Amirikian v. United States

Amirikian at a Glance: Jurisprudential Context for the Federal R&D Tax Credit

In the canon of United States federal tax jurisprudence, Amirikian v. United States, 100 F. Supp. 263 (D. Md. 1951), rev'd sub nom. United States v. Amirikian, 197 F.2d 442 (4th Cir. 1952), occupies a foundational position at the intersection of contract law, scientific research incentives, and federal tax characterization. Although originally litigated under Sections 22(a) and 22(b)(3) of the Internal Revenue Code of 1939 prior to the modern codification of Internal Revenue Code (IRC) Section 174 and the Research and Development (R&D) Tax Credit under IRC Section 41, some contemporary federal R&D tax credit case law compendia categorize Amirikian as a primary precedent governing the Funded Research Exclusion under IRC Section 41(d)(4)(H).

Summarised in the RDTAXCASES.com case library, a Swanson Reed database.

The enduring doctrinal significance of Amirikian stems from the contract-based reasoning it applied to a contest prize awarded for a technical engineering paper. The United States Court of Appeals for the Fourth Circuit held that the case was ruled by Robertson v. United States, under which, when a contestant submits work in response to a contest sponsor's offer and wins the prize, the payment of the prize is, in the legal sense, the discharge of a contractual obligation; the Fourth Circuit applied that rule even though the sponsor was a tax-exempt scientific and educational foundation that purchased neither the paper nor any publication rights in it, quoting the Supreme Court's statement that where the payment is in return for services rendered, it is irrelevant that the donor derives no economic benefit from it. The Fourth Circuit did not address grant programs, industry awards generally, or the research credit, which did not yet exist.

When mapped onto the modern statutory architecture of IRC Section 41 and Treasury Regulation Section 1.41-4A(d), the contract principle applied in Amirikian—read together with the separate, later line of funded-research authority in Fairchild Industries, Inc. v. United States, 71 F.3d 868 (Fed. Cir. 1995), Lockheed Martin Corp. v. United States, 210 F.3d 1366 (Fed. Cir. 2000), Geosyntec Consultants, Inc. v. United States, 776 F.3d 1330 (11th Cir. 2015), Populous Holdings, Inc. v. Commissioner, T.C. Docket No. 405-17 (2019), Meyer, Borgman & Johnson, Inc. v. Commissioner, 100 F.4th 986 (8th Cir. 2024), and Smith v. Commissioner, T.C. Memo. 2026-50—can create formidable compliance barriers for engineering, architectural, defense, and industrial technology taxpayers. Specifically, third-party payments, industry foundation awards, and client-reimbursed engineering contracts may disqualify underlying Qualified Research Expenses (QREs) unless the taxpayer proactively structures its agreements to retain both the financial risk of technical failure and substantial rights in the research results, while separating retrospective technical documentation from contemporaneous processes of experimentation.

Comprehensive Case Deconstruction: United States v. Amirikian, 197 F.2d 442 (4th Cir. 1952)

Factual Background and Technical Engineering Context

The taxpayer, Dr. Arsham Amirikian (1899–1990), was an eminent civil and structural engineer employed in the Bureau of Yards and Docks of the United States Department of the Navy in Washington, D.C., an agency later reorganized as the Naval Facilities Engineering Command, where he served as Chief Engineering Adviser before founding Amirikian Engineering Company, reportedly based in Arlington, Virginia. Over a distinguished career that led to his election to the National Academy of Engineering in 1980, Dr. Amirikian pioneered structural behavior theories for protective construction—presented in his 1950 Navy publication Design of Protective Structures (reportedly designated NT-3726)—alongside innovations in precast concrete shell structures and welded steel pontoon bridges used in military operations.

Between October 1939 and April 1940, in the course of his official duties with the Navy's Bureau of Yards and Docks, Amirikian participated in the designing and supervision of a new method of constructing caissons, or gates, for naval dry docks by means of industrial arc welding. According to the court, this work resulted in a substantial monetary saving for the United States Government; the opinion makes no finding that it extended the service life or structural integrity of naval dry dock infrastructure, although increased service life was one of the factors the contest booklet listed for judging entries.

In 1936, the Lincoln Electric Company established The James F. Lincoln Arc Welding Foundation, a tax-exempt scientific and educational organization operating under Section 101(6) of the Internal Revenue Code of 1939. The chartered purpose of the Foundation was to "stimulate scientific interest and scientific research"—together with study and education in respect of the development of the arc welding industry—while the stated purpose of the 1940 contest was to encourage the industrial use of the arc welding process through the distribution of information and knowledge about its application in various industrial fields. In January 1940, the Foundation announced a contest offering monetary prizes for technical papers addressing the subject "Progress made by application of arc welding between January 1, 1940 and June 1, 1942."

