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Geosyntec Consultants, Inc. v. United States

United States Court of Appeals, Eleventh Circuit

January 29, 2015

GEOSYNTEC CONSULTANTS, INC., Plaintiff - Appellant,
v.
UNITED STATES OF AMERICA, Defendant - Appellee

Appeal from the United States District Court for the Southern District of Florida. D.C. Docket No. 9:12-cv-80334-DLB.

For Geosyntec Consultants, Inc., Plaintiff - Appellant: Alex E. Sadler, Steven C. Caywood, Patrick J. Smith, Ivins Phillips & Barker, Chartered, Washington, DC; Edward A. Marod, Gunster Yoakley & Stewart, PA, West Palm Beach, FL.

For United States of America, Defendant - Appellee: Anthony T. Sheehan, Jonathan S. Cohen, U.S. Department of Justice, Tax Division, Appellate Section, Washington, DC; Wifredo A. Ferrer, Kathleen Mary Salyer, U.S. Attorney's Office, Miami, FL; Michael N. Wilcove, USDOJ - Tax Division, Washington, DC; David Zisserson, U.S. Department of Justice, Tax Division, Washington, DC.

Before WILSON and ROSENBAUM, Circuit Judges, and CONWAY,[*] District Judge.

OPINION

Page 1331

WILSON, Circuit Judge:

Plaintiff-appellant Geosyntec Consultants, Inc. (Geosyntec) appeals the district court's grant of summary judgment in favor of defendant-appellee United States of America (United States) and against Geosyntec, in which the district court found that Geosyntec was not entitled to research tax credits pursuant to 26 U.S.C. § 41 for research expenses incurred on certain client projects during tax years 2002 to 2005.

Under § 41, a taxpayer may claim a tax credit for increased spending on qualified research. Certain categories of research are expressly excluded from the definition of " qualified research." Specifically, under § 41(d)(4)(H), a taxpayer is precluded from claiming the research tax credit when otherwise qualifying research is " funded" by a third party. The district court found that research conducted by Geosyntec pursuant to two particular contracts was funded by Geosyntec's clients, making Geosyntec ineligible for the research tax credit for those contracts. On appeal, Geosyntec challenges the district court's categorization of those contracts as funded.

We are thus asked to consider whether the research performed by Geosyntec pursuant to the two contracts was funded by

Page 1332

Geosyntec's clients (making Geosyntec ineligible for the research tax credit) or not funded (such that Geosyntec is entitled to claim the research tax credit). Although we have not previously had occasion to consider the applicability of § 41(d)(4)(H)'s funded research exclusion, the Federal Circuit has, and the parties rely heavily on that court's seminal opinion. See Fairchild Indus., Inc. v. United States, 71 F.3d 868 (Fed. Cir. 1995), modified (Feb. 23, 1996). Upon review, we conclude that the district court was correct in its interpretation of § 41 and affirm its entry of summary judgment against Geosyntec.

I.

Geosyntec is a specialized consulting and engineering firm that contracts with clients, both public and private, to provide services on projects involving the environment, natural resources, and geological infrastructure. It specializes in environmental studies and cleanup, infrastructure design and engineering, and natural resources assessment and restoration. Geosyntec's stated business model is the development of innovative and sustainable solutions to environmental issues facing its clients.

In 2012, Geosyntec filed suit in the district court, seeking a federal income tax refund of $1,677,432 pursuant to 26 U.S.C. § 41--the research tax credit. Geosyntec alleged that it was entitled to research tax credits for qualified research expenses that it incurred on client projects in taxable years 2002, 2003, 2004, and 2005. Geosyntec had previously sought a federal income tax refund from the Internal Revenue Service (IRS), which the IRS had disallowed. In response to Geosyntec's district court action, the United States maintained its position that Geosyntec was not eligible for any tax refund under § 41.

Between 2002 and 2005, Geosyntec entered into hundreds of varied contracts with its clients. In the interest of efficiency, Geosyntec and the United States designated six representative contracts for the district court's review. Three of the contracts were fixed-price contracts, under which Geosyntec was paid a fixed total price for its work. The other three contracts were cost-plus contracts subject to a maximum, also known as " capped contracts," under which Geosyntec was paid for its labor and expenses, plus a mark-up, subject to an agreed-upon maximum price.

