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

ATTORNEYS FOR PETITIONER: ATTORNEYS FOR RESPONDENT:
RANDAL J. KALTENMARK CURTIS T. HILL, JR.
ZIAADDIN MOLLABASHY ATTORNEY GENERAL OF INDIANA
BARNES & THORNBURG LLP REBECCA L. MCCLAIN
Indianapolis, IN DEPUTY ATTORNEY GENERAL
Indianapolis, IN
JOHN H. DIES
JEREMY M. FINGERET SEAN P. BURKE
ROSALIND J. LEWIS HAMISH S. COHEN
JEFFERSON H. READ ELINAM B. KPOTUFE
ZERBE MILLER FINGERET MATTINGLY BURKE COHEN &
FRANK & JADAV, P.C. BIEDERMAN LLP
Houston, TX Indianapolis, IN
FILED
IN THE May 10 2019, 2:08 pm
CLERK
INDIANA TAX COURT Indiana Supreme Court
Court of Appeals
and Tax Court
TELL CITY BOATWORKS, INC., )
)
Petitioner, )
)
v. ) Cause No. 18T-TA-00004
)
INDIANA DEPARTMENT OF )
STATE REVENUE, )
)
Respondent. )
ORDER ON RESPONDENT’S MOTION
TO EXCLUDE THE ALLIANTGROUP REPORT AND
EXCLUDE OR LIMIT THE PROPOSED TESTIMONY OF STACY LITTLE
FOR PUBLICATION
May 10, 2019
WENTWORTH, J.
This matter concerns the Indiana Department of State Revenue’s “Motion to
Exclude the AlliantGroup Report and Exclude or Limit the Proposed Testimony of Stacy
Little.” Upon review, the Court denies the Department’s Motion in part and grants it in
part.
BACKGROUND
On January 16, 2018, Tell City Boatworks, Inc. filed an original tax appeal
challenging the Department’s final determination that Tell City was not entitled to a
qualified research expense credit (the “QRE credit”) or an income tax refund for the 2010
tax year. Pursuant to the Court’s Case Management Plan, the parties were ordered to
disclose the names, addresses, and reports of any experts no later than October 4, 2018.
That deadline was later extended to October 12, 2018.
At some point during the discovery process, Tell City produced its “Research and
Development Tax Credit Study” (“Report”). (See Resp’t Br. Supp. Mot. Exclude Alliant
Group Report & Exclude or Limit Proposed Test. Stacy Little (“Resp’t Br.”) at 3, Ex. B.)
The Report provided that Tell City had retained the alliantgroup LP “to assist in analyzing,
substantiating, and documenting [Tell City’s] various research and experimental activities
in accordance with the guidelines provided” in Indiana Code § 6-3.1-4 et seq. and IRC §§
41 and 174 for the 2010 tax year. (Resp’t Br., Ex. B at 1.) In addition, Tell City indicated
that although it did not intend to call an expert witness to testify, it may call Stacy Little,
an Associate Director with the alliantgroup, as a fact witness. (See Resp’t Br., Ex. A at
Interrogs. 11, 12.) Tell City explained that Ms. Little’s testimony might “address anything
from project qualification to quantification of the research credit to substantiation or other
items related to the claimed credit.” (Resp’t Br., Ex. A at Interrog. 11.)
In October of 2018, the Department sent a 30(B)(6) Notice of Deposition and a
subpoena duces tecum for the production of certain documents to the alliantgroup.
(Resp’t Br., Ex. C.) The parties subsequently agreed to postpone that discovery “until
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. . . Tell City decided whether it would call a representative of the alliantgroup as a witness
at trial.” (Resp’t Br. at 4.) At some point thereafter, the Department discovered that Ms.
Little was both an alliantgroup employee and an attorney and that all of Tell City’s non-
local counsel held managerial, executive, or senior positions at the alliantgroup. (See,
e.g., Resp’t Br. at 1-2, 7-8.) On January 29, 2019, the Court held a Status Conference
during which Tell City confirmed for the first time that Ms. Little would be called as a fact
witness. (Resp’t Br. at 4.)
On February 13, 2019, the Department filed its Motion, claiming the Report and
testimony of Ms. Little should be excluded or limited pursuant to Indiana Rules of
Evidence 403, 602, 701, 704, 801, and 802. (See generally Resp’t Br. at 9-22.) On March
5, 2019, after the matter was fully briefed, the Court took the Department’s Motion under
advisement. Additional facts will be supplied when necessary.
