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Tell City Boatworks, Inc. v. Indiana Department of State Revenue

Tax Court of Indiana

April 18, 2019

TELL CITY BOATWORKS, INC., Petitioner,
v.
INDIANA DEPARTMENT OF STATE REVENUE, Respondent.

          ATTORNEYS FOR PETITIONER: RANDAL J. KALTENMARK ZIAADDIN MOLLABASHY BARNES & THORNBURG LLP Indianapolis, IN JOHN H. DIES JEREMY M. FINGERET ROSALIND J. LEWIS DAVID C. LORENTZ JEFFERSON H. READ ZERBE MILLER FINGERET FRANK & JADAV, P.C. Houston, TX

          ATTORNEYS FOR RESPONDENT: CURTIS T. HILL, JR. ATTORNEY GENERAL OF INDIANA REBECCA L. MCCLAIN DEPUTY ATTORNEY GENERAL Indianapolis, IN SEAN P. BURKE HAMISH S. COHEN ELINAM B. KPOTUFE MATTINGLY BURKE COHEN & BIEDERMAN LLP Indianapolis, IN

          ORDER ON PETITIONER'S MOTION TO STRIKE THE REPORT AND EXCLUDE THE TESTIMONY OF JOHN WILLIAM SULLIVAN

          MARTHA BLOOD WENTWORTH, J.

         This matter concerns Tell City Boatworks, Inc.'s Motion to Strike the Report and Exclude the Testimony of John William Sullivan. Upon review, the Court denies Tell City's Motion.

         BACKGROUND

         Tell City is a domestic corporation that designs and manufactures barges and other vessels. (See Jt. Stipulation of Facts ("Second Stip") ¶¶ 1-4, 10 (filed 1/11/2019).) In 2015, Tell City filed an amended Indiana income tax return, claiming its work on six projects entitled it to both a qualified research expense credit (the "QRE credit") and an income tax refund for 2010. (See Second Stip. ¶¶ 6, 29.) The Department subsequently determined that Tell City was not entitled to the QRE credit and denied Tell City's refund claim. (See Second Stip. ¶¶ 7-8.)

         On January 16, 2018, Tell City timely initiated an original tax appeal, claiming that the Department's final determination was erroneous. During the course of the litigation, the Department retained Robson Forensic, Inc. to investigate "whether a process of experimentation would [have] be[en] necessary ... in order for [Tell City] to complete" the six projects at issue. (See Pet'r Mem. Supp. Mot. Strike Report & Exclude Test. John William Sullivan ("Pet'r Br."), Ex. A at 1.) Thereafter, Robson Foresnic's employee, John William Sullivan, investigated the matter and prepared a report. (See Pet'r Br., Ex. A.) (See also Resp't Resp. Opp'n Pet'r Mot. Strike & Exclude Test. John William Sullivan ("Resp't Resp. Br."), Ex. 2.)

         On January 24, 2019, Tell City moved to strike Sullivan's report and exclude his testimony. On February 18, 2019, after the matter was fully briefed, the Court took Tell City's Motion under advisement. Additional facts will be supplied when necessary.

         LAW AND ANALYSIS

         In its Motion, Tell City claims that Sullivan's report and testimony are inadmissible for three interrelated reasons regarding their overall lack of relevancy and credibility. (See generally Pet'r Mot. Strike Report & Exclude Test. John William Sullivan ("Pet'r Mot.").) In response, the Department maintains that Sullivan's report and testimony are admissible because Tell City's complaints simply go to the weight of the evidence, not its admissibility. (See generally Resp't Resp. Br.)

         1.

         Tell City first maintains that Sullivan's report and testimony are inadmissible because Sullivan's opinions "are exclusively based upon a defunct legal standard[:]" the Discovery Rule. (Pet'r Br. at 4-11.) Tell City explains that "[t]he 'Discovery Rule' is an antiquated idea whereby a company would have to exceed, expand or refine the common knowledge of science in a given area to show qualified research was performed." (Pet'r Br. at 6 (footnote omitted).) Tell City contends that because the parties have previously stipulated that another standard applies, Sullivan's report and testimony are not relevant, misleading, and potentially prejudicial. (See Pet'r Br., Ex. C.)

         The parties arguments on the merits indicate that one of the issues before the Court involves whether Tell City's activities constitute "elements of a process of experimentation" for purposes of IRC § 41 and the related Treasury Regulations.[1] (See, e.g., Pet'r Br. at 8-11; Resp't Resp. Br. at 4-9.) The resolution of that issue will depend on several factors. See, e.g., Treas. Reg. § 1.41-4(a)(3)(i) (2019) (implicating, for example, questions of whether Tell City's activities were "undertaken for the purpose of discovering information that is technological in nature[, ]" or were "intended to eliminate uncertainty concerning the development or improvement of a business component" (emphasis added)).

         The Treasury Regulations expressly provide, however, that a taxpayer does not need to show that it sought to obtain information that exceeded, expanded, or refined the common knowledge of science in the relevant field to meet the "uncertainty" requirement. See Treas. Reg. § 1.41 -4(a)(3)(ii). Nonetheless, evidence of that type is not automatically irrelevant, misleading, or potentially prejudicial that would make it inadmissible. Indeed, other courts have considered similar evidence in determining whether a taxpayer's activities were undertaken for the purpose of discovering technological information. Compare generally, e.g., Suder v. Comm'r. 108 T.C.M. (CCH) 354 (T.C. 2014) with Trinity Indus. Inc. ...


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