# United States Tax Court

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URL: https://www.frixlaw.com/law-library/documents/agency%3Atax-court%3A4519e591d5b3dc78

## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

United States Tax Court
T.C. Memo. 2026-50
ADRIAN D. SMITH AND NANCY W. SMITH, ET AL., 1
Petitioners
v.
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
[*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
[*3] and Forest. Petitioners resided in Illinois when the Petitions were
timely filed. 6
I.

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
[*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
A.

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
[*5]

B.

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.
C.

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
[*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
A.

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
[*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
[*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
[*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
[*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.
B.

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
[*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.
(c) Provided that the Employer had fulfilled its obligations
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
[*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
[*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.
C.

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
[*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
[*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
[*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].”
D.

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
[*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.
E.

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
[*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.
(c) 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

19
[*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
[*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.
F.

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
[*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
[*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
[*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.
V.

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
[*24] Petitioners timely filed independent Petitions with this Court
which were consolidated for all purposes on February 28, 2018.
VI.

Experts
A.

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.
B.

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
[*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
[*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
I.

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
[*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
[*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
[*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
[*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
[*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
[*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
[*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
[*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
A.

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
[*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
[*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
[*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.
1.

Atrium City Tower (Project No. 208021)
a.

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
[*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
[*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).
b.

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
[*40] support the finding that AS+GG’s financial risk was not
contingent on the success of its research performed.
c.

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.
d.

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
[*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.
e.

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
[*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.
2.

Kingdom Tower (Project No. 210005)
a.

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
[*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.
b.

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
[*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).
c.

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.
3.

Masdar HQ (Project No. 208004)
a.

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
[*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.
b.

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
[*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.
c.

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.
d.

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
[*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.
e.

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
[*48]

4.

Atrium City Masterplan (Project No. 207014)
a.

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
[*49]

b.

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.
c.

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.
d.

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
[*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.
e.

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.
5.

Plot 14 (Project No. 206003)
a.

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
[*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.
b.

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
[*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.
c.

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.
d.

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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Atax-court%3A4519e591d5b3dc78. Public record. Not legal advice.