The parties further agreed on three key issues: (1) Geosyntec could not claim the research tax credit if a third party had " funded" the otherwise qualified research; (2) Geosyntec's existing client contracts governed determination of the funding issue and, there being no factual disputes as to those contracts, expert testimony would be unnecessary; and (3) if the district court determined Geosyntec's research was funded, the United States was entitled to judgment in its favor. A finding that Geosyntec's research was not funded, however, would necessitate further litigation on additional fact-intensive issues related to Geosyntec's right to the research tax credit.

Given the parties' stipulations and on the parties' joint motion, the district court authorized summary judgment briefing on the threshold matter of whether research performed by Geosyntec under the representative fixed-priced and capped contracts was funded within the meaning of § 41. The parties filed cross-motions for summary judgment on the funding issue.

On April 17, 2013, the district court entered an order granting each party's motion for summary judgment in part and denying each in part. As to the three capped contracts, the district court agreed with the United States and found those contracts funded, making Geosyntec ineligible for the research tax credit for research

Page 1333

expenses incurred under the capped contracts. As to the three fixed-price contracts, the district court agreed with Geosyntec and found that those contracts were not funded. Therefore, Geosyntec remained eligible for the research tax credit for qualifying research expenses it incurred under the fixed-price contracts.

Because Geosyntec remained eligible for the research tax credit as to the fixed-price contracts, further litigation would be necessary to determine whether Geosyntec was, in fact, entitled to the research tax credit. However, in lieu of further litigation, the parties entered into a settlement agreement. Pursuant to the parties' settlement, the district court entered an agreed-upon judgment that, among other things, (a) allowed Geosyntec a federal income tax refund totaling $255,575, plus statutory interest, for the unfunded fixed-price contracts; (b) denied a refund for the funded capped contracts; and (c) preserved Geosyntec's right to appeal the district court's ruling as to the capped contracts. This appeal followed.[1]

II.

We review a district court's order granting summary judgment de novo, applying the same legal standards as those applied by the district court.[2] See Thrasher v. State Farm Fire & Cas. Co., 734 F.2d 637, 638 (11th Cir. 1984) (per curiam). To this end, we view the evidence and make all reasonable inferences in favor of the non-moving party. See Whatley v. CNA Ins. Cos., 189 F.3d 1310, 1313 (11th Cir. 1999) (per curiam). Summary judgment is properly granted only where there exists " no genuine issue of material fact and the moving party is entitled to judgment as a matter of law." See Beal v. Paramount Pictures Corp., 20 F.3d 454, 458 (11th Cir. 1994) (citing Fed.R.Civ.P. 56(c)).

III.

Geosyntec contends that the district court erred in finding that the three capped contracts were funded and that Geosyntec was thus ineligible for the research tax credit as to research expenses incurred under those contracts. While three capped contracts were before the district court, Geosyntec appeals the district court's summary judgment ruling as to only two: (1) a contract with the Delaware Solid Waste Authority (DSWA) to expand the capacity of the Cherry Island Landfill in Wilmington, Delaware (the Cherry Island Contract); and (2) a contract with Waste Management, Inc. (WM) to evaluate technology for remediating groundwater beneath a warehouse in Niagara, New York (the WM Contract).[3]

After consideration of the applicable statute and regulations, the district court found that both the Cherry Island

Page 1334

Contract and the WM Contract were funded within the meaning of § 41 and Geosyntec was therefore not entitled to claim the research tax credit for research conducted pursuant to those contracts. Geosyntec agrees with the district court's invocation of the standard articulated in Fairchild, 71 F.3d at 873, that the funded research inquiry " turns on who bears the research costs upon failure" of the research; but it challenges the district court's application of that standard to the Cherry Island and WM Contracts. According to Geosyntec, both of those contracts place the costs of research failure " squarely" on Geosyntec, and it is thus eligible for the research tax credit. The United States disagrees. On ...


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