The Foundation's contest required contestants to submit their papers in accordance with specified rules and conditions and set out eligibility requirements and judging factors. Contestants were required to have actually engaged in the design or execution of the work upon which the subject matter of their papers was based. Furthermore, the booklet announcing the contest listed as factors to be considered in making the awards the cost saved by the method described in the paper, compared with the previous method, both for the author's organization and across the broader industry, increased structural service life, and functional engineering advantages, while literary skill was explicitly excluded from consideration in the judging process. Crucially from an intellectual property standpoint, the court recorded that neither Amirikian's paper itself nor any publication rights in it were purchased by the Foundation.

Amirikian learned of the Foundation's competition in the fall of 1941. Collaborating with a co-author—the Director of Planning and Design in the Navy Department's Bureau of Yards and Docks—Amirikian expended approximately 40 hours compiling and drafting a technical paper titled "Welded Caissons for Naval Dry Docks," which described the improved designs and the methods for developing the arc-welded caissons on which Amirikian had been working, and the substantial savings resulting from them. The co-authors formally submitted the manuscript on May 30, 1942, and in August 1942, the Foundation awarded their submission the competition's first prize of $13,700, of which Amirikian received a 50% share totaling $6,850.

Procedural History and the Judicial Split

Amirikian reported the $6,850 award as gross income on his 1942 federal income tax return, remitted the resulting tax liability under protest, and on December 5, 1946, filed a claim for refund (the opinion does not state the amount claimed); he later recovered a District Court judgment of $1,622.85, the amount by which his tax was increased by the inclusion of the prize money in his taxable income. Following the Internal Revenue Service's disallowance of the refund claim, Amirikian initiated a refund suit in the United States District Court for the District of Maryland.

In Amirikian v. United States, 100 F. Supp. 263 (D. Md. 1951), the District Court ruled in favor of Amirikian and entered judgment for $1,622.85. The Fourth Circuit's opinion records only that the District Court held that the money Amirikian received in the contest should not be included in his taxable income; it does not recite the District Court's reasoning, and the further characterization that the District Court relied on earlier appellate authority regarding scholarly essay prizes and emphasized the Foundation's charitable and scientific intent to foster public engineering knowledge alongside Amirikian's non-pecuniary motivation in advancing naval engineering, holding that the $6,850 payment constituted a tax-exempt gift under IRC Section 22(b)(3) rather than compensation for services rendered under Section 22(a), is drawn from sources outside the appellate opinion and is not confirmed by it.

The United States appealed to the United States Court of Appeals for the Fourth Circuit, where the case was heard (reportedly argued on November 5, 1951) before Chief Judge Parker, Circuit Judge Soper, and District Judge Moore. On June 16, 1952, Circuit Judge Soper delivered the opinion of the Fourth Circuit in United States v. Amirikian, 197 F.2d 442 (4th Cir. 1952), reversing the District Court's judgment and holding that the prize money was includible in taxable income because the case was ruled by Robertson v. United States, under which payment of a contest prize is the discharge of a contractual obligation.

The Fourth Circuit's Holding and Doctrinal Rationale

The Fourth Circuit held that its disposition was directly controlled by the United States Supreme Court's landmark decision issued two weeks earlier on June 2, 1952, in Robertson v. United States, 343 U.S. 711, 72 S. Ct. 994 (1952). In Robertson, a composer submitted an unpublished symphony written between 1936 and 1939 to a philanthropic competition established in 1945 for native-born composers of the Western Hemisphere, winning a $25,000 award in 1947. Writing for the Fourth Circuit in Amirikian, Judge Soper held that the case was ruled by Robertson and quoted the Supreme Court's statement that, in the legal sense, payment of a prize to a winner of a contest is the discharge of a contractual obligation, because the acceptance by the contestants of the offer tendered by the sponsor of the contest creates an enforceable contract; the Fourth Circuit did not extend that reasoning to research funding generally or characterize the contract as bilateral.

Consequently, under the quoted Robertson passage, the discharge of legal obligations—the payment for services rendered or consideration paid pursuant to a contract—is in no sense a gift. The passage the Fourth Circuit quoted stated that the case would be different if an award were made in recognition of past achievements or present abilities, or if payment was given not for services but out of affection, respect, admiration, charity or like impulses, citing Old Colony Trust Co. v. Commissioner, 279 U.S. 716, 730.

