                   T.C. Memo. 2009-50



                 UNITED STATES TAX COURT



UNION CARBIDE CORPORATION AND SUBSIDIARIES, Petitioner v.
       COMMISSIONER OF INTERNAL REVENUE, Respondent



 Docket No. 11119-99.              Filed March 10, 2009.



      R determined deficiencies in P’s Federal income
 tax for 1994 and 1995. Pursuant to a negotiated
 agreement, P was allowed research credits under sec.
 41, I.R.C., for 1994 and 1995. In an amended petition
 P now seeks additional research credits for 106
 projects conducted at its manufacturing plants. To
 resolve this action expeditiously, P and R agreed to
 try five of the largest projects underlying P’s
 research credit claim.

      Held: Two of the five projects constitute
 qualified research under sec. 41(d), I.R.C.

      Held, further, P has established that it included
 all activities that were similar to the two qualified
 research projects in its calculation of its base amount
 under sec. 41(c)(4), I.R.C.

      Held, further, P has established that it incurred
 $1,045 of additional qualified research expenditures
                               - 2 -

      (QREs) for wages paid to specific plant employees for
      qualified services performed during the two qualified
      research projects. The remaining expenditures for
      which P claims additional research credits are not QREs
      because they were incurred in the production of goods
      for sale, not in the conduct of qualified research.

           Held, further, P improperly included production
      costs in its base amount. However, because P’s error
      caused P to overestimate its base amount, we find P’s
      error to be harmless and accept P’s calculation of its
      additional base period QREs with several adjustments.


      Harold J. Heltzer, Alex E. Sadler, Robert L. Willmore, Peter

B. Work, and Allen D. Madison, for petitioner.

      Jill A. Frisch, Daniel A. Rosen, Lyle B. Press, Alex

Shlivko, and Jenny D. Boissonneault, for respondent.


                              CONTENTS

FINDINGS OF FACT   . . . . . . . . . . . . . . . . . . . . . . . 9

I.    Overview . . . . . . . . . . . . . . . . . . . . . . . . . 9
       A. Petitioner . . . . . . . . . . . . . . . . . . . . . . 9
       B. Procedural History . . . . . . . . . . . . . . . . . 11

II.   Claim Projects . . . . . . . . . . . . . . . . .   .   .   .   .   15
      A. The Olefins Production Process . . . . . . .    .   .   .   .   16
      B. The Amoco Anticoking Project . . . . . . . .    .   .   .   .   20
           1. Overview of Coking . . . . . . . . . .     .   .   .   .   20
           2. The Coke Reduction Program and Amoco’s
               Technology . . . . . . . . . . . . . .    .   .   .   .   22
           3. The Amoco Anticoking Project . . . . .     .   .   .   .   25
      C. The Spuds Project . . . . . . . . . . . . .     .   .   .   .   32
           1. Overview of the Spuds Project . . . . .    .   .   .   .   32
           2. Petitioner’s Motion for Leave To Amend
               Its Petition . . . . . . . . . . . . .    .   .   .   .   37
      D. The Sodium Borohydride Project . . . . . . .    .   .   .   .   38
           1. Overview of the Acid Gas Removal System    .   .   .   .   38
           2. The Sodium Borohydride Project . . . .     .   .   .   .   41
      E. UOP GA-155 Project . . . . . . . . . . . . .    .   .   .   .   48
           1. Overview of Fouling in the C3 Column .     .   .   .   .   48
           2. Overview of Inhibitors . . . . . . . .     .   .   .   .   50
                                 - 3 -

             3. The UOP GA-155 Project . . . . . . . . . .            .   .   52
       F.   The UCAT-J Project . . . . . . . . . . . . . . .          .   .   60
             1. Overview of Polyethylene Production . . . .           .   .   60
             2. UCAT-J . . . . . . . . . . . . . . . . . .            .   .   66
             3. Overview of the UCAT-J Project . . . . . .            .   .   70
             4. Experimental Runs Before the Credit Years .           .   .   79
             5. Experimental Runs During the Credit Years .           .   .   79
                 a. DJM-5265H (UCAT-J Run 1) . . . . . . .            .   .   81
                 b. DJM-1810B (UCAT-J Runs 2 and 11) . . .            .   .   84
                 c. DJM-1732H (UCAT-J Runs 3 and 15) . . .            .   .   88
                 d. DJM-2419H, DJM-1810H, and DJM 2016H
                    (UCAT-J Runs 4 Through 6) . . . . . . .           . . 91
                 e. DJM-1735H (UCAT-J Runs 7 and 16) . . .            . . 95
                 f. DJL-5264H and DJL-5280H (UCAT-J Runs 8,           9,
                     18, and 19 . . . . . . . . . . . . . .           . . 98
                 g. DJH-2580H and DJH-2950H (UCAT-J Runs 10           and
                     12) . . . . . . . . . . . . . . . . . .          . . 101
                 h. DJL-5420H and DJL-5143H (UCAT-J Runs 13           and
                     14) . . . . . . . . . . . . . . . . . .          . . 103
                     i. DJM-1720H (UCAT-J Run 17) . . . . .           . . 104

III.    Claimed Costs . . . . . . . . . . . . . . .   .   .   .   .   .   .   106
       A. Cost Documentation Used . . . . . . . .     .   .   .   .   .   .   106
            1. PCDs and MASs . . . . . . . . . . .    .   .   .   .   .   .   106
            2. CMAI Data for Ethylene Byproducts .    .   .   .   .   .   .   107
            3. Wage Information . . . . . . . . .     .   .   .   .   .   .   109
            4. R&D Budgets . . . . . . . . . . . .    .   .   .   .   .   .   109
       B. Costs of the Amoco Anticoking Project .     .   .   .   .   .   .   110
            1. Supplies . . . . . . . . . . . . .     .   .   .   .   .   .   110
            2. Wages . . . . . . . . . . . . . . .    .   .   .   .   .   .   113
       C. Costs of the Spuds Project . . . . . . .    .   .   .   .   .   .   114
       D. Costs of the UOP GA-155 Project . . . .     .   .   .   .   .   .   115
            1. Supplies . . . . . . . . . . . . .     .   .   .   .   .   .   115
            2. Wages . . . . . . . . . . . . . . .    .   .   .   .   .   .   116
       E. Costs of the Sodium Borohydride Project     .   .   .   .   .   .   116
       F. Costs of the UCAT-J Project . . . . . .     .   .   .   .   .   .   117
            1. Supplies . . . . . . . . . . . . .     .   .   .   .   .   .   117
            2. Wages . . . . . . . . . . . . . . .    .   .   .   .   .   .   118

IV.    Base Period Projects . . . . . . . . . . . . . . . . . .               119
       A. Scope of the Trial . . . . . . . . . . . . . . . . .                119
            1. Organization of UCC’s Manufacturing Operations
                During the Base Period . . . . . . . . . . . .                120
            2. Acquisitions and Dispositions Between the
                Claim Years and the Base Period . . . . . . . .               122
                a. Acquisitions . . . . . . . . . . . . . . .                 122
                b. Dispositions . . . . . . . . . . . . . . .                 124
            3. UCC/Shell Polypropylene Business . . . . . . .                 125
                          - 4 -

          a. The Cooperative Undertaking . . . . . . . .    125
          b. SPC . . . . . . . . . . . . . . . . . . . .    127
          c. Petitioner’s Base Amount Recalculation . .     129
B.   Base Period Projects . . . . . . . . . . . . . . . .   130
      1. UCC’s Focus on R&D During the Base Period and
          Credit Years . . . . . . . . . . . . . . . . .    130
      2. The Role of R&D and Engineering at UCC’s
          Manufacturing Plants . . . . . . . . . . . . .    130
      3. Petitioner’s Identification of Plant-Based
          Qualified Research Activities Conducted During
          the Base Period . . . . . . . . . . . . . . . .   131
          a. Dr. Wadia’s Assignment . . . . . . . . . .     131
          b. Dr. Wadia’s Methodology . . . . . . . . . .    133
          c. Dr. Wadia’s Conclusions . . . . . . . . . .    134
          d. Petitioner’s Concessions . . . . . . . . .     136
              i. Nalco Inhibitor Antifouling Test (Run
                  816) . . . . . . . . . . . . . . . . .    136
              ii. Wastewater Activity (Run 809) . . . .     137
              iii. Rohm & Haas Runs (Runs 813
                    and 814) . . . . . . . . . . . . . .    138
          e. Activities That Were Not Identified Base
              Period Activities . . . . . . . . . . . . .   139
              i. NOx . . . . . . . . . . . . . . . . . .    139
              ii. John Zink Co. Orders . . . . . . . . .    149
              iii. Star Pelleting . . . . . . . . . . .     149
              iv. Naphtha Analysis . . . . . . . . . . .    150
          f. Duration and Quantities of Product
              Produced . . . . . . . . . . . . . . . . .    150
              i. Natural and Forced Draft Burner Tests
                 (Runs 1 through 11, 95, and 96) . . . .    153
              ii. Nalco 5211 Tests (Run 15) . . . . . .     157
              iii. Vinyl Acetate Catalyst Protection
                    Tests (Runs 47 and 48 and Runs 594
                    and 596) . . . . . . . . . . . . . .    159
              iv. Butyl Acetate Capacity Increase Test
                  (Run 161) . . . . . . . . . . . . . . .   161
              v. MEK Production Test (Run 175) . . . . .    161
              vi. Secondary Refining System Test
                   (Run 178) . . . . . . . . . . . . . .    162
              vii. Spanish Fermentation Ethanol Refining
                    Test (Run 180) . . . . . . . . . . .    162
              viii. Ethanol Tertiary Recovery Test (Run
                       181) . . . . . . . . . . . . . . .   162
              ix. Mexican Fermentation Ethanol Refining
                   Test (Run 184) . . . . . . . . . . . .   163
              x. Propionic Acid Hydrogen Peroxide
                  Treatment Test (Run 190) . . . . . . .    163
                               - 5 -

                   xi.  Adiabatic Hydrogenation Beds
                        Rearrangement Test (Run 198 . . . . . 163
                   xii. Butanol Refining Test (Run 202) . . . 164
                   xiii. DIBK Recycle to Mixed Keytones
                          Converters Test (Run 608) . . . . . 164

V.    Base Period QREs . . . . . . . . . . . . . . . . . . .                        .   164
       A. Documentation . . . . . . . . . . . . . . . . . .                         .   166
       B. Ms. Toivonen’s Costing Methodology . . . . . . . .                        .   167
            1. Identifying the Lead PCD . . . . . . . . . .                         .   168
            2. Identifying the Materials . . . . . . . . . .                        .   169
            3. Tracing the Materials . . . . . . . . . . . .                        .   169
            4. Determining the Unit Costs of Materials . . .                        .   170
            5. Calculating Total Materials Costs . . . . . .                        .   172
            6. Calculating the Wage Costs . . . . . . . . .                         .   173
            7. Calculating the Total Run Costs . . . . . . .                        .   175
            8. Exceptions to Ms. Toivonen’s General Costing
                Methodology . . . . . . . . . . . . . . . . .                       . 175
       C. Ms. Toivonen’s Conclusions . . . . . . . . . . . .                        . 178
       D. Disputed Calculations . . . . . . . . . . . . . .                         . 178
            1. Acrolein Refining System Capacity Test (Run
                   128) . . . . . . . . . . . . . . . . . . .                       .   179
            2. Propyl Dipropasol Refining Test (Run 171) . .                        .   179
            3. Isophorone Mids Conversion Test (Run 173) . .                        .   180
            4. Secondary Refining System Test (Run 178) . .                         .   180
            5. Naphtha-Sulfur Injection Test (Run 807) . . .                        .   180
            6. Methylmercaptopropanal (MMP) Refrigeration
                   Tests (Run 810) . . . . . . . . . . . . .                        . 181

OPINION . . . . . . . . . . . . . . . . . . . . . . . . . . . 182

I.    The Experts . . . . . . . . . . . .   .   .   .   .   .   .   .   .   .   .   .   186
       A. Petitioner’s Expert Witnesses     .   .   .   .   .   .   .   .   .   .   .   187
            1. Peter Spitz . . . . . . .    .   .   .   .   .   .   .   .   .   .   .   187
            2. Gilbert Froment . . . . .    .   .   .   .   .   .   .   .   .   .   .   187
            3. Richard Martin . . . . .     .   .   .   .   .   .   .   .   .   .   .   188
            4. Norman Brockmeier . . . .    .   .   .   .   .   .   .   .   .   .   .   188
            5. Ms. Hinojosa . . . . . .     .   .   .   .   .   .   .   .   .   .   .   188
            6. Dr. Wadia . . . . . . . .    .   .   .   .   .   .   .   .   .   .   .   189
            7. Ms. Toivonen . . . . . .     .   .   .   .   .   .   .   .   .   .   .   189
       B. Respondent’s Expert Witnesses     .   .   .   .   .   .   .   .   .   .   .   189
            1. Roy T. Halle . . . . . .     .   .   .   .   .   .   .   .   .   .   .   189
            2. M. Julianne McClung . . .    .   .   .   .   .   .   .   .   .   .   .   190
            3. Gary Allen . . . . . . .     .   .   .   .   .   .   .   .   .   .   .   190

II.    Whether the Claim Projects Constitute Qualified Research 191
       A. The Qualified Research Tests . . . . . . . . . . . . 191
            1. The Section 174 Test . . . . . . . . . . . . . 194
                                - 6 -

             2. The Technological Information Test . . . . . .     197
             3. The Business Component Test . . . . . . . . . .    198
             4. The Process of Experimentation Test . . . . . .    198
             5. Activities That Are Not Qualified Research . .     203
       B.   The Claim Projects . . . . . . . . . . . . . . . . .   204
             1. Plant-Based Research . . . . . . . . . . . . .     204
             2. The Amoco Anticoking Project . . . . . . . . .     207
                 a. The Section 174 Test . . . . . . . . . . .     208
                 b. The Technological Information Test . . . .     211
                 c. The Business Component Test . . . . . . . .    212
                 d. Process of Experimentation Test . . . . . .    212
                 e. Funded Research . . . . . . . . . . . . . .    215
                 f. Research After Commercial Production . . .     216
                 g. Data Collection and Routine Testing . . . .    217
                 h. Substantiation Requirement . . . . . . . .     219
             3. The Spuds Project . . . . . . . . . . . . . . .    220
                 a. The Section 174 Test . . . . . . . . . . .     221
                 b. The Remaining Tests . . . . . . . . . . . .    223
             4. The Sodium Borohydride Project . . . . . . . .     223
                 a. The First Three Tests . . . . . . . . . . .    224
                 b. The Process of Experimentation Test . . . .    224
             5. The UOP GA-155 Project. . . . . . . . . . . . .    227
                 a. The Section 174 Test . . . . . . . . . . .     228
                 b. The Remaining Tests . . . . . . . . . . . .    230
             6. The UCAT-J Project . . . . . . . . . . . . . .     230
                 a. The Section 174 Test . . . . . . . . . . .     230
                     i. Uncertainty . . . . . . . . . . . . . .    232
                     ii. Discovering Information . . . . . . .     235
                 b. The Technological Information Test . . . .     238
                 c. The Business Component Test . . . . . . . .    239
                 d. The Process of Experimentation Test . . . .    239
                 e. Research After Commercial Production . . .     242
                 f. Substantiation Requirement . . . . . . . .     243

III.    Base Period Activities . . . . . . . . . . . . . . . .     244
       A. Whether Petitioner Must Include Activities Conducted
           By the Entire Consolidated Group . . . . . . . . . .    245
       B. Acquisitions and Dispositions . . . . . . . . . . .      248
       C. Polypropylene Runs . . . . . . . . . . . . . . . . .     250
       D. Whether Petitioner Included All Activities Similar
           to the Claim Projects on Its List of Identified
           Runs . . . . . . . . . . . . . . . . . . . . . . . .    251
           1. Petitioner’s Sources of Information . . . . . .      251
               a. Whether Petitioner Was Required To Use
                   FOCRs To Identify Base Period Activities . .    251
               b. Whether Petitioner Was Required To Consider
                   Alternative Sources . . . . . . . . . . . .     255
                                 - 7 -

          2.  Whether Petitioner Should Include Additional
               Activities in Its Base Period Calculation . . . 256
               a. NOx . . . . . . . . . . . . . . . . . . . . 257
               b. John Zink Co. Products . . . . . . . . . . 257
               c. Star Pelleting Line . . . . . . . . . . . . 257
               d. Naphtha Analysis . . . . . . . . . . . . . 258
               e. Dr. Wadia’s Limitation of Duration . . . . 258
            3. Reliability of Dr. Wadia’s Methodology . . . . 260
               a. Reliability of Dr. Wadia’s Methodology as
                   Expert Testimony . . . . . . . . . . . . . 261
                   i. Whether the Methodology Can Be Tested . 263
                   ii. Whether the Methodology Is Known or
                        Accepted in the Community, Has Been
                        Published, or Has Been Subjected to Peer
                        Review . . . . . . . . . . . . . . . . 264
                   iii. Whether the Methodology Is Subject to
                         Known Rate of Error . . . . . . . . . 264
               b. Petitioner’s Definition of “Qualified
                   Research” . . . . . . . . . . . . . . . . . 268
               c. Whether Dr. Wadia Is Biased . . . . . . . . 272

IV.    Claimed Costs   . . . . . . . . . . . . . . . . . . . . . 273

V.    Base Period QREs . . . . . . . . . . . . . .    . . . . . . 285
       A. Alleged Flaws in Ms. Toivonen’s Costing
           Methodology . . . . . . . . . . . . . .    . . . . . . 285
       B. Alleged Errors in Ms. Toivonen’s
           Calculations . . . . . . . . . . . . . .   . .   .   .   .   .   288
       C. Documents Ms. Toivonen Relied Upon . . .    . .   .   .   .   .   291
       D. Consistency Requirement . . . . . . . .     . .   .   .   .   .   291
            1. In General . . . . . . . . . . . .     . .   .   .   .   .   293
            2. Base Case Costs . . . . . . . . . .    . .   .   .   .   .   294
            3. Wage Costs . . . . . . . . . . . .     . .   .   .   .   .   295
       E. Whether Ms. Toivonen Calculated the Cost    of
           “Qualified Research” Activities . . . .    . .   . . . . 296

VI.    Conclusion . . . . . . . . . . . . . . . . . . . . . . . 296



               MEMORANDUM FINDINGS OF FACT AND OPINION


      GOEKE, Judge:    Respondent determined deficiencies in

petitioner’s Federal income tax of $20,481,520 and $140,732,254

for 1994 and 1995, respectively.    In its petition, as amended,
                                - 8 -

petitioner alleges that it is entitled to additional research

credits under section 411 of approximately $3,656,091 and

$4,726,664 for 1994 and 1995, respectively (claimed credits).2

The claimed credits are based on 106 projects it conducted in

various units within six manufacturing plants during 1994 and

1995 (credit years).   For purposes of resolving this action

expeditiously, the parties have agreed to try five of the largest

projects3 underlying petitioner’s affirmative research credit

claims (claim projects).4

     The issue before the Court is whether petitioner is entitled

to additional research credits under section 41 for 1994 or

1995.5   Resolution of this issue requires us to determine:    (1)



     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years at issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
     2
      In its original petition, petitioner claimed as affirmative
adjustments additional research credits of $4,808,671 and
$5,851,619 for 1994 and 1995, respectively.

     After amending its   petition, petitioner has conceded that an
additional project does   not satisfy the requirements of sec.
41(d). This concession    does not affect our discussion of
petitioner’s claims and   will be addressed in the parties’ Rule
155 computations.
     3
      The term “projects” is used for convenience.
     4
      Petitioner withdrew a sixth project before trial.
     5
      All other issues in this case were resolved by agreement of
the parties or our previous Opinion in Union Carbide Foreign
Sales Corp. v. Commissioner, 115 T.C. 423 (2000).
                               - 9 -

Whether any of the claim projects constitute qualified research

under section 41(d); (2) whether any of the claim projects

constitute qualified research, whether petitioner included all

activities that were similar to the claim projects in its

calculation of its base amount under section 41(c)(4); (3) if any

of the claim projects constitute qualified research under section

41(d), whether the claimed costs of supplies and wages

attributable to those projects (claimed costs) are qualified

research expenditures under section 41(b) (QREs); and (4) if any

of the claimed costs are QREs, whether petitioner included all

similar costs in its base amount calculation.

                         FINDINGS OF FACT

I.   Overview

      Some of the facts have been stipulated and are so found.

The stipulated facts and the accompanying exhibits are

incorporated herein by this reference.

      A.   Petitioner

      Union Carbide Corp. (UCC) was the parent corporation of a

group of corporations (collectively, petitioner) that filed

consolidated Federal income tax returns for the years ending

December 31, 1994 and 1995.   UCC is a corporation organized and

existing under the laws of the State of New York.   At the time

the petition was filed, UCC maintained its principal corporate

office in Danbury, Connecticut.
                              - 10 -

     At all relevant times petitioner was a worldwide

manufacturer and marketer of basic chemicals and plastics and

specialty and intermediate chemicals.   Petitioner conducted its

operations at large-scale production facilities throughout the

United States and abroad.

     Petitioner’s basic chemicals and plastics (C&P) operations

involved the processing of raw hydrocarbon feedstocks--

principally ethane, propane, and naphtha--into basic building-

block chemicals known as olefins.   Ethylene and propylene were

the major olefins UCC produced and were key raw materials for

petitioner’s olefins-chain C&P businesses.

     Petitioner used process technologies to convert manufactured

and purchased ethylene and polypropylene into first-line

derivatives such as:   (1) Polyethylene, which is used for high-

volume applications such as food containers, milk and water

bottles, grocery and trash bags, pipes, and tubing; (2)

polypropylene, which is used for similar high-volume

applications; and (3) ethylene oxide/glycol and derivatives,

which are used for products such as automobile antifreeze,

polyester resin, and film and as raw materials for petitioner’s

specialty and intermediates chemicals business.

     Petitioner’s specialty and intermediates chemicals

operations involved the production of a wide variety of specialty

chemical and polymer product lines, as well as solvents and
                               - 11 -

chemical intermediates.   During the credit years petitioner also

licensed its key olefins-based process technologies, such as the

UNIPOL process for manufacturing polyethylene, to third parties

in the oil and gas petrochemical industries.

     During the credit years UCC maintained research and

development (R&D) technical centers in South Charleston, West

Virginia (South Charleston); Tarrytown, New York; Bound Brook,

Edison, and Somerset, New Jersey; and Cary, North Carolina.   UCC

carried out process and design engineering at the technical

center in South Charleston.

     On February 6, 2001, UCC merged into a wholly owned

subsidiary of Dow Chemical Co. (Dow).

     B.   Procedural History

     UCC, as the common parent of petitioner’s consolidated

group, timely filed consolidated Federal income tax returns for

the years at issue on Forms 1120, U.S. Corporation Income Tax

Return.

     On its 1994 and 1995 Federal income tax returns (returns),

petitioner claimed research credits of $14,100,887 and $4,053,901

for 1994 and 1995, respectively (original returns research

credits).   UCC elected the reduced research credit under section

280C(c)(3) on its 1995 return, but not on its 1994 return.

     In computing the original returns research credits,

petitioner included the following amounts as QREs for 1984
                                 - 12 -

through 1988 attributable to UCC (UCC’s original returns base

period QREs):

                             UCC’s Original Returns
                  Year          Base Period QREs
                  1984              $68,503,722
                  1985               64,742,828
                  1986               48,107,169
                  1987               52,170,492
                  1988               70,499,622
                   Total            304,023,833

UCC’s original returns base period QREs for 1984 through 1987

were drawn exclusively from UCC’s R&D technical centers.   UCC’s

1988 original returns base period QREs were drawn from UCC’s R&D

technical centers except for $1.9 million attributable to UCC’s

G-1750 reactor at its Seadrift facility in Texas (Seadrift).

     UCC’s annual gross receipts for the base period were as

follows:

                                   UCC’s Annual
                     Year         Gross Receipts
                     1984         $2,737,545,150
                     1985          2,440,721,126
                     1986          2,976,592,778
                     1987          3,547,163,938
                     1988          5,033,745,128
                         Total    16,735,768,120
                             - 13 -

     UCC’s annual gross receipts for 1990 through 1994 were as

follows:

                             UCC’s Annual
                     Year   Gross Receipts
                     1990   $4,010,083,913
                     1991    3,724,913,910
                     1992    3,608,486,054
                     1993    3,617,655,799
                     1994    3,789,545,361

     On March 22, 1999, respondent timely mailed a notice of

deficiency to petitioner determining income tax deficiencies of

$20,481,520 and $140,732,254 for 1994 and 1995, respectively.

     The parties negotiated an agreement that resolved most of

the issues raised in the notice of deficiency.   Respondent

allowed petitioner’s original returns research credits as part of

the negotiated agreement.

     Petitioner alleges in its petition, as amended, that it is

entitled to additional claimed credits of approximately

$3,656,091 and $4,726,664 for 1994 and 1995, respectively.6

Petitioner’s claimed credits are based on 106 projects it

conducted in various units within six manufacturing plants during

the claim years.




     6
      These figures have not been adjusted to reflect the fact
that petitioner has conceded that some of the projects do not
satisfy the requirements of sec. 41(d).
                              - 14 -

     In computing the claimed credits, petitioner claimed

$56,247,556 and $145,435,822 as additional QREs under section

41(b) for 1994 and 1995, respectively (claimed QREs).   The amount

of claimed QREs for 1995 is the full-year amount although

petitioner acknowledges that section 41 does not apply to any

amount paid or incurred after June 30, 1995, and before January

1, 1996, and petitioner will disregard such amounts in computing

the amount of additional research credits to which it is

entitled.   On its original 1994 and 1995 returns petitioner

reported the claimed QREs as costs of goods sold.   The supply

items that are in dispute are raw materials used to produce goods

for sale.

     For purposes of resolving this action expeditiously, the

parties have agreed to try five of the largest projects

underlying petitioner’s affirmative research credit claims.7     The

five claim projects are referred to as:   (1) The Amoco anticoking




     7
      The parties have not specified how they will proceed as to
the remaining credit year projects. The Court hopes that this
opinion will provide the parties with sufficient guidance to
determine whether additional research credits are available for
those projects. However, additional proceedings may be necessary
if the parties cannot agree on the final disposition of the
remaining projects.
                               - 15 -

project; (2) the spuds project;8 (3) the sodium borohydride

project; (4) the UOP GA-155 project; and (5) the UCAT-J project.

      The Court held two special trial sessions in connection with

the petition claims.   The first addressed the research credit

eligibility of the claim projects, and the second addressed

petitioner’s section 41(c) base amount recomputation.    Both

parties introduced fact testimony from former UCC employees (in

some instances, current Dow employees) and opinion testimony from

expert witnesses.

II.   Claim Projects

      UCC conducted the claim projects at the Taft Plant (Taft)

and the Star Plant (Star), both of which were in Hahnville,

Louisiana.9   UCC conducted its olefins production at Taft’s

hydrocarbons unit, which contained two production subunits

designated Olefins-1 and Olefins-2.     During the credit years Taft

was a manufacturing plant that included facilities for the

conversion of raw hydrocarbon feedstocks such as ethane, propane,

and naphtha into basic olefins such as ethylene, propylene, and

butadiene.    The Amoco anticoking, spuds, sodium borohydride, and



      8
      Petitioner now concedes that the spuds project is not
qualified research. However, for reasons discussed below, we
will make an independent determination as to whether the spuds
project constitutes qualified research.
      9
      Following Dow’s acquisition of UCC in 2001, Taft and Star
were integrated into a single petrochemical complex referred to
as St. Charles Operations.
                                - 16 -

UOP GA-155 projects related to the olefins production process and

were conducted at Taft.

     UCC produced film and molding polyethylene resins using

petitioner’s low pressure UNIPOL process technology at Star.    The

UCAT-J project related to UCC’s production of polyethylene resins

and was conducted at Star.

     A.   The Olefins Production Process

     A highly simplified description of the olefins production

process at Taft is that hydrocarbon feedstock is pumped from

storage into pyrolysis furnaces, preheated, and diluted with

steam and then is broken into lighter hydrocarbons through

thermal cracking.   Hydrocarbons are any chemical compounds

consisting primarily of carbon and hydrogen.    Hydrocarbons may

include 1 to more than 60 carbon atoms and can be gases, liquids,

or solids at normal temperatures depending on the number of

carbon atoms in the compound.    Hydrocarbons are found in

petroleum, coal, and natural gas.    Hydrocarbons are significant

sources of fuel and raw materials for the production of basic

petrochemicals and derivatives such as plastics, rubbers, and

specialty chemicals.

     “Cracking” is the process whereby hydrocarbon molecules are

decomposed and recombined into lighter, commercially useful

molecules through the breaking of carbon-to-carbon or carbon-to-

hydrogen bonds.   Cracking can be accomplished through a thermal
                               - 17 -

or a catalytic process.   UCC’s olefins production facilities

employed a thermal process called “steam cracking”, whereby a

gaseous or liquid hydrocarbon feed is diluted with steam and

heated in a fire furnace.    The steam cracking reaction requires

temperatures in the range of 1400 to 1650 degrees Fahrenheit and

ordinarily occurs for less than half a second before being

“quenched”, or cooled rapidly, in a heat exchanger or by direct

contact with colder fluid.   UCC’s heat exchangers are typically

referred to by the acronym “TLE”, which stands for “transfer line

exchanger”.   A TLE tubesheet is a flat, circular sheet

approximately 5 feet in diameter that manifolds together many

double concentric tubes each with an inner diameter of about 1

inch.   Water and steam flow through the concentric annulus of

each double concentric tube, and the very high temperature

effluent flows through the center tube.   Heat is transferred from

the cracked gas, or “effluent”, to the water and steam to quench

the ethylene furnace reaction products.   TLEs use the extremely

hot effluent to boil water into high pressure steam that may be

used to power large steam turbine drivers in the product recovery

section of the plant or for other purposes.

     The steam cracking process requires the construction and

maintenance of large, capital intensive, and complex cracking

furnaces to supply the necessary heat.    Most of the furnaces at

Olefins-1 and 2 were Lummus SRT (SRT stands for “short residence
                               - 18 -

time”) furnaces.    A Lummus SRT furnace consists of a rectangular

firebox with a row of vertical tubular coils, or “cracking sets”,

located in the center plane between two radiating ceramic

refractory walls.

     After the effluent is initially quenched in the furnace’s

TLE to minimize secondary chemical reactions, it is further

quenched through direct contact with water and/or oil in a quench

tower.   Heavier hydrocarbons, known as “pyrolysis fuel oil”, are

separated from the effluent during the quenching process.      The

cracking, quenching, and pyrolysis fuel oil separation processes

occur in the hot section of UCC’s olefins production units.

     After quenching, the effluent enters the recovery section

(or cold section) of the olefins production units.    The effluent

is first compressed in a multistage centrifugal compressor to the

pressure required for separation.    Acid gasses such as carbon

dioxide and hydrogen sulfide are removed in an acid gas removal

unit during the compression process.

     Following compression and acid gas removal, the effluent is

dried, chilled, and partially condensed.    It then proceeds

through a separations train whereby ethylene, propylene,

butadiene, and byproducts are fractionated and recovered in a

series of distillation columns and related equipment.

     Distillation is performed in a column through the

application of heat from a reboiler at the column’s base and the
                                - 19 -

removal of components in a condenser at the column’s top.      The

lighter fraction in the column feed mixture (the fraction

containing the components of the mixture with the lower boiling

points) is separated according to the lower boiling points

relative to the other chemicals in the mixture and recovered as

overhead vapor at the top of the column.     The heavier fractions

in the column feed mixture exit as “bottoms” through the column’s

base.

       Olefins-1 and Olefins-2 each had several distillation

columns, including the demethanizer (C1) column, which separated

methane from less volatile components; the deethanizer (C2)

column, which separated ethylene and ethane from less volatile

components; the depropanizer (C3) column, which separated

propylene and propane from less volatile components; and the

debutanizer (C4) column, which separated crude butadiene, butane,

and other four-carbon compounds from less volatile components.

The units also included an ethylene fractionator, which separated

ethylene from ethane, and a propylene fractionator, which

separated propylene from propane, as well as several other

columns.

        Recovered methane and hydrogen were used primarily as fuel

gas.     UCC typically supplied recovered ethylene, propylene, and

crude butadiene to third parties and/or one of UCC’s dedicated

olefins derivatives units.     UCC also recovered and sold certain
                               - 20 -

byproducts of the olefins production process, such as acetylene,

dripolene (pygas), and fuel oil.     Ethane and propane recovered in

the process were recycled through the process to extinction.

     B.   The Amoco Anticoking Project

           1.   Overview of Coking

     Coke is a heavy, hard, and relatively brittle form of carbon

that gradually forms on the interior walls of cracking set coils

during the cracking process.    The cracking reaction produces two

types of coke, “catalytic” and “thermal”.10    Catalytic coking is

caused by the reaction between active metal sites on the inner

furnace tube walls and hydrocarbon molecules in the cracked

furnace gas.    Thermal coking gradually forms as a result of the

reaction between catalytic coke and the highly reactive products

in the cracked furnace gas.    Time and temperature combine to

remove the hydrogen from the hydrocarbon molecules, forming

thermal coke.

     Coke buildup adversely influences furnace performance in a

number of ways.   Coke insulates the furnace tubes from the

inside, impeding effective heat transfer from the furnace walls

to the gas within the cracking sets.     This gradually increases

the skin temperature of the coils to the mechanical limit,

approximately 2,000 degrees Fahrenheit.    Coil coking also closes



     10
      There are other coke formation theories that are not
relevant here.
                              - 21 -

off the flow cross-section area within the cracking sets and

thereby causes the hydrocarbon partial pressure (the pressure

exerted by the hydrocarbons within the gas mixture) to increase.

Higher partial pressure in the coils reduces the desired ethylene

yield from the furnace.

     Coke also accumulates in the TLEs, located immediately

downstream from the radiant section, and the accumulation can

lead to higher hydrocarbon partial pressures and TLE exit

temperatures.   Higher pressure in the TLEs caused by coking also

reduces the desired ethylene yield from the furnace.

     Because of these effects of coking on furnace operation, the

cracking sets must be decoked periodically.   UCC generally

decoked the furnaces in Taft’s hydrocarbons unit every 30 to 60

days through a process in which air and steam were fed into the

cracking sets at elevated temperatures (hot decokes).   After

approximately three to four hot decokes, UCC brought the furnaces

down for an extended “cold turnaround” in which damaged cracking

sets were replaced and coke was manually removed from the TLE

system.   Hot decokes and cold turnarounds necessarily resulted in

maintenance costs and lost production.   Inhibiting coke formation

could result in reduced maintenance, longer furnace run times,

longer equipment life, and increased productivity.
                               - 22 -

           2.   The Coke Reduction Program and Amoco’s Technology

     Before and during the credit years UCC’s hydrocarbons R&D

group had in place a coke reduction program aimed at achieving

economic and productivity improvements by implementing

technologies designed to reduce or eliminate coke in UCC’s

ethylene furnaces.    Because of the inefficiencies caused by coke,

finding ways to reduce or eliminate coke was an important

objective of UCC’s hydrocarbons business.    The goal of the coke

reduction program was to reduce the number of decokes per year by

50 percent and increase productivity by 4 to 4.5 percent per

year.    If successful, UCC estimated that this would reduce its

decoking costs by $2.4 million per year and increase revenue by

as much as $20 million.

     Many coke mitigation technologies have been proposed and

developed in laboratories over the years, but none have succeeded

commercially.    Some failed to mitigate coke or even made it

worse.    UCC screened and commercially tested numerous anticoking

technologies in the mid-1980s and later.    During the credit years

there was no known, generally accepted, commercial coke

mitigation technology for pyrolysis furnaces.    UCC considered at

least four technologies during the credit years but tested only

technology developed by Amoco Chemical Corp. (Amoco) during that

period.
                              - 23 -

     One of UCC’s senior engineering scientists, David Milks,

approached Amoco regarding its anticoking technology in January

1994.   Dr. Milks operated out of the South Charleston technical

center.   On January 21, 1994, Amoco’s anticoking technology

manager wrote to UCC regarding an Amoco-developed furnace

anticoking technology that would mitigate coke formation and

extend furnace run times between decokings.   Amoco’s technology

involved the pretreatment of the interior walls of the cracking

sets with a solution of dithiophosphoric acid derivative.     Amoco

claimed that the pretreatment bonded to the sites of the tube

walls that promote catalytic coke formation and “poisoned” these

sites for several furnace runs to prevent coke buildup.     Amoco

told UCC that its anticoking technology had been successfully

tested in a pilot plant and two commercial plants and that the

treatment had been shown to survive multiple decokes.   After

reading about the science behind the technology, Dr. Milks

believed that it was theoretically sound but not yet proven.

Both Dr. Milks and Amoco were interested in testing the

technology on UCC’s facilities.

     Several UCC employees formed the Amoco anticoking technology

test team to evaluate the technology on one of the furnaces at

Olefins-2 and to provide a recommendation as to whether UCC

should license the technology and implement it on all of its

furnaces at Taft and other UCC plants.   William Hyde, an
                               - 24 -

operations improvement engineer at Taft, was the team leader.       As

the team leader, Mr. Hyde prepared a charter for the team,

evaluated the technology to determine whether it was worth

testing, and coordinated the testing of the technology.

     Amoco’s anticoking technology included the treating chemical

and a specialized method of application.     Unlike prior decoking

technologies that UCC had tested, which involved the continuous

injection of an anticoking chemical, Amoco’s technology was a

pretreatment to be applied to a clean furnace before introducing

the feed.

     Because of the proprietary nature of the technology, Amoco

required the protection of a secrecy agreement before disclosing

its process to UCC.   On or about November 23, 1994, UCC entered

into an agreement with Amoco relating to Amoco’s anticoking

technology (the secrecy agreement).     The secrecy agreement was

the only agreement UCC entered into with Amoco regarding Amoco’s

anticoking technology.    According to the secrecy agreement, UCC’s

goal in conducting the Amoco anticoking project was to evaluate

the technical and economic feasibility of Amoco’s process and

equipment for inhibiting coking in UCC’s ethylene furnaces.     UCC

also wanted to determine whether it was interested in a licensing

arrangement with Amoco.   UCC’s rights in Amoco’s technology were

limited to these purposes.    The secrecy agreement obligated UCC

to provide Amoco with a nonconfidential summary of the Amoco
                                - 25 -

anticoking technology’s performance no later than 3 months after

testing was completed.    UCC gained no rights in, or licenses to,

any Amoco patent, but the secrecy agreement contemplated that the

parties could enter into a licensing agreement after the testing

was completed.

           3.    The Amoco Anticoking Project

     At the beginning of the Amoco anticoking project UCC was

under the impression that the Amoco technology was fairly

established and beyond early developmental stages but that it

would still require some testing before it was proven technology.

Except for the fact that UCC was testing the Amoco technology,

UCC intended to continue its ethylene production process as usual

without decreasing production during the Amoco anticoking

project.

     UCC worked with Amoco to draft a test plan that specified

the number of test runs (runs), the run lengths, what would be

measured, and the method of injecting the inhibitor.      The run

lengths would be determined by “furnace cycles”, the amount of

time the furnace would run between hot decokes under normal

operating conditions.    The test plan called for the collection of

data over four consecutive furnace cycles.      The testing would

begin on furnace 24 in Taft’s Olefins-2 unit.      The test plan

provided that Amoco would apply the inhibitor to four of the six

coils in the furnace so that the coke formation could be compared
                              - 26 -

between the treated cracking sets and the untreated cracking

sets.   The test plan provided that treating four of the six coils

would ensure that the test results would not be affected by

differences between furnaces or operating conditions.

     The test plan called for the collection of various

measurements during decokes, including furnace coil skin

temperature, pressure drop across the coils, TLE inlet pressure,

carbon monoxide, carbon dioxide, and phosphine.    Except for

phosphine, these measurements are affected by coke formation.

Phosphine is a toxic substance that can be produced when

phosphorous-containing materials are used as coke inhibitors.

     To prepare for the test, Mr. Hyde prepared a Facility

Operational Change Review (FOCR) for the project.    An FOCR is a

document that is prepared by the operations personnel when a

significant operational change is to take place.    It generally

addresses technical, quality, health, waste, and safety issues

that must be considered before the change is implemented in order

to minimize any risks involved.   Jason Tregre, a Taft hydrocarbon

R&D technology manager, participated in the prestartup safety

review on furnace 24.   As part of the test preparation UCC also

manufactured and installed nozzles according to design

specifications provided by Amoco.   Among the other final test

preparations were several discussions with Amoco representatives
                               - 27 -

and a walkthrough at Taft on November 7, 1994, in which Amoco and

UCC personnel reviewed the pretreatment application procedures.

     On or about November 28, 1994, after a hot decoke, four of

the six cracking sets were treated.     Amoco personnel worked with

UCC’s plant operators to apply the treatment using Amoco’s

equipment.    Amoco provided the treatment free of charge and

agreed to pay any overtime for additional time that UCC’s

employees would be required to work.    The treatment was completed

on November 30, 1994.   After the pretreatment was complete, UCC’s

plant personnel returned the furnace to normal operating

conditions.

     UCC paid for the feedstocks and fuel gases used during the

project as well as the normal wages of the UCC employees involved

in the project.   The supplies used for the project were the same

supplies that UCC used for normal operations, and UCC sold the

materials produced during the Amoco anticoking project in the

ordinary course of its business.    The Amoco anticoking project

did not disrupt UCC’s normal manufacturing processes or products.

     After the pretreatment was applied, UCC’s plant personnel

took various measurements, including the following, some of which

were not normally taken and others of which were not normally

taken as frequently:
                             - 28 -

          Measurement        Frequency         Normal
             Taken          During Test       Frequency
        Furnace coil      Once per day      Once every 1
        skin                                  to 3 days
        temperature
        Radiant coil      At least once     Not normally
        pressure drop     per day           measured
        TLE inlet         Continuously      Continuously
        pressure
        Carbon monoxide   Not specified     Not normally
                                              measured
        Carbon dioxide    During the        Not normally
                          decoke              measured
        Hydrocarbon and   Every 6 minutes   Not specified
        steam flows       for the first 7
                          days, hourly
                          thereafter
        Phosphine         Not specified     Not normally
                                            measured


Some of these measurements were collected on the Olefins-2 unit’s

process computer, and others were collected manually.

     UCC took measurements for approximately 45 days, then

performed a hot decoke of furnace 24 in January 1995.

Throughout the project UCC continued to decoke furnace 24

according to the plant’s normal schedule.   UCC restarted the

furnace on or about January 15, 1995, without retreating the

furnace and continued to take measurements for about 9 days

thereafter.

     Dr. Hyde compiled these measurements and sent them to Dr.

Milks and Dr. Husebye, a researcher in the hydrocarbons R&D group
                              - 29 -

at the South Charleston technical center.    Dr. Husebye

reformatted the data and analyzed them.    Dr. Husebye did not

typically perform this type of analysis.    UCC did not share the

data it collected with Amoco.11

     Dr. Husebye and Dr. Milks documented the results of the

first Amoco pretreatment in a report dated February 21, 1995.

The report covered approximately 7 weeks of furnace 24’s

operation.   The results showed that carbon monoxide in the

treated cracking sets was initially reduced, indicating

successful coke inhibition.   However, after the first hot decoke

and restart of furnace 24, there was no statistically significant

difference in the amount of carbon monoxide in the treated versus

untreated cracking sets.   Dr. Milks and Dr. Husebye hypothesized

that the hot decoke that was performed before the Amoco

pretreatment was applied might have been incomplete and the

pretreatment might not have survived the first hot decoke

following the pretreatment.   The results from the other

measurements were either inconclusive or indicated no difference

between the treated and untreated cracking sets.

     Because the results from the first pretreatment were

inconclusive, Dr. Milks and Dr. Husebye recommended a second

pretreatment with the Amoco technology after a thorough cold


     11
      Respondent argues that UCC did share data it collected
with Amoco, and there is conflicting testimony on this point.
However, this fact does not control our decision.
                               - 30 -

turnaround.    Amoco personnel applied the second pretreatment in

April 1995 to four of the six cracking sets.    UCC personnel

gathered the same data following the second pretreatment as they

had gathered following the first pretreatment, and Dr. Husebye

analyzed the data.   While UCC did not retain its analysis of the

second pretreatment, it did retain archived computer records that

included data collected after the second pretreatment that could

be used to reconstruct the original analysis.

     Following the second pretreatment, the initial carbon

monoxide levels in the treated cracking sets were again

significantly lower than the carbon monoxide levels in the

untreated sets.   However, after the hot decokes of furnace 24 in

May and June 1995, the carbon monoxide levels in the treated and

untreated cracking sets were nearly identical.    The results from

the second pretreatment, as a whole, indicated that the Amoco

technology did not inhibit coke formation in furnace 24’s treated

cracking sets during the runs conducted between April and mid-

August 1995.

     On August 21, 1995, a furnace operator participating in a

cold turnaround of furnace 24 observed that the TLE cones

connected to the treated cracking sets had significantly greater

amounts of coke deposits than the TLE cones connected to the

untreated cracking sets.    This was unexpected, and UCC believed
                              - 31 -

that the pretreatment may have contributed to the excess coke in

the TLE cones.

     During the cold turnaround UCC removed tube samples and coke

samples from furnace 24 to be tested.   UCC’s corrosion and

machinery engineering department evaluated the samples and

documented the results of its analysis in a formal project

report.   This report included the results of several tests

performed on the samples, analyses of those tests, and

recommendations for future tests of the Amoco technology.     UCC

did not prepare any other formal project reports to specifically

document the results of the second pretreatment.   However, UCC

reported the results of the two pretreatments in several informal

reports and memoranda.

     UCC considered the Amoco anticoking project to be finished

in August 1995, and UCC never again tested the Amoco technology

in any of its ethylene furnaces.   UCC later discovered that the

problem might have been caused by a mistake on Amoco’s part in

establishing the feed rate or the quantity of inhibitor to be fed

to the furnaces.   This indicated to UCC that Amoco’s technology

was more developmental than UCC originally believed it to be.

UCC never entered into a licensing agreement with Amoco to use

its technology.

     UCC used the information gathered during the Amoco

anticoking project primarily to determine that Amoco’s technology
                                 - 32 -

did not effectively reduce coke formation in its commercial

facilities.      UCC also learned about the operation of

thiophosphates (the active ingredients in the Amoco technology),

the relationship between sulfur and carbon monoxide levels, and

the effect of anticoking technology on the ceramic material on

TLE cones.    UCC used this information in the course of its

business.

