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T.C. Memo. 2026-50

ADRIAN D. SMITH AND NANCY W. SMITH, ET AL., 1

Petitioners

COMMISSIONER OF INTERNAL REVENUE,

Respondent

__________

Docket Nos. 13382-17, 13385-17,

13387-17.

Filed June 16, 2026.

__________

Steven Todd Miller, John H. Dies, Jeremy M. Fingeret, and Jefferson H.

Read, for petitioners.

Jonathan E. Behrens, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

WEILER, Judge: The principal question in these consolidated

cases concerns petitioners’ entitlement to credits under section 41 2 for

research activities (research credits). Adrian Smith + Gordon Gill

Architecture, LLP (AS+GG), reported research credits for research

activities related to architectural projects for tax years 2008, 2009, and

1 The following cases are consolidated herewith: Carlisle G. Gill and Wendy S.

Gill, Docket No. 13385-17; and Robert J. Forest and Susan N. Gaspari-Forest, Docket

No. 13387-17.

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

Code, Title 26 U.S.C. (I.R.C. or 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.

Served 06/16/26

[*2] 2010 (tax years at issue). 3 These research credits flowed through to

AS+GG’s three partners, Adrian D. Smith, Carlisle G. Gill, and Robert

J. Forest (collectively, Partners). The Partners and their spouses

reported the research credits on their joint personal income tax returns.

The credits were carried forward and subsequently carried back through

amendments to their original joint personal income tax returns. The

Internal Revenue Service (IRS or respondent) disallowed the research

credits for the tax years at issue.

For purposes of trial the disallowed research credits are limited

to those claimed for “6 Sample Projects” performed by AS+GG: Atrium

City Tower (Project No. 208021); Kingdom Tower (Project No. 210005);

Masdar HQ (Project No. 208004); Atrium City Masterplan (Project No.

207014); Plot 14 (Project No. 206003); and Plot R2 (Project No. 207016)

(collectively, Projects). 4 After concessions 5 the issues remaining for

decision are whether (1) the research in connection with the Projects was

funded research within the meaning of section 41(d)(4)(H) and (2) the

2008 compensation of Messrs. Smith, Gill, and Forest was reasonable

under section 174(e).

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 tax years at issue AS+GG was a

partnership whose sole partners and owners were Messrs. Smith, Gill,

3 In his original Answer respondent asserted a deficiency in tax for petitioners’

2007 tax year; but pursuant to the Supplemental Stipulation of Settled Issues, this

deficiency amount has been waived since respondent did not expressly reserve for trial

the issue of research credits generated in tax year 2007.

4 AS+GG research credits are attributable to 48 projects in total, but the

parties stipulated that the scope of the trial would be limited to the 6 projects.

5 The parties conceded multiple issues in these cases: (1) AS+GG’s claimed

business components for the tax years at issue satisfy the four-part test and are

qualified under section 41(d); (2) the exclusions under section 41(d)(4)(A)−(G) are

inapplicable for the tax years at issue; (3) AS+GG’s reported fixed-based percentage

under section 41(c)(3) is 3.00% for the tax years at issue; (4) all issues regarding the

foreign research exclusion under section 41(d)(4)(F) are resolved; (5) respondent

conceded that petitioners are not liable for accuracy-related penalties under section

6662(a) for the tax years at issue; and (6) “all other issues or defenses arising from

AS+GG’s tax year[s] 2008, 2009, and 2010, which are not expressly settled or reserved

for trial herein are resolved in favor of Petitioners” under the Supplemental

Stipulation of Settled Issues (Docket No. 13382-17, Doc. 139).

[*3] and Forest. Petitioners resided in Illinois when the Petitions were

timely filed. 6

Background of AS+GG

Messrs. Smith and Gill cofounded AS+GG, an Illinois limited

liability partnership, and entered into an agreement of partnership on

November 2, 2006. Mr. Forest was made a partner of AS+GG in

December 2006. AS+GG’s vision was to work on large-scale, highly

innovative, sustainable projects. In 2006 only a handful of architecture

firms were designing supertall 7 buildings that were sustainable.

AS+GG’s early years were focused on developing architecture

designs with net-zero energy, 8 but it transitioned to a focus on net-zero

carbon 9 around 2007. The change to net-zero carbon led AS+GG to

design buildings that used less energy and generated energy that fed

back into power grids. AS+GG is well known in the industry, and it has

acquired many of its contracts through winning international design

competitions. AS+GG’s projects have won various awards such as the

International Property Awards for Verde Residences as the Best Green

Development and the Middle East Award for Green Project of the Year

for Masdar Headquarters.

Most of AS+GG’s projects are highly sustainable, complex, largescale, iconic 10 architectural structures. AS+GG has experience in

designing large complex structures, but many of these structures often

require a large amount of research. AS+GG’s design process did not

follow a traditional linear approach but integrated a holistic approach

that engaged all elements of the project at the very beginning. Under

this method AS+GG did not delegate its work to engineers or other

mechanics but instead worked with all aspects of the building project to

efficiently design the structure.

6 The parties stipulated that these consolidated cases are appealable to the

U.S. Court of Appeals for the Seventh Circuit.

7 Supertall is anything over approximately 300 meters.

8 Energy refers to the amount of energy production that a building consumes.

9 Carbon in this context refers to the life cycle of carbon such as the materiality

of the energy and the full lifetime span of a building, not just from the moment it is

delivered.

10 “Iconic” was described as a criterion that clients asked for which was really

something they had never seen before.

[*4] In 2008 Messrs. Smith and Gill were the design partners of

AS+GG while Mr. Forest was a management partner. Design partners

conceptualized what a building would become by creating architectural

designs while the management partner assisted in the delivery of the

project through technical execution, client management, consultant

selection, and fee structure.

II.

AS+GG Partners

Mr. Smith

Mr. Smith received his bachelor’s degree in architectural design

from the University of Illinois, Chicago. While attending university he

also worked at Skidmore, Owings & Merrill (SOM), where he worked on

designing supertall buildings. At SOM Mr. Smith worked with various

partners on large projects where he learned the importance of holistic

design and the interconnection between architecture, structure, and

mechanical engineering.

Throughout Mr. Smith’s career at SOM he worked on a variety of

notable projects including the Jin Mao Tower, an 88-story tower in

China which at the time it was finished was the tallest building in

China; Nanjing Greenland Financial Center, which was a triangular

building approximately 458 meters tall; the Pearl Water Tower a zeroenergy building, which incorporated wind turbines and photovoltaics; 11

and the Burj Khalifa, which is the world’s current tallest structure,

standing 828 meters tall. Mr. Smith won various awards for his

architectural designs including a total of nine national American

Institute of Architects (AIA) awards. 12

Mr. Smith ultimately decided to start AS+GG because he wanted

to establish his own firm, and he believed that his compensation was not

reflective of the amount of revenue he was bringing into SOM. At SOM

he contributed profits of around $6–$8 million a year but received

compensation of $800,000 to $1.3 million. By 2008 Mr. Smith had gained

approximately 40 years of experience in practicing architecture.

11 Photovoltaics is the process of generating electrical power from sunlight.

12 AIA awards are annual awards where architects submit projects for

consideration by a jury of their peers.

[*5]

Mr. Gill

Mr. Gill has a bachelor’s degree in architecture from Ryerson

University in Toronto, Canada, a master’s degree in architecture from

the University of Texas at Arlington, and a master’s degree in

architecture from Harvard University. Mr. Gill is a licensed architect in

Illinois, Indiana, and Ontario, Canada, and he has over 31 years of

experience as an architect. He was admitted into the AIA College of

Fellows in 2013. He has taught at the Art Institute of Chicago and

Harvard University.

Mr. Gill began his career at SOM in 1993 as a C-level architect

before advancing to an associate position where he worked on projects

such as theatres, parks, the Ravinia Festival renovation, and the

Aramco headquarters in Dammam, Saudi Arabia. In 1998 Mr. Gill left

to become Director of Design at VOA Associates in the Orlando, Florida,

office, where he worked on projects in Latin America and Florida.

In 2000 he returned to SOM as an associate and worked his way

up to associate partner before leaving the firm in 2006. Mr. Gill worked

with Mr. Smith at SOM on notable projects such as the Nanjing Tower,

the Shanghai Grand, and the Pearl River Tower. The Pearl River Tower

in Guangzhou, China, is 309 meters tall and the world’s first net-zero

energy supertall at that time. The Pearl River Tower won architectural

design and sustainability awards.

Mr. Gill’s projects received many awards, and in 2006 he was

named the Best Emerging Architect in Chicago. In addition to awards,

he wrote many publications including peer-reviewed articles on

sustainability and thermal properties. Mr. Gill left SOM to form AS+GG

because he sought greater creative freedom regarding designs.

Mr. Forest

Mr. Forest has a bachelor’s degree in architecture from Carleton

University in Ottawa, Canada. He is a fellow of the AIA and a

Leadership in Energy and Environmental Design Accredited

Professional, and he sat on the AIA Chicago Board for 12 years along

with serving as the chapter president in 2019.

Mr. Forest began his career at MHS Architects—an architecture

and engineering firm in Osaka, Japan—before working for RMJM

Architecture in Hong Kong, China. In 2001 Mr. Forest joined SOM,

[*6] where he started as a technical architect and advanced to associate

partner.

Mr. Forest worked on notable projects at SOM including Burj

Khalifa with Mr. Smith and the Nanjing Tower and the Pearl River

Tower with Messrs. Smith and Gill. On the Nanjing Tower deal Mr.

Forest negotiated the agreement, formulated the execution of the

project, and worked with the client and the SOM team to get the project

completed.

Mr. Forest worked on projects that received awards including the

Middle East Architect Award for Green Project of the Year and the

National AIA Honor Award for the Regional and Urban Design Chicago

Decarbonization Plan. Mr. Forest left SOM for what he described as the

“Dream Team” to work alongside Messrs. Smith and Gill. Although Mr.

Forest was on track to become a partner at SOM, he believed that the

Partners of AS+GG could work well together and had similar

philosophies about architecture, and there was tremendous long-term

potential for creative future projects that could be pursued.

III.

Projects at Issue

Atrium City Tower (Project No. 208021)

AS+GG entered into a consultancy agreement with Meraas

Developments, LLC (Meraas), on August 8, 2008 (Atrium City Tower

Contract). The Atrium City Tower Contract specified that it would be

governed by the laws and regulations of the Emirate of Dubai, United

Arab Emirates (U.A.E.).

The Atrium City Tower—also known as 1 Dubai—was designed

by AS+GG as three mixed-use towers of approximately 1,000 meters,

800 meters, and 650 meters in height. The Atrium City Tower was

situated in the center of the Atrium City District in the Emirate of

Dubai. The three towers were interconnected by two lateral structures—

first by three triangulated bridges linking all three towers and second

by two bridges linking two of the towers. AS+GG considered solar

orientation and wind movement as part of the planning process for the

design. Further, AS+GG performed a study to evaluate the Atrium City

Tower bridges regarding whether the corners of the masses should be

articulated or straight up and down, whether it should be solid or cable

supported, and whether the tops should be partially open. The Atrium

City Tower Contract specifications required that the design would have

three of the world’s tallest towers, be very energy efficient, and be

[*7] designed to high environmental and performance standards.

AS+GG was also required to produce deliverables which included

proposals for dimensions, materials, utilities, roof plans, and other

building information that would be necessary for construction.

The Atrium City Tower Contract provided, within schedule 2,

appendix B, that it would be broken down into six phases: the

Mobilization Fee, 13 Concept Design, Schematic Design, Design

Development, Construction/Tender Documents, and Signing of

Construction Contract. Scope of services, schedule 2, section 1.2(e),

provided that “[AS+GG] shall report to [Meraas] on its progress in the

performance of the Services at such intervals as [Meraas] may

reasonably require.” The Atrium City Tower Contract required that

AS+GG obtain approval from Meraas for each phase, which included a

formal presentation before proceeding to the subsequent phases.

Approval clauses were stated throughout the Atrium City Tower

Contract, such as “[d]evelop the concept design schemes culminating in

a concept design approved by [Meraas],” “obtain agreement of the design

programme with [Meraas],” and “incorporate as applicable the

requirements of [Meraas] and submit to [Meraas] for approval purposes

the final version of the Detailed Design Phase documentation.”

The Atrium City Tower Contract performance standard for

completing the design was provided in section 2.3, Performance:

Consultant shall perform the services in accordance with

sound internationally recognized professional standards

and shall exercise skill, care and diligence in the discharge

of the duties agreed to be performed by it hereunder which

are reasonable to be expected from a competent consultant

experienced in carrying out services on projects similar in

size and scope as the Project.

Section 6.1, Information, Documents, and Confidentiality,

provided:

(b) In the event that the Employer terminates this

Agreement for convenience during the Concept Design

phase, the Consultant shall retain the intellectual property

and upon payment of the fees related to the Concept Design

13 The mobilization fee is an advance payment before the commencement of

services to cover initial investments, such as hiring staff, and provides a cushion in the

event that monthly payments are delayed.

[*8]

phase and in addition to the Consultant retaining the

mobilization fee, provide an indefinite royalty fee license to

the Employer to use unconditionally the intellectual

property for the completion of the Project. This Clause is

conclusive evidence of the license and no further

documentation is required for this purpose.

....

(d) Following any termination beyond the Concept

Design phase and upon payment in full for the Phase of

Services performed by the Consultant and in addition to

the Consultant retaining the mobilization fee, the

ownership of the intellectual property will vest

automatically with the Employer. The Consultant shall

have a limited license to display, present, exhibit and state

the design to be the Consultant’s work product without

obtaining the Employer’s written consent. This Clause is

conclusive evidence of the license and no further

documentation is required for this purpose.

....

(h) It is understood that the Consultant intends to

use the work for publication purposes in educational ways

to advance the knowledge of the architectural profession,

the ability to publish the work for the benefit of the

Consultant exposure, enhancement and professional

esteem and to present work in public forum/conferences

with the consent of the Employer which shall not be

unreasonably withheld.

Section 6.2(a), Confidentiality, provided:

The Consultant shall not and shall ensure that its

personnel, subcontractors, representatives and agents

shall not, without having first obtained on each occasion

the express prior written approval of the Employer, issue,

disseminate, publish, cause to publish or divulge to any

third party, alone or in conjunction with any other person,

any information, article, press release, drawing,

photograph, illustration or any other publicity relating to

this Agreement or the Project generally or use such

[*9]

information for any purpose other than performing the

Services.

The total compensation for the Atrium City Tower Contract was

a fixed-price lump-sum payment of approximately $298 million.

Schedule 3, Remuneration, section 2.1, provided that the “payments

[are] to be made monthly based on a percentage complete estimate of

services performed.” The percentage payments were broken into

Concept Design for 10%, which was approximately $29.8 million;

Schematic Design for 20%, which was approximately $59.6 million;

Design Development for 30%, which was approximately $89.4 million;

Construction/Tender Documents for 35%, which was approximately

$104.3 million; and Signing of Construction Contract for 5%, which was

approximately $14.9 million. In addition, AS+GG was paid a

Mobilization fee of $29.8 million prior to the commencement of services.

The payments were made 30 days after AS+GG submitted an invoice.

“If any item on any such invoice is disputed or subject to question by

[Meraas] that shall not entitle [Meraas] to delay payment for the

remainder of such invoices.”

Schedule 3, section 4.1, provided that for “any Additional Services

performed by [AS+GG] not forming part of the Services, [AS+GG] shall

receive a fee either on the basis of the aggregate of the scheduled hourly

billing rates [in a] method [that] is mutually acceptable and agreed to in

writing,” and under section 5, Reimbursable Expenses, AS+GG “shall be

reimbursed at actual cost on production of accounts/receipts plus 5%.”

Meraas could terminate the Atrium City Tower Contract on the

basis of material breach, insolvency, and convenience. If there was a

termination, the payment under the contract would be “for such part of

the Services already performed to the satisfaction of [Meraas] prior to

the effect of the termination.”

The Atrium City Tower Contract was never completed; therefore,

AS+GG and Meraas entered into a Deed of Settlement on December 15,

2009 (Deed of Settlement). The Deed of Settlement stated:

The remainder scope of the ASGG Services that has not

been carried out as at the date of this Deed is to be

considered as removed from the scope of ASGG Services

that the ASGG was engaged to carry out under said

Contracts and such Contracts are as from the Effective

[*10] Date of this Deed mutually agreed by both parties to be

cancelled by virtue of this Deed.

....

ASGG retains the copyright in the Projects Documents and

hereby grants Meraas a license to market the Projects

Documents and Projects on condition that ASGG’s name is

legibly on all images/models/videos of the Projects

wherever they are displayed (E.g.: website, marketing

material, poster, etc.) ASGG should be credited as:

Designer: Adrian Smith + Gordon Gill the Architecture.

The two parties agreed to final payments, and the Deed of

Settlement was governed by the laws of the U.A.E. and of Dubai.

Kingdom Tower (Project No. 210005)

AS+GG entered into a consultancy agreement with Jeddah

Economic Co. (Jeddah) on March 3, 2010 (Kingdom Tower Contract).

The Kingdom Tower Contract specified that it was governed by the laws

and regulations of the Kingdom of Saudi Arabia.

