United States v. Grigsby

635 F.Supp.3d 467

UNITED STATES of America v. Leonard L. GRIGSBY, et al.

CIVIL ACTION NO. 19-00596-BAJ-SDJ

United States District Court, M.D. Louisiana

Signed October 19, 2022

Chase Evan Zachary, U.S. Attorney's Office, Civil Division, Baton Rouge, LA, Elizabeth N. Duncan, Thomas K. Vanaskie, Zachary Allen Gray, DOJ-Tax, U.S. Dep't of Justice, Tax Division, Washington, DC, for Plaintiff.

John H. Dies, Jr., Pro Hac Vice, Janine M. Campanaro, Pro Hac Vice, Roalind Jones Lewis, Jefferson H. Read, Pro Hac Vice, Zerbe, Miller, Fingeret, Frank & Jadav, LLP, Houston, TX, Benjamin Paul

Barmore, Pro Hac Vice, Ted B. Lyons and Associates, Mesquite, TX, for Leonard L. Grigsby, et al.

RULING AND ORDER

BRIAN A. JACKSON, UNITED STATES DISTRICT JUDGE

The United States seeks to recover a $576,756 tax refund (plus interest) paid to Defendants Leonard and Barbara Grigsby, which, allegedly, resulted from the Internal Revenue Service erroneously granting a $1.3 million research expenses tax credit to Defendants' S-Corporation, Cajun Industries, LLC ("Cajun").

Now the Government moves for summary judgment (Doc. 64, the "Motion"), arguing that undisputed evidence establishes that Cajun, a construction company, did not conduct any qualified research activities during the tax year in question, and, by extension, Defendants are not entitled to the resulting refund. Defendants oppose the Government's Motion. (Doc. 71). For reasons to follow, the Government's Motion will be granted, and judgment will be entered in the United States' favor.

I. BACKGROUND

A. Summary Judgment Evidence

The following facts are undisputed, as set forth in the parties' statements of undisputed facts supporting their respective memoranda (Doc. 64-2 ("USA SOF"), Doc. 71-1 ("Defendants SOF"), Doc. 79-1 ("USA Reply SOF")), the parties' Joint Statement Of Undisputed Facts submitted with their proposed joint Pretrial Order (Doc. 82-1, "Joint PTO"), and the record evidence submitted in support of these pleadings.

i. Relevant Tax History

Cajun is a civil construction company headquartered in Baton Rouge, Louisiana. Cajun contracts with hundreds of private and public clients throughout the Gulf South to provide a wide-range of construction services in various markets, including oil and gas; chemical processing; power and utilities; infrastructure; communications; and water quality.

Cajun is organized as a Subchapter S Corporation ("S-Corp") for federal income tax purposes, which means that Cajun's income, losses, deductions, and credits pass through to its shareholders on a pro rata basis. Cajun's tax year runs from October 1st through September 30th. At all relevant times, Defendant Leonard Grigsby owned a 73 percent interest in Cajun. (Joint PTO ¶¶ 2-4, 15, 17).

In 2015, Cajun hired alliantgroup LP [sic], a consulting firm, to analyze whether Cajun was entitled to amend its prior tax returns to claim additional credits for the 2011 through 2016 tax years. Specifically, alliantgroup reviewed whether (and to what extent) Cajun was entitled to a tax credit "for increasing research activities" under 26 U.S.C. § 41 (the "qualified research tax credit" or "QRTC"). Based on a sampling of 105 projects from Cajun's 2012 tax year, alliantgroup determined that Cajun was entitled to claim additional research credits exceeding $1.3 million. Thereafter, Cajun amended its tax return for the year ending September 30, 2013, claiming a QRTC in the amount of $1,341,420. Cajun had never before claimed the QRTC. (Joint PTO ¶¶ 5-6, 9, 19).

In conjunction with its amended return, Cajun issued an amended Form K-1 to its shareholders, including Mr. Grigsby. Mr. Grigsby's amended K-1 reported a pro rata allocation of Cajun's QRTC in the amount of $979,237. (Joint PTO ¶¶ 7-8).

Upon receiving the amended Form K-1, Defendants filed an amended federal income tax return for the 2013 tax year on which they reported Cajun's QRTC. Defendants' QRTC claim generated a tax credit in the amount of $954,527 and, after the credit was applied to reduce Defendants' 2013 tax liability, an overpayment in the amount of $576,756 plus statutory overpayment interest in the amount of $73,663.38 (collectively, the "Contested Refund"). (Joint PTO ¶¶ 10-11).

On September 15, 2017, the IRS issued a tax refund check to the Defendants for the 2013 tax year, which included the Contested Refund.¹ (Joint PTO ¶¶ 12-14).

ii. Relevant Activities Resulting in Cajun's Claimed QRTC

The parties agree that a sampling of four of Cajun's projects during the tax year ending September 2013 is determinative of the outcome of this dispute: Project 12-001 (the "Claiborne Project"); Project 12-023 (the "East Bank Project"); Project 12-051 (the "Chevron Project"); and Project 13-020 (the "Methanex Project") (collectively, the "Representative Projects"). (Joint PTO ¶ 20; see also (Doc. 52 at p. 5 ("Pursuant to an agreement between the parties, Defendants' discovery responses are limited to a sample of four projects from Cajun's tax year ending September 30, 2013.").

