Court Opinion

ID: 9896682
Source: CourtListenerOpinion
Date Created: 2023-11-14 01:00:31.771175+00
Date Added: 2024-06-11T09:15:12.119801
License: Public Domain

Case: 22-30764     Document: 00516965151         Page: 1    Date Filed: 11/13/2023

           United States Court of Appeals
                for the Fifth Circuit                                 United States Court of Appeals
                                                                               Fifth Circuit

                                ____________                                 FILED
                                                                     November 13, 2023
                                 No. 22-30764                           Lyle W. Cayce
                                ____________                                 Clerk

   United States of America,

                                                            Plaintiff—Appellee,

                                      versus

   Leonard L. Grigsby; Barbara F. Grigsby,

                                          Defendants—Appellants.
                  ______________________________

                  Appeal from the United States District Court
                      for the Middle District of Louisiana
                            USDC No. 3:19-CV-596
                  ______________________________

   Before HIGGINBOTHAM, SMITH, and ELROD, Circuit Judges.
   PATRICK E. HIGGINBOTHAM, Circuit Judge:
          Today, we visit the classic congressional practice of using its taxing
   powers to achieve permissible policy goals; here, the lure of a tax credit to
   incentivize creative research. Leonard L. Grigsby and Barbara F. Grigsby ap-
   peal the judgment of the United States District Court for the Middle District
   of Louisiana which rejected research and development tax credits claimed by
   Cajun Industries LLC and upheld the resulting tax deficiency.
          We AFFIRM.
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                                         No. 22-30764

                                               I.
              Cajun Industries LLC (“Cajun”) claimed tax credits for the 2013 tax
   year pursuant to § 41 of the Internal Revenue Code, 26 U.S.C. § 41. First,
   the Code provision at issue in this case, § 41 offers a tax credit for “qualified
   research expenses” including wages and expenditures incurred in pursuit of
   qualified research.1
              The Internal Revenue Code provides a tax credit for qualified
   research activities, as defined by the Code.2 To constitute “qualified
   research,” the research must satisfy the four tests laid out in § 41(d)(1): “(1)
   the expense must be of the type deductible under § 174 of the Code (i.e., R
   & D expenses that are reasonable under the circumstances), (2) the research
   must be undertaken for the purposes of discovering information that is
   ‘technological in nature,’ (3) the information must be ‘intended to be useful
   in the development of a new or improved business component of the
   taxpayer,’ and (4) ‘substantially all of the activities [must] constitute
   elements of a process of experimentation.’”3 Relevant here, “business
              _____________________
   1
       26 U.S.C. § 41(b).
   2
       See generally id.
   3
    Shami v. Comm’r, 741 F.3d 560, 563 (5th Cir. 2014) (citing 26 U.S.C. § 41(d)(1)). The full
   text of 26 U.S.C. § 41(d)(1) reads:
            (d) Qualified research defined.--For purposes of this section--
            (1) In general.--The term “qualified research” means research--
            (A) with respect to which expenditures may be treated as specified
            research or experimental expenditures under section 174,
            (B) which is undertaken for the purpose of discovering information--
                     (i) which is technological in nature, and
                     (ii) the application of which is intended to be useful in the
                     development of a new or improved business component of the
                     taxpayer, and
            (C) substantially all of the activities of which constitute elements of a
            process of experimentation for a purpose described in paragraph (3).
            Such term does not include any activity described in paragraph (4).

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   components” are defined as “any product, process, computer software,
   technique, formula, or invention which is to be (i) held for sale, lease, or
   license, or (ii) used by the taxpayer in a trade or business of the taxpayer.”4
              However, qualified research expressly excludes so-called “funded”
   research.5 Funded research include “any research to the extent funded by
   any grant, contract, or otherwise by another person (or governmental en-
   tity).”6 Treasury Regulations further explain that research is funded if, in any
   agreement to perform research (1) the researcher retains no substantial rights
   to their research; or (2) payment is not contingent upon the research’s suc-
   cess.7
              A. Claimed Credits
              Cajun provides construction services throughout the Gulf Coast
   Region and engaged in over one hundred construction projects during the
   time period in question. In 2015, Cajun hired a consulting firm to evaluate its
   projects and advise whether Cajun was eligible for research credits under
   § 41. Based on the firm’s report, Cajun, believing it was entitled to a
   $1,341,420 research credit, filed an amended Form 1120S for the 2013 tax
   year claiming the $1,341,420 credit.

              _____________________
   26 U.S.C. § 41(d)(1).
   4
       Id. § 41(d)(2)(B).
   5
     Id § 41(d)(4)(H) (“(4) Activities for which credit not allowed. --The term ‘qualified
   research’ shall not include any of the following . . . (H) Funded research.--Any research to
   the extent funded by any grant, contract, or otherwise by another person (or governmental
   entity).”).
   6
       Id.
   7
       26 C.F.R. § 1.41-4A(d).

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           As an S-Corporation, Cajun’s income, losses, deductions, and credits
   pass through to its shareholders for income tax purposes. At all relevant
   times, Appellant Leonard Grigsby owned a 73% interest in Cajun and was thus
   entitled to a pro rata allocation of Cajun’s tax credit, which amounted to
   $979,237. The $979,237 credit reduced Mr. and Mrs. Grigsby’s tax liability
   for 2013 and indicated the couple overpaid their federal income taxes by
   $576,756. Appellants filed an amended 2013 tax return and sought a refund
   of $576,756 plus statutory overpayment interest in the amount of $73,633.38
   (the “Contested Refund”). On September 15, 2017, the Internal Revenue
   Service (“IRS”) issued Appellants a refund of $671,071.38, comprised of the
   Contested Refund and an additional $20,652 not at issue in this case.8
           However, on August 13, 2019, the IRS notified Appellants that the
   Contested Refund was issued erroneously and challenged Cajun’s claimed
   credit. The Commissioner demanded Appellants repay the amount and
   warned that if Appellants did not do so, the IRS would recommend “an
   action be commenced in District Court to recover the erroneous refund, as
   permitted by I.R.C. § 6532(b) and 7405.” Shortly thereafter, the United
   States initiated this suit.
           B. The Representative Projects
           Before the District Court, the Parties agreed that four projects
   adequately represented Cajun’s research activities: (1) Project 13-020 (the
   “Methanex Project”); (2) Project 12-051 (the “Chevron Project”);
   (3) Project 12-001 (the “Claiborne Project”); and (4) Project 12-023 (the
   “East Bank Project”) (together, the “Representative Projects”). Thus,