Jeddah requested that AS+GG design the Kingdom Tower to be

the tallest building in the world, over 1,001 meters in height. The

Kingdom Tower Contract required additional amenities such as a hotel,

apartments, condominiums, commercial office space, retail space, and

an observatory. AS+GG determined through wind tunnel testing that

the Kingdom Tower design was better suited by rotating the structure

15 degrees to point a corner into the wind and that sloping the structure

was better than stepping. The fact that the base of the Kingdom Tower

was to be constructed on sand presented significant issues resolved

through research regarding load carrying capacity. The Kingdom Tower

Contract was broken down into phases: Concept Design, Schematic

Design, Marketing Collateral Materials, Detailed Design, Tender and

Contract Documentation Phase, and Construction Documentation. The

Kingdom Tower Contract required Jeddah’s approval of each phase and

provided that AS+GG “[c]ommence the [phase] following receipt of

[Jeddah]’s approval of the [phase] Design.”

The Kingdom Tower Contract’s appendix A provided eight pages

of the tower site components including height details and dimensions for

retail, office space, a hotel, and an apartment. The appendix mentioned

that many of the requirements were “recommendations,” that “there

[*11] [was] flexibility in the treatment of the site within the district and

the ultimate shape of the site,” and that “[s]hould the architect wish to

diverge from the programme indicated above for functional or aesthetic

reasons, we are willing to consider modifications.” Section 2.3,

Performance, provided:

Consultant shall perform the Services strictly in

accordance with sound internationally recognized

professional standards and shall exercise all reasonable

skill, care and diligence in the discharge of the duties

agreed to be performed by it hereunder.

Section 6.1, Information Documents and Confidentiality, provided:

(b) Provided that the Employer has fulfilled its obligations

in respect of remuneration to the Consultant, all

information, data, drawings and documents developed or

prepared by the Consultant in the performance of the

Services shall forthwith become the absolute property of

the Employer. The Employer shall be entitled to use or copy

(and/or arrange for others to use or copy) such information,

data, drawings and documents for the project and for the

purposes intended and the Employer need not obtain the

Consultant’s permission to so use or copy and/or to arrange

for others to so use or copy as aforesaid.

in respect of remuneration to the Consultant, except for

standard specifications, details and designs previously

used on other projects by the Consultant the copyright in

relation to all information, data, drawings and documents

developed or prepared by the Consultant in the

performance of the Services shall forthwith vest in the

Employer and the Consultant shall not use them for any

purpose other than for the performance of the Services.

Further, section 6.2, Confidentiality, provided:

(a) The Consultant shall not and shall ensure that its

personnel, subcontractors, representatives and agents

shall not, without having first obtained on each occasion

the express prior written approval of the Employer:

[*12]

(i) issue, disseminate, publish, cause to publish or

divulge to any third party, alone or in conjunction with any

other person, any information, article, press release,

drawing, photograph, illustration or any other publicity

relating to this Agreement or the Project generally or use

such information for any purpose other than performing

the Services, or

(ii) take or permit to be taken any photograph of the

Project, the Project site or any part thereof other than

photographs required by the Consultant for record

purposes.

(b) The obligations of the Consultant under this Clause 6.2

shall continue indefinitely notwithstanding the expiration

or termination of this Agreement.

The total compensation for the architectural design services was

a fixed lump-sum payment of approximately $29 million. The fixed

lump-sum payment was divided into Concept Design for $2.2 million,

Schematic Design for $3.9 million, Marketing Collateral Materials for

$175,000, Detailed Design for $11,737,500, Tender and Contract

Documentation for $300,000, Technical Reports on Tenders Received for

$175,000, Construction Documentation for $10,287,500, and Master

Plan & Guidelines for $225,000. Section 6.1, Invoices, provided that the

fixed-price lump-sum fee was divided into monthly payments of

$1,488,888 for the next 17 months with a final payment one month after.

This payment schedule is dependent on the Consultant

maintaining the progress of the Services to the agreed

program[] over the period of eighteen (18) months. Should

it be found that the progress of the Services is not in line

with the agreed program[] then appropriate mutually

agreed adjustments to the payment schedule shall be made

so that payments reflect the actual progress of the Services

achieved.

Section 7.1, Payments, provided that Jeddah would make

payments within 30 days of the receipt of an invoice. “If any item on any

such invoice is disputed or subject to question by [Jeddah] that shall not

entitle [Jeddah] to delay payment for the remainder of such invoices.”

The Kingdom Tower Contract provided a lump-sum fee for all expenses

but allowed additional coverage for any additional trips.

[*13] Jeddah could terminate the Kingdom Tower Contract on the basis

of material breach, insolvency, and convenience. Section 10.5,

Consequences of Termination, provided that AS+GG had the “right to

payment of all remuneration which has accrued due under this

agreement up to the date of termination.” Further, section 11.1,

Payment Upon Default of Consultant, provided that the sum shall be

“for such part of the Services already performed to the satisfaction of

[Jeddah] prior to the effect of the termination.”

Kingdom Tower currently remains under construction.

Masdar HQ (Project No. 208004)

AS+GG entered into a consultancy agreement with Abu Dhabi

Future Energy Co. PJSC (Abu Dhabi Future Energy or Masdar) on June

23, 2008 (Masdar HQ Contract). The Masdar HQ Contract specified that

it was governed by and construed in accordance with the laws of

England.

Abu Dhabi Future Energy requested AS+GG to design Masdar

HQ for Masdar City, located in Abu Dhabi, U.A.E. The Masdar HQ office

site was approximately one million square feet. The design concept

included wind cones and a roof canopy that cast a natural shade over

the building and surroundings. The Masdar HQ consisted of a ground

floor designed as an open space to filter air into shaded areas created by

the 50-meter cantilever roof, an upper part of the building which

consisted of 6 floors enveloped by an exterior wall, and 11 courtyards

formed by cone structures to enhance airflow. The Masdar HQ Contract

required zero carbon emissions, minimal energy usage, and innovative

designs. Multiple research studies were conducted to complete these

building requirements including studies on thermodynamics,

geotechnics, fluid dynamics, microclimates, and plant acclimation.

The Masdar HQ Contract was broken into three phases: phase 1,

which included Concept Design and Design Development; phase 2,

which included Technical Design, Production Information, Tender

Documentation, and Tender Action; and phase 3, which included

Construction Supervision. At the end of each phase approval by Masdar

was required before AS+GG could proceed to the next phase. The

approval process required a performance evaluation for phase 1.

At the completion of Phase 1 there shall be a complete

performance evaluation of the systems to review if Project

goals are being met. The AS + GG team shall meet with

[*14] Client and appointed third party reviewers to substantiate

the design performance. The Performance evaluation shall

form the basis to proceed into Phase 2. Upon Completion of

Phase 1 the Client shall review and confirm whether or not

AS + GG is to proceed to the Phase 2 scope of work.

The Masdar HQ Contract further provided: “It is understood that

Phase 2 services shall only commence upon approval from the Client and

the Client has the right not to proceed with AS+GG for Phase 2.” The

performance standard of care was provided for in section 3.1.

The Consultant agrees to exercise diligence in the

performance of the Services consistent with the agreed

upon project schedule, and in accordance with Good

Industry Practice. If no time for performance of the

Services is specified, the consultant shall perform the

Services within a time to be specified by Masdar or, failing

that, within a reasonable time

Section 10, Intellectual Property, provided:

10.1 Masdar acknowledges that the Documents are vested,

and shall remain vested, in the Consultant or SubConsultants as appropriate. Masdar acknowledges that in

the course of providing the Services and producing any

Documents, the Consultant (and the Sub-Consultants)

may use Disclosure, products, materials and methodologies

proprietary to Masdar. The Consultant agrees that neither

it nor the Sub-Consultants shall acquire any rights in such

Disclosure, proprietary, products, materials and

methodologies, whether under this Agreement or

otherwise.

10.2 The Consultant shall, . . . grant (and shall procure that

the Sub-Contract grant) a worldwide, irrevocable royaltyfree exclusive license(s) to Masdar to copy, use and to

reproduce any or all of the Documents for any purpose

connected with the Project

....

10.3 The license(s) granted pursuant to Clause 10(2) shall

not prevent Consultant publishing articles either about the

Consultant or the development of Masdar city

[*15]

....

10.4 Notwithstanding the Intellectual Property rights in

the Documents remains vested in the Consultant, the

Consultant shall not, without prior written consent of

Masdar such consent being within the sole discretion of

Masdar, be entitled to use the Documents so as to design

any building or structure similar in overall design and

appearance to Masdar city, nor shall it be entitled to use

the Documents for any purpose connected with Masdar city

other than for the purpose of this Agreement . .

In the defined terms section of the Masdar HQ, “Contract

Documents” means all “drawings, models, plans, elevations, sections,

perspectives, specifications, schedules, designs and any other works and

documentation produced as part of the services.”

The payment was a fixed-price lump sum of $18.7 million. The

payment schedule required that “AS+GG shall be paid monthly upon

provision of services on the basis of a percentage complete basis.” The

payment phases included the Mobilization Fee of 10%, Concept of 10%,

Design Development of 25%, Technical Design of 25%, and Production

Information, Tender Documentation, and Tender Action of 30%. The

payment schedule for construction supervision provided that “AS+GG

shall be paid monthly, within 30 days of invoicing, according to the

schedule of monthly construction supervision rates . . . . AS+GG shall be

entitled to stop work should payment not be made by the Client

according to the Payment Schedule.” The Masdar HQ Contract also

provided that various reimbursable expenses were to be given to AS+GG

along with additional compensation for any additional services required.

Masdar could terminate the Masdar HQ Contract under section

12, Termination, on a 14-day written notice for breach of any term or

condition and if AS+GG were to enter into liquidation. If there was a

termination, under section 12.3 “Masdar shall pay [AS+GG] the

proportion of the price payable for the Services as relates to the work

properly and satisfactorily carried out or where the Services are charged

on a time basis, for the time properly and necessarily spent on the

Services prior to the termination.”

The Masdar HQ was never completed. Masdar and AS+GG

entered into a Settlement Agreement on May 24, 2011 (Masdar

Settlement Agreement). The parties agreed to a settlement amount to

[*16] satisfy the payment obligations of the Masdar HQ Contract. The

Masdar Settlement Agreement “acknowledge[d] Masdar’s perpetual

license and right to use the Intellectual Property pursuant to Clause

10.2 of the Consultancy Agreement.” Further, the Masdar Settlement

Agreement determined that “[f]or the avoidance of doubt, the [original

contract] remains in full force and effect subject to the terms of this

Settlement Agreement and any amendments or variations to the

[original contract].”

Atrium City Masterplan (Project No. 207014)

AS+GG entered into a consultancy agreement with Meraas on

December 23, 2007 (Atrium City Masterplan Contract). The Atrium City

Masterplan Contract specified that it would be governed by the laws and

regulations of the Emirate of Dubai.

The Atrium City Masterplan was in the Emirate of Dubai. The

Atrium City Masterplan Contract required retail, residential areas, an

office, a hotel, transit, and a water taxi station. It also required that it

would be built in a tremendously positive and sustainable manner.

Meraas requested four major towers in the area and that two of the

towers be designed over 470 meters in height to complement the Burj

Khalifa. The total land area was approximately 5.82 million square feet.

The Atrium City Masterplan Contract was broken into three

stages. At the end of each stage there was a “Presentation and Client

Review & approval of Stage [number].” Section 1.5 provided that AS+GG

“shall not proceed with any ‘successor’ stage before [Meraas] has

approved the deliverables of the relevant ‘predecessor’ stage.” However,

AS+GG “will not be required to submit a Performance Guarantee.”

The Atrium City Masterplan Contract section for copyright

provided:

AS+GG shall retain the copyright of their work and upon

payment of all fees when due shall grant the Client a

license to reproduce the work in connection with the

completion of the Project subject to the following

conditions. Should AS+GG’s services not proceed past

Concept Design or should the client hire another architect

to complete the Project past Concept Design AS+GG shall

retain the ownership and copyright of all work produced

and the Client may not use AS+GG documents for the

Project. Once a license is granted to the Client to use the

[*17] documents, the documents shall not be used in connection

with any other project by either AS+GG or the Client.

The Atrium City Masterplan Contract had a fixed-price lumpsum fee of $750,000. The payments were to be made at a presentation

meeting for each stage, and AS+GG was required to submit an invoice

at least seven days before the meetings. The payment schedule included

a Mobilization Fee of 20% for $150,000, stage 1 of 26% for $195,000,

stage 2 of 27% for $202,500, and stage 3 of 27% for $202,500. The Atrium

City Masterplan Contract provided for reimbursable travel expenses,

and an “additional services fee [that] shall be a mutually agreeable lump

sum or on the basis of the AS+GG hourly billing rates” for any additional

services required beyond the contract.

The Atrium City Masterplan Contract provided that “[Meraas]

may instruct you to cease work at any time at any stage of the Services;

subject only to reimbursement for each completed and approved stage of

Services, an agreed percentage complete for any uncompleted stage of

Services and reimbursable expenses as defined in the Proposal.”

The Atrium City Masterplan was never completed. AS+GG and

Meraas entered into a Deed of Settlement on December 15, 2009—the

same Deed of Settlement as seen in the Atrium City Tower Contract.

AS+GG agreed to withdraw any claims for further payments by Meraas

related to the Atrium City Masterplan Contract, and Meraas agreed to

release AS+GG from any further obligations. The two parties agreed to

final payments.

Plot 14 (Project No. 206003)

AS+GG entered into a consultancy agreement with Emaar

Properties PJSC (Emaar Properties) in June 2007 (Plot 14 Contract).

The Plot 14 Contract specified that it would be governed by the laws and

regulations of the Emirate of Dubai.

The objective for Plot 14 was to create unique architecture that

reflected modern Islamic architecture and took advantage of its prime

location—which is opposite the Burj Khalifa. Emaar Properties wanted

a mixed-use tower that was inspired by the Rockefeller Center in New

York City. Plot 14 was located in the Burj District in Dubai, which

included the Burj Khalifa and the Dubai Mall. The Plot 14 design was

centered around a large lake and an island park which were tied

together by a boulevard that circled the development. It included a mix

of offices, residential plots, and luxury hotels.

[*18] The Plot 14 Contract required deliverables that included a main

tower with two lower level towers, a plaza, elements of Islamic

character, a site that took advantage of its location, integrated facilities,

and vehicle access. The Plot 14 Contract required specific dimensions for

the residential areas and provided that the design satisfy certain styles

including an “architectural statement of quality & stature that embodies

a luxury destination,” “[a]ttention to detail, using durable and easy to

maintain materials is essential,” a main lobby that is “[r]ichly yet

decorated to reflect the characteristics of a 5-star hotel,” and an interior

mood that “[s]hould match the architectural style.” AS+GG conducted

research to design a tower that employed solar diagrams to optimize

sunshades and facade treatments tailored to different zones for optimal

solar heat control.

The Plot 14 Contract was divided into six phases: Preliminary

Study; Concept Design; Schematic Design; Detailed Design; Tender,

Contract, and Construction Documentation; and Technical Reports on

Tenders Received. At the end of each phase AS+GG had to submit the

deliverables for approval by Emaar Properties. The subsequent phase

could not be commenced until “receipt of [Emaar Properties’] approval.”

The performance standard in section 2.3 provided that “[AS+GG] shall

perform the Services strictly in accordance with sound internationally

recognized professional standards and shall exercise reasonable skill,

care and diligence in the discharge of the duties agreed to be performed

by it hereunder.”

The Plot 14 Contract section 6.1, Information, Documents and

Confidentiality, provided:

(b) All information, data, drawings and documents

developed or prepared by the Consultant in the

performance of the Services shall forthwith become the

absolute property of the Employer. The Employer shall be

entitled to use or copy (and/or arrange for others to use or

copy) such information, data, drawings and documents for

the Project and for the purpose for which they are intended

and the Employer need not obtain the Consultant’s

permission to so use or copy and/or to arrange for others to

so use or copy as aforesaid.

previously used on other projects by the Consultant the

[*19] documents developed or prepared by the Consultant in the

performance of the Services shall forthwith vest in the

Employer and the Consultant shall not use them for any

purpose other than for the performance of the Services.

Further, section 6.2, Confidentiality, provided:

(a) The Consultant shall not and shall ensure that its

personnel, subcontractors, representatives and agents

shall not, without having first obtained on each occasion

the express prior written approval of the Employer:—

(i) issue, disseminate, publish, cause to publish or

divulge to any third party, alone or in conjunction with any

other person, any information, article, press release,

drawing, photograph, illustration or any other publicity

relating to this Agreement or the Project generally or use

such information for any purpose other than performing

the Services, or

(ii) take or permit to be taken any photographs of the

Project, the Project site or any part thereof other than

photographs required by the Consultant for record

purposes.

(b) The obligations of the Consultant under this Clause 6.2

shall continue indefinitely notwithstanding the expiration

or termination of this Agreement.