LAW AND ANALYSIS
The Department has presented several arguments claiming, for one reason or
another, that Indiana’s rules of evidence bar the admission of Ms. Little’s testimony and
the Report. (See, e.g., Resp’t Br. at 9-22.) It appears, however, that the Department’s
primary claim is that Ms. Little should not be permitted to testify as a fact witness because
the substance of both her testimony and the Report are more akin to the opinions of
experts than those of fact witnesses. (See, e.g., Resp’t Br. at 14-16.)
Tell City, on the other hand, claims that the Department’s characterization of Ms.
Little as “‘an expert in lay witness’ clothing’” is unfounded because she possesses none
of the attributes of a retained expert. (See Pet’r Resp. Opp’n Resp’t Mot. Exclude
AlliantGroup Report & Exclude or Limit Proposed Test. Stacy Little (“Pet’r Br.”) at 2, 4-5,
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13-14 (indicating that Ms. Little was directly involved in conducting the alliantgroup’s study
of Tell City).) Tell City further claims that the Department’s concerns regarding the Report
are misplaced because it is nothing more than a “summary of the actions taken by Ms.
Little throughout her involvement in the subject study.” (Pet’r Br. at 5.) Tell City’s
arguments, however, are not persuasive.
Tell City seeks to introduce Ms. Little’s testimony pursuant to Rule 701 of Indiana’s
Rules of Evidence. Rule 701 provides that “[i]f a witness is not testifying as an expert,
testimony in the form of an opinion is limited to one that is: (a) rationally based on the
witness’s perception; and (b) helpful to a clear understanding of the witness’s testimony
or to a determination of a fact in issue.” Ind. Evidence Rule 701.
At the outset, it is not clear how many individuals from the alliantgroup were
involved in conducting the study or creating the Report. (See Pet’r Br. at 1-2 (indicating
that Ms. Little “helped” create the Report).) In fact, it is not clear who actually authored
the Report because it lists the alliantgroup as its sole author. (See Resp’t Br., Ex. B.)
Nonetheless, the Report does indicate that Ms. Little’s opinions on Tell City’s eligibility for
the QRE credit were based on reviews of “contemporaneous documentation” and
interviews with an unspecified number of “key employees.” (See Resp’t Br., Ex. B at 12-
16.) (See also Pet’r Br. at 6-7.) Indeed, the Report provides that because “Tell City’s
management and Engineering Team employees did not track their time directly to
projects[,]” the “alliantgroup discussed and subsequently evaluated the activities of these
individuals in order to determine the percentage of time spent engaged in qualifying
activities on qualified projects[.]” (Resp’t Br., Ex. B at 15.) Thus, it appears that Ms.
Little’s opinions on Tell City’s eligibility for the QRE credit were based on information
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received from others not her own personal perceptions. See, e.g., Averitt Exp., Inc. v.
State ex rel. Indiana Dep’t Transp., 18 N.E.3d 608, 613 (Ind. Ct. App. 2014) (explaining
that when an Indiana state trooper considered what witnesses told him about an accident,
his opinions were based on information received from others, and thus, were not
admissible under Rule 701). Accordingly, Tell City has not shown that Ms. Little’s
testimony is admissible under Indiana Evidence Rule 701. The analysis does not,
however, end here.
Indiana Evidence Rule 702 provides “[a] witness who is qualified as an expert by
knowledge, skill, experience, training, or education may testify in the form of an opinion
or otherwise if the expert’s scientific, technical, or other specialized knowledge will help
the trier of fact to understand the evidence or to determine a fact in issue.” Ind. Evidence
Rule 702(a). This Rule, among others, governs the admission of two types of expert
evidence: 1) scientifically-based evidence; or 2) non-scientific evidence based on an
expert’s specialized knowledge and experience. See Malinski v. State, 794 N.E.2d 1071,
1084-86 (Ind. 2003). When expert evidence is based upon the expert’s skill or experience
instead of the application of scientific principles, the proponent of the evidence “must only
demonstrate that the subject matter is related to some field beyond the knowledge of lay
persons and that the witness possesses sufficient skill, knowledge or experience in the
field to assist the trier of fact to understand the evidence or to determine a fact in issue.”