     Mr. Hyde spent 35 hours in 1994 and 10 hours in 1995 working

on the Amoco anticoking project.      Mr. Tregre spent 5 hours

working on the Amoco anticoking project in 1994.12

     C.   The Spuds Project

            1.    Overview of the Spuds Project

     The spuds project involved replacing four-hole spuds with

one-hole spuds on furnace 3 in Olefins-1 at Taft.      The one-hole

spuds were installed on furnace 3 on or about January 13, 1995.

     A burner is a device that provides radiant heat in a

pyrolysis furnace through controlled combustion.      In a pyrolysis

furnace, combustion is intended to provide a uniform temperature

to the fired radiant wall, allowing for even heat flux

distribution to the cracking set coils.




     12
      Petitioner does not claim as QREs any wages paid to Dr.
Milks or Dr. Husebye, who operated out of the South Charleston
technical center. Their wages would have been included in
petitioner’s original returns research credits.
                              - 33 -

     The furnaces in Olefins-1 each had 112 radiant wall burners.

The burners are mounted through the furnace radiant wall and

produced a thin, flat circular disk of flame adjacent to the

wall.   The burners were equally spaced in a grid pattern and

radiated heat to the process tubes on the centerline of the

furnace.   Each burner had a single spud.

     A spud is the orifice or port through which fuel gas flows

into the burner.   It resembles a bolt with one or more holes at

the end.   Spuds are installed at the piping terminations of each

burner and affect fuel flow and pressure.   Spuds function to

equally divide the amount of fuel being injected to each burner

so that the heat released from the burners is evenly and

predictably distributed throughout all of the burners in the

firebox.   The size and number of spud orifices determine the

pressure of the fuel gas just upstream of the orifice and the

exit velocity of the fuel gas from the orifice, parameters known

as “flow characteristics”.   Flow characteristics of the spuds

help determine the burner firing capacity, which is the British

Thermal Unit (BTU) per hour heat output generated by a single

burner, flame stability, and fuel efficiency.   As fuel gas passes

through the spud it produces a high velocity gas jet, which

entrains combustion air and mixes it with the fuel.   The amount

of air that mixes with the fuel is critical to the stability of

the flame.
                              - 34 -

     When it was first built in the 1960s, Olefins-1 used one-

hole spuds until it was moth-balled in the 1980s.   When it was

restarted in 1989, Olefins-1 switched to four-hole spuds in order

to reduce noise.   The four-hole spuds were prone to plugging, and

UCC typically cleaned the spuds during furnace shutdowns by

poking them with pieces of wire.    Plugging of spuds may also be

improved or eliminated by cleaning the fuel gas system, removing

contaminants in the fuel gas, setting up a regular maintenance

schedule for removing and cleaning the spuds, or increasing the

size of the orifice(s) in the spuds.   Some of these methods may

be costly and/or labor intensive.   While replacing multihole

spuds with one-hole spuds without changing the total area of the

holes was a known method of reducing plugging, one-hole spuds

cause significantly more noise than multihole spuds and therefore

cannot always be used.

     The Taft hydrocarbons unit identified fuel efficiency as an

area for operational improvement.   In October 1994 the John Zink

Co. conducted a combustion survey of Taft’s hydrocarbons unit.

The John Zink Co. is a large ethylene burner manufacturer that

manufactured the burner used on furnace 3.   Burner manufacturers

generally use their test furnaces to evaluate new spud designs

because testing new spuds in a commercial furnace can be

hazardous and the costs are unreasonably high.   However, once a

spud design is proven, it generally performs better on commercial
                               - 35 -

furnaces than on test furnaces because the higher heat content in

a commercial furnace results in more stable flames.    Testing and

evaluating a new spud on a test furnace takes about a day or

less.

     Following the survey, the John Zink Co. recommended using

one-hole spuds instead of four-hole spuds in the Olefins-1

furnaces to reduce plugging.   UCC had been using one-hole spuds

in its Olefins-2 furnaces since the late 1970s and noticed that

Olefins-2 had not experienced any plugging problems.   However,

UCC was concerned about changing to one-hole spuds because they

might create too much noise.   Olefins-1 and 2 were physically

different, and noise was more of a concern at Olefins-1 than at

Olefins-2.   However, noise was not a major concern because the

plant personnel already wore hearing protection.

     UCC followed the John Zink Co.’s recommendation to try

switching from four-hole spuds to spuds with one hole with the

same total hole area.   UCC decided to purchase enough spuds for

three furnaces, which would cost $3,400 to $3,700 per furnace.

UCC believed that this was a relatively inexpensive way to solve

the plugging problem.   UCC intended to test the new spuds on one

furnace; and if the test was successful, then UCC would

immediately begin replacing the spuds on two other furnaces.

     To test the new spuds, UCC planned to monitor performance

data such as:   (1) The fuel-to-feed ratio (BTUs of fuel per point
                              - 36 -

of feed), (2) excess oxygen in the fuel gas, (3) the amount of

combustibles in the fuel gas, and (4) fuel pressure.    UCC

intended to evaluate the fuel efficiency improvements by

measuring BTUs in a process computer, measurements that were

available regardless of whether a test was being performed.    The

goals of the test were to determine whether the new spuds would:

(1) Stop or reduce plugging; (2) increase efficiency, and if so

by how much; and (3) increase noise, and if so by how much.    Mr.

Tregre was involved in this planning.

     UCC did in fact take the above test data on furnace 3 for

about 90 days.   Mr. James Gorenflo, a furnace technician, was

involved in testing furnace 3.   UCC monitored plugging by

checking fuel pressure gauges.   The results showed that pressure

was not increasing, which indicated that the new spuds solved the

plugging problem.   UCC also evaluated fuel efficiency by

analyzing measurements of fuel gravity and the fuel-to-feed

ratio.   Mr. Tregre was involved in this evaluation.   The results

showed that fuel efficiency improved, although not as

dramatically as UCC had hoped.

     Because the one-hole spuds solved the plugging problem, UCC

installed one-hole spuds on all of its furnaces at Olefins-1

after the 90-day test period was over.   While UCC hoped that the

change would increase fuel efficiency more, the fact that the
                                - 37 -

one-hole spuds solved the plugging problem was sufficient

justification for changing the spuds.

     Mr. Tregre spent 70 hours in 1994 and 10 hours in 1995

working on the spuds project.    Mr. Gorenflo spent 10 hours in

1995 working on the spuds project.

          2.   Petitioner’s Motion for Leave To Amend Its Petition

     On January 19, 2007, petitioner filed a motion for leave to

amend its petition.    If filed, the amended petition would have:

(1) Withdrawn petitioner’s affirmative claim for additional

research credits under section 41 to the extent it was based on

the spuds project, (2) adjusted the claimed QREs to reflect the

withdrawal of the spuds project, and (3) applied the correct

credit rate for 1994.    Respondent opposed this motion because the

Court had already held a trial on the claim projects, including

the spuds project.    Given the substantial cost of litigation,

respondent argued that he would be prejudiced if the Court was

prevented from rendering a decision on whether the spuds project

satisfied the criteria for qualified research.    In addition, to

the extent that petitioner claimed additional research credits

for projects similar to the spuds project that were not litigated

in the claim year trial, respondent argued that he would be

prejudiced by the absence of a decision on whether the spuds

project constituted qualified research.
                               - 38 -

     Following a hearing on this motion on August 29, 2007, we

denied petitioner’s motion because we found that it would be

unfair to allow petitioner to unilaterally alter its agreement

with respondent to hold a trial on the five claim projects.

     D.   The Sodium Borohydride Project

           1.   Overview of the Acid Gas Removal System

     The sodium borohydride project involved the injection of a

sodium borohydride solution into the Olefins-2 caustic scrubber.

     The Olefins-1 and Olefins-2 acid gas removal systems remove

carbon dioxide and hydrogen sulfide from cracked furnace gas.

Acid gases are impurities that can cause operational problems in

downstream plant equipment.   Acid gas removal is also necessary

to meet product specifications.

     The acid gas removal system consists of a regenerative

monoethanolamine (MEA) system followed by a caustic scrubber.

Cracked furnace gas is fed into the MEA system, where it is

washed with a countercurrent flow of amine solution that removes

the bulk of acid gases.   As an incidental benefit the MEA system

removes the impurity acetaldehyde from the cracked furnace gas.

Acetaldehyde is a highly reactive compound created in trace

quantities during the thermal cracking of hydrocarbons in the

presence of steam.   It is formed in the furnaces through the

interaction of free radicals from steam and ethane or other raw

materials.   Acetaldehyde can polymerize and foul plant equipment.
                               - 39 -

     After being treated by the MEA system, the cracked furnace

gas passes through a two-stage caustic scrubber for removal of

residual acid gases.   The caustic scrubber is sized so that it

can reduce acid gases to specification levels even when the MEA

system is shut down.

     The MEA systems in both Olefins-1 and Olefins-2 had to be

periodically shut down and manually cleaned because of the

fouling of heat transfer surfaces partially caused by

acetaldehyde polymerization.   Fouling is the deposition of heavy

organic solids that were dissolved in process fluid.    When one of

the MEA systems is down, the cracked furnace gas passes through

only the caustic scrubber for acid gas removal.    The caustic

scrubber, however, does not remove acetaldehyde.    Taft’s MEA

systems ordinarily ran from 3 to 6 months between shutdowns,

depending on the feedstocks used and furnace cracking conditions.

Cleaning the MEA system normally took about 14 days.

     In the early 1990s UCC produced at its Taft plant a

hydrocarbon product called crude butadiene.   Crude butadiene is

highly reactive and is a major contributor to fouling in the

olefins process equipment.   When the MEA system was shut down and

only the caustic scrubber was used to remove acid gases, some

acetaldehyde would leave the process with the crude butadiene.

     In 1994 Shell Oil Co. (Shell) was Taft’s primary customer

for crude butadiene.   At the time, Taft stored crude butadiene in
                              - 40 -

two storage tanks and transported it in barges to Shell, which

operated a plant directly across the Mississippi River from Taft.

Shell had a product specification limiting the amount of

acetaldehyde in Taft’s crude butadiene to 100 parts per million

(ppm) because acetaldehyde would foul Shell’s processing

equipment.   On one occasion in the summer of 1994, UCC

manufactured crude butadiene that did not meet Shell’s

acetaldehyde specification.   Shell refused to accept a barge

shipment of that crude butadiene and returned it to Taft.

     When the MEA system was in service, acetaldehyde levels in

Taft’s crude butadiene were well below 100 ppm.   However,

acetaldehyde levels reached between 500 and 800 ppm when the MEA

system was shut down.   One method that UCC used to bring off-

specification crude butadiene within specification levels was

called “blending”.   UCC would store off-specification crude

butadiene and then blend it with on-specification crude butadiene

when the MEA system was restarted.

     However, when the amount of off-specification crude

butadiene exceeded UCC’s available storage capacity, UCC would

have to attempt to recycle the crude butadiene or find a

purchaser who would accept it as it was.   Another problem of

blending was that it was difficult to calculate the amount of on-

specification product needed to blend with the off-specification

product.   UCC was also considering building a pipeline directly
                              - 41 -

from Taft to the Shell plant, which would reduce or eliminate the

need for storage tanks and make blending impractical.   Therefore,

UCC did not view blending as a permanent solution to the problem

of off-specification crude butadiene.

          2.   The Sodium Borohydride Project

     Because of the shortcomings of blending, UCC sought a way to

remove acetaldehyde from crude butadiene during the periods that

the MEA system was shut down for maintenance.   UCC decided that a

possible solution was to add sodium borohydride to the caustic

scrubber to remove acetaldehyde when the MEA system was shut down

for maintenance.

     In February 1995 UCC considered using sodium borohydride

regularly to remove acetaldehyde if using sodium borohydride

proved to be effective.   UCC knew that sodium borohydride was

effective in removing aldehydes, including acetaldehyde, as UCC

had been testing sodium borohydride in laboratories for such

purposes as early as 1961.   UCC and its competitors had

successfully used sodium borohydride in commercial processes to

remove acetaldehyde and other carbonyl compounds from products.

However, UCC did not know how effectively sodium borohydride

could remove acetaldehyde in the caustic scrubber.   Liquid sodium

borohydride was often used to remove acetaldehyde from other

liquids, but in the caustic scrubber UCC would need to use liquid

sodium borohydride to remove acetaldehyde from a gas.   The
                               - 42 -

interaction of a liquid with a gas is much more difficult to

predict than the interaction of a liquid with other liquids.

     UCC also knew that sodium bisulfate could be used to remove

acetaldehyde.   However, UCC would have had to use a higher

concentration of sodium bisulfate than sodium borohydride to

effectively remove acetaldehyde, and sodium bisulfate was more

difficult to work with than sodium borohydride.

     On October 10, 1994, Mr. George Brandon, a senior production

specialist at Taft, initiated an FOCR for injecting sodium

borohydride into the caustic scrubber in Olefins-2.    According to

the FOCR, the purpose of the project was to run a test to

determine whether sodium borohydride could be used to remove

acetaldehyde when the MEA system was shut down.

     An R&D report dated January 9, 1995, prepared by Robert

Manyik, a consultant in the hydrocarbons R&D group, was attached

to the FOCR.    In the R&D report Dr. Manyik proposed a plant test

to add sodium borohydride to the caustic scrubber when the MEA

system was down in order to remove acetaldehyde to on-

specification levels.   UCC would use a sodium borohydride

solution called VenPure, sold by Morton Performance Chemicals

(Morton).   The R&D report addressed whether such a test was

feasible, identified potential hazards that could arise during a

test, and provided the necessary technical information that would

be needed to conduct the test.    The R&D report specified the
                               - 43 -

equipment that was available, how much sodium borohydride UCC

would purchase, the rate at which the sodium borohydride would be

added, and the benefits and drawbacks of diluting the sodium

borohydride.    The FOCR also included a diagram illustrating how

the sodium borohydride would be injected and a memorandum setting

out, in question and answer format, the duration of the test, the

controls that would be monitored, whether the sodium borohydride

would be diluted, the physical configuration of the injection

equipment, operation temperatures and pressures for the injection

equipment, and UCC’s plan to prevent the buildup of salt

precipitates.

       One of the departments that reviewed the FOCR was Taft’s

Environmental Pollution Department (EPD).    The EPD endorsed the

sodium borohydride project provided that certain conditions were

met.    These conditions were that the EPD would sample and monitor

the plant’s wastewater for the presence of boron 2 weeks before,

during, and 2 weeks after the test, and the use of sodium

borohydride would be immediately terminated if the monitoring

indicated that the wastewater quality was beginning to

deteriorate.    The EPD was concerned that large amounts of boron

might enter the wastewater system and disrupt the wastewater

treatment.    Another condition that the EDP imposed was that the

injection rate would not exceed 5 pounds per hour; and if the
                               - 44 -

plant was required to increase this rate, it would seek approval

from the EPD at that time.

     Approval from UCC’s R&D department was also necessary before

beginning the project because it involved the introduction of a

new chemical to the process.   UCC wanted to ensure that the

change was safe and that there would be no adverse consequences

to the plant process from the injection of sodium borohydride.

The R&D department approved the sodium borohydride project on

January 13, 1995, and the engineering department approved the

sodium borohydride project on February 20, 1995.

     UCC believed that a plant test was necessary to determine

whether sodium borohydride would effectively remove acetaldehyde

in an actual caustic scrubber.   UCC was uncertain how well the

sodium borohydride would mix with the acetaldehyde because of the

difficulty in modeling liquid-gas interactions.    Therefore, while

it was known that sodium borohydride would react with

acetaldehyde in a laboratory or pilot plant setting, UCC was not

sure how well sodium borohydride and acetaldehyde would react in

a full-scale plant given the plant’s size, gas flow, and

configuration.   Because cracked furnace gas travels quickly

through the caustic scrubber, UCC was unsure whether the

residence time of the sodium borohydride in the caustic scrubber

would give the sodium borohydride sufficient time to react with

the acetaldehyde and bring the crude butadiene within
                                - 45 -

specification levels.    UCC was also unsure of the appropriate

rate to inject the sodium borohydride and of the effect the

sodium borohydride would have on the boron concentration of the

wastewater.   Because of these uncertainties as to how sodium

borohydride would interact with acetaldehyde, UCC referred to the

sodium borohydride project as a “test run”.

     After injecting the sodium borohydride, UCC intended to

monitor the acetaldehyde content of crude butadiene extracted

from the caustic scrubber.    The EPD also planned to monitor the

wastewater for boron content.

     The equipment for the sodium borohydride project was

initially installed at Olefins-1 on June 11, 1995, but the crude

butadiene remained within specification levels when the Olefins-1

unit’s MEA system was shut down for maintenance.    Accordingly,

UCC moved the equipment to Olefins-2 and conducted the test

there.   UCC had a limited amount of sodium borohydride and did

not want to waste it on crude butadiene that was already on-

specification.   The sodium borohydride project began in the

Olefins-2 unit on or about June 12, 1995, and ran for

approximately 2 weeks.

     During the test, UCC injected the sodium borohydride

solution into the Olefins-2 caustic scrubber.    To inject the

sodium borohydride UCC used a small tote tank (owned by Morton)

to hold the solution, a small metering pump to inject the
                               - 46 -

solution, and tubing to connect the tank and the pump to the

process.   Morton recommended an amount for UCC to inject, and UCC

followed that recommendation initially but then made adjustments

as the project progressed.    UCC did not regularly record the

amount of sodium borohydride that was injected during the test.

     Taft employees monitored the crude butadiene production from

the Olefins-2 unit’s C4 column during the sodium borohydride

project.   UCC measured the acetaldehyde content of the crude

butadiene every 12 hours.    UCC normally took these measurements

about three times a week.    To take the measurements, plant

operators took samples of crude butadiene to Taft’s central

quality control laboratory for testing.    In addition, Mr. Brandon

measured acetaldehyde levels in the cracked furnace gas entering

and exiting the caustic scrubber.    To take these measurements,

Mr. Brandon used a device called a “drager pump and tube system”.

The tubes would indicate how many ppm of acetaldehyde the cracked

gas contained.   Mr. Brandon took these measurements at least

daily for the duration of the project.    Mr. Brandon did not

normally take such measurements.    As planned, the EPD also

monitored the wastewater approximately every 12 hours.    The EPD

normally monitored the wastewater weekly unless a special test

was being run.

     Mr. Brandon collected and recorded the results of the crude

butadiene analyses and drager tube tests and reported the results
                               - 47 -

to Terry Swindle, a Taft engineer assisting with the sodium

borohydride project.    Mr. Brandon devoted approximately 200 hours

to the sodium borohydride project.      The EPD collected and

recorded the results of the wastewater monitoring and reported to

Mr. Swindle that the boron was within acceptable limits.

However, the data collected from the sodium borohydride project

were not documented in a final project report.      UCC treated the

January 9, 1995, R&D report prepared by Dr. Manyik as the

functional equivalent of a project report even though the report

was prepared before the test of sodium borohydride occurred.

     UCC considered the sodium borohydride project to be a

success because the sodium borohydride effectively kept the

acetaldehyde in the crude butadiene production below the 100 ppm

specification level.    Accordingly, Taft began to use sodium

borohydride regularly to reduce acetaldehyde levels when an MEA

system was shut down.

     Several years later, UCC discovered that using sodium

borohydride to remove acetaldehyde caused unacceptably high

levels of ethanol, a byproduct of the reaction, in the crude

butadiene.    During the credit years UCC believed that ethanol

would leave the system with the spent caustic and therefore did

not consider whether ethanol would be a problem and did not

measure it.   However, the ethanol remained in the crude butadiene

and later caused it to fail Shell’s new specifications.
                                - 48 -

Therefore, UCC began using a new product to remove acetaldehyde

instead of sodium borohydride.

     E.    UOP GA-155 Project

            1.   Overview of Fouling in the C3 Column

     The UOP GA-155 project involved the injection of an

inhibitor, UOP GA-155, into the C3 column line at Olefins-1 in an

attempt to reduce fouling in the C3 column trays and reboilers.

Fouling is a major problem for petrochemical plants.

Consequences of fouling may include declining performance,

frequent shutdowns of process equipment, loss of operation time,

and increased maintenance costs for cleaning or replacement of

equipment.

     Fouling is a particular problem in distillation column

services.    Deposit buildup in distillation columns can reduce

capacity and efficiency by blocking the flow path and by impeding

the performance of heat exchangers.      An ethylene unit can

experience polymer fouling in the C2, C3, and C4 distillation

columns.    The C3 column typically has the worst fouling problem.

     The main function of the C3 column was to separate the

propylene and propane (C3 molecules) and heavier hydrocarbons.

The liquid hydrocarbon steam entered the C3 column at the

column’s midpoint and fell to the bottom where it was heated by

one of the two reboilers mounted on the column’s base.      The

lighter C3 molecules were vaporized and captured at the top of
                                - 49 -

the column, while the remaining heavier components exited the

bottom of the column and traveled on to the C4 column.     The C3

column contained approximately 40 trays that held the liquid

hydrocarbon stream being processed so that it could be exposed to

the vapor generated by the reboiler.

     Column fouling is typically greatest within the reboiler and

also occurs in the trays.    One cause of fouling in distillation

columns is the polymerization of reactive components in the

liquid phase of distillation.    Polymerization is the linking of

double bonds to form long chain molecules.   Most of the

polymerization is due to the reaction of diolefins and reactive

species such as styrenics.

     In the mid-1990s Olefins-1 was experiencing high levels of

fouling in the C3 columns, reboilers, and internal trays caused

by the formation of polybutadiene polymer, a rubbery black

substance that adhered to the insides of the column.     There were

two reboilers mounted to the base of the C3 column, but only one

operated at a time.   The polybutadiene polymer fouled the tubes

in the operating reboiler and restricted the liquid flow.     When

the reboiler fouled to the point that it became inoperable, it

was taken out of service and cleaned, and the clean reboiler was

placed in service.    Typically, it took about 2 weeks to clean a

fouled reboiler and cost about $25,000.   In 1994 and 1995 the
                                - 50 -

ideal run time for a reboiler between cleanings was 2 to 3

months.

     The polybutadiene polymer also accumulated on the trays to

the point that the vapors rising from the bottom of the column

could not pass through the holes in the tray.     This fouling

created a high differential pressure in the column, causing the

column to flood with liquid and become inoperable.     At this

point, plant employees would have to shut down the column and

clean it.    In 1994 and 1995 the ideal run time for a C3 column

was approximately 3 years but, depending on the feedstock,

cracking, and operating conditions, the column would not always

run that long.    It would typically take about a month to clean a

fouled C3 column and cost about $50,000.    Occasionally the entire

olefins unit needed to be shut down when a column cleaning

occurred.

            2.   Overview of Inhibitors

     An inhibitor is a chemical that is added to a chemical plant

to reduce fouling and increase the time that a particular piece

of equipment will operate before it needs to be cleaned or shut

down.     Olefins plants use two types of inhibitors (1)

polymerization/oxidation inhibitors and (2) dispersants.

Polymerization/oxidation inhibitors are added to stabilize

certain products that can polymerize or break down when exposed

to air.     Dispersants are added to products to keep impurities
                              - 51 -

suspended in the liquid hydrocarbon stream from depositing on

plant surfaces and fouling them.   An effective inhibitor will

improve column and reboiler run length times and will not cause

any additional problems in the plant.

     UCC used about 12 different inhibitors in its olefins

manufacturing processes at any particular time in the early

1990s.   In 1994 and 1995 UCC used different inhibitors in its

olefins manufacturing units because an inhibitor that works well

in one olefins plant may not necessarily work well in another

olefins plant.   Because equipment differs from plant to plant, an

inhibitor might have a different residence time or different

contact times in different columns.    In addition, flow rates,

pressures, and temperatures, which all affect the operation of an

inhibitor, differ from plant to plant.

     The vendors from whom UCC purchased inhibitors tested the

inhibitors in laboratories to verify that they would in fact

inhibit polymerization or oxidation.    However, UCC could not

determine how well the inhibitors would work in one of its plants

without testing them in the plant.     UCC generally gathered data

when using a new inhibitor and compared that data to baseline

data to determine whether the inhibitor worked as expected.      The

purpose of inhibitors is to extend the time equipment can be used

before it must be shut down and cleaned.    Therefore, one way to

know whether an inhibitor is effective is to compare the run time
                               - 52 -

of a compressor, reboiler, or column operating with the inhibitor

against the preinhibitor run time of the same equipment.        UCC

believed that the test of a new inhibitor should last for about

as long as the vendor claims the equipment will run with the use

of the inhibitor.   UCC also generally used inhibitor tests to

determine the proper dosage.   While UCC believed it was important

to use enough of an inhibitor for it to be effective, excessive

use of an inhibitor can have adverse effects on the production

process or on the plant’s products.      Furthermore, because

inhibitors are expensive, using a higher dosage than is necessary

will reduce the economic benefit of using the inhibitor.

     The hydrocarbons R&D group was generally involved in

decisions to test process inhibitors at UCC’s plants because the

tests would involve the introduction of a new chemical into the

plant and could have environmental, health, and safety

consequences.   R&D was familiar with the chemistries and

processes of the plants and could provide input on whether a new

inhibitor might be effective in the plant, what dosage levels to

use, how to set up the test plan, and how to measure the results

of the inhibitor use.

          3.    The UOP GA-155 Project

     Dripolene was a byproduct of Taft’s olefins production

process that flowed out the bottom of the C4 column, the final

column in the olefins separations train.      UCC could not ship
                              - 53 -

dripolene unless it was stabilized with a certain amount of

polymerization/oxidation inhibitor.    Without the inhibitor, the

dripolene could react with oxygen and present an explosion

hazard.

     Before undertaking the UOP GA-155 project, Taft’s

hydrocarbons unit had been injecting a stabilizer known as UOP-5

into the dripolene as it flowed out of the C4 column.     The active

ingredient of UOP-5 was phenylenediamine.   The dripolene from

Olefins-1 and 2 was blended and stored in the same tank, so the

Olefins-1 dripolene was stabilized by the inhibitor injected into

the Olefins-2 dripolene.

     Because cleaning the reboilers and shutting down the columns

was very expensive, UCC was always looking for ways to decrease

operating costs by reducing fouling.   Mr. Brandon discussed the

problem with members of Taft’s hydrocarbons R&D group to try to

find ways to reduce fouling in the C3 column.   Mr. Brandon

approached UOP, a supplier to the petrochemical industry, to

determine whether UOP had a product that could be fed directly

into the Olefins-1 C3 column to both reduce fouling and stabilize

the dripolene.   UOP reviewed UCC’s process stream, operation,

equipment, and operating conditions.   On the basis of those

observations, UOP recommended that UCC use UOP GA-155, which

contains phenylenediamine (the active ingredient used in UOP-5)

as well as a dispersant.   UOP told UCC the approximate
                              - 54 -

percentages of UOP-5 and the dispersant contained in UOP GA-155.

UOP maintained that UOP GA-155 would operate as an oxidation

inhibitor in the C3 column, the phenylenediamine would stabilize

the dripolene, and the dispersant would mitigate fouling in the

C3 column.   UOP represented to UCC that UOP GA-155 was effective

in extending process run length.

     UCC had not previously used UOP GA-155 in any of its

facilities and was not aware of any other olefins plants in the

country that had used UOP GA-155.   However, UOP told UCC that

some of the ingredients in UOP GA-155 were industry-wide standard

materials that were being used in olefins plants.   UCC did not

consider other possible inhibitors or chemicals because their

cost was excessive because they were bundled with the purchase of

services that UCC did not want.

     UCC wanted to test UOP GA-155 in its plant because

successful laboratory tests do not guarantee that an inhibitor

will be effective enough in a full-scale plant to justify its

cost.   While manufacturers often made representations to UCC

regarding the inhibitors that they were selling, the inhibitors

did not always work as represented.

     To test the UOP GA-155, UCC planned to inject UOP GA-155

into the C3 column feed instead of into the dripolene product as

it had done with UOP-5.   The UOP GA-155 would then flow out of
                               - 55 -

the bottom of the C3 column, flow into the C4 column feed, and

flow out of the C4 column and the plant with the dripolene.

     Mr. Brandon initiated an FOCR, numbered 94-80 (FOCR 94-80),

for moving the equipment that was being used to inject UOP-5 into

the Olefins-2 dripolene product over to Olefins-1 in order to

inject the inhibitor into the C3 column feed.   UCC hoped that

injecting the inhibitor into the C3 column feed instead of

injecting it into the dripolene as it flowed out of the C4 column

would inhibit fouling in the depropanizer system.   Mr. Brandon

initiated another FOCR, numbered 94-61 (FOCR 94-61), for changing

the inhibitor from UOP-5 to UOP GA-155 and injecting UOP GA-155

into the C3 column feed.   FOCRs were generally required when

introducing new inhibitors because the introduction of a new

inhibitor is a process change.   According to FOCR 94-61, the

purpose of the change was to reduce fouling in the C3 and C4

columns and their reboilers.   The FOCR listed as concerns that

needed resolution (1) whether the customers would approve of the

change and (2) whether UCC had a pump that had a high enough

discharge pressure.

     Mr. Brandon’s supervisor instructed Mr. Brandon to keep the

UOP GA-155 project on hold until the necessary approvals had been

obtained from the hydrocarbons R&D group, the EPD, and UCC’s

customers.   UCC informed its customers that UOP GA-155 would be

injected into Taft’s Olefins-1 production process, and its
                              - 56 -

customers did not object.   The FOCRs were finally approved on

September 22, 1994.

     While Mr. Brandon hoped that UOP GA-155 would increase the

C3 column’s run time, he was not certain how effective UOP GA-155

would be.   Mr. Brandon was also concerned that UOP GA-155 could

actually harm UCC’s production process.    Specifically, he was

concerned that adding a dispersant to the column could cause

existing polymers to loosen from the column walls and trays and

plug the column.   If that happened, UCC would have to shut down

the column and possibly the entire Olefins-1 unit.    In addition,

Mr. Brandon was concerned about the effect that UOP GA-155 might

have on Taft’s commercial products because the UOP GA-155 would

flow out with the crude dripolene.     Because UOP GA-155 would be a

new ingredient in the product, it was possible that it could

adversely affect the downstream olefins products or cause

problems when fed into customers’ production processes.

     The injection of UOP GA-155 into the C3 column feed line in

Olefins-1 began soon after the final approvals were obtained for

FOCR 94-61 and FOCR 94-80 on September 22, 1994.     The

hydrocarbons R&D group asked the plant personnel to collect data

during the test.   Accordingly, Mr. Brandon collected daily all of

the pertinent data that were regularly recorded on the process

computer system in the Olefins-1 control room, including

differential column pressure, feed flows, throughput rate, steam
                               - 57 -

temperatures, and steam flows.    Differential column pressure is

the measurement of the different pressures across the column

trays from top to bottom.    When polybutadiene polymer accumulates

on the trays, the trays plug and the differential pressure

increases.    While UCC did not normally review these measurements

daily, UCC did monitor reboiler chest pressure when there were

problems.    It was also typical in the industry to measure column

differential pressure when equipment is prone to fouling.

     During the test Mr. Brandon also measured and recorded

condensate pressure of the reboiler every day.    Neither Mr.

Brandon nor any of UCC’s other employees had monitored the

condensate pressure daily before the UOP GA-155 project.    An

increase in condensate pressure is a primary indicator of

reboiler fouling.

     Mr. Brandon and other employees also took samples of

dripolene and analyzed the inhibitor levels once per 12-hour

shift.    Before the UOP GA-155 project, UCC’s employees had

analyzed the inhibitor levels in the dripolene once a week for

quality control.    Mr. Brandon took measurements for approximately

90 days during the UOP GA-155 project.    Mr. Brandon also kept

track of reboiler run lengths both before and during the test

period.    Mr. Brandon spent approximately 200 hours in 1994 and

200 hours in 1995 working on the UOP GA-155 project.
                              - 58 -

     It would take approximately 3 years to determine whether UOP

GA-155 substantially extended the run length of the C3 column.

UCC could determine whether UOP GA-155 was reducing fouling in

the column by opening the column, but that was not practical.

Therefore, UCC relied on indicators such as differential column

pressure to determine whether UOP GA-155 was reducing fouling in

the column.

     It would take at least 3 months for UCC to assess whether

UOP GA-155 would increase the run length of the reboiler because

the normal run length of a reboiler without the addition of an

inhibitor is about 2 to 3 months.   UCC believed that a successful

inhibitor could extend the run length of a reboiler to about 6

months.   Therefore, while Mr. Brandon recorded data only for

about 90 days, UCC treated the project as beginning on September

22, 1994, and lasting for 6 months.    During this time the

Olefins-1 unit operated normally except for the addition of the

activities described above.   UCC sold the products produced

during the UOP GA-155 project in the ordinary course of its

business.

     UCC considered the UOP GA-155 project to be a success

because it reduced fouling and increased the run length of the

reboiler to 6 months.

     Mr. Brandon recorded the results of the project and shared

them with Mr. Swindle.   However, Mr. Brandon did not prepare a
                              - 59 -

formal project report after the project was completed or save the

data for use when fouling of Olefins-2 was discovered in 1997 or

1998.   However, the results of the project would have been

reported in the quarterly reports that the hydrocarbons R&D group

prepared.   The results of the UOP GA-155 project were also

included in a memorandum prepared for a conference call to be

held on July 27, 1995.   The memorandum did not include data from

the project but reported the results as follows:

     UOP Inhibitor Project: Recall that in the beginning of
     the second half last year, the UOP-5 inhibitor was
     replaced with the UOP GA-155 inhibitor and it was
     injected earlier in the system in order to reduce
     fouling of the C3 Column Reboilers in Ole-1. In
     January of this year, the east kettle [reboiler] had to
     be taken out of service due to tube leaks which were
     not caused by the inhibitor or fouling - it was due to
     attack from carbonic acid in the steam condensate. The
     newly purchased kettle, which was installed last
     October, was then put in service and is still in
     service. We feel that the success of the kettle - six
     month life - is primarily due to the use of the new
     inhibitor. In addition, the new inhibitor is now also
     being used in Ole-2.

     UCC did not always prepare formal project reports when an

inhibitor test such as the UOP GA-155 project was performed.

Although it was preferable for a project report to be prepared to

summarize the results of an inhibitor test, this did not always

happen because it was not always a top priority.

     On or about October 28, 1994, about a month after the UOP

GA-155 project began, Mr. Brandon began preparing an FOCR for a

project to begin using UOP GA-155 in Olefins-2.    On November 29,
                                 - 60 -

1994, Mr. Swindle recommended that UOP GA-155 be used at Olefins-

2.   On or about June 14, 1995, after the completion of the UOP

GA-155 project, UCC began injecting UOP GA-155 into Olefins-2’s

C2 column tail.     The purpose of this change was to reduce fouling

in the C2, C3, and C4 columns in Olefins-2 and simultaneously

stabilize the dripolene.     However, during a plant shutdown in

1997 or 1998, UCC discovered that the dispersant in UOP GA-155

caused severe fouling in the Olefins-2.

     F.    The UCAT-J Project

             1.   Overview of Polyethylene Production

     The UCAT-J project involved a series of runs using a new

polyethylene (PE) catalyst referred to as UCAT-J conducted at

Star.     PE is a plastic made by reacting ethylene with other

materials to form polymers, or molecular chains, of ethylene.

The PE production process generally involves a reaction between a

polymerization-initiating catalyst (as relevant here, M-1 or

UCAT-J13), a cocatalyst, a monomer (usually ethylene), a

comonomer (hexene or butene), triethylaluminum (TEAl), and

hydrogen.     Once polymerization begins, monomer molecules diffuse

to the growing polymer chains and resin is formed.      Following

polymerization, the resin is discharged into a separate vessel

known as a product purge bin.     Purging removes the residual



     13
      The UCAT-J and M-1 catalysts are described in greater
detail below.
                              - 61 -

hydrocarbons in the resin and deactivates the catalyst and

cocatalyst.   The resin is then fed into a pelletizer, which

converts the resin into pellets.   The pelleted PE resin is the

finished product.   UCC typically shipped pelleted PE in hopper

cars (which each hold about 185,000 pounds of PE resin) to

customers who used it to make items such as grocery and trash

bags, packaging, thin-walled containers, and industrial liners.

     Star was dedicated to the commercial production of linear

low-density film and molding resins (LLDPE) and medium density

(MDPE) and high density (HDPE) molding resins using UCC’s low-

pressure UNIPOL process technology.    “UNIPOL” is the trade name

for a low-pressure gas phase fluidized bed process that UCC

developed and licensed to third parties.    Star’s Low Pressure 3

Unit (LP-3) operated two UNIPOL reactors:   Reactor 1, which was

used primarily for HDPE molding resins, and Reactor 2, which was

used primarily for LLDPE film resins.   Although used for

different purposes, the two reactors were physically and

technologically identical.   Reactor 1 and Reactor 2 operated

continuously 24 hours a day except for limited downtime

maintenance, transitions, and unforeseen problems such as

electrical outages.

     In the early 1990s UCC began to plan the design of another

UNIPOL manufacturing facility, Low Pressure 6 Unit (LP-6).     LP-6

was designed to produce PE using UCAT-J as the catalyst, but UCC
                              - 62 -

decided to install two different sets of catalyst feeders so that

M-1 could be used at the plant if UCC could not commercialize

UCAT-J by the time LP-6 was complete.   UCC believed that it was

likely that it would be able to use UCAT-J at LP-6 once it was

constructed, but also knew that beginning the design of LP-6

before UCAT-J was ready for commercial production was a risk.

UCC did not want to wait until UCAT-J was commercialized before

building LP-6 because it takes years to design and build a

manufacturing facility and UCC wanted LP-6 to be completed close

to the time that UCAT-J was commercialized.   LP-6 began producing

PE in June of 1995 using UCAT-J.

     A UNIPOL reactor is referred to as a “fluidized bed” because

the circulating gas flow in the reactor causes the solid granular

resin to fluidize.   The catalyst is fed directly into the side of

the fluidized bed through an injection system.   A cocatalyst is

also fed into the bottom of the UNIPOL reactor to activate the

catalyst and promote catalyst activity.

     “Reactor operability” refers to a wide range of potential

reactor operating issues, including catalyst stability,

reproducibility (whether the reactor consistently produces the

same responses), reactor control, production rate control,

product discharge, and downstream equipment operation.    Reactor

operability is affected by a number of factors such as the

history of the reactor since it was last cleaned (i.e., how often
                               - 63 -

it has been exposed to oxygen and moisture), the mix of products

run on the reactor, the purity of the feed streams, and the

catalysts and cocatalysts used on the reaction system.

     A significant UNIPOL operability issue is the formation of

sheets and agglomerates caused by static in the reactor.    Sheets

and agglomerates are often referred to as continuity problems

because they interrupt the continuous operation of the reactors.

Sheets are formed when resin continues to react in a stagnant

zone (a zone with poor fluidization) next to the walls of the

reactor.    Without fluidization to remove the heat of reaction,

the resin fuses together and forms sheet-like blocks ranging from

paper thin to several inches in thickness and several feet in

length.    Agglomerates are formed when granular resin fuses

together forming solid or tightly adhered chunks ranging from

popcorn sized to several feet in diameter.    These chunks can be

caused by sheets folding or rolling in the fluidizing bed, poor

catalyst distribution, localized poor heat transfer, or areas of

poor fluidization on the reactor distributor plate.    Sheets and

agglomerates interfere with fluidization and plug the product

purge bin valve, requiring UCC to shut down and clean the

reactors.

     Another operability issue is the formation of small, dust-

like particles called “fines”.    Fines can create static (which
                              - 64 -

can lead to sheeting), cause continuity problems in the reactor,

and foul the cycle gas system.

     The occurrence of operability problems might require a

reactor to be “killed”.   A reactor kill (or CO kill) is typically

accomplished by the injection of carbon monoxide into the

reaction cycle gas to either reduce the rate of reaction (a

minikill) or stop all reaction as quickly as possible.

     PE material meeting all applicable product specifications is

referred to as “aim-grade”.   PE material that does not meet all

applicable product specifications is referred to as “off-grade”.

The production of off-grade material was not unusual, and UCC

sold both aim-grade and off-grade resin to third parties but at

different prices.   Specific product properties of PE resins

include the average particle size (APS), density (for solid

molded resin), bulk density (for loose resin powder), film

appearance rating (FAR), hexane extractables (relating to the

stickiness of the resin), melt flow index, melt flow ratio (MFR),

and resin morphology.

     The specific properties of the PE products made in a UNIPOL

reactor are determined by a variety of factors, including the

catalyst used and reactor operating conditions.   The key reactor

operating conditions that determine the properties of the PE

resin are reactor temperature, ethylene partial pressure,
                              - 65 -

hydrogen-to-ethylene ratio, comonomer ratio, TEAl cocatalyst

ratio (Al/Ti), and residence time.

     Star’s reactors made a variety of PE base resins.   UCC

identified base resins using a three-letter prefix followed by a

four-number code and either an “H” or a “B”.   The prefix of all

base resins begins with a “D”, followed by a “J” if UCAT-J is

used as the catalyst or a “G” if M-1 is used as the catalyst,

followed by an “H”, “M”, or “L” depending on the melt index

range.   The four-number code identifies the density and melt

index designation.   The final “H” or “B” identifies the comonomer

as hexene or butene, respectively.

     A transition is the period when reactor conditions are

changed from one product’s specifications to a new product’s

specifications.   A transition typically takes three to four bed

turnovers to complete, and each bed turnover lasts about 2 hours.

A bed turnover is the average amount of time material stays in

the reactor before flowing out of the product stream.    The resin

made during transitions is either intermediate-grade material

that can be recycled into aim-grade resin or off-grade material

sold for scrap uses such as picnic tables and barrels.   Once a

reactor is transitioned into a new product it takes a number of

additional bed turnovers to “line out” the reactor.   Lining out

the reactor involves increasing the production rate back to the

normal level after slowing down for the transition and returning
                                - 66 -

operation conditions back to their normal steady state.       After a

transition from M-1 to UCAT-J, it takes at least 12 hours to line

out the reactor.

            2.   UCAT-J

       In a chemical reaction, a catalyst is a substance that

increases the rate of the reaction or causes the reaction to

occur under different conditions than otherwise possible.

Polymerization cannot occur in a UNIPOL reactor without a

catalyst.    The catalyst provides the site on which the polymer

chain grows.     A PE catalyst “precursor” refers to the catalyst

state before the incorporation of aluminum alkyl catalyst

modifying agents.

       From Star’s startup in 1981 through the beginning of the

UCAT-J runs at Star in 1992, Reactor 1 and Reactor 2 at the LP-3

unit operated exclusively on a catalyst called M-1.     UCC

continued to use M-1 at Star during the credit years during

normal production runs occurring between UCAT-J runs.     Despite

its extensive experience using M-1, UCC occasionally experienced

operability and continuity problems with M-1, particularly

sheeting.

       UCC developed UCAT-J as a superior catalyst alternative to

M-1.    The primary advantage of UCAT-J is that UCAT-J is over four

times more “active” than M-1, meaning that the same amount of

catalyst makes over four times as much PE resin as can be made
                              - 67 -

with M-1.   This, in turn, significantly reduces both capital

outlays for catalyst manufacturing facilities and the cost of

catalysts used in manufacturing PE.     UCAT-J also requires less

hydrogen and TEAl than M-1, thereby reducing manufacturing costs

further, and improves some properties of PE resin such as FAR.

However, UCC used about the same amount of ethylene, hexene, and

butene regardless of whether it used M-1 or UCAT-J.     Although UCC

had not commercialized UCAT-J during the credit years, UCC knew

of these advantages during the credit years and described them to

its licensees in anticipation of UCAT-J’s commercialization.

     M-1 and UCAT-J are both Ziegler-Natta catalysts, a general

category of PE catalysts made from a transition metal such as

titanium and requiring a cocatalyst to initiate polymerization.

Both catalysts are based on a chemical solution of magnesium

chloride, titanium trichloride, and tetrahydrofuran, although the

proportions of these materials in M-1 and UCAT-J are different.

Most significantly, UCAT-J has a higher titanium loading and

magnesium-to-titanium ratio than M-1, both of which give UCAT-J

superior activity.   Both M-1 and UCAT-J use titanium to provide

the catalyst active site and TEAl as the co-catalyst.

     To create M-1, a chemical solution is added to small

particles of treated silica, which absorb the solution.     Most of

the tetrahydrofuran is then evaporated to produce a free-flowing

solid, which is the M-1 precursor.     The M-1 precursor is then
                              - 68 -

reduced with aluminum alkyls, diethylaluminum chloride (DEAC) and

tri-n-hexylaluminum (TnHAl), to produce the M-1 catalyst.

Catalyst reduction refers to the treatment of the catalyst

precursor with aluminum alkyl modifying agents to moderate

catalyst activity and ensure acceptable product properties such

as bulk density and particle size.     The aluminum alkyl reduction

agents used for both M-1 and UCAT-J were DEAC and TnHAl.    In its

final form, M-1 is a dry powder resembling sand.

     UCAT-J is spray dried instead of being silica based.    The

chemical solution is transformed into a fine droplet spray in a

spray dryer.   As these droplets pass through a drying chamber,

the tetrahydrofuran evaporates, leaving only the solid catalyst.

The catalyst is then added to mineral oil to create a slurry (a

mixture of liquid and insoluble solids) of UCAT-J precursor.    The

UCAT-J precursor is then reduced with aluminum alkyls.    Although

Star made its own M-1 catalyst precursor, UCC made UCAT-J

precursor at a separate catalyst manufacturing facility in South

Charleston and shipped it to Star.

     Because of the different methods by which they are made, M-1

and UCAT-J have different “catalyst morphology”, a term used to

describe the size, shape, and surface texture of a catalyst

particle.   M-1 catalyst particles have a substantially larger APS

than those of UCAT-J.   M-1 particles are typically rounder and

smoother than UCAT-J particles.   UCAT-J’s morphology creates some
                               - 69 -

problems that were not present with M-1, particularly increased

fines and resin flowablity problems.    These problems created

operating uncertainties that had not been resolved by the

beginning of 1994.    UCAT-J and M-1 also respond differently to

other chemicals present during polymerization, respond

differently to reactor conditions, and create differences in PE

product properties.

     M-1 precursor is reduced in the catalyst manufacturing unit

before the catalyst is delivered for use in the reactor.      UCAT-J

precursor, in contrast, requires “in-line” catalyst reduction,

meaning that the DEAC and TnHAl modifying agents are injected

into the catalyst stream immediately before it is fed into the

UNIPOL reactor.

