Gary C. George & Robin George

United States Tax Court

T.C. Memo. 2026-10

GARY C. GEORGE AND ROBIN A. GEORGE,

Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

GARY C. GEORGE AND ROBIN GEORGE,

Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

__________

Docket Nos. 27494-16, 21889-21. Filed February 3, 2026.

__________

John H. Dies, Rosalind J. Lewis, Matthew S. Reddington, and Kerith A.

Willard, for petitioners.

Ronald S. Beach II, Mayah Solh-Cade, Fatima Garcia, Justyna W.

Jozwik, Vincent H. Kan, and Christopher A. Liegel, for respondent in

Docket No. 27494-16.

Ronald S. Beach II, Fatima Garcia, Justyna W. Jozwik, Vincent H. Kan,

and Christopher A. Liegel, for respondent in Docket No. 21889-21.

MEMORANDUM FINDINGS OF FACT AND OPINION

GREAVES, Judge: The principal question in these consolidated

cases concerns petitioners’ entitlement to credits under section 41 for

Served 02/03/26

2

[*2] increasing research activities (research credits). 1 George’s of

Missouri, Inc. (GOMI), an S corporation for federal tax purposes,

reported research credits for research activities related to broiler

chickens between 2012 and 2014 (research years). These credits flowed

through to the sole shareholder, Gary George. Gary George and his wife

Robin George reported research credits on their original and amended

income tax returns and attempted to apply them for tax years 2011,

2012, 2014, and 2016. The Internal Revenue Service (IRS or

respondent) disallowed the research credits and imposed accuracy-

related penalties for 2014 and 2016. 2

The disallowed research credits relate to seven research trials

conducted to create an “improved poultry product.” The issues for

decision are (1) whether any of the seven research trials constituted

qualified research, (2) the amounts of research credits, if any, petitioners

were entitled to, and (3) whether petitioners are liable for accuracy-

related penalties for tax years 2014 and 2016. The primary dispute is

whether GOMI conducted research trials during the research years or

whether the alleged research trials are merely post hoc distortions of

routine data collection into the model of section 41 qualified research.

Forget the proverbial chicken or the egg; today we are called to answer

which came first, the research or the research credit study?

FINDINGS OF FACT

Some of the facts are stipulated and are so found. The parties’

stipulations of facts and the attached exhibits are incorporated herein

by this reference. During the research years GOMI was an S corporation

and Gary was the sole shareholder. Petitioners lived in Arkansas when

the petitions were filed.

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

Code, Title 26 U.S.C. (Code), 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.

2 Petitioners conceded that they are liable for accuracy-related penalties for

2011 and 2012 related to adjustments determined in the notice of deficiency.

3

[*3] I. History of George’s, Inc., and Related Entities

Today, George’s 3 is one of the largest fully integrated poultry

processing companies in the United States. For four generations, the

George family has ruled the roost in the chicken industry, but the story

of George’s starts with humble beginnings in Bush Creek, Arkansas.

In 1922 C.L. George owned and operated a successful small

country grocery store. But the Great Depression hit, and like many

others C.L. struggled to keep the small grocery store afloat. He decided

to shift from the grocery business and began hauling live chickens to

open-air markets in Kansas City, St. Louis, and Chicago to sell. As his

sons Gene and Luther came of age, C.L. brought them into the live

hauling business.

The trio shaped the business into something more akin to the

George’s of today. They focused on expansion and developed George’s

into the model of a traditional chicken producer. In the 1950s George’s

partnered with a processing plant in Springdale, Arkansas, to process

live chickens. This “processing” looked very different from today’s.

Instead of neatly wrapped trays of select cuts of meat, the processor left

the chickens whole and shipped them on ice to consumers.

By the 1960s George’s owned a commercial production complex

that included a female hatchery, a farm, a processing plant, and a small

egg production plant. After the death of his father and brother, Gene

continued the family business with an eye on expanding commercial

production. As soon as his son Gary was old enough to work, Gene

brought him into the family business. Naturally, Gary began his career

at the beginning of the production process in the hatchery.

After a few years away from the business to attend college, Gary

returned to George’s full time. Gary started learning the ropes by

observing the day-to-day activities of George’s and attending meetings.

After eight years of observation without a set role in the company, his

father named Gary the president of George’s as a 30th birthday gift in

1980. This made him the third generation to run George’s.

Gary was focused on the big picture and looked to delegate the

management of George’s day-to-day activities. To that end, Gary hired

3 Unless otherwise stated, this Opinion uses “George’s” to include George’s,

Inc., and all affiliated entities, including GOMI, George’s Farms, Inc., and George’s

Processing, Inc.

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[*4] Monty Henderson as the chief operating officer, a decision Gary

characterized as the second-best decision of his life after marrying his

wife.

With Mr. Henderson handling the day-to-day affairs, Gary

focused on growth. He expanded George’s size by adding new

commercial product complexes north of Springdale. But like his

ancestors, Gary felt cooped up in George’s regional market. In 2001

George’s acquired a commercial product complex in Virginia to unlock

the east coast retail market. Gary also spent time creating and

maintaining good relationships with fast food companies, including

Kentucky Fried Chicken.

In 2012 Gary kept the family tradition by naming his twin sons,

Carl and Charles, as co-presidents of George’s on their 30th birthday.

Gary remained, and is still, the chairman of the board.

II. A Tangled Nest of Entities

George’s patchwork of growth over 100 years created a tangled

nest of an entity chart. George’s entity structure is a creature devised

by accountants and lawyers with little practical impact on the day-to-

day operations of George’s. People who worked at George’s were often

unaware of which entity employed them and paid their salaries.

Generally, people familiar with the company referred to all entities

involved in George’s chicken production as George’s, Inc., regardless of

actual ownership. However, because it is relevant to later discussions,

we will attempt to tease apart the ownership structure and

responsibilities of each entity during the research years. An

organizational chart, as explained in detail below, follows:

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[*5]

George’s, Inc., is a C corporation that acts as the parent company

for certain subsidiaries. George’s, Inc., directly owns three subsidiaries:

George’s Processing, Inc.; George’s Farms, Inc.; and George’s Gas Co.

George’s Processing, Inc., wholly owns George’s Chicken, LLC. In

addition to these related companies, George’s entities include three

entities unrelated by ownership: GOMI; George’s Food, LLC; and

George’s Family Farms, LLC. Each entity is responsible for a different

part of the poultry production process.

GOMI is the entity responsible for the live production portion of

the business from the incubation of eggs through transporting the

chickens for slaughter. GOMI manages the hatcheries, live haul, feed

mills, and farms. GOMI is an S corporation that is 100% owned by Gary.

George’s Farms, Inc., purchases the chickens from GOMI at cost

plus one percent. George’s Farms, Inc., is the entity that ultimately sells

the processed chicken to end customers, but it does not process the

chickens. That task is left to George’s Processing, Inc., which owns and

operates the processing plants in Missouri and Arkansas. It processes

the chickens from George’s Farms, Inc., for a fee.

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[*6] George’s Gas Co. sold and hauled propane to farmers to heat the

chicken houses in the winter. 4 George’s Chicken, LLC; George’s Food,

LLC; and George’s Family Farms, LLC, are associated with chicken

production in Virginia and are not relevant to the issues in these cases.

With the number of entities involved in George’s chicken

production and the less than clear demarcation between entities,

expenses were often paid by the incorrect entity. We note that while

GOMI was not always the entity to initially pay for the feed, the

ultimate cost was transferred to GOMI’s general ledger as the entity

responsible for the live production during the research years. A similar

process occurred for employee compensation. George’s Farms, Inc., paid

the live production employees’ salaries and issued them Forms W–2,

Wage and Tax Statement. At the end of each month, George’s Farms,

Inc., transferred the wage expenses to GOMI, which accounted for them

in the overhead expenses associated with each flock.

III. Commercial Chicken Production

The poultry industry classifies chickens into two categories:

breeders and broilers. While both are the same genetic line of chicken,

they lead vastly different lives. Breeders are hens that lay eggs that

eventually hatch into broilers for commercial sale. Farmers raise

breeders for 21 weeks on a farm, at which point they are transferred to

the laying house. Here, they lay eggs until they reach approximately 65

weeks of age when egg production begins to decline. At this point, the

breeders are cycled out of the laying house and killed. Because breeders

live well beyond the usual life of a commercial broiler, they are

vaccinated against various diseases to prevent outbreaks in the laying

houses. In addition to controlling disease spread in the laying houses,

vaccination allows the breeder to pass its immunity to certain diseases

to its progeny.

Broilers are chickens raised for commercial processing and sale.

GOMI divides broilers further into two groups based on the target end

weight: small broilers and large broilers. Small broilers are raised until

they hit four pounds, at which point they are generally between 35 and

37 days old. By contrast, large broilers are raised until they weigh

between seven and eight pounds, which takes approximately 60 days.

During the research years GOMI primarily raised small broilers in

Missouri and large broilers in Arkansas. Within GOMI, the live

4 George’s Gas Co. is no longer operating.

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[*7] production manager oversees the short but complicated lifecycle of

the broilers. During the research years, Benny McClure was the live

production manager for GOMI.

GOMI organizes its broiler production process into commercial

product complexes that contain all facilities needed to raise broilers.

Each commercial product complex consists of a hatchery, grow farms, a

processing facility, and a feed mill. The first stop in a broiler’s life is the

hatchery. Eggs from the laying house are transported to the hatchery

for incubation and hatching. During the incubation process, GOMI may

administer certain vaccines into the egg (in ovo) based on vendor-

established guidelines. While at the hatchery, the broiler chicks are

given vaccines and other medications to build immunity to diseases that

they are likely to encounter later in life at the grow farms (farms).

Soon after hatching, the broiler chicks are sent to farms where

they will live until they reach the target weight. Each farm has one or

more tunnel-like structures with concrete floors that are referred to in

the industry as houses. The floor of a house is covered in shavings as

bedding for the broilers. The farms do not change the bedding between

flocks to encourage immunity to diseases common in that house.

Importantly, GOMI does not own these farms. Instead,

independent contractor growers own the farms and agree to care for the

broilers, maintain their facilities, and provide utilities to each house.

GOMI continues to own the broilers and provides the growers with the

necessary food and medications for the broilers. GOMI contracts with

these farms on an “evergreen basis” in which the contracts continue from

year to year unless one party terminates the agreement. Each contract

covers several flocks that are placed on a farm at the same time. Each

farm generally is covered by two or more contracts.

GOMI classifies farms as either company-related or contract

farms. Company-related farms are those owned by someone closely

related to the company, such as a member of the George family or an

employee of George’s. The company-related farms during the research

years were Bals, Boss East, Boss West, Bush Creek, Carpenter Farm,

Highfill Farm, Leslie Broilers, Littrell Broilers, Twin G.W., and Twin

G.E. By contrast, contract farm owners are unrelated to the company.

GOMI provides each grower with the George’s handbook, which sets

forth best practices in raising broilers.

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[*8] The time spent on the farm is the most important and riskiest

part of broiler production. Consequently, the growers closely monitor

the broilers for signs of disease or other symptoms that indicate a failure

to thrive. Multiple times per day the growers walk the broiler houses to

pick up dead broilers and log the number of diseased broilers for GOMI.

The growers are not alone in raising the broilers. GOMI sends

broiler service technicians to the farms to advise the growers on the best

practices for raising broilers. These service technicians visit the farms

at least weekly to review the mortality logs, observe the broilers for any

odd behavior that could indicate illness, and administer any

vaccinations or medications that are required. Occasionally, these

service technicians collect blood from the broilers to test for immunity

to certain diseases. These visits and associated tests help GOMI to

determine the effectiveness of vaccination campaigns and to monitor for

any unexpected diseases in the houses.

Additionally, GOMI organizes “posting sessions” at least every

eight weeks. During these sessions, the service technicians collect

samples of live broilers from several farms and bring them to a common

location for examination by a veterinarian. The veterinarian euthanizes

the broilers and performs a necropsy to look for any obvious signs of

disease. To detect less visible signs of illness, the veterinarian collects

samples of the broilers’ gut tissues for laboratory testing. In addition to

these surveillance posting sessions, GOMI veterinarians are on call to

address issues with flocks as they arise.

After a month or two of careful monitoring by the growers and

GOMI personnel, the broilers finally reach their target weight and are

ready for processing. The GOMI live operations team travels to the

farms, counts each head of live broiler, and loads them on a specialized

truck for transport to the processing plant. The broilers are unloaded at

the processing plant, and at this point George’s Farms, Inc., takes over.

George’s Farms, Inc., then contracts with Geroge’s Processing, Inc., to

process the birds at the processing plant. The date on which the broilers

are transported to the processing plant and killed is known as the

settlement date.

Upon arrival at the processing plant, the broilers are examined

by U.S. Department of Agriculture Food Safety and Inspection Service

workers that look for one of seven condemnable conditions. If signs of

these conditions are found, the inspection worker cuts off the diseased

portion of the broiler if possible or condemns the entire broiler.

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[*9] During the research years, GOMI transported between 30 and 40

small broiler contracts and between 12 and 15 large broiler contracts per

week to the processing plant. Between small and large broilers, this

accounted for approximately 3.5 million heads processed weekly.

Throughout this process, employees collected several statistics, which

the live production account manager compiled into weekly grower

reports.

The final portion of each commercial product complex is the feed

mill. The feed mill, as the name would suggest, is where the feed recipes

are mixed for each farm. During the research years, GOMI had two feed

mills: the Springdale Feed Mill and the Cassville Feed Mill. Each feed

mill supplied the farms closest to it.

Throughout their time on the farms, the broilers are given

different feed recipes that correlate with their age and nutritional needs.

In the beginning, broilers need a high protein, low energy diet. As they

age, this ratio flips with broilers requiring a low protein, high energy

diet. Small broilers are fed three different recipes throughout their life,

and large broilers are fed four different recipes.

Feed is the most expensive part of raising broilers and requires

striking a balance between cost savings and nutrition targets.

Consequently, GOMI employed an animal nutritionist to review and

revise the feed recipes weekly during the research years. Starting in

2010 GOMI employed Matthew Greenwood as an animal nutritionist

consultant. Dr. Greenwood viewed himself as a progressive nutritionist

that always looked for cutting-edge developments in the poultry space.

During the research years, he balanced a consulting practice of 13 to 16

clients. Each week, Dr. Greenwood reviewed the current feed recipes

with the goal of maximizing performance while minimizing cost. He set

the “specs” for the feed, which included specific targets for fat, proteins,

and amino acids. He then created feed recipes to hit these specs with

the most cost-effective ingredients and sent them to Mr. McClure for

approval. Once approved, Mr. McClure sent the recipes to the feed mill.

There was a lag between Dr. Greenwood’s signoff on a feed recipe and

the time when GOMI delivered the feed to the farms. The length of the

lag depends primarily upon whether GOMI has the required ingredients

in stock.

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[*10] IV. Flocks and Flocks of Data

Poultry production is a high-volume, low-margin industry with

even small changes having dramatic impacts on profitability. If all the

stars align and everything goes according to plan, a poultry producer

can expect to earn approximately one penny of profit per pound. While

the profit per pound is incredibly small, when it is multiplied by millions

of heads of broilers each year the poultry business is quite lucrative for

those with a strong stomach.

The single most important driver of profit in the industry is the

size and uniformity of the broilers. It is of utmost importance for a

poultry producer to limit the variance in size between broilers. George’s

contracts with its customers for very precise specifications for each cut

of meat. For example, Kentucky Fried Chicken, one of George’s largest

customers, requires each piece of meat to fit within a narrow range of

sizes so that it can be used in mass production. If a broiler does not fit

within this range, it must undergo additional processing, adding costs.

Even after additional processing, the meat is sold at a discount.