The Plot 14 Contract was a fixed lump-sum payment of $10.23

million. The payment was broken into Preliminary Study for $306,900;

Concept Design for $716,100; Schematic Design for $3,580,500; Detailed

Design for $4,910,400; Tender, Contract, and Construction

Documentation for $511,500, and Technical Reports on Tenders

Received for $204,600. Section 8.1, Payment, provided that Emaar

Properties was required to make payments within 30 days of receipt of

an invoice. Further, “[i]f any item on any such invoice is disputed or

subject to question by [Emaar Properties], this shall not entitle [Emaar

Properties] to delay payment or remainder of such invoices.”

Section 4, Reimbursable Expenses, provided that Emaar

Properties would reimburse AS+GG for any reasonably incurred

expenses. If AS+GG had to work overtime or on public holidays, Emaar

Properties agreed to pay additional reasonable compensation.

[*20] Emaar Properties could terminate the Plot 14 Contract on the

basis of material breach, insolvency, and convenience. If there was such

a termination section 11.1 provided that AS+GG was entitled to

payment only for “part of the Services already performed to the

satisfaction of [Emaar Properties] prior to the effect of the termination.”

The Plot 14 Contract was not fully completed, and in June 2009

Emaar Properties and AS+GG exchanged emails to propose a final

settlement. On October 10, 2010, AS+GG sent an official letter to

confirm acceptance of the Plot 14 final settlement for an agreed-upon

amount and discharge from any further work.

Plot R2 (Project No. 207016)

AS+GG entered into a consultancy agreement with ETA Star

Property Developers LLC (ETA Star Property) in December 2007 (Plot

R2 Contract). The Plot R2 Contract specified that it would be governed

by the laws and regulations of the Emirate of Dubai.

The Plot R2 was a 40-story residential tower designed as a highperformance, sustainable building that included residential and retail

development. The total construction area was 1,340,442 square feet, and

it was located within Dubai Maritime City Development in Dubai. The

Plot R2 Contract schedule 1, Project Details, and schedule 2, Scope of

Services, within approximately ten pages provided that AS+GG was to

produce design deliverables for the 40-story residential tower that

included a basement with above-grade parking levels, retail, health

clubs, office spaces, and a residential area with a specified number of

bedroom units. AS+GG conducted research studies regarding

implementing wind turbines into the tower to generate energy and

reduce the building’s energy demand.

The Plot R2 Contract was broken into five phases: Concept

Design; Schematic Design; Design Development; Construction

Documents; and Tender, Contract, and Award. Each phase required

approval by ETA Star Property before AS+GG could proceed to the next

phase. Section 2.3, Performance, provided that “[t]he Consultant shall

perform the Services in accordance with sound internationally

recognized professional standards and shall exercise reasonable skill,

care and diligence in the discharge of the duties agreed to be performed

by it hereunder.”

The Plot R2 Contract section 6.1, Information, Documents and

Confidentiality, provided:

[*21] (b) The consultant shall retain the copyright of their work

and upon payment of all fees when due shall grant the

Employer a license to reproduce the work in connection

with the completion of the Project subject to the following

conditions. Should the Consultant’s services not proceed

past Concept Design or should the Employer hire another

architect to complete the Project past Concept Design the

consultant shall retain the ownership and copyright of all

work produced and the Employer may not use documents

for the Project. Once a license is granted to the Client to

use the documents, the documents shall not be used in

connection with any other project by either the Consultant

or the Client.

The Plot R2 Contract was a fixed-price lump sum of $7.5 million,

which consisted of precontract services of $5.625 million and

Construction Supervision of $1.875 million. In addition, AS+GG was

paid a Mobilization fee of $750,000 prior to the commencement of

services. The precontract services were broken into Concept Design of

10% for $562,500; Schematic Design of 15% for $843,750; Design

Development of 27.5% for $1,546,875; Construction Documents of 45%

for $2,531,250; and Tender, Contract, and Award of 2.5% for $140,625.

Schedule 4, section 8.1, Payments, provided that AS+GG was to submit

an invoice to ETA Star Property and within 30 days of receipt of the

invoice, a payment would be made. “If any item on any such invoice is

disputed or subject to question by [ETA Star Property], this shall not

entitle [ETA Star Property] to delay payment or remainder of such

invoices.”

Reimbursable Expenses, section 4, provided that AS+GG would

be reimbursed for reasonably incurred expenses such as travel, business

visits, and translation of documents into other languages. If AS+GG was

required to work overtime or on public holidays, the Plot R2 Contract

provided that ETA Star Property “shall pay to [AS+GG] reasonable

additional remuneration in relation thereto as agreed between the

parties or according to Dubai Law.”

ETA Star Property could terminate the Plot R2 Contract on the

basis of material breach, insolvency, and convenience. Section 11.1

provided that AS+GG would be entitled to payment for “part of the

Services already performed prior to the effect of the termination.”

[*22] The Plot R2 Contract was never completed, and a settlement was

never reached.

IV.

Tax Reporting

AS+GG engaged alliantgroup, LP, to identify and calculate

possible research credits under section 41 on the basis of research

conducted during tax years 2007 and 2008. AS+GG subsequently

engaged Warner Robinson, LLC, to identify and calculate possible

research credits under section 41 on the basis of research conducted

during tax years 2009 and 2010. AS+GG claimed research credits for

research activities pursuant to section 41 for the tax years at issue, and

the Partners claimed the research credits attributable to their

distributive shares.

AS+GG claimed a research credit on its 2008 Form 1065, U.S.

Return of Partnership Income, of $3,134,318. At the time of AS+GG’s

filing, Mr. Smith owned 60% of AS+GG, Mr. Gill owned 22.5%, and Mr.

Forest owned 17.5%. On the basis of the ownership amounts Mr. Smith

claimed a research credit of $1,880,592, Mr. Gill claimed a research

credit of $705,221, and Mr. Forest claimed a research credit of $548,505.

AS+GG’s reported average annual gross receipts—as defined in section

41(c)(1)(B)—for tax year 2008 were $2,403,450. In 2008 AS+GG

deducted guaranteed payments to Messrs. Smith, Gill, and Forest in the

respective amounts of $970,126, $855,994, and $788,621.

AS+GG’s total taxable Ordinary Business Income (OBI) for 2008

was $56,976,935. The Partners were issued individual Schedules K–1,

Partner’s Share of Income, Deductions, Credits, etc., for the 2008 tax

year which reported their shares of OBI.

The 2008 gross salaries originally reported for Messrs. Smith,

Gill, and Forest were the respective amounts of $30,249,440,

$11,799,698, and $9,286,873. AS+GG originally claimed wage-related

qualified research expenditures (Wage QREs) for tax year 2008

attributable to Messrs. Smith, Gill, and Forest for $16,231,850,

$5,883,329, and $2,574,321, respectively. The parties stipulated in

advance of trial that Messrs. Smith, Gill, and Forest devoted 53.66%,

[*23] 45%, 14 and 27.72%, respectively, of their time to qualified services

during tax year 2008. 15

AS+GG claimed a research credit on its Form 6765, Credit for

Increasing Research Activities, attached to the 2009 Form 1065, of

$557,455. At the time of AS+GG’s filing, Mr. Smith owned 60% of

AS+GG, Mr. Gill owned 22.5%, and Mr. Forest owned 17.5%. On the

basis of the ownership amounts Mr. Smith claimed a research credit of

$334,474, Mr. Gill claimed a research credit of $125,427, and Mr. Forest

claimed a research credit of $97,554. AS+GG’s reported average annual

gross receipts—as defined in section 41(c)(1)(B)—for tax year 2009 were

$39,127,389.

AS+GG claimed a research credit on its 2010 Form 1065 of

$515,463. At the time of AS+GG’s filing Mr. Smith owned 55% of

AS+GG, Mr. Gill owned 25%, and Mr. Forest owned 20%. On the basis

of the ownership amounts Mr. Smith claimed a research credit of

$283,506, Mr. Gill claimed a research credit of $128,865, and Mr. Forest

claimed a research credit of $103,092. AS+GG reported average annual

gross receipts—as defined in section 41(c)(1)(B)—for tax year 2010 of

$35,705,978.

Notices of Deficiency and Petitions

On April 7, 2017, respondent issued to Adrian D. and Nancy W.

Smith (collectively, Smiths) a Notice of Deficiency for tax years 2005,

2006, 2008, and 2010 determining deficiencies of $465,169, $150,741,

$1,704,075, and $145,057. On April 7, 2017, respondent issued to

Carlisle G. and Wendy S. Gill (collectively, Gills) a Notice of Deficiency

for tax years 2008 and 2010 determining deficiencies of $643,178 and

$40,784. On April 7, 2017, respondent issued to Robert J. Forest and

Susan N. Gaspari-Forest (collectively, Forests) a Notice of Deficiency for

tax years 2005 through 2008 determining deficiencies of $19,993,

$34,577, $33,129, and $515,022.

14 The percentage of time devoted to qualified research services during tax year

2008 was originally 49.86%, but the parties stipulated a reduced amount of time of

45%—which explains the discrepancies in the claimed Wage QREs.

15 Respondent stipulates total reasonable compensation for tax year 2008

allocable to Messrs. Smith, Gill, and Forest of $2.32 million, $1.807 million, and $1.474

million, respectively.

[*24] Petitioners timely filed independent Petitions with this Court

which were consolidated for all purposes on February 28, 2018.

VI.

Experts

Brent M. Longnecker

Petitioners offered expert witness testimony from Brent M.

Longnecker. Mr. Longnecker received a bachelor’s degree in business

administration and a master’s degree in business administration from

the University of Houston. He is the chairman and chief executive officer

of Longnecker & Associates. He has the following certifications and

licenses: (1) Compensation Committee Certification, (2) Certified

Compensation Professional, (3) Certified Benefits Professional,

(4) Global Remuneration Professional, (5) Certified Executive

Compensation Professional, and (6) Compensation Analyst Credential.

He was accepted by the Court as an expert in reasonable compensation.

Mr. Longnecker’s expert opinion evaluates the incumbent’s (or

employee) career stage and the relative performance of that employee to

determine a specific market percentile using his own proprietary

matrix, referred to as the Longnecker Percentile Identification Matrix

(LPIM). According to Mr. Longnecker, the intersecting values of these

two analyses dictates the market percentile for assessing reasonable

compensation of an employee.

Under this approach Mr. Longnecker concluded the individual

reasonable compensation for Messrs. Smith, Gill, and Forest for 2008

was approximately $23.6–27.2 million, $11.7 million, and $9.5 million,

respectively.

Joseph J. Ruble

Respondent offered expert testimony of Joseph J. Ruble. Mr.

Ruble received a bachelor’s degree in accountancy from the University

of Illinois, Urbana-Champaign, and a master’s degree in business

administration with a concentration in finance from DePaul University.

He is the managing director at Caliber Advisors, Inc. Mr. Ruble is a

Chartered Financial Analyst and an Accredited Senior Appraiser in

Business Valuation from the American Society of Appraisers and is a

member of the American Institute of Certified Public Accountants and

the Illinois Society of Certified Public Accountants. The Court

recognized Mr. Ruble as an expert in reasonable compensation.

[*25] Mr. Ruble used both the independent investor test 16 and the

multifactor test 17 to determine the reasonable compensation of the

Partners. Mr. Ruble opined that the independent investor test should

not be applied under a section 174(e) analysis. However, Mr. Ruble then

does apply the independent investor test, and he reversed

approximately $3.1 million of expenses related to the tax credit analysis

to compute a normalized operating income. Then to account for personal

taxes on AS+GG’s distributive share of income, he assumed hypothetical

distributions were made by AS+GG to cover the tax liabilities of the

Partners at the marginal effective tax rate of 36.95%.

After the adjustments Mr. Ruble concluded that the ending

adjusted equity balance of AS+GG was $2.16 million. He then

determined that the average equity of AS+GG (the average of the

beginning and ending equity balances) was $545,000. He concluded that

the ratio of the adjusted profit to the average equity balance would

result in a return on equity of 939% to the Partners. He concluded on

the basis of the mathematical results of the independent investor test

that the Partners’ compensation, in total, was not unreasonable.

Mr. Ruble also used the multifactor analysis to determine the

reasonableness of the compensation claimed by AS+GG. The factors Mr.

Ruble considered under the multifactor analysis included: (1) type and

extent of services rendered; (2) amount of compensation received by the

Partners in previous years; (3) prevailing rates of compensation for

comparable positions in comparable concerns; (4) the Partners’

qualifications and earning capacity; (5) size and complexities of the

business; (6) prevailing general economic conditions; and (7) consistency

of AS+GG’s salary policy in relation to all employees. Mr. Ruble

concluded that on the basis of these factors—given that the Partners

spent 100% of their time devoted to developing or supervising the

development of architectural designs—the reasonable fair market

16 The independent investor test is “whether an inactive, independent investor

would be willing to compensate the employee as he was compensated.” Elliotts, Inc. v.

Commissioner, 716 F.2d 1241, 1245 (9th Cir. 1983), rev’g T.C. Memo. 1980-282.

17 The multifactor test, articulated in Mayson Mfg. Co. v. Commissioner, 178

F.2d 115, 119 (6th Cir. 1949), includes weighing the following factors: (1) the

employee’s qualifications; (2) the nature, extent, and scope of the employee’s work;

(3) the size and complexities of the business; (4) a comparison of salaries paid with

gross income and net income; (5) the prevailing general economic conditions;

(6) comparison of salaries with distributions to stockholders; (7) the prevailing rates of

compensation for comparable positions in comparable concerns; and (8) the salary

policy of the taxpayer as to all employees. See Suder v. Commissioner, T.C. Memo.

2014-201, at *64.

[*26] compensation that could be claimed by Messrs. Smith, Gill, and

Forest for 2008 was approximately $2.3 million, $1.807 million, and

$1.474 million, respectively.

OPINION

Jurisdiction and Burden of Proof

The Commissioner’s determination set forth in a Notice of

Deficiency is generally presumed correct, and the taxpayer bears the

burden of proving that the determination is in error. Rule 142(a)(1);

Welch v. Helvering, 290 U.S. 111, 115 (1933). “This presumption imposes

upon the taxpayer the burden of proving that the [determination] is

erroneous.” Pittman v. Commissioner, 100 F.3d 1308, 1313 (7th Cir.

1996) (quoting Gold Emporium, Inc. v. Commissioner, 910 F.2d 1374,

1378 (7th Cir. 1990), aff’g T.C. Memo. 1988-559), aff’g T.C. Memo. 1995243. The presumption is not irrebuttable. Presumptions are not

recognized when determinations are shown to be “without rational

foundation” or “arbitrary and erroneous,” but “[a]s long as the

procedures used and the evidence relied upon by the government to

determine the [determination] had a rational foundation, the inquiry

focuses on the merits of the tax liability, not on IRS procedures.” Id.

(quoting Ruth v. United States, 823 F.2d 1091, 1094 (7th Cir. 1987)).

Therefore, a taxpayer can rebut the presumption of correctness and shift

the burden to the Commissioner, but “the taxpayer must demonstrate

that the Commissioner’s deficiency [determination] lacks a rational

foundation or is arbitrary and excessive.” Id.

Petitioners contend that there is a discrepancy between their tax

returns and the Statutory Notices of Deficiency (SNOD). Therefore,

petitioners argue that the SNODs should not be afforded any

presumption of correctness. However, petitioners offer no evidence that

the determinations were without rational foundation, arbitrary, or

erroneous.

Petitioners argue that the math in the SNODs is inaccurate on

the basis of the tax returns filed and that the SNODs disallow a research

credit different from what the parties agreed to in the Stipulations.

However, the differences between the SNODs and the tax returns for

the originally claimed research credits were based on an undisputed

change in accounting methods made during the IRS examination which

petitioners are not challenging in these consolidated cases. Accordingly,

we do not find there to be a discrepancy between petitioners’ returns and

[*27] the SNODs. The difference is attributed to an undisputed

adjustment respondent made in audit.

Respondent has presented evidence of a Certificate of Official

Record and Form 4340, Certificate of Assessments, Payments, and

Other Specified Matters, for each tax year at issue. The taxable income

reported for the tax years at issue on Form 4340 matches the taxable

income for each of the tax years at issue shown on Form 5278,

Statement—Income Tax Changes, attached to the SNODs. The Seventh

Circuit held that “Certificates of Assessments and Payments establish

the fact of assessment and carry with them a presumption of validity

and that the assessments they reflect were properly made.” Hefti v. IRS,

8 F.3d 1169, 1172 (7th Cir. 1993). Petitioners failed to present evidence

to demonstrate that the assessments lack a rational foundation or are

arbitrary or erroneous. Accordingly, the SNODs are presumed correct.

Credits are a matter of legislative grace, and taxpayers must

demonstrate their entitlement to credits claimed. See Feigh v.

Commissioner, 152 T.C. 267, 270 (2019) (citing INDOPCO, Inc. v.

Commissioner, 503 U.S. 79, 84 (1992)); see also United Stationers, Inc.

v. United States, 163 F.3d 440, 443 (7th Cir. 1998). Petitioners have not

established that they meet the requirements of section 7491(a) as

necessary to shift the burden of proof to respondent on any factual

issues. Accordingly, the burden of proof remains with petitioners.

II.