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

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                                       No. 22-30764

   Cajun’s eligibility for the tax credit, and Appellants’ by extension, hinged on
   whether it performed qualified research while completing these projects.
          1. The Methanex Project
          In 2012, Jacobs Field Services North America, Inc. (“Jacobs”) hired
   Cajun as a subcontractor on a project to relocate a Methanex USA, LLC
   methanol plant from Chile to Louisiana. Cajun was originally tasked with cre-
   ating temporary facilities at the new site. According to the Scope of Work
   provisions of the contract, Cajun’s responsibilities included:
          3.0 GENERAL SCOPE OF SERVICES (WORK)
          3.1 [Cajun] shall complete the Work and support functions
          required to effectively manage and report on the status of the
          Work as specified.
          3.2 [Cajun] shall provide all management, supervision, labor,
          consumable materials, construction equipment, construction
          aids, tools, services, testing devices, warehousing, supplies,
          inspections, insurance, fully furnished and equipped offices,
          communication devices, and all other necessary items to
          successfully accomplish the construction described by the
          Scope of Work. This includes, but is not limited to, on and off
          site transportation, receiving, loading and unloading, storing,
          maintenance, and distribution of construction materials,
          installation of such materials into the Work, proper care of
          materials, testing and final construction punch list completion
          and turnover of the Work Scope as specified.9
          In executing these tasks, Cajun was “solely responsible for and have
   [sic] control over construction means, methods, techniques, sequences and
   procedures and for coordinating all portions of the Work.” This included

          _____________________
   9
    “Work” was defined as the “work, services, deliverables, duties and activities to be
   performed or provided by, or on behalf of, [Cajun] under this Subcontract.”

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   obtaining approval for materials, identifying and coordinating vendors,
   offering design input, and participating in “a lot of review processes.”
   However, Jacobs retained “ultimate authority to resolve issues in the field.”
             The contract was subject to a capped price of $6,485,000 and payment
   was conditioned on Cajun’s completion of “all Work.”10 Cajun accepted
   payment “as full compensation for doing all Work and furnishing all material
   contemplated by and embraced in this Subcontract,” “for all loss or damage
   arising out of the nature of the Work,” “from any unforeseen or unknown
   difficulties or obstructions which may arise or be encountered in the
   prosecution of the Work,” and “for all risks of every description connected
   with the Work.”
             Section 26 of the contract addressed ownership of any work product
   and provided that all “Work Product prepared by [Cajun] shall be ‘works
   made for hire,’ and all rights, title and interest to the Work Product . . . shall
   be owned by [Methanex].” To the extent any “work product” was not
   considered work for hire, “or if ownership of all right, title and interest in the
   Work Product shall not otherwise vest in [Methanex],” Cajun agreed that
   ownership of said “Work Product . . . shall be automatically assigned from
   [Cajun] to [Methanex] without further consideration, and [Methanex] shall
   thereafter own all right, title and interest in the Work Product.”11

             _____________________
   10
      This price included “billed actual manhours and actual cost of other cost reimbursable
   items in accordance with the agreed labor wage rates, construction equipment rates,
   mobilization and demobilization rates as included in this Exhibit D.” Cajun was also
   entitled to additional compensation if Jacobs modified its scope of work. By the end of the
   project, the contract price rose from $6 million to approximately $90 million because of 65
   work scope modifications.
   11
        The contract defined Methanex as the “Owner.”

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          The contract defined “work product” as “all documents, data,
   analyses, reports, plans, procedures, manuals, drawings, specifications,
   calculations, or other technical tangible manifestations of [Cajun]’s efforts
   (whether written or electronic) created by [Cajun] in the performance of the
   Work, including but not limited to all Documents.” In turn, “documents”
   included “any or all tracings, designs, drawings, field notes . . . specifications,
   electronic information . . . and other documents or records developed or
   acquired by [Cajun] and its suppliers or sub-subcontractors in performing the
   Work.”
          2. The Chevron Project
          In 2011, Chevron Products Company, a division of Chevron U.S.A.,
   Inc., contracted with Cajun to provide construction services to expand Chev-
   ron’s Pascagoula Refinery (the “Chevron Project”). Cajun’s responsibilities
   included providing “all labor, supervision, quality control, administration,
   document control, equipment, [and] tools,” in addition to completing spe-
   cific civil tasks such as surveying, excavation and backfill, installing piping,
   and performing field inspections. Appellants maintain that Cajun also offered
   “constructability reviews” of the engineer’s designs and specifications.
   However, the engineer of record, who was not a Cajun employee, retained
   “ultimate authority to resolve any issues that arose in the field.”
          The Chevron contract was a fixed-price contract and compensated
   Cajun for all work described in Exhibit B of the contract, the “Schedule of
   Compensation for Work.” Exhibit B detailed all costs covered by the contract
   price, including craft labor, non-manual, and equipment costs in addition to
   all overhead and profit. Furthermore, according to the “Pricing” section of
   the contract, Chevron paid for “performance of all Work” and the contract
   prices were “all inclusive” of Cajun’s “supply and services including with-
   out limitation; salaries and wages . . . the cost of supervision and support