Ensuring uniformity is challenging. Even broilers that are genetically

identical, raised on the same farm, and fed the same food naturally vary

in size. In addition to uniformity, the distribution of white and dark

meat on a broiler has a large impact on profitability. In the United

States, white meat demands a premium with breast meat selling for the

highest price.

The tight margins and ample opportunity for failure create an

obsession for data and data analytics in the industry. With millions of

broilers processed weekly, there is no shortage of raw data for GOMI to

review and analyze. GOMI tracks the costs for each flock to the fraction

of a penny. In addition to costs, GOMI records various metrics

throughout a broiler’s life and during processing, including weight and

mortality. GOMI compares these live metrics to historic performance

and industry performance reported by voluntary reporting

organizations, such as Agri Stats, to monitor any trends in the data. 5

During the research years, the job of compiling all this information into

5 Agri Stats is a comparative data analysis tool that prepares monthly data

analytics and anonymously benchmarks poultry producers on the following metrics:

ingredient purchasing, feed formulation, feed milling and delivery, breeder production,

broiler production, processing, sales, and profitability. Agri Stats obtains its data from

voluntary self-reporting by customers.

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[*11] a useable format fell to the live production account manager, Gary

Hopkins.

During the research years, Mr. Hopkins oversaw recording all

costs associated with each broiler, including the cost of the chick, feed,

and medication, in a data management system called Lawson. Of

particular importance was tracking the feed cost associated with each

contract. GOMI recorded each lot of feed that was delivered to the farms

for this purpose and Mr. Hopkins was tasked with determining the cost

of each lot. Mr. Hopkins first calculated the cost of the ingredients

added to the feed delivered to the farms and then made adjustments for

any feed loss inherent in production, including loss due to water weight,

spillage, or spoilage (shrink adjustment). This artificially increased the

cost associated with the feed to account for lost product. GOMI adopted

a standard fixed percentage of the cost to produce each pound of food

that is added to the final total cost to account for the shrink adjustment.

During the research years, GOMI added a shrink adjustment of 0.5% to

1% to its feed. The feed cost also included the wages for live production

staff, delivery expenses, and cost of any medication added to the feed.

Mr. Hopkins then matched this cost data to the data he received

from the production plant for each flock. Mr. Hopkins refined this data

into spreadsheets to determine grower compensation and create trend

analyses for broiler health. First, he used the raw data to calculate a

grower’s payment for raising the broilers. GOMI followed a tournament

style of compensation for growers in which growers are paid based on

their performance. GOMI compensated growers that performed above

average more and companies that fell below the average less. Then Mr.

Hopkins calculated the average for contract farms and ranked their

performances. This list was used to calculate contract farms’

compensation. After calculating this, Mr. Hopkins added back in the

company-related farms and redid the calculations and rankings. This

was the basis for the company-related farms’ compensation. This split

system was designed to control any perception of preferential treatment

of the company-related farms compared to the contract farms. In

addition to the tournament style payment, GOMI paid farmers a

premium if they upgraded their houses.

Mr. Hopkins also synthesized the data to create useful metrics to

gauge broiler performance based on field and process plant records.

These metrics included feed conversion and average daily weight gain.

Feed conversion is the amount of food required for a broiler to gain a

pound. It is calculated by dividing the end weight of all broilers by the

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[*12] total pounds of feed delivered to the farm. The average daily

weight gain is the final weight of the broilers divided by the number of

days the flock was in the field. He also added to the report the useful

portions of the raw data including average weight, the number of

broilers that made it to the processing plant, and the number of

condemned broilers. GOMI and its veterinarians reviewed these weekly

reports to gauge performance across live operations.

V. Not All Sunny-Side Up

Even though their lives are very short, broilers confront a variety

of parasites and diseases that diminish their performance and lead to

mortality. Just when GOMI thought that it had a solution for a parasite

or disease, the ground would shift from under it requiring it to find a

new solution.

During the research years, one of the most difficult parasites to

manage was coccidiosis. Coccidiosis is a parasite that lives in the gut of

broilers and is acquired from the environment. Every animal that eats

off the ground has coccidiosis, but the parasite only causes issues to

animals in captivity because of added stress. The coccidiosis parasite

causes damage to the broiler’s gut, which limits nutrient absorption and

ultimately leads to underweight and nonuniform broilers. Each year,

the coccidiosis parasite evolves and causes new side effects in the

infected broilers.

Drugs that treat coccidiosis are called coccidiostats. Generally,

GOMI rotated coccidiostats in cycles throughout the year because after

a couple months of use, the parasite would become resistant to a specific

treatment. Generally, GOMI had three treatment cycles per year.

Before the research years, GOMI relied heavily on the drug 3-Nitro to

prevent coccidiosis. However, 3-Nitro was removed from the market in

2011.

In addition to this parasite, GOMI was confronted time and time

again by three diseases: infectious bursal disease (IBD),

Laryngotracheitis (LT), and necrotic enteritis. IBD is a virus that

attacks the immune system of a broiler. For the first three to four weeks

of life, a broiler’s immune system is dependent on B-cells produced from

the bursa gland that sits at the base of its tail. After this period,

immunity is provided from T-cells, which are produced in the thymus.

IBD attacks the bursa gland and inhibits it from producing B-cells,

leaving the broilers immunocompromised in their early life. Broilers do

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[*13] not die of IBD but rather die of other infectious diseases that

attack the broilers’ weakened immune systems.

LT is a highly contagious, often fatal, respiratory infection in

broilers. It is formally diagnosed in a laboratory by closely examining

an infected broiler’s trachea. But these laboratory tests are not needed

for experienced growers and field service technicians who know the

telltale symptoms of infection. LT attacks and kills a broiler’s trachea

cells. These cells then slough off and enter the airway making it difficult

for the broiler to breathe. As the broiler’s airway fills with this tissue,

the broiler attempts to expel the blockage. However, a broiler cannot

cough so its efforts cause a distinctive wheezing sound. The broilers also

become lethargic, and their eyes become crusty. LT is a state reportable

disease that calls for all-hands-on-deck coordination between

commercial poultry producers. 6

Every winter, GOMI had an LT outbreak in the same geographic

region around Interstate 49 (I–49). This region was home to large

commercial poultry producers along with unregulated backyard

chickens. The proximity of these unregulated birds and the commercial

production flocks made this area a hotbed for LT. LT started as a

seasonal disease that GOMI focused on in the winter. However, by 2014,

outbreaks occurred year round.

Once an LT outbreak started, there was no stopping it. Growers

were forced to let the disease run its course, often killing many broilers.

During the research years, breeders were vaccinated proactively against

LT because of their longer lives. On the other hand, broilers were

generally not vaccinated unless there was an outbreak.

The final disease that hit GOMI particularly hard during the

research years was necrotic enteritis. Necrotic enteritis is caused by a

bacteria that attacks a broiler’s midgut. It is commonly diagnosed via a

necropsy focusing on the gut. The gut of a broiler with necrotic enteritis

has a distinct look that appears like fuzz growing from the intestine

walls. Necrotic enteritis causes high mortality in broilers.

While not a parasite or disease, another force around the research

years threatened to upend everything the poultry industry knew about

raising broilers. Around this time, antibiotic-resistant bacteria were on

6 A state reportable disease is a disease that must be immediately reported to

the Arkansas State Veterinarian Office and/or the U.S. Department of Agriculture,

Veterinary Services.

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[*14] the rise and people began questioning whether antibiotics given to

the animals we eat were a contributing factor. It was standard industry

practice to administer large-molecule antibiotics to treat many diseases.

The fear of antibiotic resistance pushed forward the idea of no-

antibiotic-ever chicken, a broiler raised without the use of antibiotics.

The industry panicked as very few poultry producers had ever

raised broilers without the help of antibiotics. Facing the mounting

pressure around 2012, the market, including GOMI, began looking for

ways to eliminate the use of antibiotics. This led to an immediate

decline in broiler performance, including worsening average daily

weight gain and feed conversion rates. Everyone scrambled to find ways

to improve broiler performance without introducing antibiotics.

The no-antibiotic-ever chicken trend was also at odds with animal

welfare regulations. When broilers get sick, animal welfare regulations

require that the producers treat the broilers. For several diseases, this

treatment is antibiotics. If a producer was forced to administer

antibiotics, it would lose the premium for no-antibiotic-ever chicken and

be forced to find a new market for the flock.

GOMI primarily relied on its veterinarians to manage the moving

target of these ailments. Around 2011 GOMI retained two consulting

veterinarians: Leonard Fussel and David Fields. Dr. Fussel was the

primary veterinarian for GOMI’s live production process between 2011

and 2014. He conducted surveillance visits on a random selection of

farms once per month to check the broilers’ health. In addition to these

visits, he frequently met with GOMI employees to review performance

data and laboratory reports. In contrast, GOMI used Dr. Fields as a

stopgap consultant when an issue arose and Dr. Fussel was unavailable.

In 2014 the Food and Drug Administration changed its

regulations to require a veterinarian’s signature before certain drugs

that GOMI used could be administered to broilers. Because of this

increased demand on veterinarian time, GOMI decided it was finally

time to hire an in-house veterinarian. In 2014 GOMI hired Robinette

Gilbert. Dr. Gilbert assumed Dr. Fussel’s tasks including surveillance

visits, necropsies, trend monitoring, and special visits to farms to

address urgent concerns such as outbreaks. Dr. Gilbert also trained the

service technicians to perform field necropsies and other monitoring

tests.

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[*15] VI. Runt and Stunt Challenges (Base Year Activities)

GOMI constantly sought to improve its production process. One

of the most significant challenges GOMI ever confronted was the

outbreak of runt and stunt syndrome between 2010 and 2012. Runt and

stunt syndrome is a condition that causes feed refusal, diuretic episodes,

and poor performance. This syndrome is particularly devastating for

small broiler production because the short life of these broilers does not

offer an opportunity to recover from the disease. GOMI and the industry

saw a large uptick in the number of cases between 2010 and 2011. While

other companies began to resolve the issue in early 2011, GOMI could

not get ahead of its outbreak.

Dr. Greenwood, who was new to GOMI in 2010, spent a lot of his

early days with GOMI in the field with the broilers to identify the cause

of the syndrome. One theory was that runt and stunt syndrome was

related to coccidiosis—or at least controlling coccidiosis would lessen the

detrimental effects of the syndrome. Dr. Greenwood implemented a

rotating coccidiosis treatment program for more effective control. Dr.

Greenwood also sought to create a more uniform feed program to limit

exogenous variables. For example, he discovered that the salt levels in

different batches of feed varied wildly because of the salt content in raw

materials. He worked with the internal laboratory to monitor feed

ingredients as they arrived to gauge the level of salt. This allowed him

to more accurately control the salt levels in the batches of feed in the

hopes of controlling the diarrhetic symptoms of runt and stunt

syndrome. However, altering the salt in the feed did not resolve the runt

and stunt syndrome outbreak. Dr. Greenwood continued to work on

runt and stunt syndrome from his start in 2010 through a portion of

2012.

Dr. Greenwood was not alone in his fight against runt and stunt

syndrome. Dr. Fussel also took an active role on the veterinarian side

when he started with GOMI in 2011. Dr. Fussel spent considerable time

in the field observing the broilers and collecting data. This observation

led him to the theory that the syndrome was related to something living

in the litter of the broiler houses. But swapping out the litter between

flocks was not financially feasible. Instead, it was standard practice for

growers to only add a top-dressing between contracts. Dr. Fussel posited

that this allowed the organism that caused runt and stunt syndrome to

transfer between flocks. Dr. Fussel developed a plan of leaving the litter

in the houses without broilers for five to six weeks that he called biologic

downtime. This biologic downtime seemed to work as new flocks were

16

[*16] not infected at the same rate. GOMI also collaborated with a

vendor to identify and formulate a vaccine for the disease-causing

organism. Dr. Fussel could not identify the farms where he conducted

his research.

VII. Research Trials at Issue

As new drugs and treatments come on the poultry market, the

drug vendors frequently call upon producers to buy their products. To

develop these products, the vendor undertakes significant research to

determine the effectiveness of the drug or treatment. The goal of these

tests is to determine the treatment’s effectiveness against the target

that it seeks to control. These experiments are performed in sterile

laboratory environments to control and eliminate as many exogenous

variables as possible. This includes eliminating any factors that may

cause stress on the broilers.

While these tests are a good starting point for poultry producers,

they do not indicate how these products will work in the real world. As

much control as GOMI tries to exercise over the broilers, there are

always exogenous variables that alter a treatment’s effectiveness. For

example, temperature fluctuations, which are common in broiler houses

but controlled for in a lab, alter the effectiveness of medications. Even

between two seemingly identical farms, a treatment’s effectiveness can

vary. On one farm, a grower may find that the broilers develop a

resistance to a treatment that works perfectly at the farm next door.

Each farm also has a unique mix of viruses, bacteria, and protozoans

that affect broiler performance.

With the loss of vital products, the recurrence of diseases that

decimated flocks, and a new health-conscious push for no antibiotics,

GOMI entered the research years with a lot of questions. It hoped to

find the answers through a series of research trials. The research trials

included testing the following feed additives, which are explained in

greater detail infra:

17

[*17]

Feed Additive or Medication Use

Salinomycin Coccidiosis treatment

HatchPak Coccidiosis vaccine

Tylan Antibiotic for treatment of infections

Floramax Probiotic for gut health

Calsporin Probiotic for gut health

Sporulin Probiotic for gut health

Phytase Enzyme to increase phosphorus digestion

Vaxxitek IBD vaccine

In some cases, GOMI tested combinations of these drugs. 7 GOMI’s

research projects also included off-label uses for the drugs.

A. Salinomycin

Salinomycin is a chemical compound added to feed to treat

coccidiosis. During the research years it was sold under the brand

names Bio-cox and Sacox. The main indication for Salinomycin was to

prevent coccidiosis from cycling between broilers. That is, Salinomycin

kills the coccidiosis parasite in the broiler’s body before it can be passed

along to another broiler in the infected waste. Ordinarily, when a broiler

is infected with coccidiosis it sheds some of the parasite in its waste onto

the floor of the house near the feed. The next broiler comes along and

eats the feed contaminated by the waste and will likewise become

infected. If the litter in the house is not changed between flocks, it is

possible that the coccidiosis will spread to the next flock. Salinomycin

stops this transmission cycle, but its benefits are known to decline over

time.

7 Petitioners and GOMI employees have linked each treatment to a specific

uncertainty. Therefore, in the consideration of each project in the coming sections we

will focus on the uncertainty identified by petitioners and GOMI employees for each

drug.

18

[*18] GOMI used Salinomycin before the research years and considered

it a failure in 2011. Between 2009 and 2011 GOMI regularly added

between 0.83 pound and 1 pound of Salinomycin per ton of feed.

However, there still remained a question of the most effective manner

of use to control coccidiosis.

As Dr. Fussel and Dr. Greenwood joined GOMI, they began

theorizing that a higher dose of Salinomycin combined with chemical

coccidiostats such as Robenz could improve performance. Petitioners

identified the following 12 contracts between January and June 2012 as

those used to test GOMI’s hypothesis:

Farm Dates in 2012

Bals 18‐27 January 2–February 22

Boss West 1–8 January 2–February 22

Brush Creek 1–8 January 9–February 29

Leslie Broilers 1–5 February 1–March 7

Boss East 9–17 February 5–March 28

Twin G.W. 1–8 February 12–April 4

Twin G.E. 9–16 February 26–April 18

Bals 18–27 March 11–May 2

Boss West 1–8 March 17–May 9

Brush Creek 1–8 March 18–May 9

Leslie Broilers 1–5 March 21–April 25

Twin G.W. 1–8 April 15–June 6

The feed recipes indicated that GOMI added the same dosages of

Salinomycin to the feed as it had in prior years. GOMI added Robenz to

one of the feed recipes for broilers between the age of 17 and 27 days on

19

[*19] April 3, 2012. 8 GOMI employees provided no additional

information on how the results of these trials were analyzed. GOMI

considered this test a failure.