Funded Research Exclusion

Section 38 provides taxpayers with a current-year business credit

that includes a credit for research expenses as determined under section

41(a). To constitute qualified research, a research activity must satisfy

a four-part statutory test. I.R.C. § 41(d)(1). If the research activities

corresponding to a particular product as a whole fail to satisfy the fourpart test, we may re-apply the test to subsets of the product. See Treas.

Reg. § 1.41-4(b)(2) (providing the “shrinking-back rule”). Respondent

does not contest that AS+GG’s research in connection with the Projects

satisfies the four tests enumerated under section 41(d)(1). Respondent,

rather, contends the Projects are otherwise excluded from qualified

research under section 41(d)(4)(H).

Section 41(d)(4)(H) excludes from the definition of qualified

research “[a]ny research to the extent funded by any grant, contract, or

otherwise by another person (or governmental entity).” Section 41 does

not define the term “funded.” To determine the extent to which research

[*28] is funded, the Department of the Treasury (Treasury) directs the

reader to Treasury Regulation § 1.41-4A(d). See Treas. Reg. § 1.414(c)(9). This Treasury regulation provides two relevant factors in

determining whether research is funded. See generally Treas. Reg.

§ 1.41-4A(d).

First, “[a]mounts payable under any agreement that are

contingent on the success of the research and thus considered to be paid

for the product or result of the research” are not treated as funded. See

Treas. Reg. § 1.41-4A(d)(1); see also Fairchild Indus., Inc. v. United

States, 71 F.3d 868, 870 (Fed. Cir. 1995) (describing exclusion as

allocating the credit “to the person that bears the financial risk of failure

of the research”). Alternatively, if the taxpayer is paid for the results of

the research regardless of its success, then the research is funded. See

Treas. Reg. § 1.41-4A(d)(1).

Second, research is funded if the taxpayer performing research

for another person “retains no substantial rights” in the research. Treas.

Reg. § 1.41-4A(d)(2).

If a taxpayer performing research for another person

retains no substantial rights in research under the

agreement providing for the research, the research is

treated as fully funded for purposes of section 41(d)(4)(H),

and no expenses paid or incurred by the taxpayer in

performing the research are qualified research expenses.

For example, if the taxpayer performs research under an

agreement that confers on another person the exclusive

right to exploit the results of the research, the taxpayer is

not performing qualified research because the research is

treated as fully funded under this paragraph (d)(2).

Incidental benefits to the taxpayer from performance of the

research (for example, increased experience in a field of

research) do not constitute substantial rights in the

research.

Id. The U.S. Court of Appeals for the Federal Circuit has determined

that these regulatory elements interact. See Lockheed Martin Corp. v.

United States, 210 F.3d 1366, 1374–75 (Fed. Cir. 2000).

If the taxpayer does not have the right to use or exploit the

results of the research, its expenditures are not entitled to

the tax credit regardless whether there is an agreement

[*29] that the research will be paid for only if successful, and

regardless whether the taxpayer receives some “incidental

benefit” such as increased experience.

Id. To determine whether the Projects were funded, we are to examine

the terms of the parties’ contractual arrangements. See Tangel v.

Commissioner, T.C. Memo. 2021-1, at *11; Treas. Reg. § 1.41-4A(d)(1)

(“All agreements (not only research contracts) entered into between the

taxpayer performing the research and other persons shall be considered

in determining the extent to which the research is funded.”); see also

Lockheed Martin, 210 F.3d at 1376 (stating that application of the

exclusion “must be determined by reference to the research

agreements”).

The Treasury regulation equally requires that the taxpayer

retain substantial rights in the research performed. See Treas. Reg.

§ 1.41-4A(d)(3). Treasury Regulation § 1.41-4A(d)(3)(i) provides:

If a taxpayer performing research for another person

retains substantial rights in the research under the

agreement providing for the research, the research is

funded to the extent of the payments (and fair market

value of any property) to which the taxpayer becomes

entitled by performing the research. A taxpayer does not

retain substantial rights in the research if the taxpayer

must pay for the right to use the results of the research.

Except as otherwise provided in paragraph (d)(3)(ii) of this

section, the taxpayer shall reduce the amount paid or

incurred by the taxpayer for the research that would, but

for section 41(d)(4)(H), constitute qualified research

expenses of the taxpayer by the amount of funding

determined under the preceding sentence.

Consequently, if a taxpayer were to retain the right to use the

results of the research in carrying on its business but did not satisfy the

contingent on success element—namely the agreement calls for the

taxpayer to be paid regardless of the outcome of the research—the

taxpayer remains eligible to claim a reduced amount of qualified

research expenses. See Treas. Reg. § 1.41-4A(d)(3)(ii), (6) (ex. 1).

III.

Loper Bright Analysis

A precise definition of the funded research exclusion, created by

Congress in section 41(d)(4)(H), is not found in the Code. Rather, the

[*30] funded research exclusion is detailed in the applicable Treasury

regulations. See Treas. Reg. § 1.41-4(c)(9) (“Qualified research does not

include any research to the extent funded by any grant, contract, or

otherwise by another person (or governmental entity). To determine the

extent to which research is so funded, § 1.41-4A(d) applies.”).

Petitioners argue that under the Supreme Court’s landmark

decision in Loper Bright, Treasury Regulation § 1.41-4A(d) is no longer

the single best reading of section 41(d)(4)(H). See Loper Bright Enters.

v. Raimondo, 144 S. Ct. 2244 (2024). Under today’s precedent a

deferential and permissible interpretation of the statute no longer

prevails simply because Treasury offers it to resolve a perceived

ambiguity. See Varian Med. Sys., Inc. & Subs. v. Commissioner, 163 T.C.

76, 105 (2024) (citing Loper Bright, 144 S. Ct. at 2266, 2273).

Petitioners argue that the best reading of section 41(d)(4)(H) and

the determination of the meaning of “funded research” should be based

on its ordinary meaning found in a dictionary, namely “a sum of money

set apart for a specific objective.” Petitioners argue that canons of

interpretation support this reading of the statute. Petitioners also

contend that the regulatory two-element requirements found in

Treasury Regulation § 1.41-4A(d) are superfluous, not found in the Code,

and therefore invalid. In further support of their statutory

interpretation, petitioners contend that this Court should not defer to

prior cases relying on Treasury Regulation § 1.41-4A(d) since none of

these decisions performed an analysis of the statutory text now required

under Loper Bright. We disagree with petitioners’ statutory argument

as the term “funded” does not necessarily require that financial support

be a specific sum that is “set apart for a specific objective.” For it is

likewise easy to conclude that the funded research exclusion is meant

more broadly to include any research that has been provided with

financial resources or monetary support. 18

Respondent contends that the single best way to establish the

meaning of the term “funded” in section 41(d)(4)(H) is to consider the

terms of the agreements between the parties to determine whether

payment received is contingent on the success of the research and

whether AS+GG retains substantial rights in the research. Further, in

response to petitioners’ challenge to Treasury Regulation § 1.41-4A(d),

18 Needless to say, petitioners’ proposed definition of “funded” is not the only

meaning of the word. For instance, in casual conversation one might refer to a spoiled

child as someone who is “funded” by his parents, or to a local nonprofit theatre as being

“funded” by one or more generous donors.

[*31] respondent cites Skidmore v. Swift & Co., 323 U.S. 134 (1944), and

its factors weighing in favor of Treasury’s reading of the Code and puts

forth numerous factors giving rise to the “power to persuade.” These

factors include how Treasury first proposed the applicable regulations

in 1983, in response to congressional concerns, and finalized the

Treasury regulations in 1989 which have since provided consistent

guidance to taxpayers for some 35 years.

Loper Bright, 144 S. Ct. at 2273, states:

By [overruling Chevron U.S.A. Inc. v. Natural

Resources Defense Council, Inc., 467 U.S. 837 (1984)], . . .

we do not call into question prior cases that relied on the

Chevron framework. The holdings of those cases that

specific agency actions are lawful . . . are still subject to

statutory stare decisis despite our change in interpretive

methodology.

Thus, prior decisions have directly addressed the applicability of

these Treasury regulations. In Fairchild Industries, 71 F.3d at 870, the

Federal Circuit specifically analyzed a taxpayer’s challenge to the

“contingent on success” element by looking to congressional intent. It

found that Congress’s overarching purpose was to “provide an incentive

to American industry to invest in research.” Id. Moreover, it determined

that the “regulations implement allocation of the tax credit to the person

that bears the financial risk of failure of the research to produce the

desired product or result.” Id.; see also Geosyntec Consultants, Inc. v.

United States, 776 F.3d 1330, 1335–36 (11th Cir. 2015) (“The

regulations allocate the research tax credit to the entity or person that

bears ‘the financial risk of failure of the research to produce the desired

product or result.’” (quoting Fairchild Indus., 71 F.3d at 870)); Staff of

J. Comm. on Tax’n, 97th Cong., General Explanation of the Economic

Recovery Tax Act of 1981, at 120–21 (J. Comm. Print 1981).

The taxpayers in Lockheed Martin Corp. v. United States, 42 Fed.

Cl. 485, 495 (1998), rev’d, 210 F.3d 1366 (Fed. Cir. 2000), disputed the

source of the substantial rights requirement of section 41 under

Chevron. 19 Thus, the U.S. Court of Federal Claims under Lockheed

Martin already addressed the validity of the “substantial rights”

requirement:

19 This issue was not raised again on appeal.

[*32] The court concludes that the Secretary’s incorporation of a

substantial rights inquiry in Treas. Reg. § 1.41-5(d) is a

reasonable construction of I.R.C. § 41(d)(4)(H)’s funded

exclusion. That is because, as defendant correctly argues,

there is a clear connection between payment for research

and the allocation of rights to research results. . . .

Therefore, the court declines to invalidate Treas. Reg.

§ 1.41-5(d)’s definition of “funded” research as

incorporating a “substantial rights” element.

Id. 20 The Federal Circuit has reaffirmed both the contingent on success

and the substantial rights requirements.

These regulations imply two scenarios in which the

taxpayer’s research will be considered “funded” by another

person. The first is when the parties agree that payment

shall not be contingent on the success of the research. If the

taxpayer’s research will be paid for by another person

whether or not the research succeeds, the research is

funded and the expenditures are not entitled to the tax

credit. In contrast, if the taxpayer will be paid only if it

succeeds in its research for the other party, the taxpayer's

research will not be considered funded. See Fairchild

Indus., Inc. v. United States, 71 F.3d 868, 873

(Fed.Cir.1995). “The statute is designed so that those who

will bear the risk of financial loss can include the tax credit

in their calculation of investment risk.” Id. at 874.

The second scenario in which a taxpayer’s research

can be considered “funded” or “paid for” is when the

taxpayer agrees to perform research for another person

without retaining “substantial rights” to its research—

when the person for whom the research is performed has

“the exclusive right to exploit the results of the research”

and the taxpayer “must pay for the right to use the results

20 Treasury initially promulgated regulations addressing “qualified research”

in 1989. See T.D. 8251, 1989-1 C.B. 3. The regulation governing “funded research”

originally appeared as Treasury Regulation § 1.41-5(d), which was captioned

“Qualified research for taxable years beginning before January 1, 1986.” See T.D. 8251,

1989-1 C.B. at 9-10. As part of revised regulations issued in 2000, Treasury

redesignated Treasury Regulation § 1.41-5 as Treasury Regulation § 1.41-4A. See T.D.

8930, 2001-1 C.B. 433, 449. Although Treasury Regulation § 1.41-4A retains its

original caption, paragraph (d) thereof is applicable for the tax years at issue.

[*33] of the research.” See Treasury Reg. § 1.41(5)(d)(2) and —

(3). If the taxpayer does not have the right to use or exploit

the results of the research, its expenditures are not entitled

to the tax credit regardless whether there is an agreement

that the research will be paid for only if successful, and

regardless whether the taxpayer receives some “incidental

benefit” such as increased experience. On the other hand,

it follows that as long as exclusive rights are not vested in

“another person,” the taxpayer may retain substantial

rights. Treasury Reg. § 1.41-5(d) thus implements the

statute’s purpose of giving a tax credit only to those

taxpayers who themselves take on the financial burden of

research and experimentation to develop new techniques,

equipment, and products that they can use in their

businesses.

Lockheed Martin, 210 F.3d at 1374–75 (footnote omitted). In addition to

the Federal Circuit, other courts and our own precedent relied on

Treasury Regulation § 1.41-4A(d). See Meyer, Borgman & Johnson, Inc.

v. Commissioner, 100 F.4th 986, 988 (8th Cir. 2024); United States v.

Grigsby, 86 F.4th 602, 616–17 (5th Cir. 2023); Geosyntec, 776 F.3d at

1334–35; Fairchild Indus., 71 F.3d at 869–70; Betz v. Commissioner,

T.C. Memo. 2023-84, at *101; Tangel, T.C. Memo. 2021-1, at *9–10;

Union Carbide Corp. & Subs. v. Commissioner, T.C. Memo. 2009-50, 97

T.C.M. (CCH) 1207, 1259, aff’d, 697 F.3d 104 (2d Cir. 2012); Gen.

Dynamics Corp. & Subs. v. Commissioner, T.C. Memo. 1996-153, 71

T.C.M. (CCH) 2586, 2588; Dynetics, Inc. & Subs. v. United States, 121

Fed. Cl. 492, 498 (2015).

Thus, we find that the holdings in our prior cases and the

aforementioned decisions of the Federal Circuit and Federal Claims

continue to remain in effect. See Diversified Grp. Inc. v. Commissioner,

Nos. 17038-18L, et al., 166 T.C., slip op. at 21–22 (2026); see also, e.g.,

Garcia Pinach v. Bondi, 147 F.4th 117, 121, 131–33 (2d Cir. 2025)

(analyzing Loper Bright and the doctrine of statutory stare decisis and

leaving undisturbed the holding of a prior panel opinion).

Moreover, we find respondent’s power to persuade argument

compelling. In reaching a conclusion on the validity of a regulation we

may give “[c]areful attention to the judgment of the Executive Branch.”

Loper Bright, 144 S. Ct. at 2273. For the views of Treasury in this

context “constitute a body of experience and informed judgment to which

courts and litigants may properly resort for guidance.” Id. at 2262

[*34] (quoting Skidmore, 323 U.S. at 140). “The weight of such a

judgment in a particular case,” of course, “depend[s] upon the

thoroughness evident in its consideration, the validity of its reasoning,

its consistency with earlier and later pronouncements, and all those

factors which give it power to persuade, if lacking power to control.” Id.

at 2259 (quoting Skidmore, 323 U.S. at 140); see also Varian Med. Sys.,

163 T.C. at 106. Congress has delegated authority to Treasury under

section 7805(a) to define criteria for Congress’s funded research

exclusion found in section 41(d)(4)(H). Here, Treasury has exercised that

authority and issued longstanding and favorable administrative

guidance that offers both clarity and certainty for taxpayers.

Considering the foregoing, we conclude the regulatory

requirements found in Treasury Regulation § 1.41-4A(d) used to

determine whether research is funded are reasonably related to and

otherwise consistent with the intent of section 41(d)(4)(H). Accordingly,

we reject petitioners’ contention that the Supreme Court’s decision in

Loper Bright undermines the prior decisions that relied on Treasury

Regulation § 1.41-4A(d) and their effects as precedent in these cases.

Further, we reject petitioners’ reading of the phrase “to the extent

funded by any grant, contract, or otherwise” found in section 41(d)(4)(H)

to mean only “a sum of money set apart for a specific objective” and

likewise determine our reading of this phrase would not be as beneficial

as the Treasury regulation requirements. In other words, we find no

benefit to petitioners’ argument, should we be inclined to reject

respondent’s reading of the Code for our own.

On the basis of the foregoing, we decline to invalidate Treasury

Regulation § 1.41-4A(d) and the requirements for determining funded

research under section 41(d)(4)(H) incorporating both “contingent on

success” and “substantial rights” elements.

IV.

Funded Research Exclusion Analysis

Whether Payment Was Contingent on the Success of

Research

For a taxpayer to claim a research credit the amounts payable

under the agreement must be contingent on the success of the research.

See Treas. Reg. § 1.41-4A(d)(1).

The inquiry turns on who bears the research costs upon

failure, not on whether the researcher is likely to succeed

in performing the project. When payment is contingent on

[*35] performance, such as the successful research and

development of a new product or process, the researcher

bears the risk of failure.

Fairchild Indus., 71 F.3d at 873. We start by looking at the relevant

caselaw and its treatment of contractual provisions similar to those at

issue here regarding whether a contract is contingent on the success of

research.

In Fairchild Industries, 71 F.3d at 874, the Federal Circuit held

that the qualified research expenses were not funded because payment

was contingent on the success of the research. The contract at issue

“contained over 1,000 pages of technical specifications that required [the

taxpayer] to meet specific design, construction, quality, and

performance standards.” Id. at 870. It also contained a clause that made

the taxpayer accept total responsibility for the research and allowed the

contractor to reject the work if it was deemed unacceptable. Id. at 871.

The Federal Circuit determined that the contract was contingent on the

success of the research since the taxpayer had no right to payment until

it fully succeeded in each phase of the project and payment remained at

risk until the research was successfully completed and accepted. Id.

at 873.