Crucially for modern R&D tax credit jurisprudence, the Fourth Circuit quoted the Supreme Court's mandate that "where the payment is in return for services rendered, it is irrelevant that the donor derives no economic benefit from it." Even though the James F. Lincoln Arc Welding Foundation, a tax-exempt scientific and educational organization, purchased neither Amirikian's paper nor any publication rights in it, the court held that the case was ruled by Robertson, so the $6,850 he received was includible in his taxable income. Furthermore, the opinion recites that the Robertson symphony was written between 1936 and 1939, before that award was established in 1945, and that Amirikian participated in designing and supervising the welded caisson method between October 1939 and April 1940—after the Foundation announced its contest in January 1940 but before he learned of it in the fall of 1941—and spent about forty hours preparing the paper; the court did not separately analyze this timing. The opinion therefore does not itself announce a rule that documenting pre-existing research to satisfy a sponsor's program requirements creates a contract for services; it simply held that the case was ruled by Robertson.

Doctrinal Bridge: How Amirikian Governs Modern R&D Tax Credit Disputes Under IRC Section 41

The Funded Research Exclusion and the "Mirror Image" Regulatory Regime

In contemporary federal R&D tax credit practice, Amirikian v. United States is indexed in some case law compendia alongside Fairchild Industries, Lockheed Martin, Geosyntec Consultants, Populous Holdings, and Meyer, Borgman & Johnson under the Funded Research Exclusion of IRC Section 41(d)(4)(H). Under Section 41(d)(4)(H), the term "qualified research" explicitly excludes "any research to the extent funded by any grant, contract, or otherwise by another person (or governmental entity)."

To prevent two taxpayers from claiming the R&D tax credit for the same dollar of research expenditure—or conversely, to determine whether the research performer or the paying sponsor is entitled to the subsidy—Treasury Regulation Sections 1.41-2(e)(2) and 1.41-4A(d) (incorporated into current Section 41 regulations via Treas. Reg. § 1.41-4(c)(9)) establish what the Federal Circuit in Fairchild Industries termed "mirror image" rules. When evaluating whether a payment from an external party, whether a commercial client, a defense agency like the Department of the Navy, or an industry foundation like the Lincoln Arc Welding Foundation, renders the researcher's activities "funded," courts examine "all agreements (not only research contracts) entered into between the taxpayer performing the research and other persons."

Under Treasury Regulation Section 1.41-4A(d)(1) and (2), research performed under any grant, contract, or third-party arrangement is treated as funded, and therefore disqualified from the researcher's QREs, unless the taxpayer satisfies a conjunctive Two-Prong Test. First, under the financial risk and contingency prong of Treasury Regulation Section 1.41-4A(d)(1), amounts payable under the agreement must be contingent upon the success of the research, meaning the taxpayer bears the financial risk of technical failure and is compensated for the successful product or result of the research rather than the mere performance of services or submission of work. Second, under the substantial rights prong of Treasury Regulation Section 1.41-4A(d)(2), the taxpayer must retain substantial rights in the research under the agreement. If the researcher retains no substantial rights, or must pay the client or sponsor a royalty or license fee to use the results of the research, the research is treated as 100% funded, even if payment was contingent on success. Furthermore, Treasury Regulation Section 1.41-4A(d)(2) explicitly mandates that "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."

Four Specific Legal Vulnerabilities Exposed by Amirikian Under IRC Section 41

When a modern engineering, manufacturing, or software enterprise conducts technical work analogous to Arsham Amirikian's naval dry dock caissons and Lincoln Foundation submission, four distinct legal vulnerabilities may arise under IRC Section 41.

The "Grant, Contract, or Otherwise" Trap for Non-Commercial Awards and Consortia

Taxpayers frequently assume that funds received from tax-exempt scientific foundations, industry trade associations, government innovation challenges, or corporate prize competitions are exempt from the IRC Section 41(d)(4)(H) funded research exclusion because the sponsor is not purchasing a commercial product or acquiring intellectual property. Amirikian is cited against this assumption, although the Fourth Circuit decided only that contest prize money was taxable income, decades before Section 41 existed. Practitioners reason that because, under the Robertson passage quoted in Amirikian, a contestant's acceptance of a sponsor's offer creates an enforceable contract and it is irrelevant that the donor derives no economic benefit where payment is for services rendered, such awards may fall within the statutory phrase "funded by any grant, contract, or otherwise." If the researcher is entitled to the grant, stipend, or milestone payment merely for performing the research and submitting a report—rather than bearing the financial risk of refunding advances if the technical objective fails—the payment may taint the underlying QREs.