B. HatchPak and Tylan

Fresh off the failure of the Salinomycin trials, GOMI still had not

found a replacement for 3-Nitro in its coccidiosis program. Adding to

the difficulty, the coccidiosis parasite continued to evolve and cause

issues in the broilers. GOMI set its sights on a combination of HatchPak

Cocci III (HatchPak) and Tylan to prevent coccidiosis. HatchPak is a

coccidiosis vaccine administered via spray that is based on a strain of

coccidiosis that does not naturally occur. This genetically engineered

strain of coccidiosis is susceptible to the traditional treatments for

coccidiosis. The main purpose of HatchPak is to replace the strain of

coccidiosis circulating in the broiler house with the vaccine strain. With

this strain now the dominant strain, poultry producers could use the

traditional treatment for coccidiosis to eradicate the parasite. A well-

known side effect of HatchPak is necrotic enteritis.

Tylan is an antibiotic generally used in the poultry business to

treat mycoplasma, a respiratory illness, in breeders. GOMI

administered Tylan to breeders infected with mycoplasma and broiler

chicks hatched from those breeders. Tylan may also be used to treat

necrotic enteritis. GOMI regularly added Tylan-40 to its feed starting

in or around 2009.

GOMI theorized that administering the HatchPak vaccine in the

hatcheries to broiler chicks and administering Tylan in the field later

would effectively control coccidiosis and prevent any adverse side

effects. GOMI administered HatchPak and Tylan in the third and

fourth quarters of 2012 and 2013 on all company-related farms. GOMI

ensured that it fed these flocks a feed recipe that did not contain a

coccidiosis vaccine that would inactivate the HatchPak. To denote these

recipes, Dr. Greenwood created feed recipes throughout 2012 that were

labeled in the 800s. In 2012 GOMI administered the combination of

8 Although petitioners cited Robenz as an example of a chemical coccidiostat

that GOMI used in conjunction with Salinomycin, they did not provide the name of any

other chemical coccidiostats used in these trials. Therefore, we are unable to

determine based on the feed record when any other chemical coccidiostats tests

occurred.

20

[*20] HatchPak, Tylan, and Floramax to flocks covered by 14 contracts. 9

These contracts had settlement dates between July and November 2012.

The adjusted feed expenses, excluding the shrink adjustment and

overhead expenses, for these flocks were $5,115,281. 10

To monitor the success of the research trials, GOMI focused on

whether the combination reduced coccidiosis and whether cases of

necrotic enteritis increased. Both conditions were monitored by more

frequent necropsies conducted by vendor veterinarians that reported to

the GOMI veterinarians. These vendor veterinarians performed onsite

examinations of the broilers’ guts to count the number of coccidiosis

parasites and lesions. GOMI also compared these flocks’ weight, feed

conversion, and seven-day mortality to historic data. Reviewing these

criteria in 2012, GOMI determined that the combination treatment was

successful because the broilers gained more weight and had a better feed

conversion ratio. The trial flocks had an average increase in weight of

0.1 pound per broiler.

At this time, Mr. McClure believed that there were “no real

indicators that [the combination treatment] wasn’t going to work” going

forward. Likewise, Dr. Fussel indicated that the 2012 trials showed that

HatchPak and Tylan “worked like a charm.” Dr. Fussel was not

concerned with the possibility of the coccidiosis parasite’s becoming

resistant to the HatchPak and Tylan combination because resistance

was not common with these types of medications. If anything, Dr.

Fussel expected the performance of the HatchPak and Tylan

combination treatment to become more effective over time. Happy with

the results of the 2012 study, GOMI decided to administer HatchPak

and Tylan in the third and fourth quarters of 2013. GOMI followed the

exact same procedure it had in 2012 to administer the combination

treatment to all company-related farms, which included flocks covered

by 20 contracts.

GOMI first administered the combination of HatchPak, Tylan,

and Vaxxitek to flocks covered by two contracts with settlement dates

in July 2013. Next, GOMI administered the combination of HatchPak,

Tylan, Vaxxitek, and Calsporin to flocks covered by seven contracts with

settlement dates between July and September 2013. Finally, GOMI

9 The flocks covered by contracts that were involved in two or more research

projects were not double counted. However, they may be discussed in different sections

of this Opinion.

10 All dollar amounts are rounded to the nearest dollar.

21

[*21] administered the combination of HatchPak, Tylan, Vaxxitek, and

Sporulin to flocks covered by 11 contracts with settlement dates between

September and November 2013. GOMI undertook the same data

analysis as in 2012 but got vastly different results. The average weight

of these broilers declined and feed conversion worsened, both of which

indicated that the research trials failed. GOMI theorized that the

failure was due to the evolution of coccidiosis.

C. Probiotics

Producers do not normally use probiotics in broiler production

because antibiotics adequately control the broiler’s gut flora. However,

with antibiotics falling out of favor, GOMI had to find another

mechanism to control the broilers’ gut health. GOMI began looking to

probiotics to create more uniform broilers in the face of losing 3-Nitro

and the growing shift to no-antibiotic-ever chicken. Dr. Fussel, Dr.

Greenwood, and Mr. McClure led this initiative. They first developed a

list of questions regarding the use of probiotics and invited several

different direct-fed-probiotic vendors to a meeting. These vendors

included the manufacturers of Floramax, Sporulin, and Calsporin. The

vendors pitched their probiotics and fielded questions from GOMI. From

this meeting, Dr. Fussel, Dr. Greenwood, and Mr. McClure theorized

which probiotics were most likely to be successful in GOMI’s standard

production process and narrowed the list of possible probiotics to

Floramax, Calsporin, and Sporulin. At this time, it was understood that

these probiotics could take several cycles to become effective.

GOMI began its probiotics tests with Floramax in 2012 and

continued into 2013. At this time Floramax was administered almost

exclusively in turkeys, and Dr. Greenwood had experience with this

application. Although both turkeys and chickens are poultry, there is

little overlap in their veterinary care. For 2012 and 2013 petitioners

identified the flocks covered by 45 contracts as the Floramax test

flocks. 11 Floramax was administered to these flocks via water on select

company-related farms. The remaining company-related farms did not

receive Floramax and acted as a control group.

According to petitioners, GOMI administered the combination of

Floramax and Salinomycin to flocks covered by 12 contracts with

settlement dates between February and June 2012. Next, GOMI

11 All representations concerning which contracts were included in the

Floramax trials are based on petitioners’ representations on brief. As discussed infra,

we have no corroborating evidence that these flocks were research flocks.

22

[*22] administered only Floramax to flocks covered by ten contracts that

settled between June and December 2012. During this time GOMI also

administered a combination of Floramax, HatchPak, and Tylan to flocks

covered by 14 contracts that were settled between July and November

2012. In the final series of tests, GOMI administered Floramax and

Vaxxitek to nine flocks that were settled between December 2012 and

February 2013. Seven of these flocks were settled in 2013.

The results of each of these tests were compared to the control

group of broilers. Specifically, GOMI focused on whether Floramax

improved feed conversion, average daily weight gain, and the seven-day

mortality of the broilers. The data revealed no difference between the

control and experimental groups.

Up next in the probiotic trials was Sporulin, a direct-fed microbial

that promotes gut health that was introduced to the market around

2012. Because it was a new product, not much was known in the

industry about its effectiveness. Preliminary research indicated that

Sporulin effectively treated salmonella, but GOMI theorized it could

reduce necrotic enteritis.

GOMI added Sporulin to broiler pre-starter, starter, and grower

feed between July and November 2013. GOMI added Sporulin to the

feed at the GOMI feed mill, which meant that all company-related farms

that received this recipe received Sporulin. There is no record of GOMI’s

previously adding Sporulin to its feed recipes.

GOMI administered Sporulin to flocks covered by 18 contracts.

First GOMI administered the combination of Sporulin, Vaxxitek, Tylan,

and HatchPak to flocks covered by 11 contracts with settlement dates

between September and November 2013. Next, GOMI administered the

combination of Sporulin and Vaxxitek to flocks covered by seven

contracts with settlement dates between November and December 2013.

The adjusted feed expenses, excluding the shrink adjustment and

overhead expenses, for these flocks were $4,748,616.

Because all company-related farms received the feed with

Sporulin, GOMI compared the performance of these flocks to historic

data from previously settled flocks on company-related farms. This data

review focused on weight gain, feed conversion, overall mortality, and

seven-day mortality. GOMI also monitored whether these broilers were

treated for necrotic enteritis and performed necropsies to look for signs

of the disease. The results of this analysis showed that the broilers

23

[*23] performed no better than the previously settled flocks on

company-related farms. GOMI was unsure whether this failure

occurred because Sporulin was ineffective or because other extrinsic

factors influenced broiler performance. Dr. Greenwood recommended

discontinuing use.

The final probiotic GOMI tested on its flocks was Calsporin.

Calsporin is a direct-fed microbial product that promotes gut health and

reduces the occurrence of necrotic enteritis. Before commercialization,

the vendor tested the performance of Calsporin in university

laboratories in Japan and the United States to determine effectiveness.

This study focused on feed intake, weight gain, feed conversion, and

mortality. To determine the effectiveness in the real world, GOMI

decided to replicate this study by measuring the same variables when

Calsporin was added to the feed for all company-related farms. GOMI

added Calsporin to the broiler pre-starter and starter feed between May

and December 2013. There is no record of GOMI’s previously adding

Calsporin to its feed recipes.

GOMI administered Calsporin to flocks covered by seven

contracts in 2013. For these flocks, GOMI administered the combination

of Calsporin, Vaxxitek, Tylan, and HatchPak. These contracts were

settled between July and September 2013. The adjusted feed expenses,

excluding the shrink adjustment and overhead expenses, for these flocks

were $2,531,962.

As in the Sporulin trials, GOMI compared the broilers’

performance to historic data because of the lack of a control group.

GOMI compared the same data as in the Sporulin trial: weight gain,

feed conversion, overall mortality, seven-day mortality, and occurrence

of necrotic enteritis. However, GOMI reviewed the data and found the

results were not consistent across the research flocks. Because of this

variance, GOMI could not determine the effectiveness of Calsporin.

D. Phytase

Corn, a staple in most broiler diets, is high in phosphorus, an

important nutrient for broilers that affects bone density. However,

because of the molecular structure of corn, broilers are unable to break

down this natural source of phosphorus. Instead, poultry producers

must add an additional source of phosphorus to the feed, which increases

the cost. The phosphorus in the corn remains indigestible and passes

through the broilers’ digestive system. It concentrates in the broilers’

24

[*24] waste and prevents the poultry producer from selling the waste as

manure for fields.

Around 1999 a new product called phytase (brand name

Phyzyme) was introduced to the market. Phytase is an enzyme that

allows a broiler to break down naturally occurring phosphorus in corn

and reduces or eliminates the need to add additional phosphorus to the

feed. Because the phosphorus in the corn is digested by the broilers, the

phosphorus levels in the broilers’ manure is also reduced. This means

the grower can sell the manure as fertilizer as a secondary source of

income. As an enzyme, phytase is heat and moisture sensitive and can

be rendered ineffective at extremes. This first generation of phytase had

mixed success. After several failed attempts early on, GOMI ultimately

discontinued use of phytase.

The first generation of phytase had limited success across the

industry. The vendor worked to improve phytase and eventually

released a second generation of the product to more effectively break

down the phosphorus in corn. In 2010 and 2011 GOMI added between

0.3 and 0.5 pound of this second generation of phytase per ton of feed.

This second generation of phytase was labeled in GOMI’s feed recipes as

the brand name Phyzyme TPT 2500. At an unknown time before the

research years, GOMI transitioned from the first to the second

generation of phytase.

Petitioners represented that in 2012 GOMI focused on unlocking

the potential of the second generation of phytase to lower production

costs, under the direction of Dr. Greenwood. Dr. Greenwood theorized

that if GOMI altered the dosage of phytase according to the feed

composition, it could receive the promised cost savings. GOMI

conducted phytase trials between September and December 2012.

Phytase was allegedly given to all farms—contract and company related.

Petitioners identified flocks related to 232 contracts as receiving the

experimental dose of phytase. GOMI’s feed recipes show that GOMI

continued to add between 0.3 and 0.5 pound of Phyzyme TPT 2500 per

ton of feed. Over the relevant feed recipes identified by petitioners, all

feed recipes added Phyzyme TPT 2500 as a consistent 0.4 pound per ton.

Before this trial, Dr. Greenwood ran several tests on the feed

composition to determine the amount of naturally occurring phosphorus

available, including sending samples to a laboratory in March 2012.

To determine the effectiveness of phytase, Dr. Greenwood walked

the broiler flocks to look for gait and mobility issues that signaled low

25

[*25] bone density. If a broiler had one of these issues, Dr. Greenwood

euthanized it and performed a necropsy with particular focus on bone

development. In particular, he looked for green bone, a condition in

which a broiler’s leg bone can be bent in half without breaking. Dr.

Greenwood developed a formula based on this testing for the successful

dosage of phytase. 12

E. LT

Each winter LT threatened to decimate GOMI’s flocks west of

I–49. Thus it was an existential threat that GOMI always looked to

neutralize. In each of the research years, GOMI faced an outbreak of

LT west of I–49. As noted above, GOMI did not generally vaccinate

broilers for LT without an active outbreak because the vaccine

negatively affected performance.

With each outbreak, GOMI faced several urgent decisions to

protect the health of the flocks. First was the question of whether GOMI

should vaccinate its broilers or whether quarantine would be sufficient

to control an outbreak. GOMI chose the wrong answer many times. In

some instances, GOMI assumed that quarantine would work to contain

the spread, only for broilers outside the quarantine radius to develop

LT. At other times, GOMI aggressively vaccinated nearby flocks to the

detriment of performance, only for the infection to remain quarantined

on a single farm.

Next came the question of which vaccine to administer. The

industry standard was the chicken embryotic vaccine (CEO vaccine)

which was derived from a chicken embryo. To make this vaccine, the LT

virus is injected into an egg during the incubation process. The chick

and the virus develop together in the egg. The incubated virus is then

harvested from the egg and refined into a vaccine. CEO vaccines are

exceptionally potent because the virus matures with the chicken

embryo. These vaccines have been known to cause significant side

effects or even an LT infection in the broilers because of the potency.

Within the industry, these vaccines were generally given to the longer

living breeders because any short-term decline in egg production was

outweighed by long-term immunity. During the research years it was

known that the CEO vaccines were effective, but it was unknown what

12 It appears that in 2013 GOMI added a new phytase brand called Optiphos

to the feed. However, because this new brand was used after the claimed research

trials, we do not consider any experimentation that may have occurred with this

introduction.

26

[*26] side effects would occur and how those side effects should be

treated. The large poultry producers in the area often coordinated

administration of the CEO vaccine to promote collective immunity.

Leading up to the research years, GOMI administered the CEO vaccine

by spraying it on broilers.

In either 2012 or 2013 GOMI began to question whether spraying

the broilers was the best method to administer the vaccine. While this

was the typical industry method and recommended by the

manufacturer, GOMI found that it resulted in uneven administration

that caused varying levels of immunity among the same flock. Seeing

this issue, GOMI considered other techniques. It started with a simple

solution of attaching laser pointers to the ends of the leaf blowers used

to administer the vaccine so that the user could see where he was

spraying. Unfortunately, this did not improve the uniformity of

administration. GOMI next turned to more unorthodox methods.