To follow is a brief description of each Representative Project, with particular attention to the terms of the underlying contracts.² See Tangel v. Comm'r of Internal Revenue, 121 T.C.M. (CCH) 1001, 2021 WL 81731 at *4 (T.C. 2021) (instructing that "the parties' contract" determines who is entitled to the QRTC (citing authorities)); Populous Holdings, Inc. v. Comm'r of Internal Revenue, No. 405-17, 2019 WL 13032526, at *2 (T.C. Dec. 6, 2019) (instructing that courts consider "payment procedures, quality and performance standards, termination clauses, and warranty and default provisions" when determining entitlement to the QRTC).

a. The Methanex Project

In 2012, Cajun executed a construction services subcontract (Doc. 64-1, the "Methanex Subcontract" or "Mx Subcontract") with Jacobs Field Services ("Jacobs") to perform site preparation for the relocation of Methanex USA, LLC's methanol plant from Chile to Geismar, Louisiana. Cajun's original scope of work was broadly defined, and subject to a "capped"³ (not-to-exceed) price of $6,485,000. (Mx Subcontract at Recitals ¶¶ 3, 10; id., at Ex. "A" (Scope of Work)). Through dozens of written change orders, Cajun's scope of work gradually expanded to include site establishment, construction of temporary facilities, earthwork, underground piping, and concrete foundations, for which Cajun was ultimately paid $90 million. Cajun performed its work according to plans provided by Jacobs, (see USA SOF ¶ 40; Defendants SOF ¶ 40), and completed the Methanex Project in December 2014. (Joint PTO ¶¶ 36-38, 51, 62-63).

The Methanex Subcontract is composed of a Construction Services Agreement ("CSA") and 10 Exhibits ("Ex."). Most relevant here, the Exhibits include a detailed scope of work (Ex. A); terms of monthly payment (including additional payment for changes to Cajun's original scope of work) (Ex. C); line-item pricing for Cajun's labor costs (including "Project Cost Engineer" wages), services and materials (Ex. D); and quality control standards, including standards for Jacobs' review and approval of Cajun's work (Ex. G).

As stated, Jacobs originally agreed to pay Cajun a "NOT TO EXCEED PRICE [of] $6,485,000" to perform "the Scope of Work as outlined in Ex. A," with compensation "based on billed actual manhours and actual cost of other cost reimbursable items in accordance with the agreed . . . rates as included in this Ex. D." (Mx Subcontract at Ex. D §§ 2.1-2.2; see also id. at Recitals ¶ 10). However, the Methanex Subcontract makes additional compensation available to Cajun in stated circumstances. Specifically, General Conditions ("GC") § 8 ("Changes") provides that if Jacobs demands an adjustment to Cajun's scope of work, Cajun is entitled to submit a "prior written change order" negotiating a new contract price. (Mx Subcontract GC § 8A). In such instances, "[a]dditional compensation for changes shall, at [Jacob's] sole discretion, be determined by . . . (i) negotiated lump sum; (ii) time and materials; (iii) unit price; or (iv) any combination of the foregoing." (Id.).

The Methanex Subcontract requires Cajun to submit "an application for payment . . . on or before the tenth day of each month, for Work completed during the preceding month." (Mx Subcontract GC § 9(A)). Cajun's monthly applications are subject to Jacobs' "approval," and Jacobs is entitled to demand "supporting documentation . . . reasonably require[d] to evidence . . . [Cajun's] entitlement to the amounts claimed." (Id. at §§ 9(A), (E)). Upon approval, Jacobs must pay Cajun within 10 days of Jacobs' "receipt of the corresponding payment from [Methanex USA]," less a 10 percent retainage. (Id. at § 9(A)). Payment of the retainage is due after Jacobs' final acceptance of Cajun's work. (Id.). Jacobs' final acceptance is conditioned on Cajun's delivery of a lien waiver showing that Cajun performed its work "completely . . . and that there are no unsatisfied or undischarged claims, demands, losses, liens, attachments or encumbrances arising out of the Subcontract." (Id.).

Cajun's work under the Methanex Subcontract is subject to quality assurances and controls set forth in Exhibit G. Among these assurances, Cajun is required to bear the cost of remediating any work that fails to conform to "Project requirements":

Subcontractor [Cajun] shall remain totally responsible for the quality and accuracy of its Work which shall at all times conform to Project requirements. In the event that the results of tests performed are not in accordance with Project requirements, Subcontractor shall be responsible for any repair, rework, re-testing and/or additional testing required as a result of the Work not being compliant with Project requirements. The costs associated with any repair, rework, re-testing, and/or additional testing required as a result of the Work not being compliant with Project requirements shall be to Subcontractor's account.

(Mx Subcontract Ex. G at § 1.9). Essentially the same term is...