     Before the first UCAT-J run at Star, which occurred in May

1992, UCC installed new equipment at Star to allow the in-line

reduction of UCAT-J precursor.    The in-line precursor

modification system was a new unit operation installed

specifically for use with UCAT-J.    In this system, UCAT-J

precursor was placed into a slurry feed tank, agitated to

maintain good dispersion, and pumped at a controlled rate.      DEAC

and TnHAl were pumped into the catalyst stream at a specific

ratio to the catalyst feed.    Following the injection of the

aluminum alkyls, the precursor flowed into a static mixer to
                                - 70 -

ensure adequate contacting and then into a residence time pot to

provide time for the in-line modification to occur.

     The UCAT-J in-line reduction system presented several

operating uncertainties not present with M-1.     When the system

was first used, it created catalyst consistency problem that were

due in part to the absence of static mixers and in part to the

fact that the original design contacted the UCAT-J precursor with

DEAC first and then with TnHAl, as was customary with M-1.      UCC

later discovered that consistency improved when the order was

reversed.    UCC also had difficulty controlling flow rates,

keeping control consistent and accurate, and injecting UCAT-J

because a slurry does not disburse as easily as a dry catalyst

like M-1.    These uncertainties were not resolved by 1994.

            3.   Overview of the UCAT-J Project

     The UCAT-J commercialization program involved the

development of UCAT-J to the point where it could be

commercialized.    UCC’s UNIPOL licensing business wanted to

commercialize UCAT-J in order to:    (1) Derive revenues from

selling UCAT-J to existing UNIPOL licensees; (2) be able to tout

the superior qualifies of UCAT-J to prospective UNIPOL licensees;

(3) avoid the capital costs associated with constructing plants

to manufacture the less-productive M-1 catalyst; and (4) reduce

Star’s manufacturing costs as a result of UCAT-J’s superior

productivity.    The UCAT-J commercialization program took place at
                               - 71 -

Star from 1992 to 1996.   References to the “UCAT-J project” are

only to those runs that occurred during the credit years.

     Once UCC made the decision to commercialize UCAT-J, members

from process R&D, product R&D, and catalyst R&D formed an

interdisciplinary UCAT-J technology task force.   The members met

monthly or bimonthly, usually in person, to review the status of

the commercialization effort and develop strategies for

overcoming problems with UCAT-J implementation.

     During 1993 through 1995 UCC’s process R&D group conducted

what it called “experimental runs” of UCAT-J on a small-scale

UNIPOL reactor at a pilot plant at the South Charleston technical

center.   UCC defined an experimental run as a run of a product

that UCC deemed noncommercial.14   During the credit years UCC’s

manufacturing business required that a commercial facility

conduct at least two, but preferably three, objective-meeting

experimental runs of new PE products, including products made

with a new catalyst, for the products to be considered

commercial.   The successful completion of two to three objective-

meeting runs would demonstrate the operability of a new

technology to the satisfaction of the UNIPOL R&D and

manufacturing organizations.   A customer’s qualification of a PE

resin depended on an independent inquiry related to the



     14
      We use the term “experimental run” for convenience and
consistency with UCC’s terminology.
                              - 72 -

suitability of the product produced and did not establish that

the product could be produced consistently enough to be

considered commercial.   UCC was not required to advise customers

that they were receiving base resins produced with UCAT-J unless

a specific contractual term required such a disclosure.

     The South Charleston pilot plant’s UNIPOL reactors were used

strictly for R&D purposes, and one reactor was dedicated to UCAT-

J.   UCC ran UCAT-J on the pilot plant reactor to evaluate

catalyst performance, estimate optimal operating conditions for

the commercial reactors, and make PE resin for evaluation by the

product R&D group in Bound Brook.   After experimenting with new

technologies on the pilot plant, UCC generally experimented with

the technologies on its mid-size UNIPOL reactors at Seadrift

before experimenting with the technology on the larger reactors

at Star.   However, UCC took some UCAT-J products from the pilot

plant directly to Star or did not test them on smaller reactors

at all.

     Successful commercialization of UCAT-J required UCC to

conduct experimental runs at UCC’s commercial plants to evaluate

whether UCAT-J could be used with reactor operability and resin

properties at least equivalent to, and hopefully better than,

those achieved using M-1.   While UCC was often able to achieve at

least the same level of reactor operability and continuity using

UCAT-J as it had achieved with M-1 at pilot plants, commercial-
                              - 73 -

scale plant tests were also necessary because there were

significant differences between the pilot plants and commercial

reactors.   For example, the bed volume of Star’s commercial

reactors was about 825 times the size of the bed volume of the

pilot plant reactor.   Because of this difference, UCC’s pilot

plant and commercial reactors use different methods of

fluidization.   These differences affect the amount of sheeting

and static in a reactor.   Accordingly, a successful run at the

pilot plant did not indicate that sheeting and static would not

cause significant problems when a similar run was conducted at a

commercial plant.

     The first commercial-scale run using UCAT-J was conducted on

UCC’s smallest commercial-scale reactor, the G-1750 reactor at

Seadrift, in 1991.   UCC continued the UCAT-J commercialization

program at Star until 1996.   UCC did not consider UCAT-J fully

commercial before the program was completed because UCC did not

know with certainty how UCAT-J would affect reactor operability

and continuity, how it would affect product quality and how much

off-grade material it would produce, whether there would be

problems feeding the catalyst into the reactor, and how it would

respond to CO kills.   UCC was also concerned about reactor feed

stability, fines creation, production rate control, resin

properties, sheeting, and agglomeration.   Such reactor

operability and continuity issues could develop at any time
                              - 74 -

during an experimental run, so process R&D representatives

remained on site for the duration of the runs, even after the

reactor had been successfully transitioned into UCAT-J.     Process

R&D preferred longer experimental runs because they afforded more

opportunities to evaluate reactor operability and continuity.

     UCAT-J experimental runs were initiated by the completion of

an experimental run request by the appropriate business manager,

R&D group leader, inventory planning and control (IPAC) manager,

and plant department head.   IPAC controlled the scheduling of the

experimental runs and the duration of each run.     When scheduling

the runs, IPAC considered existing customer orders and the risks

posed by experimental runs so that the experimental runs would

fit UCC’s commercial requirements.     Once an experimental run

request was completed and the experimental run was scheduled,

representatives from process R&D in South Charleston would

prepare a strategic run plan with input from the UCAT-J

technology task force.   The principal purpose of a strategic run

plan was to communicate to all interested parties the run

objectives, key operating parameters, analytical requirements,

and run coverage.   After receiving the strategic run plan, a Star

engineer would prepare a tactical run plan.     The purpose of the

tactical run plan was to give detailed run instructions to the

plant operators responsible for reactor operation.     Strategic run

plans and tactical run plans were not prepared for routine
                              - 75 -

commercial production runs.   The operations improvement group

would also complete a “New Product Introduction/Commercialization

Procedure Checklist” showing whether all required documentation

was in place.

     The function of process R&D representatives during

experimental runs was to evaluate what was happening in the

reactor, identify problems, create hypotheses for how to solve

those issues or improve the process, and test those hypotheses by

conducting experiments.   Process R&D representatives conducted

experiments by adjusting operating ratios, modifying catalyst

properties, and introducing new reactor control technologies.

Process R&D generally did not address minor problems that could

be solved by troubleshooting, which were addressed by the

production group at the plant.

     During the UCAT-J project process R&D regularly collected

various measurements of reactor operability and continuity and

product properties.   While many of these measurements were

collected during nonexperimental runs, process R&D

representatives collected some data that were not normally

collected and took other measurements more frequently than they

normally would.   For example, process R&D measured residual

aluminum and titanium to monitor for TEAl starvation during the

UCAT-J project but did not normally take these measurements.

TEAl starvation occurs when there is an inadequate amount of TEAl
                              - 76 -

cocatalyst in the reactor.   This lowers hydrogen and comonomer

response and catalyst productivity, which cause a loss of control

over the reactor and product properties.   Process R&D also

measured hexane extractables more frequently than normal during

the UCAT-J project.   The process R&D representatives recorded

their observations in R&D notebooks.   At least every other day

process R&D sent an e-mail update to the members of the UCAT-J

technology task force and UCC’s management.   This was not done

for normal commercial production runs.   Process R&D

representatives were also called upon to address significant

production problems with products made using the M-1 catalyst

during the credit years.

     Representatives from catalyst R&D and product R&D, both

based in Bound Brook, were available as needed.    Samples of PE

resins made during UCAT-J experimental runs were shipped to the

product R&D group for testing to ensure that the resin was

equivalent to or better than that made with M-1.    Any remaining

aim-grade resin made during the experimental runs was sold to

UCC’s customers.   Product R&D did not provide coverage or test

resin samples for routine commercial production runs with M-1.

     The run team, comprising representatives from process R&D

and Star’s management and operations staff, met before each run

to discuss the run objectives and transition into UCAT-J.     The

run team also met regularly during the course of the UCAT-J runs
                               - 77 -

to assess the status of the run objectives and develop strategies

for resolving any operating problems that had surfaced.     At the

end of each run the run team met to discuss the extent to which

the run objectives had been met.    The run team presented these

findings at meetings of the UCAT-J technology task force.    In

addition, process R&D representatives prepared a run notebook for

each run containing the strategic run plan, the tactical run

plan, the R&D monthly report description of the run, the

presentation to the UCAT-J technology task force, e-mails and

other communications regarding the run, and lab data.    Process

R&D also described the UCAT-J runs in monthly reports issued by

the process R&D group, but these reports did not provide

technical details concerning the runs.    Process R&D did not

generally mention normal production runs in these reports.

          4.    Experimental Runs Before the Credit Years

     UCC conducted nine UCAT-J run campaigns on reactor 2 at Star

from May 1992 to November 1993.    The UCAT-J runs conducted at

Star in 1992 and 1993 involved only hexene LLDPE film resins made

on reactor 2.   These were the principal products made at Star and

UNIPOL licensee plants and tended to have tighter product

requirements than molding resins.    At the end of 1993 UCC had

conducted no UCAT-J runs on reactor 1 or on reactor 2 with either

molding or butene film resins.
                              - 78 -

     About 6 percent of the PE resin UCC made at Star in 1993 was

made with UCAT-J.   By the end of 1993, UCC had resolved some

uncertainties related to UCAT-J such as an issue related to

catalyst particle size.   The plant personnel at Star also gained

experience operating the plants using UCAT-J and were at ease

using UCAT-J and in transitions.   Furthermore, a number of UCAT-J

runs had produced no off-grade product.

     However, the UCAT-J runs conducted at Star in 1992 and 1993

suffered from numerous operability problems.   Many were

unresolved as of the end of 1993, including:   (1) Gas channeling

(resin becomes stagnant and nitrogen is channeled through the

resin instead of mixing with it, causing inadequate resin

purging); (2) TEAl starvation; (3) sticky stretch LLDPE resins

(resins that agglomerated and did not flow properly); (4)

sheeting; and (5) poor control over product properties such as

melt index, density, and hexane extractables caused by

differences in UCAT-J and M-1 catalyst morphology.   UCC was

confident that many of these issues could be resolved but was

unsure when or how it would be able to resolve them.

     Following a UCAT-J run campaign on LLDPE film resins in

November 1993, a moratorium was imposed on further experimental

runs on film resins to allow R&D to work out various problems,

some related to UCAT-J and others that were general plant
                                - 79 -

problems.    UCC did not believe that UCAT-J was ready to be

commercialized by the end of 1993.

            5.   Experimental Runs During the Credit Years

     At the beginning of 1994 some of the major outstanding

issues with UCAT-J were:    (1) Obtaining acceptable product

properties in fractional melt index film resins; (2) resolving

butene film bulk density problems; (3) determining the cause of

and preventing resin stickiness; (4) establishing operating

parameters for UCAT-J film resins; (5) developing UCAT-J for

molding resins; and (6) ensuring that UCAT-J met operational

requirements.    UCC believed it needed to conduct additional

experimental runs to resolve these issues.

     UCC seeks research credits for the expenses incurred in 19

UCAT-J runs (UCAT-J runs 1 through 19) conducted at Star during

the credit years.    The base resins produced, types of resin

produced (low-density film or high-density molding), start and

end dates of the runs, and pounds of base resin produced

according to UCC’s product cost detail reports (PCDs) are

included in the chart below:
                                    - 80 -

                                                        Aim-Grade         Off-Grade
                                                          Resin             Resin
Run       Base                    Start                 Produced          Produced
No.       Resin    Resin Type     Date       End Date   (pounds)          (pounds)
  1   DJM-5265H   HDPE Molding    2/16/94     2/17/94           958,968            -
  2   DJM-1810B   LLDPE Film     10/22/94    10/26/94   4,832,092              771,350
                                                            1             2
  3   DJM-1732H   LLDPE Film     11/14/94    11/15/94           188,068    1,162,650
  4   DJM-2419H   LLDPE Film     12/11/94    12/13/94   1,632,872              765,700
  5   DJM-1810H   LLDPE Film     12/13/94    12/17/94   5,254,885              455,700
  6   DJM-2016H   LLDPE Film     12/17/94    12/18/94           703,691            -
                                                            3                  4
  7   DJM-1725H   LLDPE Film     12/18/94    12/18/94       731,842             137,100
  8   DJL-5264H   HDPE Molding    1/26/95     1/27/95   6,135,634              797,750
  9   DJL-5280H   HDPE Molding    1/27/95     1/28/95   1,864,465                  -
 10   DJH-2580H   LLDPE Film       3/3/95      3/6/95   2,601,861              578,450
 11   DJM-1810B   LLDPE Film       3/4/95     3/13/95   8,707,791         1,058,450
 12   DJH-2950H   LLDPE Film       3/6/95      3/6/95           132,324        148,750
 13   DJL-5420H   HDPE Molding   3/25/95    3/26/95          696,181               -


 14   DJL-5143H   HDPE Molding    3/26/95     3/27/95   1,006,947                  -

                                                        5                 6
 15   DJM-1732H   LLDPE Film      5/16/95     5/22/95    4,091,446            2,430,700
 16   DJM-1725H   LLDPE Film      5/22/95     5/26/95   3,653,813              966,350
 17   DJM-1720H   LLDPE Film      5/26/95     5/27/95           886,625        520,100
                                                                  8
 19   DJL-5280H   HDPE Molding    6/22/95     6/23/95


      1
       This amount was found on a PCD for DJM-1734H. UCC could
not find a PCD for DJM-1732H, so it used the PCD for a similar
product.
     2
       This amount was found on a PCD for DJM-1734H. UCC could
not find a PCD for DJM-1732H, so it used the PCD for a similar
product.
     3
       This amount includes base resin produced during both run 7
and another experimental run that took place in November 1994.
     4
       This amount includes base resin produced during both run 7
and another experimental run that took place in November 1994.
     5
       This amount was found on a PCD for DJM-1734H. UCC could
not find a PCD for DJM-1732H, so it used the PCD for a similar
product.
                                 - 81 -
     6
       This amount was found on a PCD for DJM-1734H. UCC could
not find a PCD for DJM-1732H, so it used the PCD for a similar
product.
     7
       The resin that petitioner claims UCC produced during run 18
is included in the amount of resin petitioner claims UCC produced
during run 8.
     8
       The resin that petitioner claims UCC produced during run 19
is included in the amount of resin petitioner claims UCC produced
during run 9.

                    a.   DJM-5265H (UCAT-J Run 1)

     UCAT-J run 1 was the first UCAT-J run at Star with a molding

resin and the first UCAT-J run conducted on reactor 1.    The base

resin, DJM-5265H, was selected to be the first molding resin made

with UCAT-J at Star because it was a basic cornerstone product

that Star made in large quantities and UCC considered it to be a

low-risk product.    UCC had made aim-grade DJM-5265H at the pilot

plant using UCAT-J and found UCAT-J to be equivalent to M-1 with

respect to operability and continuity on that scale.

     Before UCAT-J run 1, two short runs of DJM-5265H had been

conducted at the UNIPOL facility of a licensee, Hanwa Chemical

Corp. (Hanwa), in Korea.     While the runs at Hanwa were generally

successful, they lasted only a few days, and the second run was

aborted when the second transition failed.     These results were of

limited value to UCC because Hanwa’s reactors were different from

Star’s reactors.    Hanwa’s reactors were just over half the size

of Star’s reactors and so were less prone to static.

Furthermore, Hanwa’s reactors had a purification system for raw

materials that was considerably better than UCC’s purification
                               - 82 -

system.   As a result, Hanwa’s reactor feed was much cleaner than

UCC’s and the catalyst had better productivity.

     The objectives of UCAT-J run 1 were to:   (1) Successfully

scale up production (adjust production to take into account the

differences in reactor size) of DJM-5265H from the South

Charleston pilot plant to reactor 1; (2) produce aim-grade resin

for customer qualification; and (3) establish reactor operability

and continuity on reactor 1.   As to the third objective, UCC was

not merely confirming that reactor operability and continuity

were as expected.   UCC wanted to evaluate how well reactor 1

worked with UCAT-J.

     UCC’s primary concerns before UCAT-J run 1 were that:   (1)

The differences between the pilot plant and reactor 1 at Star

could cause the product to go off grade; (2) TEAl starvation

could cause operability and continuity problems; (3) difficulties

with CO kills could occur if any kills were necessary; and (4)

resin clumpiness could cause operability and continuity problems.

     As with all of the UCAT-J runs discussed below (although not

specifically mentioned below for brevity), representatives from

process R&D and product R&D provided coverage for UCAT-J run 1

and process R&D collected data, some of which were not normally

collected or was not normally collected as frequently.

Additionally, samples of resin were collected during and
                                - 83 -

following the run and were sent to product R&D in Bound Brook for

evaluation.

     UCAT-J run 1 was aborted after 17 hours because of sheeting

caused by the use of M-1 before the transition to UCAT-J and the

formation of a spongy material that resembled Styrofoam.      UCC

analyzed the spongy material and determined that it formed

because of the use of UCAT-J.    But because the sheeting was

caused by M-1, UCC was unable to determine the extent to which

the use of UCAT-J contributed to the shutdown.

     UCC also discovered a discrepancy between the Ti/Al ratio

calculated by flow rate and the measured Ti/Al ratio that

correlated with catalyst feed rate.      UCC was unable to explain

this discrepancy and was concerned about TEAl starvation.      UCC

also discovered more fines than expected.

     UCAT-J run 1 did not last long enough for UCC to draw any

conclusions from the run.   It remained uncertain following the

run whether UCAT-J could be used on reactor 1 with operability,

continuity, and resin properties equivalent to those achievable

with M-1.   Because of the formation of the spongy material, TEAl

starvation concerns, and increased fines, UCC had serious doubts

as to its ability to make further product.      Therefore, it did not

attempt to make another molding resin run again until 1995.

     According to a PCD for DJM-5265H, UCC produced 958,968

pounds of aim-grade base resin for customer evaluation during
                                   - 84 -

UCAT-J run 1.15      Petitioner claims as QREs costs associated with

producing 960,150 pounds of aim-grade base resin during UCAT-J

run 1.

                      b.   DJM-1810B (UCAT-J Runs 2 and 11)

       UCAT-J run 2 was the first UCAT-J run conducted at Star

using butene, as opposed to hexene, as the comonomer.         UCC wanted

its plant operators to gain production experience using butene

comonomers in anticipation of the startup of LP-6.       There had

been successful runs of DJM-1810B at Seadrift, the pilot plant,

and a licensee’s facility, which encouraged UCC to believe that

it would be able to use butene as a comonomer at Star.        However,

process R&D had encountered significant difficulties producing

butene film resins using UCAT-J with acceptable bulk density

because of particle morphology differences between UCAT-J and

M-1.

       The principal objective for UCAT-J run 2 was to successfully

scale up UCAT-J on the butene film resin from the pilot plant to

Star.       A successful scale-up would require that the run:   (1)

Demonstrate operability using UCAT-J equivalent to that

achievable using M-1; (2) reach aim-grade production within a



       15
      As discussed below, PCDs were produced monthly and
annually, not for specific projects. However, no base resin
produced with UCAT-J was made in more than one run in any given
month during the credit years. Accordingly, the PCD for the
month in which a UCAT-J run occurred would include information
only for that particular run.
                                - 85 -

specified period; (3) produce no significant off-grade material

once the transition was complete; and (4) produce resin with

acceptable bulk density.    UCC was uncertain before the run

whether any of these requirements would be met or whether the

scale-up would be successful.    UCC also hoped to produce 10 to 12

million pounds of aim-grade resin to sell to customers during

UCAT-J run 2.

     To achieve acceptable bulk density, process R&D planned to

change the catalyst reduction ratios and increase the amount of

isopentane in the reactor during the run.    Process R&D regarded

both changes as experimental and was uncertain whether they would

improve bulk density without adversely affecting reactor

productivity.

     Additional objectives of UCAT-J run 2 were to demonstrate a

closed reactor restart with UCAT-J following a CO kill on M-1 and

to demonstrate the ability to kill the reactor while it contained

UCAT-J.   UCC had never attempted a closed reactor restart at Star

with UCAT-J.    UCC had had some experience with CO kills using

UCAT-J, but the results had been mixed.    In particular, mini-

kills had been much less effective when using UCAT-J as compared

with M-1.

     UCC was also concerned about several other risks, including:

(1) TEAl starvation; (2) resin carryover (a negative effect of
                               - 86 -

low resin APS, which may result from steps taken to improve bulk

density); and (3) resin clumpiness.

     UCAT-J Run 2 began well and met some of the objectives,

including the first successful reactor startup with UCAT-J, no

significant off-grade material produced, and unexpectedly high

bulk density.   However, UCC experienced operating problems a few

days into the run that required the reactor to be shut down and

the run aborted.   The most significant of these problems were

unexplained production rate swings and the formation of “cue

balls” of PE resin that were about the size of softballs.     UCC

hypothesized that the cause of the cue balls was poor catalyst

dispersion, and accordingly it planned to change the injection

tube for the next run of DJM-1810B to improve catalyst dispersion

and determine whether that would solve the problem.

     According to a PCD for DJM-1810B, UCC produced 4,832,092

pounds of aim-grade and 771,350 pounds of off-grade base resin

during UCAT-J run 2.   Petitioner claims as QREs costs associated

with producing 4,954,150 pounds of aim-grade and 771,350 pounds

of off-grade base resin during UCAT-J run 2.

     UCAT-J run 11 was the second run of DJM-1810B.   UCC’s

primary objective was to make DJM-1810B without the problems

experienced in UCAT-J run 2.

     UCAT-J run 11 lasted from March 4 to 13, 1995, the longest

run for a single product during the UCAT-J project.   A long run
                              - 87 -

is usually evidence that the run was successful.    However, the

transition to DJM-1810B was unusually long and difficult, and a

significant amount of off-grade resin was produced.    Once UCAT-J

was introduced into the reactor, the resin bulk density

unexpectedly dropped significantly, causing the product purge bin

to plug.   This resulted in significant off-grade material and

required the production rate to be lowered.    UCC did not

anticipate the bulk density problem because UCAT-J run 2 produced

resin with unexpectedly high bulk density.    There were also

problems with catalyst stability, sheeting, poor hydrogen

control, and melt index swings.   These problems were all specific

to UCAT-J and were not anticipated before the run.

     Because of the bulk density and operability problems, UCC

decided to return the testing of DJM-1810B to Seadrift.      While

UCAT-J run 11 provided valuable operating data, it did not

establish that reactor 1 at Star could produce UCAT-J butene

LLDPE film resins with operability and continuity equivalent to

that achieved using M-1.

     According to a PCD for DJM-1810B, UCC produced 8,707,791

pounds of aim-grade and 1,058,450 pounds of off-grade base resin

during UCAT-J run 11.   Petitioner claims as QREs costs associated

with producing 8,941,350 pounds of aim-grade and 1,058,450 pounds

of off-grade base resin during UCAT-J run 11.
                               - 88 -

                  c.   DJM-1732H (UCAT-J Runs 3 and 15)

     UCAT-J run 3 produced DJM-1732H, a low-density, high-melt-

index LLDPE film resin.   UCAT-J run 3 was the first UCAT-J

experimental run of an LLDPE film resin with a hexene comonomer

conducted at Star since November 1993.   UCC experienced so many

problems during the November 1993 run and the run had such a

negative impact on manufacturing that R&D wanted to do more work

on smaller reactors before attempting the run again at Star.    UCC

had conducted runs of DJM-1732H at Star in January and March 1993

for 1 day each, but these runs were too short to establish that

the process could be used with sufficient operability and

continuity.

     The objectives of UCAT-J run 3 were to:    (1) Produce

sufficient product for customer qualification; (2) run reactor 2

at normal Star rates with operability and continuity equivalent

to or better than M-1; (3) reach aim-grade production within a

specified period; and (4) produce no significant off-grade

material.   UCC was uncertain whether any of these objectives

could be met or whether the run would be successful.

     Because low-density, high-melt-index LLDPE film resin is

sticky by design, resin flowability was a primary concern before

UCAT-J run 3.   UCC was also concerned about:   (1) TEAl

starvation; (2) resin carryover; (3) difficulties with CO kills,

if they were necessary; and (4) resin clumpiness.    Resin
                               - 89 -

clumpiness had also been a problem when using M-1 to make DJM-

1732H but tended to be worse with UCAT-J.

     UCAT-J run 3 had several successes:    (1) UCC was able to use

CO mini-kills, which produced a rapid and significant effect; (2)

no fines were produced; and (3) a hopper car of resin was

produced.    However, the run as a whole was considered a failure

and several problems occurred:    (1) There was extensive formation

of clumpy resin that plugged the product purge bin; (2) there was

poor melt index control; and (3) there was TEAl starvation in the

reactor.    Process R&D evaluated these problems, identified their

potential causes, and developed possible solutions for future

runs.    UCC determined that the next run might be more successful

if it:    (1) Lowered the ethylene partial pressure in the reactor

to reduce the amount of hexane; (2) controlled the cycle gas

composition and flow ratio; and (3) doubled the TEAl feed into

the reactor for 20 minutes (known as giving the reactor a “TEAl

shot”) periodically even if starvation was not expected and more

frequently during upset conditions.     UCAT-J run 3 did not

establish that UCAT-J could be used with operability and

continuity equivalent to that achieved using M-1.

     According to a PCD for DJM-1734H, not DJM-1732H, UCC

produced 188,068 pounds of aim-grade and 1,162,650 pounds of off-

grade DJM-1734H in 1994.    No PCD was available for DJM-1723H for

1994.    Petitioner claims as QREs costs associated with producing
                              - 90 -

188,850 pounds of aim-grade and 1,162,650 pounds of off-grade

base resin during UCAT-J run 3.   However, other postrun

documentation indicates that UCC produced 743,987 pounds of aim-

grade base resin during UCAT-J run 3.

     In addition to the objectives stated for UCAT-J run 3, a

goal of UCAT-J run 15, the next run of DJM-1732H, was to

implement measures developed by process R&D to control resin

stickiness and TEAl levels and to demonstrate acceptable

operability and continuity using UCAT-J in reactor 2.   To control

resin stickiness, process R&D recommended that ethylene partial

pressure be lowered below 90 psi, which had never been done

before at Star with UCAT-J.   This change to reactor conditions

was considered experimental and had two drawbacks:   (1) Lowering

the ethylene partial pressure could lower the productivity of the

catalyst, which would lower resin APS and increase fines, causing

fouling; and (2) if the reactor transitioned back to M-1, it

would be necessary to increase the ethylene partial pressure by a

greater amount.   UCC also planned to give the reactor periodic

TEAl shots to minimize TEAl starvation, which UCC began using in

run 4 (discussed below).   However, UCC was unsure whether these

steps would be successful.

     UCC hoped to produce 23 hopper cars of DJM-1732H for

customer qualification and consumption.   Other run objectives

were to:   (1) Run reactor 2 at normal production rates; (2) reach
                                 - 91 -

aim-grade production within a specified period; and (3) produce

no significant off-grade material.

     UCAT-J run 15 was generally successful.     UCC was able to

control resin stickiness by lowering the ethylene partial

pressure, and UCC was able to maintain good catalyst productivity

even though it is more difficult to maintain at low ethylene

partial pressure.    Overall, operability and continuity were good

throughout the run.      However, while flowability improved, it was

still slightly worse than flowability that had been achieved

using M-1.   Furthermore, there was some TEAl starvation due to

the TEAl feed system, though less than had occurred during

previous runs.   Therefore, the information gained was valuable to

UCC but process R&D still had some concerns.

     A PCD for DJM-1734H, not DJM-1732H, shows that UCC produced

4,091,446 pounds of aim-grade DJM-1734H in 1995.     No PCD was

available for DJM-1732H for 1995.     Petitioner claimed as QREs

costs associated with producing 4,108,850 pounds of aim-grade and

2,430,700 pounds of off-grade base resin during UCAT-J run 15.

                    d.   DJM-2419H, DJM-1810H, and DJM 2016H (UCAT-J
                         Runs 4 Through 6)

     UCAT-J runs 4 through 6 were all runs of hexene LLDPE film

resins.   With the exception of DJM-1810H (UCAT-J run 5), which

had been used as an experimental bed resin for various types of

reactor testing, Star had limited experience with the UCAT-J

resins to be made in these runs.
                              - 92 -

     UCC designed UCAT-J run 4 to make DJM-2419H, which UCC had

previously made at Star only during a 1-day run in 1993.    UCC

produced approximately 600,000 pounds of DJM-2419H in 1993 and

UCC’s customers had accepted DJM-2419H made with UCAT-J.

However, UCC was still uncertain whether it would be able to

produce DJM-2419H at Star consistently with satisfactory

operability.

     UCC designed UCAT-J run 5 to make DJM-1810H.    UCC had used

DJM-1810H as an experimental bed resin and had produced it in 11

runs at Star during 1992 and 1993.     UCC experienced significant

problems during the earlier runs.    During the later runs UCC used

DJM-1810H as an experimental bed for catalyst reduction tests,

order of reduction tests, and similar tests.    UCC made about 170

hopper cars of DJM-1810H in 1993.    DJM-1810H produced with UCAT-J

had already been accepted by customers.    However, UCC still

considered DJM-1810H to be an experimental resin at this point,

primarily because it had flowability problems.

     UCC designed UCAT-J run 6 to produce DJM-2016H, which UCC

had never made at Star.   However, UCC had produced DJM-2016H at

other plants during earlier experimental runs and customers had

qualified resin produced during those runs.    UCC expected results

similar to those that had been obtained during runs of DJM-1810H

(UCAT-J run 5).
                              - 93 -

      The overarching goal of these runs was to demonstrate

sustained operability of UCAT-J with hexene LLDPE film resins.

The specific run objectives listed on the strategic run plan were

to:   (1) Produce sufficient product for customer qualification;

(2) further commercial experience through the extended production

run of DJM-2419H (UCAT-J run 4) and DJM-1810H (UCAT-J run 5)

(among other runs not claimed); (3) run reactor 2 at normal Star

rates with operability equivalent to that achieved using M-1; (4)

reach aim-grade production within a specified period; and (5)

produce no significant off-grade material outside product

transitions.

      In response to a recommendation made at the UCAT-J

technology task force meeting following UCAT-J run 3, UCC decided

to run reactor 2 at a lower than normal ethylene partial pressure

during UCAT-J runs 4 through 6 to improve resin flowability.    UCC

considered this change to be an experiment because it was

uncertain whether the change would successfully eliminate

flowability problems and there was a risk that the change could

significantly reduce catalyst productivity.   UCC also decided to

use production rate control, which is an automated system to

control the catalyst feed rate and the ethylene partial pressure

in the reactor.   The goal of this system was to maximize

production rate by allowing production rate to run closer to the

constraints of the reactor system.
                              - 94 -

     Because of the problems with TEAl starvation in UCAT-J run

3, UCC decided to experiment with TEAl shots during UCAT-J runs 4

through 6.   However, UCC was concerned that increasing the Ti/Al

ratio would also increase hexane extractables.

     In addition to TEAl starvation, UCC identified several other

risks related to UCAT-J runs 4 through 6:   (1) Resin carryover;

(2) difficulties with CO kills, if they were necessary; and (3)

resin clumpiness.

     Process R&D representatives evaluated the ethylene partial

pressure and TEAl shot experiments during UCAT-J runs 4 through 6

in addition to the support that R&D provided to all of the UCAT-J

runs.

     UCAT-J runs 4 through 6 were generally successful.   Reducing

the ethylene partial pressure and using production rate control

reduced the stickiness problem and giving the reactor TEAl shots

reduced TEAl starvation.   UCC viewed this as a substantial

achievement.   The only significant problem was a decrease in FAR,

which occurs when there are gels or foreign matter in the film.

UCC took samples of the resin to try to determine the potential

causes and solutions for the decreased FAR.   UCC hypothesized

that the decrease in FAR was caused by the use of wet hexene.

     Process R&D concluded that it had gained confidence that

Star could produce DJM-1810H (UCAT-J run 5) and DJM-2016H (UCAT-J

run 6) with sufficient operability and continuity.   However, UCC
                               - 95 -

believed that additional experiments were necessary to reach this

conclusion with respect to DJM-2419H (UCAT-J run 4).

     According to a PCD for DJM-2419H, UCC produced 1,632,872

pounds of aim-grade and 765,700 pounds of off-grade base resin

during UCAT-J run 4.   Petitioner claims as QREs costs associated

with producing 1,640,950 pounds of aim-grade and 765,700 pounds

of off-grade base resin during UCAT-J run 4.

     According to a PCD for DJM-1810H, UCC produced 5,254,885

pounds of aim-grade and 455,700 pounds of off-grade base resin

during UCAT-J run 5.   Petitioner claims as QREs costs associated

with producing 5,270,050 pounds of aim-grade and 455,700 pounds

of off-grade base resin during UCAT-J run 5.

     According to a PCD for DJM-2016H, UCC produced 703,691

pounds of aim-grade base resin during UCAT-J run 6.    Petitioner

claims as QREs costs associated with producing 704,600 pounds of

aim-grade base resin during UCAT-J run 6.

                  e.   DJM-1735H (UCAT-J Runs 7 and 16)

     UCAT-J run 7 was an experimental run of DJM-1725H, another

hexene LLDPE film resin that is very sticky and had shown poor

flowability.   UCAT-J run 7 began and ended on December 18, 1994.

UCC also produced DJM-1725H in November 1994, but there were so

many problems with clumpy resin, melt index control, and TEAl

starvation that UCC did not use that resin for customer

qualification.
                              - 96 -

      As in UCAT-J runs 4 through 6, the overarching objective of

UCAT-J run 7 was to demonstrate sustained operability of UCAT-J

with hexene LLDPE film resins.   The specific run objectives were

to:   (1) Produce sufficient product for customer qualification;

(2) run reactor 2 at normal Star rates with operability

equivalent to that achieved with M-1; (3) reach aim-grade

production within a specified period; and (4) produce no

significant off-grade material outside of product transitions.

      UCC implemented the recommendation of the UCAT-J technology

task force to run reactor 2 at a lower than normal ethylene

partial pressure to improve resin flowability.    UCC also gave the

reactor TEAl shots to reduce TEAl starvation but was still

concerned that increasing the TEAl ratio would also increase

hexane extractables.   In addition to the support R&D provided to

all of the UCAT-J runs, process R&D representatives evaluated the

ethylene partial pressure and TEAl shots experiments.

      UCAT-J run 7 was generally successful.   The only significant

problem was a decrease in FAR caused by gels or foreign matter in

the film, which had also occurred during UCAT-J runs 4 through 6.

UCC took samples of the resin to try to determine the potential

causes and solutions for the decreased FAR.    UCC believed that

additional experiments were necessary to gain confidence that it

could produce DJM-1725H with sufficient operability and

continuity.
                               - 97 -

       According to the summary report of the UCAT-J experimental

runs conducted at Star, UCC produced 480,461 pounds of aim-grade

and 177,821 pounds of off-grade base resin during UCAT-J run 7.

According to a PCD for DJM-1725H, UCC produced 541,866 pounds of

aim-grade and zero pounds of off-grade base resin.     Petitioner

claims as QREs costs associated with producing 737,200 pounds of

aim-grade and 137,100 pounds of off-grade base resin, which

includes total production for 1994 (both UCAT-J run 7 and the run

that took place in November 1994).

       UCC produced DJM-1725H again in UCAT-J run 16 because UCAT-J

run 7 did not establish that DJM-1725H could be made without

continuity problems during longer runs.    TEAl starvation remained

another significant operating issue.

       In addition to the objectives for UCAT-J run 7, the goals of

UCAT-J Run 16 were to implement measures developed by process R&D

to control resin stickiness and TEAl levels and to demonstrate

acceptable operability and continuity of UCAT-J in reactor 2.       As

in UCAT-J run 15, to control resin stickiness process R&D

recommended that ethylene partial pressure be lowered below 90

psi.    UCC also planned to use periodic TEAl shots to minimize

TEAl starvation.    However, UCC was unsure whether these steps

would be successful.

       UCAT-J run 16 was generally successful.   UCC controlled

resin stickiness by lowering the ethylene partial pressure below
                                - 98 -

90 psi, and UCC was able to maintain good catalyst productivity.

Overall, operability and continuity were good throughout the run.

However, while flowability improved, it was still slightly worse

than the flowability that could be achieved using M-1.

Furthermore, there was some TEAl starvation due to the TEAl feed

system, though less than had occurred during previous runs.

Therefore, the information gained was valuable to UCC but process

R&D still had some concerns.

     According to a PCD for DJM-1725H, UCC produced 3,653,813

pounds of aim-grade and 966,350 pounds of off-grade base resin

during UCAT-J run 16.    Petitioner claims as QREs costs associated

with producing 3,665,150 pounds of aim-grade and 966,350 pounds

of off-grade base resin during UCAT-J run 16.

                   f.   DJL-5264H and DJL-5280H (UCAT-J Runs 8, 9,
                        18,and 19

     UCAT-J runs 8 (DJL-5264H) and 9 (DJL-5280H) were the next

experimental runs of HDPE molding resins after UCAT-J run 1,

which UCC aborted before it could draw any meaningful

conclusions.   Following UCAT-J run 1, process R&D took a year to

evaluate UCAT-J molding resins in the pilot plant before

conducting another experimental run at Star.    UCC determined that

UCAT-J was equivalent to M-1 with respect to reactor operability

and continuity when making DJL-5264H and DJL-5280H at its pilot

plant, but UCC was still uncertain whether UCAT-J would perform

as well at Star.   UCC had not yet determined that it could make
                              - 99 -

DJL-5264H or DJL-5280H consistently on full-scale commercial

reactors before UCAT-J runs 8 and 9.

     The objectives of UCAT-J runs 8 and 9 were to:    (1) Produce

sufficient product for customer qualification; (2) run reactor 1

at normal Star rates with operability equivalent to that achieved

using M-1; (3) reach aim-grade production within a specified

period; and (4) produce no significant off-grade material.

     The primary risks UCC identified for UCAT-J runs 8 and 9

were:   (1) TEAl starvation; (2) resin carryover; and (3)

difficulties with CO kills, if they were necessary.     To reduce

the risk of TEAl starvation, UCC measured aluminum and titanium

during the run and gave the reactor periodic TEAl shots.     Since

TEAl starvation had not been a problem with M-1, these

measurements were not taken during commercial runs using M-1.

Although resin carryover was listed as a risk on the strategic

run plan for UCAT-J runs 8 and 9, according to the strategic run

plan UCC did not actually expect resin carryover to be a problem.

     UCAT-J runs 8 and 9 were generally successful.    Reactor 1

demonstrated acceptable operability and continuity and all other

run objectives were met.   There was some melt index variation

(resin in some hopper cars had a higher melt index than the resin

in others), but this was not significant problem.     Some TEAl

starvation also occurred, but it did not cause the resin to go

off grade; and UCC determined that it could most likely fix the
                               - 100 -

problem by implementing a different TEAl system.     Because UCAT-J

runs 8 and 9 each lasted only 1 day, UCC did not have time to

fully evaluate operability and continuity.     However, the

information UCC gained was valuable, and one or two more

successful experimental runs would establish to UCC’s

satisfaction that the process was ready for commercialization.

     UCAT-J runs 18 and 19 were the next experimental runs of

DJL-5264H and DJL-5280H.    The operability and continuity of

reactor 1 in making these products remained uncertain before

these runs, as only a few short HDPE molding resin runs had been

conducted up to this point with mixed results.

     The primary objectives of UCAT-J run 18 were to operate at

normal Star rates with operability equivalent to that achieved

using M-1 and to make a maximum of 250,000 pounds of off-grade

material.

     UCAT-J run 18 yielded 825,000 pounds of off-grade material,

which indicated poor operability, particularly poor control of

the resin properties in the reactor.     There were also problems

with the product purge bin, poor flowability, and poor melt index

control.    However, UCAT-J run 19 was generally successful.

     According to a PCD for DJL-5264H, UCC produced 6,135,634

pounds of aim-grade and 797,750 pounds of off-grade base resin

during 1995, including both UCAT-J runs 8 and 18.     Postrun

documentation indicates that UCC produced 933,000 pounds of aim-
                               - 101 -

grade base resin during run 8 and 5,313,000 pounds of aim-grade

and 825,000 pounds of off-grade base resin during UCAT-J run 18.

Petitioner claims as QREs costs associated with producing

6,143,300 pounds of aim-grade and 797,750 pounds of off-grade

resin during UCAT-J runs 8 and 18 combined.

     According to a PCD for DJL-5280H, UCC produced 1,864,465

pounds of aim-grade base resin in 1995, including both UCAT-J

runs 9 and 19.   Postrun documentation indicates that UCC produced

851,844 pounds and 1,331,804 pounds of aim-grade base resin

during UCAT-J runs 9 and 19, respectively.    Petitioner claims as

QREs costs associated with producing 1,750,532 pounds of aim-

grade base resin during UCAT-J runs 9 and 19 combined.

                  g.   DJH-2580H and DJH-2950H (UCAT-J Runs 10 and
                       12)

     UCC made DJH-2580H (UCAT-J run 10) in two short runs in 1992

and 1993.   The run in 1993 produced about 17 hopper cars of base

resin that customers accepted.   However, the 1992 and 1993 runs

of DJH-2580H presented significant operability problems.    DJH-

2950H (UCAT-J run 12) was a difficult product to run and had

never been made at Star.

     The primary objectives of UCAT-J runs 10 and 12 were to

produce these resins with acceptable product properties,

particularly fractional melt index, and to demonstrate acceptable

reactor operability and continuity.
                               - 102 -

     UCAT-J run 10 ran for 3 days and then transitioned to DJH-

2950H (UCAT-J run 12).   Significant sheeting problems developed

after the transition.    The reactor was mini-killed and restarted,

but the sheeting continued and became worse.   As a result,

Reactor 2 had to be shut down so that the sheets could be

physically removed with a suction truck and chainsaws.   Opening

the reactor to remove sheets exposes the reactor to oxygen and

can cause problems in subsequent runs.   As a result of the

sheeting, UCC aborted the runs and reactor 2 was restarted with

M-1 because resuming operation with UCAT-J was considered to be

too risky in the light of UCC’s overall business considerations.

However, some aim-grade resin was produced during the runs and

was sold to customers.

     Process R&D suspected that the sheeting that first developed

after the transition to DJH-2950H (UCAT-J run 12) was due to the

high molecular weight of the DJH-2950H resin, and the sheeting

that developed after the mini-kill was due to static.    Because of

the significant sheeting problems experienced during these runs,

process R&D moved testing of DJH-2580H and DJH-2950 to Seadrift

before returning the testing to Star.    UCC imposed a moratorium

restricting fractional melt index products from operation at

Star.

     According to a PCD for DJH-2580H, UCC produced 2,601,861

pound of aim-grade and 578,450 pounds of off-grade base resin
                                - 103 -

during UCAT-J run 10.    Petitioner claims as QREs costs associated

with producing 2,668,500 pounds of aim-grade and 578,450 pounds

of off-grade base resin during UCAT-J run 10.

     According to a PCD for DJH-2950H, UCC produced 132,324

pounds of aim-grade and 148,750 pounds of off-grade base resin

during UCAT-J run 12.    Petitioner claims as QREs costs associated

with producing 132,800 pounds of aim-grade and 148,750 pounds of

off-grade base resin during UCAT-J run 12.

                  h.    DJL-5420H and DJL-5143H (UCAT-J Runs 13 and
                        14)

     Although UCC had successfully produced high density molding

base resins in the pilot plant using UCAT-J, it had never made

DJL-5420H (UCAT-J run 13) or DJL-5143H (UCAT-J run 14) at Star

before these runs.

     UCC’s objectives for UCAT-J runs 13 and 14 were to:    (1)

Produce requested quantities of each resin for customer

qualification (about four hopper cars for each product); (2) run

reactor 1 at normal Star rates with operability equivalent to

that achieved using M-1; (3) reach aim-grade production within a

specified period; and (4) produce no significant off-grade

material.

     UCC was concerned about the risks of:    (1) TEAl starvation;

(2) resin carryover; and (3) difficulties with CO kills, if they

were necessary.   UCC planned for both of these runs to be short

because of the risk associated with UCAT-J.
                               - 104 -

     Several operability issues occurred during the runs,

particularly minor sheeting during UCAT-J run 13, cold bands

after the transition to DJL-5143H, and the formation of spongy

agglomerates.   A cold band is an area where the reactor wall is

cold and it indicates that there is enough static to cause resin

to stick to the walls and create sheeting.   The spongy

agglomerates that formed were similar to the substances that

formed during UCAT-J run 1.

     Despite these problems, UCC considered the runs to be a

success.   However, because these were short runs, UCC would need

to continue to evaluate the resins to determine whether

continuity issues would arise on longer runs.

     According to a PCD for DJH-5420H, UCC produced 696,181

pounds of aim-grade base resin during UCAT-J run 13.   Petitioner

claims as QREs costs associated with producing 696,981 pounds of

base resin during UCAT-J run 13.

     According to a PCD for DJL-5143H, UCC produced 1,006,947

pounds of aim-grade base resin during UCAT-J run 14.   Petitioner

claims as QREs costs associated with producing 1,008,181 pounds

of aim-grade base resin during UCAT-J run 14.

                  i.   DJM-1720H (UCAT-J Run 17)

     DJM-1720H had never been made at Star before UCAT-J run 17.

Two of the goals of this run were to implement measures developed

by process R&D to control resin stickiness and TEAl levels (first
                              - 105 -

implemented in UCAT-J runs 15 and 16, discussed above) and to

demonstrate acceptable operability and continuity of UCAT-J in

reactor 2 with these products.   The other run objectives

identified in pre-run documentation were to:    (1) Produce the

requested quantities of resin for customer qualification (four

hopper cars); (2) run reactor 2 at normal production rates; (3)

reach aim-grade production within a specified period; and (4)

produce no significant off-grade material attributable to UCAT-J.