It is common in the poultry industry to administer vaccines in

drinking water. While the prevailing thought was that the CEO vaccine

could not be administered via water because LT was a respiratory virus,

GOMI decided to try it. GOMI field technicians mixed one ounce of the

CEO vaccine in a gallon of water. The field technicians then turned off

the drinking water to the houses for a period to make the broilers

thirsty. The mixture was then sent through the water lines and

consumed by the broilers. GOMI collected data regarding mortality,

symptoms, and performance. GOMI compared the performance of these

broilers to broilers vaccinated via the traditional spray method. It

determined that the broilers that drank the vaccine in the water had

more uniform immunity to LT and better outcomes. GOMI also

determined that the severity of the side effects was reduced. GOMI

performed LT experimentation on all flocks west of I–49 in 2012 and

2013. Petitioners identified flocks covered by 27 contracts in 2012 and

111 contracts in 2013. 13

In 2014 GOMI sought to make the process of vaccination less

harsh for broilers with a new vector vaccine (HVT–LT vaccine). A vector

vaccine is a vaccine that promotes immunity by using a portion of a

virus’s DNA that cannot alone cause infection. This vaccine trains a

broiler’s immune system to detect and fight any disease with that

13 All representations concerning which contracts were included in the LT

method of administration trials are based on petitioners’ representations on brief. As

discussed infra we have no corroborating evidence that these flocks were research

flocks.

27

[*27] portion of DNA. A vector vaccine is used when traditional vaccines

that expose the broiler to the entire virus have too great an infection

risk. But vector vaccines have a drawback. If a disease evolves such

that the portion of DNA used in the vaccine changes, the broiler’s

immune system will not detect and fight off the disease. This causes

most vector vaccines to quickly lose effectiveness. Because of this, vector

vaccines are less effective than CEO vaccines.

Despite the emergence of the new vector vaccine in 2014, the large

poultry producers in the area selected the CEO vaccine to administer in

response to the 2014 outbreak of LT. While GOMI also administered

the CEO vaccine, it saw a possible alternative use for the HVT–LT

vaccine. In breeders, GOMI commonly administered a vector vaccine in

the hatchery to provide initial weak immunity to the virus. Then in the

field, GOMI administered the CEO vaccine to the breeders for continued

immunity. Because the breeders had prior exposure to the virus

through the vector vaccine, their reactions to the CEO vaccine were less

severe. GOMI referred to this process as priming. While it was a

common practice in breeders, GOMI did not normally prime broilers. On

the basis of conversations with farms on the east coast, GOMI theorized

that it could prime the broilers with the HVT–LT vaccine that would

reduce later side effects to the CEO vaccine.

In 2014 GOMI primed flocks of broilers at the hatchery and

monitored the broilers’ reactions to the later CEO vaccines. The primed

flocks had less severe side effects, and GOMI decided to implement this

priming going forward. As of September 2, 2014, the vaccine protocol

for 2014 indicated that all big broilers west of I–49 and north of

Interstate 40 (I–40) were primed with the HVT–LT vaccine. Some flocks

of small broilers in the same location were also primed. According to

petitioners, GOMI performed LT experimentation on all flocks west of

I–49, which included flocks covered by 133 contracts. Of these flocks, 24

were placed after September 2, 2014, and 6 were big broilers. The

adjusted feed expenses, excluding the shrink adjustment and overhead

expenses, for these 6 flocks were $1,521,039.

F. Vaxxitek

As noted above, one recurrent issue in raising broilers was IBD,

a disease that affects a broiler’s immune system. Before the research

years, GOMI vaccinated broilers for IBD several times throughout their

lifetime to maintain immunity. Generally, GOMI administered one

vaccine at day 1 of a broiler’s life, one vaccine between day 14 through

28

[*28] 16 of a broiler’s life, and for large broilers, one vaccine around day

60 of a broiler’s life.

Vaxxitek came onto the market to cut down on the need to repeat

vaccinations for IBD throughout a broiler’s life. 14 Vaxxitek is a viral

vector vaccine. The unique thing with the Vaxxitek vaccine is that the

IBD virus is delivered to the broiler’s immune system on a deactivated

herpes virus. As in humans, herpes is an incurable infectious disease

that continues to replicate in the host’s body throughout life. As the

herpes virus replicates in the broiler’s body, the IBD virus portion of the

DNA continues to replicate causing a continued immune response. This

allows the broiler to maintain immunity without additional

vaccinations. Vaxxitek was marketed to the industry as a drug that

would improve uniformity in broilers by limiting the spread of IBD.

GOMI theorized that Vaxxitek would help control cases of IBD and lead

to more uniform broilers.

GOMI’s experience with Vaxxitek started prior to the research

years. Before the research years, GOMI noticed during routine

necropsies that its broilers had smaller than average bursa glands. This

set off the IBD alarm bells. In response, GOMI administered Vaxxitek

at the manufacturer’s recommended dosage. After one cycle of Vaxxitek,

GOMI saw an immediate improvement in the broilers. The broilers had

better feed conversion ratios, were more uniform, and had larger bursa

glands.

GOMI was eager to confirm these results and administered

Vaxxitek for a second and third consecutive trial. The effectiveness

quickly declined as the IBD virus evolved such that it no longer matched

the portion of IBD DNA in the Vaxxitek vaccine. Performance fell and

necropsies showed signs of IBD. But GOMI did not view the research

trials as a failure. Instead, GOMI determined that the Vaxxitek vaccine

was effective for one cycle at the manufacturer’s recommended dosage

but that the Vaxxitek vaccine should be given for only one cycle per year.

This brings us to the research years. Although GOMI knew that

Vaxxitek worked at the full dosage in one cycle, it questioned whether a

lower dosage would provide the same immunity and save money.

Profits in the poultry industry are measured by fractions of a penny per

pound so any cost savings would pay off big for GOMI. During this time,

14 There are multiple versions of Vaxxitek vaccines for different diseases. The

focus of GOMI’s research project related to Vaxxitek was the Vaxxitek vaccine for IBD.

29

[*29] GOMI administered Vaxxitek to broilers with the goal to

determine the lowest effective dosage that could be administered. GOMI

purchased vials of Vaxxitek from Merial Select, Inc., for these trials

between December 2012 and February 2014.

According to petitioners, GOMI administered Vaxxitek for these

trials between 2012 and 2014. 15 In 2012 GOMI administered the

combination of Vaxxitek and Floramax to flocks covered by nine

contracts. Two of these contracts were settled in 2012 with the

remaining flocks carrying over to 2013. After the carryover contracts

settled in 2013, GOMI administered only Vaxxitek to flocks covered by

26 contracts. These contracts were settled throughout 2013 with six

stretching into 2014. In 2013 GOMI also sequentially tried the following

combinations: Vaxxitek, HatchPak, and Tylan to flocks covered by two

contracts; Vaxxitek, HatchPak, Tylan, and Calsporin to flocks covered

by seven contracts; Vaxxitek, HatchPak, Tylan, and Sporulin to flocks

covered by 11 contracts; and Vaxxitek and Sporulin to flocks covered by

seven contracts. Finally, in 2014 GOMI administered only Vaxxitek to

flocks covered by six contracts that were settled between February and

March 2014. The record does not contain any information regarding the

dosages given to each flock.

As with the pre-research year study, GOMI continued to monitor

health trends and perform necropsies to measure bursa size. Petitioners

did not provide the results of these trials. 16

G. Ross 708

When picking up a plastic tray of chicken from the grocery store

or a bucket of Kentucky Fried Chicken, the average consumer does not

know the genetic line of chicken that produced the meat. But the genetic

line drives the entire production process for the poultry producer. Each

genetic line of chicken performs differently. One genetic line of chicken

may perform better as big broilers, and another may perform better for

deboning. Each genetic line of chicken has different nutrient needs and

will be predisposed to different ailments. Because of the impact on the

15 All representations concerning which contracts were included in the

Vaxxitek trials are based on petitioners’ representations on brief. As discussed infra

we have no corroborating evidence that these flocks were research flocks.

16 On brief, petitioners conflate these research trials regarding dosage with the

pre-research years’ trials to determine the effectiveness of Vaxxitek. We disregard any

analysis as it relates to the tests to determine the effectiveness of Vaxxitek before the

research years.

30

[*30] production process, poultry producers take the decision to switch

genetic lines very seriously. The importance of making the correct

decision is amplified because once a decision to switch is made, it can

take up to three years to convert production to that genetic line.

New genetic lines of chickens were constantly being created and

evaluated by genetic vendors to produce the best quality product. After

making a few tweaks to a genetic line, these genetic vendors undertook

extensive laboratory experimentation in clean conditions to see how the

chickens performed under ideal conditions. With the results of these

studies in hand, genetic vendors visited poultry producers with the hope

of swaying them away from their current genetic line of chickens. If the

sales call went well, the poultry producer purchased eggs from the

genetic vendor to raise as breeders. Those breeders then produced the

broilers.

In determining whether to switch genetic lines, GOMI’s primary

consideration was the sales mix currently demanded by end customers.

For example, GOMI’s customers demanded uniformity that would allow

mass production in a fast-food setting. After narrowing down possible

breeds to fit the product mix, GOMI next considered whether the

broilers would perform well under its standard production process.

Even small changes, such as geography, can make the same genetic line

perform dramatically differently.

In 2012 GOMI raised the Cobb 500 genetic line of broilers, which

it purchased from Cobb-Vantress. The Cobb 500 genetic line of broilers

was initially designed to produce the best small broilers on the market.

As such, the broilers had a steep growth curve that tended to flatten out

as they grew over four pounds. Because a portion of GOMI’s customers

demanded big broilers, GOMI had to push the Cobb 500 broilers past

the plateau with more feed and extended growth times. Cobb 500

broilers are resilient towards environmental stressors, such as

coccidiosis, but are at an increased risk of bowel obstructions. GOMI

based its nutrition plans on the needs of the Cobb 500 broilers; for

example, the diets included more fiber.

At the same time, George’s operations in Virginia ran a genetic

line trial to compare the performance of the Cobb 500 broilers to Ross

708 broilers, a genetic line sold by Aviagen for large broiler production.

The research trials showed that in the first few weeks of life, the Ross

708 broilers have a flatter growth curve, with Ross 708 broilers weighing

less than Cobb 500 broilers at three weeks. After four weeks the rate of

31

[*31] growth flipped with the Ross 708 broilers growing from seven to

nine pounds very quickly. However, the Ross 708 broilers are highly

susceptible to coccidiosis. During the genetic line trials, Virginia

operations had resounding success with the Ross 708 broilers.

One successful trial in Virginia was not enough for GOMI to

switch to the Ross 708 broiler, especially considering the influence of

geography on performance. GOMI undertook a genetic line trial in 2014

for its large broilers looking to replicate the success in Virginia. GOMI

reviewed Agri Stats to determine genetic line performance across the

industry. Agri Stats showed that the Ross 708 breeds produced fewer

chicks per egg incubated than the Cobb 500. With caution based on this

information, GOMI reached out to Aviagen, who organized an egg swap

with another poultry producer for the Ross 708 breed. GOMI assigned

this genetic line code 3677 in its records. 17 GOMI incubated the test

eggs at its hatchery. GOMI also selected a group of its standard Cobb

500 eggs to run as a control test. GOMI assigned this genetic line code

1977 in its records. These eggs were incubated and hatched alongside

the Ross 708 eggs.

When the chicks hatched, they were ready to be transferred to

farms to grow. GOMI selected the Littrell Broiler Farm, a company-

related farm for the research trial. Around July 1, 2014, GOMI placed

two houses of Cobb 500 and two houses of Ross 708 at the Littrell Broiler

Farm. It appears from the record that GOMI reported expenses related

to two houses of Cobb 500 (houses 1 and 5) and one house of Ross 708

(house 3). 18 The adjusted feed expenses, excluding the shrink

adjustment and overhead expenses, for these flocks were $398,520.

The next question GOMI faced was how to feed the test houses.

As noted above, Cobb 500 broilers and Ross 708 broilers have vastly

different growth curves that demand unique nutritional programs.

Aviagen provided GOMI with nutrition guidelines that were derived

outside of the United States, which GOMI found to be inapplicable. It

would be counterintuitive to the experimental design to feed the flocks

different feeds when the goal was to determine whether the Ross 708

broilers were superior under GOMI’s standard operating procedures.

GOMI slightly altered the nutritional content of its standard feed to

17 Reviewing GOMI’s weekly grower analysis report, it appears as though

GOMI had run this genetic line of Ross on only one prior occasion in 2012.

18 While testimony and contemporaneous emails indicated that two houses of

Ross 708 broilers were placed as part of this trial, petitioners reported research credits

related to only one house of Ross 708 broilers.

32

[*32] meet the unique demands of the Ross 708 broilers’ diet. The test

and control houses were fed this slightly altered formulation.

GOMI raised a portion of these broilers to its standard big broiler

weight of seven pounds. GOMI used this group to determine how the

different genetic line would perform under standard operations. GOMI

raised the remainder of the broilers to 8.5 pounds before they were

processed. In the processing, GOMI focused on the yield of each cut of

meat. Instead of the normal George’s processing plant, GOMI sent these

test broilers to the University of Arkansas for yield analysis. The

University of Arkansas maintains a specialized processing plant to more

finely dissect broilers into the different cuts of meat.

GOMI received a report from the University of Arkansas on

October 7, 2014, which showed the weight of the live broiler, carcass,

fat, and cuts of meat. GOMI’s corporate lab director, Bill Potter,

analyzed this data to determine the margin per pound and resulting

annual margin that GOMI could expect if it switched to the Ross 708

broilers. Generally, he determined that the Ross 708 broilers had an

increased margin of $0.021 per pound, which would increase the annual

margin by over $4 million. The Ross 708 broilers also had more breast

meat, one of the most expensive cuts.

As for the broilers processed at seven pounds, the corporate lab

director noted that the Ross 708 broilers had slightly lower feed

conversion rates and a higher mortality. Despite this, the Ross 708

broilers that survived until processing were of higher quality and more

valuable. As a result of these trials, GOMI switched the genetic line for

its large broilers to the Ross 708.

VIII. Research Credit Study

George’s was a longtime client of Frost PLLC, an accounting firm

in Little Rock, Arkansas. Frost PLLC developed a deep understanding

of George’s business over the 50-plus-year relationship. In fact,

George’s, Inc.’s chief financial officer, Gini Driskell, was a former

employee of Frost PLLC. Accountants at Frost PLLC worked closely

with George’s in-house accountants to prepare the annual returns for all

the George’s entities. With petitioners’ returns intertwined with the

business of George’s, Frost PLLC also prepared petitioners’ personal

returns.

One year, Frost PLLC called Ms. Driskell out of the blue with a

proposal to have alliantgroup review George’s financials to determine

33

[*33] whether George’s was eligible for research credits. alliantgroup is

a tax consulting and lobbying firm with over a thousand employees,

including many attorneys. By the time of the recommendation,

alliantgroup had over 12 years of experience in performing tax credit

and incentive studies. It had numerous employees with experience in

the highest levels of tax law, including a former IRS commissioner,

former tax counsel to the U.S. Senate Finance Committee, and former

members of Congress. alliantgroup extensively trains its employees on

the intricacies of the Code upon recruitment and hosts annual trainings

to keep employees up on the latest developments. Ms. Driskell took this

suggestion to Gary. Gary had never heard of the research credit or

alliantgroup, but he thought it was worth further investigation

exclusively on the recommendation of his trusted accounting firm Frost

PLLC. This green light was the extent of Gary’s involvement in the

research credit study with Gary delegating management of it to his sons,

the co-chief executive officers and co-presidents of George’s.

On August 30, 2014, one of petitioners’ sons signed an

engagement letter with alliantgroup to conduct a research credit study

on behalf of George’s, Inc., and related entities. alliantgroup assigned

Associate Director Jeremy Troutman as the lead consultant on the

research credit study. Mr. Troutman had been with alliantgroup for 16

years and completed approximately 300 research credit studies by the

time of trial. He focuses on research credit studies in the agriculture

industry.

