidizer was experiencing issues 

44 In the alternative we also conclude that the expenditures incurred in 

connection with the M&W Ireland project are independently excluded from the 

definition of qualified research by way of the section 41(d)(4)(B) adaptation exclusion. 

Cf. Trinity Indus., Inc., 691 F. Supp. at 697 & n.11 (holding in the alternative that 

adaptation exclusion applied to taxpayer’s “refinement of a preliminary design” 

provided by customer). Whatever the scope of the adaptation exclusion, we find it 

evident that an exact copy of a previous product with some minor site-specific

modifications falls squarely within its plain meaning. See § 41(d)(4)(B) (excluding 

“[a]ny research related to the adaptation of an existing business component to a 

particular customer’s requirement or need”); Adaptation, Oxford English Dictionary

(3d ed. 2011), https://www.oed.com/view/Entry/2115 (last updated March 2023)

(defining adaptation as “[t]he action or process of adapting one thing to . . . suit 

specified conditions, esp. a new or changed environment, etc.”).
98

[*98] with (1) recirculation of cold air at the inlet; (2) pinhole leaks; 

(3) uninsulated components; and (4) a possibly dangerous natural gas 

injector. On January 2, 2014, Mr. Harmsen submitted a report to 

Enterprise, detailing the inspection findings and the recommendation 

that Enterprise engage CPI to design and supply CPI’s hot air 

recirculation solution and make other necessary fixes. That report 

included the necessary basic information and specifications for 

designing the components, including the particular VOCs at issue and 

the cold temperatures at the facility. We thus conclude that CPI had 

resolved any objective uncertainty about the basic design specification 

of the two components before 2014. Cf. Siemer Milling Co., T.C. Memo. 

2019-37, at *33 (concluding that project failed section 174 test where 

taxpayer already had prior-year testing information resolving 

uncertainty).

At trial, petitioners’ counsel and Mr. Harmsen sought to 

characterize the ultimate design of the components as “significantly 

different” from the initial design projections in the report. This 

characterization appeared to rely on the fact that the final general 

arrangement drawing changed the location of the hot air recirculation 

duct system and added a new fan to one of the existing oxidizers. 

However, petitioners failed to further explain how the design of the hot 

air recirculation component itself (as opposed to its location) changed. 

Nor did petitioners produce evidence showing what activities particular 

CPI employees performed to gather information about the appropriate 

placement of the air recirculation duct system or the addition of the fan. 

We find Mr. Harmsen to lack credibility with respect to his testimony 

suggesting that the final design as a whole was “significantly different” 

from his initial recommendations.

We conclude that petitioners have not produced credible evidence 

establishing (1) what information was otherwise unavailable to CPI 

with respect to the design of the two components; and (2) what 

investigative activities CPI personnel undertook to obtain such 

information in 2014. To the extent that investigative activities were

performed with respect to the Enterprise project, we find that they 

correspond to wages that were incurred in tax year 2013. We conclude 

that petitioners have failed to carry their burden of establishing that 

they satisfied the section 174 test with respect to the claimed wage 

QREs on the Enterprise project.
99

r. DuPont La Porte (#14-07831)

This project involved CPI’s design and supply of a 1,067 SCFM 

direct thermal oxidizer for a chemical manufacturing facility. 

Petitioners identified the large size of the exhaust stack as a design 

uncertainty. However, petitioners failed to establish that CPI itself 

conducted any investigative activities intended to resolve this 

uncertainty. Indeed, we find that, in contrast to its typical process, CPI 

simply engaged IVI North to design the exhaust stack itself to DuPont’s 

provided specifications, because CPI lacked the capability to do so.45 

Petitioners have offered no evidence establishing what (if any)

investigative activities IVI North or CPI may have conducted with 

respect to the stack’s design. Cf. Union Carbide Corp., 97 T.C.M. (CCH) 

at 1261 (holding that uncertainty did not exist where third party 

designed product and taxpayer provided no evidence that it modified the 

design). Even if petitioners had been able to make such a showing with 

respect to IVI North, they have not contended at any point in this 

litigation that they incurred contract research expenses with respect to 

amounts paid to their subcontractors, and we would thus deem that 

issue conceded.46 See Petzoldt, 92 T.C. at 683. 

At trial Mr. Harmsen also identified the design of a custom burner 

for the project as a design difficulty. However, Mr. Harmsen testified 

that this entailed “going out and finding a supplier that could design a 

custom-made burner for this application.” Even assuming arguendo 

that contacting suppliers for bids constitutes research and development 

within the meaning of the section 174 regulations, it is assuredly not 

part of a process of experimentation. See Siemer Milling Co., T.C. 

Memo. 2019-37, at *36. 

We conclude that petitioners have failed to carry their burden of 

establishing that CPI employees performed qualified services with 

respect to the DuPont La Porte project.