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   services from personnel other than those permanently assigned to the Con-
   tract . . . employee income tax and statutory payroll deductions, social secu-
   rity charges, [and] all taxes (except sales and use taxes) . . . .” Cajun agreed
   that payment “constituted full payment for the performance of the Work,
   and completion of [Chevron]’s payment obligations under the Contract.”
              The contract designated Chevron as the owner of all work product
   generated during the project and provided:
              2.20.3. All drawings, documents, engineering and other data
              prepared or furnished by [Cajun] in performing the Work are
              considered to be [Chevron’s] work for hire and shall become
              [Chevron’s] property from the time of preparation and may be
              used by [Chevron] for any purpose whatsoever without obliga-
              tion or liability whatsoever to [Cajun]. [Cajun] assigns all rights
              in the above referenced drawings, documents, engineering and
              other data to [Chevron], including copyrights.
              [. . .]
              18.4. All inventions, discoveries and improvements (patentable
              and unpatentable) that are made or conceived by [Cajun] or
              [Cajun]’s employees in performing the Services and all domes-
              tic and foreign patent rights based thereon shall belong to
              [Chevron] or an Affiliate designa1ed by [Chevron]. [Cajun]
              shall promptly and fully disclose all such inventions, discover-
              ies and improvements to [Chevron] or the designated Affiliate.
              Furthermore, Cajun agreed that all “Technical Information will be
   used only for performance of the Services for [Chevron]” and that it would
   not disclose this information without Chevron’s express written consent.12
   This obligation remained in force even after the Chevron Project concluded.

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

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              3. The Claiborne Project
              In September 2011, Cajun contracted with the U.S. Army Corps of
   Engineers to construct a “box culvert,” or an underground canal, as part of
   the Southeast Louisiana Urban Flood Control Project (the “Claiborne Pro-
   ject”). In doing so, Cajun was responsible for selecting the means and meth-
   ods of construction, including equipment selection, personnel decisions, and
   “how to produce the work in accordance with the plans and specifications.”
   The Claiborne contract was a “fixed price” contract valued at
   $25,971,694.50.
              The contract incorporates various provisions of the Federal Acquisi-
   tion Regulations (“FAR”), Title 48 of the Code of Federal Regulations, ei-
   ther “by reference” or by “full text.” Relevant here, the contract incorpo-
   rates FAR 52.232. FAR § 52.232-5(f) dictates the ownership rights of any
   material generated throughout the contract’s performance and states “all
   material and work covered by progress payments made shall, at the time of
   payment, become the sole property of the Government.”13 “Work” includes
   “construction activity . . . [including] buildings, structures, and improve-
   ments of all types.”14

              _____________________
              [A]ny and all information, data and knowledge which is either made
              available to [Cajun] by [Chevron] relating to the performance of the Work,
              or developed by [Cajun] as a consequence or arising out of this Contract.
              Technical Information includes all inventions, discoveries or
              improvements (patentable or otherwise) that are made or conceived with
              by [Cajun] in performing the Work and all patent rights associated these
              inventions, discoveries or improvements.
   13
        FAR § 52.232-5(f), codified as 48 C.F.R. § 52.232-5(f).
   14
     Section 00700 of the contract “incorporate[s] by reference” FAR 52.202-1, which
   provides that “when a solicitation provision or contract clause uses a word or term that is
   defined in the Federal Acquisition Regulation (FAR), the word or term has the same
   meaning as the definition in FAR 2.101 in effect at the time the solicitation was

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                                         No. 22-30764

           4. The East Bank Project
           In January 2012, the Sewerage and Water Board of New Orleans
   (“SWBNO”) awarded Cajun a construction contract to modify the flood
   protection system at the East Bank Wastewater Treatment Plant in New Or-
   leans. Cajun’s scope of work included providing “all labor, materials, super-
   vision, construction equipment, [and] mechanical and electrical equip-
   ment.”15
           The East Bank contract was a “firm, fixed-price contract” originally
   valued just under $24.4 million, although the contract eventually totaled
   $29.4 million due to changes in the scope of work. Cajun’s compensation in-
   cluded payment for “all general foremen, foremen, labor, teams and trucks
   actually engaged on such specific work for the time actually so employed at
   the rates actually paid.” Compensation also included a “fee for [Cajun’s] su-
   perintendence, general expense and profit,” which “shall be understood also
   to reimburse [Cajun] for any sub-contractor’s general expense and profit
   which [Cajun] may allow to one or more sub-contractors.”
           Cajun accepted payment as “full compensation for furnishing all the
   labor, materials, tools, equipment, etc., needed to complete the whole work
   of the contract” and also “as full compensation for all loss, damages or risks
   of every description, connected with or resulting from the nature of the work,

           _____________________
   issued . . . .” See FAR 52.202-1, codified as 48 C.F.R. § 2.101. Thus, the reference to 48
   C.F.R. § 52.202-1 effectively incorporates all definitions provided in FAR 2.101. Section
   2.101 defines “work” as noted.
   15
     Unlike the Methanex, Chevron, and Claiborne projects, Cajun was not solely responsible
   for the means and methods of executing these tasks. SWBNO hired an engineering firm,
   Burk-Kleinpeter, Inc. (“BKI”) to design the system modification(s). BKI oversaw Cajun’s
   daily construction activities and was required to approve Cajun’s means and methods and
   any materials Cajun selected for permanent features of the project.

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   or from any obstructions or difficulties encountered, of any sort or nature
   whatsoever[.]”
            The East Bank contract contained no provisions relating to ownership
   of work product or research developed during the project.
            C. District Court Proceedings
            Throughout discovery, Appellants claimed Cajun engaged in research
   which led to the development of four new “products:” two oil refineries and
   two flood control systems. When the United States moved for summary
   judgment, the Government argued these products failed the “business
   component[s]” test and, as such, that Cajun did not perform qualified
   research. Furthermore, the Government claimed the Representative Projects
   were otherwise ineligible for the credit because they were “funded.”
            Appellants responded that Cajun had also developed “processes”
   that amounted to business components, in addition to the “products”
   identified during discovery. Appellants claimed their new “processes”
   encompassed the various “construction means and methods” Cajun used to
   perform on its contracts and develop these products. Appellants also
   disputed that the Representative Projects were funded, and maintained that
   Cajun retained substantial rights to its “research results.” Alternatively,
   Appellants contended that the contracts were contingent upon Cajun’s
   provision of deliverables and were not funded, as set out in 26 C.F.R. § 1.41-
   4A(d).
            The District Court granted the United States’s motion for summary
   judgment on three bases. First, the District Court rejected Appellants’
   “processes” argument pursuant to Federal Rule of Civil Procedure 37(c)(1)
   because this argument was inconsistent with Cajun’s prior discovery
   disclosures which, instead, “unequivocally state that, as to each