In Dynetics, 121 Fed. Cl. at 498–99, Federal Claims analyzed

seven contracts with various payment arrangements to determine

whether any of the payments for the contracts were contingent on the

success of the research. The taxpayers in that case made a number of

arguments for contingency on success including (1) a course of dealing

argument that the taxpayer was expected to produce a successful result

to receive payment from the contracting partner, (2) an inspection clause

or a warranty clause that put the taxpayer at risk of not being paid, and

(3) the termination clauses in the contracts that put the taxpayer at risk

of nonpayment. Id. at 499.

Regarding the course of dealing argument, the court ruled in

favor of the Commissioner and determined that the course of dealing

argument could be considered only if the contracts were ambiguous—

which the Court did not find. Id. at 500–01.

The court rejected the taxpayer’s argument that a contract’s

inspection clause was similar to the one in Fairchild Industries. Id. at

504. Federal Claims determined the taxpayer was mistaken in its

reading of Fairchild Industries as the Federal Circuit’s decision was not

[*36] based on the incorporated inspection clause alone, but rather on

“the inspection, rejection, and payment clauses incorporated into the

contract.” Id. The court concluded that the taxpayer’s inspection clause

in Dynetics included no wording about “accept[ing] responsibility for

producing a product . . . did not include rejection language; nor did it

limit payment to work the government accepted.” Id. at 505.

The court equally rejected the taxpayer’s argument that the

termination clause put it at risk of nonpayment. Id. at 516. Federal

Claims stated that “[w]hile it is true that [the taxpayer] would not have

the opportunity to earn its full fee, the loss of an opportunity for profit

is not the type of financial risk contemplated in the Treasury regulation.

See Treas. Reg. § 1.41-4A(d)(1).” Id.

In Geosyntec, 776 F.3d at 1343, the U.S. Court of Appeals for the

Eleventh Circuit held that the two contracts at issue in the case were

not contingent on the success of the research. First, the Eleventh Circuit

rejected the taxpayer’s argument that it faced substantial financial risk

under capped contracts because its expenses could exceed the ceiling

price for each contract. Id. at 1339. “Cost-of-performance is not the

financial risk with which we are concerned because ‘the only issue is

whether payment was contingent on the success of the research’—that

is, the financial risk of failure.” Id. (quoting Fairchild Indus., 71 F.3d at

872).

Second, the Eleventh Circuit found that the contracts did not

expressly require that payments to the taxpayer be contingent on the

success of the research. Id. at 1340. Next, the contract required

performance “in accordance with the standard of care applicable to like

professionals performing comparable services on the type of project

contemplated by each of the contracts.” Id. at 1341. There was “no

barometer by which [the taxpayer]’s performance could be considered

‘successful,’ and there existed no mechanism for evaluation and

acceptance or rejection of the delivered design.” Id. at 1341–42. Lastly,

the contracts provided no clear method of rejection as the taxpayer was

paid upon submission of monthly invoices. Id. at 1342–43. In sum the

Eleventh Circuit found that the taxpayer was entitled to payment under

both contracts regardless of success. Id. at 1343.

Respondent contends that on the basis of the plain wording of the

Projects’ contracts, payments were not contingent on the success of the

research. Petitioners contend that looking at the Projects’ contracts,

settlement agreements, and foreign law together, the payments were

[*37] contingent on the success of the research. Thus, we will examine

the terms of the research agreements of the Projects to determine

whether the payments were contingent on the success of the research.

Atrium City Tower (Project No. 208021)

Approval Clauses

Petitioners argue that the research performed was not funded

since AS+GG was entitled to progress payments only for each

successfully completed milestone approved by Meraas and the approval

clause found in the Atrium City Tower Contract is the same contractual

payment structure found in the contract discussed in Fairchild

Industries, 71 F.3d at 870−72. Petitioners specifically cite schedule 2,

appendix B of the Atrium City Tower Contract, which provided for

approval of each phase at a final meeting as follows: “[d]evelop the

concept design schemes culminating in a concept design approved by

[Meraas],” “obtain agreement of the design program[] with [Meraas],”

and “incorporate as applicable the requirements of [Meraas] and submit

to the [Meraas] for approval purposes the final version of the Detailed

Design Phase documentation.”

We find that petitioners are mistaken as to their reading of

Fairchild Industries. The Atrium City Tower Contract and the contract

in that case are similar in that both had an approval process. However,

the contract in Fairchild Industries “contained over 1,000 pages of

technical specifications that required Fairchild to meet specific design,

construction, quality, and performance standards.” Fairchild Indus., 71

F.3d at 870. Here, the Atrium City Tower Contract required

construction of three of the world’s tallest towers, which had to be very

energy efficient, designed to high environmental and performance

standards, had a general schedule of project details, and required a

timeframe of completion. However, these requirements are not similar

to the 1,000 pages of technical specifications requiring the taxpayer’s

research to meet specific approval for design, construction, quality, and

performance standards as found in Fairchild Industries. Id.

In Meyer, Borgman & Johnson, Inc. v. Commissioner, 100 F.4th

at 989, the taxpayer was required under the contracts

to create a design that included all of the items the owner

required, complied with all of the pertinent codes and

regulations, would result in a structurally sound building

without being so over-engineered as to compromise the

[*38] construction budget, and was sufficiently detailed that a

contractor could follow it and successfully construct it.

The U.S. Court of Appeals for the Eighth Circuit ruled that the research

conducted was funded since the contracts’ “provisions lack the specificity

of Fairchild, where the taxpayer ‘had to succeed at each step’ of its

research to be paid.” Id. at 990 (quoting Geosyntec, 776 F.3d at 1340).

The Atrium City Tower Contract is most similar to the contracts

examined in Meyer as it listed specifications that Meraas required along

with overall standards for successful construction; moreover, the Atrium

City Tower Contract lacked the specificity found in the Fairchild

Industries contract. See Fairchild Indus., 71 F.3d at 870.

Second, the Atrium City Tower Contract lacked the clear

performance standard required in Fairchild Industries, 71 F.3d at 873.

In Geosyntec, 776 F.3d at 1341–42, the Eleventh Circuit determined that

the research was funded when the “[c]ontract provided no barometer by

which [the taxpayer]’s performance could be considered ‘successful,’ and

there existed no mechanism for evaluation and acceptance or rejection

of the delivered design.” Like the contract in Geosyntec, the Atrium City

Tower Contract did not provide a barometer by which the performance

of the phases could be considered successful and the only reference to a

performance standard is found in section 2.3, Performance, which

required only “sound internationally recognized professional standards

. . . which are reasonable to be expected from a competent consultant

experienced in carrying out services on projects similar in size and

scope.” “There is a difference between ‘successful performance’—

meeting detailed, barometers of success—and ‘proper performance’—

providing deliverables pursuant to a general professional standard of

care and promising work free from negligence, error, or defects.” Meyer,

Borgman & Johnson, Inc. v. Commissioner, 100 F.4th at 989 (quoting

Geosyntec, 776 F.3d at 1341).

Further, in Fairchild Industries, 71 F.3d at 870–71, specific

contract terms explicitly accepted responsibility for doing whatever was

necessary to produce the project and clear rejection terms within the

inspection clause allowed the contractor to reject the inspected work.

Here, however, there was no rejection clause based on failure to deliver

a “successful” design, and no express terms in the Atrium City Tower

Contract stated AS+GG would accept responsibility for producing the

product. In sum, the approval clause found in the Atrium City Tower

Contract does not show that the research performed by AS+GG was not

funded. See Dynetics, 121 Fed. Cl. at 504–05 (ruling the research was

[*39] funded when the contract did not direct the taxpayer to accept

responsibility for the research or allow the contractor to reject the

inspected work).

Payment Clauses

Petitioners also argue that AS+GG was not entitled to payment

just for performing research but that it was entitled to payment only for

providing end results after approval of its work product. Petitioners

contend the payment clause under the Atrium City Tower Contract

shows the research performed was not funded.

Schedule 3, Remuneration, section 2.1, provides that the

“payments [are] to be made monthly based on a percentage complete

estimate of services performed.” Under section 9, Payment, AS+GG was

required to submit invoices for payment, and within 30 days of receipt

of the invoice Meraas was obligated to pay the invoice by wire transfer.

The Atrium City Tower Contract payment section likewise supports a

finding of funded research, given that it merely required an invoice

based on the percentage of work complete, and this section did not

provide for Meraas’s review and approval of each phase before payment

was required. See Geosyntec, 776 F.3d at 1342 (ruling that research was

funded when payment was based on an invoice submission without prior

approval of the product). 21

In Dynetics, 121 Fed. Cl. at 506, Federal Claims determined a

research contract was funded even though the contractor did not recover

additional profit for corrective work but was not precluded from

recovering its costs for replacement or correction. Here the Atrium City

Tower Contract in schedule 3, section 4.1, provides that for “any

Additional Services performed by the Consultant not forming part of the

Services, the Consultant shall receive a fee either on the basis of the

aggregate of the scheduled hourly billing rates [or by a] method [that] is

mutually acceptable and agreed to in writing.” And section 5,

Reimbursable Expenses, provides that AS+GG “shall be reimbursed at

actual cost on production of accounts/receipts plus 5%.” These

contractual terms found in the Atrium City Tower Contract further

21 Further, the Atrium City Tower Contract provided that “[i]f any item on any

such invoice is disputed or subject to question by [Meraas] that shall not entitle

[Meraas] to delay payment for the remainder of such invoices.” The fact that Meraas

could not be excused from paying petitioners if there was a dispute does not support a

finding that approval was required before payment.

[*40] support the finding that AS+GG’s financial risk was not

contingent on the success of its research performed.

Termination Clause

Petitioners also contend that the fact that Meraas could

terminate the Atrium City Tower Contract on the basis of material

breach, insolvency, and convenience supports their claim the research

performed was not funded. Petitioners refer to section 11.1 which

provides that if there is such a full and final settlement of all claims and

expenses, then payment of the sum would be “for such part of the

Services already performed to the satisfaction of [Meraas] prior to the

effect of the termination.” Petitioners argue that AS+GG was entitled to

payments only for the milestones actually completed. The taxpayers in

Dynetics, however, made the same argument as petitioners do here. In

response to this argument Federal Claims stated that “[w]hile it is true

that Dynetics would not have the opportunity to earn its full fee, the loss

of an opportunity for profit is not the type of financial risk contemplated

in the Treasury regulation. See Treas. Reg. § 1.41-4A(d)(1).” Dynetics,

121 Fed. Cl. at 516. Like our sister court, we similarly determine that

the loss of opportunity for AS+GG to receive its full fee under the Atrium

City Tower Contract is not the type of financial risk considered in the

Treasury regulation in establishing whether the research performed

was funded.

Settlement Agreement

Next, petitioners argue that the Deed of Settlement entered into

by AS+GG is not extrinsic evidence but a superseding contract with

terms that discharge the duties in the Atrium City Tower Contract. We

stated in an Order served on March 7, 2025, that “[w]e generally agree

with petitioners and find some of the documents being proposed by

petitioners—namely settlement agreements modifying the original

terms of a Contract—not as extrinsic evidence covered by our prior

Orders.” We do not agree, however, that all duties in the Atrium City

Tower Contract are discharged, but only insofar as they are inconsistent

with the Deed of Settlement. See Large v. Mobile Tool Int’l, Inc., 724

F.3d 766, 772 n.1 (7th Cir. 2013); Curia v. Nelson, 587 F.3d 824, 830 (7th

Cir. 2009) (“[A]n original contract remains in force only to the extent

that it is not modified by the new agreement.”).

In reviewing the Deed of Settlement as a modification to the

original terms of the Atrium City Tower Contract, we determine the

[*41] parties agreed to a settlement amount and to termination of any

further contractual arrangements. Petitioners contend that since

AS+GG was never fully paid for its work under the contracts, the

research performed cannot be considered funded. We disagree. Although

there was a final termination of the work, AS+GG received a reasonable

settlement payment for the portion of the work that was completed. As

mentioned above, although AS+GG is prevented from earning its full

fee, “the loss of an opportunity for profit is not the type of financial risk

contemplated in the Treasury regulation.” See Dynetics, 121 Fed. Cl. at

516. In sum, the Deed of Settlement does not support petitioners’ claim

that the research performed by AS+GG was not funded.

Foreign Law Application 22

We acknowledge that there is an express choice of law clause in

section 4.3 of the Atrium City Tower Contract which states that “[t]his

Agreement shall be governed by and construed in accordance with the

laws and regulations of and from time to time applicable in the Emirate

of Dubai.” However, we disagree with petitioners’ argument that since

there is this express clause, we should apply the foreign laws of the

Emirate of Dubai to determine whether the Atrium City Tower Contract

is funded.

Petitioners rely on our order served January 3, 2025, in System

Technologies, Inc. v. Commissioner, No. 12211-21 (T.C. May 2, 2025)

(Doc. 54). We denied the Commissioner’s motion for partial summary

judgment because payments were contingent on the success of the

research under Indiana state law. The cases here, however, are

distinguishable. 23 In System Technologies, the Court determined that

since the contracts failed to provide an adequate remedy, the contracting

22 By Order served March 7, 2025, we granted petitioners’ request for Judicial

Notice as to foreign law provisions. Respondent has reasserted his objection pursuant

to Rule 146 and requested that the Court reconsider the Order. We decline to

reconsider the Order as to the Atrium City Tower Contract.

23 In this order the Court determined that a choice of law provision for the State

of Indiana did override the “freely bargained agreement of the parties” in the original

contract (quoting Bd. of Comm’rs of Cnty. of Jefferson v. Teton Corp., 30 N.E.3d 711,

715 (Ind. 2015). The reason, however, was that Indiana law “requires at least

minimally adequate remedies to the contracting parties.” Kenworth of Indianapolis,

Inc. v. Seventy-Seven Ltd., 134 N.E.3d 370, 379 (Ind. 2019). “Where circumstances

cause an exclusive or limited remedy to fail of its essential purpose, remedy may be

had as provided in IC 26-1.” Ind. Code § 26-1-2-719(2).

[*42] parties defaulted to Indiana state law, which requires the

statutory remedy of a refund of the amounts paid.

Here, however, the terms of foreign laws of the Emirate of Dubai

would not override the remedies set forth under the terms of the contract

since the contract did in fact provide an adequate remedy. See generally

Curia, 587 F.3d at 830; Dynetics, 121 Fed. Cl. at 514. In other words,

there is no need to consider the application of foreign law, since there is

no contention by petitioners that AS+GG’s and Meraas’s remedies are

not set forth under the Atrium City Tower Contract. The Emirate of

Dubai’s is the contracting parties’ choice of law; however, we do not

agree with petitioners that the foreign law provisions cited otherwise

override the express terms of the Atrium City Tower Contract. See

Dynetics, 121 Fed. Cl. at 514 (“[A]ny determination of risk must be made

solely on the ‘research agreement’ between the parties, with no

consideration of any external statute not expressly incorporated in that

agreement.”).

In conclusion, and after considering all of the relevant contractual

terms raised by the parties, we do not find that the Atrium City Tower

Contract payments were contingent on the success of the research.

Kingdom Tower (Project No. 210005)

Approval Clauses

Similarly to the Atrium City Tower Contract, petitioners argue,

the Kingdom Tower Contract was broken into phases, and the

description of each phase contained a clause which provided that

AS+GG would “[c]ommence the [next phase] following receipt of

[Jeddah]’s approval of the [phase] Design.” Thus, petitioners contend

that since AS+GG was entitled to progress payments for each

successfully completed milestone, it is the same contractual payment

structure as in the contract in Fairchild Industries. See Fairchild Indus.,

71 F.3d at 870−72. Specifically, petitioners highlight appendix A,

Statement of Kingdom Tower Requirements, which required eight pages

of tower site components such as height, retail, residential, and other

various aspects of the towers that needed to be provided for in the

deliverables.

Unlike the Atrium City Tower Contract we acknowledge that the

Kingdom Tower Contract did have more technical specifications.

However, the appendix provides that many of the specifications are

“recommendations,” that “there is flexibility in the treatment of the site

[*43] within the district and the ultimate shape of the site,” and that

“[s]hould the architect wish to diverge from the programme indicated

above for functional or aesthetic reasons, we are willing to consider

modifications.” Thus, we likewise find that the Kingdom Tower Contract

is distinguishable from the contract in Fairchild Industries as the

specifications are not the type of clearly detailed specifications that

required approval before payment would be made. See Fairchild Indus.,

71 F.3d at 870–71.

Even then, the Kingdom Tower Contract lacks the level of

performance standard found in an unfunded research contract. See

Geosyntec, 776 F.3d at 1341–42; Fairchild Indus., 71 F.3d at 870. The

required level of performance for the Kingdom Tower Contract is defined

in section 2.3, Performance, which states that the performance

standards are “in accordance with sound internationally recognized

professional standards and . . . exercise skill, care and diligence.” This

general language of the Kingdom Tower Contract lacks any detailed

barometer of success and requires only a general professional standard

of care. See Meyer, Borgman & Johnson, Inc. v. Commissioner, 100 F.4th

at 989–90; Fairchild Indus., 71 F.3d at 870, 873.

Further, unlike those unfunded research contracts that contained

specific wording explicitly accepting responsibility for doing whatever

was necessary to produce the project and clear rejection terms, the

Kingdom Tower Contract lacks such terms. See Fairchild Indus., 71

F.3d at 870–71; Dynetics, 121 Fed. Cl. at 504–05.