45 On this point, we find Mr. Harmsen’s trial testimony—that IVI North did 

not do any design work—to lack credibility, in part because it directly conflicted with 

Mr. Betz’s testimony, as well as with the IVI North quote and the purchase order CPI 

issued to IVI North, which described the agreed-upon services as “[d]esign and 

fabricate exhaust stack.” 

46 As noted above, section 41(b)(3)(A) allows a limited amount of the credit for 

contract research expenses, defined as amounts paid or incurred “by the taxpayer to 

any person (other than an employee of the taxpayer) for qualified research.”

[*99]
100

s. Reclaimed Energy (#14-07981)

This project involved CPI’s design and supply of a 15,000 SCFM 

regenerative thermal oxidizer. Because of CPI’s longtime customer 

relationship with Reclaimed Energy, CPI personnel already had 

significant information about the facility’s airflow from work on previous 

projects, much of which they re-incorporated into a P&ID drawing for 

the new oxidizer. Trial testimony by Mr. Harmsen further addressed 

the basis of this design: 

Petitioners’ counsel: “What information were you provided 

at the beginning of the project?” 

Mr. Harmsen: “We had history with Ron [Snyder, a 

Reclaimed Energy representative] in his process, so we 

knew a little bit about it. What we wanted from him and 

what we received were what he could perceive as a 

maximum. So if he was adding a new distillation column, 

what was that going to do to his existing, how many rows 

are you going to add, and what would they produce. And 

we use that to try to reconcile against what the oxidizer 

maximums would be.”

We understand Mr. Harmsen’s testimony as stating that Reclaimed 

Energy provided CPI with information about the potential airflow 

volume and VOC concentrations at the Connersville facility, taking into 

account potential future expansion of the facility. Mr. Harmsen further 

testified that he input the VOC solvent toluene into a Bessy spreadsheet, 

because that was “the solvent [Ron] likes to say he has a lot of.”47 Using

the provided information and the output of the spreadsheet, Mr. 

Harmsen and other CPI personnel were able to determine the 

appropriate size of the various components and reduce them to design 

drawings. Petitioners point to no evidence suggesting that CPI 

employees conducted investigative activities with respect to the basic 

design specification of the oxidizer. We thus find that the information 

provided to CPI by Reclaimed Energy established the appropriate 

design of the oxidizer as a whole, and CPI personnel thus did not 

perform activities intended to discover such information within the 

meaning of the section 174 regulations. 

47 Mr. Harmsen also input methane into a separate Bessy spreadsheet to 

account for a possible worst-case scenario, because of methane’s high BTU rating.

[*100]
101

[*101] In addition, Mr. Harmsen’s trial testimony did not establish that 

further investigative activities were performed with respect to any 

shrunk-back component of the oxidizer. We conclude that petitioners 

have failed to carry their burden of establishing that they satisfied the 

section 174 test with respect to the claimed wage QREs on the 

Reclaimed Energy project.

t. Conclusion

We conclude that petitioners have failed to carry their burden of 

establishing that the activities corresponding to their claimed wage 

QREs constituted qualified research or direct supervision or support of 

qualified research, within the meaning of section 41(b)(2)(B). 

Accordingly, we will sustain respondent’s determination that petitioners 

are not entitled to a research credit.

D. Funded Research Exclusion

We now address the parties’ arguments with respect to the funded 

research exclusion, as a discrete alternative holding. Section 41(d)(4)(H) 

excludes from the definition of qualified research “[a]ny research to the 

extent funded by any grant, contract, or otherwise by another person.” 

Section 41 does not define the term “funded.” The regulations provide 

two factors that are relevant in determining whether research is 

funded.48 First, “[a]mounts 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” are not treated as funding. See

Treas. Reg. § 1.41-4A(d)(1); see also Fairchild Indus., Inc. v. United 

States, 71 F.3d 868, 870 (Fed. Cir. 1995) (describing exclusion as

allocating the credit “to the person that bears the financial risk of failure 

of the research”). Second, “[i]f a taxpayer performing research for 

another person retains substantial rights in the research under the 

agreement providing for the research,” that research is likewise not 

treated as funded. See Treas. Reg. § 1.41-4A(d)(3); see also Treas. Reg. 

§ 1.41-2(a)(3). Respondent challenges petitioners’ claim that CPI 

retained substantial rights in its research under the contracts for eight 

of the projects at issue.

