Lockheed Martin Corp. v. U.S.

• Decision Date: 26 April 2000
• Citation: 210 F.3d 1366
• Parties: (Fed. Cir. 2000) LOCKHEED MARTIN CORPORATION, as successor to MARTIN MARIETTA CORPORATION and MARTIN MARIETTA TECHNOLOGIES, INC. and affiliated corporations, Plaintiff-Appellant, v. UNITED STATES, Defendant-Appellee. 99-5039 DECIDED:
• Court: U.S. Court of Appeals — Federal Circuit

Page 1366

210 F.3d 1366 (Fed. Cir. 2000)

LOCKHEED MARTIN CORPORATION, as successor to MARTIN MARIETTA CORPORATION and MARTIN MARIETTA TECHNOLOGIES, INC. and affiliated corporations, Plaintiff-Appellant, v. UNITED STATES, Defendant-Appellee.

99-5039

United States Court of Appeals for the Federal Circuit

DECIDED: April 26, 2000

Appealed from: United States Court of Federal Claims

Judge Diane Gilbert Weinstein

Donald R. Dunner, Finnegan, Henderson, Farabow, Garrett & Dunner, of Washington, DC, argued for plaintiff-appellant. With him on the brief was Thomas W. Winland. Of counsel on the brief was Daniel J. King, King & Spalding, of Atlanta, Georgia. Of counsel were Mark M. Maloney, and Kimberly S. Piar, King & Spalding.

Charles Bricken and Stuart J. Bassin, Attorneys, Tax Division, Appellate Section, Department of Justice, of Washington, DC, argued for defendant-appellee. With them on the brief were Loretta C. Argrett, Assistant Attorney General; and Jonathan S. Cohen, Attorney.

Herbert L. Fenster, McKenna & Cuneo, L.L.P., of Washington, DC, for amicus curiae The Chamber of Commerce of the United States of America. With him on the brief was David Kasanow.

Michael F. Solomon, Ivins, Phillips & Barker, Chartered, of Washington, DC, for amici curiae Hughes Electronics Corporation and Raytheon Company. Of counsel on the brief were Philip C. Swain, Foley, Hoag & Eliot LLP, of Boston, Massachusetts; Michael W. Sales, Hughes Electronic Corporation, of El Segundo, California and Glenn H. Lenzen, Jr., Raytheon Company, of Lexington, Massachusetts.

Alexander Zakupowsky, Jr., Miller & Chevalier, Chartered, of Washington, DC, for amicus curiae Aerospace Industries Association of America, Inc. With him on the brief were Alan I. Horowitz, and Lynda Troutman O'Sullivan.

Before PLAGER, LOURIE, and BRYSON, Circuit Judges.

LOURIE, Circuit Judge.

Lockheed Martin Corporation appeals from the decisions of the United States Court of Federal Claims (1) denying Lockheed Martin's attempt to introduce late-filed expenses in its tax refund suit, see Lockheed Martin Corp. v. United States, 39 Fed. Cl. 197 (1997), and (2) granting the government's motion for summary judgment that Lockheed Martin was not entitled to a tax credit refund for certain research expenses, see Lockheed Martin Corp. v. United States, 42 Fed. Cl. 485 (1998). Because the court correctly denied Lockheed Martin's "motion for pretrial order clarifying the scope of the complaint" but erroneously determined that Lockheed Martin did not retain "substantial rights in its research" under the contracts at issue, we affirm-in-part, reverse-in-part, and remand.

BACKGROUND

Lockheed Martin was a party to numerous fixed-price contracts with the United States during the 1982 through 1988 tax years.¹ In 1991 Lockheed Martin filed refund claims for tax years 1984 through 1988. The tax refund claims asserted entitlement to research credits under the "credit for increasing research activities" provision of the Internal Revenue Code, I.R.C. § 44F (1982)² and I.R.C. § 41(d) (1988),³ based on certain research expenses that it incurred from 1982 to 1988 in performance of those contracts. Each 1120X tax form filed by Lockheed Martin stated as follows:

The credit for increasing research activities has been increased to reflect:

(1) research expenses incurred by Taxpayer pursuant to fixed price contracts with customers where the Taxpayer's right to payment under such contracts is contingent upon the success of the research [See IRS Reg. Sec. 1.41-5(d)(1)]; and

(2) additionally qualifying wages for holiday pay, vacation pay, sick pay, military leave and jury duty that were inadvertently not included as part of W-2 wages of persons performing qualified research.

