Meyer, Borgman & Johnson, Inc. v. CIR, No. 23-1523 (8th Cir. 2024)
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Meyer, Borgman & Johnson, Inc. (MBJ), a structural engineering firm, sought research tax credits for expenses incurred in creating designs for building projects. MBJ claimed approximately $190,000 in tax credits for the years ending September 30, 2010, 2011, and 2013. The Commissioner of Internal Revenue denied these credits.
The United States Tax Court affirmed the Commissioner's decision, ruling that MBJ's research was "funded" within the meaning of 26 U.S.C. § 41(d)(4)(H), and therefore, MBJ did not qualify for the credits. The Tax Court's decision was based on a summary judgment.
The United States Court of Appeals for the Eighth Circuit reviewed the Tax Court's decision de novo. MBJ argued that the Tax Court erred because its right to payment was contingent on the success of its research, and its contracts had inspection, acceptance, and quality assurance provisions. MBJ claimed that its payments were contingent on the success of its research because it was required to create a design that met all the owner's requirements, complied with all pertinent codes and regulations, and was sufficiently detailed for a contractor to successfully construct it.
However, the Court of Appeals disagreed with MBJ's arguments. It found that MBJ's contracts did not expressly or by clear implication make payment contingent on the success of MBJ’s research. The court distinguished between "successful performance"—meeting detailed, barometers of success—and "proper performance"—providing deliverables pursuant to a general professional standard of care and promising work free from negligence, error, or defects. The court found that MBJ's contracts fell into the latter category.
The Court of Appeals affirmed the Tax Court's ruling that MBJ’s research did not merit the research tax credit.
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