     DJM-1720H is an LLDPE resin, which tends to be very sticky

and had shown poor flowability in previous runs.    TEAl starvation

remained another significant operating issue.    As in UCAT-J runs

15 and 16, to control resin stickiness process R&D recommended

that ethylene partial pressure be lowered below 90 psi.     UCC

still considered this change to reactor conditions to be

experimental.   UCC also planned to give the reactor periodic TEAl

shots to minimize TEAl starvation.

     UCAT-J run 17 was generally successful.    UCC controlled

resin stickiness through ethylene partial pressure, and UCC was

able to maintain good catalyst productivity.    Overall,

operability and continuity were good throughout the run.

However, while flowability improved, it was still slightly worse

than the flowability achieved using M-1.   Furthermore, there was

some TEAl starvation due to the TEAl feed system, though less

than during previous runs.   Therefore, the information gained was
                                  - 106 -

valuable to UCC, but process R&D still had some concerns.

Following UCAT-J runs 16 and 17 UCC planned to implement a new

TEAl feed system for all of Star.      Ultimately this alleviated the

TEAl starvation issues.

       According to a PCD for DJM-1720H, UCC produced 866,625

pounds of aim-grade and 520,100 pounds of off-grade base resin

during UCAT-J run 17.     Petitioner claims as QREs the costs

associated with producing 895,700 pounds of aim-grade and 520,800

pounds of off-grade base resin.

III.    Claimed Costs

       One of petitioner’s expert witnesses, Wendi Hinojosa,16 was

responsible for costing the claim projects.     Ms. Hinojosa was

qualified as an expert in the accounting systems and

documentation used by UCC in the credit years and the base

period.     Petitioner claims as QREs incurred by UCC in connection

with the claim projects $23,356,600 for 1994 and $32,114,800 for

1995.

       A.   Cost Documentation Used

             1.   PCDs and MASs

       The primary cost accounting records that Ms. Hinojosa used

to calculate the cost of the supplies used in the claim projects

were PCDs and material accounting summary reports (MASs).       PCDs



       16
      Ms. Hinojosa’s qualifications are set out in the Opinion
section, below.
                              - 107 -

and MASs were part of UCC’s material accounting system used to

track variable costs (costs that vary with production) such as

raw materials, catalysts, and other materials used in the

manufacturing process.   UCC used the material accounting system

during both the credit years and the base period.    There were no

significant differences in UCC’s material accounting system and

related documentation during these two timeframes.

     The PCD was UCC’s official cost accounting record for

products that it manufactured.   PCDs contained detailed cost

information for every product that UCC manufactured, including

the materials and quantities used in production.    PCDs were

produced monthly and annually, not for particular projects.     The

PCD for any given year consisted of approximately 3,000 pages.

     MASs are inventory control reports containing a transaction

summary for every material UCC manufactured or purchased, each of

which was assigned a unique product code.   Material production

and consumption information was contained in both PCDs and MASs.

However, PCDs were organized by manufactured product, whereas

MASs were organized in numerical order by product code and listed

all transactions for each product code by location.

          2.   CMAI Data for Ethylene Byproducts

     Additional products made during the manufacturing process of

the primary product were listed as byproducts on PCDs.    UCC’s
                              - 108 -

material accounting system treated the cost of byproducts as a

reduction in the cost of the primary product.

     Taft’s hydrocarbons unit made several ethylene byproducts

such as propylene, butadiene, dripolene, hydrogen, methane, and

acetylene.   Because these byproducts are made from the same

starting materials as ethylene, it is difficult to separately

allocate the supply costs attributable to each byproduct.   For

this reason, Ms. Hinojosa used historical 1994 and 1995 market

values of ethylene byproducts as a proxy for their supply costs.

These market values were provided by Chemical Market Associates,

Inc. (CMAI), a leading petrochemical industry consulting and

research firm.

     Ms. Hinojosa used the byproduct values provided by CMAI to

calculate the supply costs incurred in conducting the UOP GA-155

project on the Olefins-1 unit’s C3 column, which produced

ethylene byproducts (such as propylene, butadiene, and dripolene)

as opposed to ethylene, which had already been separated off in

the C2 column.   In addition, Ms. Hinojosa deducted these

byproduct values from Taft’s total ethylene production cost, from

which she calculated the supply costs for the Amoco anticoking

and sodium borohydride projects.   This treatment of byproducts

avoided double-counting the supply costs incurred in conducting

the claim projects.
                                - 109 -

            3.   Wage Information

     UCC’s accounting system tracked budgeted and actual period

costs (fixed costs, costs that do not fluctuate with production)

such as labor.    UCC’s accounting system generated accounting

records known as account levels.    Account levels are the best

source of information for calculating wage costs.      However,

account levels were not available for the credit years.

Therefore, for the claim projects conducted in Taft’s

hydrocarbons unit (the Amoco anticoking, spuds, UOP GA-155, and

sodium borohydride projects), Ms. Hinojosa used the annual

salaries found on Forms W-2, Wage and Tax Statement, for specific

employees involved in the projects.       For the UCAT-J project, Ms.

Hinojosa used Star budget reports that provided the total wage

cost during the claim years and allocated that cost using the

percentage of PE pounds produced during the UCAT-J runs relative

to Star’s total PE production during the same period.      Wages

represented 1 percent of the total cost of all of the claim

projects.

            4.   R&D Budgets

     Ms. Hinojosa did not refer to budgets prepared by UCC during

the credit years.    UCC’s hydrocarbons R&D department did not

prepare formal budget proposals specific to individual projects,

but it did prepare an overall R&D budget that referenced various

projects that would occur during the year.      The R&D budget
                                - 110 -

generally included wages, laboratory materials, travel, and

extraordinary expenses.    Plant materials were generally included

in the plant budget, not the R&D budget.    Accordingly, R&D did

not account for feedstock or fuel when estimating how much of its

budget would be allocated to projects conducted on commercial

plants.

     B.   Costs of the Amoco Anticoking Project

           1.   Supplies

     Ms. Hinojosa calculated the supply costs of the Amoco

anticoking, spuds, and sodium borohydride projects on the basis

of the total ethylene manufacturing cost of Taft’s hydrocarbons

unit in 1994 and 1995.     Ms. Hinojosa identified the materials as

material quantities used to manufacture ethylene at Taft from the

relevant PCDs and MASs.

     In calculating Taft’s total ethylene production cost for

1994 and 1995, Ms. Hinojosa included only major components of

supplies that were supported by available accounting records.

Specifically, Ms. Hinojosa included certain materials purchased

from third-party vendors and certain internally produced

materials.

     Ms. Hinojosa did not include any general plant utilities

such as electricity, treated water, nitrogen, or compressed air

in her calculations.   However, Ms. Hinojosa did include the cost

of the fuel gases (such as natural gas, methane, and hydrogen)
                              - 111 -

used to fire Taft’s ethylene furnaces and the refrigeration used

in the cold section of the ethylene production process.    Ms.

Hinojosa included these costs because it was necessary to rapidly

reduce the temperature of the raw material stream at various

points in the production process in order to maximize the

production of ethylene.   To the extent that these costs are

considered utilities, Ms. Hinojosa considered them to be

extraordinary costs, different from general plant utilities,

because of the energy-intensive nature of the ethylene production

process relative to UCC’s other manufacturing units.

     Ms. Hinojosa used the relevant pages from the 1994 and 1995

MASs to calculate UCC’s actual per-unit cost for both materials

purchased from third parties and internally produced materials.

She multiplied these actual unit costs by the quantities used (as

shown on the relevant PCDs and MASs) to derive the total cost of

materials used in manufacturing ethylene at Taft.

     UCC was a net ethylene purchaser as it did not produce

sufficient amounts of ethylene to meet the raw material

requirements of its downstream products.   UCC made up the

difference by purchasing ethylene from third-party suppliers.

Accordingly, to determine UCC’s ethylene cost, Ms. Hinojosa

calculated a pooled ethylene price based on the weighted average

of Taft’s ethylene production cost (derived from PCDs and MASs)
                               - 112 -

and the price that UCC paid for ethylene supplied by third

parties as reported in a hydrocarbons business report.

     After calculating the total cost of materials used to

manufacture ethylene, Ms. Hinojosa subtracted the cost of

ethylene coproducts and byproducts to isolate the supply costs

attributable specifically to ethylene.   Ms. Hinojosa obtained the

quantities of coproducts and byproducts from the relevant PCDs

and MASs.   As discussed above, the unit costs of the deducted

byproducts were based on historical 1994 and 1995 market value

data provided by CMAI.

     Using this methodology, Ms. Hinojosa determined that Taft’s

total ethylene production cost was $96,947,718 in 1994 and

$97,479,242 in 1995.   Ms. Hinojosa calculated the supply costs

for the Amoco anticoking, spuds, and sodium borohydride projects

by allocating Taft’s total ethylene production costs in 1994 and

1995 according to (1) the duration of the projects and (2) the

percentage of the production capacity of Taft’s hydrocarbons unit

employed in the projects.   Ms. Hinojosa did not add the cost of

any extraordinary supplies that were purchased specifically for

the claim projects.    If UCC increased the supplies it used during

the projects or altered its production rate while conducting the

projects, these facts are not reflected in Ms. Hinojosa’s

calculations.
                                - 113 -

     For the Amoco anticoking project, Ms. Hinojosa calculated

the supply costs by multiplying Taft’s average daily ethylene

production cost ($265,610 in 1994 and $267,066 in 1995) by (1)

the project duration (30 days in 1994, 173 days in 1995) and (2)

the fraction of the production capacity of Taft’s hydrocarbons

unit employed in the project (one-seventeenth).    Petitioner

claims that the Amoco anticoking project lasted from the start of

the first pretreatment on November 29, 1994, until a furnace cold

turnaround in mid-August of 1995.    Petitioner included the

materials cost for producing ethylene in all six (four treated

and two untreated) cracking sets.

     To avoid double-counting of supplies used in conducting both

the Amoco anticoking project and the sodium borohydride project,

Ms. Hinojosa eliminated the supplies used during the 1-week

sodium borohydride project from her supply cost calculation for

the Amoco anticoking project.

     Ms. Hinojosa calculated UCC’s supply QREs for the Amoco

anticoking project as $468,723.86 and $2,717,793.54 for 1994 and

1995, respectively.

          2.   Wages

     For the projects conducted at Taft’s hydrocarbons unit, Ms.

Hinojosa determined wage rates for the employees who were

primarily involved in the projects and multiplied those rates by

the number of hours that the employees estimated they had worked
                              - 114 -

on the project.   For the Amoco anticoking project, Ms. Hinojosa

determined that Mr. Hyde, Mr. Tregre, and Mr. Gorenflo spent 35,

5, and 2 hours working on the project in 1994 and that Mr. Hyde

spent 10 hours working on the project in 1995.     Mr. Hyde’s wage

rate was $21 per hour, Mr. Tregre’s wage rate was $20 per hour,

and Mr. Gorenflo’s wage rate was $19 per hour.     Ms. Hinojosa

derived the wage rates from the employees’ annual salaries,

decreased by estimated overtime and profit-sharing.

     Ms. Hinojosa calculated petitioner’s wage QREs for the Amoco

anticoking project as $873 and $210 for 1994 and 1995,

respectively.

     C.   Costs of the Spuds Project

     Petitioner’s claimed amount for supplies used during the

spuds project was also based on UCC’s total manufacturing costs

for 1995, which were then prorated between Olefins-1 and Olefins-

2 according to production capacity.     Petitioner claims as QREs

one-seventeenth of its production costs for the 89 days after UCC

changed the spuds on furnace 3.   Ms. Hinojosa calculated as QREs

$1,188,445.55 for supplies attributable to the spuds project in

1995.

     Ms. Hinojosa calculated the wage costs for the spuds project

using the same methodology she used to calculate wage costs for

the Amoco anticoking project, discussed above.     Ms. Hinojosa

determined that Mr. Tregre spent 70 hours in 1994 and 10 hours in
                              - 115 -

1995 on the project and that Mr. Gorenflo spent 10 hours in 1995

on the project.   Ms. Hinojosa calculated as QREs $1,400 and $390

for wages attributable to the spuds project in 1994 and 1995,

respectively.

     However, petitioner no longer claims any QREs attributable

to the spuds project.

     D.   Costs of the UOP GA-155 Project

           1.   Supplies

     UCC conducted the UOP GA-155 project in the Olefins-1 unit’s

C3 column, downstream of the C2 column where ethylene was

separated from the process flow.   The C3 column processed the

ethylene byproducts (propylene, butadiene, and dripolene).     The

supply costs for the UOP GA-155 project are based on the cost of

the materials running through the C3 column during the test.     Ms.

Hinojosa calculated this cost by multiplying the CMAI material

values for each of the byproducts by their respective feed rates

into the C3 column and the project duration.   The claimed supply

costs include costs for plant feed, energy, and other costs of

manufacturing products in Olefins-1 for 179 days (from September

22, 1994, through March 21, 1995).   Ms. Hinojosa also included

the costs of the UOP GA-155 additive, which were $14,077 and

$24,534 for 1994 and 1995, respectively.
                               - 116 -

     Ms. Hinojosa calculated UCC’s supply QREs for the UOP GA-155

project as $20,707,920 and $23,117,359.20 for 1994 and 1995,

respectively.

            2.   Wages

     Ms. Hinojosa calculated the wage costs for the UOP GA-155

project using the same methodology she used to calculate the wage

costs for the Amoco anticoking project, discussed above.    Ms.

Hinojosa determined that Mr. Brandon spent 220 hours working on

the UOP GA-155 project during each of the credit years.    Mr.

Brandon’s wage rate was $21 per hour.    Ms. Hinojosa calculated

UCC’s wage QREs for the UOP GA-155 as $4,620 for each of the

credit years.

     E.   Costs of the Sodium Borohydride Project

     Ms. Hinojosa calculated the claimed supply costs of the

sodium borohydride project using the same methodology she used to

calculate the claimed costs for the Amoco anticoking project,

discussed above.

     Ms. Hinojosa calculated the supply costs for the sodium

borohydride project by multiplying Taft’s average daily ethylene

production cost in 1995 ($267,066) by (1) the project duration (7

days) and (2) the percentage of the production capacity of Taft’s

hydrocarbons unit employed in the project (approximately 67

percent).    Accordingly, Ms. Hinojosa calculated UCC’s supply QREs

for the sodium borohydride project as 1,248,300.86 for 1995.      The
                                - 117 -

production cost included $55,583 for the sodium borohydride

additive.

     Ms. Hinojosa calculated UCC’s wage QREs as $4,620 for the

sodium borohydride project using the methodology she used to

calculate wage costs for the Amoco anticoking project, discussed

above.    Ms. Hinojosa determined that Mr. Brandon spent 220 hours

working on the sodium borohydride test in 1995.

     F.   Costs of the UCAT-J Project

            1.   Supplies

     For the UCAT-J project, Ms. Hinojosa used the PCDs for the

PE base resins made in the UCAT-J experimental runs to identify

the materials and material quantities used in the runs.     For

UCAT-J runs 3 and 15, Ms. Hinojosa did not have a PCD for the

specific product that was made (DJM-1732H), and she accordingly

used a PCD for a similar product (DJM-1734H).     Ms. Hinojosa did

not include any costs classified on the PCDs as utilities or the

costs of additives incorporated into base resins during

postreaction pelleting.     Ms. Hinojosa then used 1994 and 1995

MASs to calculate the actual per-unit cost of purchased materials

used in the UCAT-J project.     Because UCC used both purchased and

internally produced ethylene to manufacture PE, Ms. Hinojosa used

a pooled ethylene price.

     Ms. Hinojosa used the 1994 and 1995 MASs to calculate the

unit costs of the UCAT-J reduction agents (DEAC and TnHAl) and
                              - 118 -

hydrogen mix used in UCAT-J runs.   For the internally produced

UCAT-J precursor, Ms. Hinojosa used 80 percent of the standard

cost shown on the PCDs.

     Petitioner claims as QREs for supplies $2,006,700 and

$4,670,900 for 1994 and 1995, respectively, for the UCAT-J

project.

           2.   Wages

     The UNIPOL reactors in Star’s LP-3 unit operated

continuously during the UCAT-J credit year experimental runs,

with production staff supporting the reactors 24 hours per day on

12-hour rotating shifts.   According to Ms. Hinojosa, the amount

of time spent by plant operators and other support staff did not

vary significantly for experimental UCAT-J runs as compared to

normal production runs.

     Ms. Hinojosa calculated the wage QREs attributable to the

UCAT-J project by allocating Star’s total wages in 1994 ($8.92

million) and 1995 ($9.72 million) according to the percentage of

Star’s total PE production made during the UCAT-J experimental

runs in 1994 (2.1 percent) and 1995 (4.18 percent), adjusted for

reactor downtime.17


     17
      Ms. Hinojosa reduced wages for downtime in response to a
comment from Mr. Allen, one of respondent’s expert witnesses. In
response to another comment from Mr. Allen, Ms. Hinojosa also
calculated wages using an allocation based on the duration of the
runs instead of production. Ms. Hinojosa believes that the
impact of this change was insignificant and therefore did not
                                                   (continued...)
                                - 119 -

      Petitioner claims as QREs for wages $167,839 and $351,040

for 1994 and 1995, respectively, for the UCAT-J project.

IV.   Base Period Projects

      The second special trial session focused on petitioner’s

revised base period computations (base period trial).18

Petitioner arrived at a revised base amount by identifying

additional activities that it believes constitute qualified

research within the meaning of section 41(d) (identified runs)

and calculating the cost of those identified runs.

      A.   Scope of the Trial

      On September 15, 2006, petitioner filed a motion for partial

summary judgment seeking to:    (1) Limit the scope of the evidence

at the base period trial to QREs incurred by UCC, as opposed to

petitioner’s entire consolidated group; and (2) shift the burden

of proof on the base period issues to respondent.

      By an order dated January 17, 2007, the Court granted

petitioner’s motion in part and denied it in part, informing the

parties in pertinent part that:    (1) Petitioner would bear the

burden of production with respect to its revised base period

computations; (2) for purposes of conforming the base period

computations to the methodology petitioner employed to compute


      17
      (...continued)
alter her methodology.
      18
      The “base period” includes the years beginning after Dec.
31, 1983, and before Jan. 1, 1989. See sec. 41(c)(3)(A).
                              - 120 -

the claimed credits, only evidence of the revised base period

computations for the legal entity for which additional credits

are claimed would be necessary; (3) in the above-described legal

entity computations, it would be necessary to produce evidence to

revise the base amount for businesses acquired by the legal

entity after December 31, 1983, and not disposed of before

January 1, 1994; and (4) if petitioner could show that any

dispositions that occurred before 1994 played no role in the

computation of QREs of the legal entities in the return as filed,

then petitioner would not have to account for dispositions of

those trades or businesses in conforming the base period

computations to the methodology used to claim additional credits

for the years at issue.

     Because petitioner’s claimed credits all relate to alleged

QREs incurred by UCC as a single legal entity, the scope of the

base period portion of the trial was limited to research that UCC

conducted, including research conducted by any businesses that

UCC acquired after December 31, 1983, and did not dispose of

before January 1, 1994.

          1.   Organization of UCC’s Manufacturing Operations
               During the Base Period

     During the base period UCC operated its C&P business segment

as well as various other business segments, including consumer

products, carbon products, and industrial gases.   As a result of

a divestiture policy that UCC pursued in the late 1980s and early
                                - 121 -

1990s, the C&P business segment was the only UCC business segment

remaining during the credit years.    Accordingly, when petitioner

revised UCC’s base amount for QREs incurred at UCC’s

manufacturing plants during the base period, petitioner included

only QREs that were incurred within UCC’s C&P business segment.

     During the base period UCC’s C&P business consisted of four

divisions that corresponded to product groupings:    (1) The

industrial chemicals division; (2) the polyolefins division; (3)

the solvents and coatings materials division; and (4) the

specialty chemicals division.

     The industrial chemicals division encompassed 19 separate

manufacturing units that collectively produced ethylene and other

olefins, ethylene oxide/ethylene glycol, various ethylene oxide

derivatives, and other products at Taft; Seadrift; UCC’s Texas

City, Texas plant (Texas City); UCC’s Institute, West Virginia,

plant (Institute); and UCC’s Washougal, Washington, plant

(Washougal).

     The polyolefins division encompassed six manufacturing units

that collectively manufactured commodity and specialty PE

products at Seadrift and Star as well as a wire and cable

compounding plant in Bound Brook.    UNIPOL was a part of the

polyolefins division during the base period and was the largest

consumer of R&D funding within the division.
                               - 122 -

     The solvents and coatings materials division encompassed 21

manufacturing units that collectively manufactured glycol ethers,

acrylates, and various other solvents and coatings at UCC’s Taft,

Seadrift, Texas City, Institute, and South Charleston plants, as

well as latex products at several small production facilities

across the country.

     The specialty chemicals division encompassed 13

manufacturing units that collectively manufactured a variety of

low-volume, high-performance specialty chemicals, including

acrolein derivatives, alkyl alkanolamines, Cellosize, and Polyox

at Taft, Institute, and South Charleston.

          2.   Acquisitions and Dispositions Between the Claim
               Years and the Base Period19

                  a.   Acquisitions

     On November 16, 1990, UCC acquired particular assets of Rohm

& Haas Co. (Rohm & Haas).   The acquired assets included chemical

formulas and other intellectual property associated with Rohm &

Haas’s worldwide surfactant and alkylphenol business under the

trade name Triton (Triton assets).    Surfactants are a family of

organo-silicone molecules, including detergents and hard-surface

cleansers.   Following the sale of the Triton assets, all

associated technical data and intellectual property were

transferred to UCC.


     19
      Acquisitions and dispositions that do not affect
petitioner’s revised research credit computations are omitted.
                              - 123 -

     During the base period the Triton business represented a

mature technology.   Rohm and Haas had not performed any work to

improve or add products to its portfolio in many years.   During

the base period and until the sale of the Triton assets to UCC,

it was Rohm & Haas’s practice to manage the Triton business as a

“cash cow”, harvesting substantial amounts of cash from the

business while investing only limited resources for research and

growth.

     Rohm & Haas treated its sale of the Triton assets and its

obligations under various agreements made in connection with the

sale as a disposition of a major portion of a trade or business

for purposes of the research credit computation.   Likewise, UCC

treated its purchase of the Triton assets and its obligations

under the various agreements as an acquisition of a major portion

of a trade or business for purposes of the research credit

computation.

     In 1990 UCC acquired the Norkool business from Quantum

Chemical Corp.   The Norkool products included industrial coolants

and antifreeze formulations, corrosion inhibitor packages, and

cooling system cleaners.   During the base period one person was

assigned to provide R&D support for most of the Norkool business,

although additional R&D support analyzed Norkool’s fluids to
                                 - 124 -

ensure that they were properly balanced.     In addition, there were

engineers available to provide assistance if necessary.20

     In 1990 UCC acquired the worldwide Polyphobe thickeners

business and assets from De Soto, Inc.     The Polyphobe thickeners

were used in the formulation of latex paints.21

                    b.   Dispositions

     UCC’s original base period QREs reflected allowable

adjustments under section 41(f)(3)(B) attributable to

dispositions by UCC of the major portion of a trade or business

or the major portion of a separate unit of a trade or business.

During the credit years there were no dispositions by UCC of the

major portion of a trade or business or the major portion of a

separate unit of a trade or business for which petitioner must

adjust its base period QREs or gross receipts under section

41(f)(3)(B) other than the dispositions reflected in the base

period QREs and gross receipts reported on UCC’s original

returns.

     UCC divested itself of its home and automotive, agricultural

products, film packaging, engineering polymers and advanced

composites, worldwide metals, and battery products businesses in

1986.     UCC sold a 50-percent interest in its carbon products


     20
      None of petitioner’s original base period QREs were
attributable to the Norkool business.
     21
       None of petitioner’s original base period QREs were
attributable to the Polyphobe thickeners business.
                                  - 125 -

business in 1991.     UCC spun off its industrial gases business in

1992.     Before January 1, 1994, UCC divested itself of the

following additional businesses:      Primary alcohol ethoxylates,

polycrystalline silicon, urethane polyether polyols and propylene

glycol, silicones and urethane catalysts, coatings service,

phenolic resins, and phenoxy resins.

             3.   UCC/Shell Polypropylene Business

                     a.   The Cooperative Undertaking

     On December 22, 1983, UCC and Shell formed a tax partnership

called the Cooperative Undertaking, pursuant to a legal agreement

entitled the “Cooperative Undertaking Agreement” (CUA).        UCC and

Shell each contributed goods and services in return for a 50-

percent interest in the Cooperative Undertaking.        According to

the CUA, the purpose of the Cooperative Undertaking was to

develop and adapt UCC’s UNIPOL technology to incorporate Shell’s

catalyst technology and create a combined commercial process for

the manufacture of polypropylene (combined commercial process).

The Cooperative Undertaking planned to license the combined

commercial process to third parties.        Shell was also interested

in producing polypropylene using the combined commercial process.

     The CUA envisioned a three-phase process.22        In phase I, UCC

and Shell would develop acceptable pilot plant operating


     22
       As discussed below, some of the activities envisioned by
the CUA were not actually performed by the Cooperative
Undertaking.
                              - 126 -

conditions and produce acceptable polypropylene resin.   In Phase

II, UCC would construct a demonstration plant at Seadrift and

scale up manufacture of polypropylene resin from the pilot plant

to the demonstration plant.   In addition, Shell would develop

preliminary commercial markets for the sale of cooperatively made

polypropylene resin using the combined commercial process.   In

phase III, certain limited licenses between UCC and Shell would

become effective; UCC and Shell would operate the demonstration

plant to produce cooperative polypropylene resin using the

combined commercial process; UCC would solicit, grant, and

administer third-party licenses with Shell’s assistance; and UCC

and Shell would continue to cooperate to improve the combined

commercial process.   On January 29, 1987, phase II ended and

phase III began.

     Under the CUA, UCC and Shell each paid their own costs for

R&D covered by the CUA and retained sole intellectual property

rights for information they developed separately during phases I

and II.   However, UCC and Shell would share all net licensing

revenue equally during phase III.   UCC and Shell would jointly

own any intellectual property jointly developed during any phase.

     UCC and Shell agreed that the Cooperative Undertaking was a

partnership solely for tax purposes.    The Cooperative Undertaking

accordingly filed Federal and State partnership tax returns with

UCC serving as the tax matters partner.   However, the CUA
                               - 127 -

expressly excluded from the CUA tax partnership:    (1) All

research activities conducted individually by UCC and Shell

during phases I and II; and (2) all activities conducted by

Seadrift Polypropylene Co. (SPC).    As discussed below, SPC was to

conduct all manufacturing activities using the combined

commercial process and the Cooperative Undertaking would not

engage in any manufacturing activities or plant-based

experiments.

                   b.   SPC

     On March 21, 1984, UCC and Shell formed SPC as a partnership

under the laws of the State of Texas.    UCC and Shell each

contributed goods and services in return for a 50-percent

interest in SPC.   SPC filed Federal and State partnership tax

returns, with Shell serving as the tax matters partner and

providing accounting services.

     The purpose of SPC was to construct and operate a

demonstration manufacturing plant, the P-1 unit, which would be

used to commercialize the combined commercial process developed

by the Cooperative Undertaking, demonstrate the combined

commercial process to licensees and potential licensees, and

produce polypropylene.    Only SPC, not the Cooperative

Undertaking, would conduct polypropylene manufacturing

operations.
                              - 128 -

     Also on March 21, 1984, SPC retained and designated UCC as

an independent contractor to design and construct the P-1 unit.

SPC leased existing plant facilities and land from UCC so that

UCC could build the P-1 unit within the confines of Seadrift.

Under the contract signed with SPC (the engineering and

construction contract), SPC paid UCC a fixed price for the design

and construction work on the P-1 unit.   Under the engineering and

construction contract, UCC would own any intellectual property

that it developed in the course of designing and constructing the

plant under the contract.   Petitioner did not include any

activities that occurred under the engineering and construction

contract during the base period in either its original or revised

base period calculations.

     Pursuant to another agreement between UCC and SPC (the

operating agreement) dated March 21, 1984, SPC retained UCC as an

independent contractor to serve as the operator of the P-1 unit.

In this capacity, UCC initially incurred the costs of SPC’s

polypropylene manufacturing operations, including variable costs

such as raw materials and period costs such as plant labor.   UCC

purchased polypropylene and catalysts directly from Shell.    UCC

submitted monthly invoices for these costs to SPC, and, pursuant

to the operating agreement, SPC reimbursed UCC for these costs.

The operating agreement provided that any intellectual property

discovered or developed by UCC in the course of performing its
                                 - 129 -

duties would be governed by the CUA, not the operating agreement

or any other SPC agreement.

     SPC did not maintain a separate set of books and records.

However, in its capacity as an independent contractor UCC

maintained SPC’s accounting records and identified SPC as a

separate business.

     In the mid-1990s UCC sued Shell and various other entities,

claiming, inter alia, that Shell had violated its fiduciary duty

with respect to the joint venture.     The litigation settled, and

on January 18, 1996, UCC acquired Shell’s polypropylene business

assets, including Shell’s interest in SPC, as part of the

settlement.

                    c.   Petitioner’s Base Amount Recalculation

     Petitioner did not include the cost of any research

conducted at P-1 during the base period in its base amount

because petitioner believes that SPC, not UCC, incurred the costs

of that research.    However, petitioner identified 138 runs that

occurred at P-1 during the base period that it would treat as

qualified research in the event that the Court finds that UCC,

not SPC, incurred the costs of these runs (polypropylene runs).23

Petitioner determined that the 138 runs that occurred at P-1

during the base period cost $29,508,628.41.


     23
      The criteria used to identify the research that petitioner
believes constitutes qualified research within the meaning of
sec. 41(d) are discussed below.
                                  - 130 -

     B.    Base Period Projects

            1.   UCC’s Focus on R&D During the Base Period and
                 Credit Years

     UCC viewed manufacturing process improvements as important

during both the base period and the credit years.      UCC’s

manufacturing process was continuously evolving throughout these

years.    In particular, in the early 1990s William Joyce, the

president of UCC’s polyolefins division, implemented a new

process improvement program designed to lower costs.      Mr. Joyce

implemented this program as part of a program to increase UCC’s

licensing business.

            2.   The Role of R&D and Engineering at UCC’s
                 Manufacturing Plants

     During the base period, R&D provided plant support to all

four C&P divisions.    R&D supported the operation and safety of

the plants and monitored the quality of the products.       UCC’s

engineering and manufacturing departments also helped to develop

UCC’s manufacturing process.      Plant-based experiments were

typically carried out through multifunctional teams.

     There was no formal rule during the base period regarding

how many successful runs of a new product must be conducted

before the product is deemed to be commercial.      However, in the

polyolefins division UCC generally preferred to conduct at least

three runs on a new product before deeming it commercial.
                               - 131 -

          3.   Petitioner’s Identification of Plant-Based
               Qualified Research Activities Conducted During the
               Base Period

                  a.   Dr. Wadia’s Assignment

     Parvez H. Wadia, one of petitioner’s expert witnesses, was

qualified in the base period trial as an expert in conducting R&D

related to the manufacturing of chemicals and plastics.24      Dr.

Wadia’s task was to identify all activities that UCC conducted at

its domestic C&P manufacturing facilities during the base period

that Dr. Wadia believed constituted “qualified research” as

defined by petitioner’s counsel.    The criteria that Dr. Wadia

used to select the identified runs are referred to as the

“qualified research criteria”, and the activities that Dr. Wadia

believes satisfy the qualified research criteria are referred to

as the “identified runs”.25   Another of petitioner’s expert

witnesses, Sheri L. Toivonen, calculated the costs of the

identified runs.26

     Dr. Wadia was not familiar with the claim projects before

beginning his task.    At petitioner’s request Dr. Wadia later

compared the identified runs with the spuds project.    However,


     24
      Dr. Wadia’s qualifications are set out in the Opinion
section, below.
     25
       We make no finding at this time whether the identified
runs constituted qualified research within the meaning of sec.
41(d).
     26
      Ms. Toivonen’s qualifications are set out in the Opinion
section, below.
                               - 132 -

Dr. Wadia was not asked to opine whether the claim projects

satisfy the qualified research criteria or to identify activities

similar to the claim projects that occurred during the base

period.

     Dr. Wadia was assisted by five other professionals from Mid-

Atlantic Commercial Research, a subsidiary of the Mid-Atlantic

Technology, Research & Innovation Center (MATRIC) (collectively,

MATRIC team27).   MATRIC’s largest client is the United States

Government.   The MATRIC team had more than 224 years of

experience in the chemicals and plastics industry and 171 years

of experience with UCC.   None of the MATRIC team members

testified as fact witnesses during the trial.

     The qualified research criteria closely tracked the

definition of qualified research under section 41(d) and section

1.41-4, Income Tax Regs.28   The criteria required Dr. Wadia to

consider five key questions:   (1) Does the research activity seek

to eliminate an uncertainty concerning the development or

improvement of a business component, which can be either a

product or a process?   (2) Does the research activity seek

technological information?   (3) Does substantially all of the


     27
      Although the company that petitioner retained was a
subsidiary of MATRIC, the parties generally refer to the team as
being from MATRIC. We adopt that designation for convenience.
     28
      As we explain infra note 42, respondent concedes that
petitioner may rely on sec. 1.41-4, Income Tax Regs., even though
it is effective for years ending on or after Dec. 31, 2003.
                                  - 133 -

research activity involve elements of a process of

experimentation?    (4) Does the research activity relate to a

qualified purpose?       (5) Is the activity an “excluded activity”?

Dr. Wadia was provided with a list of excluded activities that

tracked section 41(d)(4).      To be consistent with petitioner’s

selection of the claim projects, petitioner asked Dr. Wadia to

identify only plant-based experiments that occurred at UCC’s

domestic manufacturing facilities.

                    b.    Dr. Wadia’s Methodology

     Dr. Wadia and his team spent approximately 5,650 hours

selecting the identified runs.      This time was spent reviewing

over 120,000 pages of technical documents, conducting electronic

searches, interviewing 157 current and former Dow and UCC

employees, and visiting 42 of Dow’s unit libraries and 69

satellite libraries.      The technical documents that the MATRIC

team reviewed included, but were not limited to, R&D project

reports and project memoranda, definition of technology reports,

technology manager’s reports, UNIPOL strategic run plans and

tactical run plans, and latex process and commercial product

information.   Dr. Wadia reviewed a few FOCRs, but most of the

FOCRs that had been produced during the base period were no

longer available.    Dr. Wadia’s project identification

investigation was highly interactive and often complex,

nonlinear, and iterative.
                              - 134 -

     For each of the identified runs, Dr. Wadia defined the

activity by providing:   (1) A run description; (2) the

manufacturing plant locations and specific manufacturing units;

(3) the product(s) made during the activities and their

production volumes; (4) the raw materials and catalysts used to

make the product(s); (5) the start and end dates of the

activities; (6) any other relevant scientific information; and

(7) the documents related to the identified runs.

     Dr. Wadia used a somewhat modified process with respect to

UCC’s crystal products business based at Washougal, which UCC

sold to an unrelated third party in 1999.    Dr. Wadia used a “top-

down” approach to estimate how much UCC spent on plant-based

experimentation for this business.    To make this estimation, Dr.

Wadia assumed that:   (1) Annual sales for the business ranged

from $9 to $10 million per year; (2) manufacturing cost as a

percent of sales was 60 percent; and (3) about 5 to 10 percent of

the crystal growth stations for manufacturing products were

dedicated to experimental work.    The plant manager for the

Washougal crystal products plant confirmed that he believed that

these were reasonable estimates.

                 c.   Dr. Wadia’s Conclusions

     Dr. Wadia identified a total of 793 separate plant-based

activities that he believes satisfy the qualified research
                              - 135 -

criteria.29   Dr. Wadia originally identified 764 runs in his

opening expert report dated August 3, 2007.   After receiving and

reviewing additional information, Dr. Wadia identified 29

additional runs that he listed in his supplemental expert report

dated October 26, 2007.   Dr. Wadia also revised the duration and

production of runs 408, 574, and 777 at that time.

     The MATRIC team considered thousands of projects.   Dr. Wadia

rejected some projects at the outset because they occurred

outside the base period, were not conducted at a manufacturing

facility, or otherwise clearly did not satisfy the qualified

research criteria.   The MATRIC team then discussed the remaining

potential projects, and Dr. Wadia decided whether they satisfied

the qualified research criteria.   The MATRIC team did not retain

a list of potential projects that were discussed but not included

on the list of identified runs.    Dr. Wadia was satisfied that the

MATRIC team had sufficiently analyzed each project and did not

feel that such a list was necessary.

     Dr. Wadia listed the identified runs as runs 1 through 806

on the exhibits to his initial and supplemental expert reports.30

Dr. Wadia later produced a table of identified runs that includes


     29
      These runs are listed as runs 1 through 806. Dr. Wadia
did not identify any runs as run 121, 278, 524, 525, 526, 527,
679, 687, 688, 689, 690, 691, or 775.
     30
       As discussed above, Dr. Wadia has not identified any runs
as Run 121, 278, 524, 525, 526, 527, 679, 687, 688, 689, 690,
691, or 775.
                                 - 136 -

comments on the runs.      In his expert report Dr. Wadia discusses

the specific manufacturing units that conducted the runs and

provides additional narrative information regarding many of the

runs.

                 d.     Petitioner’s Concessions

     As a result of fact witness testimony at trial, petitioner,

with the assistance of Dr. Wadia, conceded that 14 additional

plant-based research activities conducted during the base period

satisfy the qualified research criteria (runs 807 through 820).

Ms. Toivonen summarized each of the conceded activities, provided

references to pertinent testimony and documents, and provided

calculations of the cost of the research activities on the basis

of the referenced information and relevant accounting records.

The pertinent conceded runs are discussed below.31

                      i.    Nalco Inhibitor Antifouling Test (Run
                            816)

     Dr. Wadia did not include the Nalco inhibitor antifouling

test among the first 793 identified runs, but petitioner later

conceded that this test satisfies the criteria for qualified

research and added this test as run 816.




     31
      As discussed in the Opinion section, respondent argues
that the fact that Dr. Wadia did not initially include runs 807
through 820 illustrates a flaw in his methodology. While we
state no opinion on respondent’s argument at this time, we
provide pertinent facts regarding the runs that respondent
addresses in his argument.
                               - 137 -

     During the base period UCC worked with Nalco Chemical

(Nalco) to develop a type of antioxidant or fouling inhibitor to

inject into the C2 column, which would then enter the C3 column

and prevent fouling in that column.      If successful, this would

minimize the number of times the reboiler had to be cleaned and

extend the number of months the reboiler could operate without

being shut down.

     Nalco approached UCC with a fouling inhibitor for UCC to

test.   UCC most likely would have prepared an FOCR for the

installation of the pumping facilities to inject the inhibitor

and for the addition of a new chemical into the plant.

     UCC tested the Nalco inhibitor for 5 to 6 months.     UCC

personnel monitored the steam pressure on the C3 column reboiler

and checked the reboiler for fouling during the test.

     The inhibitor extended the length of time the reboiler ran

without being cleaned and the steam pressure was reduced.     As a

result of these findings, UCC determined that the Nalco inhibitor

worked as it was intended to work and did not perform additional

testing.

     Ms. Toivonen determined that the Nalco inhibitor antifouling

test cost $7,192,670.85.

                     ii.   Wastewater Activity (Run 809)

     Another activity that Dr. Wadia did not include as an

identified run in his original or supplemental report was a plant
                                 - 138 -

test performed at Taft’s wastewater treatment facility.     UCC

received a tank truck of wastewater from another plant and

processed the tank through the wastewater treatment facility at

Taft.

     A technology highlights memorandum describes the activity as

a “plant test” that would be run in mid-November of 1985.     The

activity would involve dumping half of the tank into the

wastewater facility at a rate of 2 gallons per minute and

monitoring for odor.    UCC would rapidly dump the remaining 2,900

gallons in two stages.    In the first stage UCC would dump 1,450

gallons into the acrylics sump.     If that caused odor problems,

UCC would dump the remaining 1,450 gallons into a different sump.

If the dumping of the first 1,450 gallons did not cause odor

problems, UCC would also dump the remaining 1,450 gallons into

the acrylics sump.

     Ms. Toivonen calculated the QREs associated with this

activity to be $8,441.65.

                       iii.   Rohm & Haas Runs (Runs 813 and 814)

     Dr. Wadia included two runs associated with the Triton

assets in his expert witness report as identified runs.     Ms.

Toivonen calculated the cost of these two runs as $1,489.06 and

$39,630.61, respectively.     Petitioner later conceded that two

additional runs (runs 813 and 814) associated with the Triton

asset should have been included in its base amount calculation.
                                  - 139 -

In her second supplemental expert witness report Ms. Toivonen

calculated the costs of these runs as $21,826.32 and $345,683.94,

respectively.   This concession doubled the number of identified

runs associated with the Triton assets and increased the costs of

the identified runs associated with the Triton assets nearly

tenfold.

                  e.    Activities That Were Not Identified Base
                        Period Activities

     Respondent argues that Dr. Wadia should have included the

following additional activities on the list of identified runs.

                       i.   NOx

     Dr. Wadia did not include as identified runs any activities

related to NOx.   “NOx” refers to various compounds of nitrogen

and oxygen that can be contained in catalytically cracked

refinery gases that are sometimes fed to ethylene units.       NOx can

accumulate in the cryogenic sections of commercial ethylene

units.   These cryogenic sections, called “cold boxes”, separate

very low boiling point materials in the cracked furnace gas as

part of the ethylene recovery process.       Nitric oxide (NO), a

compound of NOx, has very low boiling and freezing points.

Therefore, nearly all of the NO in the ethylene unit cracked gas

stream enters the cold box.       NO may be oxidized to NO2 in the

cold box by the presence of oxygen, and NO2 can react with

additional NO to form N2O3.
                               - 140 -

     Some NOx compounds (NO2 and N2O3 in particular) freeze and

boil at significantly higher temperatures than NO.   Therefore,

NOx compounds can freeze in the cold box and accumulate.     The

accumulation of NOx compounds in the cold box can present a

significant safety hazard.   Some NOx compounds are highly

reactive and can combine with other materials, in particular

butadiene, in the cold box to form NOx gums.   NOx compounds also

react with ammonia to form ammonium nitrate and nitrite (NOx

salts).    While stable at the very low cold box temperatures, NOx

gums and NOx salts can become unstable and explosive when the

cold box is warmed.   NOx gums may explode at temperatures well

below ambient, while NOx salts require warmer temperatures to

explode.   Even small amounts of explosive gums can be a serious

safety hazard.

     UCC was aware of the potential safety hazards of NOx

accumulation in cold boxes long before the base period.    UCC had

not had an NOx-related explosion before the base period, but it

had been aware of NOx-related explosions in other cryogenic gas

processing units in the chemical industry.

     By 1982 it was generally known that thawing a cold box would

remove NOx that had accumulated in the cold box.   A controlled

thaw involves shutting off the cracked furnace gas feed,

gradually warming the cold box to ambient temperature, and

injecting purge gas through the piping to flush out the NOx
                                - 141 -

compounds.    It was also generally known how fast to warm the cold

box and to what temperature to warm the cold box to minimize the

risk of explosion.    Furthermore, it was generally known that

after a thaw a cold methanol wash could be used to remove NOx

gums from the cold box equipment and at what temperature the cold

methanol wash should be used.

       During the base period it was industry practice to thaw cold

boxes periodically.    UCC thawed its cold boxes approximately once

per year during the 1980s but had not used a methanol wash until

July 1985.    Before the base period UCC had never quantified the

amount of accumulated NOx or the rate of NOx accumulation in any

of its olefins units’ cold boxes.

       By late November 1984 operations personnel at Texas City had

determined that they did not have enough information to define a

safe run length for the cold box.     During several earlier thaws

UCC had checked the effluent from the Texas City cold box for

NOx.    UCC found NOx in the effluent on every occasion but never

quantified the amount or determined the form or type of NOx

compounds present in the Texas City cold box.    UCC used a

chemical method called the Griess-Saltzman method to detect the

presence of NOx.    UCC also used Draeger tubes (another analytical

technique) to measure NOx concentrations in the cold box vent

gas.    UCC thought that the NOx that was accumulating might be NOx

gums.
                              - 142 -

     In December 1984 Luis Batiz, an engineer in Texas City’s

olefins unit, sent a letter to the hydrocarbons R&D technology

manager expressing concern about the potential accumulation of

NOx compounds in the Texas City cold box and requesting

assistance in developing a standard philosophy and general

procedure that could be implemented in Texas City to thaw the

cold box.   The Texas City olefins unit was particularly

susceptible to NOx accumulation because it used refinery gas,

which was known to contain NOx, as a raw material.   At that point

the Texas City cold box had been operating continuously for about

1 year without a thaw.   UCC had no way to estimate how much NOx

had accumulated because UCC had not previously quantified the

accumulation of NOx.

     Mr. Batiz’s request was assigned to Dr. Henstock, a project

scientist in UCC’s hydrocarbons R&D group, in early 1985.    Dr.

Henstock was based at the technical center in South Charleston.

Dr. Henstock researched the issue, reviewed the situation at

Texas City, and concluded that the Texas City personnel did not

have enough information to determine a safe run length or set

their own operating guidelines.   In February of 1985 Dr. Henstock

informed his supervisors that while the hazards of NOx had been

known for some time, the formation of NOx deposits and their

removal was still not well understood.   Dr. Henstock decided to

conduct a controlled thaw as soon as was practical and measure
                              - 143 -

the amount of NOx that was liberated from the cold box to

determine the rate at which it was accumulating.    UCC intended to

use this information to determine how frequently the cold box

must be thawed.

     In order to better analyze the amount of NOx that came out

of the cold box, UCC’s South Charleston technical center built a

prototype of a photoionization analyzer.   The photoionization

analyzer gave readings every 2 to 3 minutes, recorded data

automatically, and could be left unattended.   UCC believed that

this method for analyzing NOx was superior to the Griess-Saltzman

method because the Griess-Saltzman method did not give readings

frequently, was very time consuming, required skill to operate,

and could not be operated unattended.

     The first Texas City thaw began on February 19 and ended on

February 24, 1985.   This was UCC’s first attempt to measure

accumulated NOx.   During the thaw an operator noticed a bright

blue liquid leaking from a cold box valve, which was not

expected.   Dr. Henstock discussed this phenomenon with some of

his colleagues in South Charleston, and they determined that the

material was N2O3, which is not the form of NOx compound that Dr.

Henstock had expected.   Dr. Henstock then vented the material

into the atmosphere while measuring the concentration and total

flow rate in order to calculate the total amount.   Dr. Henstock

estimated that about 100 pounds of material had built up in the
                                - 144 -

cold box.     Much of the NOx that had entered the system was from

purchased refinery gas.     Dr. Henstock did not determine whether

NOx gums had formed.     The rest of the cold box thaw was completed

uneventfully and the cold box was returned to normal operation.

