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increased credits be disallowed. In addition, the engineer’s
1994 report reflected an amount that the engineer believed was
allowable if respondent was incorrect regarding the legal theory
for disallowance of the research credits attributable to fixed-
price Government contracts. The 1994 notice of deficiency made
no reference to the increased credits claimed by petitioner.
At the time of the engineer’s 1994 report, the Government
was engaged in litigation with another taxpayer involving a
substantially similar theory for disallowing research credits
attributable to fixed-price Government contracts. At the time of
the issuance of the notice of deficiency and the filing of the
petition in this case, respondent’s legal approach had been
approved by the Court of Federal Claims. See Fairchild Indus.,
Inc. v. United States, 30 Fed. Cl. 839 (1994). The decision in
Fairchild was on appeal during the pendency of this Court’s
pretrial order.
In its petition, petitioner claimed entitlement to the
increased credits, and, in her answer, respondent denied that
petitioner was entitled to such credits. In an October 1995
status report to the Court, respondent stated, concerning the
issue of whether petitioner was entitled to the increased
credits, that “the parties expect to enter into stipulations
which establish the amounts of increase in petitioner’s R&E
[research] Expenses for each period. The issue will be whether
these R&E [research] Expenses were ‘funded’ by the contracts.”
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