48 Treasury Regulation § 1.41-4A is captioned “Qualified research for taxable 

years beginning before January 1, 1986” but remains applicable in relevant part for

tax year 2014, by way of a separate regulatory provision. See Treas. Reg. § 1.41-4(c)(9) 

(“To determine the extent to which research is so funded, § 1.41-4A(d) applies.”); see 

also Tangel v. Commissioner, T.C. Memo. 2021-1, at *9 n.4.
102

[*102] We determine whether a taxpayer has substantial rights in 

research by looking to the terms of the parties’ contract for each project 

at issue. See Tangel, T.C. Memo. 2021-1, at *11; Treas. Reg. § 1.41-

4A(d)(1); see also Lockheed Martin Corp. v. United States, 210 F.3d 1366, 

1376 (Fed. Cir. 2000) (stating that application of the exclusion “must be 

determined by reference to the research agreements”). A taxpayer 

retains no substantial rights in research performed “under an 

agreement that confers on another person the exclusive right to exploit 

the results of the research.” Treas. Reg. § 1.41-4A(d)(2). Similarly, a 

taxpayer retains no substantial rights in research “if the taxpayer must 

pay for the right to use the results of the research.” Id. subpara. (3)(i); 

cf. Lockheed Martin Corp., 210 F.3d at 1375 (“The right to use the 

research results, even without the exclusive right, is a substantial 

right.”). Finally, “[i]ncidental benefits” to the taxpayer from performing 

research, such as “increased experience in a field of research,” are not 

substantial rights. Treas. Reg. § 1.41-4A(d)(2). As with other elements 

of the research credit, petitioners bear the burden of showing that CPI 

retained substantial rights in the results of any research performed 

under the contracts. See Dynetics, Inc. & Subs. v. United States, 121 

Fed. Cl. 492, 523 (2015).

We start by looking to the relevant caselaw and its treatment of 

contractual provisions similar to those at issue here. In Tangel, T.C. 

Memo. 2021-1, at *4-5, we reviewed a contract that stated in relevant 

part:

A. With respect to Articles for which any technical 

information, written, oral or otherwise, (i) has been 

supplied to Seller by or on behalf of Buyer; or (ii) Seller has 

designed at Buyer’s expense; or (iii) Seller has designed 

specifically to meet Buyer-furnished technical 

requirements (hereinafter designated “Information”), 

Seller, in consideration of Buyer’s furnishing of such 

Information and/or design funding, agrees that it will not 

use, or assist others in using, such Information, design 

funding or tooling to develop or sell such Articles (or 

similar interchangeable or substitute Articles, or parts 

thereof) to anyone other than Buyer, either as production, 

spare or repaired Articles, without Buyer’s prior written 

consent. Seller shall not use or disclose such Information 

except in the performance of Orders for Buyer, and, upon 

Buyer’s request, such Information and all copies thereof 

shall be returned to Buyer.
103

[*103] B. Information prepared by Seller specifically in 

connection with performance of this Order, including 

original works of authorship created by Seller, are 

considered “works made for hire” within the meaning of the 

U.S. Copyright Laws. Buyer shall be deemed the author of 

such works. If any such work is determined by a court of 

competent jurisdiction not to be a work made for hire, this 

Order shall operate as an irrevocable assignment to Buyer 

of all right, title and interest in and to such work.

We concluded that paragraph A prevented the taxpayers from 

using the results of the research under the contract for any other 

purpose, unless the customer gave prior written consent. Id. at *12–13. 

We further concluded that paragraph B vested the customer with the 

right to any copyrightable materials created in performing the contract. 

Id. at *13–14. The taxpayers argued in part that the institutional 

knowledge gained from research was a substantial right; we squarely 

rejected this contention, characterizing institutional knowledge as a 

mere incidental benefit from performing research within the meaning of 

Treasury Regulation § 1.41-4A(d)(2). Tangel, T.C. Memo. 2021-1, at *16. 

Accordingly, we concluded that the taxpayers had failed to retain 

substantial rights in research under the contract.

In Dynetics, Inc., 121 Fed. Cl. at 518–23, the Court of Federal 

Claims (CFC) analyzed two separate contracts under the substantial 

rights doctrine. The first contract, between the taxpayer and the 

University of Alabama, Huntsville (University), stated in relevant part:

All rights, title, and interest in and to inventions or other 

intellectual property rights conceived or reduced to 

practice in the course of performance of the work called for 

by this Contract are hereby vested in the University. The 

contractor agrees to promptly disclose to the University, in 

a format acceptable to the University, any potentially 

patentable idea or concept conceived or reduced to practice 

in the course of performance of the work called for by this

Contract.

Id. at 518.

The taxpayer argued that its work under the contract, which 

involved solving equations and developing simulations, was not 

patentable and was thus outside the scope of the terms. Id. Focusing 
104

[*104] on the phrase “other intellectual property rights,” the CFC 

determined otherwise and found that the contract vested a “broad 

category of rights” in the University, including both patentable and 

nonpatentable technology “conceived or reduced to practice in the course 

of performance.” Id. at 519. Accordingly, the CFC concluded that the 

taxpayer had failed to retain substantial rights in the research with 

respect to the contract. Id.