The Evolution of Financial Risk: From Fairchild Industries to Meyer, Borgman & Johnson (2024) and Smith (2026)

In Fairchild Industries, Inc. v. United States, 71 F.3d 868 (Fed. Cir. 1995), the taxpayer entered into a fixed-price incentive contract with the U.S. Air Force to design and produce a prototype training aircraft. Although the Air Force remitted progress payments calculated as a percentage of costs actually incurred, the contract explicitly stipulated that Fairchild could retain those progress payments only if the research succeeded and resulted in technical deliverables tested and accepted by the Air Force; if the research failed, Fairchild was contractually obligated to repay the advances. Consequently, the Federal Circuit reversed the Court of Federal Claims and held that Fairchild bore the financial risk of failure.

Conversely, in Geosyntec Consultants, Inc. v. United States, 776 F.3d 1330 (11th Cir. 2015), while the IRS conceded that Geosyntec's fixed-price engineering contracts were unfunded, the Eleventh Circuit held that its capped cost-plus contracts, under which Geosyntec billed labor and expenses up to a maximum ceiling, were funded. The court emphasized that running the business risk of exceeding a budget cap or losing profit margin is the "wrong sense of risk" for Section 41; rather, payment must be legally contingent on the technical success of the research.

This judicial standard tightened in Meyer, Borgman & Johnson, Inc. v. Commissioner, 100 F.4th 986 (8th Cir. 2024) (affirming the Tax Court's summary judgment in Docket No. 7805-16) and Smith v. Commissioner, T.C. Memo. 2026-50 (June 16, 2026). In Meyer, Borgman & Johnson (MBJ), a structural engineering firm claimed approximately $190,000 in R&D credits across fiscal years ending September 30 of 2010, 2011, and 2013 for designing structural building systems. Although MBJ's contracts contained phased inspection clauses and allowed clients to terminate for substantial failure to perform, both the Tax Court and the Eighth Circuit disallowed the credits, holding that standard professional standards of care, inspection clauses, and termination-for-cause provisions lack the contractual specificity of Fairchild Industries, where payment explicitly turned on the technical success of each research step. Similarly, in Smith v. Commissioner (2026), the Tax Court evaluated six sample architectural projects under a two-step framework—examining substantial rights first and financial risk contingency second—concluding that research on projects where the firm did not retain substantial rights was fully funded, and that where the firm retained substantial rights but payment was not contingent on research success, the research was funded to the extent of client payments, so credits were available only to the extent research expenses exceeded those payments.

Post-Production Documentation vs. Contemporaneous Process of Experimentation

In Amirikian, the taxpayer's participation in designing and supervising the new arc-welding method of constructing caissons for naval dry docks took place between October 1939 and April 1940, whereas the approximately forty hours he spent preparing the prize paper fell between his learning of the contest in the fall of 1941 and the paper's entry on May 30, 1942. Under modern IRC Section 41, claiming QREs for those 40 hours, or for routine engineering execution, would likely fail on three independent statutory grounds. First, under the exclusion of IRC Section 41(d)(4)(A), any research conducted after the beginning of commercial production of the business component is excluded from qualified research. Second, under IRC Section 41(d)(1)(A)–(C) and Treasury Regulation Section 1.41-4(a)(5)(i), qualified research requires that the capability, method, or appropriate design of the business component be uncertain at the outset, and that substantially all activities constitute elements of a process of experimentation evaluating alternatives through modeling, simulation, or systematic trial and error. As illustrated in cases such as United States v. Grigsby, 86 F.4th 602 (5th Cir. 2023), Phoenix Design Group, Inc. v. Commissioner, T.C. Memo. 2024-113, and Little Sandy Coal Co., Inc. v. Commissioner, 62 F.4th 287 (7th Cir. 2023) (No. 21-3145), applying known, established engineering principles or drafting retrospective technical reports without testing substantially all elements of a pilot model or design can fail the Four-Part Test. Third, under Treasury Regulation Section 1.41-4(d) and recent Tax Court jurisprudence—including George v. Commissioner, T.C. Memo. 2026-10, Betz v. Commissioner, T.C. Memo. 2023-84, Scott Moore v. Commissioner, T.C. Memo. 2023-20, and Shami v. Commissioner, T.C. Memo. 2012-78—taxpayers must retain contemporaneous documentation substantiating the direct nexus between officer or employee wages and technical experimentation.