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   Representative Project, Cajun developed a ‘product.’”16 The District Court
   further found that Appellants’ construction processes claim failed for lack of
   specificity because Appellants “fail[ed] to specifically identify even one new
   or improved process that resulted from Cajun’s work on the Representative
   Projects.”
           Second, the District Court found that Appellants’ briefing “fail[ed] to
   cite any evidence or offer any argument establishing that Cajun’s work on the
   Representative Projects resulted in new ‘products.’” Because the excluded
   evidence of any construction processes was the “only evidence (and
   argument) offered to establish the business component element of their
   QRTC claim,” the court concluded the Representative Projects failed to
   establish a business component.
           Third, as an alternative basis for its holding, the District Court held
   that the Representative Projects were “funded.” In particular, the District
   Court determined that the Methanex, Chevron, and Claiborne Projects failed
   the substantial rights prong of the “funded research exclusion,” and that the
   East Bank contract was funded because Cajun was fully compensated for any
   research performed or risk incurred.
           Appellants timely appealed. This Court has jurisdiction under 28
   U.S.C. § 1291.

           _____________________
   16
     “If a party fails to provide information or identify a witness as required by Rule 26(a) or
   (e), the party is not allowed to use that information or witness to supply evidence on a
   motion, at a hearing, or at a trial, unless the failure was substantially justified or is
   harmless.” FED. R. CIV. P. 37(c)(1).

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                                                   II.
              We review a district court’s grant of summary judgment de novo,
   applying the same standard as the district court.17 Grants of summary
   judgment may be affirmed for any reason raised to the district court and
   supported by the record, and we are not bound by the grounds articulated by
   the district court.18 Decisions to exclude evidence under Federal Rule of Civil
   Procedure 37 are reviewed for abuse of discretion.19
                                                   III.
              Appellants advance three arguments on appeal. None are persuasive.
              A. Burden on Summary Judgment
              The District Court granted summary judgment after finding
   Appellants did not “offer competent evidence or argument establishing that
   Cajun performed qualified research,” namely on the business components
   element. Appellants argue that this improperly placed the burden on
   Appellants as the non-moving party at summary judgment.
              It is well established that the IRS’s assessment of tax liability may be
   presumed correct so long as it is not “without rational foundation and
   excessive.”20 The Government satisfies this burden by “specify[ing] the

              _____________________
   17
        Roberts v. City of Shreveport, 397 F.3d 287, 291 (5th Cir. 2005).
   18
        Chevron U.S.A., Inc. v. Traillour Oil Co., 987 F.2d 1138, 1146 (5th Cir. 1993).
   19
        CQ, Inc. v. TXU Min. Co., L.P., 565 F.3d 268, 277 (5th Cir. 2009).
   20
      United States v. Janis, 428 U.S. 433, 441 (1976); Portillo v. Comm’r, 932 F.2d 1128, 1133
   (5th Cir. 1991) (“[W]e begin with the well settled principle that the government’s
   deficiency assessment is generally afforded a presumption of correctness . . . The tax
   collector’s presumption of correctness has a herculean muscularity of Goliathlike reach,
   but we strike an Achilles’ heel when we find no muscles, no tendons, no ligaments of fact.”)
   (internal citations omitted); Sealy Power, Ltd. v. Comm’r, 46 F.3d 382, 386 (5th Cir. 1995)
   (“A determination of deficiency issued by the Commissioner is generally given a

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   amount of the deficiency or provid[ing] the information necessary to
   compute the deficiency.”21 Once an assessment is presumed correct, the
   burden shifts to the taxpayer to rebut the presumption.22 Importantly, the
   taxpayer bears this burden regardless of whether the case is a refund suit

           _____________________
   presumption of correctness, which operates to place on the taxpayer the burden of
   producing evidence showing that the Commissioner’s determination is incorrect.”).
   21
      Sealy, 46 F.3d at 386. At oral argument, Appellants’ counsel argued that the IRS
   assessment was insufficient because it did not result from an administrative proceeding.
   However, Appellants provided no citations for this proposition and the Court has found
   none in support of this position. To the contrary, this Court in Portillo recognized that
   “there is no prescribed form for a deficiency notice,” Portillo, 932 F.2d at 1132 (citing
   Donley v. Comm’r, 791 F.2d 383 (5th Cir. 1986)), and such notice must merely evince “a
   thoughtful and considered determination that the United States is entitled to an amount
   not yet paid,” id. (quoting Scar v. Comm’r, 814 F.2d 1363, 1369 (9th Cir. 1987)).
   22
      Portillo, 932 F.2d at 1133 (“This presumption is a procedural device that places the
   burden of producing evidence to rebut the presumption on the taxpayer.”). The
   presumption is consistent with the general principle that taxpayers must demonstrate their
   entitlement to any refund, deduction, or credit as well as the taxpayer’s record-keeping
   obligations imposed by the Revenue Code. See id. at 1134 (“The taxpayer clearly bears the
   burden of proof in substantiating claimed deductions.”); United States v. McFerrin, 570
   F.3d 672, 675 (5th Cir. 2009) (“Tax credits are a matter of legislative grace, are only
   allowed as clearly provided for by statute, and are narrowly construed.”); 26 U.S.C. § 6001
   (“Every person liable for any tax imposed by this title, or for the collection thereof, shall
   keep such records, render such statements, make such returns, and comply with such rules
   and regulations as the Secretary may from time to time prescribe.”) (emphasis added); 26
   C.F.R. § 1.6001-1(a) (“Except [for farmers and wage-earners], any person subject to tax
   under subtitle A of the Code . . . or any person required to file a return of information with
   respect to income, shall keep such permanent books of account or records, including
   inventories, as are sufficient to establish the amount of gross income, deductions, credits, or
   other matters required to be shown by such person in any return of such tax or
   information.”) (emphasis added); 26 C.F.R. § 1.41-4(d)(“Recordkeeping for the research
   credit. A taxpayer claiming a credit under section 41 must retain records in sufficiently
   usable form and detail to substantiate that the expenditures claimed are eligible for the
   credit.”).