Norfolk S. Ry. Co. v. Estate of Wagers, 833 N.E.2d 93, 102 (Ind. Ct. App. 2005) (citation
omitted), trans. denied.
The United States Court Tax has stated that “[t]he research tax credit is one of the
most complicated provisions in the [Internal Revenue] Code.” Suder v. C.I.R., 108 T.C.M.
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(CCH) 354, 2014 WL 4920724, at *30 (T.C. 2014). Given its complexity, taxpayers
seeking the credit typically retain individuals with experience in the field, like the
alliantgroup, to assist with assessing their eligibility for the credit. See, e.g., id. at *22
(explaining that an employee learned how to calculate the qualified research expense
credit independently after working closely with the alliantgroup on an unrelated qualified
research expense study). See also United States v. Quebe, 2017 WL 279539, at *1 (S.D.
Ohio 2017) (providing that Quebe retained the alliantgroup to evaluate its eligibility for the
research tax credit).
Indiana incorporates certain provisions of the Internal Revenue Code and related
Treasury Regulations for purposes of determining whether a taxpayer qualifies for the
QRE credit. See, e.g., IND. CODE § 6-3.1-4-1 (2019). Thus, it follows that the evaluation
of whether a taxpayer is eligible for Indiana’s QRE credit requires specialized knowledge,
skill, experience, or training. Ms. Little “was responsible for the development, calculation,
and finalization of the tax credit” that Tell City seeks. (Pet’r Br. at 1.) The Department
has not claimed that she lacked the knowledge, skill, experience, or training to accomplish
these tasks. (See generally, e.g., Resp’t Br.) Moreover, the Court believes expert
testimony would assist the Court in understanding the evidence. Accordingly, the Court
finds that if Ms. Little testifies, she may do so only as an expert witness.
The Department further claims that it would be prejudiced by the introduction of
Ms. Little’s testimony and the Report “because it would have to respond to what are
essentially expert opinions without the benefit of the normal expert disclosures, the full
scope of expert discovery, and/or a real opportunity to find, disclose, and present a
rebuttal expert.” (See Resp’t Br. at 15-16.) The Court will therefore level the playing field
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by providing the Department with additional time to conduct discovery.
Finally, with respect to the Report, Indiana Evidence Rule 704 prohibits witnesses
from testifying to legal conclusions. See Ind. Evidence Rule 704(b). The Department
claimed that there are portions of the Report that draw legal conclusions. (See Resp’t Br.
at 17-19.) For instance, the Report discusses why Tell City’s projects satisfied the
relevant statutory requirements, and it opines “that is more likely than not the
expenditures allocated in this Study qualify for the [QRE credit] based on current statutes
and regulations.” (See, e.g., Resp’t Br., Ex. B at 6-11, 20-42.) Nonetheless, it is not clear
whether the statements in the Report are inadmissible legal conclusions or admissible
opinions that simply apply the law to the facts because neither party has briefed this
specific issue. Compare, e.g., Walker v. Lawson, 526 N.E.2d 968, 970 (Ind. 1988)
(providing “[i]t is inappropriate for a court to entertain evidence concerning a witness’s
interpretation of the law”) with Quebe, 2017 WL 279539, at *16-17 (indicating that an
opinion regarding the application of law to facts is not a legal conclusion). See also
generally Resp’t Br.; Pet’r Br.) Consequently, neither Ms. Little nor any other witness may
testify to any portion of the Report that the Court determines is a legal conclusion.
CONCLUSION
The Court, having determined that Ms. Little may testify only as an expert witness
rather than a fact witness, declined to exclude any portion of the Report at this phase in
the proceedings, and determined that the Department may conduct additional discovery
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regarding Tell City’s expert witness and the Report, now DENIES the Department’s
Motion in part and GRANTS it in part.
SO ORDERED this 10th day of May 2019.
Martha Blood Wentworth, Judge
Indiana Tax Court
Distribution:
Randal J. Kaltenmark, John H. Dies, Jeremy M. Fingeret, Rosalind J. Lewis, Ziaaddin
Mollabashy, Jefferson H. Read, Rebecca L. McClain, Sean P. Burke, Hamish S. Cohen,
Elinam B. Kpotufe
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