        Dr. Henstock documented the February 1985 cold box thaw in a

project report dated August 13, 1985.      The project report

summarized what occurred during the thaw and documented the

results.     Dr. Henstock was surprised and concerned about the

amount of NOx that he found.     Accordingly, Dr. Henstock

recommended that the thaw be repeated in a few months to see how

much NOx would accumulate in that time.      Dr. Henstock also

recommended that a methanol wash be performed to determine

whether NOx gums had formed.     UCC decided to have an external

consultant perform laboratory work to understand the hazards of

N2O3.

        Recognizing the potential safety implications of the

significant quantities of NOx found during the February 1985

thaw, UCC made the results of the thaw available to the olefins

industry during the summer of 1985.       The findings of the February

1985 thaw resulted in the formation of the Task Group on Nitrogen

Oxides in Ethylene plans, which met four times from October 1985

to October 1986.     The task group issued a report of its findings

that identified potential problems regarding NOx and made

suggestions on how to safely handle equipment likely to contain
                               - 145 -

NOx.    Dr. Henstock also wrote a paper on NOx that was presented

at an American Institute of Chemical Engineers (AIChE) meeting in

the spring of 1986.

       Following Dr. Henstock’s recommendations, UCC performed

another thaw of the Texas City cold box in July 1985, followed by

a methanol wash.    This was the first methanol wash that UCC had

performed at any of its olefins facilities.    UCC determined that

less than 3 pounds of NOx had accumulated and that no NOx gums

had formed.

       Dr. Henstock wrote another project report to document the

results of the July 1985 thaw.    Because of the small amount of

NOx accumulation found and the absence of NOx gums during this

thaw, Dr. Henstock regarded the NOx issue as a manageable safety

hazard at Texas City.    Dr. Henstock postulated that much of the

NOx passed through the cold box and flowed out in the fuel

stream.    Dr. Henstock recommended that a method should be

developed for monitoring the NOx balance around the Texas City

cold box, such as the installation of a permanent NOx analyzer.

Dr. Henstock also recommended that future thaws at all locations

be monitored closely to determine the amount of NOx accumulation.

In the meantime, Dr. Henstock recommended that the Texas City

cold box be thawed at least every 12 months.    Dr. Henstock did

not believe that methanol washes would be necessary at Texas City
                               - 146 -

in the future, but he recommended methanol washes at locations

where NOx and butadiene could both enter the cold box.

     In January 1986 UCC performed a thaw and methanol wash of

the cold box and one of the two methane columns at Seadrift.

Seadrift did not use refinery gas as a raw material.    Therefore,

UCC assumed that NOx accumulation at Seadrift was less likely

than at Texas City.   However, UCC had detected NOx at several

points within the process, which indicated that there might be

NOx present.   UCC also believed that NOx and butadiene

occasionally contacted one another, which could potentially cause

the formation of NOx gums.    UCC was concerned about an incident

at Seadrift in which thaw gas flowing out of piping was found to

be unexplainably warm during a cold box thaw in 1979.     UCC had

never quantified the accumulation of NOx or NOx gums or used a

methanol wash at Seadrift before this thaw.

     During the January 1986 thaw at Seadrift, UCC used the same

general procedures it had used at Texas City.   UCC did not find

any NOx accumulation or NOx gums in the cold box.   Dr. Henstock

documented the results of the January 1986 thaw in a project

report dated June 16, 1986.   Dr. Henstock concluded that the warm

thaw gas outlet pipe incident during the 1979 thaw was probably

not related to NOx.   Dr. Henstock also developed guidelines for

future management of potential NOx hazards at Seadrift.     Dr.

Henstock determined that future Seadrift cold box thaws should be
                              - 147 -

closely monitored for NOx in the outflowing warmup gas but that

methanol washes would not be required unless evidence of NOx gum

formation developed.

     UCC followed the plans recommended after the July 1985 thaw

at Texas City and conducted another thaw at Texas City in January

1987.   UCC improved the procedure it had previously used at Texas

City by using a drain vaporizer when NOx levels were very low.

UCC purged less than 1 pound of NOx during the January 1987 thaw.

     Dr. Henstock documented the results of the January 1987 thaw

in a project report dated March 11, 1987.    Dr. Henstock concluded

that the smaller accumulation was probably due to decreases in

the level of NOx in the refinery gas.   Dr. Henstock recommended

careful monitoring of the refinery gas NOx concentrations once

the permanent analyzer was installed later in 1987.    Dr. Henstock

also recommended that it was safe to increase the time between

thaws to 24 months as long as the low NOx concentrations in the

feed streams persisted, but he suggested reevaluating the time

interval between thaws according to the results of the next thaw.

     In March 1988 UCC measured NOx accumulation during a normal

plant shut down and cold box thaw at Taft.   Taft’s Olefins-2 unit

had run continuously for over 3 years at that point.   UCC had

never attempted to quantify the accumulation of NOx or NOx gums

at Taft before this thaw.   Taft did not use refinery gas as a raw

material, but the design of the separations system at Taft
                                - 148 -

allowed some butadiene (known to form NOx gums) to enter the cold

box.    UCC analyzed the process streams feeding and leaving the

cold box at Taft on three different occasions before the March

1988 thaw but found no measurable NOx.

       During the March 1988 thaw UCC monitored the effluent for

NOx and detected less than a pound of NOx.      UCC did not detect

any NOx gums or polymers on a visual inspection of the cold box

and methane column feed separators.       Dr. Henstock concluded that

future monitoring of the Taft cold box by the hydrocarbon R&D

group would not be necessary.    However, Taft personnel would

continue to check the cold box streams for NOx with Draeger tubes

at any future shutdowns.

       None of the thaws discussed above involved the changing of

any variables before the NOx accumulation was measured.      During

each thaw UCC collected data for the purpose of determining how

fast NOx was accumulating under normal conditions and how long

the cold boxes could safely operate without being thawed.      Dr.

Henstock continued to study NOx into the 1990s and still

considered NOx accumulation to be a safety issue at least as late

as 2002.32


       32
      A serious NOx gum explosion occurred at the Shell Olefins
plant in Berre, France, in 1990. A second industry task group
was formed in response to this explosion. However, these events
did not occur during the base period or the credit years, and
accordingly we do not address them in detail here. A minor NOx-
related explosion also occurred at Texas City in 1994. However,
                                                   (continued...)
                                - 149 -

     Dr. Wadia did not include any NOx-related activities on the

list of identified runs because the MATRIC team concluded that

they did not involve a process of experimentation but merely

constituted data collection and monitoring.     Accordingly, Ms.

Toivonen did not include the cost of any NOx-related activities

in her expert witness report.

     Roy T. Halle, one of respondent’s expert witnesses,

estimated that the cost of the ethylene that UCC produced at

Texas City, Seadrift, and Taft during the periods leading up to

the cold box thaws was about $443 million.33

                     ii.    John Zink Co. Orders

     UCC purchased equipment from the John Zink Co. during the

base period.   UCC conducted tests on equipment purchased from the

John Zink Co. during the base period that Dr. Wadia did not

include on his table of identified runs.      These tests generally

consisted of testing the products to see whether they functioned

properly.

                     iii.    Star Pelleting

     In 1986 UCC installed one of the industry’s largest and most

effective pelleting lines at Star.    UCC tested the new equipment



     32
      (...continued)
none of the claim projects relate to this explosion.
Accordingly, we need not discuss the event further.
     33
      Mr. Halle’s qualifications are set out in the Opinion
section, below.
                                 - 150 -

to validate that everything functioned as was expected.    However,

UCC did not take any steps to further develop the new pelleting

line.   UCC did not have any significant difficulties with the

startup of the new pelleting line.

                       iv.   Naphtha Analysis

     In 1987 UCC’s R&D department analyzed virtually every

naphtha shipment that arrived at Taft to determine the

composition of the naphtha.     Naphtha is not a standard chemical,

and different batches of naphtha could lead to different yields

of ethylene and different degrees of coking.    R&D analyzed the

naphtha with a gas chromatograph and entered the results into a

computer to predict the naphtha’s yields, and this information

was given to UCC’s economics department to determine which

naphtha shipments had the highest value.

                  f.    Duration and Quantities of Product Produced

     The MATRIC team provided Ms. Toivonen with the duration of

the identified runs and the amount of products produced during

the runs so that Ms. Toivonen could calculate the costs incurred

in conducting those runs.     As discussed in more detail below, Ms.

Toivonen used duration to calculate the wage costs and the amount

of product produced to calculate the material costs.

     Where there was no explicit statement of the duration or the

production quantity in the documentary evidence, the MATRIC team

determined the amounts using a number of different methods.    In
                               - 151 -

some cases the documents stated the pounds of material made

during the run, and the MATRIC team calculated the duration by

dividing the material by the operating rate in terms of pounds

per hour.   The MATRIC team determined the production rate from a

number of different sources.   If the operating rate was not

known, the MATRIC team made estimates by looking at analogous

tests or experiments.

     Where neither the duration nor the quantity produced was

explicitly stated on supporting documentation, the MATRIC team

looked at similar runs and talked to people who actually

conducted the experiments to obtain additional information.     The

MATRIC team then used its technical judgment to determine when a

particular experiment began and ended.   However, this was

necessary for only a small percentage of the identified runs.

     If the amount of product produced was not explicitly stated

on the documentation but the raw materials were mentioned, the

MATRIC team made estimates on yields or efficiencies based on

information in the documents, its own knowledge, or information

from interviewees.   The MATRIC team used the data on the raw

materials and its estimates on yields or efficiencies to

calculate the amount of product made and then calculated duration

using the amount of product made and the operating capacity or

operating rate.
                              - 152 -

     If the MATRIC team found a strategic run plan but not a run

report, then it estimated the length of the run.   The MATRIC team

made these estimates on the basis of interviews with people who

worked on the projects and data from analogous runs with the same

technology.   The names of the people who assisted the MATRIC team

are not documented in the table of identified runs but are

included in the interview notes.   Other than with respect to the

cable and wire business, Dr. Wadia did not check his production

estimates against PCDs because the annual PCDs would show the

entire quantity of the product produced in the year, not the

quantity produced during the duration of the experiments.

     In some cases the MATRIC team reported the duration of an

identified run as shorter than the total duration of the

activity.   In those cases the MATRIC team included only the

portion of the run that it determined related to experimentation.

For example, if UCC personnel conducted experiments only between

the time a run started and the time the unit reached a steady

state, the MATRIC team included only the time required to reach a

steady state in the duration of the identified run.   If a run was

conducted for the purpose of determining whether it would produce

a product of acceptable quality, the MATRIC team treated the

experimental portion of the run as ending when that determination

was made.   However, if the researchers continued to experiment

after the unit reached a steady state, the MATRIC team would also
                               - 153 -

include the time when experimentation occurred in the total

duration.   In a small number of cases it was not clear when the

experimental portion began or ended, and in those cases the

MATRIC team made an estimate based on its knowledge, similar

runs, and information from interviewees.    The MATRIC team used

the total run duration for most of the identified runs conducted

in the polyolefins area because of the complexity of that area,

but it frequently used a partial run duration for identified runs

conducted in the industrial chemicals area where the systems are

more predictable.   The MATRIC team noted when it used a partial

run duration in the comments section of the table of identified

runs.

     The MATRIC team also noted in the comments section of the

table of identified runs when it made assumptions about run

duration.   According to the comments section, the MATRIC team

made assumptions with respect to about 225 identified runs.     We

find that most of these assumptions were reasonable.    However,

the parties dispute the duration of the identified runs discussed

below.

                     i.   Natural and Forced Draft Burner Tests
                          (Runs 1 through 11, 95, and 96)

     Runs 1 through 11 involved tests on natural draft burners.

Runs 95 and 96 involved tests on forced draft burners.    UCC

prepared a report for the natural draft burner tests and another

report for the forced draft burner tests.
                               - 154 -

      UCC conducted the tests on natural draft burners to

determine the most energy efficient operating parameters for the

furnaces.    UCC collected data for runs 1 through 11 from January

to October 1985.

      UCC conducted runs 1 through 11 on nine furnaces equipped

with natural draft burners (furnaces 1, 4, 5, 7, 9, 14, 15, 18,

and 2434).    UCC conducted an 11-point test on each of nine

burners and also conducted additional tests on furnaces 9 and 15.

It appears that Dr. Wadia determined that there were 11 runs by

including one run for each of the nine furnaces and two

additional runs for the second tests conducted on furnaces 9 and

15.   However, Dr. Wadia did not distinguish between the 11 runs

in his expert report.

      The duration of each of the natural draft burner tests was

reported in the natural draft burner report as 1 to 1-1/2 days.

Dr. Wadia used the midpoint, 30 hours, as the duration of each of

these runs.    This was a conservative estimate because each of the

11 test points lasted about an hour, so the tests most likely

occurred over 1-1/2 work days, not 24-hour days.

      UCC also tested the effects of fuel specified gravity on

energy use on furnace 9.    UCC ran a 13-point test at three


      34
      As discussed below, natural draft burner tests were also
conducted on furnaces 10 and 12, but those tests were conducted
to collect baseline data for the forced draft burner tests in
1983, not as part of the natural draft burner tests that took
place in 1985.
                                   - 155 -

different gravities.        The extra test points added approximately 2

hours to this test, but UCC could still reasonably complete the

test within 30 hours.

        The natural draft burner report refers to two separate 11-

point tests conducted on furnace 15.          During one test UCC

collected data over a 23-hour period, and during the second UCC

collected data over a 25-hour period.          However, the engineer

conducting the test would not typically collect data continuously

over the entire test period.

        The natural draft burner report also refers to the

implementation of a new measurement technique called the Bunker-

Ramo control technique.        However, the technique was already well

understood at that point, and UCC did not test or experiment with

this technique as part of the natural draft burner tests.

        Runs 95 and 96 were conducted on forced draft burners on

furnaces 10 and 12 in 1984.35       UCC installed the forced draft

burners in early 1984 or late 1983.          Before installing the new

burners, UCC collected data from the natural draft burners on

furnaces 10 and 12 to compare with data that UCC would collect

after installing the new burners.        We find that the tests on the

natural draft burners on furnaces 10 and 12 occurred in late

1983.        The natural draft burner tests conducted on Furnaces 10


        35
      Dr. Wadia originally determined that runs 95 and 96
occurred in 1985 but corrected the date in his supplemental
report. Respondent agrees that these runs occurred in 1984.
                               - 156 -

and 12 are not included in runs 1 through 11, 95, or 96 (or

elsewhere on the table of identified runs).

     The purpose of runs 95 and 96 was to measure the energy

efficiency of the forced draft burners and compare the results

with the tests on Furnaces 10 and 12 before the new burners were

installed.   UCC conducted two 11-point tests and one 7-point test

on Furnace 10 during Run 95 and three 11-point tests on Furnace

12 during Run 96.   Dr. Wadia determined that the durations of

Runs 95 and 96 were 20 and 24 hours, respectively.   Dr. Wadia

believed this was a reasonable estimate because each point would

take at least half an hour.    The test data collected on Furnaces

10 and 12 with both the natural and forced draft burners were

reported in the forced draft burner report.

     The forced draft burner report also included data taken to

measure NOx in order to aid UCC in complying with environmental

regulations.   The data was collected from Furnaces 10 and 12,

which were fitted with forced draft burners at the time, and

furnaces 3, 5, 6, 7, and 8, which were natural draft burners.     To

collect the data, UCC put an analyzer on the stack gas portion of

the furnaces, which detected the amount of NOx floating up in the

furnace.   UCC did not make any changes to the furnaces outside

the normal operating window.   The purpose of collecting these

data was to verify representations made by the burner vendors
                                - 157 -

regarding NOx production.    Dr. Wadia did not include these data

collection activities on the table of identified runs.

                    ii.     Nalco 5211 Tests (Run 15)

     Dr. Wadia identified two tests of a coke inhibitor known as

Nalco 5211 as runs 15 and 566.36    Run 15 was conducted on furnace

23 in Taft’s Olefins-2 unit in 1986 and 1987.    The overall

purpose of the test was to determine the effectiveness of Nalco

5211 as a coking inhibitor.    One objective of the test was to

gather enough information to determine whether Nalco 5211

improved operations enough to justify the inhibitor’s cost.

     Dr. Wadia determined that run 15 lasted for 110 days, which

is the amount of time that the furnace ran after Nalco 5211 was

injected before the furnace was shut down.    The test run ended

prematurely because the furnace was upset.    UCC predicted that

the furnace would run for about 150 to 220 days if no upsets

occurred.

     According to the project report, the data collected after

Nalco 5211 had been injected were compared to data collected from

five base case runs on furnace 23 when no inhibitor had been

injected and furnace 23 operated normally.    A “base case” refers

to the collection of data during normal operations to serve as a

reference to compare to data collected during an experiment or



     36
      The parties only dispute the duration of run 15.
Accordingly, references to the Nalco 5211 test are only to run
15.
                               - 158 -

after an operational change has occurred.   The five base case

runs spanned 292 days from January to December 1985.   The base

case data were the same data normally collected by computer and

would have been collected even if UCC did not intend to test

Nalco 5211 on Furnace 23.   An analysis of the base case data

indicated that UCC’s furnaces could run for 60 to 90 days between

decokings under normal conditions without an inhibitor instead of

30 to 45 days as previously believed.

     Following the test, UCC concluded that there was little

economic incentive at Taft to justify the use of Nalco 5211 and

that savings could be realized by extending the furnace run times

without adding an inhibitor.

     Dr. Wadia did not include the base case runs in his expert

report because UCC did not change any process variables before

the base case runs.   Therefore, Dr. Wadia did not believe that

they involved a process of experimentation.   Ms. Toivonen, in her

expert witness report, determined that the Nalco 5211 test cost

$1,419,392.24 excluding the cost of the base case runs.   Mr.

Halle, one of respondent’s expert witnesses, estimated that the

base case runs would have cost about $5.4 million using Ms.

Hinojosa’s methodology for costing the Amoco anticoking project.
                               - 159 -

                     iii.   Vinyl Acetate Catalyst Protection
                            Tests (Runs 47 and 48 and Runs 594 and
                            596)

     The vinyl acetate catalyst protection tests (runs 47 and 48)

involved runs in the vinyl acetate unit.   The goal of these runs

was to protect the expensive catalyst from low levels of iodine,

which comes in as an impurity with acetic acid.   In run 47, a

small (about a quarter of an inch) pilot tube was installed in

the process stream to divert some of the feedstock to create a

slipstream.   UCC would then test the performance of a silver-

containing resin for removing iodine from the acetic acid feed.

The purpose of the run was to test the physical strength of the

resin, which was being used as a trap bed for iodine, over a

period of 2,400 hours to determine whether minor components in

the acetic acid feed would have a deleterious effect on the

resin.

     For run 47 Dr. Wadia treated the experiment as having a

duration of 12 hours, which was the time it took to set up and

take down the apparatus and determine whether the material had

maintained its physical integrity.   Dr. Wadia did not count the

2,400 hours that the tube was in place as part of the test

because there was no monitoring during that time.   Furthermore,

Dr. Wadia treated the product quantity as zero because the amount

of feedstock going through the tube was so small compared to what
                               - 160 -

was going through the main process and it would be very difficult

to quantify.

     Run 48 was very similar to run 47 except that run 48

involved a larger tube and full-scale trap bed made of the same

material.    The purpose of Run 48 was similar to that of run 47

except that UCC also wanted to determine whether there would be

other issues with scaling up the channeling.

     For run 48 Dr. Wadia treated the duration as 720 hours,

which was the time it would take to get a good indication of

stability.    The comment section on the table of identified runs

does not provide any additional details as to how Dr. Wadia

concluded that the duration of the run was 720 hours.    Dr. Wadia

did not include the entire duration of the run because the plant

would have continued to operate as normal even if the experiment

never happened.

     Dr. Wadia again treated the production quantity as zero

because the same materials that were used during run 48 were also

being used in a simultaneous plant test of a new catalyst in the

unit (Run 153) and Dr. Wadia did not believe that it was

appropriate to double count the materials.

     Dr. Wadia used the same methodology (including only the

feedstock material flowing through the parts of the process in

which the tests were being conducted) for runs 594 and 596, which

also used a slipstream.    Dr. Wadia used a duration of 216 and 96
                                 - 161 -

hours for runs 594 and 596, respectively.      Dr. Wadia determined

that 3,000 and 3,800 pounds of products were produced during runs

594 and 596, respectively.

                      iv.    Butyl Acetate Capacity Increase Test
                             (Run 161)

       UCC conducted the butyl acetate capacity increase test (run

161) to test an increase in butyl acetate production by

increasing the number of refining column trays in the esters

batch still.    The trays were installed in January 1987 and

removed in February 1987.      Dr. Wadia treated the run as lasting 4

days even though the trays may have been in place for up to 2

months.    Nothing in Dr. Wadia’s expert reports explains how he

determined this duration.

                      v.    MEK Production Test (Run 175)

       The MEK production test (run 175) involved the production of

methyl ethyl keytone (MEK) at Institute from August 27 to October

5, 1988 (6 weeks).    The production campaign responded to a severe

market shortage of MEK.      This run was UCC’s first attempt to make

MEK.    According to the project report, UCC collected data for the

first 914 hours of the run.

       Dr. Wadia assumed that the startup and experimentation

involved in the project took 2 weeks, and accordingly treated the

duration as 336 hours.      Nothing in Dr. Wadia’s expert reports

explains how Dr. Wadia arrived at the conclusion that the startup

and experimentation took only 2 weeks.
                                  - 162 -

                      vi.     Secondary Refining System Test (Run 178)

     The secondary refining system test (Run 178) involved a

plant test conducted on the secondary refining system for the

purpose of optimizing the ethanol refining system.      The test

involved feeding the primary extractive column overheads directly

to the lights column to immediately separate acetaldehyde and

ether from ethanol.   The lights column tails were then fed to the

secondary extractive column.      The secondary refining system

project lasted 2 weeks.      However, Dr. Wadia assumed a duration of

1 week.   Nothing in Dr. Wadia’s expert reports explains how he

arrived at this conclusion.

                      vii.    Spanish Fermentation Ethanol Refining
                              Test (Run 180)

     The Spanish fermentation ethanol refining test (run 180)

involved the refining of Spanish fermentation ethanol with a goal

of producing 200 proof ethanol.      Dr. Wadia assumed a 4-day

duration although about 11 days of testing were reported.

Nothing in Dr. Wadia’s expert reports explains how he arrived at

this conclusion.

                      viii.    Ethanol Tertiary Recovery Test (Run
                               181)

     The ethanol tertiary recovery test (run 181) was conducted

for the purpose of optimizing the separation of propanol and the

recovery of ethanol in the ethanol residue column.      Dr. Wadia

assumed a 4-day duration even though about 15 days of testing
                                 - 163 -

were reported.   Nothing in Dr. Wadia’s expert reports explains

how he arrived at this conclusion.

                      ix.    Mexican Fermentation Ethanol Refining
                             Test (Run 184)

     The Mexican fermentation ethanol refining test (run 184)

involved the refining of Mexican fermentation ethanol with the

goal of producing specification ethanol.     Dr. Wadia assumed a 4-

day duration although a 1-week test was reported.     Nothing in Dr.

Wadia’s expert reports explains how he arrived at this

conclusion.

                      x.    Propionic Acid Hydrogen Peroxide
                              Treatment Test (Run 190)

     The propionic acid hydrogen peroxide treatment test (run

190) involved the addition of small quantities of hydrogen

peroxide to the process for making propionic acid.     It began on

February 18, 1987, and lasted 10 days.     Dr. Wadia assumed a test

period of 4 days.   Nothing in Dr. Wadia’s expert reports explains

how he arrived at this conclusion.

                      xi.    Adiabatic Hydrogenation Beds
                             Rearrangement Test (Run 198)

     The adiabatic hydrogenation beds rearrangement test (run

198) involved rearranging the order of the adiabatic

hydrogenation beds used to make butanol in order to improve

product quality.    The order was changed on February 29, 1984, and

data were collected on March 21, 1984.     Dr. Wadia determined that
                                   - 164 -

the duration of run 198 was 4 days.          Nothing in Dr. Wadia’s

expert reports explains how he arrived at this conclusion.

                        xii.    Butanol Refining Test (Run 202)

      The butanol refining test (run 202) involved adjusting the

base temperature on the butanol refining forecolumn.          A 2-week

test was reported, but Dr. Wadia determined a 4-day duration.

Nothing in Dr. Wadia’s expert reports explains how he arrived at

this conclusion.

                        xiii.    DIBK Recycle to Mixed Keytones
                                 Converters Test (Run 608)

      The DIBK recycle to mixed keytones converters test (run 608)

was a process enhancement test to suppress the formation of

diisobutyl ketone (DIBK).       The test was conducted between October

25 and November 23, 1988.       However, Dr. Wadia determined that the

portion of the test from November 1 to 8 demonstrated the

catalyst performance and trends.       Dr. Wadia does not explain in

his expert reports how he chose November 1 and 8.

V.   Base Period QREs

      Ms. Toivonen, one of petitioner’s expert witnesses,

calculated the supply and wage costs UCC incurred in conducting

the identified runs, including runs 807 through 820, which

petitioner concedes occurred during the base period and

constitute qualified research under section 41(d).         Ms. Toivonen

is a partner with the public accounting firm of Ernst & Young LLP
                              - 165 -

(E&Y).   In performing her assignment Ms. Toivonen led a team of

E&Y accounting professionals ranging from 10 to 75 people.

     In addition, four current or former Dow/UCC cost accountants

(including Ms. Hinojosa) assisted Ms. Toivonen in the costing

process.   Ms. Hinojosa and her colleagues identified the lead

PCDs (the page of the PCD that is tied to the product produced in

a specific run) and the MASs relating to the products Ms.

Toivonen costed.   Ms. Hinojosa also consulted on other issues.

     As discussed above, Ms. Toivonen obtained the production

quantities and run durations from the MATRIC team for runs 1

through 806.   In situations where Dr. Wadia’s production quantity

exceeded the production quantity reflected on the lead PCD, Ms.

Toivonen used Dr. Wadia’s production quantity to calculate the

cost of the run, to be conservative.    Ms. Toivonen did not

independently verify the MATRIC team’s conclusions regarding run

duration or production quantity, and the MATRIC team did not

review Ms. Toivonen’s costing of the identified runs.

     Ms. Toivonen determined the run durations and production

quantities for runs 807 through 820 using UCC’s accounting

records, not information provided by Dr. Wadia.    Petitioner’s

counsel provided Ms. Toivonen with the accounting records that

related to these runs.   Ms. Toivonen did not have access to all

of the technical documents produced in this case.    However, when

Ms. Toivonen felt that she needed additional documents, she asked
                                - 166 -

petitioner’s counsel to see whether more information was

available.    Ms. Toivonen did not conduct an independent search

for information relating to these runs because the Court directed

Ms. Toivonen to rely on the factual record that existed at the

end of the base period trial.    Ms. Toivonen used historical UCC

cost accounting records to calculate the costs of runs 807 to

815, 818, and 819.    Ms. Toivonen used cost information supplied

by CMAI to calculate the costs of runs 816, 817, and 820.

     A.    Documentation

     During the base period, as in the credit years, UCC used the

material accounting system for production, inventory, and product

costing.    Ms. Toivonen relied primarily upon PCDs and MASs to

calculate the supply costs of the identified runs, which are the

same types of documents that Ms. Hinojosa used to calculate the

claimed QREs for the claim projects.      Ms. Toivonen also used

other records such as reports of UCC’s third-party purchases and

documents from UCC’s latex business.      Ms. Toivonen primarily used

account levels and Star’s performance history report to calculate

wage costs.    More than 90 percent of the base period cost

calculations were based upon historical UCC accounting records.

Ms. Toivonen and her team also used the MATRIC team’s table of

identified runs, a separate table prepared by the MATRIC team

that listed the materials and material quantities used in the 140

latex runs identified by Dr. Wadia, historical pricing
                              - 167 -

information from CMAI regarding ethylene byproducts, and

information provided by Dow/UCC cost accountants and Dow

technical personnel.

     Petitioner was unable to find its R&D budgets for 1984,

1985, 1986, 1988, 1994, or 1995.   However, petitioner provided

its R&D budgets for 1987.

     B.   Ms. Toivonen’s Costing Methodology

     To develop a methodology to calculate the costs UCC incurred

in conducting the identified runs, Ms. Toivonen reviewed Ms.

Hinojosa’s expert report for the credit years and designed her

methodology to be consistent with Ms. Hinojosa’s methodology.

Ms. Toivonen included the same types of costs and used the same

types of records that Ms. Hinojosa used when it was possible.

Ms. Toivonen’s methodology involved:37   (1) Identifying the lead

PCDs for the runs; (2) identifying the materials that required

costing; (3) tracing the materials through UCC’s accounting

records; (4) determining the unit costs of materials; (5)

calculating the total materials costs; (6) calculating the wage

costs; and (7) calculating the total run costs.

     Following this process, Ms. Toivonen and her team prepared

detailed cost calculations for each identified run.   With certain


     37
      As discussed above, some of these activities were
performed by Ms. Hinojosa and her colleagues or the MATRIC team.
In particular, Ms. Hinojosa identified the lead PCDs, and the
MATRIC team determined the duration and production quantities for
most of the identified runs.
                                - 168 -

exceptions discussed below, each identified run is supported by:

(1) A lead PCD for the product or the closest match if the lead

PCD was unavailable; (2) secondary PCDs and MASs used to derive

the per-unit costs of internally produced materials used in the

production of the lead PCD product; (3) an E&Y-generated unit

cost calculation worksheet showing the actual unit cost

calculation for each material used in the identified run; (4) an

E&Y-generated material detail report showing the total cost of

the materials used in producing the final product made in the

identified run; (5) an E&Y-generated wage detail report showing

the wage cost calculation for the identified run; and (6) an E&Y-

generated summary report showing the total material and wage

costs for the identified run.    The supporting documentation was

substantially similar for the identified runs conducted in UCC’s

latex business although the latex business did not use the same

accounting records as the rest of UCC’s C&P business.

           1.   Identifying the Lead PCD

     As discussed above, Ms. Hinojosa identified the lead PCDs

for the identified runs.   A lead PCD provides the materials and

material quantities used in manufacturing the final product(s) in

a given year and essentially provides the “recipe” for making the

product.   Lead PCDs were not found for all of the products

produced in the identified runs.    If a lead PCD was not found for

a specific product, Ms. Toivonen used a PCD for a similar
                               - 169 -

product.   In other cases, Ms. Hinojosa identified more than one

lead PCD that could have been a match for a run.    In those cases,

Ms. Toivonen selected the PCD that was the closest match.

           2.   Identifying the Materials

     In a few cases Dr. Wadia identified materials used in a run

that were different from the materials listed on the PCD.    In

such cases Ms. Toivonen relied on the PCD because it was UCC’s

official cost accounting record.   As a result, Ms. Toivonen

either would not cost the material identified by Dr. Wadia or

would cost a material listed on the PCD that was different from

the material identified by Dr. Wadia.    Ms. Toivonen did not keep

a list of materials that were identified by Dr. Wadia but that

were not listed on the PCDs she used because she believed that

materials would be omitted from UCC’s cost accounting records

only if their costs were immaterial.

     Ms. Toivonen generally did not include utilities when she

identified the materials that required costing.    However, Ms.

Toivonen did include the costs of the furnace gases and

refrigeration used in the ethylene production process because Ms.

Hinojosa included those costs when costing the claim projects

that involved the ethylene production process.

           3.   Tracing the Materials

     To calculate the unit cost of purchased materials, Ms.

Toivonen divided the total material cost for the year by the
                                - 170 -

quantity received.    The unit cost for internally produced

materials was more complex.    For internally produced materials

the E&Y team identified the applicable secondary PCDs and traced

all of the materials listed on the secondary PCDs.    This tracing

process was continued until the E&Y team reached the originating

material purchases from third-party vendors.    Internally produced

materials frequently required multiple levels of tracing.

     Ms. Toivonen and the E&Y team developed practical approaches

to simplify the tracing process for internally produced

materials.   For example, where multiple levels of tracing were

required, the tracing process was repeated until at least 80

percent of the total material quantity had been reached.      The

actual unit cost calculated from this material quantity was

applied to the entire amount for the material used in an

identified run.    In some cases where an internally produced

material accounted for less than 5 percent of the total cost

shown on a lead PCD, Ms. Toivonen used UCC’s annually updated

material standard cost.    These approaches did not materially

affect the calculated cost of internally produced materials

because the standard cost reasonably approximated UCC’s actual

per-unit cost.

          4.     Determining the Unit Costs of Materials

     Transfer costs shown on lead PCDs represented materials

transferred to the manufacturing site from another UCC division
                               - 171 -

or location.   E&Y used MASs to determine the UCC division or

location where the materials were originally purchased or

produced.   Other than the addition of freight or other charges,

the unit cost calculation for transfer costs was the same for

purchased and internally produced materials.

     Consistent with Ms. Hinojosa’s treatment of byproducts in

calculating the costs of the claim projects, Ms. Toivonen and her

team treated the costs of byproducts as reductions in the unit

cost calculations.   Actual per-unit byproduct costs were used

where these costs had been previously determined.    Otherwise, Ms.

Toivonen used historical values from CMAI because that was the

source of information that Ms. Hinojosa used for her claim

project calculations.    In a few instances where CMAI data were

not available, Ms. Toivonen used UCC’s standard cost.    Where

byproducts represented less than 5 percent of the total cost on a

lead PCD, no reduction was taken because the impact on overall

cost was immaterial.

     During the base period, UCC both purchased and internally

produced ethylene, which was a major raw material for many

chemicals and plastics.    Additional calculations were necessary

to determine the actual unit cost of ethylene consumed in

downstream products.    Consistent with the methodology that Ms.

Hinojosa used for the claim projects, Ms. Toivonen calculated a

“Gulf Coast Weighted Average Pooled Price for Ethylene” using the
                                - 172 -

weighted average cost of UCC’s ethylene purchases and internal

production for each base period year.

     Ms. Toivonen used a different approach to derive the unit

costs of materials used in the 140 identified runs from UCC’s

latex business.    The latex business did not use PCDs or MASs, and

there were no accounting records for the base period for the

latex business.    Accordingly, Ms. Toivonen derived unit costs of

the materials used in the latex runs from available latex

business documents from other periods with adjustments for

inflation where appropriate.    For deionized water, which is a

high-volume, low-dollar raw material, Ms. Toivonen used the UCC

standard cost.    Collectively, the 140 latex runs accounted for

less than 1 percent of the total cost of the identified runs.

          5.     Calculating Total Materials Costs

     Once Ms. Toivonen calculated the unit cost for each of the

materials used to make the product produced during a run, Ms.

Toivonen calculated the total materials cost for the product by

multiplying the per-unit costs by the quantities of each material

shown on the lead PCD (or on the MATRIC team’s “Latex Run Batch

Components Table” for the latex runs).    This calculation

generated the total production cost for the year for the product

manufactured in the run.    Ms. Toivonen then divided this total

production cost for the product by the total quantity of the

product produced in the year to generate a per-unit cost of the
                                - 173 -

product manufactured.    Ms. Toivonen and the E&Y team then

multiplied this per-unit cost by the quantity of product made

during the identified run to determine the total material cost

for the run.   As discussed above, Ms. Toivonen obtained the

production quantities from Dr. Wadia for runs 1 through 806.

          6.     Calculating the Wage Costs

     Ms. Toivonen determined wage costs for each identified run

by multiplying the run duration (supplied by Dr. Wadia) by a

calculated hourly wage rate for the UCC manufacturing unit in

which the run was conducted.    Ms. Toivonen derived the hourly

wage rates from account levels, which reported both budgeted and

standard labor cost information for the budget accounts within

UCC locations.    Ms. Toivonen then adjusted the standard labor

costs to actual costs by an allocation of the deviation accounts,

which represent the differences between standard and actual labor

costs.   To calculate the hourly wage rates, Ms. Toivonen created

“wage groups” based on common manufacturing areas at UCC plants.

Ms. Toivonen then calculated “wage group dollars” based on the

actual direct labor costs of each wage group as well as the

allocable portion of shared laboratory and shift administration

labor costs.   Wage group dollars represented an aggregate cost of

all employee-related wages and benefits associated with a UCC

manufacturing unit.    Ms. Toivonen calculated “wage group dollars
                              - 174 -

per production unit hour” by dividing wage group dollars by the

wage group’s total production unit hours.

     The above methodology for calculating wages was used for all

identified runs except for the latex runs and the runs conducted

at Star between 1985 and 1988.    Because account levels were not

available for these runs, Ms. Toivonen estimated hourly wage

rates on the basis of the best available information.

     Ms. Toivonen determined that the total wage cost for all

identified runs was approximately $7.937 million, or about 5.87

percent of the total run costs.   For the claim projects, Ms.

Hinojosa determined that wages accounted for only 1 percent of

the total project costs.   Furthermore, the wage rates for

approximately 98 percent of the identified runs were higher than

the wage rates used by Ms. Hinojosa.    The reason for these

differences was that Ms. Toivonen’s approach to costing the

identified runs was much more comprehensive than that used by Ms.

Hinojosa and the records available for the base years were more

detailed than those available for the credit years.    In

particular, budget reports were not available for the credit

years.   However, since Ms. Toivonen did not have data for wages

paid at the Star plants for 1985 through 1988, she used the Star

plant performance history report that was consistent with what

Ms. Hinojosa used for the credit years.    Furthermore, since Ms.

Toivonen did not have accounting records for the latex business,
                               - 175 -

she estimated the wages for that business using information

provided by the MATRIC team.   The MATRIC team also calculated the

run costs for the crystal products business because there were no

accounting records available for that facility.

          7.   Calculating the Total Run Costs

     Ms. Toivonen and the E&Y team then added the total materials

cost to the total wage cost for each identified run to calculate

the total cost of each identified run.

          8.   Exceptions to Ms. Toivonen’s General Costing
               Methodology

     Certain identified runs involved extraordinary situations

requiring Ms. Toivonen and the E&Y team to develop and apply

special costing rules.

     The first exception was for sequential runs.   When the

manufactured product of an initial run was used as a material in

a subsequent run, the costs of the manufactured product from the

initial run were excluded from the second run calculation to

avoid double counting.

     Different treatment was also required for runs where third

parties contributed materials at no charge.   In these cases no

cost was assigned to the contributed materials.

     The next exception occurred when materials used to produce

the manufactured product included some quantity of the same

manufactured product that was treated as a work-in-process, such

as recycled materials.   In these cases the material quantity was
                                - 176 -

netted against the production quantity as shown on the lead PCD

and the cost of the work-in-process material was excluded from

the total cost on the PCD.

     Ms. Toivonen calculated the cost of materials used in some

ethylene furnace tests differently.       The MATRIC team did not

provide production quantities for some identified runs performed

on ethylene furnaces because the ethylene was mass produced in

multiple furnaces.   In those cases, Ms. Toivonen calculated an

hourly production rate for one furnace and multiplied the rate by

the run duration as shown on the MATRIC table of identified runs.

     Another exception was necessary when the PCDs for certain PE

products made at Seadrift did not specify a nomenclatured resin

but instead identified a generic “fluff” product.       To identify

the correct lead PCD for runs making these products, Ms. Toivonen

used run-specific information such as the unit, density,

comonomer, catalyst, and cocatalyst.       Where there were multiple

PCDs involving fluff resins with run-specific characteristics,

Ms. Toivonen calculated a weighted average per-unit cost for the

identified run from the PCDs.

     Ms. Toivonen made an exception for the Oxo-12 LPO vaporizer

capacity test (run 193) because the lead PCD reflected three

manufactured products with two different units of measure.       In

addition, one manufactured product had a work-in-process material

adjustment.   Calculating a per-unit cost for the relevant
                               - 177 -

manufactured product required the quantity of the relevant

product to be isolated on the PCD as a production quantity.      One

of the other manufactured products had to be recategorized as a

byproduct, and the other had to be netted as a work-in-process

material adjustment.

       Ms. Toivonen also made an exception for identified runs

where the lead PCD reported significant negative material

quantities, resulting in a negative per-unit material cost.      A

negative per unit material cost was typically the result of UCC’s

reclassification of a material or some other adjustment.    Ms.

Toivonen corrected these quantities based on the forecasted

contribution of the material to the standard cost shown on the

PCD.

       The next exception was for the crystal products business.

UCC accounting records were not available for the crystal

products business in Washougal, which was sold in the late 1990s.

Accordingly, Ms. Toivonen and the E&Y team did not compute the

cost of plant-based R&D activities for this business.    The MATRIC

team estimated that the cost of the identified runs conducted as

part of the crystal products business (runs 687 through 691) was

$472,000 per year.

       Ms. Toivonen also used a different methodology for the runs

conducted by Rohm & Haas before UCC acquired the Triton assets.

Ms. Toivonen and the E&Y team determined material and labor costs
                                  - 178 -

for the runs using Rohm & Haas documentation and made adjustments

based on the Consumer Price Index, as published by the U.S.

Department of Labor, Bureau of Labor Statistics.

     The last exception was for identified runs where the table

of identified runs did not report any production for the run.

For those runs Ms. Toivonen obtained the materials and quantities

consumed from the MATRIC team and then used the general costing

methodology discussed above.

     C.     Ms. Toivonen’s Conclusions

     Ms. Toivonen concluded that, in her opinion, the total cost

of all of the identified runs (the initial 793 identified runs

and runs 807 through 820) for each base period year was as

follows:

                                      Cost of
                        Year      Identified Runs
                        1984        $17,433,643
                        1985         22,837,583
                        1986         38,870,319
                        1987         22,396,571
                        1988         33,574,796
                          Total     135,112,912

     D.     Disputed Calculations

     The parties dispute Ms. Toivonen’s calculations of the

following runs.38     Accordingly, we discuss them below.


     38
          Respondent also questions Ms. Toivonen’s reliance on Dr.
                                                       (continued...)
                               - 179 -

          1.   Acrolein Refining System Capacity Test (Run
               128)

     Dr. Wadia determined that UCC produced 1.8 million pounds of

product in the acrolein refining system capacity test (run 128).

However, Ms. Toivonen treated the production quantity as 90,000

pounds.   Ms. Toivonen determined that the unit cost per pound was

$0.16588 and accordingly calculated the total run material cost

to be $14,929.27.    Had Ms. Toivonen treated the run production

quantity as 1.8 million pounds, the total run material cost would

have been $298,584, a difference of $283,654.73.    Ms. Toivonen

testified that the discrepancy might be attributable to a unit of

measure conversion, but she did not explain the discrepancy in

her expert report.

          2.   Propyl Dipropasol Refining Test (Run 171)

     Dr. Wadia listed sodium hydroxide as the catalyst for the

propyl dipropasol refining test (run 171) on the table of

identified runs.    However, the PCD that Ms. Toivonen used to cost

the run does not reference sodium hydroxide.    Instead, the PCD

lists sodium propylate as a raw material.    Accordingly, Ms.

Toivonen calculated the cost of sodium propylate instead of

sodium hydroxide when costing the run.




     38
      (...continued)
Wadia’s determinations of the durations and production quantity
for the runs discussed in sec. IV.B.3.f., above. However,
because we have already discussed the facts relating to those
runs, we need not address them again here.
                               - 180 -

     Ms. Toivonen determined that the unit cost of sodium

propylate for 1988 was $1.04607.   For the cellosolve solvent test

(run 576) Ms. Toivonen determined that the unit cost of sodium

hydroxide pellets in 1985 was $0.2375 per pound.

          3.   Isophorone Mids Conversion Test (Run 173)

     Dr. Wadia listed potassium carbonate as the catalyst for the

isophorone mids conversion test (run 173) on the table of

identified runs.    Because potassium carbonate was not listed on

the lead PCD for this run, Ms. Toivonen did not include the cost

of potassium carbonate when she costed the run.    According to a

project report for the run, UCC used 15 gallons of potassium

carbonate.   Ms. Toivonen determined that potassium carbonate cost

34 cents to 95 cents per pound for other identified runs.

          4.   Secondary Refining System Test (Run 178)

     Dr. Wadia’s report states that part of the secondary

refining system test (run 178) included a 2-day test with a

caustic addition.   However, Ms. Toivonen did not list any caustic

additives as materials used in this run.    The cost of caustic

solutions in other runs ranged from 6 cents to 25 cents per

pound.

          5.   Naphtha-Sulfur Injection Test (Run 807)

     The naphtha-sulfur injection test involved the injection of

naphtha into the production process.     The purpose of the run was

to determine whether the normal diethyl sulfide (DES) injection
                               - 181 -

could be replaced with naphtha in the gas feed to the cracking

furnaces without causing problems to furnace operations or

increasing carbon monoxide levels.

     In costing the naphtha-sulfur injection test Ms. Toivonen

did not include the costs of the equipment required to inject the

naphtha.   The equipment cost approximately $2,500 per furnace.

Ms. Toivonen did not include the costs of the equipment because

she considered those to be capital costs, not supplies or wages.

     Ms. Toivonen also did not calculate the cost of naphtha as a

separate material for the naphtha-sulfur injection test because

the lead PCD did not list naphtha.   However, the cost of the

naphtha may have been captured on a secondary PCD which Ms.

Toivonen used to calculate the costs of materials listed on lead

PCDs.   It is also possible that Ms. Toivonen included the cost of

DES instead of naphtha, although DES is not listed on the lead

PCD as a material used in the production of ethylene.

     Ms. Toivonen determined that the naphtha-sulfur injection

test lasted 35 days.   The technical report for the test, written

on January 20, 1986, states that the test began on December 16,

1985.   Ms. Toivonen allowed 1 day for preparation of the report.

           6.   Methylmercaptopropanal (MMP) Refrigeration
                Tests (Run 810)

     Run 810 consisted of two MMP refrigeration capacity tests.

The first test was designed to evaluate transfer chiller control

at negative 10 degrees Centigrade instead of negative 17 degrees
                                - 182 -

Centigrade as a means to minimize super-cooling, which could

cause MMP to freeze or hydrates to form.     The second test was

designed to estimate the ambient heat gain of the day tanks and

storage tanks as a means to verify assumptions that UCC’s

engineering division used in calculations.

     Ms. Toivonen did not include any utility costs in the cost

of the MMP refrigeration tests.     Ms. Toivonen determined that

utility costs should not be included in the cost of the run

because Ms. Hinojosa generally excluded utility costs unless they

were extraordinary.     Ms. Hinojosa found utility costs to be

extraordinary only in the production of ethylene.     Accordingly,

Ms. Toivonen considered electricity to be an extraordinary cost

only when a run involved the production of ethylene.     In other

situations, Ms. Toivonen did not calculate the cost of

electricity because it was not captured in UCC’s accounting

records.     Accordingly, Ms. Toivonen had no basis for determining

whether the cost of electricity was extraordinary.

