Fixed price contract work qualifies for research credit

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January 2020


In an order dated December 6, 2019, US Tax Court Judge Robert Goeke granted summary judgment to Populous Holdings, Inc. (Populous) on the issue of whether research expenses were for ‘funded research’ and therefore excluded from the definition of qualified research under Section 41(d)(1)(H).

Judge Goeke concluded that the research performed by Populous under various contracts was not funded research and therefore qualified for the Section 41 research credit because: (1) payment for the research was contingent on the success of the research and (2) Populous retained substantial rights in the research.

The summary judgment motion that led to the court’s order focused on the contracts for its analysis, which is consistent with the position that research credit risk analysis should involve only the ‘four corners’ of the contract. In his order, Judge Goeke explicitly stated that the ‘specific terms of the contract’ must be examined to determine risk.

The takeaway

Judge’s Goeke’s opinion in the Populous case provides a helpful ‘roadmap’ to ‘risk’ and ‘rights’ analysis in determining whether contract research is funded or unfunded.

While this opinion is only an order on a summary judgment motion, this is a Tax Court case so the decision has potential applicability to other cases across the United States (unlike Geosyntec, which was a district court case) and is consistent with other research credit risk-and-rights opinions.

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Brett Ritter

Partner, National R&D Tax Services Leader, PwC US

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