Trinity: Introduction
This is a tax refund suit. Trinity Industries, Inc. (“Trinity”) seeks a refund for certain qualified research expenditure (“QRE”) tax credits it claims were wrongly disallowed for its tax years ending in March of 1994 and 1995 [1] (the “Tax Years”), pursuant to IRC § 41. [2] Although Treas. Reg. § 1.41-4 was formally adopted after the tax years in question, both sides agree that it is authoritative. Both sides also agree that Trinity bears the burden of proving its entitlement to the credits. From there, the parties diverge.
Trinity is a large corporation engaged in a variety of businesses. Over time, Trinity has acquired and divested various other businesses. Some of these businesses were incorporated subsidiaries, and some were unincorporated constituent elements of Trinity. The expenditures at issue here were incurred by a division of Trinity sometimes called Trinity Marine Group (“TMG”). In 1987, Trinity formed TMG to serve as an umbrella for Trinity’s marine activities, later including the Halter Marine Division. Trinity acquired Halter Marine, Inc., an independent corporation, in 1983. Trinity dissolved Halter Marine in April 1988, which had the effect of merging Halter Marine into Trinity and TMG. Halter Marine operated as an unincorporated division of Trinity and TMG. After the Tax Years, Trinity incorporated the Halter Marine Group, Inc. to facilitate a spin-off of the Halter Marine and related assets.
TMG did not always scrupulously observe corporate formalities. Through use of old paper forms and force of habit, it continued to use the Halter Marine name in the conduct of its business, even entering into contracts in the name of Halter Marine, Inc. Notwithstanding these paperwork lapses, the Court finds that all of the expenditures at issue in the Tax Years were incurred by TMG as an unincorporated division of Trinity and properly reportable in Trinity’s consolidated returns.
TMG in the Tax Years was in the business of shipbuilding. Halter Marine began building work boats that serviced offshore drilling rigs and wells. By the Tax Years, TMG had expanded into many other market segments for shipbuilding. TMG used a design methodology it called the design spiral, consisting of six phases: conceptual, contract design, functional design, detail design, construction, and testing. When TMG designs a new type, or class, of ship, the first one is called “first in class.” A first in class ship is essentially a prototype. TMG’s hope is that many more will be built that are substantially duplicates of the first in class, but there is no guarantee of that. The claimed QREs here were primarily related to design and construction of first in class ships designed and built under contracts for various customers.
At issue are six projects:
1. Mark V
2. Extra-Fast Patrol Boat (“XFPB”)
3. Oceanographic Survey Ship T-AGS 60
4. Dirty Oil Barge
5. Hurley Dredge
6. Crew Rescue Boat
—-Footnotes—-
[1] Trinity originally also claimed credits for 1996, but has since dropped that claim.
[2] The Court will cite to Title 26, United States Code, as “IRC.” The Court will cite to the corresponding regulations found in Title 26, Code of Federal Regulations, as “Treas. Reg.”