                                OPINION

     The research credit was introduced with the enactment of the

Economic Recovery Tax Act of 1981, Pub. L. 97-34, sec. 221(a), 95

Stat. 241.39     Congress enacted the research credit to “stimulate

a higher rate of capital formation and to increase productivity”,

S. Rept. 97-144, at 76-77 (1981), 1981-2 C.B. 412, 438-439; H.


     39
          The research credit was originally included in sec. 44F.
                               - 183 -

Rept. 97-201, at 111 (1981), 1981-2 C.B. 352, 358, and “to

encourage business firms to perform the research necessary to

increase the innovative qualities and efficiency of the U.S.

economy.”    S. Rept. 99-313, at 694 (1986), 1986-3 C.B. (Vol. 3)

1, 694; H. Rept. 99-426, at 177 (1985), 1986-3 C.B. (Vol. 2) 1,

177.    Congress found research to be essential to America’s

economic progress and competitiveness.    H. Conf. Rept. 100-1104,

at 88 (1988), 1988-3 C.B. 473-578.

       However, in 1986 Congress became concerned that taxpayers

were interpreting the research credit too broadly and that “some

taxpayers * * * claimed the credit for virtually any expenses

relating to product development.”    S. Rept. 99-313, supra at 694-

695, 1986-3 C.B. (Vol. 3) at 694-695; see also H. Rept. 99-426,

supra at 178, 1986-3 C.B. (Vol. 2) at 178.    Therefore, Congress

amended the research credit by the Tax Reform Act of 1986, Pub.

L. 99-514, sec. 231(b), 100 Stat. 2173, to provide a definition

of “qualified research”.

       The research credit was intended to apply to incremental

research and experimental expenditures in order to overcome the

resistence of businesses to bearing the costs that must be

incurred to initiate or expand research programs.    H. Rept. 97-

201, supra at 111, 1981-2 C.B. at 358; see also Staff of Joint

Comm. on Taxation, General Explanation of the Economic Recovery

Tax Act of 1981, at 119-120 (J. Comm. Print 1981) (“The new
                              - 184 -

credit applies only to increases in qualified research

expenditures, in order to encourage enlarged research efforts by

companies which already may be engaged in some research

activities.”).   The goal of the research credit was to encourage

research activity that would not otherwise have been undertaken.

135 Cong. Rec. S13114, S13125 (daily ed. Oct. 12, 1989) (Senate

Finance Committee Report on Title VI, Revenue Reconciliation Act

of 1989, Subtitle A., Extensions of Certain Expiring Tax

Provisions).

     Section 41(a)(1) allows taxpayers a credit against income

taxes in an amount equal to 20 percent of the excess (if any) of

the taxpayer’s QREs for the year over the base amount.40    To

determine the amount of a taxpayer’s QREs, the taxpayer must

determine whether any of its activities constitute “qualified

research” as defined in section 41(d), and then determine which

costs attributable to the qualified research constitute QREs

under section 41(b).   QREs include in-house research expenses and

contract research expenses.   Sec. 41(b)(1).

     The base amount is generally the product of the fixed-base

percentage and the average annual gross receipts of the taxpayer

for the 4 years preceding the credit year.     Sec. 41(c)(2).    The

fixed-base percentage is normally the lesser of 16 percent or the


     40
      Sec. 41(a)(2) does not apply in this case. Sec. 41(a)(3)
was added in 2005. Energy Policy Act of 1985, Pub.L. 109-58,
sec. 1351(a)(1), 119 Stat. 594, 1056.
                                - 185 -

percentage that the aggregate QREs of the taxpayer for the

taxable years beginning in the years 1984 through 1988 (the base

period) is of the aggregate gross receipts of the taxpayer for

those years.   Sec. 41(c)(3)(A).   However, the base amount may not

be less than 50 percent of the QREs for the credit year.     Sec.

41(c)(2).   The parties do not dispute the amount of UCC’s annual

gross receipts for the 4 years preceding the credit years or for

the base period.   Accordingly, we need only determine the amount

of UCC’s additional QREs for the base period to be able to

recalculate the base amount.

     A taxpayer must determine its QREs to be taken into account

in computing its fixed-base percentage “on a basis consistent

with” its determination of QREs for the credit year (the

consistency requirement).   Sec. 41(c)(4).41   Accordingly, the

taxpayer must include the same types of activities from the

credit year and the base period when identifying qualified

research activities and include the same types of costs as QREs

for the credit year and the base period.

     Respondent argues that petitioner has failed to prove that

any of the claim projects constitute qualified research within

the meaning of section 41(d).    Even if some of the claim projects


     41
      In 1996 the consistency requirement was redesignated
subsec. (c)(5). Small Business Job Protection Act of 1996, Pub.
L. 104-188, sec. 1204(c), 110 Stat. 1774. In 2006 the
consistency rule again was redesignated subsec. (c)(6). Tax
Relief and Health Care Act of 2006, Pub. L. 109-432, div. A, sec.
104(c)(1), 120 Stat. 2935.
                              - 186 -

constitute qualified research, respondent also argues that

petitioner has not satisfied the consistency requirement because

it has not proved that it included all similar activities in its

base period computations.   Respondent further argues that even if

petitioner has satisfied these requirements, it has not

established that it incurred any additional QREs not already

taken into account for the credit years because petitioner is

claiming production costs as QREs.   To the extent that petitioner

has incurred additional credit year QREs, respondent argues that

petitioner failed to establish that it used a consistent method

to calculate its revised base period QREs.   Respondent also

argues that petitioner failed to substantiate its credit year and

base period activities, made unreliable assumptions and

estimations to calculate its claimed credits, and asks the Court

to rely on conclusory opinions of its expert.   We address these

arguments in turn.

I.   The Experts

      Both parties rely on expert opinions to support their

arguments.   We evaluate expert opinions in the light of all of

the evidence in the record, and we are not bound by the opinion

of any expert witness.   Helvering v. Natl. Grocery Co., 304 U.S.

282, 295 (1938); Shepherd v. Commissioner, 115 T.C. 376 (2000),

affd. 283 F.3d 1258 (11th Cir. 2002).   We may reject, in whole or
                                  - 187 -

in part, any expert opinion.       Estate of Davis v. Commissioner,

110 T.C. 530, 538 (1998).

     A.   Petitioner’s Expert Witnesses

           1.   Peter Spitz

     Petitioner introduced expert testimony by Peter Spitz

regarding the role of plant-based research.       Mr. Spitz is a

chemical engineer who has written two books on the petrochemical

industry, consulted for petrochemical companies for several

decades, and testified as an expert witness regarding the role of

plant-scale R&D for petrochemicals.

           2.   Gilbert Froment

     Petitioner introduced expert testimony by Gilbert Froment

regarding the Amoco anticoking project.       Dr. Froment is a

professor of chemical engineering at Texas A&M University with

about 50 years of experience teaching and consulting in the field

of thermal cracking for olefins production.       He has written at

least 70 scientific papers dedicated to issues in olefins

production, and several of these papers specifically related to

coke formation and its consequences.        Dr. Froment is a member of

several professional associations and has designed thermal

cracking pilot plants in which he has led studies of coke

formation and its consequences.
                                   - 188 -

            3.    Richard Martin

     Petitioner introduced expert testimony by Richard Martin

regarding the spuds project.        Dr. Martin has over 30 years of

experience developing, designing, and testing combustion

equipment for the refining and petrochemical industries.          Dr.

Martin was previously employed by the John Zink Co. and was

involved in the development and testing of the radiant wall

burners that are currently installed in the furnaces used in

Taft’s Olefins-2 unit.

            4.    Norman Brockmeier

     Petitioner introduced expert testimony by Norman Brockmeier

regarding the UCAT-J commercialization program conducted at Star

in general and the UCAT-J project that took place during the

credit years in particular.        Dr. Brockmeier is a licensed

professional engineer, president of Oakwood Consulting, Inc., and

a Fellow of the AIChE.      He has more than 40 years of industrial

experience.      His specialty is polyolefin process design and

catalysis, and he has many publications and design projects in

this field.

            5.    Ms. Hinojosa

     Ms. Hinojosa, a former cost accountant for UCC and currently

an accountant for Dow, calculated the costs of the supplies and

wages that petitioner claims as QREs in conducting the claim

projects.    At trial Ms. Hinojosa was qualified as an expert in
                                 - 189 -

the accounting systems and documentation employed by UCC during

the credit years and the base period.

            6.   Dr. Wadia

     Dr. Wadia was qualified in the base period trial as an

expert in conducting R&D related to the manufacturing of

chemicals and plastics.      Dr. Wadia has a doctorate of science and

a master’s degree in chemical engineering from the Massachusetts

Institute of Technology.      Dr. Wadia held a variety of technical

and senior management positions in business and corporate R&D,

technology licensing, and engineering over approximately 30 years

with UCC and Dow.

            7.   Ms. Toivonen

     Ms. Toivonen is a certified public accountant and partner

with E&Y.    During the base period trial Ms. Toivonen was

qualified as an expert in accounting.      Ms. Toivonen’s specialty

is forensic accounting, a practice that involves the application

of accounting, auditing, and investigative skills to analyze a

company’s financial records.

     B.   Respondent’s Expert Witnesses

            1.   Roy T. Halle

     Respondent introduced expert testimony by Roy T. Halle

regarding the Amoco anticoking, sodium borohydride, and UOP GA-

155 projects as well as some of the identified runs that occurred

during the base period.      Mr. Halle has over 45 years of
                                - 190 -

experience in the petrochemical and petroleum industries, mostly

in the olefins industry.    For the past 10 years, Mr. Halle has

worked as an independent consultant on olefins manufacturing

process issues.   Mr. Halle is an affiliate of LECG, L.L.C.

(LEGC), in the area of petroleum and petrochemicals.

          2.   M. Julianne McClung

     Respondent introduced expert testimony by M. Julianne

McClung regarding the spuds project.      Ms. McClung, like Mr.

Halle, is an affiliate of LECG.    Ms. McClung has over 11 years of

experience working with the steam-cracking area of an ethylene

plant, during which she was involved in all areas of maintaining,

operating, and designing a steam-cracking furnace.

          3.   Gary Allen

     Respondent introduced expert testimony by Gary Allen

regarding the UCAT-J project.    Dr. Allen is an affiliate of the

petroleum and chemicals practice of LECG.      He has over 30 years

of experience in the chemicals and plastics industry.      Dr. Allen

led the development and commercialization of several different

polymer technologies.    Respondent introduced Dr. Allen as an

expert in scaling up chemical and process technologies to

commercial operations.    While Dr. Allen conceded that he has less

experience with PE, polyolefins, and UNIPOL than petitioner’s

fact witnesses, Dr. Allen has extensive experience scaling up
                               - 191 -

products and processes from laboratories through pilot plants to

commercial manufacturers.

II.   Whether the Claim Projects Constitute Qualified Research

      A.   The Qualified Research Tests

      To be eligible for a credit under section 41(a)(1) a

taxpayer must show that it has performed “qualified research”

during the years at issue.    Sec. 41(a)(1)(A), (b)(2).   To be

qualified research, the research must satisfy four tests.     First,

expenditures connected with the research must be eligible for

treatment as expenses under section 174 (the section 174 test).

Sec. 41(d)(1)(A).    Second, the research must be undertaken for

the purpose of discovering technological information (the

technological information test42).   Sec. 41(d)(1)(B)(i).    Third,


      42
      We have previously called this test the “discovery test”.
See Norwest Corp. & Subs. v Commissioner, 110 T.C. 454, 491
(1998); Eustace v. Commissioner, T.C. Memo. 2001-66, affd. 312
F.3d 905 (7th Cir. 2002). Before the promulgation of sec. 1.41-
4(a)(3)(ii), Income Tax Regs., we held that this test had a
“discovery” component that was to be construed more narrowly than
the discovery test of sec. 174 and required that the taxpayer
discover information that went beyond the current state of
knowledge in the relevant field. Norwest Corp. & Subs. v.
Commissioner, supra at 493; Eustace v. Commissioner, supra.
However, the current regulations provide that “A determination
that research is undertaken for the purpose of discovering
information that is technological in nature does not require the
taxpayer be seeking to obtain information that exceeds, expands
or refines the common knowledge of skilled professionals in the
particular field of science or engineering in which the taxpayer
is performing the research.” While these regulations apply to
years ending on or after Dec. 31, 2003, sec. 1.41-4(e), Income
Tax Regs., respondent has taken the position that he will not
challenge return positions that are consistent with these final
regulations and therefore that the current regulation should
                                                   (continued...)
                              - 192 -

the taxpayer must intend that the information to be discovered

will be useful in the development of a new or improved business

component of the taxpayer (the business component test).   Sec.

41(d)(1)(B)(ii).   Fourth, substantially all of the research

activities must constitute elements of a process of

experimentation for a purpose relating to a new or improved

function, performance, reliability, or quality (the process of

experimentation test).   Sec. 41(d)(1)(C), (3).

     The Department of the Treasury (Treasury) and the Internal

Revenue Service (IRS) promulgated regulations to clarify the

definition of “qualified research” under section 41(d) that are

effective for taxable years ending on or after December 31, 2003.

Because the Treasury Decision implementing these regulations

states that “the IRS will not challenge return positions that are

consistent with these final regulations” for taxable years ending

before the effective date of this regulation, T.D. 9104, 2004-1

C.B. 406, 410, and respondent conceded that petitioner may rely

on the current regulations, we will not hold petitioner to a

higher standard than the regulations require.




     42
      (...continued)
govern the outcome of this case, see T.D. 9104, 2004-1 C.B. 406,
410. Accordingly, respondent concedes that petitioner satisfies
the “technological in nature” test as long as the information
sought to be discovered is in fact technological, and we accept
this concession. In light of the change to the test, we find
that it is more appropriate to refer to this test as the
“technological information test”.
                                  - 193 -

     The above tests are applied separately to each business

component.    Sec. 41(d)(2)(A).    A “business component” includes,

in pertinent part, a product or process that the taxpayer either

holds for sale, lease, or license or uses in its trade or

business.    Sec. 41(d)(2)(B).    In the case of a production

process, section 41(d)(2)(C) provides that “Any plant process,

machinery, or technique for commercial production of a business

component shall be treated as a separate business component (and

not as part of the business component being produced).”

     The claim projects all relate to UCC’s processes for

commercial production of ethylene, PE, or related products.

Accordingly, each of the claim projects includes two business

components:    (1) The production process and (2) the product being

produced.    Petitioner argues that for each claim project it is

one of UCC’s processes, not the product produced, that is the

relevant business component.      Therefore, in order to analyze the

discrete business components at issue, for each project we must

separate the activities that relate to the improvement of the

production process from the activities that relate to the product

being produced.    Sec. 1.41-4(b)(1), Income Tax Regs.    The fact

that activities that relate to the product being produced do not

satisfy the qualified research tests of section 41(d) will have

no impact on whether the activities that relate to the

improvement of the production process satisfy those tests.
                                - 194 -

     If a business component as a whole fails the qualified

research tests, we may apply the “shrinking-back rule”, which

allows us to apply the qualified research tests to subsets of the

business component if doing so will allow the subset to satisfy

those tests.     Sec. 1.41-4(b)(2), Income Tax Regs.   The shrinking-

back rule provides that if the qualified research tests are not

satisfied at the level of the discrete business component, they

are then applied to the most significant subset of elements of

the business component.     The shrinking-back continues until

either a subset of the business component satisfies the tests or

the most basic element of the business component is reached and

fails to satisfy the tests.     The shrinking-back rule applies only

if the overall business component does not satisfy the qualified

research tests set out in section 41(d)(1) and is not itself a

reason to exclude activities from credit eligibility.      Id.

            1.   The Section 174 Test

     The section 174 test requires that expenditures connected

with the research activities must be eligible for treatment as

expenses under section 174.     Section 174 provides alternative

methods of accounting for “research or experimental expenditures”

that taxpayers would otherwise capitalize.     Sec. 1.174-1, Income

Tax Regs.    The regulations define “research or experimental

expenditures” as “expenditures incurred in connection with the

taxpayer’s trade or business which represent research and
                              - 195 -

development costs in the experimental or laboratory sense.”      Sec.

1.174-2(a)(1), Income Tax Regs.43   The parties do not dispute

that costs of the claim projects were incurred in connection with

UCC’s trade or business.   As relevant here, an activity is

“research and development * * * in the experimental or laboratory

sense” if:   (1) The information available to the taxpayer does

not establish the capability or method for developing or

improving a product or process or the appropriate design of a

product or process (i.e., an uncertainty exists); and (2) the

activity is intended to discover information that would eliminate

this uncertainty.   Sec. 1.174-2(a)(1) and (2), Income Tax Regs.

Because the taxpayer need only be uncertain as to “the capability

or method * * * or the appropriate design” of the improvement, an

uncertainty may exist even if the taxpayer knows that it is

technically possible to achieve a goal but is uncertain of the

method or appropriate design to use to reach that goal.    Sec.

1.174-2(a)(1), Income Tax Regs. (emphasis added).   Whether an



     43
      While the current version of these regulations applies to
years beginning after Oct. 3, 1994, the Treasury Decision
accompanying the current regulations states: “Because the
amendments merely clarify the existing definition of research or
experimental expenditures, retroactive application of the
amendments is unnecessary. Return positions consistent with the
amendments will be consistent with the existing regulations and
will be recognized as such by the IRS.” T.D. 8562, 1994-2 C.B.
30, 31. Respondent concedes that petitioner may rely on the
current version of the regulations to determine whether the claim
projects carried out in 1994 constitute qualified research.
                               - 196 -

uncertainty exists is an objective test that depends on the

information available to the taxpayer.     See Mayrath v.

Commissioner, 41 T.C. 582, 590-591 (1964), affd. 357 F.2d 209

(5th Cir. 1966).    These guidelines apply to the nature of the

activity examined, not the nature of or the level of

technological advancement represented by the product or process.

Sec. 1.174-2(a)(1) and (2), Income Tax Regs.

     However, deductions are allowed under section 174 only to

the extent that they are reasonable.     Sec. 174(e).   Furthermore,

deductions under section 174 are limited to “expenditures of an

investigative nature expended in developing the concept of a

model or product”, as opposed to the construction or manufacture

of the product itself.    Mayrath v. Commissioner, supra at 590;

Glassley v. Commissioner, T.C. Memo. 1996-206; Kollsman

Instrument Corp. v. Commissioner, T.C. Memo. 1986-66, affd. 870

F.2d 89 (2d Cir. 1989).   Therefore, if a project involves both

the development of the concept of a new or improved process and

the use of the process in production, only the activities related

to the development of the concept of the process satisfy the

section 174 test.

     The regulations under section 174 exclude expenditures for

certain activities, including, as relevant here, the ordinary

testing or inspection of materials, products, or processes for

quality control (quality control testing).     Sec. 1.174-2(a)(2)
                               - 197 -

and (3), Income Tax Regs.    Quality control testing includes

testing or inspecting to determine whether particular units of

materials, products, or processes conform to specified

parameters.    Sec. 1.174-2(a)(2) and (3), Income Tax Regs.

However, quality control testing does not include testing to

determine whether the design of the product or process is

appropriate.    Sec. 1.174-2(a)(2), (3), and (4), Income Tax Regs.

     Because section 174 refers to research and experimental

expenditures, not research and experimental activities, we

interpret section 41(d)(1)(A) as requiring only that qualified

research activities constitute research and development within

the meaning of section 174.    However, as discussed below, to

determine which costs of those activities constitute QREs under

section 41(b), the reference to section 174 in section

41(d)(1)(A) requires us to consider whether those costs may be

treated as expenses under section 174.    See Norwest Corp. & Subs.

v. Commissioner, 110 T.C. 454, 491 (1998).

          2.    The Technological Information Test

     The technological information test requires that the

research be undertaken for the purpose of discovering information

that is “technological in nature”.    Sec. 41(d)(1)(B)(i).

Information is “technological in nature” if it “fundamentally

relies on principles of the physical or biological sciences,

engineering, or computer science”.    H. Conf. Rept. 99-841 (Vol.
                                - 198 -

II), at II-71 through II-72 (1986), 1986-3 C.B. (Vol. 4) 1, 71-

72.   Therefore, discovery of information related to the social

sciences, arts, or humanities would not satisfy this test.

Norwest Corp. & Subs. v. Commissioner, supra at 492.

            3.   The Business Component Test

      The business component test requires that the taxpayer

intend that the information to be discovered be useful in the

development of a new or improved business component of the

taxpayer.    Sec. 41(d)(1)(B)(ii).   To be useful within the meaning

of this test, the research need only provide some level of

functional improvement to the taxpayer.        Norwest Corp. & Subs. v.

Commissioner, supra at 495.

            4.   The Process of Experimentation Test

      The process of experimentation test has three elements:        (1)

Substantially all of the research activities must constitute (2)

elements of a process of experimentation (3) for a qualified

purpose.    Sec. 41(d)(1)(C).

      The “substantially all” element means that 80 percent or

more of the taxpayer’s research activities for each business

component, measured on a cost or other consistently applied

reasonable basis, must constitute a process of experimentation

for a qualified purpose.     Norwest Corp. & Subs. v. Commissioner,

supra at 497; sec. 1.41-4(a)(6), Income Tax Regs.       A taxpayer

does not fail this requirement even if the remaining 20 percent
                               - 199 -

(or less) of its research activities with respect to the business

component do not constitute elements of a process of

experimentation for a purpose described in section 41(d)(3) as

long as the remaining research activities satisfy the

requirements of section 41(d)(1)(A) (the section 174 test) and

are not otherwise excluded under section 41(d)(4).    Sec. 1.41-

4(a)(6), Income Tax Regs.   If a business component fails the

process of experimentation test because of the “substantially

all” requirement, the taxpayer may apply the shrinking-back rule,

discussed above, until an element that satisfies the test is

reached.   Norwest Corp. & Subs. v. Commissioner, supra at 497.

     A process of experimentation is “a process designed to

evaluate one or more alternatives to achieve a result where the

capability or the method of achieving that result, or the

appropriate design of that result, is uncertain as of the

beginning of the taxpayer’s research activities.”    Sec. 1.41-

4(a)(5)(i), Income Tax Regs.   The “uncertainty” element of this

test is essentially the same uncertainty as is required by the

section 174 test,44 and the test may be satisfied even if the

taxpayer is certain of either the capability or method of

achieving the desired goal if the appropriate design of the

desired result is uncertain at the outset.   Sec. 1.41-4(a)(5)(i),


     44
      Sec. 1.174-2(a)(1), Income Tax Regs., provides that
“Uncertainty exists if the information available to the taxpayer
does not establish the capability or method for developing or
improving the product or the appropriate design of the product.”
                              - 200 -

Income Tax Regs.; cf. Norwest Corp. & Subs. v. Commissioner,

supra at 496.45

     However, this test also imposes a more structured method of

discovering information than section 174 requires and may not

include all actions a taxpayer takes to resolve uncertainty.    See

Norwest Corp. & Subs. v. Commissioner, supra at 496; see also

Eustace v. Commissioner, 312 F.3d 905, 907 (7th Cir. 2002), affg.

T.C. Memo. 2001-66.   The process of experimentation test was

added to section 41 because Congress was concerned that taxpayers

had been claiming the credit “for virtually any expenses relating

to product development” as opposed to high technology.     S. Rept.

99-313, supra at 694-695, 1986-3 C.B. (Vol. 3) at 694-695; see

also H. Rept. 99-426, supra at 178, 1986-3 C.B. (Vol. 2) at 178.

The process of experimentation test is not necessarily satisfied

just because a taxpayer takes steps to improve a business

component.   The legislative history explains:

          The term process of experimentation means a
     process involving the evaluation of more than one
     alternative designed to achieve a result where the
     means of achieving that result is uncertain at the
     outset. This may involve developing one or more
     hypotheses, testing and analyzing those hypotheses
     (through, for example, modeling or simulation), and
     refining or discarding the hypotheses as part of a
     sequential design process to develop the overall
     component.




     45
      As discussed above, we shall apply the more generous rule
of the final regulations where it differs from our prior
holdings.
                              - 201 -

          Thus, for example, costs of developing a new or
     improved business component are not eligible for the
     credit if the method of reaching the desired objective
     (the new or improved product characteristics) is
     readily discernible and applicable as of the beginning
     of the research activities, so that true
     experimentation in the scientific or laboratory sense
     would not have to be undertaken to develop, test, and
     choose among viable alternatives. On the other hand,
     costs of experiments undertaken by chemists or
     physicians in developing and testing a new drug are
     eligible for the credit because the researchers are
     engaged in scientific experimentation. Similarly,
     engineers who design a new computer system, or who
     design improved or new integrated circuits for use in
     computer or other electronic products, are engaged in
     qualified research because the design of those items is
     uncertain at the outset and can only be determined
     through a process of experimentation relating to
     specific design hypotheses and decisions as described
     above. [H. Conf. Rept. 99-841 (Vol. II), supra at II-
     72, 1986-3 C.B. (Vol. 4) at 72.]

This requires the use of the scientific method sense, not merely

taking steps to resolve uncertainty or to improve a product.   See

Black’s Law Dictionary (8th ed. 2004) (defining the “scientific

method” as “An analytical technique by which a hypothesis is

formulated and then systematically tested through observation and

experimentation.”).   To satisfy the process of experimentation

test, the taxpayer should develop a hypothesis as to how a new

alternative might be used to develop a business component, test

that hypothesis in a scientific manner, analyze the results of

the test, and then either refine the hypothesis or discard it and

develop a new hypothesis and repeat the previous steps.

     It is not sufficient that the taxpayer use a method of

simple trial and error to validate that a process or product
                              - 202 -

change meets the taxpayer’s needs.   See id.   While the

Commissioner concedes in the regulations that a “systematic trial

and error methodology” can be a process of experimentation, sec.

1.41-4(a)(5)(i), Income Tax Regs., the term “systematic” suggests

that the project must involve a methodical plan involving a

series of trials to test a hypothesis, analyze the data, refine

the hypothesis, and retest the hypothesis so that it constitutes

experimentation in the scientific sense.   Testing and refining a

hypothesis may involve determining the strengths and weakness of

the alternative tested, whether and how the process could be

further refined and improved, and whether other alternatives

might be better suited for achieving the taxpayer’s goal.   While

the process of experimentation need identify only one

alternative, it generally should be capable of evaluating more

than one alternative.   Sec. 1.41-4(a)(5)(i), Income Tax Regs.   If

only one alternative is tested, for that alternative to

constitute a process of experimentation the taxpayer should

conduct a series of experiments with the alternative in order to

develop the business component.   See H. Conf. Rept. 99-841 (Vol.

II), supra at II-72, 1986-3 C.B. (Vol. 4) at 72.

     In response to commentary that “in the industrial or

commercial setting, the recording of results is not necessarily

inherent in a bona fide process of experimentation”, Treasury and

the IRS acknowledged that the regulations in place during the
                                - 203 -

years at issue did not impose any rules regarding the recording

of experiment results.    T.D. 8930, 2001-1 C.B. 433, 437.

However, even if the results are not actually recorded, the

taxpayer should perform a sufficient analysis of the alternative

tested so that the taxpayer could meaningfully compare one

alternative to another.    Furthermore, section 1.41-4(d), Income

Tax Regs., requires a taxpayer to “retain records in sufficiently

usable form and detail to substantiate that the expenditures

claimed are eligible for the credit.”

     The qualified purposes are purposes relating to a new or

improved function, performance, reliability, or quality.      Sec.

41(d)(3).    By contrast, style, taste, cosmetic, or seasonal

design factors are not qualified purposes.     Sec. 41(d)(3)(B).

            5.   Activities That Are Not Qualified Research

     Section 41(d)(4) lists certain activities that do not

constitute qualified research, including, as relevant here:       (1)

Research after commercial production, (2) routine data

collection, (3) foreign research, and (4) funded research.

     Research conducted after the beginning of commercial

production is not qualified research.     Sec. 41(d)(4)(A).   A

business component is ready for commercial production when it is

developed to the point where it:    (1) Meets the basic functional

and economic requirements of the taxpayer; or (2) is ready for

commercial sale or use.    H. Conf. Rept. 99-841 (Vol. II), supra
                                - 204 -

at II-74, 1986-3 C.B. (Vol. 4) at 74.     Typical examples of

activities conducted after commercial production include:       (1)

Preproduction planning for a finished business component; (2)

tooling-up for production; (3) trial production runs; (4)

trouble-shooting involving detecting faults in production

equipment or processes; (5) accumulation of data relating to

production processes; and (6) debugging product flaws.        Id. at

II-74 through II-75, 1986-3 C.B. (Vol. 4) at 74-75.     The

exclusion for research after commercial production applies

separately to the activities relating to the development of the

product and the activities relating to the development of the

process.    Sec. 1.41-4(c)(2)(iii), Income Tax Regs.   Therefore,

even after a product is ready for commercial sale, activities

relating to the development of the manufacturing process may

constitute qualified research.

     Funded research refers to research to the extent it is

funded by any grant, contract, or otherwise by another person or

governmental entity.    Sec. 41(d)(4)(H).

     B.    The Claim Projects

            1.   Plant-Based Research

     All of the claim projects took place at UCC’s manufacturing

plants during the production process.     Petitioner argues that as

a general matter, plant-based research can be “qualified

research”.    Mr. Spitz, one of petitioner’s expert witnesses,
                              - 205 -

testified that petrochemical chemical companies carry out plant-

scale R&D for many reasons, such as developing new process

technologies and products, enhancing the performance of existing

process technologies and products, and attempting to resolve

operational problems.   Mr. Spitz believes that it is essential

for petrochemical companies to conduct research at commercial

plants to obtain meaningful test data.   In Mr. Spitz’s opinion,

experiments conducted in laboratories or pilot plants cannot

simply be “scaled-up” to full-sized plants without additional

testing because of the differences in size, dimensions, and fluid

dynamics of plant equipment and the inherent unpredictability of

chemical reactions and chemical plant operations.

     Petitioner argues that making plant-based research eligible

for the research credit comports with Congress’ intent to promote

business research in order to spur economic growth.    Furthermore,

petitioner argues that Congress could not have intended to

foreclose availability of the credit for research that is helpful

to a taxpayer’s trade or business because the research was

conducted in a plant environment and the research resulted in

salable products.

     Respondent agrees that plant-based research satisfying

section 41(d) is eligible for the research credit.    However,

respondent argues that all of the claim projects fail the

qualified research tests because the activities involved in the
                                - 206 -

claim projects were primarily production activities, not

investigative activities related to developing the concept of the

process, and therefore fail the section 174 test under Mayrath v.

Commissioner, 41 T.C. at 590.    Respondent argues that the claim

projects also fail the section 174 test because they were

designed to produce products for sale, not to eliminate any

uncertainties.   Furthermore, respondent argues that all of the

claim projects fail the process of experimentation test because

substantially all of the activities for which petitioner is

claiming QREs constituted production activities, not elements of

a process of experimentation.    Respondent also argues that the

claim projects involve research after the beginning of commercial

production and therefore are excluded under section 41(d)(4)(A).

     Petitioner argues that respondent incorrectly identified the

end products produced by UCC, not the techniques and processes

UCC employed to produce those products, as the “business

component” to which the research relates.    While the products

produced during the claim projects already met UCC’s basic

functional and economic requirements, petitioner argues that the

processes were still experimental and had not yet been proven.

     As discussed above, under section 41(d)(2)(C) plant

processes for commercial production are treated as a separate

business component from the product being produced.    Accordingly,

where a taxpayer seeks research credits for plant processes but
                              - 207 -

not for the products produced, we apply the qualified research

tests only to activities related to the development of the

process without taking into account the activities related to the

production or development of the product.     Sec. 1.41-4(b)(1),

Income Tax Regs.   While each of the claim projects in its

entirety necessarily involves production activities because the

goal of each of the claim projects was to improve UCC’s

production process, we find that for each of the claim projects

there are two business components:   (1) A process business

component and (2) a product business component.     The activities

that relate primarily to the improvement of UCC’s processes are

part of the process business component, and the activities that

relate primarily to the production of products are part of the

product business component.   Therefore, respondent’s arguments

that petitioner’s production activities do not satisfy the

section 174 test or the process of experimentation test have no

bearing on whether the activities that relate primarily to the

development of UCC’s processes satisfy the qualified research

tests.

          2.   The Amoco Anticoking Project

     Petitioner claims that the Amoco anticoking project

constitutes qualified research and the specific business

component at issue is the olefins production process.     As

discussed above, under section 41(d)(2)(C) and section 1.41-
                               - 208 -

4(b)(1), Income Tax Regs., we find that only activities that

relate to the improvement of UCC’s olefins production process,

not production activities, are part of this business component.

                a.   The Section 174 Test

     In the opinion of Dr. Froment, one of petitioner’s expert

witnesses, the Amoco anticoking project was designed to eliminate

several uncertainties, in particular whether the pretreatment

would:   (1) Inhibit, reduce, or increase coke formation; (2)

extend run lengths between furnace turnarounds; and/or (3)

adversely affect the downstream manufacturing processes or

properties of finished olefins products.    While the Amoco

technology had shown promise in tests in laboratories and pilot

plants, petitioner argues that UCC believed that it had not yet

been proven and UCC was unsure whether it would work on its

commercial-scale ethylene furnaces.

     Respondent argues that the Amoco anticoking project fails

the section 174 test because petitioner did not show that UCC

undertook the project for the purpose of eliminating an

uncertainty.   Respondent argues that UCC believed that the Amoco

technology’s capabilities were already well established because

Amoco told UCC that its technology had been successfully tested

in two commercial plants.    Accordingly, respondent believes that

UCC was merely testing the Amoco technology to validate that it

worked as Amoco claimed.    Respondent argues that UCC did not
                               - 209 -

realize that Amoco’s technology was still developmental until

just before it abandoned the project.

     Petitioner argues that the technology was promising but far

from proven.    There is some conflicting evidence in the record as

to how well established UCC believed Amoco’s technology to be at

the time it agreed to test the technology.46   However, it is

clear that neither UCC nor Amoco regarded the technology as

proven or established to the point where it could be licensed

commercially.   The fact that Amoco applied the treatment at no

cost to UCC supports petitioner’s argument that the technology

was not fully established.   When UCC decided to undertake the

Amoco anticoking project, the information available did not

establish that Amoco’s technology was capable of preventing or

reducing coking on UCC’s furnaces.   See sec. 1.174-2(a)(1),

Income Tax Regs.

     Section 174 does not require that the technology be in the

very beginning stages of development, only that the taxpayer be

uncertain as to whether the technology will improve its product

or process.    The record supports petitioner’s argument that UCC

was uncertain as to whether the Amoco anticoking technology would

work in UCC’s facilities.    Therefore, we find that at the time of


     46
      Dr. Milks testified that he believed that the Amoco
technology was experimental and definitely not proven. Jack
Marchio, the technology manager for hydrocarbons R&D at the South
Charleston technical center, testified that he thought the Amoco
technology was established technology.
                              - 210 -

the test UCC was uncertain as to whether coke formation could be

reduced in its commercial facility and, if so, whether Amoco’s

technology would reduce it.

     Respondent also argues that the Amoco anticoking project is

not qualified research because it does not satisfy the test of

Mayrath v. Commissioner, 41 T.C. at 590.   Respondent argues that

most of the claimed costs associated with the Amoco anticoking

project relate primarily to production activities, not the

development of the concept of the Amoco anticoking technology.

     We agree with respondent that many of the activities

involved in the Amoco anticoking project did not relate to the

development of the concept of using the Amoco technology to

reduce coke formation but instead constituted production

activities, such as the basic operation of furnace 24 and all

downstream activities.   These production activities relate

primarily to the production of ethylene, not the improvement of

UCC’s production process.   Accordingly, they are part of the

product business component, not the process business component at

issue, and do not affect our analysis.   To the extent that

petitioner has included production activities as part of the

business component, we may apply the shrinking-back rule and

apply the qualified research tests to the most significant subset

of elements of the process that satisfies the qualified research

tests, which we find to be the subset of activities that relate
                                 - 211 -

primarily to the testing of the Amoco technology.     See sec. 1.41-

4(b)(2), Income Tax Regs.

     We find that the following activities relate primarily to

the testing of the Amoco technology and are therefore the focus

of our inquiry:    (1) Reviewing research of prior testing of the

Amoco technology; (2) preparing a test plan; (3) designating

reference and experimental cracking sets; (4) preparing for the

test; (5) applying the pretreatment; (6) collecting test data;

(7) analyzing the data; (8) forming of a conclusion; (9) refining

the hypothesis; and (10) repeating steps 4 through 8 for the

refined hypothesis (collectively, Amoco anticoking research

activities).   We find that these activities related to the

development of the concept of using the Amoco anticoking

technology and therefore are not excluded under Mayrath.

Accordingly, the Amoco anticoking research activities, as defined

above, satisfy the section 174 test.

                  b.   The Technological Information Test

     Petitioner argues that the Amoco anticoking project

satisfies the technological information test because the

information it sought to discover was based on organic chemistry,

chemical engineering, and other sciences.     We agree that the

Amoco anticoking research activities satisfy this test.
                               - 212 -

                c.   The Business Component Test

     Petitioner argues that the Amoco anticoking project

satisfies the business component test because it was designed to

improve the performance of its olefins production processes by

reducing coke formation.   We agree that the Amoco anticoking

research activities, as defined in part a., satisfy this test.

                d.   Process of Experimentation Test

     In the opinion of Dr. Froment, the Amoco anticoking project

consisted of a process of experimentation in the scientific sense

because UCC:   (1) Researched and considered a variety of

anticoking technologies; (2) developed and implemented a detailed

test plan by designating reference versus experimental cracking

sets, applying the pretreatment, and recording test data; (3)

analyzed the results; (4) refined the process after results from

the first test were not satisfactory; (5) retested the product;

and (6) drew a conclusion.   Petitioner argues that substantially

all of the activities involved in the Amoco anticoking project

were part of this process of experimentation and that the project

was conducted for a qualified purpose--the evaluation of whether

the Amoco pretreatment would improve the olefins production

process by inhibiting coke formation.

     Respondent argues that UCC’s activities did not constitute a

process of experimentation because UCC was merely validating

Amoco’s claim that the technology worked.
                              - 213 -

      We find that the Amoco anticoking research activities

constitute a process of experimentation.    UCC did not merely

determine whether the Amoco technology inhibited coke formation

but instead collected and analyzed data that could be used to

compare the technology with alternatives.    When the first

pretreatment proved to be unsuccessful, UCC considered that the

problem might have been the fact that the pretreatment was

applied over coke remaining after a hot decoke.    UCC refined the

process by applying the second pretreatment to the furnace after

a cold turnaround.   After UCC applied the second pretreatment in

April 1995, it continued to collect and analyze data until August

1995, and it used the data analysis to evaluate the technology.

While UCC did not continue to refine its hypothesis as to the

effectiveness of the Amoco technology and test it for four

consecutive furnace cycles as it had planned, satisfaction of the

process of experimentation test does not require a taxpayer to

continue testing a hypothesis that has no possibility of success.

Such a requirement would be contrary to the purpose of section

41.   Accordingly, we find that UCC used a process of

experimentation to evaluate the Amoco technology and did not

merely change its process and decide whether the change satisfied

its basic needs.

      Petitioner argues that this project was undertaken for a

qualified purpose–-to evaluate the efficiency of the Amoco
                                - 214 -

technology at inhibiting coke formation in order to improve the

function, reliability, and performance of the ethylene production

process.   Successful coke inhibition would have resulted in

significantly longer furnace runs, reduced maintenance, longer

equipment life, and increased ethylene productivity, yielding

significant cost savings and increased profits.    We agree that

this was a qualified purpose.

     Respondent counters that even if the Amoco anticoking

project exhibits some characteristics of research, it fails the

“substantially all” test.   See Norwest Corp. & Subs. v.

Commissioner, 110 T.C. at 497.    Respondent argues that

substantially all of the activities for which petitioner is

claiming QREs do not constitute elements of a process of

experimentation but instead constitute production activities.

     We agree that the ordinary production activities that would

have occurred even if UCC was not conducting an experiment do not

constitute elements of a process of experimentation.    However, as

discussed above with regard to the section 174 test, we find that

the qualified research tests should be applied solely to the

Amoco anticoking research activities.     Accordingly, we consider

only whether these activities satisfy the process of

experimentation test.   We find that when we limit the project to

only the Amoco anticoking research activities, “substantially
                                - 215 -

all” of those activities satisfy the process of experimentation

test.

     Respondent argues that even if the Amoco anticoking project

satisfies the qualified research tests, it is excluded from the

definition of qualified research because it constitutes funded

research, research after commercial production, or data

collection and routine testing.

                e.   Funded Research

     Section 41(d)(4)(H) provides that research is not qualified

research “to the extent funded by any grant, contract, or

otherwise by another person”.    The evidence shows that Amoco and

UCC each paid their own costs during the Amoco anticoking

project.   While Amoco covered the cost of applying the

pretreatment and was contractually obligated to pay for any

overtime worked by UCC employees, petitioner did not include any

of these costs in its QRE calculations.

     Respondent argues that under section 1.41-4A(d)(2), Income

Tax Regs., as made applicable by section 1.41-4(c)(9), Income Tax

Regs., research is treated as fully funded “If a taxpayer

performing research for another person retains no substantial

rights in research under the agreement providing for the

research”.   Furthermore, under section 1.41-4A(d)(3), Income Tax

Regs., “A taxpayer does not retain substantial rights in the
                               - 216 -

research if the taxpayer must pay for the right to use the

results of the research.”

     However, petitioner is not seeking credit for research

conducted for the benefit of Amoco or that Amoco would purchase

from UCC.   It would clearly violate Congress’s intent in enacting

section 41 if a taxpayer could seek a tax credit for research

that it did not ultimately pay for.      Petitioner is also not

seeking credit for the costs that Amoco incurred to develop the

technology.   Petitioner is seeking credit for research that UCC

performed for its own benefit and at its own cost.     While UCC did

not gain any rights to Amoco’s technology by conducting the Amoco

anticoking project, UCC retained all rights to its own research.

Petitioner produced credible evidence at trial that the

information that UCC gained during the Amoco anticoking project

was valuable regardless of whether it licensed Amoco’s technology

or not.   Accordingly, we find that the Amoco anticoking research

activities do not constitute funded research.

                f.   Research After Commercial Production

     Respondent argues that the Amoco anticoking project is

research after commercial production because UCC’s olefins

process already met its functional and economic requirements.

Respondent points out that the Amoco anticoking project did not

disrupt UCC’s normal production process and resulted in a salable
                                - 217 -

product.   Respondent argues that UCC was simply tweaking its

existing process.

     Petitioner argues that the Amoco anticoking project was not

merely research after commercial production but was a process of

experimentation that UCC had to conduct before deciding whether

to license Amoco’s technology.    As discussed above, it is only

the Amoco anticoking research activities that we must examine,

not UCC’s entire olefins process, which we agree already met

UCC’s basic functional and economic requirements and was used

commercially.   We conclude that the Amoco technology was not yet

ready for commercial use at the time UCC undertook the Amoco

anticoking project.    The fact that Amoco’s technology ultimately

failed is a clear indication that it did not meet UCC’s needs.

Petitioner further argues that the Amoco anticoking project was

not a “trial production run” because it was conducted before the

potential process improvement, the Amoco technology, was

satisfactorily tested and proven.    We agree with petitioner that

the Amoco anticoking research activities were not merely research

after commercial production and are not excluded from the

definition of qualified research by section 41(d)(4)(A).

                g.    Data Collection and Routine Testing

     Respondent next argues that the Amoco anticoking project is

specifically excluded from the definition of qualified research

because it constitutes routine data collection, routine or
                              - 218 -

ordinary testing, or inspection for quality control.    Respondent

argues that after the initial results from the first pretreatment

suggested failure, the activities occurring during the remaining

period were primarily the accumulation of data.    Respondent

points out that some of the data that UCC collected were

routinely collected in its normal operations and was available to

UCC regardless of whether a test were being conducted.

     Petitioner counters that during the Amoco anticoking project

UCC collected some data that it did not normally measure and took

other measurements more frequently than it normally took them.

Furthermore, petitioner points out that UCC analyzed the

collected data, which UCC did not normally do.    While UCC did

take some measurements during the normal olefins production

process, petitioner argues that the purpose of those measurements

was to ensure that furnace was operating normally.    By contrast,

petitioner argues that during the Amoco anticoking project UCC

took many more measurements for the purpose of determining

whether Amoco’s anticoking technology actually reduced the

formation of coke and whether the technology could improve UCC’s

production process.   We agree that UCC’s activities went beyond

routine data collection and that the Amoco anticoking research

activities are not excluded from the definition of qualified

research by section 41(d)(4)(D).
                               - 219 -

                h.   Substantiation Requirement

     Respondent finally argues that even if the Amoco anticoking

project would otherwise satisfy the qualified research tests,

petitioner has not substantiated its claim after the 10th week of

testing.   While the activities that occurred from the first

pretreatment to the cold turnaround in January 1995 were

documented in the project report dated February 21, 1995,

respondent points out that there is no comparable project report

to corroborate UCC’s argument that the Amoco anticoking project

continued with a second pretreatment in April 1995 and additional

testing until the August 1995 cold turnaround.    Respondent argues

that petitioner was unable to find any data or analysis of data

collected after February 21, 1995.   Therefore, respondent argues

that petitioner has failed to substantiate any activities after

the February 21, 1995, project report was written.   See sec.

6001; Boyd v. Commissioner; 122 T.C. 305, 320 (2004); Tyson

Foods, Inc. & Subs. v. Commissioner, T.C. Memo. 2007-188; Eustace

v. Commissioner, T.C. Memo. 2001-66; sec. 1.6001-1, Income Tax

Regs.

     Petitioner argues that there is sufficient evidence to show

that UCC continued to run the test and evaluate data until August

1995.   Petitioner offered four witnesses who corroborated that

the second test occurred, two of whom confirmed that the test

lasted until August 1995.   Furthermore, petitioner submitted
                               - 220 -

documentary evidence that confirms the testimony and shows that

some analysis was performed on the data collected from the second

test.   One of respondent’s own expert witnesses, Mr. Halle,

concluded that the Amoco anticoking project lasted 8 to 9 months.

Accordingly, on the basis of the entire record, we conclude that

petitioner sufficiently substantiated its claim that the Amoco

anticoking project included a second test that ran from April to

August 1995.

     On the basis of the foregoing, we hold that the Amoco

anticoking research activities were qualified research.

