Bloomberg Tax
Jan. 4, 2023, 9:45 AM

Cajun Industries Case Yields Four Lessons for the R&D Tax Credit

Holland King
Holland King
Law Office of Holland King LLC

The US government in 2019 sued a construction company over a research and development tax credit refund claim and won this past October, resulting in a costly loss for the taxpayer. The case, US v. Grisgby, centered on the company’s research activities and taught four critical lessons to anyone claiming the tax credit.

Cajun Industries LLC, a civil construction company in Louisiana that was primarily owned by Leonard Grigsby, had amended its return to claim the tax credit, which flowed through to Grigsby’s return. While six years were claimed, the 2013 tax credit was approximately $1.3 million, which the IRS initially refunded roughly $575,000 to Grigsby. The US then filed a claim in the US District Court for the Middle District of Louisiana to recover the erroneous refund.

Lesson 1: If You Claim a Process, Describe the Process

We don’t get to see how the court would have handled the case on its merits, but we do get a glimpse into the likely challenges that a construction company will face in defending its credit. The court almost immediately took issue with the taxpayer’s business components. For the research credit, qualified activities must develop a new or improved product or process, among other things. It’s not enough to say that you have a business component; you must state what the business component is and how the activity claimed relates to its development.

Here, the taxpayer contended that their methods of construction fundamentally relied on engineering principles, allowing them to determine the proper construction method. While the business component must rely on a fundamental principle of science, it’s not enough to carry the day.

The taxpayer must state what the new or improved process is, not just that it was a construction process. It’s often difficult for technical experts to identify the proper business component and explain how it is new or improved compared to similar projects; it’s even harder to get an IRS agent without industry experience to understand the activity’s nuances. But this is core to the credit requirements and critical for taxpayers to execute correctly.

Lesson 2: Works Made for Hire Are Funded

Despite the taxpayer failing to state the relevant business component, the court proceeded to review the contracts of the four sample projects, striking down three because Cajun didn’t retain rights to the research. When another party funds the research, it’s excluded from the credit. The activity is deemed funded if the taxpayer doesn’t own the research rights or bears the risk of failure.

The three contracts explicitly stated that they were works made for hire—a term of art from copyright law that means you create the item for someone else. Consequently, you aren’t considered the owner. While this is a copyright-specific term, it demonstrated that the taxpayer had no rights to the research.

Even under the bundle of rights theory, it’s hard to see how these contracts reserved any rights for the taxpayer. The clauses were broadly drafted in favor of Cajun’s client, leaving little for Cajun to claim. Admittedly, this is not uncommon with construction companies; intellectual property rights aren’t a high priority. However, you must retain the research rights to claim the research credit.

Lesson 3: Read All, Not Just Favorable, Contract Terms

Cajun’s contract problems didn’t end with its lack of rights. The court found that the last project, while not a work made for hire, still failed because it was funded by the customer. Nominally, this contract was fixed price and as such was presumed unfunded because the risk of failure (theoretically) was mainly on the contractor. They must perform for a set price regardless of the cost, but that presumption can be refuted by the terms of the contract that protect the contractor.

It appears the taxpayer determined it was a fixed-price contract and stopped its analysis. Once you get past the contract type, you see that the agreement included clauses compensating the taxpayer in almost every instance that would create a financial risk. The contract allowed the taxpayer to receive compensation for “all loss, damages or risks ... connected with ... the work.” This included unanticipated amounts for inspection and testing.

The court noted this level of protection financially favored Cajun but meant the research credit was unavailable. What was good for business is not necessarily suitable for tax. A complete contract review, and not just a superficial review of the contract terms, was necessary.

Lesson 4: Don’t Ignore Your Mistakes

This litigation-focused lesson also is an excellent general lesson. Early in the proceedings, Cajun stated it was developing products. Being as generous as possible to the taxpayer, this was a mistake, as Cajun wasn’t producing or selling products but was providing services from excavation to utility relocation. In late 2021, Cajun stated in an interrogatory that it developed products. It didn’t change its stance until a September 2022 claim that the business components were processes in response to the government’s motion for summary judgment.

The court noted that there had been several opportunities to correct the initial statement, but each was ignored. Maybe Cajun’s counsel was distracted in the interim, but this wasn’t a small thing to miss. Even if everything else had gone Cajun’s way, it was enough for the court to rule against the taxpayer. The failure to correct the error until the eve before the trial cost them the entire case and, as a result, the $1.3 million refund.


Grigsby’s company lost the case, but the court provided several important lessons for those claiming the credit. While these fundamental lessons aren’t complicated, they bear repeating: Describe your business component, ensure your research is not funded, review your contracts carefully, and fix your mistakes.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Holland King runs a tax litigation firm focused on credits and incentives in Atlanta. He has 15 years of experience representing clients before the IRS and litigating matters before the US Tax Court.

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