Mr. Troutman approached the research credit study in three

phases. In the first phase he spoke to the technical, accounting, and

finance employees of George’s to determine whether George’s had any

potentially qualifying activities. Some of the clients who engage

alliantgroup never make it out of this stage because alliantgroup

determines that they did not perform any qualified research. Mr.

Troutman made two visits to George’s to interview employees from all

stages of the commercial broiler production process. This included

interviews with those that would have the best sense of what, if any,

research was occurring at George’s: Mr. McClure (live production

manager), Mr. Hopkins (live production accountant), Dr. Gilbert

(veterinarian), William Potter (vice president of quality assurance), and

others. Mr. Troutman also requested any documents that would shed

light on the qualifying activities. Kyle Avey, a service technician and

broiler manager, was delegated this task and supplied the documents,

including those reflecting changes in feed ingredients and vaccinations.

34

[*34] On the basis of these interviews and documents, alliantgroup

informed George’s that it had identified potential credits.

Then came the second phase of the study, which focused on

substantiation. alliantgroup requested all documents linking expenses

to the research trials it had identified in phase 1. Mr. Troutman and his

team also interviewed several employees regarding the product

development process. George’s provided alliantgroup with numerous

spreadsheets showing settlement and feed information. Mr. Troutman

reconciled these documents into a single spreadsheet that connected

each flock to settlement data, feed expenses, and research trials.

Mr. Troutman determined the following projects were qualified

research that could be substantiated for 2012 and 2013: Calsporin,

Floramax, HatchPak, LT, Salinomycin, Sporulin, Tylan, and Vaxxitek.

As for 2014, he determined the following projects were qualified

research that could be substantiated: LT, Vaxxitek, and Ross 708.

To calculate the value of the research credit, Mr. Troutman relied

on GOMI documents to connect each flock with the research trial and

feed expenses. He received relevant documents from Ms. Driskell and

Mr. Hopkins. In reviewing the feed costs for each flock, Mr. Troutman

considered whether the amount recorded as feed expenses on settlement

data included any expenses that should be removed. One expense he

removed was the shrink adjustment expense, which reduced the credit

to only feed consumed by the broilers. He calculated the average shrink

adjustment per year, including Virginia farms, and removed this

amount from the qualified research supplies. Mr. Troutman also

removed the estimated manufacturing overhead cost that GOMI adds to

its feed costs. He estimated this overhead expense by dividing the total

tons of feed per flock by the cost of overhead at each of the mills and

removing the resulting expense.

In total, Mr. Troutman determined that GOMI had the following

qualified supply expenses: $16,450,745 in 2012; $29,478,367 in 2013;

and $17,025,243 in 2014. Although alliantgroup claimed it found

qualified activities and related services, it did not calculate any qualified

service expenses because the process to determine the value of the credit

was not worth the intense effort to allocate the wages.

To calculate the base amount, Mr. Troutman estimated research

expenses between 2009 and 2011. He calculated the average ratio of

qualified supply expenses to total expenses for the research years, which

35

[*35] was 10.23%. He then applied this ratio to the total supply

expenses between 2009 and 2011 to calculate the qualified supply

expenses for these years. He used these numbers to calculate the base

amount for 2012. For tax year 2013, alliantgroup used the estimates for

2010 and 2011 but the actual qualified supply expenses for 2012 as

determined in the report. For tax year 2014, alliantgroup used the

estimate for 2011 and the actual qualified supply expenses for 2012 and

2013 as determined in the report.

In total, Mr. Troutman determined that GOMI was entitled to the

following research credits: $1,070,380 for 2012, $2,870,901 for 2013, and

$530,317 for 2014. Mr. Troutman’s calculations and determinations

were checked by two additional people at alliantgroup. Additionally,

Frost PLLC verified facts and financial data. At the end of this second

phase, alliantgroup provided petitioners with pro forma Forms 6765,

Credit for Increasing Research Activities, that they could file to report

the research credits.

alliantgroup’s work with George’s was not complete. The third

and final phase of the research credit study was to draft two reports

detailing the information gathered from the earlier phases. At some

point after February 6, 2017, alliantgroup memorialized its findings in

two undated written reports. The reports set forth extensive detail

about the research trials and the calculation of qualified supply

expenses for each trial. In total, Mr. Troutman spent between 700 and

800 hours on the reports.

IX. Tax Reporting and Tax Court

The exact timing of the end of the alliantgroup research credit

study, petitioners’ tax reporting, and the audits in these cases is murky.

For clarity, we will explain petitioners’ tax reporting and audits

separately though they were happening simultaneously.

A. Tax Reporting

GOMI did not report any research credits on its timely filed

Forms 1120S, U.S. Income Tax Return for an S Corporation, for tax

years 2012 through 2014. Through a series of amendments in 2016 and

2017, GOMI reported qualified research expenses and credits as follows:

36

[*36]

Tax Year Amendment Date Qualified Research Expenses Research Credit

2012 September 16, 2016 $16,450,745 $1,070,380

2013 September 12, 2017 29,478,367 2,870,901

2014 November 10, 2015 17,025,243 530,317 19

Before petitioners filed the amended returns, alliantgroup

provided Frost PLLC pro forma Forms 6765 that reported the research

credits as calculated in the research study. Frost PLLC used these pro

forma Forms 6765 in preparing the amended returns. The Forms 6765

submitted with the amended returns are identical to the pro forma

Forms 6765 contained in the final research credit reports.

For tax years 2011 and 2012, petitioners did not report any

research credits on their timely filed individual income tax returns. On

October 17, 2016, petitioners filed amended 2011 and 2012 tax returns.

On the amended 2012 tax return, petitioners reported a research credit

attributed to GOMI’s amended tax return for tax year 2012 of

$1,070,380. Petitioners used a portion of this credit for 2012 and carried

the remainder back to tax year 2011 through the amended 2011 tax

return. Reporting these credits resulted in refund claims for petitioners.

Respondent processed the amended returns except for certain

partnership adjustments and denied the refund claims.

For tax year 2013, petitioners again did not report any research

credits on their timely filed individual income tax return. On September

29, 2017, petitioners submitted an amended individual tax return that

reported research credits attributed to GOMI’s amended Form 1120S for

tax year 2013 of $2,870,901. Petitioners did not use any of the credits

and the credits were carried forward.

For tax year 2014, petitioners timely filed their individual tax

return. They reported and used research credits attributed to GOMI’s

19 This amount was reduced from $815,873 by an election under section 280C.

Section 280C generally provides that a taxpayer’s deductions (or the amounts it would

otherwise charge to its capital account) for qualified research expenses must be

reduced according to the amount of the taxpayer’s research credit. § 280C(c)(1) and (2).

Alternatively, a taxpayer may avoid these requirements by electing to reduce the

amount of its research credit pursuant to section 280C(c)(3).

37

[*37] amended Form 1120S for tax year 2014 of $530,317. On October 2,

2017, petitioners filed an amended individual tax return that reported

a research credit carryforward of $1,879,611. This carryforward

resulted in a refund claim. Respondent processed the return and denied

the refund claim. On June 18, 2018, petitioners filed another amended

individual tax return, reporting a research credit carryforward of

$2,870,901. Respondent did not process this second amended return.

For tax year 2015, petitioners did not report or use any research

credit on their timely filed individual tax return. On October 2, 2017,

petitioners filed an amended individual tax return that reported a

research credit carryforward of $476,280. Respondent processed this

amended return. On June 18, 2018, petitioners filed a second amended

individual income tax return. Therein, petitioners reported a research

credit carryforward of $1,467,570. Respondent did not process this

return.

For tax year 2016, petitioners reported and used on their timely

filed individual tax return a research credit carryforward of $476,280

from tax year 2014. On June 18, 2018, petitioners filed an amended

individual tax return reporting a research credit carryforward of

$1,467,570. Petitioners used a portion of this carryforward and claimed

a refund. Respondent did not process this return. 20

Following all the amendments, both accepted and rejected,

petitioners reported the following research credits:

20 Shortly before trial, petitioners filed an additional petition in this Court to

challenge a notice of deficiency for tax year 2019 that disallowed petitioners’ research

credits carried forward from tax years 2013 and 2014. Respondent determined a

deficiency in petitioners’ individual income tax of $842,907 and accuracy-related

penalties of $168,581. On November 22, 2023, the parties executed a stipulation to be

bound by these cases.

38

[*38] Tax Year Research Credit Used

2011 $550,320

2012 520,060

2013 -0-

2014 1,933,648

2015 -0-

2016 624,663

B. Audits and Tax Court

Before petitioners amended their individual returns, respondent

selected their originally filed 2011 and 2012 returns for audit. On

August 1, 2016, a revenue agent was assigned to the audit. On

September 21, 2016, respondent issued petitioners a notice of deficiency

for tax years 2011 and 2012 unrelated to the research credits. On

December 23, 2016, petitioners filed a petition with this Court for a

redetermination of the deficiencies and accuracy-related penalties. 21 On

April 1, 2019, petitioners amended the petition, alleging that GOMI was

entitled to $1,070,380 in research credits for tax year 2012, which flowed

through to petitioners’ 2012 tax return. Petitioners and respondent

have settled all issues from 2011 and 2012 except for the research

credits.

Respondent also selected petitioners’ 2014 and 2016 returns for

audit. These original returns reported research credits as discussed

above. On July 15, 2021, respondent issued petitioners a notice of

deficiency for tax years 2014 and 2016. Respondent disallowed

petitioners’ research credits and determined accuracy-related penalties

of $106,063 for 2014 and $95,256 for 2016. Petitioners petitioned this

Court for redetermination of the deficiencies and penalties. On

February 14, 2022, we consolidated these cases for trial, briefing, and

opinion.

21 As noted above, petitioners conceded the accuracy-related penalties for tax

years 2011 and 2012, which were related to adjustments no longer at issue.

39

[*39] OPINION

I. Jurisdiction and Burden of Proof

Where notices of deficiency issued to an S corporation shareholder

include adjustments to both S corporation items and other items

unrelated to the S corporation, we have jurisdiction to redetermine the

correctness of all adjustments in the shareholder-level deficiency

proceeding. See Johnson v. Commissioner, 160 T.C. 18, 28 (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’ shares of GOMI’s reported research credits

and any other determinations in the notices of deficiency.

The Commissioner’s determinations set forth in notices of

deficiency are presumed correct, and taxpayers bear the burden of

proving that they are erroneous. Rule 142(a)(1); Welch v. Helvering, 290

U.S. 111, 115 (1933). Credits are a matter of legislative grace, and

taxpayers must demonstrate their entitlement to credits reported. See

Feigh v. Commissioner, 152 T.C. 267, 270 (2019) (citing INDOPCO, Inc.

v. Commissioner, 503 U.S. 79, 84 (1992)). 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.

II. Expert Witnesses

Both parties relied on expert opinions to support their theories on

how we should resolve the disputed issues. We evaluate an expert’s

opinion in the light of his or her qualifications and all the evidence in

the record. See Helvering v. Nat’l Grocery Co., 304 U.S. 282, 295 (1938);

Estate of Mellinger v. Commissioner, 112 T.C. 26, 39 (1999). “The

persuasiveness of an expert’s opinion depends largely upon the disclosed

facts on which it is based.” Estate of Davis v. Commissioner, 110 T.C.

530, 538 (1998). We are not bound to follow any expert witness’ opinion

where it is contrary to our own judgment. Helvering v. Nat’l Grocery

Co., 304 U.S. at 295; Estate of Hall v. Commissioner, 92 T.C. 312, 338

(1989). We may adopt or reject an expert’s opinion in whole or in part.

Estate of Davis, 110 T.C. at 538.

Respondent offered the expert testimony of Elizabeth Bobeck, an

associate professor of animal sciences at Iowa State University. At trial

she was qualified as an expert in poultry nutrition, poultry immunology,

and broiler production. Her opening expert report was received at trial

40

[*40] as her direct testimony under Rule 143(g)(2). Her report provided

background information on broiler production and evaluated whether

the two alliantgroup research credit reports contain sufficient

information to show that GOMI engaged in the scientific method with

respect to the research trials. Ultimately, reviewing the research credit

reports, Dr. Bobeck concluded that there was insufficient information to

determine that GOMI followed the scientific method in performing the

research trials.

Petitioners offered the rebuttal expert testimony of Corey

Johnson, a poultry nutritionist at a feed manufacturer. At trial he was

qualified as an expert in poultry nutrition. His rebuttal report was

received at trial as his rebuttal testimony under Rule 143(g)(2). Solely

on the basis of the research credit reports, Dr. Johnson agreed with Dr.

Bobeck’s conclusion that the reports do not contain enough information

to demonstrate that GOMI followed the scientific method. He noted,

however, that Dr. Bobeck was not provided the underlying GOMI

documentation. In his review of the underlying data, he concluded that

GOMI did follow the scientific method. 22

Both experts agree that basic and applied research are critical in

the poultry industry because the “sterile” confines of the basic research

performed in laboratory settings may not directly translate to the large-

scale, less controlled environment of the farms.

III. Section 41 Research Credit

A. Basic Structure

Section 38(a) permits a taxpayer to report on his return a credit

against tax equal to the sum of (1) business credits carried forward to

the tax year, (2) current year business credits, and (3) business credits

carried back to the tax year. Current year business credits include the

credit under section 41 for increasing research activities. § 38(b)(4).

Section 41 provides several alternative approaches to calculate

the research credit. See § 41(a), (c)(3), (4), (5). GOMI elected to calculate

its research credits under the alternative simplified method of

22 We struck a large portion of Dr. Johnson’s report as exceeding the scope of a

proper rebuttal report to Dr. Bobeck’s report.

41

[*41] section 41(c)(5). 23 Under the alternative simplified method, the

research credit is equal to 14% of the excess of the taxpayer’s qualified

research expenses (QREs) in the credit year over 50% of the average of

the taxpayer’s QREs from the three preceding years. § 41(c)(5)(A). If

the taxpayer has no qualified research in each of the three preceding

years, the credit is reduced to 6% of the taxpayer’s QREs in the credit

year. § 41(c)(5)(B); Treas. Reg. § 1.41-9(c)(1).

QREs are limited to the amounts “paid or incurred by the

taxpayer during the taxable year in carrying on any trade or business.”

§§ 41(b)(1), 7701(a)(25). QREs comprise in-house research expenses and

contract research expenses. § 41(b)(1). As relevant to these cases, in-

house research expenses are (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” (qualified supplies). § 41(b)(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

qualified research. § 41(b)(2)(B). Generally, wages are considered in-

house research expenses to the extent that the wages were paid for

qualified services of an employee. § 41(b)(2)(A)(i); Treas. Reg. § 1.41-

2(d)(1). Qualified supplies include all tangible property other than land,

improvements to land, or depreciable property. § 41(b)(2)(C). 24

B. Qualified Research

To constitute qualified research, the 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

23 The alternative simplified credit reported by GOMI was moved from section

41(c)(5) to section 41(c)(4) by the Consolidated Appropriations Act, 2018, Pub. L. No.

115-141, div. U, § 101(c), 132 Stat. 348, 1160.

24 The Secretary has promulgated regulations under section 41. Petitioners do

not challenge the validity of these Treasury regulations.

42

[*42] (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).

The four-part statutory test is applied separately to each business

component. § 41(d)(2)(A).

If a business component fails any part of the four-part statutory

test, we may apply the test to a subset of the product or process

(shrinking-back rule). Treas. Reg. § 1.41-4(b)(2). The shrinking-back

rule instructs us to reapply the four-part statutory test to the business

component at its most significant subset of elements. Id. If that subset

of elements again fails, we generally drill down to a more granular

subset of the business component until either (1) a subcomponent

satisfies the test or (2) the most basic level of the component fails to

satisfy the test. Id.