Payment Clauses

Petitioners argue that under the Kingdom Tower Contract

AS+GG was not entitled to payments just for performing research but

that it was entitled to payment only for providing end results after

approval of its work product.

Section 6.1, Invoices, provides that the fixed-price lump-sum fee

was broken down into monthly payments of $1,488,888 for 17 months

with a final payment one month after. If the services performed under

the Kingdom Tower Contract did not align with the payments,

“mutually agreed adjustments to the payment schedule shall be made

so that payments reflect the actual progress of the Services achieved.”

Section 7.1, Payments, provides that Jeddah would make payments

within 30 days of the receipt of an invoice. There was no mention in the

Kingdom Tower Contract Payments section that Jeddah had to review

[*44] and approve the phases before payment. The plain wording of the

Kingdom Tower Contract provides that payment is based on receipt of

an invoice. See Geosyntec, 776 F.3d at 1342. Further, section 6.1 provides

that Jeddah was not allowed to delay payments for the invoices if there

was a dispute. Jeddah’s inability to dispute the payments to AS+GG

does not support a finding that Jeddah had to approve the work product

before payment. Id.; see Fairchild Indus., 71 F.3d at 873 (“Fairchild had

no right to payment until it fully succeeded in each phase of the

project.”).

The Kingdom Tower Contract does provide that the lump-sum fee

due was considered to be fully inclusive of all expenses. However, the

mere financial risk that could come with having additional costs to

produce a project is not risk attributable to the failure of research, but

rather the general financial risk of doing business, which may exceed

the contracted payment. See Dynetics, 121 Fed. Cl. at 506; Treas. Reg.

§ 1.41-4A(d)(1).

Termination Clause

Petitioners note that Jeddah was permitted to terminate the

Kingdom Tower Contract on the basis of material breach, insolvency,

and convenience. However, under section 10.5, Consequences of

Termination, AS+GG had the “right to payment of all remuneration

which has accrued due under this agreement up to the date of

termination.” Further, section 11.1, Payment Upon Default of

Consultant, provided that if there was a full and final settlement the

sum would be “for such part of the Services already performed to the

satisfaction of [Jeddah] prior to the effect of the termination.” As already

stated, “the loss of an opportunity for profit is not the type of financial

risk contemplated in the Treasury regulation. See Treas. Reg. § 1.414A(d)(1).” Dynetics, 121 Fed. Cl. at 516.

In conclusion, we do not find that the Kingdom Tower Contract

payments were contingent on the success of the research.

Masdar HQ (Project No. 208004)

Approval Clauses

Petitioners argue that the Masdar HQ Contract explicitly stated

that each phase required a “complete performance evaluation of the

systems to review if Project goals are being met” and that the phases

“shall only commence upon approval from [Masdar] and [Masdar] has

[*45] the right not to proceed with AS+GG for [the next phase].”

Petitioners cite this statement and contend that the Masdar HQ

Contract is similar to the contract considered in Fairchild Industries

and that this research contract was not funded. Further, petitioners

contend that they were obligated to develop as part of their design “zero

carbon emissions” and “minimal energy usage,” which was the standard

of performance to determine whether the results were successful.

We acknowledge that the Masdar HQ Contract had an approval

process, but we cannot ignore that the contract in Fairchild Industries,

71 F.3d at 870, had 1,000 pages of technical specifications that had to be

met before approval. Even though the Masdar HQ Contract required

“zero carbon emissions” and “minimal energy usage,” these provisions

lack a level of specificity where “the taxpayer ‘had to succeed at each

step’ of its research to be paid.” Meyer, Borgman & Johnson, Inc. v.

Commissioner, 100 F.4th at 990 (quoting Geosyntec, 776 F.3d at 1340).

The Masdar HQ Contract section 3.1 required that AS+GG

“exercise diligence in the performance of the services . . . in accordance

with Good Industry Practice.” Again, this good industry standard of

performance is not a standard that establishes a clear barometer of

success. See id. at 989.

The Masdar HQ Contract also lacked specific wording whereby

AS+GG explicitly accepted responsibility, and it lacked clear rejection

inspection clause terms which the contract in Fairchild Industries

contained. See Fairchild Indus., 71 F.3d at 870–71. Thus, we disagree

with petitioners’ position that the Masdar HQ Contract was similar to

the contract in Fairchild Industries. See id.; Dynetics, 121 Fed. Cl.

at 504–05.

Payments Clause

Petitioners argue that AS+GG was not entitled to any payment

for simply conducting research activities as the client sought a final

product that met its functional and economic needs. The payment

schedule provided that “AS + GG shall be paid monthly upon provision

of services on the basis of a percentage complete basis.” The payment

schedule for construction supervision provided that “AS+GG shall be

paid monthly, within 30 days of invoicing, according to the schedule of

monthly construction supervision rates. AS+GG shall be entitled to stop

work should payment not be made by [Masdar] according to the

Payment Schedule.” Neither of these payment schedules mentions

[*46] review and approval of the work product before payment. A

payment schedule tied to the percentage of services performed is similar

to the contracts in Geosyntec—which the Eleventh Circuit held were

funded contracts. Geosyntec, 776 F.3d at 1341−42.

The Masdar HQ Contract also provided for various reimbursable

expenses along with compensation to AS+GG for any additional services

required. The additional payments for services and the reimbursement

costs do not support a finding that the financial risk is attributable to

the success of the research. See Dynetics, 121 Fed. Cl. at 506.

Termination Clause

The Masdar HQ Contract section 12, Termination, provided that

Masdar could terminate on a 14-day written notice on the basis of a

breach of terms or conditions and if AS+GG were to enter into

liquidation. If there was a termination, section 12.3 provided that

“Masdar shall pay [AS+GG] the proportion of the price payable for the

Services as relates to the work properly and satisfactorily carried out or

where the Services are charged on a time basis, for the time properly

and necessarily spent on the Services prior to the termination.” As

previously stated, although AS+GG could lose the opportunity for full

payment under the contract, “the loss of an opportunity for profit is not

the type of financial risk contemplated in the Treasury regulation. See

Treas. Reg. § 1.41-4A(d)(1).” Dynetics, 121 Fed. Cl. at 516.

Settlement Agreement

As under the Deed of Settlement for the Atrium City Tower

contract, not all duties under the Masdar HQ Contract were discharged

since only contradictory terms of the Masdar Settlement Agreement

overrode the original terms of the Masdar HQ Contract.

Under the Masdar Settlement Agreement the parties agreed to a

settlement amount due and payable. “For the avoidance of doubt, the

[original contract] remains in full force and effect subject to the terms of

this Settlement Agreement and any amendments or variations to the

[original contract].” Other than the amount due and payable, there were

no specific clauses in the Masdar Settlement Agreement that would

override the Masdar HQ Contract.

Petitioners argue that AS+GG received partial payment for

services performed and waived the right to be paid in full for services

rendered. Although there was a final termination of the work, AS+GG

[*47] received a reasonable payment under the Masdar Settlement

Agreement for the portion of the work that was completed. As mentioned

above, although AS+GG was prevented from earning its full fee, “the

loss of an opportunity for profit is not the type of financial risk

contemplated in the Treasury regulation.” Dynetics, 121 Fed. Cl. at 516.

Foreign Law Application

As in the Atrium City Tower Contract, we acknowledge that there

was an express choice of law clause in section 26.1 of the Masdar HQ

Contract, which stated that “[t]his Agreement and the relationship

between the Parties shall be governed by, and construed in accordance

with, the laws of England.” Petitioners again argue that since there is

this express clause, we should allow the foreign laws of the United

Kingdom (U.K.) to determine whether the contract is funded. We

continue to disagree with petitioners.

Petitioners provide no explanation as to how or why U.K. law

would apply to the HQ Masdar Contract. Petitioners reference the Sale

of Goods Act 1979, Chapter 54 of the United Kingdom Public General

Acts from 1979 to define the basic essentials for a contract, the law

afforded to a seller and a buyer including a reasonable opportunity to

examine goods upon delivery, and the seller’s obligation to bear the costs

for repair or replacement of goods. Yet it is unclear how petitioners are

applying the U.K. sale of goods law to the Masdar HQ Contract given

that the contractual terms describe AS+GG’s performance as services.

Furthermore, petitioners provide no explanation or expert witness

testimony on how U.K. law would override the mutually agreed-upon

terms of the contract.

Overall, although U.K. law is the choice of law between the

parties to the contract, the provisions cited are not incorporated into any

terms of the Masdar HQ Contract and thus are irrelevant. See Dynetics,

121 Fed. Cl. at 514 (“[A]ny determination of risk must be made solely on

the ‘research agreement’ between the parties, with no consideration of

any external statute not expressly incorporated in that agreement.”).

In conclusion, and after considering all the relevant contractual

terms raised by the parties, we do not find that the Masdar HQ Contract

payments were contingent on the success of the research.

[*48]

Atrium City Masterplan (Project No. 207014)

Approval Clauses

Petitioners argue that at the end of each stage for the Atrium City

Masterplan Contract there was a “Presentation and Client Review &

approval of Stage [number].” Section 1.5 provided that AS+GG “shall not

proceed with any ‘successor’ stage before [Meraas] has approved the

deliverables of the relevant ‘predecessor’ stage.” Thus, petitioners

contend that since there is approval before payment, the Atrium City

Masterplan Contract has the same contractual payment structure as the

contract in Fairchild Industries. See Fairchild Indus., 71 F.3d at

870−71. We disagree.

There was required approval for each stage, and the stages

mention general requirements such as preparing feasibility studies,

area calculations, exterior renderings, site/roof plans, and ground floor

plans. However, these requirements are not so specific as to render the

Atrium City Masterplan Contract comparable to that in Fairchild

Industries. See Meyer, Borgman & Johnson, Inc. v. Commissioner, 100

F.4th at 990 (ruling research is funded when the contract “provisions

lack the specificity of Fairchild, where the taxpayer ‘had to succeed at

each step’ of its research to be paid” (quoting Geosyntec, 776 F.3d at

1340)); Fairchild Indus., 71 F.3d at 870, 873. Further, there was no

mention of a review standard that was used during approval of these

components. Accordingly, there is no barometer by which the

performance of the stages would be deemed successful under the Atrium

City Masterplan Contract as it merely required completion of general

requirements within a specified period.

In Fairchild Industries there was specific wording that explicitly

accepted responsibility for the project and clear rejection terms within

the inspection clause. Fairchild Indus., 71 F.3d at 870−71. Here, there

was no rejection clause based on the failure to deliver a “successful”

design and there was no explicit statement in the Atrium City

Masterplan Contract that AS+GG would accept responsibility for

producing the product. See Dynetics, 121 Fed. Cl. at 504–05

(determining the contracts were funded when there was no direct

wording of rejection or wording that directed the taxpayer to accept

responsibility for producing a product).

[*49]

Payment Clauses

Petitioners argue that AS+GG was not entitled to payment

merely for performing research but that it was entitled to payment only

for providing end results after approval of its work product.

The Payment Schedule, however, provided for a lump-sum

payment which was broken down by percentage of completion for each

stage. “Payments shall be made to [AS+GG] at the presentation

meetings . . . . [AS+GG] shall submit an original invoice to [Meraas] at

least seven days prior to the meetings in order that a cheque can be

raised in time for each meeting.” Although there was a general review

of the stages, the payment schedule does not mention Meraas’s required

approval of the stage before the payment and whether Meraas would

withhold the amount if approval was not given. See Geosyntec, 776 F.3d

at 1342.

The Atrium City Masterplan Contract also provided for

reimbursable travel expenses beyond the provided coverage of travel.

Similarly, any additional service required of AS+GG by Meraas would

have an “additional services fee [that] shall be a mutually agreeable

lump sum or on the basis of the AS+GG hourly billing rates.” The

additional payments for services and the reimbursement for additional

travel do not support a finding that there was financial risk contingent

on the success of the research. See Dynetics, 121 Fed. Cl. at 506.

Termination Clause

Petitioners argue that if Meraas terminated the Atrium City

Masterplan Contract, AS+GG was entitled to payments only for the

work completed. The Atrium City Masterplan Contract provided that

“[Meraas] may instruct you to cease work at any time at any stage of the

Services; subject only to reimbursement for each completed and

approved stage of Services, an agreed percentage complete for any

uncompleted stage of Services and reimbursable expenses as defined in

the Proposal.” As previously discussed as to the Atrium City Tower

Contract, “the loss of an opportunity for profit is not the type of financial

risk contemplated in the Treasury regulation. See Treas. Reg. § 1.414A(d)(1).” Id. at 516.

Settlement Agreement

The Deed of Settlement entered into for the Atrium City

Masterplan is the same Deed of Settlement entered into for the Atrium

[*50] City Tower. Moreover, petitioners make identical arguments for

the Atrium City Masterplan Contract. The analysis is already discussed

in the Atrium City Tower section. See supra Part IV.A.1.d.

Foreign Law Application

The foreign law application is identical to that for the Atrium City

Tower. Therefore, the analysis already discussed in the Atrium City

Tower section, see supra Part IV.A.1.e, will apply here.

In conclusion, and after considering all the relevant contractual

terms raised by the parties, we do not find that the Atrium City

Masterplan Contract payments were contingent on the success of the

research.

Plot 14 (Project No. 206003)

Approval Clauses

Petitioners argue that since AS+GG was entitled to payments

only after approval by Emaar Properties and that the next phase cannot

be commenced until “receipt of [Emaar Properties]’ approval,” the terms

provide the same contractual payment structure as found in the contract

in Fairchild Industries. See Fairchild Indus., 71 F.3d at 870–71.

Petitioners argue that Emaar Properties’ review was based on the

detailed degree of requirements found in schedules 1 and 2. Petitioners

cite schedule 1, Client Design Brief, which provided design criteria that

“should be considered for the site,” which included concepts that

reflected the Rockefeller Center, dimensions of the tower, designs that

had Islamic characteristics, facilities, and vehicle access. For the

residential areas the schedule provided specific dimensions for the

building. But for other areas, such as retail and exterior, the schedule

provided general requirements such as “include a component of retail at

ground level that interacts with the boulevard,” “building exterior is to

have an architectural statement of quality & stature that embodies a

luxury destination,” “[a]ttention to detail, using durable and easy to

maintain materials is essential,” a main lobby that is “[r]ichly yet

decorated to reflect the characteristics of a 5-star hotel,” and an interior

mood that “[s]hould match the architectural style.”

Petitioners are correct that there was an approval process and the

schedules did provide detailed requirements as to various heights and

dimensions for the residential spaces; however, the schedules are not so

technical that there was a clear barometer of success. Specifically,

[*51] schedule 1 had general requirements such as “attention to detail”

and “embodies a luxury destination” that were open ended regarding

how AS+GG was to complete the project. Accordingly, we find that the

requirements in the Plot 14 Contract lack “the specificity of Fairchild,

where the taxpayer ‘had to succeed at each step’ of its research to be

paid.” Meyer, Borgman & Johnson, Inc. v. Commissioner, 100 F.4th

at 990 (quoting Geosyntec, 776 F.3d at 1340).

Further, the Plot 14 Contract lacked the specific performance

standard found in Fairchild Industries. Section 2.3, Performance,

provided that the standard of care was “sound internationally

recognized professional standards and . . . exercise [of] reasonable skill,

care and diligence.” The Plot 14 Contract required only a general

professional standard of performance. Again “[t]here is a difference

between ‘successful performance’—meeting detailed, barometers of

success—and ‘proper performance’—providing deliverables pursuant to

a general professional standard of care and promising work free from

negligence, error, or defects.” Id. at 989 (quoting Geosyntec, 776 F.3d

at 1341).

Furthermore, there was no rejection clause based on the failure

to deliver a “successful” design, nor was there explicit wording in the

Plot 14 Contract stating AS+GG would accept responsibility for

producing the product. See Fairchild Indus., 71 F.3d at 870–71;

Dynetics, 121 Fed. Cl. at 504–05.

Payment Clauses

Petitioners argue that AS+GG was not entitled to payments just

for performing research but that it was entitled to payment only for

providing end results after approval of its work product.

Section 8.1, Payment, provided that Emaar Properties was

required to make payments within 30 days of receipt of an invoice.

Further, the same section provided that “[i]f any item on any such

invoice is disputed or subject to question by [Emaar Properties], this

shall not entitle [Emaar Properties] to delay payment or remainder of

such invoices.” We find there was no specific approval required before

AS+GG would be paid; and even if there was a dispute over the invoice,

payment would still be due from Emaar Properties to AS+GG. See

Geosyntec, 776 F.3d at 1342.

