That’s what Judge Ronald L. (“Ingenuity”) Buch does, and tells IRS, when dealing with IRS’ motion for partial summary J denying Section 41 Qualified Research credits, in System Technologies, Inc., Docket No. 12211-21, filed 1/3/24. STI made powder-coating equipment for outboard motors and stuff, which it sold to manufacturers. All the contracts at issue specified IN law; but the contractual warranty was simply “exclusively repair or replace.” No other remedy provided for breach.

IRS claims this puts the fun in “funded” research. Buyer is paying for the research; seller has no skin in the cliché. Researchers have to buy the credit by taking the economic risk of failure.

So what if STI couldn’t deliver any conforming goods? IRS says that’s a nonissue, everybody knows that STI could deliver. Judge Ingenuity Buch says that goes to uncertainty, a different gate in the four-part Section 41(d) slalom. Maybe STI flunks on uncertainty, but that’s not at issue here.

Taishoff says uncertainty is inherently factual. Holmes (Sherlock, not Judge Mark) asked the basic question: “Of what had you made certain, after you had made certain that you had made certain of nothing?” The Adventure of the Golden Pince-Nez.

IN law (their take on the Uniform Commercial Code, which is pretty uniform on sales; I remember when we first saw this brand-new enactment On The Hill Far Above under the firm hand of The 49th MacNeill of Barra, RIP) provides among the remedies for seller’s nonperformance is restitution of whatever buyer paid seller. And while the IN UCC says the parties can contractually modify or eliminate the warranties and remedies provided by statute or commonlaw, IN decisional law says the parties can’t trade away all their rights if the result would be inequitable. Practice tip: IN lawyers check out Judge Buch’s essay on IN sales of goods law, Order, at pp. 5-6.

“Although the Commissioner’s factual suppositions may be correct, we cannot rely on them in deciding a motion for summary judgment, where we must draw factual inferences in the light most favorable to the non-moving party. Furthermore, the Commissioner’s argument does not appear to be directed at the question of funded research, but instead at the question of whether the research is qualified research. As previously discussed, for expenses to constitute qualified research, the research must pass each prong of a four-part test. The first prong of this test, the section 174 test, requires the taxpayer to demonstrate that the research ‘would eliminate uncertainty concerning the development or improvement of a product.’ Treas. Reg. §1.174-2(a)(1). The Commissioner expressly argues that neither System Technologies nor its customers had any doubt that System Technologies could deliver the contracted products. This may raise a fact question as to whether there was uncertainty concerning the development or improvement of a product, but it does not answer the question of what remedies might be available in the event of such a failure. In such an event, however remote, Indiana state law provides the remedy of a refund of payments made.” Order, at p. 7.

Oh, and for blow-off and cool-off, see Order, at p. 2 (Tomita project).