The second contract, between the taxpayer and the United States 

Department of Defense (DOD), was subject to a number of standard 

national security requirements with respect to the taxpayer’s use of 

classified intelligence information. Id. at 519–20. Those requirements 

prohibited the taxpayer from reproducing intelligence materials or 

releasing intelligence materials to others without authorization and 

required the return or destruction of all materials generated by the 

taxpayer as directed upon completion of the contract. Id. at 521. The 

taxpayer made a three-pronged argument, asserting that (1) it retained 

the right to use generalized “skills and advancements” that it developed 

in performing the contract; (2) it could use the particular research 

results for other contracts following authorization from the relevant 

component of DOD; and (3) a regulation incorporated into the contract 

provided that it would retain the rights to any patentable invention or 

discovery conceived or reduced to practice in performing the contract. 

Id. at 521–23.

With respect to the taxpayer’s initial argument, the CFC

characterized any skill or advancement gained as an “incidental benefit” 

from performing research and thus not a substantial right under 

Treasury Regulation § 1.41-4A(d)(2). Dynetics, Inc., 121 Fed. Cl. at 521. 

With respect to the second argument, the CFC observed that the 

taxpayer had not answered “the obvious question of how it could have 

substantial rights in the results of the research, if it needed the 

government’s ‘authorization’ to use those results.” Id. Finally, while the 

CFC acknowledged that the taxpayer would retain patent rights under 

the contract, the CFC concluded that such a right would be irrelevant to 

whether the taxpayer retained substantial rights in the nonpatentable 

results of its research at issue. Id. at 523. The CFC thus concluded that 

the taxpayer retained no substantial rights in the research performed 

under this contract. Id.

Here, respondent points to the fact that CPI’s standard terms and 

conditions are silent with respect to CPI’s rights in its research. 

Respondent thus argues that the terms and conditions in the purchase 
105

[*105] orders issued by CPI’s customers control whether CPI retained 

substantial rights in research performed. Respondent identifies eight 

projects—3M Hutchinson, 3M Monrovia, 3M Hartford, Celanese, 

Smalley, Enterprise, Teva, and HAI—where the governing terms

purportedly conferred on the customer all substantial rights in 

research.49 Relying on Lockheed Martin Corp., 210 F.3d at 1374, 

petitioners respond that the express transfer of usage rights in these 

contracts was not exclusive and thus CPI still retained substantial 

rights in the research. We now turn to the eight projects at issue.

1. 3M (#13-05720, 13-07611, 14-07784)

The master agreement between CPI and 3M governed all three 

3M projects for which CPI claimed the research credit for 2014. Clause 

10.2 of the master agreement provided in relevant part that 3M owned 

all intellectual and tangible property rights in “any goods, equipment

. . ., apparatus, documents, drawings, computer software and artwork 

which . . . [CPI] creates at 3M’s expense or [CPI] creates using 3M 

Confidential Information (‘3M Rights’).” Clause 10.2 further provided 

that CPI assigned to 3M “all of [CPI’s] rights, including, without 

limitation, all intellectual and tangible property rights” with respect to 

“any property subject to 3M Rights.” Finally, clause 8.3 provided that 

“if [CPI] retains ownership” of any “drawing, illustrations, instructions, 

maintenance information, and other materials that relate to the 

Equipment,” CPI “grants 3M the perpetual, unrestricted right to use, 

copy, and distribute those materials for 3M’s internal use.”

We find the contract terms to be unambiguous. Via clause 10.2, 

CPI assigned to 3M “without limitation, all intellectual and tangible 

property rights” in the work product resulting from research performed 

under the contract. In turn, clause 8.3 vested nonexclusive usage rights 

in 3M for materials that “relate to the Equipment,” but only “if [CPI] 

retains ownership” of those materials. Reading the two clauses 

together, we understand clause 8.3 as inapplicable to work product that 

CPI did not retain ownership over, pursuant to the assignment in clause 

10.2 (i.e., work product “create[d] at 3M’s expense” or “create[d] using 

3M Confidential Information”). Clause 8.3 thus appears to be a fallback 

provision, applying primarily to pre-existing, project-related materials 

49 We thus deem respondent to have conceded that, under the remaining 11

projects’ contracts, CPI retained substantial rights and thus did not perform funded 

research. See, e.g., Petzoldt, 92 T.C. at 683 (treating party’s failure to argue point on 

brief as concession).
106

[*106] that (1) were not created in performing the project and (2) are

owned by CPI.

We conclude that CPI no longer retained a right to use any of the 

work product and thus no longer retained a substantial right in the 

results of its research. See Treas. Reg. § 1.41-4A(d)(2); see also United 

States v. Grigsby, No. 19-00596, 2022 WL 11269773, at *4, *14–15 (M.D. 