Attached to each of Lockheed Martin's refund claims was a Form 6765 "Credit for Increasing Research Activities," which stated the amounts that Lockheed Martin spent during the applicable year on different categories of research expenses--wages, supplies, rental and leasing costs, contract expenses, and payments to qualified research organizations for basic research. Also attached to each claim was a summary of how those research costs were allocated among different Lockheed Martin divisions. For example, on Form 6765 for the 1986 tax year, Lockheed Martin stated that it spent $16,540,427 on supplies used in conducting qualified research in 1986. The summary apportioned that amount among Martin Marietta Corp. ($16,472,519), Martin Marietta Aluminum Properties Inc. ($0), Martin Marietta Measurement Systems, Inc. ($5,008), Martin Marietta Information Technology Inc. ($62,900), and Gamma Monolithics Partnership ($0). The summaries similarly apportioned other categories of expenses among the divisions. Lockheed Martin did not submit any evidence to support its claims until the claims were examined by the I.R.S. Lockheed Martin then produced schedules of specific expenses that it incurred during performance of the 13 largest contracts underlying its refund claims. Both parties refer to these schedules as the "Green Books." These schedules included approximately 80% of the total expenses underlying the refund claims.

The IRS disallowed the refund claims on the ground that the research expenses did not qualify for the tax credit. The IRS stated that the research performed under the contracts was not "qualified research" under §§ 44F(d) and 41(d) because, under Treasury Reg. § 1.41-5(d) (1989), the research was "funded" by the government. The IRS concluded that the research was "funded" because payment was not contingent on the success of the research and Lockheed Martin did not retain "substantial rights" in the research.

Lockheed Martin appealed this decision to the Court of Federal Claims. During the course of discovery on the Low Altitude Navigation and Targeting InfraRed for Night ("LANTIRN") contract, Lockheed Martin learned of additional research expenses that it had not included in its Green Books. It filed a "motion for pretrial order clarifying the scope of complaint" asking the court to order the government to consider evidence regarding these expenses and any other expenses uncovered during discovery.

The Court of Federal Claims denied the motion, reasoning that the submission to the IRS of a tax refund claim stating detailed legal and factual grounds for the refund is a prerequisite to bringing a tax refund suit, and that Lockheed Martin could not substantially vary either the legal or factual bases for its refund claim at trial. See Lockheed Martin, 39 Fed. Cl. at 200-02. The court held that Lockheed Martin's introduction of additional expenses would constitute a substantial variance of the factual basis for its refund claims because those expenses could have constituted a separate basis for recovery had they been timely filed. See id. at 202-03.

The parties both subsequently moved for summary judgment on the question whether, under Treasury Reg. § 1.41, Lockheed Martin retained "substantial rights" in the research for which it claimed qualified research expense tax credits. The parties agreed to have the issue resolved by reference to the contracts governing four programs that represented approximately 65% of the expenses claimed, and to extend the court's determination whether Lockheed Martin retained substantial rights under those contracts, pro rata, to all of the contracts in the suit. The four programs were the LANTIRN, Small Intercontinental Ballistic Missile ("SICBM" or "Midgetman"), Supersonic Low Altitude Target ("SLAT"), and Titan IV programs. The parties refer to these as the "Major Programs."

The contract provisions setting forth the parties' rights in the results of Lockheed Martin's research were substantially the same for each of the Major Programs. The SICBM, Titan IV, and SLAT programs were governed by a single contract. The LANTIRN program was governed by both Full Scale Engineering Development (FSED) and Production contracts. Except for the LANTIRN Production contract, each contract incorporated by reference substantially similar standard regulatory clauses regarding patent rights. Each of the Major Program contracts also (1) incorporated by reference standard regulatory clauses regarding rights in technical data and computer software; (2) contained security classification guidelines for certain information; and (3) incorporated by reference substantially similar regulatory clauses regarding the government's recovery of nonrecurring costs on commercial sales.

The Court of Federal Claims held that Lockheed Martin did not retain substantial rights in its research under any of the Major Program contracts. See Lockheed Martin, 42 Fed. Cl. at 500. The court so concluded because (1) the government had an unlimited right to use Lockheed Martin's technical data and disclose it to third parties, which "considerably diminished, if not destroyed" the value of Lockheed Martin's right to use its research results and hence its competitive advantage; (2) Lockheed Martin had to seek prior approval from the State Department before entering into licensing agreements or discussing with other customers technical information not in the public domain; (3) the government had veto power over Lockheed Martin's right to file patent applications and could require Lockheed Martin to transfer title to a subject invention if Lockheed Martin failed to file a patent application within a specific period of time; and (4) the recoupment provision required Lockheed Martin to pay the government for the right to use its research results. See id. at 498-500. The court also held that Lockheed Martin lacked substantial rights in its research for the further reason that particular statutory provisions restricted Lockheed Martin's exports. See id. at 498. The court characterized the profits that Lockheed Martin received on private sales of related technology as "incidental benefits." See id. at 499.

Lockheed Martin timely...