           3.   The Spuds Project

     Petitioner originally claimed that the spuds project was

qualified research but now concedes that it does not satisfy the

requirements of section 41(d).      Dr. Wadia testified that, in his

opinion, the spuds project did not constitute research or

experimentation in the scientific sense.     Dr. Wadia believes that

the spuds project was a standard mechanical design change

followed by routine plant troubleshooting.     Dr. Wadia also

believes that the spuds project presented a low level of

uncertainty because UCC had been using one-hole spuds at Olefins-

2 for 18 years.

     Petitioner originally argued that the relevant business

component was the olefins production process.     As discussed

above, under section 41(d)(2)(C) and section 1.41-4(b)(1), Income
                                - 221 -

Tax Regs., we find that only activities that relate to the

improvement of UCC’s olefins production process, not production

activities, are part of this business component.

                 a.   The Section 174 Test

     In the opinion of Dr. Martin, another of petitioner’s expert

witnesses, the purpose of the spuds project was to eliminate

uncertainties concerning improvements that might be achieved in

the operation of the Olefins-1 furnaces by replacing the four-

hole spuds with one-hole spuds.    Dr. Martin’s opinion is that it

would be impossible to determine the impact of the change on all

of the various operating conditions in the furnace by calculation

or by testing in a small test facility similar to the test

facilities operated by burner vendors.       Petitioner originally

argued that the specific uncertainties that the spuds project was

designed to eliminate were whether the new spud design would:

(1) Reduce plugging, carbon monoxide levels, and erratic burner

flame patterns; (2) increase furnace fuel efficiency; and/or (3)

adversely affect furnace operations or downstream processes.

Specifically, UCC was concerned that using the one-hole spuds

would increase the level of noise from the furnaces above

acceptable levels.

     Respondent argues that the spuds project fails the section

174 test because the project was not designed to eliminate any

uncertainties.   Ms. McClung, one of respondent’s expert
                              - 222 -

witnesses, testified that the one-hole spud design maintained the

same design flow area as the four-hole spuds and did not

necessitate testing to validate performance.   In Ms. McClung’s

opinion, changing the number of spud holes without changing the

total area of the holes would not be expected to significantly

affect anything concerning the furnace or burner operation other

than to reduce or eliminate the plugging problem.   Furthermore,

Ms. McClung believes that UCC’s experience with one-hole spuds on

its Olefins-2 furnaces eliminated any uncertainties that may have

otherwise existed.   Accordingly, respondent argues that UCC was

certain that replacing four-hole spuds with one-hole spuds would

result, at a minimum, in the improvement of the plugging problem

on the basis of its use of the one-hole spuds at Olefins-2 and

common sense.

     Petitioner’s fact witnesses testified that they hoped that

the one-hole spuds would improve the process, but they were not

certain.   However, the section 174 test requires that an

objective uncertainty exist as to the capability or method for

developing or improving a product or process or the appropriate

design of a product or process.   See Mayrath v. Commissioner, 41

T.C. at 590-591.   We find that regardless of whether some of

UCC’s employees were not certain that the one-hole spuds would

improve UCC’s production process at Olefins-1, UCC had sufficient

information available to it, both information gathered from its
                                 - 223 -

own experiences using one-hole spuds and information provided by

the John Zink Co., to be certain that the one-hole spuds were

capable of improving UCC’s production process.

     Furthermore, UCC was certain that changing the four-hole

spuds to one-hole spuds was the appropriate method for reducing

plugging.    UCC knew that changing the spuds would be an effective

and relatively inexpensive way to solve the problem.

     Finally, there was no uncertainty as to the appropriate

design of the improvement.     The John Zink Co. designed the one-

hole spud, and there is no evidence that UCC ever considered

adapting the John Zink Co.’s design.

                  b.   The Remaining Tests

     Because the spuds project fails the section 174 test, we

need not address whether it satisfies the remaining tests.

            4.   The Sodium Borohydride Project

     Petitioner claims that the sodium borohydride project is

qualified research.     Petitioner identified the olefins production

process as the relevant business component.       As discussed above,

under section 41(d)(2)(C) and section 1.41-4(b)(1), Income Tax

Regs., we find that only activities that relate to the

improvement of UCC’s olefins production process, not production

activities, are part of this business component.
                              - 224 -

               a.   The First Three Tests

     As explained below, we find that the sodium borohydride

project fails the process of experimentation test.   Accordingly,

we need not discuss whether it satisfies the section 174,

technological information, or business component test.

               b.   The Process of Experimentation Test

      Petitioner argues that the sodium borohydride project

satisfies the process of experimentation test because

substantially all of the activities involved constitute a process

of experimentation designed to determine whether UCC could

effectively use sodium borohydride to remove acetaldehyde to

below 100 ppm while the MEA system was out of service.

Petitioner argues that the process involved:   (1) Considering

alternatives, most notably sodium bisulfate; (2) preparing a

detailed project memorandum and an FOCR; (3) posing and answering

a series of questions about the proposed sodium borohydride

injections; (4) determining test dosages and injection rates; (5)

injecting the sodium borohydride; (6) sampling the cracked gas

stream and crude butadiene product for acetaldehyde; (7) sampling

the wastewater for boron; (8) analyzing the results; and (9)

evaluating the results and drawing the conclusion that sodium

borohydride had successfully removed acetaldehyde to below

specification levels.   Furthermore, petitioner argues that the

process of experimentation was for qualified purposes–-improved
                              - 225 -

function and performance of Taft’s ethylene production process

and improved quality of the consumer product.

     Respondent argues that the sodium borohydride project did

not involve a process of experimentation but was merely a method

of reducing the acetaldehyde in UCC’s crude butadiene.

Respondent argues that UCC was not evaluating alternatives but

was simply validating that injecting sodium borohydride could be

used to remove acetaldehyde and troubleshooting any problems that

came up.   Respondent argues that while sodium bisulfate could

have been used as an alternative to sodium borohydride, UCC never

seriously considered using sodium bisulfate because it knew that

sodium borohydride would work better.   In respondent’s opinion,

the occurrence of operating issues or the collection of data does

not make a process one of experimentation.   Respondent argues

that the sodium borohydride project lacked any analysis of the

data collected or evaluation of the process change beyond

validating that the change satisfied UCC’s needs.

     We agree with petitioner that the sodium borohydride

research activities were designed to resolve uncertainty.    Even

if the capability of using sodium borohydride to remove

acetaldehyde was generally known, UCC was not certain whether (1)

sodium borohydride was the appropriate method for removing

acetaldehyde from crude butadiene while the MEA system was out of
                              - 226 -

service given its high cost and unknown efficiency or (2) UCC’s

design for injecting sodium borohydride was appropriate.

     However, to constitute a process of experimentation, the

sodium borohydride project research activities must have been

designed not only to test whether sodium borohydride satisfied

UCC’s needs but to evaluate the use of sodium borohydride through

a sequential process of experimentation.    Such a process would

include not only planning the test, implementing the test, and

collecting data, but would also include analyzing of the data

collected, refining and discarding hypotheses, and progressively

developing the process. There is no evidence to support UCC’s

assertion that it actually analyzed the data it collected beyond

determining that sodium borohydride reduced acetaldehyde below

100 ppm.   While petitioner argues that UCC was uncertain about

the appropriate dosages or injection rates, there is no evidence

that UCC experimented with dosages or injection rates or

determined the optimal dosage and injection rate.    UCC was merely

validating that injecting sodium borohydride into the caustic

scrubber would reduce acetaldehyde to on-specification levels.

     There is also no evidence that the results of the test were

sufficiently analyzed so that UCC could compare them with the

results of tests of other alternatives.    UCC’s data collection

alone, no matter how extensive, does not constitute a process of

experimentation if it is not followed by meaningful analysis.
                               - 227 -

While Dr. Manyik prepared an R&D report for the sodium

borohydride project that UCC considered to be the functional

equivalent of a project report, Dr. Manyik prepared the R&D

report before the test of sodium borohydride occurred.

Therefore, it could not have included any analyses of the project

that were not available before the project began.   The fact that

UCC found Dr. Manyik’s R&D report and other prerun reports

sufficient to document the sodium borohydride project indicates

that UCC did not find it necessary to analyze the results of the

project and was not interested in developing or refining its

process.   Accordingly, we find that the sodium borohydride

research activities fail the process of experimentation test and

were not qualified research.   We need not address respondent’s

remaining arguments relating to this project.

           5.   The UOP GA-155 Project

     Petitioner argues that the UOP GA-155 project is qualified

research and that the relevant business component is the olefins

production process.    As discussed above, under section

41(d)(2)(C) and section 1.41-4(b)(1), Income Tax Regs., we find

that only activities that relate to the improvement of UCC’s

olefins production process, not production activities, are part

of this business component.
                               - 228 -

                a.   The Section 174 Test

     Petitioner argues that the UOP GA-155 project satisfies the

section 174 test because it was designed to eliminate

uncertainties as to:   (1) Whether UOP GA-155 would reduce

butadiene polymer fouling in the C3 column and reboilers; (2) the

proper dosage of UOP GA-155 to both reduce C3 column fouling and

stabilize the dripolene; and/or (3) whether UOP GA-155 would

adversely affect Taft’s downstream processes and commercial

products.   Petitioner argues that these uncertainties could not

have been resolved without a plant test because laboratory tests

would not translate well to the plant.

     Respondent argues that the UOP GA-155 project fails the

section 174 test because any uncertainties with respect to

injecting UOP GA-155 had been resolved before the project began.

Respondent believes that the only question that remained was how

much UOP GA-155 to use, and UCC intended to resolve this issue by

obtaining advice from UOP, not through its own testing.

Respondent argues that there were no issues with respect to the

capability or method for developing or improving the process or

the appropriate design of the process but that UCC was merely

verifying UOP’s claims that UOP GA-155 would reducing fouling.

If there were any uncertainties with respect to the UOP GA-155

project, respondent argues that they would have been reflected in

the FOCR.
                              - 229 -

     While UCC’s employees testified that they were uncertain

whether UOP GA-155 would reduce fouling, we find that the

information available to UCC established that UOP GA-155 would be

effective.   The evidence shows that UOP, not UCC, performed the

research to determine UOP GA-155’s effectiveness.    The fact that

UCC desired to confirm UOP’s assertions with its own testing does

not create an uncertainty within the meaning of section 174.      The

section 174 test is an objective test, and a taxpayer may not

turn its back on the available information in order to create

uncertainty.

     Furthermore, there is no evidence that UCC was uncertain as

to the appropriate method for reducing fouling.    UCC had

significant experience using inhibitors before beginning the UOP

GA-155 project and there is no evidence that UCC had any doubt

that injecting an inhibitor into the C3 column was the

appropriate method to reduce fouling in the C3 column.

     Finally, UCC had sufficient information available to it to

eliminate any uncertainties as to the appropriate design of using

UOP GA-155 to reduce fouling in the C3 column.    It was UOP that

developed UOP GA-155, studied UCC’s process, and recommended the

design that UCC should use to inject UOP GA-155.    There is no

evidence that UCC intended to use the UOP GA-155 project to

discover information to improve upon or change the design

suggested by UOP.
                                 - 230 -

                  b.   The Remaining Tests

     Because the UOP GA-155 project fails the section 174 test,

we need not address whether it satisfies the remaining qualified

research tests.

          6.   The UCAT-J Project

     Petitioner claims that the UCAT-J project is qualified

research and that the relevant business component is the PE

production process.     Respondent argues that each of the

individual UCAT-J runs constitutes a separate project.       We find

that the UCAT-J runs were separate tests in the same project to

develop the use of UCAT-J in UCC’s PE production process and

should be treated as a single business component.     However, as

discussed above, under section 41(d)(2)(C) and section 1.41-

4(b)(1), Income Tax Regs., we find that only activities that

relate to the improvement of UCC’s PE production process, not

production activities, are part of this business component.

                  a.   The Section 174 Test

     In the opinion of Dr. Brockmeier, one of petitioner’s expert

witnesses, the UCAT-J project was designed to discover

information that would eliminate several uncertainties relating

to whether UCC could use UCAT-J to produce PE base resins in

Star’s UNIPOL reactors with reactor operability and continuity

and product properties equivalent to or better than those that

could be achieved using M-1.     For example, Dr. Brockmeier
                               - 231 -

believes that UCC was uncertain whether using UCAT-J as the

catalyst would increase the amount of static in the reactor and

cause operability problems.   Static was a greater problem with

UCAT-J than with M-1 because of the dielectric properties of the

UCAT-J system.   In Dr. Brockmeier’s opinion, UCC could not

discover how to solve this problem at the pilot plants or smaller

commercial reactors because static was less of a problem in

smaller reactors.   Petitioner argues that other examples of

operability issues related to UCAT-J were UCC’s ability to:    (1)

Control bulk density when producing butene film resins; (2)

reduce resin stickiness without reducing catalyst productivity;

and (3) prevent TEAl starvation.   Petitioner argues that these

issues created uncertainties regarding UCC’s capability of using

UCAT-J to produce base resin and/or uncertainties regarding the

design for using UCAT-J to develop or improve its UNIPOL process

technology used at Star.   Petitioner argues that the UCAT-J

project was intended to discover information that would eliminate

these uncertainties.

     In the opinion of Dr. Brockmeier, the “rule of three”

followed at Star was reasonable and one or even two problem-free

experiments does not provide a manufacturer with sufficient

assurance that the technology can be used without R&D supervision

and involvement.    Dr. Brockmeier also believes that the duration

of the UCAT-J runs was scientifically reasonable and that UCC was
                                - 232 -

continuing to discover information about UCAT-J’s operability

after the reactor was lined out and reached a steady state.   In

Dr. Brockmeier’s opinion, the UCAT-J runs were not merely trial

production runs because UCC had not yet eliminated the

uncertainties associated with the new technology.

     Respondent’s analysis of the UCAT-J project relies on the

report of one of his expert witnesses, Dr. Allen.   Respondent

argues that the UCAT-J project fails the section 174 test

because: (1) UCC was certain that it could produce aim-grade base

resin using UCAT-J; and (2) the UCAT-J project was conducted for

the purpose of producing products for sale to customers, not for

the purpose of discovering information.

                    i.     Uncertainty

     Respondent argues that the UCAT-J project fails the section

174 test because UCC was certain that it could produce aim-grade

base resin using UCAT-J.    Respondent argues that UCC gained this

certainty because it had successfully used UCAT-J on the UNIPOL

pilot plant as well as at Star and Seadrift.   Respondent believes

his argument is supported by the fact that UCC had enough

confidence to begin designing LP-6, which was designed to use

UCAT-J, and to tout the benefits of UCAT-J to UNIPOL licensees

before it began the UCAT-J project.

     Respondent argues that the Court should consider

petitioner’s arguments and testimonial evidence against the
                               - 233 -

documentary evidence made contemporaneously with the runs.      In

support of his argument, respondent cites United States v. United

States Gypsum Co., 333 U.S. 364, 395-396 (1948), where the

Supreme Court stated:

     Both on direct and cross-examination counsel were
     permitted to phrase their questions in extremely
     leading form, so that the import of the witnesses’
     testimony was conflicting. * * * Where such testimony
     is in conflict with contemporaneous documents we can
     give it little weight, particularly when the crucial
     issues involve mixed questions of law and fact. * * *

Respondent points to documents dated before the UCAT-J project

began indicating that UCC had produced aim-grade resin on its

smaller reactors without significant operability or continuity

problems and that UCAT-J performed better than M-1 on the pilot

plant.   Respondent also argues that the pre-run documentation

does not identify the uncertainties that petitioner claims

existed before the runs.

     We agree with respondent that some of the documentary

evidence indicates that UCC was confident that at some point it

would be able to produce base resin using UCAT-J on a commercial

scale and sell UCAT-J to licensees.      Furthermore, we find that

UCC generally found UCAT-J to work as well as or better than M-1

in its pilot plants.    However, this not end our inquiry.    Even if

UCC was certain that it was capable of using UCAT-J commercially,

the section 174 test may also be satisfied “if the information

available to the taxpayer does not establish the * * *
                               - 234 -

appropriate design of the product.”      Sec. 1.174-2(a)(1), Income

Tax Regs.    The documentary evidence indicates that UCC was

confident that it would eventually be able to use UCAT-J with

satisfactory operability and continuity, but it does not indicate

that UCC knew how to design its process so that (1) using UCAT-J

would be an improvement over using M-1 in its full-size

commercial reactors and (2) UCC could fully use UCAT-J’s superior

qualities.    Many of the documents in evidence list the objectives

and the risks involved in the runs, and petitioner confirmed

through testimony that each of the runs was conducted for the

purpose of discovering information that would help eliminate

uncertainties as to how UCC could improve its PE production

process using UCAT-J.   Therefore, we find that the testimony does

not conflict with the documentary evidence.

     Furthermore, we find that at the beginning of 1994 UCC did

not have enough information available to establish how it should

design its process so that using UCAT-J would be an improvement

over using M-1 on a full-scale commercial reactor.     UCC may have

been satisfied with the design of its process using UCAT-J in the

pilot plant and the smaller reactor at Seadrift, but UCC could

not use the same design on Star’s reactor because Star’s larger

size caused problems that did not occur at the smaller plants

such as static and sheeting.    UCC was still experiencing

significant operability and continuity problems at Star that
                               - 235 -

negated many of the benefits of using UCAT-J.   The purpose of

testing a process on a pilot plant is to eliminate any

uncertainties that can be eliminated at the pilot plant level

before moving the experiment to a commercial-scale reactor, but

any uncertainties that arise only on larger reactors cannot be

eliminated without testing on a commercial-scale reactor.    We

agree with petitioner that because of the differences between a

commercial-scale reactor and a pilot plant reactor there were

additional uncertainties relating to the design of the process

that could not be eliminated through testing on smaller reactors.

Petitioner’s argument that testing on smaller reactors would not

eliminate all uncertainties regarding the design of a commercial-

scale PE production process using UCAT-J is further supported by

the fact that UCC decided to install two different sets of

catalyst feeders on its LP-6 plant so that M-1 could be used at

the plant if UCC was unable to commercialize UCAT-J by the time

the plant was completed.

                     ii.   Discovering Information

     Respondent argues that even if there were uncertainties as

to the design of UCC’s process, the UCAT-J runs were not

conducted for the purpose of eliminating those uncertainties.     In

the opinion of Dr. Allen, all of the runs of the UCAT-J project

were conducted for commercial reasons.   Respondent points out

that:   (1) UCC sold most of the resin it produced during the
                             - 236 -

UCAT-J runs; (2) an objective for most of the runs was to produce

resin for customer qualification; and (3) many of the runs lasted

longer than the time necessary to achieve a steady state in the

reactor.

     We agree that some of UCC’s objectives were commercial as we

would expect, considering that UCC’s ultimate goal was to

commercialize the use of UCAT-J and the UCAT-J project included

both process and product business components.   However, we find

that the record supports petitioner’s argument that the primary

goal of UCC’s activities that related to the process business

component was to discover information to eliminate uncertainties

as to the appropriate design of UCC’s PE production process when

UCAT-J was used as the catalyst.   UCC’s production activities, by

contrast, are part of the product business component of the UCAT-

J project and are outside the scope of our inquiry.

     Respondent also points out that UCC wanted its plant

operators to gain experience making products with UCAT-J in

anticipation of the completion of LP-6.   While this may have been

an additional objective of the UCAT-J project, we do not believe

that it was the primary objective.

     Respondent next argues that the even if the UCAT-J project

otherwise satisfies the section 174 test, it fails the test of

Mayrath v. Commissioner, 41 T.C. 582 (1964).    Respondent argues

that most of the claimed costs associated with the UCAT-J project
                               - 237 -

related to production activities, not activities related to the

development of the concept of the project.

     We agree that the activities that related primarily to the

production of PE base resin were not related to the development

of the concept of using UCAT-J and may not be treated as expenses

under section 174.    See Mayrath v. Commissioner, supra at 590.

However, we conclude that these production activities are part of

the product business component, not the process business

component at issue.   To the extent that petitioner has included

production activities as part of the business component, we may

apply the shrinking-back rule and apply the qualified research

tests to the most significant subset of elements of the process

that satisfies the qualified research tests, which we find to be

the subset of activities that relate primarily to the development

of the production process using UCAT-J.    See sec. 1.41-4(b)(2),

Income Tax Regs.

     The activities that relate primarily to the development of

the production process using UCAT-J are part of the process

business component, and we find that they satisfy the Mayrath

test.   These activities include:   (1) Preparing run

documentation, including identifying objectives and risks of each

run; (2) monitoring reactor performance; (3) responding to

unexpected operating problems; (4) conducting experiments during

the runs; (5) collecting resin and catalyst samples; (6)
                              - 238 -

reporting run performance both during and following each run; (7)

analyzing the results of each run; (8) identifying ways to

improve subsequent runs; and (9) implementing improvements in

subsequent runs (collectively, UCAT-J research activities).

     Respondent finally argues that the UCAT-J project fails the

section 174 test because the duration of many of the runs far

exceeded the duration necessary to discover information to

resolve uncertainties.   We disagree, and we find that activities

that relate primarily to the development of the process, as

opposed to the production of base resin, may satisfy the section

174 test regardless of when they occurred as long as they were

performed for the purpose of discovering information to eliminate

the uncertainties discussed above.   We find that the UCAT-J

research activities were performed for this purpose.

               b.   The Technological Information Test

     Petitioner argues that the UCAT-J project satisfies the

technological information test because it was designed to

discover information based upon numerous principles of chemistry

and engineering including:   (1) Catalytic chemistry; (2)

polymerization; (3) heat and mass transfer; (4) reaction

kinetics; (5) statistics; (6) fluid dynamics and solubility; (7)

chemical engineering; and (8) process engineering.   We agree that

the UCAT-J research activities satisfy this test.
                                - 239 -

               c.     The Business Component Test

     Petitioner argues that the UCAT-J project satisfies the

business component test because the project was intended to

discover information that would be useful for improving UCC’s PE

production process.    We agree that the UCAT-J research activities

satisfy this test.

               d.     The Process of Experimentation Test

     Petitioner claims that substantially all of the activities

involved in the UCAT-J project constitute elements of a process

of experimentation for a qualified purpose.    In Dr. Brockmeier’s

opinion, the UCAT-J project involved a constant process of

evaluation and experimentation including:    (1) Preparing run

documentation that identified the objectives and risks of each

run; (2) monitoring reactor performance; (3) responding to

unexpected operating problems; (4) conducting experiments during

the runs; (5) collecting resin and catalyst samples; (6)

reporting run performance both during and following each run; (7)

analyzing the results of the runs; and (8) developing ways to

improve the process during subsequent runs.

     Dr. Brockmeier believes that the run team’s activities--

meeting regularly to discuss objectives, identifying obstacles,

proposing alternative remedies, and evaluating reaction system

responses to the experimental remedies–-indicate that the project

was conducted using a process of experimentation in the
                               - 240 -

scientific sense.   Dr. Brockmeier also noted various experiments

that UCC conducted during the UCAT-J project, including:    (1)

Adjusting operating ratios and chemicals; (2) adjusting ethylene

partial pressure; (3) modifying catalyst properties; (4)

introducing new reactor control technologies; and (5) giving the

reactor TEAl shots.    Dr. Brockmeier concluded in his report:

“Viewed in its entirety, the UCAT-J Project is a textbook example

of the R&D-driven process of experimentation that is required in

order to implement a catalyst change in a large-scale PE

production process.”

     Petitioner also claims that the UCAT-J project was performed

for a qualified purpose–-to improve the function and performance

of the PE production process and to improve the quality of the

consumer product.   UCAT-J, if successfully commercialized,

offered many process-related advantages over M-1 because it was

more active than M-1 and therefore could produce more base resin.

Furthermore, if UCAT-J worked properly, it would improve PE

product properties.

     Respondent argues that the UCAT-J project fails the process

of experimentation test because respondent believes that UCC had

already eliminated all uncertainties related to the use of UCAT-J

before the credit years and accordingly no experimentation was

necessary.   As discussed above with respect to the section 174

test, we find that UCC had not eliminated all uncertainties
                              - 241 -

relating to the design of its PE production process using UCAT-J

on a commercial scale before completing the project.

     Respondent also argues that petitioner failed to produce any

formal project reports that analyzed the results of the UCAT-J

project.   While such formal project reports would indicate a

process of experimentation, we are satisfied that UCC

sufficiently analyzed the results through discussion and informal

documentation.   Petitioner presented credible testimony that

process R&D collected data during the UCAT-J runs, process R&D

representatives and members of the run team analyzed and

discussed the results, and UCC used these analyses to further

refine the PE production process using UCAT-J.   The fact that UCC

was able to compare its production process using UCAT-J with its

production process using M-1 in terms of reactor operability and

continuity issues indicates that UCC could use the same process

to compare UCAT-J with other catalysts.

     We find that the UCAT-J research activities constitute a

process of experimentation.   Unlike the sodium borohydride

project, the UCAT-J project was not a simple change to a process

followed by verification that the change would work.    UCC

conducted a series of trials using UCAT-J and analyzed the

results of each trial to develop and improve its process.     UCC

was testing hypotheses and forming new hypotheses based on each

succeeding run in order to solve some of the chemical and
                              - 242 -

physical problems it had experienced using UCAT-J.   Throughout

the UCAT-J project UCC was comparing UCAT-J’s performance to M-

1’s performance on a variety of criteria related to reactor

operability, reactor continuity, and product properties.

     While many of the activities that were conducted during the

UCAT-J project as a whole did not constitute a process of

experimentation but were ordinary production activities, as

discussed above we find it appropriate to separate the production

activities and the research activities into separate business

components for the nonexperimental product and the experimental

process, respectively.   Therefore, the occurrence of

nonexperimental production activities does not cause the UCAT-J

research activities to fail the “substantially all” portion of

the process of experimentation test.    Furthermore, we find that

the improvement of UCC’s PE production process is a qualified

purpose under section 41(d)(3).   Accordingly, we find that the

UCAT-J research activities satisfy the process of experimentation

test.

               e.   Research After Commercial Production

     Respondent next argues that the UCAT-J project is excluded

from the definition of qualified research because it constituted

research after commercial production, specifically trial

production runs, troubleshooting, or debugging.   Respondent
                              - 243 -

argues that the UCAT-J runs occurred after the preproduction

planning and trial production runs had occurred.

     We disagree that the UCAT-J research activities constituted

research after commercial production.   While the aim-grade base

resin that UCC produced satisfied UCC’s basic functional and

economic requirements, the business component at issue is the

process business component, not the product business component.

UCC’s production process using UCAT-J did not satisfy its basic

functional and economic requirements during the credit years.

UCC was not yet licensing the use of UCAT-J and was not using

UCAT-J as its primary catalyst for production.     UCC was still

experimenting to eliminate significant problems that counteracted

the benefits of using UCAT-J instead of M-1.     Accordingly, we

find that the UCAT-J research activities are not excluded from

the definition of qualified research under section 41(d)(4)(A).

               f.   Substantiation Requirement

     Respondent finally argues that petitioner has not produced

sufficient documentary evidence to corroborate the testimony of

its fact witnesses in support of its argument that the UCAT-J

project was qualified research.   See sec. 6001; sec. 1.6001-1,

Income Tax Regs.; see also Boyd v. Commissioner, 122 T.C. at 320;

Tyson Foods, Inc. & Subs. v. Commissioner, T.C. Memo. 2007-188;

Eustace v. Commissioner, T.C. Memo. 2001-66.
                                  - 244 -

       Petitioner argues that there is sufficient evidence to show

that the UCAT-J project occurred and satisfies the qualified

research tests.       Petitioner produced three fact witnesses to

discuss the UCAT-J project and argues that their testimony is

corroborated by sufficient documentary evidence that provides the

objectives, risks, and results of the runs.

       Considering the record in its entirety, we find that

petitioner substantiated its claim that the UCAT-J research

activities satisfy the qualified research tests.       Accordingly,

these research activities, but not ordinary production

activities, constitute qualified research.

III.    Base Period Activities

       We next address whether petitioner included all activities

similar to the activities that we find constitute qualified

research in making its revised base period computations.       A

taxpayer must determine its QREs to be taken into account in

computing its fixed-base percentage “on a basis consistent with”

its determination of QREs for the credit year.      Sec. 41(c)(4).47

Accordingly, the taxpayer must include the same types of

activities as qualified research and include the same types of

costs as QREs for the credit years and the base period.      The

legislative history explains:

       if a taxpayer includes (or excludes) certain
       expenditures in determining its qualified research


       47
            See supra note 41.
                              - 245 -

     expenses for the current year, it must provide the same
     treatment for all such expenditures incurred during any
     year taken into account in computing the taxpayer’s
     fixed-base percentage * * *. [H. Rept. 101-247, at
     1202-1203 (1989).]

     A.   Whether Petitioner Must Include Activities Conducted By
          the Entire Consolidated Group

     In its order dated January 17, 2007, the Court ordered that

for purposes of conforming the base period computations to the

methodology petitioner employed to compute the claimed credits,

only evidence of the revised base period computations for the

legal entity for which additional credits are claimed would be

necessary.   Because petitioner claimed additional credits only

for activities conducted by UCC, the base period trial was

limited to UCC’s base period computations.

     In response to petitioner’s motion for partial summary

judgement dated September 15, 2006, respondent argued48 that

petitioner was required to calculate its QREs for the base period

for the entire controlled group on a consistent basis with its

QRE calculation for the claim projects.   This would require

petitioner to include in its revised research credit computations

the QREs incurred not only by UCC, but also the other members of

petitioner’s controlled group.   Respondent pointed to section

41(f)(1), which provides:



     48
      Respondent did not repeat these arguments on brief and
acknowledges that the Court has already decided this issue.
However, respondent reserves his arguments with respect to this
issue. Accordingly, we address his arguments here.
                              - 246 -

     (1) Aggregation of expenditures.--

          (A) Controlled group of corporations.--In determining
     the amount of the credit under this section–-

               (i) all members of the same controlled group of
          corporations shall be treated as a single taxpayer, and

               (ii) the credit (if any) allowable by this section
          to each such member shall be its proportionate shares
          of the qualified research expenses and basic research
          payments giving rise to the credit.

     However, we decided that the consistency rule applies to the

determination of QREs for each member of the controlled group

while the aggregation rule of section 41(f)(1) refers to the

determination of the overall credit.    The rule for aggregation of

expenditures exists “To ensure that the new credit will be

allowed only for actual increases in research wage expenditures”.

S. Rept. 97-144, supra at 83, 1981-2 C.B. at 442.      Congress

intended for these rules to prevent artificial increases in

research expenditures by shifting expenditures among commonly

controlled or otherwise related persons.    Id.    The rules for

aggregation were already in place when the consistency rule was

enacted as part of the Omnibus Budget Reconciliation Act of 1989,

Pub. L. 101-239, sec. 7110(b)(1), 103 Stat. 2323, yet the

legislative history does not provide any guidance as to whether

the consistency rule applies at the entity level or the

consolidated group level.   See H. Rept. 101-247, supra at 1202-

1203; H. Conf. Rept. 101-386, at 542 (1989).      Section 41(c)(4)(B)

refers to the “taxpayer”, not the controlled group, and there is
                               - 247 -

no indication in the statute or the legislative history that all

members of a consolidated group must calculate their QREs in the

same way.

     Section 41(c)(4) undercuts the logic of the argument that

the consistency rule is to be applied to the controlled group as

a whole.    Section 41(c)(4)(B) gives the Secretary authority to

issue regulations to prevent “distortions” caused by a “change in

accounting methods used by such taxpayer”.    Taxpayers that are

part of a commonly controlled group may have different methods of

accounting.    Because the statute refers only to a single

accounting method, it makes no sense to conclude that the

consistency rule applies to the controlled group as a whole.

Respondent’s attempt to read the consistency rule in the light of

section 41(f) creates an anomaly.

     Respondent argued that petitioner’s interpretation of the

consistency rule contradicts “unambiguous congressional intent.”

Respondent asked us to consider the following example:

          A and B are members of a controlled group of
     corporations. During the base years, A but not B
     incurred a certain type of QRE. In the credit year,
     the AB controlled group shifts this type of QRE to B in
     order to avoid including this item of A’s base period
     QRE in the group credit computation under the
     consistency requirement.

Respondent argued that petitioner’s interpretation of the

consistency rule would permit the result in the example.     In

support of his position, respondent cited the legislative purpose
                               - 248 -

for the aggregation rules:   “to prevent artificial increases in

research wage expenditures by shifting expenditures among

commonly controlled or otherwise related persons.”   See S. Rept.

97-144, supra at 83, 1981-2 C.B. at 442.   However, the

regulations already address respondent’s concern.    Section 41(f)

and the legislative history direct the Secretary to issue

regulations to ensure that artificial shifting of research

expenditures will not occur.   Section 1.41-6(i), Income Tax

Regs., addresses the concern of shifting artificial expenditures

among members of a controlled group by providing that because all

members of a group under common control are treated as a single

taxpayer for purposes of determining the research credit,

transfers between members of the group are generally

disregarded.49

     There is no support in the statute or the legislative

history for the application of the consistency rule at the

controlled group level.   Accordingly, because petitioner is now

seeking additional research credits for activities conducted only

by UCC, petitioner properly included base period QREs for only

UCC in its fixed-base percentage.

     B.   Acquisitions and Dispositions

     Section 41(f)(3) provides for adjustments to QREs in the

event of an acquisition or disposition by the taxpayer.   If the



     49
      During the credit years this regulation was found under
sec. 1.41-8(e), Income Tax Regs.
                              - 249 -

taxpayer acquires a major portion of a trade or business, then

the taxpayer must increase the amount of the QREs it incurred

before the acquisition by the amount of QREs incurred by the

acquired trade or business during that time.    Sec. 41(f)(3)(A).

Likewise, in the case of a disposition of a major portion of its

trade or business, the taxpayer must decrease the amount of the

QREs it incurred before the disposition by the amount of QREs

attributable to the trade or business sold.    Sec. 41(f)(3)(B).

     Section 41(d)(4)(F) excludes from the definition of

“qualified research” any research conducted outside the United

States, the Commonwealth of Puerto Rico, or any possession the

United States.   Accordingly, we need not consider any

acquisitions or dispositions of businesses that conducted

research solely outside the United States during the base period.

     UCC’s C&P business segment was UCC’s only domestic business

segment operating during the base period that remained a part of

the UCC legal entity during the credit years.    Accordingly, we

need not consider any of the other business segments that were

part of UCC during the base period.50   We find, and respondent

does not dispute, that petitioner has properly accounted for the

acquisitions and dispositions that occurred during the relevant

periods.



     50
      UCC disposed of its consumer products, carbon products,
and industrial gases segments before January 1, 1994.
                               - 250 -

     C.   Polypropylene Runs

     Dr. Wadia contends that the 138 identified polypropylene

runs that occurred at Seadrift’s P-1 unit satisfy the qualified

research criteria.   Ms. Toivonen costed the polypropylene runs at

$29.5 million.   However, petitioner did not include these runs in

its base period calculations because petitioner claims that UCC

conducted these runs as an independent contractor for SPC and SPC

ultimately bore the cost of these runs.

     Respondent argues that petitioner should have included the

polypropylene runs in its base period calculations because UCC

initially bore the costs of the runs, petitioner failed to

substantiate that UCC was compensated by SPC, SPC did not

maintain separate books and records apart from UCC’s books and

records, and UCC was required to bear its own costs of conducting

R&D under the CUA.

     Under the operating agreement between UCC and SPC, SPC

agreed to reimburse UCC for any operating expenses it incurred.

Petitioner presented testimony at trial that SPC did in fact

reimburse UCC for these expenses, and we find the testimony to be

credible.   Furthermore, while UCC provided accounting services

for SPC, petitioner provided credible evidence that UCC kept its

records separate from those of SPC.

     While we agree that the CUA provides that UCC would bear the

costs of R&D it conducted as part of the Cooperative Undertaking,
                               - 251 -

the polypropylene runs were conducted by SPC, not the Cooperative

Undertaking.    The polypropylene runs all involved plant-based

experimentation, and the Cooperative Undertaking was not involved

in any experimentation that occurred during the production

process.    While the agreements between UCC and Shell relating to

SPC provided that any intellectual property discovered or

developed by UCC in the course of performing its duties under

those agreements would be governed by the CUA, not the SPC

agreements, we find that the costs of the polypropylene runs were

costs treated as the costs of polypropylene production, not the

development of intellectual property, and they would not have

been governed by the CUA.    Accordingly, the CUA provisions are

irrelevant.51   We see no other reason why SPC should not be

respected as a tax partnership, and we accordingly find that

petitioner was correct to exclude the polypropylene runs from its

base period computations.

     D.    Whether Petitioner Included All Activities Similar to
           the Claim Projects on Its List of Identified Runs

     Respondent argues that the methodology that petitioner used

to identify plant-based research for the claim projects is

completely different and fundamentally inconsistent with its

methodology for identifying plant-based research that occurred


     51
      Respondent does not argue that petitioner failed to
include additional QREs not identified by Ms. Toivonen that UCC
incurred as part of the Cooperative Undertaking. It appears that
UCC treated these costs as QREs on its original return.
                               - 252 -

during the base period.   We address each of respondent’s

arguments in turn.

          1.   Petitioner’s Sources of Information

                a.   Whether Petitioner Was Required To Use FOCRs
                     To Identify Base Period Activities

     Respondent points out that the claim projects were largely

documented by FOCRs, but UCC destroyed its FOCRs from the base

period before performing its revised base period calculations.

Accordingly, petitioner was unable to review all of the FOCRs

produced during the base period to see whether they identified

additional qualified research activities.    Respondent argues that

because Dr. Wadia could not review the FOCRs from the base

period, petitioner cannot prove that it identified all of the

base period activities that were similar to the claim projects.

As an example, respondent argues that Dr. Wadia “missed” the

Nalco inhibitor antifouling test (run 816), which petitioner

later conceded and costed at $7 million.    Respondent argues that

this process change would have been documented by an FOCR, so Dr.

Wadia might not have missed this project had the FOCRs from the

base period been available.   Respondent argues that FOCRs were

the key document indicating manufacturing process changes during

both the base period and the credit years.   Accordingly,

respondent argues that petitioner needed to analyze and produce

its FOCRs from the base period in order to meet the consistency
                               - 253 -

requirement and capture all base period activities similar to the

claim projects.

     Neither section 41(c)(4) nor section 1.41-4(d), Income Tax

Regs., imposes any requirement that a taxpayer use the same types

of documents to identify qualified research in the base period as

it used to identify qualified research in the claim year if the

taxpayer can otherwise show that it has satisfied the consistency

requirement.   While it is true that Dr. Wadia did not include the

Nalco inhibitor antifouling test in his original list of

identified runs, we do not view this as evidence that Dr. Wadia

“missed” any projects because he did not review FOCRs from the

base period.   We find that the Nalco inhibitor antifouling test

fails the process of experimentation test.   UCC was not

experimenting with the Nalco inhibitor or conducting research to

better understand inhibitors; it was merely testing Nalco’s

product to see whether it worked as promised.   While UCC

monitored the reboiler after injecting the Nalco inhibitor, as it

did with the UOP GA-155 project, there is no evidence that UCC

analyzed the results of the test or intended to refine its

hypothesis and conduct additional tests.   Such verification,

without more, does not constitute a process of experimentation.

Accordingly, Dr. Wadia’s exclusion of the Nalco inhibitor

antifouling test from his list of identified runs does not cause

us to doubt his reliability.
                              - 254 -

     Furthermore, while petitioner did rely heavily on FOCRs to

establish that the claim projects constitute qualified research,

we do not find that FOCRs are as important to identifying

qualified research as respondent advocates.   FOCRs were used for

any process change, regardless of whether the change involved

experimentation.   Accordingly, even if all of the FOCRs from the

base period were available to Dr. Wadia, we do not believe that

this would significantly change Dr. Wadia’s conclusions.

     Respondent also argues that petitioner chose an ad hoc

methodology to identify base period activities and relied on

documents that were highly variable in completeness and

usefulness.   Respondent argues that the absence of any summary

documents, such as lists of new products introduced during the

base period or R&D budgets, makes it impossible to confirm that

Dr. Wadia captured all of the qualified research activities that

occurred during the base period.   Furthermore, because the

documents did not always provide conclusive evidence of the

duration or production quantities of the identified runs, Dr.

Wadia relied upon estimates and assumptions for a large number of

runs.   Respondent argues that estimates are legally

impermissible.

     Section 1.41-4(d), Income Tax Regs., does not require that a

taxpayer substantiate its research credit claim with any

particular types of documents but requires that the taxpayer
                               - 255 -

“retain records in sufficiently usable form and detail to

substantiate that the expenditures claimed are eligible for the

credit.”   We find that the documents that petitioner produced

were sufficient to substantiate its claim that the MATRIC team

identified all of the scientific research projects that occurred

during the base period and were sufficiently detailed to allow

the MATRIC team to make reasonable determinations as to the

duration and production quantities of the identified runs.

                b.   Whether Petitioner Was Required To Consider
                     Alternative Sources

     Respondent argues that petitioner should have examined

alternative sources to correct defects in its methodology.    As an

example, because two of the claim projects (the UOP GA-155 and

sodium borohydride projects) involved the injection of additives

into the olefins production process, respondent argues that

petitioner should have sought documents from third parties from

whom UCC purchased additives during the base period to see

whether they would show whether UCC experimented with different

additives during the base period.   Respondent argues that the

documents produced by the John Zink Co. show that UCC conducted

additional plant testing during the base period that was not

addressed by Dr. Wadia’s report.

     Petitioner argues that respondent was unable to obtain any

significant documents from third-parties from whom UCC purchased

additives during the base period, so any attempt that petitioner
                                - 256 -

would have made to obtain the same documents would have been

fruitless.    Furthermore, petitioner argues that the third-party

documents that are available, those produced by the John Zink

Co., did not identify any experimental activities.

     We agree that section 41 does not require petitioner to seek

documents from third-party sources to determine whether they

contain evidence of experimentation.      Furthermore, we find that

the documents from third-party sources that were available, those

from the John Zink Co., do not indicate that additional research

occurred during the base period that petitioner failed to

consider.    Those documents show that UCC tested the products it

purchased, but not that it experimented with them.     Considering

that we do not find the UOP GA-155 project or the sodium

borohydride project to be qualified research, we find it unlikely

that documents from UCC’s additive vendors or other third parties

would be useful in identifying additional qualified research

activities conducted during the base period.

            2.   Whether Petitioner Should Include Additional
                 Activities in Its Base Period Calculation

     Respondent argues that petitioner failed to capture all of

the qualified research activities that occurred during the base

period, specifically:    (1) The NOx project, (2) testing on

products that UCC purchased from the John Zink Co., (3) testing

of the Star pelleting line, and (4) UCC’s analysis of naphtha on

its list of identified runs.    According to respondent,
                              - 257 -

petitioner’s failure to include these projects or tests in its

base period calculations is evidence that petitioner’s

identification of qualified research activities was incomplete.

Respondent also argues that Dr. Wadia improperly omitted portions

of the identified runs.

               a.   NOx

     The NOx project does contain some elements of qualified

research to the extent that UCC was attempting to discover

information that would allow it to determine whether it was

thawing its cold boxes frequently enough to reduce the safety

hazard caused by NOx accumulation.   However, we find that the NOx

project does not satisfy the process of experimentation test

because UCC was not conducting an experiment in the scientific

sense but was merely performing maintenance on its cold boxes,

collecting data, and using the collected data to set operating

guidelines.

               b.   John Zink Co. Products

     We also find that UCC did not conduct any qualified research

activities related to purchases from the John Zink Co.    As with

the spuds project, any testing that UCC performed on products

purchased from the John Zink Co. was merely quality control

testing to ensure that the products worked as promised.
                               - 258 -

               c.   Star Pelleting Line

     Similarly, while UCC most likely tested the pelleting line

it installed at Star in 1986, there is no indication that UCC

performed any experimentation associated with the new pelleting

line, much less qualified research.      Any tests that UCC performed

were most likely quality control tests to ensure that the

pelleting line did in fact work.

               d.   Naphtha Analysis

     We find that UCC’s analysis of naphtha in 1987 was routine

data collection or routine or ordinary inspection.     There is no

indication that UCC performed any experiments when it was

determining the composition of the naphtha it purchased.

               e.   Dr. Wadia’s Limitation of Duration

     Respondent also argues that even if Dr. Wadia included all

of the projects that constitute qualified research on his list of

identified runs, Dr. Wadia’s interpretation of the definition of

“qualified research” was narrower than the definition petitioner

used during the claim years.   Respondent argues that petitioner

treated the entire duration of all of the claim projects as

qualified research regardless of whether only part of a run was

experimental, while Dr. Wadia limited the run durations to the

experimental portions of the identified runs.

     For some of the identified runs, Dr. Wadia defined qualified

research as including only the portion of a run that he believed
                              - 259 -

was experimental, not the entire run.   Accordingly, Dr. Wadia

treated the duration of many identified runs as including only

the portion of the run where experimentation occurred.   For

example, if a run was conducted for the purpose of determining

whether it would produce a product of acceptable quality, Dr.

Wadia would treat the duration of the run as lasting only until

the point at which that determination was made unless the

researchers continued to experiment after the unit reached a

steady state.

     In the MEK production test (run 175), UCC collected data for

the first 914 hours of the run, but Dr. Wadia included only the

first 336 hours in the duration of run 175.   Similarly, for the

first vinyl acetate catalyst protection test (runs 47), Dr. Wadia

treated the run as lasting only 12 hours even though the resin

was in place for 2,400 hours and one of the goals of the test was

to test the strength of the resin over a period of 2,400 hours.

Dr. Wadia used partial durations for many other runs as well.

     Respondent argues that this approach is inconsistent with

petitioner’s treatment of the UCAT-J runs because petitioner did

not limit the duration of those runs to the time it took the

reactor to reach a steady state even if no experimentation

occurred after that point.   Respondent argues that Dr. Wadia’s

approach is also inconsistent with the UOP GA-155 project, where

UCC collected data for only 90 days but treated the project as
                              - 260 -

lasting 6 months.   Respondent also argues that the duration of

the Amoco anticoking project would have been much shorter if

petitioner limited the duration to the time it should have taken

UCC to realize that the Amoco technology was not working.

Respondent argues that petitioner did not attempt to divide any

of the other claim projects into their “experimental” and “non-

experimental” parts.