The Section 174 Capitalization and Section 280C(c) Interplay

Under the post-2021 regime of IRC Section 174 and IRS Notice 2023-63, as modified by subsequent legislative updates including the One Big Beautiful Bill Act (OBBBA, P.L. 119-21), taxpayers must also evaluate Specified Research or Experimental (SRE) expenditures. Under Section 6 of Notice 2023-63, a research provider performing contract research must capitalize and amortize SRE expenditures—historically over five years for domestic research and 15 years for foreign research (for tax years beginning after December 31, 2024, the OBBBA's new Section 174A permits immediate deduction of domestic research expenditures, while foreign research remains subject to 15-year amortization)—if it either bears financial risk OR retains a right to use or otherwise exploit any resulting SRE product through sale, lease, or license, whereas mere know-how gained through research services that is not protectable under applicable law does not create an SRE product. By contrast, under IRC Section 41, only one party can claim the research credit for any one dollar of cost, meaning the research provider can claim the R&D tax credit only if it satisfies BOTH financial risk AND substantial rights. Furthermore, if payment is contingent on the success of the research, Treasury Regulation Section 1.41-2(e)(2) treats the client's payment as paid for "the product or result rather than the performance of the research," barring the client from claiming the contract research credit while preserving the internal QRE credit for the researcher, subject to the Section 280C(c) rules as amended by the Tax Cuts and Jobs Act and, for tax years beginning after December 31, 2024, by the OBBBA.

Legal Requirements of IRC Section 41 and the Funded Research Allocation Formula

To qualify a project for the R&D tax credit while overcoming the contractual funding hurdles identified in Amirikian and its progeny, a taxpayer must satisfy the Four-Part Test of IRC Section 41(d)(1) AND navigate the Two-Prong Unfunded Research Standard of Treasury Regulation Section 1.41-4A(d), or alternatively apply the regulatory partial-funding allocation formula.

The Partial-Funding Allocation Safe Harbor (Treas. Reg. § 1.41-4A(d)(3))

A critical, frequently overlooked mechanism in Treasury Regulation Section 1.41-4A(d)(3) allows taxpayers who receive a third-party grant, prize, or fixed partial funding—such as the $13,700 Lincoln Foundation award in Amirikian—to preserve a substantial portion of their R&D tax credit even when the third-party payment itself is non-contingent, provided the taxpayer retains substantial rights in the research.

Under the default rule of Treasury Regulation Section 1.41-4A(d)(3), if a taxpayer retains substantial rights in the research but receives a non-contingent funding payment that is less than its total research expenses, the funding is applied dollar-for-dollar against otherwise creditable Qualified Research Expenses first.

However, under the Proportional Allocation Exception of Treasury Regulation Section 1.41-4A(d)(3), if the taxpayer establishes to the satisfaction of the IRS District Director that (1) its total research expenses, which include both creditable QREs and non-creditable research costs, exceed the funding amount, and (2) its otherwise creditable expenses exceed 65% of the funding amount, the taxpayer is permitted to allocate the funding proportionately among total research expenses, provided that at least 65% of the payment is allocated against otherwise creditable expenses.

This regulatory formula provides a potential workaround for Amirikian-style foundation grants and industry prizes: so long as the taxpayer retains substantial rights in the research, a $13,700 foundation award (in Amirikian, paid only upon the paper's selection as the first-award winner) generally will not taint a larger engineering R&D project in its entirety; it will merely reduce the creditable QRE base by at most $13,700 under the default rule, or as little as $8,905 (65% of $13,700) under the proportional allocation exception.

Case Study 1: Maritime Structural Engineering Firm (Direct Analog to Amirikian's Naval Dry Dock Caissons and Foundation Award)

Project Fact Pattern and Initial Legal Exposure

In this first hypothetical case study, Aegis Naval Structures, Inc. ("Aegis") operates as a domestic C-corporation specializing in marine civil and structural engineering, modeled loosely on Arsham Amirikian's later private enterprise, Amirikian Engineering Company, and his pioneering structural work for the Navy's Bureau of Yards and Docks. During the current tax year, Aegis undertakes a $1,200,000 engineering and prototyping initiative to design a next-generation, blast-resistant floating dry dock caisson utilizing automated submerged-arc welding of high-yield steel plates coupled with polyvinyl alcohol (PVA) fiber-reinforced cementitious composite (FRCC) ballast chambers capable of dissipating four times the low-velocity impact energy of plain normal concrete.