La. Oct. 19, 2022) (finding no substantial rights where “all rights, title 

and interest” to similar work product was vested in customer). Absent 

a right to use such work product, CPI retained only incidental benefits 

from the project, namely any increased institutional knowledge. See

Treas. Reg. § 1.41-4A(d)(2). Consequently, any research activities 

performed by CPI on the three 3M projects were funded research and 

thus excluded from the definition of qualified research.

2. Celanese (#14-07852)

The governing terms and conditions between CPI and Celanese 

provided that “any deliverables or other work product arising from” 

CPI’s services would be confidential property of Celanese and thus could 

not be used by CPI “for any purpose other than as expressly 

contemplated by the Purchase Order.” The terms also stated that CPI 

assigned to Celanese “all other copyright and derivatives, trade secret 

and other proprietary rights that arise out of the performance of the 

Services or that are applicable to any deliverables under the Purchase 

Order.” Finally, the terms vested in Celanese the rights to all works 

eligible for copyright protection arising out of CPI’s performance as 

“work[s] made for hire.”50 The terms provided that if “any such work is 

deemed for any reason not to be a work made for hire,” CPI “hereby 

assigns all rights, title and interest in the copyright to such work” to 

Celanese.

Again, we find the contract terms to be unambiguous. We 

conclude that the applicable terms prohibited CPI from using the results 

of its research other than for the purpose of performing under the 

50 In copyright law, a work made for hire is “a work prepared by an employee 

within the scope of his or her employment” or “a work specially ordered or 

commissioned” within nine enumerated categories. 17 U.S.C. § 101; see Cmty. for 

Creative Non-Violence v. Reid, 490 U.S. 730, 750–52 (1989) (applying common law 

agency principles to determine whether person was employee within the meaning of 

copyright law); Billy-Bob Teeth, Inc. v. Novelty, Inc., 329 F.3d 586, 591 (7th Cir. 2003). 

If the work was determined to be a work made for hire, the person “for whom the work 

was prepared is considered the author” for copyright purposes. 17 U.S.C. § 201(b).
107

[*107] contract. See Tangel, T.C. Memo. 2021-1, at *13 (finding no 

substantial rights in contract that prevented seller “from using the 

results of its research for any purpose outside” of performing under the 

contract). The terms also expressly vested in Celanese the rights to all 

copyrightable material arising out of CPI’s work under the contract as 

either works made for hire or, in the alternative, as an outright 

assignment. See id. at *5, *16 (analyzing similar provision); Grigsby,

2022 WL 11269773, at *15 (“Together, the . . . [c]ontract’s ‘work for hire’

and transfer of title provisions eliminate any plausible reading under 

which [the taxpayer] retains the right to use.”). CPI conferred on its 

customer the exclusive right to use the results of its research and the 

intellectual property rights to any copyrightable material, reserving to 

itself only the institutional knowledge—an incidental benefit—that it 

gained in designing the oxidizer system. Consequently, any research 

activities performed by CPI on the Celanese project were funded 

research and thus excluded from the definition of qualified research.

3. Smalley (#14-07658)

Clause 6 of governing terms and conditions between CPI and 

Smalley provided that CPI would keep confidential “all information, 

drawings, specifications or data furnished by Buyer” and would “not 

divulge or use such information, drawings, specifications or data” except 

in performing its contractual obligations to Smalley. Clause 6 also

provided that, upon completion of the order, CPI would “make no further 

use, either directly or indirectly, of any such data or of any information 

derived therefrom without obtaining Buyer’s prior written consent.”

We find these contract terms to be ambiguous with respect to 

whether CPI retained substantial rights. Clause 6 could be read as 

divesting CPI of a right to use “all information, drawings, [and] 

specifications,” as well as all “data furnished by” Smalley. The 

ambiguity derives from the placement of the phrase “furnished by 

Buyer.” One method of resolving that ambiguity would be to apply the 

last antecedent rule.51 Under that rule, a limiting phrase (here, 

“furnished by Buyer”) should presumptively be read as modifying only 

the noun that immediately precedes it (here, “data”). Barnhart v. 

Thomas, 540 U.S. 20, 26 (2003). However, the rule “is not an 

51 Neither CPI nor Smalley appears to have included a choice-of-law provision 

in the contract documents, and both CPI and Smalley are based in Illinois. Illinois 

courts apply the last antecedent rule in construing ambiguous contract terms. See, 

e.g., State Farm Mut. Auto. Ins. Co. v. Murphy, 136 N.E.3d 595, 602–03 (Ill. App. Ct. 

2019).
108

[*108] absolute and can assuredly be overcome by other indicia of 

meaning.” Id.

