570 F.3d 672 (2009) UNITED STATES of America, Plaintiff-Appellee, v. Arthur R. McFERRIN; Dorothy F. McFerrin, Defendants-Appellants. No. 08-20377. United States Court of Appeals, Fifth Circuit. June 9, 2009. *673 Bethany Buck Hauser (argued), Kenneth L. Greene, U.S. Dept of Justice, Tax Div. App. Section, Washington, DC, Michael D. Powell, U.S. Dept. of Justice, Tax Div., Dallas, TX, for U.S. *674 Jeremy M. Fingeret (argued), Michael A. Thompson, Fingeret, Frank & Jadav, Houston, TX, for Defendants-Appellants. Before SMITH, GARZA and CLEMENT, Circuit Judges. EDITH BROWN CLEMENT, Circuit Judge: The United States brought suit against Arthur R. McFerrin ("McFerrin"[1]) seeking to recover a tax credit that the government alleges was erroneously paid by the Internal Revenue Service ("IRS") to McFerrin. After a six day bench trial, the district court held that the government had proved by a preponderance of the evidence that the tax credit was not properly supported and, consequently, should not have been granted. The district court ordered repayment of the erroneously paid refund plus interest. For the following reasons, we vacate the district court's judgment and remand for further proceedings. FACTS AND PROCEEDINGS McFerrin is a prominent chemical engineer[2] who co-founded KMCO, Inc. ("KMCO"), a Subchapter-S corporation, in 1975. KMCO manufactures commodity and specialty chemicals, mainly for the petrochemical industry. McFerrin owns three other Subchapter-S corporations which are related to KMCO: KMCO Port Arthur, Inc. d/b/a KMTEX ("KMTEX"), South Coast Acquisition, Inc. ("SC Acquisition"), and South Coast Deleware, Inc. ("SC Deleware"). SC Acquisition and SC Deleware are the only partners in another corporation, South Coast Terminals ("SC Terminals"). This case concerns tax returns filed by these corporations and McFerrin for tax year 1999 and, specifically, tax credits for increasing research activities under I.R.C. § 41. McFerrin owns all of the corporations, and their pass-through income was part of his 1999 income tax return. In 2000, all of the corporations and McFerrin originally filed tax returns for tax year 1999 and did not claim any credits for increasing research activities. In May 2003, KMCO contracted with alliantgroup, L.P. to conduct a study to determine if it was eligible for an increasing research tax credit. Based upon this study, in September 2003, McFerrin and all of the corporations filed amended 1999 tax returns claiming a credit for increasing research activities. McFerrin's income tax return claimed an overall credit of $472,092.00. Less than a month later, the IRS, as a result of a clerical error, issued the refund, which, including interest, was for $601,228.40. On October 31, 2005, the United States filed suit to recover this amount plus interest. Its complaint alleged, among other things, that the amended return "included... no supporting documents" and thus there were no documents provided to substantiate the claimed credits. On summary judgment, the district court found that SC Terminals' amended return was untimely filed and therefore McFerrin had to return the portion of the refund relating to SC Terminals and its owners SC Deleware and SC Acquisition. The issue of whether the tax credits to …
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