In its initial, unstructured contractual arrangement, Aegis falls into the legal traps illustrated by Amirikian and Meyer, Borgman & Johnson. First, Aegis executes a standard naval engineering services agreement with the U.S. Naval Facilities Engineering Command (NAVFAC) providing $1,000,000 in phased payments tied to progressive design review submittals, containing a general professional standard-of-care clause and a right for the Navy to terminate for substantial failure to perform, while assigning ownership of all final construction drawings to the Navy. Second, midway through the project, Aegis's lead structural engineers expend 120 hours ($18,000 in W-2 wages) compiling a comprehensive technical manuscript on the caisson's novel rib-framing and arc-welding distortion controls and submit it to a $50,000 competitive industrial research award sponsored by a tax-exempt welding foundation analogous to the James F. Lincoln Arc Welding Foundation in Amirikian. Aegis wins the $50,000 first prize after the dry dock caisson design is finalized.

Diagnosis of Legal Defects Under Amirikian and Section 41 Jurisprudence

If Aegis claims the $1,200,000 in project expenditures alongside the $18,000 in paper-drafting wages as Qualified Research Expenses under this initial structure, an IRS examination team would likely seek to disallow the claim in full based on three converging lines of authority. Under the Eighth Circuit's holding in Meyer, Borgman & Johnson (100 F.4th 986) and the Tax Court's 2026 decision in Smith v. Commissioner, Aegis's phased design submittal payments and standard termination-for-cause provisions do not make payment contingent upon the technical success of the research. Because Aegis is compensated for performing professional engineering services rather than delivering a technically proven result at its own financial peril, the $1,000,000 contract would likely be classified as funded research under IRC Section 41(d)(4)(H).

Simultaneously, by analogy to United States v. Amirikian (197 F.2d 442), Aegis's voluntary entry into the welding foundation's competition and compliance with its submission rules would likely be treated as creating a binding contract for services rendered—even though the foundation is a tax-exempt scientific organization that acquires no commercial ownership of the caisson design. Consequently, the $50,000 award may constitute external contractual funding under Section 41(d)(4)(H). Finally, the 120 hours ($18,000 in W-2 wages) spent drafting the technical paper for the foundation occurred after the technical design uncertainties of the caisson were resolved; under IRC Section 41(d)(4)(A) and the substantiation principles applied in cases such as United States v. Grigsby (86 F.4th 602), retrospective documentation and literary compilation after design completion generally do not constitute a process of experimentation.

Strategic Legal Restructuring to Qualify Aegis's Project Under IRC Section 41

To reduce the risk of disallowance and address the requirements of IRC Section 41, tax counsel should consider a comprehensive legal and operational restructuring prior to executing the agreements. Rather than billing for phased engineering design hours under a general standard of care, Aegis could redraft the NAVFAC agreement as a Fixed-Price Technical Deliverable Contract modeled on Fairchild Industries, Inc. v. United States (71 F.3d 868) and Populous Holdings, Inc. v. Commissioner (Docket No. 405-17). Specifically, the contract would incorporate an explicit technical performance and rejection clause under Treasury Regulation Section 1.41-4A(d)(1) stipulating that any interim progress payments are strictly financing advances subject to 100% repayment unless the final caisson prototype design passes quantitative finite element hydro-blast simulation thresholds and physical scale-model hydrostatic pressure tests. The agreement would state explicitly that Aegis is paid solely for a successful technical product or result under Treasury Regulation Section 1.41-2(e)(2) and bears 100% of the financial cost of any re-engineering, failed weld-distortion iterations, or rejected submittals without additional compensation.

In parallel, following Lockheed Martin Corp. v. United States (210 F.3d 1366) and Populous Holdings, the contract would include an intellectual property reservation clause satisfying Treasury Regulation Section 1.41-4A(d)(2). While the Navy may take title to the site-specific construction blueprints for the individual dry dock, the contract would explicitly confirm that Aegis retains an irrevocable, perpetual, non-exclusive, royalty-free right to use, reproduce, and commercially exploit all underlying research results—including the automated submerged-arc welding parameters, rib-framing structural geometries, and PVA fiber-reinforced concrete blast models—on future commercial and governmental projects without seeking consent or paying any fee to the Navy.