Section 4, Reimbursable Expenses, provided that Emaar

Properties agreed to reimburse AS+GG for any reasonably incurred

[*52] expenses. In the event that AS+GG was required to work overtime

or on public holidays, the Plot 14 Contract provided that Emaar

Properties “shall pay to [AS+GG] reasonable additional working of such

overtime.” The additional reimbursement for expenses incurred and the

additional payments for work do not support a finding that AS+GG’s

financial risk was contingent on the success of its research. See Dynetics,

121 Fed. Cl. at 506.

Termination Clause

Petitioners argue that the Plot 14 Contract provided that Emaar

Properties could terminate the Plot 14 Contract on the basis of material

breach, insolvency, and convenience. If there was such a termination,

section 11.1 provided that AS+GG was entitled to payment only for “part

of the Services already performed to the satisfaction of [Emaar

Properties] prior to the effect of the termination.” Petitioners argue that

AS+GG was entitled to payments only for the milestones completed and

not for the full contract. Although AS+GG was not entitled to the

opportunity of earning its full fee, “the loss of an opportunity for profit

is not the type of financial risk contemplated in the Treasury regulation.

See Treas. Reg. § 1.41-4A(d)(1).” Id. at 516.

Settlement Agreement

As discussed above, we will consider the additional terms in a

settlement agreement. Here, however, there was no official settlement

agreement, but rather petitioners cite email correspondence with a final

settlement amount signed by both parties. In reviewing the settlement

email correspondence, we see there were modifications to the original

terms of the Plot 14 Contract such as discharging the remaining

obligations and a final settlement payment amount.

Petitioners argue that since AS+GG was never fully paid for its

work the Plot 14 Contract cannot be considered funded. We disagree.

Although there was a final termination of the work, AS+GG received a

reasonable payment for the portion of the work that was completed

under the settlement email correspondence. As mentioned above,

although AS+GG was prevented from earning its full fee, “the loss of an

opportunity for profit is not the type of financial risk contemplated in

the Treasury regulation.” See id.

[*53]

Foreign Law Application

The foreign law application is identical to that for the Atrium City

Tower. Therefore, the analysis already discussed in the Atrium City

Tower section, see supra Part IV.A.1.e, will apply here.

In conclusion, we do not find that the Plot 14 Contract payments

were contingent on the success of the research.

Plot R2 (Project No. 207016)

Approval Clauses

Petitioners argue that each phase of the Plot R2 Contract

required approval by ETA Star Property; and since AS+GG was entitled

to payments only for each successfully completed and approved stage,

the contract contains the same contractual payment structure as the

contract in Fairchild Industries. See Fairchild Indus., 71 F.3d at 870–

71. Petitioners cite schedules 1 and 2 of the Plot R2 Contract that

provided a list of the requested deliverables and components that ETA

Star Property wanted the Plot R2 project to contain.

Petitioners are correct that at the end of the phases there was an

approval requirement, but we do not find that schedules 1 and 2 offered

such a degree of detail as to render it a barometer of success similar to

that in Fairchild Industries. See id. at 870, 873. Unlike the Fairchild

Industries contract that had 1,000 pages of detailed specifications,

schedules 1 and 2 within 10 pages state the overall goal desired by ETA

Star Property in the project design.

Section 2.3, Performance, provided that the standard of

performance was “in accordance with sound internationally recognized

professional standards and . . . exercise [of] reasonable skill, care and

diligence.” The Plot R2 Contract required only a general professional

standard and lacked the “specificity of Fairchild, where the taxpayer

‘had to succeed at each step’ of its research to be paid.” Meyer, Borgman

& Johnson, Inc. v. Commissioner, 100 F.4th at 990 (quoting Geosyntec,

776 F.3d at 1340); see id. at 989.

Furthermore, there was no rejection clause based on the failure

to deliver a “successful” design, nor were there any explicit terms in the

contract stating AS+GG would accept responsibility for producing the

services. See Fairchild Indus., 71 F.3d at 870–71; Dynetics, 121 Fed. Cl.

at 504–05. Thus, we disagree with petitioners and do not find that the

[*54] Plot R2 Contract was similar to the contract found in Fairchild

Industries.

Payment Clause

Petitioners argue that AS+GG was not entitled to payments just

for performing research but that it was entitled to payments only for

providing end results after approval of its work product.

Schedule 4, section 8.1, Payment, provided that ETA Star

Property was required to make payment to AS+GG within 30 days of

receipt of an invoice. The payment section did not have a specific

approval or rejection requirement for the work product before the

payment. Further, the same section stated that “[i]f any item on any

such invoice is disputed or subject to question by [ETA Star Property],

this shall not entitle [ETA Star Property] to delay payment or remainder

of such invoices.” After considering this wording we find, much like with

the Plot 14 Contract, that there was not an approval requirement that

needed to be met before AS+GG would be paid, and even if there was a

dispute over the invoice, payment would still be due from ETA Star

Property to AS+GG. See Geosyntec, 776 F.3d at 1342.

Section 4, Reimbursable Expenses, provided that ETA Star

Property agreed to reimburse AS+GG for reasonably incurred expenses

such as travel, business visits, and translation of documents into other

languages. In the event that AS+GG was required to work overtime or

on public holidays, the Plot R2 Contract provided that ETA Star

Property “shall pay to [AS+GG] reasonable additional remuneration in

relation thereto as agreed between the parties or according to Dubai

Law.” The additional reimbursement for expenses incurred and the

additional payments for work does not support the finding that financial

risk was contingent on the success of the research. See Dynetics, 121

Fed. Cl. at 506.

Termination Clause

The Plot R2 Contract provided that ETA Star Property could

terminate the contract on the basis of material breach, insolvency, and

convenience. If there was such a termination, section 11.1 provided that

AS+GG was entitled to payment only for “part of the Services already

performed prior to the effect of the termination.” Although AS+GG was

not entitled to the opportunity of earning its full fee, “the loss of an

opportunity for profit is not the type of financial risk contemplated in

the Treasury regulation. See Treas. Reg. § 1.41-4A(d)(1).” Id. at 516.

[*55]

Foreign Law Application

The foreign law application is identical to that for the Atrium City

Tower. Therefore, the analysis already discussed in the Atrium City

Tower section, see supra Part IV.A.1.e, will apply here.

In conclusion, we do not find that the Plot R2 Contract payments

were contingent on the success of the research.

In summary, none of the payments under the six contracts was

contingent on the success of the research. However, if a taxpayer were

to retain the right to use the results of the research in carrying on his

business but he did not satisfy the contingent on success element, the

taxpayer would remain eligible to claim a reduced amount of qualified

research expenses, as determined under the pro rata allocation. See

Treas. Reg. § 1.41-4A(d)(3), (6) (ex. 1).

Whether AS+GG Retained “Substantial Rights” in the

Research

A taxpayer retains no substantial rights in research performed

“under an agreement that confers on another person the exclusive right

to exploit the results of the research.” Id. subpara. (2). Similarly, a

taxpayer retains no substantial rights in research “if the taxpayer must

pay for the right to use the results of the research.” Id. subpara. (3)(i);

cf. Lockheed Martin, 210 F.3d at 1375. Finally, “[i]ncidental benefits” to

the taxpayer from performing research, such as “increased experience

in a field of research,” are not substantial rights. Treas. Reg. § 1.414A(d)(2). As with other elements of the research credit, petitioners bear

the burden of showing that AS+GG retained substantial rights in the

results of any research performed under the contracts. See Dynetics, 121

Fed. Cl. at 519, 523.

We start by looking to the relevant caselaw and its treatment of

contractual provisions similar to those at issue here. In Tangel, T.C.

Memo. 2021-1, at *4−5, we reviewed a contract that stated in relevant

part:

A. With respect to Articles for which any technical

information, written, oral or otherwise, (i) has been

supplied to Seller by or on behalf of Buyer; or (ii) Seller has

designed at Buyer’s expense; or (iii) Seller has designed

specifically

meet

Buyer-furnished

technical

requirements (hereinafter designated “Information”),

[*56] Seller, in consideration of Buyer’s furnishing of such

Information and/or design funding, agrees that it will not

use, or assist others in using, such Information, design

funding or tooling to develop or sell such Articles (or

similar interchangeable or substitute Articles, or parts

thereof) to anyone other than Buyer, either as production,

spare or repaired Articles, without Buyer’s prior written

consent. Seller shall not use or disclose such Information

except in the performance of Orders for Buyer, and, upon

Buyer’s request, such Information and all copies thereof

shall be returned to Buyer. . . .

B. Information prepared by Seller specifically in

connection with performance of this Order, including

original works of authorship created by Seller, are

considered “works made for hire” within the meaning of the

U.S. Copyright Laws. Buyer shall be deemed the author of

such works. If any such work is determined by a court of

competent jurisdiction not to be a work made for hire, this

Order shall operate as an irrevocable assignment to Buyer

of all right, title and interest in and to such work.

We concluded that paragraph A prevented the taxpayers from using the

results of the research under the contract for any other purpose unless

the customer gave prior written consent. Id. at *12–13. We further

concluded that paragraph B vested the customer with the right to any

copyrightable materials created in performing the contract. Id. at *13–

14. The taxpayers argued in part that the institutional knowledge

gained from research was a substantial right; we squarely rejected this

contention, characterizing institutional knowledge as a mere incidental

benefit from performing research within the meaning of Treasury

Regulation § 1.41-4A(d)(2). Tangel, T.C. Memo. 2021-1, at *16.

Accordingly, we concluded that the taxpayers had failed to retain

substantial rights in research under the contract.

In Dynetics, 121 Fed. Cl. at 518–23, Federal Claims analyzed two

separate contracts in consideration of whether substantial rights were

retained. The first contract, between the taxpayer and the University of

Alabama, Huntsville (University), stated in relevant part:

All rights, title, and interest in and to inventions or other

intellectual property rights conceived or reduced to

practice in the course of performance of the work called for

[*57] by this Contract are hereby vested in the University. The

contractor agrees to promptly disclose to the University, in

a format acceptable to the University, any potentially

patentable idea or concept conceived or reduced to practice

in the course of performance of the work called for by this

Contract.

Id. at 518. The taxpayer argued that its work under the contract, which

involved solving equations and developing simulations, was not

patentable and was thus outside the scope of the terms. Id. Focusing on

the phrase “other intellectual property rights,” Federal Claims

determined otherwise and found that the contract vested a “broad

category of rights” in the University, including both patentable and

nonpatentable technology “conceived or reduced to practice in the course

of performance.” Id. at 519. Accordingly, Federal Claims concluded that

the taxpayer had not retained substantial rights in the research

performed under the contract. Id.

The second contract, between the taxpayer and the U.S.

Department of Defense (DOD), was subject to a number of standard

national security requirements with respect to the taxpayer’s use of

classified intelligence information. Id. at 519–20. Those requirements

prohibited the taxpayer from reproducing intelligence materials or

releasing intelligence materials to others without authorization and

required the return or destruction of all materials generated by the

taxpayer as directed upon completion of the contract. Id. at 521. The

taxpayer made a three-pronged argument to the court, asserting that

(1) it retained the right to use generalized “skills and advancements”

that it developed in performing the contract; (2) it could use the

particular research results for other contracts following authorization

from the relevant component of DOD; and (3) a regulation incorporated

into the contract provided that it would retain the rights to any

patentable invention or discovery conceived or reduced to practice in

performing the contract. Id. at 521–23.

With respect to the taxpayer’s initial argument, Federal Claims

characterized any skill or advancement gained as an “incidental benefit”

from performing research and thus not a substantial right under

Treasury Regulation § 1.41-4A(d)(2). Dynetics, 121 Fed. Cl. at 521. With

respect to the second argument, the court observed that the taxpayer

had not answered “the obvious question of how it could have substantial

rights in the results of the research, if it needed the government’s

‘authorization’ to use those results.” Id. Finally, while the court

[*58] acknowledged that the taxpayer would retain patent rights under

the contract, it concluded that such rights would be irrelevant to

whether the taxpayer retained substantial rights in the nonpatentable

results of its research at issue. Id. at 523. Federal Claims thus concluded

that the taxpayer retained no substantial rights in the research

performed under this contract. Id.

In Lockheed Martin, 210 F.3d at 1375, the Federal Circuit

analyzed each of the taxpayer’s arguments on appeal. First, the Federal

Circuit determined that “[t]he right to use the research results, even

without the exclusive right, is a substantial right.” Id. On appeal the

Government argued that the determination of substantial rights

requires reference to external export control laws and top-secret

classifications. Id. The Federal Circuit rejected the argument that there

can be reference to information outside the research agreements. “The

regulation’s focus on the taxpayer’s right under the research agreements

makes it clear that the determination whether the taxpayer had the

right to use the results of its research without paying for that right must

be determined by reference to the research agreements.” Id. at 1376.

Next, the Government argued that under the “Recovery of

Nonrecurring Costs on Commercial Sales” provision the taxpayer was

required to reimburse the Government for its nonrecurring, or one-time,

costs relating to the research, development, testing, and production of

products that the taxpayer wished to sell to third parties. Id. at 1377.

The Federal Circuit found this wording distinguishable from that of a

provision requiring payment for the right to use the research. Id. The

court said that “requiring payment for the right to use is generally a

royalty based on sales of a product, not on cost of its research and

development. Such payment is generally a percentage or per item

royalty, rather than a cost reimbursement provision such as exists

here.” Id. On the basis of this distinction the Federal Circuit determined

the clause does not restrict the taxpayer’s use of the items or technology

but merely applies when the taxpayer sells items or licenses of related

technology. Id. Moreover, the court noted how the taxpayer’s “right to

make the subject products, essentially similar products, or related

technology, and to use them in its own business, is not restricted. Even

the right to sell is not precluded if reimbursement is made.” Id.

In Lockheed Martin, 210 F.3d at 1378, the Government also

argued that the “Patent Rights Clause—Retention by the Contractor”

restricts the taxpayer’s rights to research. The clause gives the taxpayer

“rights to all patents and inventions, subject to the government’s right

[*59] to a nonexclusive, nontransferable, paid-up license.” Id. The

Federal Circuit considered the Government’s argument and determined

that this clause and the “Rights in Technical Data and Computer

Software” clause gave the Government broad rights but not unlimited

rights since the taxpayer was not restricted from using the information

itself or disclosing it to others. Id. The court determined the taxpayer

was restricted on its obligation to reimburse the Government only when

it wished to sell or license the information when “the information

constitutes a contract item, an ‘essentially similar item’ or ‘related

technology.’” Id. The Federal Circuit explained that “[t]he fact that

others may have access to the data and software does not mean that

Lockheed Martin loses its rights therein. The right to use is not a zerosum game. Lockheed Martin still retains substantial rights in the

subject matter even when others do as well.” Id.

In conclusion, the Federal Circuit ruled in Lockheed Martin, 210

F.3d at 1378–79, that under the provisions of the contract it was not

funded since the taxpayer had “retained the right to use the results of

its research in its business without paying for that right and therefore

retained ‘substantial rights’ in its research under Treasury Reg. §§ 1.412(a) and 1.41-5(d).”

Here respondent contends on the basis of the plain terms of the

Projects’ contracts that AS+GG did not retain substantial rights in the

research performed. Petitioners contend—after looking in totality at the

Projects’ contracts, settlement agreements, and foreign law—that

AS+GG did retain substantial rights in its research. To decide the issue,

we will once again examine the terms of the contract for each Project

and determine whether there was a retention of substantial rights. See

id. at 1376; Tangel, T.C. Memo. 2021-1, at *17 (“[T]he parties’ agreement

controls in determining whether the taxpayer performing the research

has retained ‘substantial rights.’”).

Atrium City Tower (Project No. 208021)

The Atrium City Tower Contract section 6.1(b) and (d),

Information, Documents, and Confidentiality, provided that if there was

a termination during the concept design phase, “[AS+GG] shall retain

the intellectual property”; but if there was any termination beyond the

concept design phase which included full payment for the phases along

with the mobilization fee, “the ownership of the intellectual property will

vest automatically with [Meraas] . . . [and AS+GG] shall have a limited

license to display, present, exhibit and state the design.” Section 6.1(g)

[*60] provided that Meraas shall not replicate the same project without

remuneration to AS+GG for “25% of the original design fee.” If AS+GG

wanted to use the information for educational purposes to advance the

knowledge of the architectural profession, section 6.1(h) provided that

the consent of Meraas needed to be obtained. Finally, section 6.2(a),

Confidentiality, provided that AS+GG shall not use any information

from Atrium City Tower for any purpose other than the performance

under the contract “without having first obtained on each occasion the

express prior written approval of [Meraas].”

We conclude the Atrium City Tower Contract terms are

unambiguous. However, we determine section 6.1 inapplicable given

that neither party clearly indicates at what phase the project was

terminated, Meraas is not trying to replicate the construction of the

project, and AS+GG is not trying to use the work only for publication to

advance the general knowledge of the architectural profession.

The clause that directly addresses the issue of whether AS+GG

retained substantial rights is found in section 6.2(a). Without having

obtained on each occasion express prior written approval from Meraas,

AS+GG was prohibited from using “any information, article, press

release, drawing, photograph, illustration or any other publicity relating

to this Agreement or the Project generally or use such information for

any purpose other than performing the Services.” This clause aligns

with the contract in Dynetics, which determined that the taxpayer did

not retain substantial rights in the results of the research since it first

needed the Government’s authorization to use those results. Dynetics,

121 Fed. Cl. at 521; see also Tangel, T.C. Memo. 2021-1, at *17 (“Having

to secure permission to use the research, with no conditions limiting the

other party’s ability to withhold consent, prevents [the taxpayer] from

possessing substantial rights.”).