     Even assuming respondent is correct, we find that our

limitation of the claim projects to only the activities that

relate to the experimental process business component is at least

as narrow as Dr. Wadia’s approach.   As discussed with respect to

the claim projects, under section 41(d)(2)(C), where research is

conducted to improve a taxpayer’s production process, activities

that relate to the product being produced are part of a separate

nonexperimental product business component.   Production

activities that do not involve experimentation are properly

excluded from the definition of qualified research.   Therefore,

petitioner’s reliance on Dr. Wadia’s definition of which

activities constitute qualified research does not run afoul of

section 41(c)(4).   Accordingly, we find that there are no

additional activities that are similar to the claim year projects

that satisfy section 41(d).
                                 - 261 -

            3.   Reliability of Dr. Wadia’s Methodology

     Respondent argues that even if the Court does not find that

petitioner omitted any particular projects from its list of

identified runs, the Court cannot rely on Dr. Wadia’s testimony

to prove that it identified all of the qualified research

activities that occurred during the base period because Dr.

Wadia’s methodology is flawed.     Respondent argues that Dr.

Wadia’s methodology is unreliable because:     (1) It does not meet

the standards set out in Daubert v. Merrell Dow Pharms., Inc.,

509 U.S. 579, 593-594 (1993), and Kumho Tire Co. v. Carmichael,

526 U.S. 137, 149-150 (1999); (2) Dr. Wadia’s interpretation of

the qualified research criteria for the base period differs from

the definition that petitioner used to identify the claim

projects; and (3) Dr. Wadia is biased by MATRIC’s relationship

with Dow.

                  a.   Reliability of Dr. Wadia’s Methodology as
                       Expert Testimony

     Respondent argues that the Court should not rely on Dr.

Wadia’s opinion because it is unreliable under the standards set

out in Daubert v. Merrell Dow Pharms., Inc., supra at 593-594,

and Kumho Tire Co. v. Carmichael, supra at 149-150.       Respondent

argues that to evaluate the reliability of Dr. Wadia’s

methodology, the Court should consider the following factors:

(1) Whether the methodology has been or can be tested; (2)

whether the methodology has been published or subjected to peer
                              - 262 -

review; (3) whether the methodology is subject to potential or

known errors; and (4) whether the methodology is generally known

and accepted within the relevant community.   Daubert v. Merrell

Dow Pharms., Inc., supra at 593-594.

     Petitioner argues that respondent is merely reasserting the

challenges he previously made to the admissibility of Dr. Wadia’s

testimony and recasting them as challenges to the reliability of

his testimony.   While we decided before trial that Dr. Wadia’s

testimony was admissible under rule 104(a) of the Federal Rules

of Evidence, to the extent that the Daubert factors also pertain

to the weight that we should give to Dr. Wadia’s testimony we

consider them here.

     However, the Daubert factors are not necessarily pertinent

in all cases, and their relevance depends upon the nature of ths

issue, the expert’s particular expertise, and the subject of his

testimony.   Kumho Tire Co. v. Carmichael, supra at 150.    Dr.

Wadia’s testimony is helpful because of his specialized knowledge

of UCC’s production processes and of how research and

experimentation is conducted from a scientific point of view.

Because of his years of experience working for UCC, Dr. Wadia is

familiar with the way UCC conducted plant-based experimentation

during the base period.   While UCC’s production processes rely on

many principles of the physical sciences and the Court is

assisted by Dr. Wadia’s view of research and experimentation from
                               - 263 -

a scientist’s perspective, Dr. Wadia’s task in identifying

activities that satisfy the qualified research criteria is not

itself founded on principles of science.    See Tuf Racing Prods.,

Inc. v. Am. Suzuki Motor Corp., 223 F.3d 585, 591 (7th Cir. 2000)

(stating that “The principle of Daubert is merely that if an

expert witness is to offer an opinion based on science, it must

be real science, not junk science”, and finding that Daubert is

not applicable when the expert does not “purport to be doing

science”).   Accordingly, an analysis of the Daubert factors is of

limited value.

                     i.   Whether the Methodology Can Be Tested

     Respondent argues that Dr. Wadia’s methodology cannot be

tested because Dr. Wadia’s opinions are merely general,

conclusory statements.    Respondent argues that Dr. Wadia’s

descriptions of the runs are sparse and do not refer to any

specific facts to support his conclusions.    Furthermore,

respondent argues that Dr. Wadia does not set forth any reasons

for his conclusion that the projects that he did not list as

identified runs did not satisfy the qualified research criteria.

Respondent contrasts Dr. Wadia’s practices with those of Ms.

Toivonen, who maintained workpapers that documented her decisions

for the purpose of permitting her results to be checked and

verified.
                               - 264 -

     We disagree that Dr. Wadia’s methodology cannot be tested.

While it would be difficult for another person to duplicate Dr.

Wadia’s efforts exactly, Dr. Wadia’s method of reviewing

documents, interviewing people familiar with events that occurred

during the base period, and discussing each project with the

MATRIC team is a relatively simple methodology that could be

repeated by others.   Furthermore, because each project that Dr.

Wadia included as an identified run is essentially a concession

by petitioner, we do not find that Dr. Wadia’s failure to explain

in greater detail why those projects satisfy the qualified

research criteria detracts from his reliability.   While it would

have been more helpful to the Court if Dr. Wadia had explained

why he rejected the projects that he did not list as identified

runs, given petitioner’s concession of runs 807 through 820

(discussed below), we have sufficient information to conclude

that runs 1 through 820 include all of the additional qualified

research activities that occurred during the base period.

                      ii. Whether the Methodology Is Known or
                           Accepted in the Community, Has Been
                           Published, or Has Been Subjected to Peer
                           Review

     Respondent also argues that Dr. Wadia’s methodology was not

known or accepted in the community, was not published, and was

not subject to peer review.   Respondent argues that there are no

accepted standards or controls for applying Dr. Wadia’s

methodology.
                              - 265 -

     Petitioner responds that this factor is simply not

applicable to Dr. Wadia’s task, and we agree.   We find it highly

unlikely that there are any published methodologies in the

scientific world on how to identify research or experimentation

performed by a company for a given set of years, but clearly

Congress did not intend for the research credit to be

unattainable because of the absence of a peer-reviewed

methodology.

                    iii. Whether the Methodology Is Subject to
                          Known Rate of Error

     Respondent further argues that there is no known rate of

error in applying Dr. Wadia’s methodology.   However, respondent

believes that Dr. Wadia’s methodology was subject to errors as

evidenced by (1) Dr. Wadia’s supplemental report, which added 29

identified runs that Dr. Wadia did not include in his original

report, and (2) petitioner’s concession of runs 807 through 820.

Respondent points out that petitioner’s concession doubled the

number of runs associated with the Triton Assets from 2 to 4.    As

evidence of Dr. Wadia’s lack of thoroughness, respondent argues

that Dr. Wadia should not have missed the wastewater activity

test (run 809), which is described as a “plant test” in its

supporting documentation.   Respondent also argues that Dr. Wadia

erroneously treated the forced draft burner tests (runs 95 and

96) as occurring in 1985 instead of 1984 in his original expert

report; erroneously treated natural draft burner tests on
                              - 266 -

furnaces 10 and 12 as occurring in 1985 instead of 1984 or

earlier; and incorrectly determined the duration of the forced

draft burner tests, the natural draft burner tests on furnaces 10

and 12, and the natural draft burner tests (runs 1 through 11) on

furnace 9.

     Petitioner argues that Dr. Wadia’s methodology is not the

type of methodology that can be assigned a known rate of error

because it is not the type of research that is generally the

subject of statistical studies.   We agree that whether a project

or test satisfies the qualified research criteria from a

scientific point of view is not a question that can be

scientifically verified to a certainty.   While Dr. Wadia’s

experience as a scientist was central to his task, reasonable

scientists could disagree as to whether some projects satisfy the

qualified research criteria; and it is the duty of the Court to

determine whether any particular project does in fact satisfy

section 41(d).   We find that it is unlikely that any method of

identifying qualified research has been assigned a rate of error,

but Congress clearly intended for some taxpayers to be eligible

for the research credit.   Accordingly, the absence of a known

rate of error does not affect the weight we will give to Dr.

Wadia’s testimony.

     Furthermore, we do not find that Dr. Wadia’s “failure” to

include the wastewater activity test on his list of identified
                               - 267 -

runs indicates that Dr. Wadia was not thorough because we find

that the wastewater activity was not qualified research.   While

referred to as a “plant test” in the supporting documentation,

this project did not involve any experimentation but was merely

odor testing.   Even if UCC did form a hypothesis before

conducting this activity, there is no evidence that UCC performed

any analysis of the results.

     Regarding Dr. Wadia’s mistake of concluding that the forced

draft burner tests occurred in 1985 instead of 1984, we find that

this mistake was immaterial and it was sufficient that Dr. Wadia

corrected the mistake in his supplemental expert report.

Furthermore, respondent’s arguments regarding natural draft

burner tests on furnaces 10 and 12 are contrary to our findings

of fact–-we find that the tests on those furnaces occurred before

the base period and Dr. Wadia correctly excluded them from his

list of identified runs.   We also find that Dr. Wadia’s

determination of the duration of the forced draft burner tests

and the tests on furnace 9 during the natural draft burner tests

do not understate the duration of those runs.

     While we do not accept Dr. Wadia’s testimony as an opinion

as to which activities satisfy section 41(d), we find that he

interpreted the qualified research criteria using his knowledge

of scientific research and experimentation, and we find his

identification of runs that satisfy the qualified research
                                - 268 -

criteria from a scientific point of view to be helpful to the

Court.   We find that any errors in Dr. Wadia’s methodology have

been cured by petitioner’s concession of runs 807 through 820,

which we believe constitute the activities that may not

constitute qualified research but that bear enough marks of

qualified research that they must be considered to ensure that

petitioner has not omitted any qualified research activities from

its base period calculations.    Considering that (1) petitioner

conceded the Nalco inhibitor test and the wastewater activity,

which we find do not constitute qualified research, and (2)

respondent has not identified any projects that petitioner failed

to include that do constitute qualified research, we find it

unlikely that there are other projects that do satisfy the

qualified research criteria that petitioner has failed to

identify and concede.

                b.   Petitioner’s Definition of “Qualified
                     Research”

     Respondent argues that even if he has not identified other

activities that should have been included in petitioner’s base

period calculation, the burden is on petitioner to prove that it

has included in its base period calculations all of the

activities that are similar to the claim projects, and that

petitioner has not satisfied that burden.    Respondent argues that

petitioner cannot use Dr. Wadia’s expert testimony to prove that

it identified all of the activities that occurred during the base
                              - 269 -

period that are similar to the claim projects because Dr. Wadia

did not use the claim projects as models when applying the

qualified research criteria or give any consideration to whether

he identified all activities that were similar to the claim

projects when carrying out his task.    Furthermore, respondent

argues that Dr. Wadia’s interpretation of the qualified research

criteria was narrower than petitioner’s credit year position.

     As evidence, respondent again points to the Nalco inhibitor

antifouling test, which involved an activity that was very

similar to petitioner’s largest claim project, the UOP GA-155

project.   Had Dr. Wadia been charged with identifying all

projects that were similar to the claim projects, respondent

argues that Dr. Wadia would have included the Nalco inhibitor

antifouling test on his original list of identified runs.

     Respondent also argues that Dr. Wadia did not rely on the

“rule of three” when determining whether activities satisfied the

qualified research criteria even though petitioner relied upon

the rule of three for including some of the UCAT-J runs as

qualified research.   Accordingly, respondent argues that Dr.

Wadia may have excluded some activities from his list of

identified runs even though the technology tested in those runs

had been proven in only one or two successful runs.

     Petitioner argues that it satisfied the consistency

requirement because the qualified research criteria that Dr.
                              - 270 -

Wadia relied upon mirror the requirements of section 41 and the

regulations promulgated thereunder, and these were the same

criteria that petitioner used for its credit year claims.

Petitioner argues that using the same selection criteria for both

the credit years and the base period indicates that it complied

with the consistency requirement.

     We agree that the Nalco inhibitor antifouling test closely

resembles the UOP GA-155 project and that the fact that Dr. Wadia

did not include the Nalco inhibitor antifouling test on his list

of identified runs suggests that he interpreted the qualified

research criteria more narrowly than petitioner interpreted the

criteria when selecting the claim projects.   However, as

discussed above, we find that neither the UOP GA-155 project nor

the Nalco inhibitor antifouling test was qualified research.    We

find that Dr. Wadia’s failure to include projects similar to

those claim projects that fail the qualified research tests is

not sufficient basis for denying petitioner an additional

research credit.   As petitioner correctly argues, the consistency

requirement does not alter the definition of qualified research

under section 41(d).   Accordingly, petitioner’s failure to adhere

to section 41(d) when selecting some of the claim projects does

not necessarily indicate that Dr. Wadia failed to identify all of

the qualified research activities that occurred during the base

period.
                              - 271 -

     Furthermore, we find that the fact that Dr. Wadia did not

rely on the rule of three does not detract from his reliability.

The evidence indicates that the rule of three applied only to the

PE production process during the credit years, not to the entire

C&P division.   Furthermore, we find that Dr. Wadia is qualified

to determine whether UCC considered its technology to be

experimental or commercial during the base period.

     Respondent also argues that because Dr. Wadia kept no

records of the projects that he rejected, there is no way to

verify his conclusions or consider whether he was correct to

reject those projects.   Accordingly, respondent argues that Dr.

Wadia’s statement that he identified virtually all of the

qualified research activities that occurred during the base

period is a conclusory opinion that cannot be verified.

     We agree that this is a flaw in Dr. Wadia’s methodology.

However, we find that petitioner’s concession of runs 807 through

820 cures Dr. Wadia’s failure to identify the group of base

period projects that failed the qualified research criteria in

Dr. Wadia’s opinion but might have satisfied the Court’s

interpretation of section 41(d) because runs 807 through 820

constitute that group of projects.   While we find it unnecessary

to analyze all of the conceded runs in the light of petitioner’s

concession that they do satisfy section 41(d), the fact that the

two runs that respondent specifically criticizes Dr. Wadia for
                              - 272 -

missing do not satisfy the requirements of section 41(d) suggests

that petitioner’s concession of these runs sufficiently broadens

petitioner’s definition of “qualified research” for the base

period so that it is at least as broad as, if not broader than,

the Court’s interpretation of section 41(d).   Accordingly, under

the reasoning in Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d

Cir. 1930), we accept petitioner’s list of identified runs,

including concessions, as a close approximation of all of the

qualified research activities that occurred during the base

period.   It is highly unlikely that Dr. Wadia failed to include

any projects that would materially alter petitioner’s base period

computations.   Our view is supported by the 17 fact witnesses who

testified they were not aware of any plant experiments that

occurred during the base period that were not included on the

list of identified runs except for the experiments that

petitioner subsequently conceded.   While we agree with respondent

that the memories of the fact witnesses may be faulty, we find

that when taken together as a whole the evidence shows that

petitioner has satisfied its duty to identify all of the

activities that occurred during the base period that it was

required to take into account in calculating its base amount.

     While including all of the conceded runs may overstate

petitioner’s base amount, petitioner failed to provide the Court

with any other way to ensure that it has identified all of the
                                - 273 -

additional qualified research activities that occurred during the

base period and must bear the consequences of its own

inexactitude.   See id.

                c.    Whether Dr. Wadia Is Biased

      Respondent argues that Dr. Wadia’s methodology is flawed

because Dr. Wadia is biased by MATRIC’s relationship with Dow and

Dr. Wadia’s reliance on petitioner’s counsel to conduct document

searches.   Respondent argues that Dr. Wadia’s failure to include

the wastewater activity (run 809) on his list of identified runs

is evidence of Dr. Wadia’s bias.

      As discussed above, we do not think that Dr. Wadia was

mistaken in failing to include the wastewater activity on his

list of identified runs.    Respondent has failed to offer any

other evidence that indicates that Dr. Wadia was biased or that

his expert testimony was compromised because of MATRIC’s

relationship with Dow.

IV.   Claimed Costs

      To be eligible for the research credit under section

41(a)(1), a taxpayer must incur QREs during the credit year.

QREs are generally defined as the sum of the taxpayer’s in-house

research expenses and contract research expenses that are paid or

incurred during the taxable year in carrying on the taxpayer’s

business.   Sec. 41(b).   Petitioner does not claim as QREs any

contract research expenses and the parties do not dispute that
                                - 274 -

the claimed costs were incurred during the taxable year in

carrying on UCC’s business.

     In relevant part, section 41(b)(2)(A) defines in-house

research expenses as:

          (i) any wages paid or incurred to an employee for
     qualified services performed by such employee, [and]

          (ii) any amount paid or incurred for supplies used
     in the conduct of qualified research * * *

     Section 41(b)(2)(C) defines the term “supplies” as any

tangible property other than:

            (i) land or improvements to land, and

          (ii) property of a character subject to the
     allowance for depreciation.

Supplies must be used in the conduct of qualified research for

their costs to constitute QREs.    Sec. 41(b)(2)(A)(ii).   Amounts

incurred for supplies or property used only indirectly for

qualified research or for general and administrative expenses are

not QREs.    Sec. 1.41-2(b)(1), Income Tax Regs.

     Wages paid to an employee constitute QREs to the extent that

they are paid or incurred for qualified services performed by the

employee.    Section 41(b)(2)(B) provides that the term “qualified

services” means services consisting of:

            (i) engaging in qualified research, or

          (ii) engaging in the direct supervision or direct
     support of research activities which constitute
     qualified research.
                              - 275 -

Engaging in qualified research “means the actual conduct of

qualified research (as in the case of a scientist conducting the

laboratory experiments).”   Sec. 1.41-2(c)(1), Income Tax Regs.

Section 1.41-2(c)(2), Income Tax Regs., defines “direct

supervision” as follows:

          (2) Direct supervision.--The term “direct
     supervision” as used in section 41(b)(2)(B) means the
     immediate supervision (first-line management) of
     qualified research (as in the case of a research
     scientist who directly supervises laboratory
     experiments, but who may not actually perform
     experiments). “Direct supervision” does not include
     supervision by a higher-level manager to whom first-
     line managers report, even if that manager is a
     qualified research scientist.

The regulations define “direct support” as services in the direct

support of either (1) persons engaging in actual conduct of

qualified research or (2) persons directly supervising persons

engaged in actual conduct of qualified research.   Sec. 1.41-

2(c)(3), Income Tax Regs.

     As discussed above, the Amoco anticoking research activities

and the UCAT-J research activities constitute “qualified

research”.   However, we find that the production activities

associated with both projects are not part of the experimental

process business component and do not satisfy the process of

experimentation test.   Production activities are associated with

the separate, nonexperimental, product business components.

Accordingly, only the costs of supplies and wages that relate to
                               - 276 -

UCC’s research activities, not production activities, may be

QREs.

     Petitioner argues that the costs of all supplies and wages

that were incurred during the Amoco anticoking and UCAT-J

projects are QREs because the projects could not have occurred

without the supplies, particularly the raw materials, that were

used to make the products or without the employees who were

operating the plant, and the costs of these supplies and wages

are not otherwise excluded from the definition of QREs in section

41(b).

     We agree that the Amoco anticoking and UCAT-J projects could

not have occurred if UCC had not purchased the raw materials it

used in its production process, raw materials that UCC previously

treated as inventory and deducted as costs of goods sold.

However, this does not make the costs of these raw materials

QREs.    The definition of supplies QREs includes only amounts

“paid or incurred for supplies used in the conduct of qualified

research”.   Sec. 41(b)(2)(A)(ii) (emphasis added).   Petitioner

now seeks to include as QREs amounts incurred during the

production process upon which the qualified research was

conducted, not during the conduct of qualified research itself.

These costs are, at best, indirect research costs excluded from

the definition of QREs under section 1.41-2(b)(2), Income Tax

Regs.
                              - 277 -

     Petitioner argues that section 41 does not further define

the phrase “used in the conduct of” and the regulations provide

only that supplies are “used in the conduct of qualified research

if they are used the performance of qualified services”.   Sec.

1.41-2(b)(1), Income Tax Regs.   Accordingly, petitioner argues

that the phrase “used in the conduct of” should be interpreted in

its ordinary, everyday sense, citing Commissioner v. Brown, 380

U.S. 563, 571 (1965).

     We find that petitioner’s argument fails to recognize the

precise definition of “qualified research” found in section

41(d).   Section 41(d)(2)(C) provides that when a taxpayer seeks a

research credit related to its production process, the production

process must be divided into two business components, one that

relates to the process and another that relates to the product.

This indicates that Congress intended to allow taxpayers research

credits for research performed to improve their production

processes, but Congress did not intend for all of the activities

that were associated with the production process to be eligible

for the research credit if the taxpayer was performing research

only with respect to the process, not the product.   See sec.

1.41-4(b)(1), Income Tax Regs.   Here, the disputed supplies were

raw materials used in the commercial production and sale of

finished products.   They were used to make products for sale, not

for experimentation.
                               - 278 -

     The limited congressional intent is also expressed in the

shrinking-back rule, which permits taxpayers to divide a business

component into activities that do and do not satisfy the

qualified research tests when a project would otherwise be

disqualified when considered in its entirety.     See sec. 1.41-

4(b)(2), Income Tax Regs.    Taxpayers may not circumvent the

narrow definition of qualified research that Congress intended by

including as QREs costs of a project that are not incurred

primarily as a result of the qualified research activities.     Raw

materials used to make finished goods that would have been

purchased regardless of whether a taxpayer was engaged in

qualified research are not “used in the conduct of qualified

research”.    See sec. 41(b)(2)(A)(ii).

     Similarly, the costs of wages constitute QREs only if they

are paid for services consisting of engaging in or supervising

qualified research.    Sec. 41(b)(2)(B).   Services performed by

employees for activities that would occur regardless of whether

the taxpayer was engaged in qualified research are not qualified

services.    See sec. 41(b)(2)(A)(i).

     When section 41(d)(2)(C) applies and the relevant business

component is the process, and production of the product alone

would not constitute qualified research, we find that the costs

of supplies that would be purchased and wages attributable to

services that would have been provided regardless of whether
                                - 279 -

research was being conducted are costs associated with the

product business component and are not incurred in the conduct of

qualified research.    However, additional supplies costs incurred

because qualified research is being performed on the process or

wages attributable to services that would not normally have been

provided are attributable to the process business component and

are allowable as QREs if they otherwise satisfy section 41(b).

     Petitioner argues that Fudim v. Commissioner, T.C. Memo.

1994-235, requires a different result because in that case the

Court treated as QREs the costs of materials that the taxpayer

used to make plastic objects as part of his research on a process

known as “rapid modeling”.    These costs included the cost of the

photopolymers that were fabricated into the plastic objects.

     However, in Fudim the taxpayer’s rapid modeling process was

not a “plant process * * * for commercial production” of a

product that he himself fabricated and sold within the meaning of

section 41(d)(2)(C).   The Court found that the taxpayer was not

in the business of producing the plastic objects for sale but

“derived only a minimal amount of income on the models he made

during those years.”   Accordingly, there was no need to allocate

costs between the process business component and a product

business component.    Id.   Unlike the supplies UCC used in its

claim projects, which would have been purchased for production

even if no research had been performed, the supplies the taxpayer
                                - 280 -

in Fudim purchased were “devoted to research.”     Id. (emphasis

added).   For these reasons, we find Fudim to be distinguishable.

     Petitioner also argues that Lockheed Martin Corp. v. United

States, 49 Fed. Cl. 241 (2001), supports its position because it

implicitly holds that a “component part” of a product to be

delivered to a customer can constitute a “supply” within the

meaning of section 41(b).     In that case, the court rejected the

Government’s motion for summary judgment that component parts

used to make Supersonic Low Altitude Target (SLAT) devices could

not be “supplies”.    Id. at 247.

     We disagree that Lockheed Martin supports petitioner’s

argument.   In that case the court explicitly declined to consider

whether the component parts were used in the conduct of qualified

research.   Id. at 245-246.    Furthermore, Lockheed Martin is

distinguishable from the case before us because in that case the

relevant business component was the SLAT device, not the process

used to make the SLAT devices.

     Petitioner also cites a Canadian tax case, Consoltex Inc. v.

R, [1997] 2 C.T.C. 2846, in support of its position.    In

Consoltex, the court held that the cost of yarn used by a textile

producer during research conducted to develop improved textile

products was eligible for a scientific research and experimental

development credit.   Consoltex addressed a provision of Canadian

law, not the section 41 research credit.    In any event, Consoltex
                              - 281 -

is distinguishable because, as in Lockheed Martin, the research

conducted related to an experimental product and not the process

of producing the product.

     Petitioner argues that at many times during the conduct of

the claim projects UCC did not know whether the product produced

would meet customer specifications.     However, this does not

indicate that UCC was conducting qualified research on its

products.   To the contrary, petitioner has argued that for

purposes of determining whether the claim projects constitute

qualified research we should focus our analysis on the process,

not the product.   In any event, the evidence clearly indicates

that to the extent that UCC was conducting research on its end

products its activities would be excluded from the definition of

qualified research under section 41(d)(4)(A) as research after

commercial production because all of the products UCC produced

during the claim projects satisfied UCC’s functional and economic

requirements.   The fact that UCC occasionally produced off-

specification products does not change the fact that UCC had

already commercialized those products.

     Even if we were to include production activities as part of

the relevant business components, the production costs petitioner

claims are QREs would not be eligible for the research credit

under Mayrath v. Commissioner, 41 T.C. at 590, which limits

deductions under section 174 “to those expenditures of an
                                - 282 -

investigative nature expended in developing the concept of a

model or product.”   Section 41(d)(1)(A) incorporates section 174

into the definition of qualified research.    Petitioner cannot

avoid the restrictions of section 174 by arguing that section 174

is relevant only for determining whether activities constitute

qualified research and has no bearing on whether the costs of

those activities may be QREs.    See Norwest Corp. & Subs. v.

Commissioner, 110 T.C. at 491; H. Conf. Rept. 99-841 (Vol. II),

supra at II-71, 1986-3 C.B. (Vol. 4) at 71 (“the conference

agreement limits research expenditures eligible for the

incremental credit to ‘research or experimental expenditures’

eligible for expensing under section 174.”).

     Furthermore, the fact that petitioner first sought the

research credit for the claimed costs in its petition is strong

evidence that petitioner did not view these costs as research

costs and that UCC would have incurred these costs without the

incentive of the research credit.    Production costs that UCC

would have incurred without the incentive of the research credit

are not the types of costs that Congress sought to target when it

enacted the research credit.

     Petitioner bears the burden of proving its entitlement to

the additional research credits claimed in the petition.    See

Rule 142; New Colonial Ice Co v. Helvering, 292 U.S. 435, 440
                              - 283 -

(1934); Norwest Corp. & Subs. v. Commissioner, supra at 488-489

n.34; Eustace v. Commissioner, T.C. Memo. 2001-66.

     Petitioner’s claimed costs for supplies for both the Amoco

anticoking and UCAT-J projects include only costs of production.

Instead of calculating the cost of supplies that UCC used

specifically to perform experiments during production or analyze

data, petitioner’s calculations are founded on the assumption

that UCC did not increase its supplies costs during the claim

projects above its normal raw materials costs used in its plant

cost system to compute cost of goods sold.   It does not appear

that petitioner had any additional supplies QREs to claim because

petitioner claims as QREs only the raw material costs of the

finished products and not any additional supplies.   This

indicates that petitioner has not allocated its claimed QREs

between the experimental process business components and the

nonexperimental product business components of those projects.

Furthermore, petitioner did not distinguish between activities

that constitute elements of a process of experimentation and

ordinary production activities.   We find that the claimed

supplies costs are ordinary production costs that were properly

included in inventory and petitioner has not satisfied its burden

of proving that the costs it claims as supplies QREs were used in

the conduct of qualified research as required by section

41(b)(2)(A)(ii).   Petitioner has had ample opportunity to
                              - 284 -

establish that it incurred additional supply QREs for the claim

projects and has not carried its burden.   Accordingly, we find

that petitioner is not entitled to claim any additional supply

QREs for the claim projects, and we need not address respondent’s

remaining arguments that relate to the costs of these projects.52

     The research credits claimed on petitioner’s original

returns and allowed by respondent included the wages of UCC’s R&D

scientists and engineers at its technical centers.   Petitioner

now seeks to treat as additional QREs amounts paid to operators

at Taft and Star for the Amoco anticoking and UCAT-J projects,

respectively.

     For the Amoco anticoking project, petitioner treated as wage

QREs the wages paid to Mr. Hyde, Mr. Tregre, and Mr. Gorenflo

according to the number of hours each spent working on the

project.   Mr. Hyde and Mr. Tregre both credibly testified that

they spent a combined total of 50 hours working on the Amoco

anticoking project.   We find that the services that Mr. Hyde and

Mr. Tregre provided in connection with the Amoco anticoking


     52
      Respondent also argues that: Petitioner should not have
included the costs of utilities in its supplies costs because
utilities are generally excluded from the definition of qualified
research unless they are extraordinary, and they were not
extraordinary for the claim projects, see sec. 1.41-2(b)(1) and
(2), Income Tax Regs.; petitioner’s claimed supplies costs are
unreasonable and are therefore excluded under secs. 174 and
41(d)(1)(A); petitioner has failed to substantiate its supplies
costs; and Ms. Hinojosa erred in her allocation of one-
seventeenth of Taft’s ethylene supply costs to the Amoco
anticoking project.
                              - 285 -

project, including planning the tests, participating in the

pretreatments, and sending the data to the technical center to be

analyzed, constitute qualified services.   While respondent argues

that petitioner has not substantiated its claimed QREs, we find

that the testimonies of Mr. Hyde, Mr. Tregre, and Ms. Hinojosa

were credible and sufficiently substantiated the wages paid to

these employees.   We find that petitioner has satisfied its

burden and may treat as wage QREs $835 and $210 for 1994 and

1995, respectively.53   However, Mr. Gorenflo did not testify as

to how much time, if any, he spent on the Amoco anticoking

project.   Accordingly, petitioner has not satisfied its burden of

proving that Mr. Gorenflo spent 2 hours engaged in qualified

research with respect to the Amoco anticoking project in 1994 and

may not claim his wages as QREs.

     For the UCAT-J project, petitioner treated as additional

QREs a percentage of all wages paid to Star plant personnel

during 1994 and 1995 without determining which employees worked

on the UCAT-J project or how many hours they dedicated to the

project.   Petitioner has not provided any evidence that shows how


     53
      Mr. Hyde spent 35 and 10 hours working on the Amoco
anticoking project in 1994 and 1995, respectively, and his wage
rate was $21 per hour. Mr. Tregre spent 5 hours working on the
Amoco anticoking project in 1994 and his wage rate was $20 per
hour.

     The parties agree as to the operation of sec. 280C(c) and
any adjustments that may be required as a result of our decision.
Accordingly, we do not discuss it here.
                               - 286 -

much time Star’s plant employees actually spent on the UCAT-J

project, and there is no way to determine whether petitioner’s

estimate is accurate.    It appears that petitioner has already

received a credit under section 41 for the wages of most of the

employees who engaged in qualified research during the claim

years--the R&D scientists and engineers.    Accordingly, petitioner

is not entitled to any additional QREs attributable to wages paid

for the UCAT-J project.

V.   Base Period QREs

      A.   Alleged Flaws in Ms. Toivonen’s Costing Methodology

      Petitioner claims that it incurred $135,112,912 of QREs

during the base period on the basis of Ms. Toivonen’s costing

calculations of the runs identified by Dr. Wadia.    Respondent

argues that Ms. Toivonen’s methodology is flawed for the same

reasons respondent argues that Dr. Wadia’s methodology is flawed

because Ms. Toivonen failed to review or verify Dr. Wadia’s

determinations of the run durations and production quantities.

However, as discussed above, we find that any flaws in Dr.

Wadia’s methodology have been cured by petitioner’s concessions,

and accordingly Ms. Toivonen’s reliance on Dr. Wadia was

justified.

      Respondent also argues that Ms. Toivonen’s methodology is

flawed because she relied on Ms. Hinojosa and other Dow employees

to identify the lead PCDs and MASs relating to the products
                              - 287 -

produced.   However, respondent does not argue that Ms. Hinojosa

or the other Dow employees were unqualified to identify the lead

PCDs and MASs or that they performed their task poorly.   To the

contrary, we find that Ms. Hinojosa and other Dow employees were

in the best position to correctly identify the lead PCDs and MASs

because they were familiar with the products that UCC produced

during the base period.

     Respondent next argues that Ms. Toivonen was forced to use

cost accounting information for similar products when the actual

accounting information for a product was unavailable.   Respondent

believes that in some situations this caused Ms. Toivonen to omit

supplies that were used in the production process.   As an

example, respondent points to the propyl dipropasol refining test

(run 171), where Dr. Wadia listed sodium hydroxide as the

catalyst but Ms. Toivonen calculated the cost of sodium propylate

instead because it was listed on the PCD.   Similarly, for the

isophorone mids conversion test (run 173) and secondary refining

system test (run 178), Dr. Wadia stated that certain materials

were used that Ms. Toivonen did not include in the cost of the

runs because they were not listed on the PCDs.

     Ms. Toivonen testified that in her expert opinion any

discrepancies that may have occurred because she used accounting

information that did not exactly match the products produced or

Dr. Wadia’s descriptions of the runs are immaterial.    Regarding
                              - 288 -

Ms. Toivonen’s method of costing the propyl dipropasol refining

test, we find that Ms. Toivonen did not understate the cost of

the propyl dipropasol refining test because the cost of sodium

propylate was most likely higher than the cost of sodium

hydroxide.54   While a more conservative calculation of the cost

of the isophorone mids conversion and secondary refining system

tests would have included the cost of materials that were used

but omitted from the PCDs, we find that the omissions were

immaterial given the small amount of materials that were used.

We find Ms. Toivonen to be a credible expert witness, and in the

absence of any evidence to the contrary we find that any errors

in her conclusions that may have been caused by the accounting

records she used are immaterial.

     B.   Alleged Errors in Ms. Toivonen’s Calculations

     Respondent also argues that Ms. Toivonen made errors in her

report even when she used the correct documentation.   As an

example, respondent argues that Ms. Toivonen incorrectly

calculated the cost of 90,000 pounds of acrolein for the acrolein

refining system capacity test (run 128) instead of 1,800,000

pounds, the production quantity reported by Dr. Wadia.    Ms.

Toivonen testified that the discrepancy might be attributable to


     54
      Petitioner also argues that sodium propylate is the
chemical product of reacting sodium hydroxide with proponal, and
accordingly Ms. Toivonen’s calculation did in fact include the
cost of sodium hydroxide. However, given our finding, we need
not decide whether it is appropriate to take judicial notice of
this fact.
                                - 289 -

a unit of measure conversion, but she did not explain the

discrepancy in her expert report and could not be certain when

questioned about the discrepancy at trial.

       In the absence of any clear explanation as to why she did

not use the production quantity that Dr. Wadia provided, we find

that Ms. Toivonen should have calculated the cost of producing

1,800,000 pounds of acrolein, which would increase the base

period QREs by $283,654.80.55    However, we do not agree with

respondent that all of Ms. Toivonen’s base period calculations

should be disregarded because of this error and find it would be

more appropriate to increase petitioner’s QREs for 1987 by

$283,654.80.

       Respondent also argues that Ms. Toivonen lacked the

technical expertise to calculate the cost of runs 807 through

820.    As evidence, respondent points out that on cross-

examination Ms. Toivonen could not answer the question of whether

the cost of naphtha was captured as one of the costs for the

naphtha-sulfur injection test (run 807).    Ms. Toivonen believes

that the cost of the naphtha may have been captured on secondary

PCDs, which she used to calculate the costs of materials listed

on lead PCDs, but she could not be sure.




       55
      Ms. Toivonen calculated the supply cost per pound of
acrolein as $0.16588.
                              - 290 -

     Respondent also argues that Ms. Toivonen incorrectly

determined that the naphtha-sulfur injection test lasted for 35

days because other documents indicate that it lasted much longer

than 35 days.   As evidence, respondent points to two industrial

chemicals division monthly reports, one for December 1985, dated

January 13, 1986, and a second for July 1986, dated August 11,

1986.   The report for December 1985 states that the test began on

December 16, which is the date that Ms. Toivonen determined the

test began.   The report for July 1986 does not mention the test

at all.

     We do not think that the naphtha-sulfur injection test is

evidence that Ms. Toivonen lacked the technical expertise to

calculate the cost of runs 807 through 820.   Ms. Toivonen

captured the costs of the materials listed on the lead PCD for

the product, and we find the lead PCD to be a reliable document

to use to calculate the cost of producing a finished product.

While, as discussed below, this test does highlight a different

flaw in petitioner’s costing methodology because it includes only

the cost of ordinary production activities, we find that the fact

that naphtha was not listed on the lead PCD suggests that its

cost would not materially affect the cost of producing the

product made in the naphtha-sulfur injection test.

     Furthermore, the evidence that respondent argues indicates

that the naphtha-sulfur injection test likely lasted much longer
                                - 291 -

than 35 days does not so indicate.    To the contrary, it indicates

that it started on the date that Ms. Toivonen determined it

started and had not been completed as of 3 days before the date

that Ms. Toivonen determined that it ended.

     Respondent also believes that Ms. Toivonen mistakenly failed

to include the cost of refrigeration when costing the MMP

refrigeration test (run 810).    Section 1.41-2(b), Income Tax

Regs., provides that general and administrative expenses do not

qualify as QREs, and section 1.41-2(b)(2)(i)(1), Income Tax

Regs., provides that utilities are generally treated as general

and administrative expenses.    However, section 1.41-2(b)(2)(ii),

Income Tax Regs., provides that utilities may constitute QREs if

they are extraordinary.   Respondent argues that the cost of

refrigeration in the MMP refrigeration test was extraordinary.

     We find that refrigeration was not an extraordinary

expenditure in the refrigeration capacity tests.    In the first

test, in which UCC evaluated transfer chiller control at negative

10 degrees Centigrade instead of negative 17 degrees Centigrade,

UCC actually used less refrigeration than it would have during

the ordinary production of MMP.     In the second test, in which UCC

estimated the ambient heat gain of the day tanks and storage

tanks, any refrigeration used was not above the normal amount

that UCC would have used had it not been performing a test.

Accordingly, we do not find the cost of refrigeration to have
                              - 292 -

been an extraordinary expenditure during either of these tests.

     C.   Documents Ms. Toivonen Relied Upon

     Respondent argues that Ms. Toivonen’s methodology is flawed

because Ms. Toivonen relied on petitioner’s counsel to provide

her with the accounting records related to runs 807 through 820

instead of conducting an independent search of all of the

documents in the record.   Furthermore, respondent argues that Ms.

Toivonen looked only at accounting records to identify costs

instead of identifying technical documents to see whether they

provided additional information as to the duration or production

quantity of the runs.

     We find that the fact that Ms. Toivonen did not personally

find the necessary accounting records she needed to cost runs 807

through 820 is irrelevant.   There has been no suggestion, nor is

there any evidence, that petitioner’s attorneys were not

competent to provide Ms. Toivonen with the documents she needed

or that they withheld or tampered with any information.    Given

the large number of documents produced in this controversy, it

would have been impractical to require Ms. Toivonen to search

through all of the documents in the record without the assistance

of petitioner’s counsel.

     We also find that respondent’s argument that Ms. Toivonen

looked only at accounting records to calculate the cost of Runs

807 through 820 is inaccurate.   Ms. Toivonen’s supplemental
                                - 293 -

expert report cites numerous technical documents and trial

testimony to support her findings.    For each run, Ms. Toivonen

provided a reasonable explanation as to how she determined the

duration and production quantity and included citations of

technical documents and testimony where appropriate.    While, as

discussed above, respondent argues that Ms. Toivonen failed to

review technical documents that contradict her findings regarding

the duration of the naphtha-sulfur injection test, we find that

the technical documents at issue are consistent with Ms.

Toivonen’s determinations for that test.    Furthermore, because

the refrigeration used in the MMP refrigeration tests was not

extraordinary, there was no need for Ms. Toivonen to review

additional documents to determine the cost of the refrigeration

used.     Accordingly, we find that Ms. Toivonen committed no error

in relying upon the documents that she relied upon.

     D.     Consistency Requirement

     Respondent argues that Ms. Toivonen’s methodology for

costing the identified runs was inconsistent with Ms. Hinojosa’s

methodology for calculating the cost of the claim projects.

Specifically, respondent disputes Ms. Toivonen’s treatment of

base case costs and wage costs.

             1.   In General

     Respondent argues that the fact that petitioner claimed QREs

of $43 million for the UOP GA-155 project indicates that
                                 - 294 -

petitioner failed to satisfy the consistency requirement because

the largest base period project before the trial was costed as

$5.1 million and the most QREs petitioner claims in 1 base period

year are $33 million.

     Respondent’s argument is contrary to the purpose of the

research credit.   The research credit was designed to encourage

taxpayers to increase their spending on qualified research.    If

the fact that a taxpayer incurred more QREs in a credit year than

in the base period could be treated as dispositive that the

taxpayer ran afoul of section 41(c)(4), this would thwart the

purpose of the research credit.

     Furthermore, we find that as a general matter, petitioner

used the same methodology to calculate its credit year and base

period QREs.   In the opinions of Ms. Toivonen and Ms. Hinojosa,

petitioner’s accounting expert witnesses, the costing methodology

Ms. Toivonen applied in calculating UCC’s base period costs is

consistent with Ms. Hinojosa’s methodology.   In arriving at this

conclusion, each expert witness reviewed the methodology used by

the other.   We find both expert witnesses to be credible on this

matter and find that Ms. Toivonen’s costing methodology was

generally consistent with Ms. Hinojosa’s costing methodology.

          2.   Base Case Costs

     Respondent argues that petitioner’s treatment of base case

costs for the base period differs from its treatment of base case
                              - 295 -

costs for the credit years.   Respondent argues that for the Amoco

anticoking project petitioner treated the cost of testing the

untreated cracking sets as QREs but for the Nalco 5211 test (run

15) petitioner did not treat the cost of the base case runs as

QREs.   Respondent argues that both the Amoco anticoking project

and the Nalco 5211 test used base cases and that petitioner

should have treated both base cases the same.

     We agree that it is possible that UCC conducted some

qualified research before the start date petitioner determined

for the Nalco 5211 test.   However, as discussed above, we find

that none of the supply costs that petitioner claimed with

respect to the Amoco anticoking project constituted QREs.

Similarly, we find that it would be inappropriate to treat the

costs of raw materials that were used during the base case runs

as QREs.   While we allowed petitioner to treat $1,045 that UCC

paid to two of its employees as wage QREs, this was less than

one-tenth of 1 percent of the total QREs that petitioner claimed

for the Amoco anticoking project.   Accordingly, even if

petitioner improperly omitted wages paid to UCC plant employees

to conduct qualified research before the date on which petitioner

believes the Nalco 5211 test began, given petitioner’s expansive

reading of section 41(b) we find it highly unlikely that

petitioner’s calculation of the Nalco 5211 test understates the

amount of QREs that were actually incurred.   Accordingly, under
                                - 296 -

the principles provided in Cohan v. Commissioner, 39 F.2d at 543-

544, we find it more appropriate to accept petitioner’s

calculation of the Nalco 5211 test than to reject petitioner’s

efforts as a whole.

          3.   Wage Costs

     Respondent next argues that Ms. Toivonen’s method of

calculating wage costs was inconsistent with the method Ms.

Hinojosa used for the credit years, specifically the wage costs

for the UCAT-J project.     Ms. Hinojosa calculated the wage costs

for the UCAT-J project by multiplying the total wages incurred

for all Star employees by the ratio of UCAT-J production pounds

to total production pounds in each of the credit years.

Respondent argues that when calculating the wages incurred at

Star for the base period, Ms. Toivonen inconsistently excluded a

number of groups of personnel that were included in the credit

year wage costs.

     As discussed above, we find that none of the costs that

petitioner claims as QREs with respect to the UCAT-J project

constitute QREs.   Ms. Hinojosa determined that the amount of time

spent by plant operators and other support staff during the UCAT-

J runs was not significantly different when compared to normal

production runs.   This indicates that the employees whose wages

Ms. Hinojosa calculated were not involved in the conduct of

qualified research but were engaged in ordinary production
                                - 297 -

activities.   Even if those employees were involved in the conduct

of qualified research, petitioner has offered no way of

distinguishing the wages UCC it paid for its employees to engage

in qualified research and to engage in ordinary production

activities.   Accordingly, petitioner did not violate section

41(c)(4) by excluding similar costs from its base period

calculations.

     E.   Whether Ms. Toivonen Calculated the Cost of “Qualified
          Research” Activities

     We find Ms. Toivonen’s methodology to be flawed for the same

reason that Ms. Hinojosa’s methodology is flawed.   In calculating

the cost of the identified runs, Ms. Toivonen identified only

ordinary production costs, not the costs of performing research.

     The naphtha-sulfur injection test (run 807) highlights the

flaw in petitioner’s costing methodology that we discussed with

regard to the claim projects.    Ms. Toivonen calculated the cost

of the naphtha-sulfur injection test as being the cost of

producing ethylene, which is not an experimental product.

However, if the naphtha-sulfur injection test constitutes

qualified research,56 the activities that constitute process of

experimentation would be limited to the planning of the test,

injecting naphtha into the process stream, testing the results,

and analyzing the results.   The ordinary production activities

that would occur during the production of ethylene regardless of


     56
      We accept petitioner’s concession that this run
constitutes qualified research.
                                - 298 -

whether an experiment was being conducted would fail the process

of experimentation test, although most likely naphtha would be

considered a supply used in the experiment.    However, in costing

the naphtha-sulfur injecting test, Ms. Toivonen included all of

the ordinary production costs and excluded the cost of naphtha.

      Ms. Toivonen similarly calculated the cost of all of the

other identified runs as if they were ordinary production runs.

Ms. Toivonen did not calculate the cost of any additional

supplies that may have been purchased for the tests or calculate

the wages paid to any specific plant employees who worked on the

projects.

      However, we find Ms. Toivonen’s error to be harmless because

it causes petitioner to overestimate its base amount, thereby

reducing the research credit.    Ms. Toivonen concluded that the

total cost of all of the identified runs was $135,112,912.

Because petitioner has provided us with no way to divide these

costs between costs incurred in the conduct of qualified research

and costs incurred as ordinary production costs, we shall treat

the entire amount as additional base period QREs, adjusted

according to our findings.57

VI.   Conclusion

      We find that petitioner has established that it incurred

additional wage QREs of $835 and $210 for 1994 and 1995,



      57
      We find that Ms. Toivonen improperly calculated the cost
of the acrolein refining system capacity test.
                               - 299 -

respectively, but no additional supplies QREs for the claim

projects.   Furthermore, we accept petitioner’s calculations for

the base period, adjusted according to our findings, as UCC’s

additional base period QREs.   We shall instruct the parties to

resolve any issues regarding the remaining credit year projects

in a manner consistent with this opinion.

     On the basis of the foregoing,


                                           An appropriate order will

                                      be issued.