To limit the effect of the $50,000 foundation prize on its $1,200,000 R&D project under Amirikian, Aegis can consider one of two potential mechanisms. Under the first approach, if the industry foundation bestows an unsolicited honorarium purely in recognition of past engineering achievements without Aegis entering a bilateral competition or performing contractually mandated submission services, a court may find that no contract for services is formed, consistent with the exception stated in the Robertson passage quoted by the Fourth Circuit in Amirikian. Under the second approach, even if Aegis enters the competition and forms a contract under Amirikian, the foundation—like the Lincoln Arc Welding Foundation, which in Amirikian purchased neither the paper nor any publication rights in it—does not purchase the paper or acquire any intellectual property rights, meaning Aegis retains 100% substantial rights in the research under Treasury Regulation Section 1.41-4A(d)(2). Consequently, the $50,000 prize only disqualifies the research "to the extent funded" under IRC Section 41(d)(4)(H). Assuming Aegis incurs $1,200,000 in otherwise creditable QREs within $1,500,000 in total research expenses, the proportional allocation exception allocates 80% of the $50,000 prize, or $40,000, against creditable QREs, leaving $1,160,000 in net eligible QREs. Finally, Aegis should carve out the $18,000 in retrospective paper-drafting wages from its QRE pool and maintain contemporaneous engineering test logs proving that substantially all activities on the caisson pilot model constituted a systematic process of experimentation under Little Sandy Coal, Trinity Industries, and Betz.

Case Study 2: Industrial Robotics Consortium and Capped Software Development (Applying Amirikian and Geosyntec to Commercial Tech R&D)

Project Fact Pattern and Initial Legal Exposure

In the second hypothetical case study, ArcVision Robotics, LLC ("ArcVision") operates as an industrial automation and software engineering enterprise developing machine-vision, closed-loop thermal control software and robotic end-effectors for orbital arc welding of high-pressure pipeline infrastructure. During the tax year, ArcVision launches a $2,000,000 R&D project—comprising $1,600,000 in W-2 software and robotics engineering wages and $400,000 in prototype sensor supplies—to develop an embedded real-time neural network that detects weld-pool porosity and micro-cracking in sub-millisecond intervals using infrared spectrometry, dynamically adjusting arc voltage and wire-feed speed.

In its initial, unstructured business arrangement, ArcVision executes two agreements that create significant disallowance exposure under Amirikian, Geosyntec Consultants, and Tangel v. Commissioner. First, ArcVision enters into a "Time-and-Materials Not-to-Exceed (Capped) Development Contract" with a major energy pipeline original equipment manufacturer ("Apex Energy"), under which Apex Energy reimburses ArcVision's engineering labor hours plus a 10% markup, capped at a maximum ceiling of $1,500,000. The contract states that Apex Energy receives exclusive ownership of all software code and hardware designs developed under the statement of work, and ArcVision cannot license the software to third parties without Apex Energy's written consent and a 15% revenue-sharing royalty. Second, ArcVision enters a competitive "Clean Energy Welding Innovation Challenge" hosted by a non-profit energy research consortium; by complying with the consortium's contest rules, which require submitting quarterly empirical test logs on weld-penetration tensile strength, ArcVision wins a $250,000 research award.

Diagnosis of Legal Defects Under Amirikian and Section 41 Jurisprudence

Under this initial contractual structure, ArcVision could face a total disallowance of its $2,000,000 QRE claim. First, because Apex Energy acquires exclusive ownership of the resulting software and hardware designs and ArcVision must pay a 15% royalty to use the research results commercially, ArcVision would likely be found to retain no substantial rights under Treasury Regulation Section 1.41-4A(d)(2), Lockheed Martin (210 F.3d 1366), and Tangel v. Commissioner (T.C. Memo. 2021-1). Under Treasury Regulation Section 1.41-4A(d)(2), failing to retain substantial rights renders the entire contract research 100% funded, meaning even the $500,000 in unreimbursed cost overruns borne by ArcVision above the $1,500,000 cap would be disqualified from the R&D tax credit.

Second, even if ArcVision had retained substantial rights, the Eleventh Circuit in Geosyntec Consultants, Inc. v. United States (776 F.3d 1330) held that a capped cost-reimbursement contract is funded research because the contractor is entitled to payment for hours worked up to the cap regardless of whether the research ultimately succeeds; risking budget overruns above the $1,500,000 ceiling is the wrong sense of risk under Treasury Regulation Section 1.41-4A(d)(1). Third, under United States v. Amirikian (197 F.2d 442), submitting quarterly test data in compliance with the non-profit consortium's challenge rules would, by analogy to the contest-prize holding (which treated a contestant's acceptance of the sponsor's offer as creating an enforceable contract), likely be treated as forming a contract, making the $250,000 challenge award funded research under IRC Section 41(d)(4)(H).