However, as previously discussed, settlement agreements are

taken into consideration when the terms directly override the original

terms. Section 6.2(a) of the Atrium City Tower Contract is superseded

by the Deed of Settlement by section 3.2(d)(ii), where the parties

mutually agreed that “ASGG retains the copyright in the Projects

Documents and hereby grants Meraas a license to market the Projects

Documents and Projects on condition that ASGG’s name is legibly on all

images/models/videos of the Projects.”

Here, AS+GG retained the copyright to the project documents and

gave Meraas a license to market the documents. Meraas’s license,

[*61] however, does not restrict AS+GG from using any information

from the research in the future. “The right to use the research results,

even without the exclusive right, is a substantial right.” Lockheed

Martin, 210 F.3d at 1375. Consequently, we determine AS+GG has

retained substantial rights to the research performed under the Atrium

City Tower Contract, as amended through the Deed of Settlement.

Kingdom Tower (Project No. 210005)

The Kingdom Tower Contract provides under Information,

Documents and Confidentiality, section 6.1(b) and (c), that if Jeddah

fulfilled its obligations of remuneration at various points of the contract,

“all information, data, drawings and documents developed or prepared

by [AS+GG] in the performance of the Services shall forthwith become

the absolute property of [Jeddah]”; and other than designs previously

used on other projects by AS+GG “the copyright in relation to all

information, data, drawings and documents developed or prepared by

[AS+GG] in the performance of the Services shall forthwith vest in

[Jeddah] and [AS+GG] shall not use them for any purpose other than

for the performance of the Services.”

Finally, section 6.2, Confidentiality, provided that AS+GG shall

not use any information for any use other than performing the contract

“without having first obtained on each occasion the express prior written

approval of [Jeddah].”

The Kingdom Tower Contract terms are unambiguous. Under

section 6.1(b) and (c) all documents, information, and the copyright in

relation to the information prepared are to become the absolute property

of Jeddah. These clauses prevent AS+GG from obtaining any ownership

or control over the information and documents developed in respect to

the Kingdom Tower Contract. Further, the clauses explicitly preclude

AS+GG from using the information obtained. Section 6.2 provided that

AS+GG is required to obtain express written approval from Jeddah for

using the information acquired other than in performing the services

under the Kingdom Tower Contract. See Dynetics, 121 Fed. Cl. at 521

(determining the taxpayer did not retain substantial rights in its

research and failed to address “the obvious question of how it could have

substantial rights in the results of the research, if it needed the

government’s ‘authorization’ to use those results”).

Petitioners argue that various sections of the Copyright Laws of

the Kingdom of Saudi Arabia regarding moral rights apply to the

[*62] Kingdom Tower Contract. Generally Copyright Laws of the

Kingdom of Saudi Arabia provided that moral rights include attributing

work to oneself, objecting to any infringement of work, and preventing

deletion, amendments, and withdrawal of work. These moral rights are

permanent rights of the author and are not subject to waiver or lapse by

prescription. Petitioners, without explaining how the foreign law would

apply, contend that these laws override the terms of the Kingdom Tower

Contract and give rise to AS+GG’s retaining its copyright. We remain

unpersuaded.

First, petitioners do not explain through caselaw or testimony

how this statute would override the Kingdom Tower Contract that was

assented to by both parties. 24 Second, petitioners fail to explain what

moral rights encompass. Third, if this law generally applies to all

architecture contracts in the Kingdom of Saudi Arabia for the

production of any work at any stage and cannot be “subject to waiver or

lapse by prescription,” then there was no purpose in contracting to

Information, Documents and Confidentiality in section 6 of the Kingdom

Tower Contract. Fourth, the determination of substantial rights must

be made by reference to the research agreements, not by reference to

information, including foreign law, outside the agreement. See Lockheed

Martin, 210 F.3d at 1375–76.

In conclusion, AS+GG did not retain substantial rights in the

research performed under the Kingdom Tower Contract.

Masdar HQ (Project No. 208004)

Section 10.1, Intellectual Property, provided that “Masdar

acknowledges that the Documents are vested, and shall remain vested,

in [AS+GG] or Sub-Consultants as appropriate.” AS+GG agreed under

section 10.2 and 10.3 to grant “a worldwide, irrevocable royalty-free

exclusive license(s) to Masdar to copy, use and to reproduce any or all of

the Documents for any purpose connected with the Project.” Section 10.4

provided that although the intellectual property remained vested in

AS+GG, it was not entitled to “use the Documents so as to design any

building or structure similar in overall design and appearance to

Masdar city, nor shall it be entitled to use the Documents for any

purpose connected with Masdar city other than for the purpose of this

Agreement” without prior written consent of Masdar. Documents were

24 As seen in Betz, T.C. Memo. 2023-84, at *110–11, the Court relied on the

prior holdings of the courts in the jurisdiction of the choice-of-law provision to analyze

the contract terms.

[*63] defined broadly to mean “all drawings, models, plans, elevations,

sections, perspectives, specifications, schedules, designs and any other

works and documentation produced as part of the services.”

Again, the terms of the Masdar HQ Contract are unambiguous.

The documents and intellectual property rights, which include the

models, plans, and drawings, are vested in AS+GG. The license that is

granted to Masdar under section 10.2 and 10.3 does not diminish

AS+GG’s right to use the results of the research. See Lockheed Martin,

210 F.3d at 1375 (“The right to use the research results, even without

the exclusive right, is a substantial right.”).

The limiting clause of section 10.4 does generally restrict

AS+GG’s overall rights in utilizing the documents to produce another

building structure that is “similar in overall design and appearance to

Masdar City” without written consent of Masdar. However, we do not

find this clause changes the rights obtained by AS+GG. Put simply, this

clause does not exclude AS+GG from designing another building that

has innovative functional technology developed from its research under

the Masdar HQ Contract as long as the structure of the building as a

whole is not similar in overall design and appearance to Masdar HQ. See

id. at 1377; Betz, T.C. Memo. 2023-84, at *111.

The Masdar Settlement Agreement entered into between the

parties provided that they “acknowledge Masdar’s perpetual license and

right to use the Intellectual Property pursuant to Clause 10.2 of the

Consultancy Agreement.” It further provided that “[f]or avoidance of

doubt, the Agreement remains in full force and effect subject to the

terms of this Settlement Agreement and any amendments or variations

to the Agreement.” There are no terms in the Masdar Settlement

Agreement that contradict the original terms in the Masdar HQ

Contract such that further analysis is needed.

Therefore, we determine AS+GG has retained substantial rights

to its research under the Masdar HQ Contract, as amended.

Atrium City Masterplan (Project No. 207014)

The Copyright section provided that “AS+GG shall retain the

grant the Client a license to reproduce the work in connection with the

completion of the Project.” However, the Copyright section provided that

if “AS+GG’s services do not proceed past Concept Design or should the

client hire another architect to complete the Project past Concept Design

[*64] AS+GG shall retain the ownership and copyright of all work

produced and the Client may not use AS+GG documents for the Project.”

We find the Atrium City Masterplan Contract terms to be

unambiguous. AS+GG retained copyrights of its work, which would

allow it to use its research in future projects. The license to Meraas does

not divest AS+GG of its ability to use its own research. See Lockheed

Martin, 210 F.3d at 1378 (“The right to use is not a zero-sum game. [The

taxpayer] still retains substantial rights in the subject matter even

when others do as well.”). Consequently, we determine AS+GG has

retained substantial rights under the original terms of the Atrium City

Masterplan Contract.

We are to also consider the terms under the Deed of Settlement

that directly override the terms of the Atrium City Masterplan Contact.

The Deed of Settlement section 3.2(d)(ii) provided that “ASGG retains

the copyright in the Projects Documents and hereby grants Meraas a

license to market the Projects Documents and Projects on condition that

ASGG’s name is legibly on all images/models/videos of the Projects.”

After considering the Deed of Settlement, our determination

remains unchanged. AS+GG retained copyrights in the documents and

granted Meraas a license to market the documents. The license is not an

unlimited restriction prohibiting AS+GG from using any information or

its research in the future. See id. at 1375. Accordingly, AS+GG has

retained substantial rights in the research performed under the Atrium

City Masterplan Contract, as amended.

Plot 14 (Project No. 206003)

Section 6.1(b), Information, Documents and Confidentiality,

provided that “[a]ll information, data, drawings and documents

developed or prepared by [AS+GG] in the performance of the Services

shall forthwith become the absolute property of [Emaar Properties].”

Further, section 6.1(c) provided that other than designs used on other

projects by AS+GG, “the copyright in relation to all information, data,

drawings and documents developed or prepared by [AS+GG] in the

performance of the Services shall forthwith vest in [Emaar Properties]

and [AS+GG] shall not use them for any purpose other than for the

performance of the Services.” Finally, section 6.2, Confidentiality,

provided that AS+GG could not use any of the information obtained from

the project other than in performing the services “without having first

[*65] obtained on each occasion the express prior written approval of

[Emaar Properties].”

We find the Plot 14 Contract terms to be unambiguous. All

documents were the absolute property of Emaar Properties, and the

vested in Emaar Properties as stated under section 6.1(b) and (c). The

Plot 14 Contract also specifically mentioned under section 6.2 that

AS+GG had to obtain written permission from Emaar Properties to use

any of the information other than for the performance of the services for

the Plot 14 Contract. See Tangel, T.C. Memo. 2021-1, at *17 (“Having to

secure permission to use the research, with no conditions limiting the

other party’s ability to withhold consent, prevents [the taxpayer] from

possessing substantial rights.”); Betz, T.C. Memo. 2023-84, at *109 (“If

[the taxpayer] was unable to retain and use such information, material,

and work product without permission, then we fail to see what rights

[the taxpayer] retained under the contract to any research performed,

aside from the incidental benefit of increased knowledge and

experience.”); Dynetics, 121 Fed. Cl. at 521 (ruling that the taxpayer did

not retain substantial rights in the results of the research when it

needed Government “authorization” to use the results). Accordingly,

AS+GG failed to retain substantial rights to its research in the Plot 14

Contract.

The email correspondence petitioners cite regarding settlement of

the project does not address copyright or document rights under the Plot

14 Contract; therefore, no further analysis is required.

Petitioners argue that U.A.E. copyright provisions providing

automatic protection to authors should apply to the Plot 14 Contract.

We do not agree with petitioners. “The regulation’s focus on the

taxpayer’s right under the research agreements make[s] it clear that the

determination whether the taxpayer had the right to use the results of

its research without paying for that right must be determined by

reference to the research agreements.” Lockheed Martin, 210 F.3d at

1376; see Tangel, T.C. Memo. 2021-1, at *17 (“[T]he parties’ agreement

controls in determining whether the taxpayer performing the research

has retained ‘substantial rights.’”).

Petitioners provide no testimony or caselaw on how or why these

U.A.E. copyright protection laws would override the agreed-to contract

terms. Petitioners cite the U.A.E. Ministry of Information and Culture,

which affords an author protection without the need for formal

[*66] registration when the work is created. Yet this foreign law

petitioners cite also mentions that the author is the owner of all the

rights except what he disposes of openly and that the author and his

successors or the holder of the right of the author can grant a license for

exploitation of the work by any means. Consequently, we find this

foreign law inapplicable in our determination of whether substantial

rights to the research were retained by AS+GG. 25

We find that AS+GG did not retain substantial rights to its

research under the Plot 14 Contract.

Plot R2 (Project No. 207016)

Section 6.1, Information, Documents and Confidentiality,

provided that “[AS+GG] shall retain the copyright of their work and

upon payment of all fees when due shall grant [ETA Star Property] a

license to reproduce the work in connection with the completion of the

Project”; but “[s]hould [AS+GG]’s services not proceed past Concept

Design or should [ETA Star Property] hire another architect to complete

the Project past Concept Design [AS+GG] shall retain the ownership

and copyright of all work produced.”

The Plot R2 Contract terms are unambiguous, and petitioners’

arguments here are compelling. AS+GG retained the copyright of its

work, which allowed it to use the results of its research. Even if ETA

Star Property was granted a license, its right to use the research results

does not preclude AS+GG’s right to also use the research results. See

Lockheed Martin, 210 F.3d at 1375.

Accordingly, we find that AS+GG did retain substantial rights in

its research under the Plot R2 Contract.

Conclusions as to Funded Research

In conclusion, none of the payments under the six contracts were

contingent on the success of the research. However, under four of the six

contracts AS+GG did retain substantial rights—Atrium City Tower,

Masdar HQ, Atrium City Masterplan, and Plot R2. Consequently, for

the four Projects for which AS+GG did retain substantial rights,

petitioners may be eligible to claim research credits, to the extent the

25 Even if we were to apply the U.A.E. law referenced, these automatic

protections afforded under the law would have been legally contracted away when

AS+GG agreed to do so under the contracts.

[*67] total amount of the research expenses exceeded the payments

received. See Treas. Reg. § 1.41-4A(d)(3), (6) (ex. 1).

Reasonable Compensation

The parties disagree about the methodology to be used for

measuring or determining reasonable compensation of the Partners.

Petitioners argue that the test for determining reasonableness is the

independent investor test as dictated by the Seventh Circuit in Exacto

Spring Corp. v. Commissioner, 196 F.3d 833, 838 (7th Cir. 1999), rev’g

Heitz v. Commissioner, T.C. Memo. 1998-220. Respondent contends that

the independent investor test is not the applicable test in these cases

because it relates to section 162 and not specifically to section 174.

Respondent instead argues that the factors set out in Mayson

Manufacturing Co. v. Commissioner, 178 F.2d at 119, and considered in

Suder, T.C. Memo. 2014-201, at *64, should apply.

Congress added section 174(e) to the Code in the Omnibus Budget

Reconciliation Act of 1989 (OBRA), Pub. L. No. 101-239, § 7110(d), 103

Stat. 2106, 2325. The House report accompanying OBRA, H.R. Rep. No.

101-247, at 1203 n.12 (1989), as reprinted in 1989 U.S.C.C.A.N. 1906,

2673 n.57, explains:

The committee intends that the reasonableness

requirement under section 174 be parallel to the

reasonable allowance requirement for salaries and other

compensation under section 162(a)(1), in that amounts

supposedly paid for research may be recharacterized as

disguised dividends, gifts, loans, or other similar

payments. The committee does not intend that the

reasonableness requirement under section 174 be used to

question whether or not research activities themselves are

of a reasonable type or nature.

Under section 174(e) a taxpayer may deduct a research and

development expenditure to the extent that “the amount thereof is

reasonable under the circumstances.” 26 Under section 162(a)(1) a

taxpayer may deduct “a reasonable allowance for salaries or other

compensation for personal services actually rendered.” “The test of

deductibility in the case of compensation payments is whether they are

26 On the basis of the amendment to section 174, adding subsection (e), we find

Congress has legislatively overruled the district court’s conclusions reached in Driggs

v. United States, 706 F. Supp. 20 (N.D. Tex. 1989).

[*68] reasonable and are in fact payments purely for services.” Treas.

Reg. § 1.162-7(a); see id. para. (b)(3).

The Seventh Circuit, in Exacto Spring Corp. v. Commissioner, 196

F.3d at 839, has held that to determine whether payments of

compensation are reasonable, an “independent investor” test should be

applied. See also Menard, Inc. v. Commissioner, 560 F.3d 620, 623 (7th

Cir. 2009), rev’g T.C. Memo. 2004-207. The parties have stipulated that

appeal of these cases will be to the Seventh Circuit. See I.R.C.

§ 7482(b)(1) and (2). We follow the law of the court of appeals to which

an appeal will lie. Golsen v. Commissioner, 54 T.C. 742, 757 (1970), aff’d,

445 F.2d 985 (10th Cir. 1971). Accordingly, the Seventh Circuit has

expressly told us that the independent investor test is the standard we

are to use for determining reasonable compensation. Exacto Spring

Corp. v. Commissioner, 196 F.3d at 838. 27 Thus, we will faithfully apply

the independent investor test set forth by the Seventh Circuit in Exacto

Spring Corp.

The independent investor test creates a rebuttable presumption

that an owner-employee’s salary is reasonable if investors obtain a “far

higher return than they had any reason to expect.” Id. at 839. The test’s

rationale is that investors pay managers salaries to “work[] to increase

the value of the assets . . . entrusted to [their] management.” Id. at 838.

The higher the rate of return (adjusted for risk) that a

manager can generate, the greater the salary he can

command. If the rate of return is extremely high, it will be

difficult to prove that the manager is being overpaid, for it

will be implausible that if he quit if his salary was cut, and

he was replaced by a lower-paid manager, the owner would

be better off; it would be killing the goose that lays the

golden egg.

Id. Thus, if investors obtain returns above what they should reasonably

expect, a manager’s salary is presumptively reasonable. Id. at 839. The

presumption is rebutted if the high rate of return is attributable to an

extraneous event rather than the manager’s efforts. Id.

27 Respondent cites Suder, T.C. Memo. 2014-201, at *63, and contends that the

Court now applies the multifactor test described in Mayson. Respondent, however,

ignores the fact that the so-called Mayson multifactors were applied because the case

was appealable to the U.S. Court of Appeals for the Fifth Circuit. See id. at *63–64.

[*69] The parties do not dispute that if the independent investor test

was applied, the mathematical results would supp

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