We conclude that the last antecedent rule is inapposite here, for 

several contextual reasons. Clause 6 goes on to require that CPI “return

such information, drawings, specifications and data” (emphasis added)

to Smalley upon completion of the contract, thus suggesting that CPI 

was required only to give back materials furnished to it by Smalley, not 

deliver newly generated materials to Smalley. Further, the preceding 

clause 5 states in relevant part: “If drawings and specifications are 

furnished by Buyer, this Order shall be based upon such drawings and 

specifications.” That prior context, which connects “drawings and 

specifications” with being “furnished by” Smalley, is relevant to reading 

“all information, drawings, specifications or data” in clause 6. See 

Martindell v. Lake Shore Nat’l Bank, 154 N.E.2d 683, 689 (Ill. 1958) 

(“The intention of the parties is not to be gathered from detached 

portions of a contract or from any clause or provision standing by itself, 

but each part of the instrument should be viewed in the light of the other 

parts.”). Given that context and the simplicity of the categories 

“information, drawings, specifications or data,” a reader can intuitively

apply “furnished by” as a modifier to each category. See Lockhart v. 

United States, 577 U.S. 347, 352 (2016) (observing that the last 

antecedent rule is less applicable where “the listed items are simple and 

parallel without unexpected internal modifiers or structure”). To 

narrowly construe only one category as modified by the limiting phrase, 

despite the categories’ similarities, is thus not the most natural reading

of the provision. See Paroline v. United States, 572 U.S. 434, 447 (2014) 

(“When several words are followed by a clause which is applicable as 

much to the first and other words as to the last, the natural construction 

of the language demands that the clause be read as applicable to all.”

(quoting Porto Rico Ry., Light & Power Co. v. Mor, 253 U.S. 345, 348 

(1920))); see also Facebook, Inc. v. Duguid, 141 S. Ct. 1163, 1169 (2021).

We read the provision as prohibiting only CPI’s use of work product 

“furnished by” Smalley to CPI. Consequently, we conclude that clause 6 

does not necessarily preclude CPI from retaining substantial rights in 

the results of any research it performed itself under the Smalley 

contract.

We turn now to clause 10 of the terms, which defined “BuyerOwned Property” as “any tools, tooling, patterns, equipment, materials, 

or other property used in the manufacture of the Goods . . . that are 

either supplied to [CPI] by [Smalley] or have been acquired by [CPI] and 

specifically paid for by [Smalley].” The terms stated that CPI “shall not 
109

[*109] use Buyer-Owned Property in the performance of any other work 

without prior written approval of [Smalley]” and that “[t]itle to all 

Buyer-Owned Property shall at all times remain with [Smalley].” We 

find these terms to be unambiguous in vesting ownership in Smalley of 

certain property provided by Smalley to CPI or acquired and specifically 

paid for by Smalley and then used by CPI in performing the contract. 

However, clause 10 on its face does not apply to property that CPI 

developed itself (rather than acquired) in the course of performing the 

contract (i.e., the results of research). Reading clauses 5, 6, and 10 

together, we conclude that CPI’s retained right to use the work product 

results of research it performed was substantial. Accordingly, we hold 

that any research that CPI performed on the Smalley project was not 

excluded from the definition of qualified research.

4. Enterprise (#14-07851)

The governing terms and conditions between CPI and Enterprise 

provided that Enterprise would be the owner of “all information and 

materials resulting from [CPI’s] services, including sketches, layouts, 

negatives, photographs, designs, blueprints, and specifications relating 

thereto, and of the work product of all services furnished or performed

. . . including all creative ideas included therein.” The terms also stated 

that “[n]o copies or reproductions” of the information and materials 

would “be made or retained by [CPI] except as authorized in writing by 

[Enterprise].”

We construe the terms as requiring CPI to seek permission from 

Enterprise to retain and use any information, materials, and work 

product generated in performing the contract. Cf. Dynetics, Inc., 121 

Fed. Cl. at 521 (construing similarly provisions for taxpayer to seek 

permission from customer for use or reproduction of material). No 

provision otherwise limited Enterprise’s ability to withhold consent 

from CPI as to the retention of such materials. See Tangel, T.C. Memo. 

2021-1, at *17 (“Having to secure permission to use the research, with 

no conditions limiting the other party’s ability to withhold consent, 

prevents [the taxpayer] from possessing substantial rights.”). If CPI 

was unable to retain and use such information, material, and work 

product without permission, then we fail to see what rights CPI retained 

under the contract to any research performed, aside from the incidental 

benefit of increased knowledge and experience. See Treas. Reg. § 1.41-

4A(d)(2); see also Dynetics, Inc., 121 Fed. Cl. at 521 (“[The taxpayer] does 

not address the obvious question of how it could have substantial rights 

in the results of the research, if it needed the [customer’s] ‘authorization’
110

[*110] to use those results.”). We thus conclude that any research that 

CPI performed on the Enterprise project was funded and thus excluded 

from the definition of qualified research.