Strategic Legal Restructuring to Qualify ArcVision's Project Under IRC Section 41

To preserve the $2,000,000 R&D credit claim, ArcVision should consider restructuring both its intellectual property architecture and its payment mechanics before executing the contracts. First, ArcVision could amend the Apex Energy agreement to bifurcate the Core Neural-Network Arc-Welding Engine (the qualifying business component) from the narrow Apex Pipeline Field-Interface Adapter. By granting Apex Energy an exclusive license solely to the custom telemetry interface adapter while explicitly stipulating in the Master Services Agreement that ArcVision retains sole ownership and unrestricted, royalty-free commercial rights to the core machine-vision porosity-detection algorithms, thermal feedback control software, and robotic end-effector designs, ArcVision eliminates any royalty-back obligation and positions itself to satisfy the substantial rights standard of Lockheed Martin and Populous Holdings.

Second, to address Geosyntec Consultants and Meyer, Borgman & Johnson, ArcVision could replace the capped time-and-materials billing model with a Fixed-Price Contingent Product Delivery Agreement. The $1,500,000 price would be structured as a payment for the delivery of a functional, tested robotic welding system—a "product or result" rather than the performance of research services under Treasury Regulation Section 1.41-2(e)(2)—payable only upon passing a formal Factory Acceptance Test demonstrating less than 0.05% weld porosity at a welding travel speed of 45 inches per minute. If the system fails to achieve these quantitative technical metrics during acceptance testing, Apex Energy would have the unconditional contractual right to reject the deliverable, terminate the contract for technical failure, and recover all prior milestone advances.

Third, with substantial rights retained across the core platform, the $250,000 non-profit consortium challenge grant analyzed under Amirikian should no longer taint the entire $2,000,000 project. ArcVision can segregate the consortium submission deliverables into a discrete accounting cost center and apply Treasury Regulation Section 1.41-4A(d)(3). Even under the conservative default rule of Treasury Regulation Section 1.41-4A(d)(3), the $250,000 grant simply reduces ArcVision's $2,000,000 gross QREs dollar-for-dollar by $250,000, leaving $1,750,000 in unfunded QREs. Finally, to satisfy the software process of experimentation and substantiation standards enforced in Garrison v. Commissioner, Harris v. Commissioner, FedEx Corp. v. United States, and George v. Commissioner (T.C. Memo. 2026-10), ArcVision's engineering team should maintain contemporaneous source-code repository logs, iterative neural-network training failure records, and project-coded timesheets directly mapping each engineer's W-2 wages to specific technical uncertainties.

Final Thoughts and Actionable Compliance Recommendations

The doctrinal lineage running from United States v. Amirikian (1952)—an income-tax decision on contest prize money that predates the research credit and does not itself construe it—through Meyer, Borgman & Johnson (2024) and Smith v. Commissioner (2026) suggests that federal courts evaluate funded-research questions under the R&D tax credit primarily through the lens of contractual risk allocation and intellectual property retention prior to examining technical engineering merits. Even transformative structural or software innovations—such as the arc-welded naval dry dock caisson method Dr. Arsham Amirikian helped design and supervise—may not generate allowable R&D tax credits if the taxpayer performs the work as a compensated contractual service without bearing the financial peril of technical failure or without retaining royalty-free commercial rights in the research results.

To strengthen audit defense under IRC Section 41 and IRC Section 174, corporate tax departments and engineering executives should consider integrating three pre-contract governance protocols into their procurement and grant-application workflows. First, organizations can replace unconditional phased billing and capped cost-plus structures with fixed-price deliverable agreements that condition payment retention on passing objective, quantitative technical acceptance tests, consistent with Fairchild Industries. Second, legal counsel can require explicit non-exclusive intellectual property carve-outs in every statement of work, avoiding undivided, exclusive assignment of underlying research methodologies and royalty-back clauses, thereby preserving substantial rights under Lockheed Martin and Populous Holdings. Finally, taxpayers should recognize that competitive industry awards and foundation grants may be treated as contractual payments by analogy to the contest-prize holding in Amirikian; by ensuring that such grant agreements leave substantial rights with the researcher, isolating any retrospective publication hours from the QRE pool, and applying the regulatory allocation formula of Treasury Regulation Section 1.41-4A(d)(3), enterprises can help ensure that partial grants reduce QREs only to the extent funded rather than disqualifying the entire research program.