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   initiated by the taxpayer or a collection suit brought by the Government.23
   Thus, ultimately, “[t]he burden and the presumption, which are for the most
   part but the opposite sides of a single coin, combine to require the taxpayer
   always to prove by a preponderance of the evidence that the Commissioner’s
   determination was erroneous.”24
              The IRS assessment in this case was entitled to the presumption of
   correctness. This burden is a low one; the assessment must merely “advise
   the taxpayer that the [IRS] has determined that a deficiency exists for a
   particular year,” and “specify the amount of the deficiency or provide the
   information necessary to compute the deficiency.”25 The IRS’s August 13,
   2019, letter to Appellants (the “Letter”) met these requirements.26 Thus,
   the burden shifted to Appellants to refute the IRS’s determination.
   Therefore, the District Court properly required Appellants to introduce
   evidence on this point to establish a genuine dispute meriting trial.
              Moreover, even if the IRS’s assessment was not entitled to the
   presumption of correctness, the Government still met its burden of
              _____________________
   23
     Carson v. United States, 560 F.2d 693, 696 (5th Cir. 1977) (“This burden applies whether
   the proceeding is in Tax Court for redetermination of a deficiency or in district court upon
   a refund claim or a government counterclaim.”).
   24
        Id. at 695–96.
   25
     Portillo, 932 F.2d at 1132 (5th Cir. 1991) (internal citation omitted); see also Sealy, 46 F.3d
   at 386 (same).
   26
     The Letter recounted that Appellants requested a tax credit of $576,756 for the 2013 tax
   year and received a total refund of $671,071.38, which was comprised of Appellants’
   $576,756 claimed research credit plus $73,663.38 in statutory interest and an additional,
   undisputed, refund of $20,652. It further explained that the $576,756 refund was “solely
   due to information” reported on Appellants’ amended return which, in turn, was based on
   Cajun’s Amended Form 1120S. Because the IRS “determined that Cajun Industries, LLC
   & Subsidiaries is not entitled to the Research Credit claimed,” the Letter concluded that
   the “refund resulting from the Research Credit should not have been allowed and the
   refund paid to [Appellants] was erroneous.”

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                                          No. 22-30764

   production at summary judgment. As the moving party, the Government
   needed to show that there was no genuine dispute as to any material fact and
   that it was entitled to judgment as a matter of law.27 The Government could
   do so by submitting evidence negating the existence of some material element
   of Appellants’ claim or defense; alternatively, because taxpayers must
   demonstrate their entitlement to credits, the Government could have
   pointed out that the evidence in the record was insufficient to support
   Appellants’ claim that they performed qualified research.28
             The Government did so by providing approximately forty exhibits—
   including excerpts from the Representative Projects’ contracts, Appellants’
   2013 amended tax return, and corporate representative depositions from
   parties to the Methanex, Chevron, Claiborne, and the East Bank Projects—
   that refuted Appellants’ entitlement to the credit. At that point, the District
   Court was correct in offering Appellants the opportunity to rebut this
   evidence and thus create a genuine issue of fact. The District Court did not
   err on this basis.

             _____________________
   27
        FED. R. CIV. P. 56(a).
   28
     See Little v. Liquid Air Corp., 952 F.2d 841, 847 (5th Cir. 1992), on reh’g en banc, 37 F.3d
   1069 (5th Cir. 1994) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986)).

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                                          No. 22-30764

              B. Business Components Determination
              Research must satisfy the so-called “business components” test in
   order to qualify for the tax credit.29 The business components test requires
   that research be “undertaken for the purpose of discovering information (i)
   which is technological in nature, and (ii) the application of which is intended
   to be useful in the development of a new or improved business component
   of the taxpayer.”30 The test must be applied separately to each business
   component, defined as “any product, process, computer software,
   technique, formula, or invention which is to be (i) held for sale, lease, or
   license, or (ii) used by the taxpayer in a trade or business of the taxpayer.”31
              During discovery, Appellants stated that they developed four new
   “products:” two oil refineries and two flood control systems. At summary
   judgment, however, Appellants claimed Cajun also created new business pro-
   cesses, a separate type of business component, which Appellants define as
   the “means and methods of construction,” “the means and methods of per-
   forming [] construction services,” and “construction processes.”
              The District Court found that the asserted products and processes did
   not satisfy the business components test because Appellants put forth no ev-
   idence of the alleged products, any assertions of new construction processes
   were inconsistent with their prior disclosures and excludable under Federal
   Rule of Civil Procedure 37, and notwithstanding those inconsistencies, Ap-
   pellants did not specifically identify the new construction processes at issue.32

              _____________________
   29
        26 U.S.C. § 41(d)(1)(B).
   30
        Id.
   31
        Id. § 41(d)(2)(B).
   32
     See FED. R. CIV. P. 37(c)(1) (“If a party fails to provide information or identify a
   witness as required by Rule 26(a) or (e), the party is not allowed to use that information or

                                                17
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                                         No. 22-30764

