Most companies that lose Section 41 research credits lose them in obvious ways: inadequate documentation, poorly scoped studies, or incorrect employee inclusion. Tangel v. Commissioner, decided by the Tax Court in January 2021, shows a different failure. Enercon Engineering lost a research credit on a single project because its customer’s standard purchase order Terms and Conditions included language the court found eliminated Enercon’s substantial rights in the research.
The clause was not negotiated for the engagement. It was standard contract boilerplate.
Enercon designs and produces integrated controls and switchgear for custom power generation applications. In 2009, Vericor Power Systems hired Enercon to develop a new turbine enclosure and redesign three turbine units. The work was structured through a general purchase order and nineteen change orders totaling over $1.4 million. All purchase orders incorporated Vericor’s Terms and Conditions.
One section of those Terms and Conditions determined the outcome.
In simple terms, the contract said:
Enercon’s own offer letter acknowledged this structure, stating that all information and equipment generated under the order were owned by Vericor.
To claim the credit when research is performed under a customer contract, the contractor must retain meaningful rights in the research results. When an agreement gives the customer the exclusive ability to use those results, the research is treated as funded.
Enercon advanced three arguments.
1) The clause was only confidentiality language
Enercon argued the restriction applied only to information supplied by Vericor. The court disagreed. The clause explicitly covered work Enercon created for the project, meaning the restriction applied to Enercon’s own development outputs.
2) The language only mattered if IP was formally registered
Enercon argued the clause applied only if patents or copyrights were pursued. The court rejected this. Funded research analysis focuses on contract rights, not whether IP is later registered.
3) Institutional knowledge was retained
Enercon argued it could reuse experience gained from the project. The court was direct: experience is not a retained right. Reusing actual research results required Vericor’s consent, and permission that can be withheld is not a right.
The court concluded the agreement gave Vericor exclusive control over the research results. The project was treated as fully funded and the credit was denied.
Tangel is not a documentation failure. Enercon understood the clause well enough to summarize it internally. The issue was that no one evaluated how accepting those terms would affect credit eligibility before the contract was executed.
This exposure is common because customer purchase order boilerplate frequently includes:
These terms are written to protect the customer, not to address credit eligibility. The result is that genuine development activity can qualify technically but become ineligible because contract language transfers the research results.
Three practical conclusions follow:
National Tax Group reviews customer contracts before a Section 41 credit is filed, identifying provisions that affect ownership and reuse of research results. Contracts containing these provisions are not automatically disqualifying across all projects, but funded research analysis must be applied before qualified research expenses are calculated.
TaxDrone.AI documents the projects that clear this filter:
NTG decides what is defensible. TaxDrone proves it.
If your engineering or manufacturing firm accepts customer purchase orders with work-for-hire or reuse restrictions, the funded research analysis begins at contract execution, not during the study.
Reviewing contract language before filing helps determine:
Whether meaningful rights are retained at the project level
Which projects may be fully funded
Where contract terms restrict reuse of development work
Whether remediation is possible for future agreements
If eligibility is evaluated only after agreements are signed, reviewing contract structure before the next filing cycle is a practical next step.