1. The Business Component Test

In applying the four-part statutory test, a taxpayer must first

establish the business component it sought to develop. § 41(d)(2);

Siemer Milling Co. v. Commissioner, T.C. Memo. 2019-37, at *35

(holding that a taxpayer failed the business component test because it

failed to establish what business component it sought to develop). A

business component is “any product, process, . . . technique, formula, or

invention” which is to be held for sale or used by the taxpayer in its trade

or business. § 41(d)(2)(B). Critically, section 41(d)(2)(C) directs us to

treat the product a taxpayer produces as a separate business component

from its production process. If a taxpayer produces a product as part of

its trade or business, the taxpayer’s search for a way to produce the same

product in greater quantity or at lower cost may be qualified research

on the production process, but not on the product itself. See Union

Carbide Corp. & Subs. v. Commissioner, T.C. Memo. 2009-50, slip op. at

275–78, aff’d, 697 F.3d 104 (2d Cir. 2012); Treas. Reg. § 1.41-4(b)(1) (last

sentence). 25 We have previously held that to the extent a research trial

25 While this memorandum opinion and the opinion of the U.S. Court of

Appeals for the Second Circuit are not binding in these cases, neither party contests

the rationale of these cases. Given this, we find these cases persuasive in our analysis.

43

[*43] seeks to improve the process alone, QREs do not include the costs

of the experiment the taxpayer would have incurred to manufacture the

same product by the standard method. Union Carbide Corp. & Subs.,

T.C. Memo. 2009-50, slip op. at 275–78; see also Union Carbide Corp. &

Subs. v. Commissioner, 697 F.3d at 108–09 (agreeing with the Tax

Court’s conclusion on ordinary production costs).

To illustrate, imagine that a taxpayer tests two experimental

production processes designed to improve on its standard process for

producing Product X. In Test A, the taxpayer evaluates an experimental

process designed to produce an improved product, Product X+. Test B,

on the other hand, should yield the same Product X but at a lower cost

than the standard process. 26 Section 41(d)(2)(C), Union Carbide Corp.

& Subs., and Treasury Regulation § 1.41-4(b)(1) tell us that if Test B

involves qualified research at all, the taxpayer conducts such research

on the production process alone.

After a taxpayer establishes which business component it sought

to develop, the business component test requires that the taxpayer

intend for the discovered information to be useful in developing a new

or improved business component of the taxpayer. § 41(d)(1)(B)(ii). To

be useful within the meaning of this test, the research need only provide

some level of functional improvement to the taxpayer. Norwest Corp. &

Subs. v. Commissioner, 110 T.C. 454, 495 (1998).

2. The Technological Information Test

The technological information test requires that the research be

undertaken for the purpose of discovering information that is

“technological in nature.” § 41(d)(1)(B)(i). Information is technological

in nature if “the process of experimentation used to discover such

information fundamentally relies on principles of the physical or

biological sciences, engineering, or computer science.” Treas. Reg.

§ 1.41-4(a)(4). The technological information test does not require the

taxpayer to rely on novel applications of science. See id. Instead, a

See Dunaway v. Commissioner, 124 T.C. 80, 87 (2005) (explaining that memorandum

opinions are not binding); Golsen v. Commissioner, 54 T.C. 742, 757 (1970) (stating

that when a “squarely [o]n point” decision of the appellate court to which an appeal

would lie contradicts our own precedent, we will follow the appellate court’s decision),

aff’d, 445 F.2d 985 (10th Cir. 1971).

26 The same rationale would be applicable for a taxpayer seeking to produce a

greater quantity of product X with the same input.

44

[*44] taxpayer may rely on existing principles of science and

engineering to satisfy this requirement. See id.

3. The Section 174 Test

Next, the research must be research “with respect to which

expenditures may be treated as expenses under section 174.”

§ 41(d)(1)(A). We refer to this as the “section 174 test,” whereby the

taxpayer must show (1) that the research activities constituted research

and development within the meaning of section 174, and (2) that the

research expenditures would be eligible for deductions under section

174. See Norwest Corp. & Subs., 110 T.C. at 491 (requiring “the

taxpayer to satisfy all the elements for a deduction under section 174”);

Union Carbide Corp. & Subs., T.C. Memo. 2009-50, slip op. at 197

(analyzing whether a taxpayer’s activities constituted research and

development within the meaning of section 174 and whether the costs

associated with these activities may be treated as expenses under

section 174).

For background, section 174 operates as a narrow, elective

exception to the general capitalization rules. §§ 174(a), 263(a)(1),

263A(c)(2). Section 174(a) allows a taxpayer to elect a current deduction

for research and expenditures which are paid by the taxpayer during the

taxable year in connection with the taxpayer’s trade or business. 27 See

also Treas. Reg. § 1.174-1. Research and experimental expenditures are

research and development costs in the experimental or laboratory sense

and generally include all costs incident to the development or

improvement of a product. Treas. Reg. § 1.174-2(a)(1).

We apply a two-step test to determine whether a taxpayer’s

activities constituted research and development within the meaning of

section 174. In the first step the taxpayer must show that the

information objectively available to it did not establish the appropriate

design of the product. See Betz v. Commissioner, T.C. Memo. 2023-84,

at *70; Treas. Reg. § 1.174-2(a)(1); see also Union Carbide Corp. & Subs.,

T.C. Memo. 2009-50, slip op. at 195–96. If such information was not

available to the taxpayer with respect to establishing either the

capability, method, or appropriate design, then uncertainty existed. See

Betz, T.C. Memo. 2023-84, at *70; Union Carbide Corp. & Subs., T.C.

27 Section 174 was later amended to eliminate the current deduction and

instead requires amortization of research and development expenditures for tax 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.

45

[*45] Memo. 2009-50, slip op. at 195; Treas. Reg. § 1.174-2(a)(1). In

determining whether uncertainty existed, we examine the information

objectively available to the taxpayer, rather than the taxpayer’s

subjective understanding of that information. See Max v.

Commissioner, T.C. Memo. 2021-37, at *30 (finding no uncertainty

where appropriate design may have been subjectively unknown to the

taxpayer but the taxpayer “already ha[d] the information necessary to

address that unknown”); Union Carbide Corp. & Subs., T.C. Memo.

2009-50, slip op. at 195–96 (“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))). Uncertainty may extend over

multiple tax years if the taxpayer continues to face uncertainty that was

not resolved in prior years. See Siemer Milling Co., T.C. Memo. 2019-

37, at *27 (“[The taxpayer] could have faced the same uncertainties for

several years in a row; not all uncertainties are neatly resolved within

the confines of a single taxable year.”); see also Treas. Reg. § 1.174-

2(a)(1).

In the second step, if uncertainty existed, the taxpayer must 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 (citing Mayrath, 41 T.C.

at 590) (requiring the taxpayer to show it undertook investigative

activities because the purpose of section 174 was to limit deductions to

expenditures of an investigative nature). The resolution of this

uncertainty does not necessarily require experimentation. See Little

Sandy Coal Co. v. Commissioner, T.C. Memo. 2021-15, at *36, aff’d, 62

F.4th 287 (7th Cir. 2023).

If a taxpayer shows that the research activities constituted

research and development within the meaning of section 174, the

taxpayer must then show that the expenses related to these activities

are deductible under section 174. See Norwest Corp. & Subs., 110 T.C.

at 491. As a general rule, section 174 applies to the costs of developing

the concept of a product but not to the costs of building the product itself.

See Mayrath, 41 T.C. at 590; Union Carbide Corp. & Subs., T.C. Memo.

2009-50, slip op. at 196 (citing Mayrath, 41 T.C. at 590). But when a

taxpayer constructs a physical product for the purpose of assessing the

viability of its concept—a pilot model—the construction costs can be

considered costs of developing the concept of the product and thus can

be deducted under section 174. Little Sandy Coal Co., T.C. Memo. 2021-

15, at *38.

46

[*46] The 2014 amendments to Treasury Regulation § 1.174-2 clarified

that point by adopting a definition of “pilot model” and providing

examples of the treatment of pilot models under section 174. 28 This

amendment defined pilot model as “any representation or model of a

product that is produced to evaluate and resolve uncertainty concerning

the product during the development or improvement of the product.”

Treas. Reg. § 1.174-2(a)(4). Because these expenditures are undertaken

to resolve the uncertainty, the pilot model expenses are not production

costs but instead costs associated with the development of the concept

of the product. Id. subparas. (2) and (3). This is the case even if the

taxpayer later sells the pilot model. Id. subpara. (11) (example 7).

Treasury Regulation § 1.174-2(a)(11) (example 7) confirms that

the costs of producing a pilot model can qualify as research or

experimental expenditures under section 174. The example involves an

aircraft manufacturer who sought to develop an experimental aircraft

capable of taking off and landing vertically. The taxpayer “produce[d] a

working aircraft at a cost of $5,000,000” for the purpose of “evaluat[ing]

and resolv[ing] uncertainty during the development or improvement of

the product and test[ing] the appropriate design” of the aircraft. Treas.

Reg. § 1.174-2(a)(11) (example 7). The example concludes that the

aircraft the taxpayer built was a pilot model, as defined by Treasury

Regulation § 1.174-2(a)(4), and that “the $5,000,000 of costs that [the

taxpayer] incurred in producing the aircraft qualifie[d] as research or

experimental expenditures under section 174.” Id. subpara. (11)

(example 7). That was true even though the taxpayer sold the aircraft

“[i]n a later year.” Id.

4. The Process of Experimentation Test

Finally, section 41 requires that substantially all the research

activities constitute elements of a process of experimentation for a

qualified purpose. § 41(d)(1)(C). We refer to this as the process of

experimentation test. A process of experimentation is a “process

designed to evaluate one or more alternatives to achieve a result where

. . . the appropriate design of that result, is uncertain as of the beginning

28 The amendments to Treasury Regulation § 1.174-2 adopted in 2014 “apply

to taxable years ending on or after July 21, 2014.” Id. para. (d). The regulations,

however, allow taxpayers to apply the amended provisions “to taxable years for which

the limitations for assessment of tax ha[ve] not expired.” Id. We take petitioners’

invocation of the definition of “pilot model” provided in Treasury Regulation § 1.174-

2(a)(4), as amended in 2014, as an indication that they have chosen to apply the

amended provisions for tax years 2012 and 2013.

47

[*47] of the taxpayer’s research activities.” Treas. Reg. § 1.41-4(a)(5)(i).

The requisite uncertainty under this test is essentially identical to the

uncertainty required by the section 174 test. Betz, T.C. Memo. 2023-84,

at *68 n.23; Union Carbide Corp. & Subs., T.C. Memo. 2009-50, slip op.

at 199. The process of experimentation test requires a more structured

method of discovering information than section 174. Betz, T.C. Memo.

2023-84, at *68 n.23; Union Carbide Corp. & Subs., T.C. Memo. 2009-

50, slip op. at 200. The regulations elaborate on what a process of

experimentation involves:

A process of experimentation must fundamentally rely on

the principles of the physical or biological sciences,

engineering, or computer science and involves the

identification of uncertainty concerning the development

or improvement of a business component, the identification

of one or more alternatives intended to eliminate that

uncertainty, and the identification and the conduct of a

process of evaluating the alternatives (through, for

example, modeling, simulation, or a systematic trial and

error methodology). A process of experimentation must be

an evaluative process and generally should be capable of

evaluating more than one alternative.

Treas. Reg. § 1.41-4(a)(5)(i); see also Union Carbide Corp. & Subs., T.C.

Memo. 2009-50, slip op. at 201 (explaining that the process of

experimentation requires the use of the scientific method).

The substantially all requirement is satisfied if “80 percent or

more of a taxpayer’s research activities, measured on a cost or other

consistently applied reasonable basis . . . , constitute elements of a

process of experimentation for a [qualified purpose].” Treas. Reg. § 1.41-

4(a)(6). The substantially all requirement is satisfied even “if the

remaining 20 percent (or less) of a taxpayer’s research activities with

respect to the business component do not constitute elements of a

process of experimentation for a [qualified purpose], so long as these

remaining research activities satisfy the [section 174 test] and are not

otherwise excluded under section 41(d)(4).” Id.

The final part of the process of experimentation test requires that

the activities be for a qualified purpose as defined in section 41(d)(3).

Qualified research includes research that is related to (1) a new or

improved function, (2) performance, or (3) reliability or quality.

48

[*48] § 41(d)(3). Research related to style, taste, cosmetic, or seasonal

factors is not for a qualified purpose. Id.

C. Activities That Are Not Qualified Research

Section 41(d)(4) sets forth a list of additional activities that are

specifically excluded from the definition of qualified research. Two

exclusions are relevant to these cases: (1) adaptation of an existing

business component and (2) routine data collection and quality control

testing. § 41(d)(4)(B), (D). 29

Research conducted to adapt an existing business component to a

customer’s particular requirements or needs is not qualified research.

§ 41(d)(4)(B). We have previously noted that the word “adaptation”

must be read in its ordinary sense. See Betz, T.C. Memo. 2023-84, at *97

n.44 (citing 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.”).

That is, minor alterations of a design are excluded from the definition of

qualified research. Id.

Studies and surveys, including routine data collection and routine

testing for quality control do not constitute qualified research.

§ 41(d)(4)(D)(iv) and (v). We have previously held that testing that is

performed to determine whether a research trial was successful is not

routine data collection or quality control testing. Norwest Corp. & Subs.,

110 T.C. at 520–21. We elaborated on this holding in Union Carbide

Corp. & Subs., T.C. Memo. 2009-50, slip op. at 218. In that case a

taxpayer generally collected information during its manufacturing

process to ensure that the equipment was operating normally. During

the research trial, the taxpayer collected some data that it ordinarily did

not collect and took measurements more frequently for the purpose of

determining whether the research trial was effective. Id. After

collecting this data, the taxpayer analyzed the data, which it did not

ordinarily do. Id. We held that these activities went beyond routine

data collection and therefore were not excluded from the definition of

qualified research. Id.

29 In his answering brief, respondent also contends that to the extent we

determine that any of the research trials related to a process business component, the

exclusion under section 41(d)(4)(A) for research after commercial production applies.

We need not reach this argument.

49

[*49] D. Substantiation Principles

Section 6001 requires that taxpayers keep records in compliance

with the rules and regulations prescribed by the Secretary. 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 “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 research expenses, a taxpayer

need not necessarily maintain and produce records in any particular

form. See Fudim v. Commissioner, T.C. Memo. 1994-235, 1994 WL

223280, at *12 (accepting “testimony and other evidence in the record”

as basis for the Cohan rule to estimate time spent performing qualified

services); Union Carbide Corp. & Subs., T.C. Memo. 2009-50, slip op. at

254 (“[Treasury Regulation § 1.41-4(d)] does not require that a taxpayer

substantiate its research credit claim with any particular types of

documents . . . .”).

When a taxpayer fails to introduce contemporaneous records of

qualified research expenses, we have previously applied the Cohan rule

to estimate expenses when the taxpayer provides a reasonable estimate

of the qualified expenses. See Cohan v. Commissioner, 39 F.2d 540, 544

(2d Cir. 1930); Union Carbide Corp. & Subs., T.C. Memo. 2009-50, slip

op. at 294–95; Fudim v. Commissioner, 1994 WL 223280, at *12.

However, we do not apply the Cohan rule to estimate expenses paid or

incurred if the taxpayer provides “no evidence at all that would permit

an informed estimate” of the deduction, basis, or other tax advantage.

Reinke v. Commissioner, 46 F.3d 760, 764 (8th Cir. 1995), aff’g T.C.

Memo. 1993-197; see also 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; 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))); 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.”), aff’d, 101 F.4th 509

(7th Cir. 2024).