              Appellants now argue that the District Court’s determinations were
   in error.
              1. Business Components: Products
              Appellants argue they presented sufficient evidence that Cajun
   developed four business component products and cite to the “Taxpayers’
   Response to Proposed Statement of Facts” (the “Response”) as support.
   However, cited provisions primarily describe Cajun’s “means and
   methods,” i.e., their processes, and not the products. While Appellants may
   be correct that their construction processes led to the final product, the
   Revenue Code requires this Court to evaluate each business component
   separately.33
              Accordingly, Appellants have not created a genuine dispute as to
   whether the four products constitute business components.
              2. Business Components: Processes
              Appellants further assert the District Court erred in excluding their
   construction processes argument because the “development processes and
   techniques” used on the Representative Projects were “almost inextricably
   intertwined with the tangible deliverables,” the final product.
              We are not persuaded that the District Court’s decision to exclude
   Appellants’ construction processes claim was an abuse of discretion.34

              _____________________
   witness to supply evidence on a motion, at a hearing, or at a trial, unless the failure was
   substantially justified or is harmless.”).
   33
     26 U.S.C. § 41 (d)(2)(A); see also id. § 41(d)(2)(C) (“Special rule for production
   processes.--Any plant process, machinery, or technique for commercial production of a
   business component shall be treated as a separate business component (and not as part of
   the business component being produced).”).
   34
        CQ, Inc., 565 F.3d at 277.

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                                           No. 22-30764

   Federal Rule of Civil Procedure 37(c)(1) provides that “if a party fails to pro-
   vide information . . . as required by Rule 26(a) or (e), the party is not allowed
   to use that information . . . to supply evidence on a motion, at a hearing, or at
   a trial, unless the failure was substantially justified or is harmless.”35 To eval-
   uate whether a Rule 26 violation was harmless, and “thus whether the district
   court was within its discretion in allowing the evidence to be used at trial,”
   this Court weighs four factors: (1) the importance of the evidence; (2) the
   prejudice to the opposing party of including the evidence; (3) the possibility
   of curing such prejudice by granting a continuance; and (4) the explanation
   for the party’s failure to disclose.36
              First, the argument that Cajun developed new construction processes
   is important because it provided Appellants with a wholly new basis by which
   to claim the tax credit. By raising this argument for the first time at summary
   judgment, Appellants effectively asserted a new defense that was neither dis-
   closed nor explored during discovery. Moreover, as the District Court noted,
   “evidence of Cajun’s new construction processes is plainly important to [Ap-
   pellants] insofar as it is the only evidence (and argument) offered to establish
   the business component element of their QRTC claim.”
              Second, this omission was highly prejudicial to the Government given
   the procedural posture of the case. The record reflects that Cajun’s initial
   discovery responses described the business components for the Representa-
   tive Projects as “products.” Appellants’ supplemental disclosures likewise
   describe the Projects as producing “product[s].” By raising the processes ar-
   gument at summary judgment, Appellants deprived the Government of the
   opportunity investigate this claim.

              _____________________
   35
        FED. R. CIV. P. 37(c)(1).
   36
        Texas A&M Rsch. Found. v. Magna Transp., Inc., 338 F.3d 394, 401–02 (5th Cir. 2003).

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                                          No. 22-30764

           Third, although the District Court acknowledged that reopening dis-
   covery would mitigate prejudice to the Government, the case was “more
   than three years old” and one month from trial. The District Court was enti-
   tled to weigh the value of reopening discovery against providing a timely res-
   olution of the case.37
           Finally, Appellants failed to explain their change in argument before
   the District Court and, before this Court, deny that any change occurred. In
   doing so, Appellants direct the Court to their “pretrial briefing” as evidence
   that Appellants’ position has remained consistent. However, the cited pre-
   trial briefing is the Parties’ Joint Pretrial Order, which was filed over one
   month after the Government moved for summary judgment and three weeks
   after Appellants responded raising the construction process argument for the
   first time. Appellants have not directed the Court to any previous statements
   indicating that the claimed business components involved processes. This
   explanation is thus unpersuasive.
           Given these facts, the District Court did not abuse its discretion in
   excluding Appellants’ arguments about construction processes. However,
   even if the District Court abused its discretion, the error was harmless
   because the court nonetheless evaluated the merits of Appellants’ claim.
   Ultimately, the District Court determined that Appellants put forth “vague”
   and “conclusory” statements regarding their construction processes without
   identifying “even one new or improved process that resulted from Cajun’s
   work on the Representative Projects.”

           _____________________
   37
    A district court has “broad discretion in all discovery matters,” and “such discretion will
   not be disturbed ordinarily unless there are unusual circumstances showing a clear abuse.”
   Kelly v. Syria Shell Petroleum Dev. B.V., 213 F.3d 841, 855 (5th Cir. 2000) (internal citation
   omitted).

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                                         No. 22-30764

              The District Court did not abuse its discretion in excluding evidence
   of Cajun’s construction processes. Alternatively, Appellants did not offer
   sufficient evidence to create a genuine dispute as to whether Cajun’s
   products or processes constituted business components. Without a viable
   business component, the Representative Projects are not eligible for the tax
   credit, and the Government is entitled to summary judgment as a matter of
   law.
              C. Funding Exclusion
              Qualified research excludes “funded” research projects.38 Funded re-
   search include “any research to the extent funded by any grant, contract, or
   otherwise by another person (or governmental entity).”39 To determine
   whether research was funded, courts must first evaluate “all agreements (not
   only research contracts) entered into between the taxpayer performing the
   research and other persons.”40 Research is funded if: (1) the researcher re-
   tains no substantial rights in its research; 41 or (2) payment is not contingent
   upon the research’s success.42
              The District Court determined that “the Methanex, Chevron, and
   Claiborne Projects each fail the ‘substantial rights’ prong of the ‘funded

              _____________________
   38
        26 U.S.C. § 41 (d)(4)(H).
   39
        Id.
   40
        26 C.F.R. § 1.41-4A(d)(1).
   41
      Id. § 41-4A(d)(2)(“If a taxpayer performing research for another person retains no
   substantial rights in research under the agreement providing for the research, the research
   is treated as fully funded for purposes of section 41(d)(4)(H), and no expenses paid or
   incurred by the taxpayer in performing the research are qualified research expenses.”).
   42
     Id. § 1.41-4A(d)(1)(“Amounts payable under any agreement that are contingent on the
   success of the research and thus considered to be paid for the product or result of the
   research (see § 1.41–2(e)(2)) are not treated as funding.”).