5. Teva (#14-07808)

The governing terms and conditions between CPI and Teva 

provided that CPI would “not use, sell, loan or publicize any of the tools, 

specifications, blueprints, designs or artwork supplied or paid for by 

Buyer for the fulfillment of this order without Buyer’s written consent.” 

We conclude that this provision presents the same issue as clause 10 of

the Smalley terms discussed above. While the terms divested CPI of the

unconditional right to use certain “tools, specifications, blueprints, 

designs or artwork,” the scope is limited to such materials as are 

“supplied or paid for by [Teva] for the fulfillment of this order.” 

Accordingly, CPI retained the unconditional right to use work product 

results that it itself generated in performing any research on the project.

We thus conclude that any research that CPI performed on the Teva 

project was not funded and thus is not excluded from the definition of 

qualified research.

6. HA International (#13-07615)

The governing terms and conditions between CPI and HAI 

provided that HAI would be “entitled to all documents, drawings, 

specifications, calculations and other information carriers” with respect 

to CPI’s activities for HAI. The terms went on to state that HAI would 

be “solely entitled to all intellectual property rights (including patents) 

created during the performance of the obligations” under the contract. 

Finally, the terms provided that HAI would have a “full license to use” 

any intellectual property, in a case where “the intellectual property 

rights are with both” CPI and HAI.

We find the HAI terms to be unambiguous as to CPI’s rights in 

the research. In interpreting the contract between CPI and HAI, we 

apply Ohio law, pursuant to the choice-of-law provision in the HAI

terms. This includes the familiar maxim that we must construe a 

contract “so as to give effect to all of its provisions.” R.L.R. Invs., LLC 

v. Wilmington Horsemens Grp., LLC, 22 N.E.3d 233, 240 (Ohio Ct. App. 

2014). In doing so, we “presume that the intent of the parties is reflected 

in the plain language of the contract” and thus “enforce the terms as 

written.” Beverage Holdings, LLC v. 5701 Lombardo, LLC, 150 N.E.3d 

28, 31 (Ohio 2019); see also Stewart v. Hartford Life & Accident Ins. Co., 
111

[*111] 43 F.4th 1251, 1255 (11th Cir. 2022) (“When interpreting a 

written text—a contract no less than a statute—we generally 

understand ‘a material variation in terms [to] suggest[ ] a variation in 

meaning.’” (quoting Antonin Scalia and Bryan A. Garner, Reading Law: 

The Interpretation of Legal Texts 51, 170 (2012))).

The text of the provision at issue is clear as to what rights in 

research were vested in HAI. While HAI was “solely entitled” to 

intellectual property rights created during the contract, HAI was 

“entitled” only to the various work products used by CPI in performing 

the contract. Giving effect to both clauses and their material difference 

(i.e., the presence or absence of “solely”), we construe the terms as 

providing HAI with only a nonexclusive right to use the work product, 

as contrasted with its exclusive right to intellectual property. CPI thus 

necessarily retained its own right to use any work product generated 

under the contract. This right to use was substantial. See Lockheed 

Martin Corp., 210 F.3d at 1378 (concluding that the “right to use is not 

a zero-sum game” and that the taxpayer still retained substantial rights 

in research despite its customer’s “unlimited right to use, duplicate, and 

disclose” research). We thus conclude that any research that CPI 

performed on the HAI project was not excluded from the definition of 

qualified research as funded.

7. Conclusion

For five of the eight projects at issue—3M Hutchinson, 3M 

Hartford, 3M Monrovia, Celanese, and Enterprise—we conclude that 

any research performed by CPI was funded and thus independently 

excluded from the definition of qualified research. As an alternative 

holding, we will thus partially sustain respondent’s determination to 

disallow CPI’s claimed research credit on this basis with respect to these 

projects.

E. Accuracy-Related Penalties

Section 6662(a) and (b)(1) and (2) imposes a 20% accuracy-related 

penalty on, as relevant here, any underpayment of federal income tax 

which is attributable to negligence, disregard of rules or regulations, or 

a substantial understatement of income tax. Negligence includes “any 

failure to make a reasonable attempt to comply” with the Code, see

§ 6662(c), or a failure “to keep adequate books and records or to 

substantiate items properly,” see Treas. Reg. § 1.6662-3(b)(1). An 

understatement of income tax is “substantial” if it exceeds the greater 
112

[*112] of 10% of the tax required to be shown on the return or $5,000. 

§ 6662(d)(1)(A).

Respondent argues that petitioners are liable for a penalty under 

section 6662(a) on the basis of both negligence and a substantial 

understatement of income tax. Generally, the Commissioner bears the 

initial burden of production to establish via sufficient evidence that a 

taxpayer is liable for penalties and additions to tax; once this burden is 

met, the taxpayer must carry the burden of proof, including with regard 

to defenses such as reasonable cause. § 7491(c); see Higbee v. 

