(Contractor's reimbursed for research and development costs, either as direct contracts or part of their indirect cost rates, have been concerned whether these expenditures apply for the R&D tax credit.  The following case clarifies that such costs do qualify.)

Under the IRS code, a company cannot include as "qualified research" those activities that are "funded" where "funded" depends on whether the contractor had "substantial rights" in the research - in other words, if a contractors conducts research for a government agency and the contractor retains no substantial rights in the research, the cost cannot quality for the R&D tax credit.  A lower Court ruled the contractor was not entitled to the R&D credit because the government had unlimited rights to use the contractor's technical data and computer software and to disclose it to other parties.

The Appeals Court overruled the lower court stating though the contractor did not have "exclusive" rights it still had "substantial rights".  The fact others (e.g. government) may have rights does not mean the contractor losses its rights, citing examples where the contraactor may still make or use the same or similar products in its own business.

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