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                                        No. 22-30764

   research’ exclusion because in each instance Cajun transferred all rights to
   any new or improved ‘construction processes’ to its contracting counter-
   part.” The Court found that the East Bank contract was funded because
   “SWBNO plainly paid Cajun for whatever alleged research Cajun may have
   performed.”
              On appeal, Appellants dispute this finding and argue (1) that Cajun
   retained substantial rights in its research, and (2) that the Representative
   contracts were “contingent” upon delivery of a product and, as such, are not
   funded as defined by Treasury Regulation 26 C.F.R. § 1.41-4A(d).
              1. Methanex, Chevron, and Claiborne Projects
              Researchers cannot claim the tax credit if they retain no “substantial
   rights in research under the agreement providing for the research.”43 A
   researcher retains no “substantial rights” if the agreement or contract
   “confers on another person the exclusive right to exploit the results of the
   research.”44 Whether Cajun retained substantial rights to its research is
   determined by the contracts for each Representative Project.45
              Even assuming Cajun satisfied the business components test, by the
   express terms of the Methanex, Chevron, and Claiborne contracts, Cajun
   gave up its rights to any research performed under the contracts. Pursuant to
   section 26 of the Methanex contract, Methanex retained “all rights, title and
   interest” in any “work product” prepared by Cajun. The provision applies
   to all “works made for hire” as well as any work “not considered a work

              _____________________
   43
        26 C.F.R. §1.41-4A(d)(2).
   44
        Id.
   45
     Id. § 1.41-4A(d)(1) (“All agreements (not only research contracts) entered into between
   the taxpayer performing the research and other persons shall be considered in determining
   the extent to which the research is funded.”).

                                              22
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                                           No. 22-30764

   made for hire.” By contracting away “all right, title and interest” in its work
   product, Cajun gave up its rights to all “documents, data, analyses, reports,
   plans, procedures, manuals, drawings, specifications, calculations, or other
   technical tangible manifestations of [Cajun]’s efforts (whether written or
   electronic)” created while performing the contract, as well as “any or all
   tracings, designs, drawings, field notes, requisitions, purchase orders,
   specifications, electronic information . . . and other documents or records
   developed or acquired by [Cajun] and its suppliers or sub-subcontractors in
   performing the Work.”
             Similarly, Cajun assigned to Chevron “all rights” to any “drawings,
   documents, engineering and other data prepared or furnished by [Cajun]”
   under the Chevron contract. These items became “[Chevron’s] property
   from the time of preparation and may be used by [Chevron] for any purpose
   whatsoever without obligation or liability whatsoever to [Cajun].” Further-
   more, the contract also states that Chevron owns all “inventions, discoveries
   and improvements (patentable and unpatentable) that are made or conceived
   by [Cajun] or [Cajun’s] employees” during the Project. Cajun was permitted
   to use this information “only for performance of the Services for [Chev-
   ron],” and pledged not to disclose such information “to any third party with-
   out [Chevron’s] express written consent.” Importantly, this obligation per-
   sists “notwithstanding the termination of this Contract.”
             Finally, by incorporating various provisions of the Federal Acquisition
   Regulations, the Claiborne contract provides that “all material and work cov-
   ered by progress payments made shall, at the time of payment, become the
   sole property of the Government.”46 “Work” is defined broadly and includes

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

                                                 23
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                                            No. 22-30764

   “construction activity,” “buildings, structures, and improvements of all
   types.”
             Ultimately, “it is hard to see what rights—much less what substantial
   rights” Cajun retained in its undefined research.47 After assigning away all
   rights to work developed during each Representative Project, Cajun retained
   no substantial rights in its research.48
             2. East Bank Project
             Treasury Regulation 26 C.F.R. § 1.41-4A(d) defines “funded”
   research.49 Relevant here, the Regulation explains that “amounts payable
   under any agreement that are contingent on the success of the research and
   thus considered to be paid for the product or result of the research (see §
   1.41–2(e)(2)) are not treated as funding . . . .”50

             _____________________
   47
     Tangel v. Comm’r of Internal Revenue, 121 T.C.M. (CCH) 1001, 2021 WL 81731, at *6
   (T.C. 2021) (internal quotations omitted).
   48
      Appellants argue Cajun retained substantial rights to its research because “there is
   nothing [in the contracts] that precludes Cajun from performing the same types of activities
   and utilizing the same means and methods on other projects, or building other flood
   structures, or modifying refineries.” However, Appellants provided no specific examples
   of these “means and methods,” leaving the district court and this Court to guess what
   Cajun could bring to future projects aside from additional experience in its field.
   “[I]ncreased experience in a field of research” does not constitute substantial rights to
   research. 26 C.F.R. § 1.41-4A(d)(2).
   49
        26 C.F.R. § 1.41-4A(d).
   50
     Id. § 1.41-4A(d)(1). Together, 26 C.F.R. §§ 1.41-2(e) and 1.41-4A(d) provide “mirror
   image” rules “for determining when the customer for the research, rather than the
   researcher, is entitled to claim the tax credit.” Fairchild Indus., Inc. v. United States, 71 F.3d
   868, 870 (Fed. Cir. 1995), modified (Feb. 23, 1996). Fairchild interpreted 26 C.F.R § 1.41-5,
   which was redesignated as § 1.41-4A in 2001. See Credit for Increasing Research Activities,
   66 Fed. Reg. 280, 295 (2001). Section § 1.41-4A addresses when a researcher can claim the
   credit, whereas § 1.41-2(e) addresses when the payor to a contract can (or cannot) claim it.
           Accordingly, § 1.41-2(e)(2) explains that payors cannot claim expenses for
   research contracts “if an expense is paid or incurred pursuant to an agreement under which

                                                  24
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                                          No. 22-30764