50

[*50] IV. Qualification of Trial Projects as Qualified Research

We turn to the issue of whether any research trial entailed

qualified research within the meaning of section 41. Before we consider

the qualification of each research project, we pause to address two

preliminary arguments respondent relies upon to defeat the research

credits without consideration of the individual trials. First, respondent

argues that GOMI was the incorrect entity to report the research credit.

Respondent argues that George’s Farms, Inc., not GOMI, paid all the

employees that petitioners brought to testify about the research trials.

Consequently, he reasons that even if the employees conducted qualified

research, it was not on behalf of GOMI.

We reject this argument because it conflicts with the record before

us. The day-to-day operations of George’s paid little mind to the

divisions between the separate entities. In no place is this clearer than

the accounting books and records. George’s Farms, Inc., initially paid

the employees and issued Forms W–2 reporting the wages. These wage

expenses were then transferred to GOMI’s books and records as an

overhead expense on the feed. Incorporating the wage expenses into the

feed overhead allowed GOMI to allocate the wage expenses to each flock

in a manner it deemed fair. An alternative approach would have

required the field staff to separately record time entries for each flock in

the field. Be it from a disinterested attitude about managing the

separate entities or a clever way to more appropriately track expenses

to each flock, it is clear GOMI ultimately bore the cost of the employees.

It is also clear that these employees worked on tasks assigned to GOMI

in the entity chart. The activities of the field service staff, veterinarians,

and nutritionists were all related to the live production side of the

business. Therefore, any activities of these employees are attributed to

GOMI. See Kornhauser v. United States, 276 U.S. 145, 153 (1928)

(determining that legal expenses were business expenses of a taxpayer

because the expenses “proximately resulted from . . . his business”).

Respondent also argues that petitioners’ failure to claim research

credits for qualified wage expenses precludes their claiming research

credits for qualified supply expenses. We reject this argument easily.

Nowhere in the statute nor the accompanying Treasury regulations is

claiming qualified supply expenses contingent on claiming qualified

wage expenses. See § 41(b)(2)(A). Instead, to claim qualified supply

expenses, the taxpayer need only show that the supplies were used in

the conduct of qualified research. § 41(b)(2)(A)(ii). Wages for these

qualified activities could be but are not required to be claimed as QREs.

51

[*51] § 41(b)(2)(A)(i). There are a multitude of reasons that a taxpayer

may choose to claim only a portion of the credit that he is entitled to

claim. In these cases that reason is the large expense required to

substantiate the wage portion of any QREs compared to the payoff.

Therefore, petitioners may claim qualified supply expenses as QREs,

regardless of whether they claimed qualified wage expenses, so long as

the expenses otherwise satisfy the four-part statutory test. We turn to

that determination now. Below, we will address only the relevant

portions of the four-step statutory test for each research trial.

A. Salinomycin

The Salinomycin research trials fail the section 174 test because

petitioners have not substantiated the research activities. Petitioners

claim that the Salinomycin research trials were conducted for an

improved poultry product business component. Petitioners admit that

Salinomycin effectively controlled coccidiosis even though its

effectiveness declined over time. But this diminishing effectiveness was

not the uncertainty petitioners roosted on. Petitioners allege that GOMI

was uncertain as to whether higher dosages, combined with chemical

coccidiostats, would increase Salinomycin’s efficacy. It theorized that

this would produce an improved poultry product with fewer coccidiosis

infections.

As framed by petitioners, this project appears promising. GOMI

may very well have been uncertain as to whether a higher dosage of

Salinomycin administered with a chemical coccidiostat would produce

an improved poultry product by effectively controlling coccidiosis.

However, GOMI’s contemporaneous records peck away at the claim that

GOMI conducted investigatory activities to resolve this uncertainty. In

fact, GOMI’s feed recipe records demonstrate that it continued to add

the same dosage of Salinomycin to the feed before and during the

research trials. As petitioners admitted, there was no uncertainty at the

time that this dosage would work.

We likewise fail to see evidence in the feed recipes that GOMI

added chemical coccidiostats to the feed provided to the research flocks.

Petitioners identified only Robenz as the brand of chemical coccidiostats

that GOMI used during the Salinomycin trials. Because this is the only

brand of chemical coccidiostats petitioners highlighted, we are unable to

search the voluminous feed recipes to identify any other chemical

coccidiostats to corroborate that these research trials occurred. We will

not rely solely on GOMI’s employees’ testimony that other chemical

52

[*52] coccidiostats were added to the feed, because of the conflict in

testimony highlighted above regarding the dosage of Salinomycin.

The only record of GOMI’s adding Robenz to a feed recipe during

the research trials is a grower feed recipe dated April 3, 2012. By this

time, the experimental flocks covered by five contracts were settled with

additional experimental flocks settled the next day. The remaining six

contracts had settlement dates after the date on the feed recipe.

However, petitioners have provided no connection between the April 3,

2012, feed recipe and the experimental flocks covered by these

remaining six contracts. This data is particularly critical because the

six remaining flocks were at different stages of development by the time

this feed recipe was created. GOMI added Robenz to the feed recipes fed

to flocks between the ages of 17 and 27 days. Accounting for the lag

between formulation of the recipe and the time it was fed to the broilers,

it appears likely that some of the remaining six flocks would have

missed this window. Without any evidence that these flocks received

the Robenz feed, we cannot find that GOMI conducted investigatory

activities with respect to the flocks covered by these contracts.

These alleged trials are a clear example of the chicken (research

credit study) coming before the egg (research). Petitioners failed to

demonstrate that GOMI undertook research activities to resolve the

alleged uncertainty in the Salinomycin trials as they relate to any of the

flocks covered by the 12 contracts.

Petitioners generally argue that if any research trials failed, we

should apply the shrinking-back rule to find QREs. However, they

provided no meaningful basis upon which to apply this rule, nor is one

apparent. Consequently, we will leave dissecting the broilers down to

cuts of meat to the processing plants and will not apply the shrinking-

back rule. Therefore, we will deny petitioners research credits as they

relate to the Salinomycin research trials in their entirety.

B. HatchPak and Tylan

GOMI performed qualified research with respect to the HatchPak

and Tylan trials in 2012 but not in 2013. Petitioners claim that the

HatchPak and Tylan trials constitute qualified research and that the

specific business component at issue is an improved poultry product.

Respondent contests the classification of these research trials as

product-related business components and in the alternative argues that

these trials fail the four-part statutory test.

53

[*53] 1. The Business Component Test

The parties’ dispute starts with the task of identifying the

business component at issue in the HatchPak and Tylan research trials.

Petitioners alleged that the business component was an improved

poultry product, specifically one that was more resistant to coccidiosis

and had better gut health. According to petitioners this is an

improvement over its standard broiler—a broiler+ from the example

discussed above—which is a product-related business component.

Respondent on the other hand argues that the business component is a

process-related business component. Respondent contends that these

research trials were targeted at the bottom line with the goal to produce

the same broiler GOMI always produced, just at a lower cost.

The business component at issue in these trials was a product-

related business component. The aim of these research trials was not to

save money or produce more broilers with the same inputs. Instead, it

was aimed at creating higher quality broilers that did not suffer from

the adverse health consequences of coccidiosis. Coccidiosis was a

recurrent issue in GOMI’s standard production process that damaged

gut health and led to nonuniform broilers. If successful, the broilers

created in these trials would have better gut health and be more

uniform—an improvement over GOMI’s standard broiler that suffered

the consequences of coccidiosis. We are satisfied with petitioners’

characterization of the business component as a product-related

business component. 30

Other than the dispute as to whether the business component was

a process or a product, respondent does not dispute that GOMI

otherwise met the business component test. We are satisfied that the

HatchPak and Tylan research trials were designed to improve the

broilers’ health. This is an improvement to the quality of GOMI’s

standard broiler business component. It is also clear that GOMI

intended to sell these healthier broilers to George’s Farms, Inc.

Therefore, the HatchPak and Tylan trials meet the business component

test.

30 In his opening brief, respondent complains that petitioners were not

forthcoming as to the business component for any of the research trials. Although

there are inconsistencies in the record as to petitioners’ description of the business

components, petitioners stipulated that the business component GOMI sought to

improve was an improved poultry product. Thus, this is the business component upon

which we conduct the four-part statutory test.

54

[*54] 2. The Technological Information Test

The activities related to the HatchPak and Tylan trials likewise

meet the technological information test. The information GOMI sought

to discover in these trials related to the health outcomes of the broilers

in the research trials. In the pursuit of this discovery, GOMI relied on

biologic sciences to study the broilers’ performance including health

monitoring and necropsies. The HatchPak and Tylan trials satisfy the

technological information test.

3. The Section 174 Test

The activities related to the HatchPak and Tylan trials satisfy the

section 174 test in 2012 but not in 2013. Petitioners allege that GOMI

was uncertain as to the capabilities of the combination of HatchPak and

Tylan to effectively control coccidiosis, which in turn would produce

broilers with superior gut health, in its standard production process.

Petitioners rely on the subsequent failure of HatchPak and Tylan in

2013 as proof that uncertainty continued into 2013. Respondent argues

that there was no uncertainty as to these drugs because both were

commercially available and widely used during the research years.

Respondent also points out that before the research years, GOMI

routinely administered Tylan.

Related to 2012, there was objective uncertainty as to the

capabilities of HatchPak and Tylan to effectively control coccidiosis on

GOMI farms. While the parties disagree on brief as to the possibility of

uncertainty, their experts did not. Both Dr. Bobeck and Dr. Johnson

agreed that vendor research conducted before a product is launched is

not readily applicable to commercial scale poultry production. In sharp

contrast with conditions in the field, vendor research is conducted in

sterile conditions on a small number of broilers. While this research is

a helpful basis for GOMI to determine the intended results of HatchPak

and Tylan, it does not answer how the additives will perform when

combined with GOMI’s standard production process and the unique

conditions on each farm. Even between commercial poultry producers,

additives can have drastically different effects. There is no evidence

that Tylan was specifically recommended to treat the side effects of

HatchPak during the research years. Nor was there information on the

interaction between the two additives. There was objective uncertainty

as to the capability in 2012.

55

[*55] The research trials for 2013 are of a different feather. While

uncertainty may stretch beyond the bounds of a single tax year, a

taxpayer must show that the information objectively available to it in

the tax year for which it seeks a research credit did not establish the

capability, method, or appropriate design. See Siemer Milling Co., T.C.

Memo. 2019-37, at *26–27. When a taxpayer runs a test in a previous

tax year that provides objective information that resolves the

uncertainty, the taxpayer may not claim uncertainty for a later identical

test. Id. at *33. For example, in Siemer Milling Co., T.C. Memo. 2019-

37, at *7, *33, we held that a taxpayer did not have section 174

uncertainty as to whether a machine was capable of operating at over

3,600 revolutions per minute when it had previously run the machine at

5,000 revolutions per minute. See also Betz, T.C. Memo. 2023-84, at *85

(holding that objective uncertainty as to the appropriate design of an

oxidizer was resolved when the taxpayer obtained detailed

measurements and performed calculations that established the required

size and features).

We must focus on whether the information objectively available

to GOMI established the capabilities of HatchPak and Tylan to

effectively control coccidiosis in GOMI’s standard production process. At

the end of 2012 GOMI had objective data from 14 flocks across company-

related farms that were raised under GOMI’s standard production

process. Overall, these flocks performed better than the control group.

Like the previous 5,000 revolutions per minute test in Siemer Milling

Co., the 2012 trials provided a definitive answer that HatchPak and

Tylan effectively control coccidiosis in GOMI’s standard production

process.

Critically, GOMI thought the uncertainty regarding the

capability was resolved as well. Mr. McClure, the live production

manager in charge of the live production side of the business, and Dr.

Fussel, the main veterinarian at the time of these trials, both testified

that after the 2012 trials, they expected the combination of HatchPak

and Tylan to control coccidiosis under GOMI’s standard production

process. In fact, Dr. Fussel added that he expected performance to

improve the longer GOMI used the combination treatment. 31 This

31 To the extent petitioners’ arguments could be construed as putting forth an

uncertainty related to coccidiosis’ becoming resistant to GOMI’s standard treatments,

we reject this argument. Petitioners did not claim that the uncertainty in 2013 was

whether HatchPak and Tylan could control the resistant coccidiosis under its standard

production process. It claimed the same uncertainty in 2012 as to whether HatchPak

56

[*56] testimony, coupled with the large amount of data established

during the 2012 research trials, demonstrates that there was no

uncertainty as to the capabilities of HatchPak and Tylan to effectively

control coccidiosis in GOMI’s standard production process. The

successful results in 2012 resolved the uncertainty in 2013. See Siemer

Milling Co., T.C. Memo. 2019-37, at *33.

Petitioners latch onto the subsequent failure to show that there

was lingering uncertainty as of 2013. While the failure in 2013 may

have caused uncertainty going forward, the focus of our analysis is

whether uncertainty existed at the beginning of the research activities

in the tax year for which a taxpayer claims research credits. See Siemer

Milling Co., T.C. Memo. 2019-37, at *26–27; Treas. Reg. § 1.41-4(a)(5)(i).

As discussed above, at the beginning of the 2013 research trials there

was no uncertainty as to the capabilities of HatchPak and Tylan to

effectively control coccidiosis in GOMI’s standard production process.

We cannot accept a post hoc justification of uncertainty due to a

subsequent unexpected failure that was not anticipated at the beginning

of the alleged research trials. The activities related to the HatchPak

and Tylan trials for 2012 are research and development within the

meaning of section 174, but the 2013 trials are not.

In 2012 GOMI employees undertook investigative activities to

resolve the uncertainty as to whether HatchPak and Tylan would

produce an improved poultry product under GOMI’s standard

production process. GOMI employees administered the additives to the

broilers and studied the resulting condition of the broilers. This more

than exceeds the bar for investigative activities under section 174.

Finally, the 2012 feed expenses are expenditures that would be

deductible under section 174. As explained above, research and

development expenditures under section 174 include the cost to produce

a pilot model “to evaluate and resolve uncertainty concerning the

product during the development or improvement of the product.” See

Treas. Reg. § 1.174-2(a)(1), (3), (4); see also Little Sandy Coal Co., T.C.

Memo. 2021-15, at *38. The broilers subjected to the HatchPak and

Tylan trials are pilot models within the meaning of Treasury Regulation

§ 1.174-2(a)(4) because the uncertainty could be resolved only by testing

on the broilers after they reached their end weights. See Little Sandy

Coal Co., T.C. Memo. 2021-15, at *31. It then follows that the costs to

and Tylan could control coccidiosis in GOMI’s standard production process. We also

note that Dr. Fussel testified that this type of resistance is not seen with HatchPak.

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[*57] develop the broilers, including feed costs, would qualify as

research and experimental expenditures under section 174, like the cost

of producing the experimental aircraft in Treasury Regulation § 1.174-

2(a)(11) (example 7).

While not addressing the pilot model argument, respondent

maintains that the feed expenditures are not deductible under section

174 because HatchPak was not administered in feed. This distinction

does not make a difference in whether petitioners can claim the costs of

the feed as qualified research expenditures. All costs of developing the

broilers under these trials are deductible as pilot model expenses. See

Treas. Reg. § 1.174-2(a)(1), (3), (4). The feed is a necessary expenditure

in developing the pilot model broilers and resolving the uncertainty.

Therefore, the expenditures would be deductible under section 174. The

2012 HatchPak and Tylan trials satisfy the section 174 test.

4. The Process of Experimentation Test

The activities related to the 2012 HatchPak and Tylan trials

satisfy the process of experimentation test. These trials are a natural

continuation of the Salinomycin trials. Having failed with those trials,

GOMI moved to its next hypothesis: that HatchPak would effectively

control coccidiosis and Tylan would effectively curtail any adverse side

effects. After developing the hypothesis, it began the research trials.