Commissioner, 116 T.C. 438, 446–47 (2001). As part of that burden, the 

Commissioner must satisfy section 6751(b), by producing evidence of 

written approval of the penalty by an immediate supervisor, made 

before formal communication of the penalty to the taxpayer. See Graev 

v. Commissioner, 149 T.C. 485, 493 (2017), supplementing and 

overruling in part 147 T.C. 460 (2016); see also Clay v. Commissioner, 

152 T.C. 223, 246 (2019), aff’d, 990 F.3d 1296 (11th Cir. 2021).

Petitioners have conceded that respondent secured timely written 

supervisory approval for the accuracy-related penalties pursuant to

section 6751(b)(1), thus satisfying part of respondent’s initial burden. 

See, e.g., Sestak v. Commissioner, T.C. Memo. 2022-41, at *8 (accepting 

stipulation that agent obtained approval from immediate supervisor

before formal communication as satisfying section 6751(b)(1)). We also 

conclude that respondent carried his burden of establishing that 

petitioners were negligent with respect to their underpayments of tax, 

failing to maintain adequate records substantiating their entitlement to 

the research credits. See Treas. Reg. § 1.41-4(d) (“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.”); see also § 6001; Treas. Reg. § 1.6001-1(a). Alternatively, 

petitioners are liable for section 6662 penalties on the basis of 

substantial understatements of income tax to the extent that the 

understatements meet the applicable definition. See § 6662(d)(1)(A).

Section 6664(c)(1) provides that a section 6662 penalty will not be 

imposed for any portion of an underpayment if the taxpayer shows 

reasonable cause and good faith with respect to that underpayment. A 

taxpayer may establish reasonable cause by showing actual, good-faith

reliance on the advice of a competent tax professional. See Neonatology 

Assocs., P.A. v. Commissioner, 115 T.C. 43, 99 (2000), aff’d, 299 F.3d 221 

(3d Cir. 2002); Treas. Reg. § 1.6664-4(b)(1), (c)(1). In posttrial briefing, 

petitioners made the single statement, as a proposed finding of fact, that 
113

[*113] they “are not liable for penalties under section 6662(a),” with a 

supporting citation of the “Entire Record.” Petitioners made no other 

statement or argument in their posttrial briefing with respect to their 

liability for accuracy-related penalties; nor did petitioners argue on brief 

that they had reasonable cause and acted in good faith with respect to 

any underpayment.52 See Rule 151(e)(5) (requiring that parties’ 

arguments in posttrial briefing “set[] forth and discuss[] the points of 

law involved and any disputed questions of fact”); cf. United States v. 

Dunkel, 927 F.2d 955, 956 (7th Cir. 1991) (“A skeletal ‘argument’, really 

nothing more than an assertion, does not preserve a claim.”). As noted 

above, reasonable cause is an affirmative defense, for which the 

taxpayer bears the burden of proof. See ATL & Sons Holdings, Inc. v. 

Commissioner, 152 T.C. 138, 154 (2019). Petitioners’ failure to raise 

reasonable cause in posttrial briefing thus constitutes an abandonment 

of the issue. See Mendes, 121 T.C. at 312–13; Efron v. Commissioner, 

T.C. Memo. 2012-338, at *23 (concluding that taxpayer conceded 

reasonable cause when he failed to argue it on brief); see also Sanchez v. 

Miller, 792 F.2d 694, 703 (7th Cir. 1986) (“It is not the obligation of this 

court to research and construct the legal arguments open to parties, 

especially when they are represented by counsel.”). We will to the extent 

stated herein sustain respondent’s determination that petitioners are 

liable for accuracy-related penalties for tax years 2014, 2015, and 

2016.53

III. Conclusion

For the foregoing reasons, we hold (1) that petitioners are not 

entitled to a section 41 research credit and (2) that petitioners are liable 

for section 6662(a) penalties. We have considered all of the arguments 

made by the parties and, to the extent they are not addressed herein, we 

find them to be moot, irrelevant, or without merit.

52 Indeed, before posttrial briefing petitioners expressly conceded in a 

stipulation of settled issues that they did not rely upon Mr. Smiejek of Porte Brown 

nor any other representative of Porte Brown in claiming the research credit on CPI’s 

2014 Form 1120S.

53 Alternatively, even if reasonable cause had been properly raised, we would 

still conclude that any apparent reliance by petitioners on Alliantgroup with respect 

to claiming the research credits was inconsistent with ordinary business care and 

prudence and thus that petitioners failed to establish reasonable cause for their 

underpayments of tax. See § 6664(c).
114

[*114] To reflect the foregoing,

Appropriate decisions will be entered.