           Appellants offer three reasons why the East Bank Project was not
   funded. First, Appellants rely on 26 C.F.R. § 1.41-4A(d) and 26 C.F.R. §
   1.41-2(e) to argue the East Bank Project was not funded because payment was
   contingent upon Cajun delivering a “result or product,” the refineries and
   flood systems. Second, and relatedly, Appellants maintain they are entitled
   to the credit simply because SWBNO, the payor on the East Bank Project,
   was not. Finally, Appellants argue that the Project was not funded because it
   was “inherently risky.” These arguments miss the mark.
           Appellants’ argument that all contracts “for the product or result”
   are not funded improperly conflates “amounts payable under any agreement
   that are contingent on the success of the research” with contracts for
   products or services. This argument ignores the operative portion of the
   sentence: “amounts payable under any agreement that are contingent on the
   success of the research.” Structurally, the phrase “and thus considered to be
   paid for the product or result of the research” merely describes or modifies
   “amounts payable . . . contingent on the success of the research.” It does not,
   as Appellants urge, stand on its own to establish an additional type of contract
   “not treated as funding.”
           More to the point, § 1.41-4A(d)(1) only concerns agreements
   contingent upon the success of research. Simply put, the East Bank contract
   was not contingent on the success of the research because Appellants admit
   that “none of Cajun Industries’ payment was for merely conducting
   research.” Indeed, Appellants’ briefing admits “payments to Cajun

           _____________________
   payment is contingent on the success of the research” because “the expense is considered
   paid for the product or result rather than the performance of the research.” 26 C.F.R. §
   1.41-2(e)(2). In doing so, “the regulations implement allocation of the tax credit to the
   person that bears the financial risk of failure of the research to produce the desired product
   or result.” Fairchild, 71 F.3d at 870.

                                                25
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                                          No. 22-30764

   Industries were not contingent upon whether Cajun Industries conducted
   research activities.” Consequently, this argument lacks merit.
               Furthermore, Appellants are not entitled to the research credit merely
   because SWBNO could not claim the credit. The Regulations do not require
   that a tax credit be allocated in every contract.51
               Third, Appellants assert the East Bank Project was not funded
   because it was a fixed price contract and “inherently risky.” This argument
   stands on more solid ground and finds some support in a line of cases
   including Fairchild Industries, Inc. v. United States and Geosyntec Consultants,
   Inc. v. United States.52 Fairchild explained that sections 1.41-2 and 1.41-4A
   “implement allocation of the tax credit to the person that bears the financial
   risk of failure of the research to produce the desired product or result.”53
   Because fixed price contracts may not fully compensate researchers if their
   research is unsuccessful, the researcher bears the financial risk of failure, and
   fixed price contracts are more likely to be deemed unfunded.
               However, Fairchild and Geosyntec do not stand for the proposition that
   all fixed price contracts are per se not funded. Indeed, Geosyntec found that
   the fixed price contract at issue was funded.54 Furthermore, even if this Court

               _____________________
   51
     See 26 C.F.R. § 1.41-A(d)(2) (addressing a scenario in which “a taxpayer performing
   research for another person retains no substantial rights in the research and if the payments
   to the researcher are contingent upon the success of the research, neither the performer nor
   the person paying for the research is entitled to treat any portion of the expenditures as
   qualified research expenditures.”) (emphasis added).
   52
     Fairchild, 71 F.3d at 870; Geosyntec Consultants, Inc. v. United States, 776 F.3d 1330 (11th
   Cir. 2015).
   53
        Fairchild, 71 F.3d at 870.
   54
     Geosyntec, 776 F.3d at 1339 (“[W]e find that both the Cherry Island Contract and the
   WM Contract were ‘funded’ as that term is used in § 41 and Treasury Regulation § 1.41–
   4A(d).”).

                                                26
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                                          No. 22-30764

   agreed that the Regulations allocate the tax credit to the party bearing the risk
   of unsuccessful research, Cajun was compensated for all risks associated with
   the East Bank Project. According to the express terms of the contract, Cajun
   accepted payment “as full compensation for all loss, damages or risks of
   every description, connected with or resulting from the nature of the work,
   or from any obstructions or difficulties encountered, of any sort or nature
   whatsoever . . . .”
           Finally, the East Bank Project was funded for the simple reason that
   Cajun was compensated for all expenditures incurred and claimed when it
   sought the tax credit. According to Cajun’s IRS Form 6765, Cajun claimed
   the research credit entirely for “wages” incurred in pursuit of qualified
   services.55 However, Cajun was compensated under the East Bank contract
   for “all general foremen, foremen, labor, [and] teams” as well as Cajun’s
   “superintendence, general expense and profit.” Cajun accepted this
   payment as “full compensation for furnishing all the labor, materials, tools,
   equipment, etc., needed to complete the whole work of the contract.”
   Therefore, Cajun was fully compensated for all wages and labor, making
   these expenditures funded under any plain meaning of the term.56

           _____________________
   55
     Although Appellants’ brief claims that “Cajun Industries included portions of employee
   wages, contractor costs, and supply costs incurred for various construction projects as part
   of the computation of the R&D tax credits,” their tax filings indicate otherwise. In its Form
   6567, Cajun left blank spots next to the “cost of supplies” category. To the extent
   Appellants argue Cajun claimed the credit for the difference between compensation
   received and wages paid, Appellants bore the burden of demonstrated this value before the
   District Court and on appeal. They provided no such calculations.
   56
     See also 26 C.F.R. § 1.41-4A (Example 1, indicating if a researcher is wholly compensated
   for otherwise qualified expenditures, the researcher is not entitled to the credit,
   notwithstanding any rights retained in the research).

                                                27
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                                   No. 22-30764

                                       IV.
         Based upon the record before the District Court and arguments made
   on appeal, the Court finds that the Representative Projects yielded no viable
   business components and were funded. Appellants are ineligible for the
   research tax credit provided by 26 U.S.C. § 41. Therefore, the District
   Court’s grant of summary judgment is AFFIRMED.

                                        28