GOMI employees administered HatchPak at the hatchery and followed

up with dosages of Tylan to limit side effects to flocks covered by 14

contracts. GOMI collected data and performed necropsies in conjunction

with the vendor to determine whether the broilers were infected with

coccidiosis and/or had necrotic enteritis. It then compared this data to

historic performance with a particular focus on seven-day mortality.

Reviewing the results, GOMI determined that the broilers raised under

the combination treatment had better outcomes than historic data from

other flocks. This experimental design follows the pattern set forth in

the regulations that define process of experimentation: GOMI identified

an uncertainty and a possible alternative to resolve that uncertainty and

conducted a process of evaluating that alternative. This, at a minimum,

is systematic trial and error.

Respondent calls “fowl” on GOMI’s experimental design.

Specifically, respondent takes issue with the lack of a control group

raised contemporaneously with the experimental flocks and the addition

of other additives such as Calsporin to the experimental flocks.

Respondent’s first argument ignores the wide availability of data in the

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[*58] commercial poultry industry. As explained above, the poultry

industry is data driven and GOMI is no exception. GOMI meticulously

tracked and recorded data on each flock, including weight, mortality,

and illness statistics. This data, from the very farms where the

HatchPak and Tylan trials occurred, acted as a control group to which

GOMI compared the results of its research trials.

Respondent next argues that the overlapping of experimental

groups defeats the process of experimentation test because GOMI could

not isolate the effects of HatchPak and Tylan from those of the other

additives. Respondent notes that according to Dr. Bobeck certain

combinations of additives would inactivate each other. For example,

Tylan would likely inactivate Calsporin. We reject this argument. In

laboratory research designed to test the efficacy of these additives,

combining experiments would be unheard of. But GOMI was not looking

to gauge the effectiveness of these additives in isolation. In fact, the

integration of extraneous variables was exactly the point of GOMI’s

research. GOMI wanted to see whether the HatchPak and Tylan

combination would work under its standard production process, which

involved a constant rotation of additives and medications. Therefore, it

does not strike us as unusual that these trials would include extraneous

variables. As for the possibility of inactivating the additives, respondent

misreads his expert’s report. Throughout the report, Dr. Bobeck noted

that certain combinations of additives could inactivate one another.

Even she could not state for certain that these additives would

inactivate one another. If anything, Dr. Bobeck’s report supports the

need to combine different experimental treatments to test the outcome.

GOMI conducted this process of experimentation to evaluate the

effect that HatchPak and Tylan would have on coccidiosis to improve

broiler performance. Effective coccidiosis control would have resulted in

better gut health and more uniform broilers. This is an improved

quality and thus a permitted purpose.

Finally, we come to the “substantially all” portion of the test—

whether at least 80% of GOMI’s activities were part of a process of

experimentation for a permitted purpose. Petitioners contend that

GOMI satisfied this portion of the test because there are no activities

that would be included in the denominator of the fraction (research

activities under section 174) that would not also be included in the

numerator of the fraction (research activities that are part of a process

of experimentation for a permitted purpose). Respondent argues that

the activities fail the substantially all test because petitioners have not

59

[*59] substantiated the employee hours spent on the HatchPak and

Tylan trials as allegedly required by this Court in Little Sandy Coal Co.

In Little Sandy Coal Co., T.C. Memo. 2021-15, at *25, a taxpayer

argued that it satisfied the substantially all test by showing that over

80% of the business component was new. The taxpayer reasoned that if

over 80% of the business component was new, that meant that at least

80% of the activities involved a process of experimentation. Id. The

taxpayer relied on Trinity Industries, Inc. v. United States, 691 F. Supp.

2d 688 (N.D. Tex. 2010), aff’d, 757 F.3d 400 (5th Cir. 2014), in which a

district court used novelty as a proxy to determine the portion of

activities that was part of a process of experimentation. Little Sandy

Coal Co., T.C. Memo. 2021-15, at *26.

These cases are distinguishable from both Little Sandy Coal Co.

and Trinity Industries, Inc. Unlike the taxpayers in those cases,

petitioners are not attempting to prove the portion of research activities

that constitutes a process of experimentation on the basis of novelty of

the business component. Instead, petitioners provided the Court with

witness testimony and contemporaneous documentation to show that

GOMI engaged in a process of experimentation.

This testimony and documentation establish that all activities

performed by GOMI employees qualify as qualified activities for a

permitted purpose under section 41. Therefore, the expenditures for the

supplies they used in these activities are qualified as research

expenditures under section 174. We have previously applied the

substantially all test without the mathematical precision that

contemporaneous time logs would provide. See Suder v. Commissioner,

T.C. Memo. 2014-201, at *46–53; Union Carbide Corp. & Subs., T.C.

Memo. 2009-50, slip op. at 212–15. In a review of the record and the

activities of GOMI employees, we are satisfied that substantially all of

GOMI’s activities in 2012 related to the HatchPak and Tylan trials were

part of a process of experimentation for a permitted purpose.

5. Activities Excluded Under Section 41(d)(4)

The activities related to the 2012 HatchPak and Tylan trials are

not excluded from the definition of qualified research by section 41(d)(4).

Respondent argues that the routine testing or quality control exclusion

and the adaptation exclusion apply. These exclusions are not applicable.

First, respondent argues that GOMI merely purchased

commercially available HatchPak and Tylan and tested the drugs to

60

[*60] determine whether they conform to the information supplied by

the vendor. This characterization of activities is one of routine quality

control testing, which is excluded from the definition of qualified

research. Respondent relies on Treasury Regulation § 1.41-4(a)(8)

(example 2) to support his argument. In this example, a paint

manufacturer changed the color of its widgets from blue to green. Id.

After selecting the green paint, the manufacturer determined that it

needed a new paint nozzle to apply the green paint. Id. The

manufacturer consulted with the paint nozzle supplier, who pointed the

manufacturer to the appropriate nozzle. Id. The manufacturer then

tested the paint nozzle in its plant to ensure it worked with the green

paint. Id. The example concludes that the paint nozzle supplier

resolved the manufacturer’s uncertainty as to the appropriate nozzle in

the meeting. Id. It further concludes that the tests after installation

were routine or ordinary testing or inspection for quality control because

the objective was to determine whether the nozzle worked as stated by

the supplier. Id.

This example is unpersuasive. As discussed above, the vendor

research did not resolve the uncertainty as to whether these products

would work to control coccidiosis under GOMI’s standard production

process. Instead, this uncertainty could only be resolved through

applied research on commercial farms. Our caselaw has confirmed that

testing that is necessary to resolve an uncertainty is not routine testing

or quality control. See Norwest Corp. & Subs., 110 T.C. at 521 (holding

that installation and testing that was critical to the success of a

technology was not routine testing or quality control); see also Union

Carbide Corp. & Subs., T.C. Memo. 2009-50, slip op. at 217–19 (finding

that collecting and analyzing data to determine whether anticoking

technology reduced the formation of coke and whether the technology

could improve a taxpayer’s production process was not routine data

collection or quality control).

Nor does GOMI’s practice of collecting large amounts of data

throughout its standard production process transform the activities

related to these trials into routine data collection. GOMI collected

additional metrics to determine the effectiveness of the HatchPak and

Tylan regime, including performing more frequent necropsies. GOMI

also analyzed this data in a way it did not typically review standard

data. As discussed above, GOMI and the poultry industry more widely

are extremely data driven and often monitor trends in performance to

detect issues as they occur. This trend monitoring is different from the

data analytics undertaken by GOMI in relation to the HatchPak and

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[*61] Tylan trials. In these trials, GOMI was monitoring the occurrence

of coccidiosis and necrotic enteritis as compared to historic data.

GOMI’s data collection and analysis are not routine data collection

activities. See Norwest Corp. & Subs., 110 T.C. at 521 (holding that

installation and testing that was critical to the success of a technology

was not routine testing or quality control); Union Carbide Corp. & Subs.,

T.C. Memo. 2009-50, slip op. at 218 (holding that a taxpayer’s activities

were not routine data collection when it collected additional data that it

did not normally collect during its standard production process and

performed additional analysis on the data).

We also reject respondent’s contention that GOMI’s activities

were related to adapting an existing business component to fit

customers’ specifications under section 41(d)(4)(B). Respondent reasons

that any project related to controlling uniformity is merely an

adaptation because GOMI must produce broilers of a certain size to sell

to customers. As determined above, the improved poultry product is a

different business component from GOMI’s standard broilers.

Additionally, the coccidiosis control hypothesized by GOMI is a

magnitude of change greater than minor alterations of the broilers. Cf.

Betz, T.C. Memo. 2023-84, at *97 n.44 (holding that minor site-specific

modifications to machinery fall within the adaptation exclusion).

Therefore, these activities fall outside the definition of an adaptation.

6. The Amount of QREs

Petitioners have adequately substantiated GOMI’s QREs as they

relate to the HatchPak and Tylan trials for 2012. Given petitioners’

framing, we are looking for two pieces of substantiation: identification

of the experimental flocks and calculation of the feed expenses.

Petitioners identified the flocks covered by 14 contracts as the

experimental group in 2012 and calculated the feed expenses for each

flock. There is sufficient information in the record to show that these

flocks were the experimental flocks. Testimony established that the

HatchPak and Tylan experiments were conducted on the company-

related farms during the second half of 2012. The flocks petitioners

identified were all raised on the company-related farms. To identify the

specific experimental flocks, petitioners direct us to the feed recipes

labeled in the 800s, which indicate that those flocks were not given

chemical coccidiostats that would inactivate the HatchPak. These feed

recipes and those immediately following recipes contain Tylan. Finally,

the start dates and settlement dates of the flocks petitioners identified

align with the dates that the previously identified feed recipes would

62

[*62] have been fed. Piecing together testimony and the various

contemporaneous spreadsheets provided by petitioners, we are satisfied

that petitioners adequately identified the flocks for which they claim

research credits.

As for calculating the feed expenses, petitioners rely on the feed

expenses as determined by alliantgroup. These calculations start with

the feed expenses GOMI recorded in contemporaneous settlement data.

As noted above, GOMI tracked feed expenses per contract. These feed

expenses took in general overhead, including an allocation of employee

wages. Because GOMI wanted to claim QREs only for the feed,

alliantgroup removed the average overhead expenses. alliantgroup also

removed the shrink adjustment to ensure credits were claimed only for

feed that made it to the farms. Again, we can match the settlement

dates and contract numbers identifying experimental flocks with the

contemporaneously maintained feed expenses spreadsheets.

Petitioners’ adjustments to remove the shrink adjustment and overhead

expenses are corroborated by GOMI records and the testimony of Mr.

Hopkins. Petitioners appropriately calculated the amount of feed

expenses assigned to each contract. Accordingly, as it relates to the

HatchPak and Tylan trials, GOMI had $5,115,281 in QREs for 2012.

C. Probiotics

GOMI performed qualified research with respect to the probiotic

trials, and therefore petitioners are entitled to research credits for

qualified supplies to the extent the research trials are substantiated.

Petitioners claim that the probiotic trials constitute qualified research

and that the specific business component at issue is an improved poultry

product. Respondent contests the classification of these research trials

as product-related business components and in the alternative argues

that these trials fail the four-part statutory test.

1. The Business Component Test

As with the HatchPak and Tylan trials, the parties dispute

whether the probiotic trials were aimed at a product-related or a

process-related business component. Petitioners allege that the

business component was an improved poultry product, specifically one

with better gut health that does not require as many antibiotics.

Borrowing from the illustrative example above, petitioners’ argument

boils down to the claim that GOMI was producing broilers+ rather than

63

[*63] its standard broilers. Respondent disagrees, arguing that the

business component is the process for raising the broilers at a lower cost.

The business component at issue in these trials was a product-

related business component. The aim of these research trials was not to

save money or produce more broilers. Rather it was aimed at producing

higher quality broilers that had better gut health and were less reliant

on antibiotics. At the time, the market viewed the reduction or

elimination of antibiotics in the broilers as yielding a superior quality

poultry product. We are satisfied that the business component is the

product-related business component of an improved poultry product.

Other than the dispute as to whether the business component was

a process-related or product-related business component, respondent

does not dispute that petitioners otherwise satisfy the business

component test. It is clear from the record that the probiotic trials were

designed to improve the health and therefore the quality of the broiler

business component. It is also undisputed that GOMI intended to sell

the broilers to George’s Farms, Inc. Therefore, the probiotic trials pass

the business component test.

2. The Technological Information Test

The activities related to the probiotic trials meet the technological

information test. The information GOMI sought to discover in these

trials related to the health outcomes of the broilers on the probiotics. In

the pursuit of this discovery, GOMI relied on biologic sciences to study

the performance of the broilers including health monitoring and

necropsies. The probiotic trials satisfy the technological information

test.

3. The Section 174 Test

The activities related to the probiotic trials satisfy the section 174

test. Petitioners claim that GOMI was uncertain as to the capabilities

of the probiotics to produce improved broilers that had better gut health

and required less antibiotics in its standard production process.

Respondent argues that there was no uncertainty as to these probiotics

because they were all commercially available products and GOMI met

with the vendors for additional information.

For the same reasons discussed in relation to the HatchPak and

Tylan trials, we reject respondent’s argument that uncertainty cannot

exist when a product is commercially available. Both experts agreed

64

[*64] that applied research trials with GOMI’s standard production

process were required to test the probiotics’ real-world efficacy.

Likewise, the probiotic vendor meeting did not resolve the uncertainty

as to how the probiotics would perform. The meeting consisted merely

of a presentation with a question-and-answer session during which the

vendors provided information to GOMI consistent with their laboratory

research. Without conducting the tests at commercial scale under

GOMI’s standard production process, the vendors could not be certain

that the probiotics would produce an improved poultry product. When

GOMI decided to undertake the probiotic trials, the information

available to it did not establish that the probiotics could produce an

improved poultry product under GOMI’s standard production process.

See Union Carbide Corp. & Subs., T.C. Memo. 2009-50, slip op. at 209–

10 (holding that a research trial met the uncertainty requirement of

section 174 when a taxpayer did not know whether a technology would

work in the taxpayer’s manufacturing process).

GOMI employees undertook investigative activities to resolve the

uncertainty as to whether the probiotics would produce an improved

poultry product under GOMI’s standard production process. GOMI

employees administered the probiotics to the broilers and studied the

resulting condition of the broilers. This more than exceeds the bar for

investigative activities under section 174.

Respondent rehashes his argument about whether the feed

expenses are deductible under section 174, this time concentrating his

attention on the Floramax trials. Respondent contends that the feed

expenses associated with the Floramax trials are not deductible because

Floramax is administered in water. For the same reasons as with the

HatchPak and Tylan trials, we reject this argument. Without feeding

and raising the broilers to full weight, GOMI could not determine the

capabilities of Floramax to produce improved broilers that had better

gut health and required less antibiotics in its standard production

process. The feed expenses are expenditures incurred in the production

of the pilot model broilers intended to eliminate uncertainty. See Treas.

Reg. § 1.174-2(a)(4); see also Little Sandy Coal Co., T.C. Memo. 2021-15,

at *31. Therefore, the expenses are research expenditures under section

174. The probiotic trials satisfy the section 174 test.

4. The Process of Experimentation Test

The activities related to the probiotic trials satisfy the process of

experimentation test. In conducting the probiotic trials, GOMI

65

[*65] employees engaged in a process resembling the scientific method.

GOMI did not merely implement the probiotic protocol on all farms and

determine whether the change satisfied its basic needs. Instead, GOMI

conducted a series of trials for each probiotic on the company-related

farms to collect and analyze the broiler outcomes. GOMI met with the

probiotic vendors to develop a hypothesis as to which, if any, of the

probiotics would improve broiler gut health. It then tested the

hypothesis through a series of trials and compared the results to either

the control group in the case of Floramax or historic data

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