UNITED STATES OF AMERICA v. Quebe et al
DECISION AND ENTRY - IT IS THEREFORE ORDERED THAT: 1. Defendants Motion to Compel Responses to Requests for Production (Doc. # 32 ) is DENIED, in part, and GRANTED, in part, as described ;2. Defendants Motion to Compel Reponses to Interrogatories and Identification of Lay Witnesses (Doc. # 39 ) is GRANTED, in part, and DENIED, in part, as described ; 3. Plaintiffs Motion to Compel Responses to Interrogatories (Doc. # 42 ) is GRANTED, in part, and DENIED, in part, as described above; 4. Defendan ts Motion to Quash the Depositions of Kenneth Lowery and Lance Beck and Motion for Protection (Doc. # 47 ) is DENIED as moot; and 5. Plaintiffs Motion to Quash the Depositions of IRS Employees or, in the Alternative, for a Protective Order (Doc. # 49 ) is GRANTED, in part, as to the Deposition of Wayde Smith, and DENIED, in part, as to the Deposition of Rebecca McGraw. Signed by Magistrate Judge Sharon L. Ovington on 1/23/17. (pb)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF OHIO
WESTERN DIVISION AT DAYTON
UNITED STATES OF AMERICA,
DENNIS QUEBE, et al.,
: Case No. 3:15-cv-294
: District Judge Thomas M. Rose
: Magistrate Judge Sharon L. Ovington
DECISION AND ENTRY
“The research tax credit is one of the most complicated provisions in the Code.”
Suder v. Comm’r, T.C. Memo 2014-201, 108 T.C.M. (CCH) 354, 2014 WL 4920724, at
*77 (T.C. 2014). Believing that Dennis Quebe and Linda Quebe (Defendants) are not
entitled to the research and development tax credit, the United States of America
(Plaintiff) brings this action pursuant to 26 U.S.C. § 7405(b) to recover allegedly
erroneous refunds of federal taxes made to Defendants.
This case is before the Court upon five motions and related memoranda:
Defendants’ Motion to Compel Responses to Requests for Production (Doc. #s 32, 33,
36, 37, 38); Defendants’ Motion to Compel Responses to Interrogatories and
Identification of Lay Witness (Doc. #s 39, 40, 45, 46); Plaintiff’s Renewed Motion to
Compel Responses to Interrogatories (Doc. #s 42, 43, 50, 53); Defendants’ Motion to
Quash the Depositions of Kenneth Lowery and Lance Beck and Motion for Protection
(Doc. #s 47, 48); and Plaintiff’s Motion to Quash the Depositions of IRS Employees or,
in the alternative, for a Protective Order (Doc. #s 49, 54); and the record as a whole.
In 2009 and 2010, Dennis Quebe was the sole shareholder of Quebe Holdings, Inc.
(QUI), a corporation composed of three companies, Chapel Electric Co., LLC, Chapel
Romanoff Technologies, LLC, and Romanoff Electric Co., LLC. On September 14, 2010
and September 14, 2011, QUI filed a Form 1120S with the Internal Revenue Service
(IRS) for the 2009 and 2010 tax years, respectively. On April 15, 2010 and April 15,
2011, Defendants filed a Form 1040 with the IRS for the 2009 and 2010 tax years,
respectively. Income flowing through QHI was reported on Defendants’ returns from
In 2012, QUI retained alliantgroup, LP, (alliantgroup) to evaluate QUI’s
entitlement to research and development (R&D) tax credits and 179D deductions for tax
years 2009 through 2011. [A]lliantgroup issued a report identifying approximately
$268,686.00 of estimated net R&D tax credits. On April 1, 2013, QUI filed an amended
Form 1120S with the IRS for the 2009 tax year. QUI claimed credits for increasing
research activities under 26 U.S.C. § 41 and deductions under 26 U.S.C. § 179D. On the
same day, the IRS received a Form 1040X from Defendants that reflected a reduction in
their income tax liability in the amount of $107,292.00. On August 26, 2013, the IRS
issued a refund in the amount of $119,954.90.
On December 16, 2013, QUI filed an amended Form 1120S for the 2010 tax year.
Again, QUI claimed credits for increasing research activities under 26 U.S.C. § 41 and
deductions under 26 U.S.C. § 179D. On December 30, 2013, the IRS received a Form
1040X from Defendants that reflected a reduction in their income tax liability in the
amount of $118,048.00. On April 7, 2014, the IRS issued a refund in the amount of
QUI and Defendants also filed amended tax returns for tax years 2008, 2011, and
2012, and the IRS issued refunds for those years as well. The IRS subsequently reviewed
Defendants’ income tax returns for 2008, 2011, and 2012 and QUI’s corporate income
tax returns for 2011 and 2012. The IRS concluded that Defendants were not entitled to
the R&D tax credits and deductions. Plaintiff then filed this case on August 25, 2015,
alleging that QUI is not entitled to credits under 26 U.S.C. § 41 or deductions under 26
U.S.C. § 179D for the 2009 and 2010 tax years. Plaintiff seeks to recover from
Defendants $119,954.65 plus interest for 2009 and $129,482.90 plus interest for 2010.
Defendants deny that the refunds were erroneous and request the case be dismissed with
STANDARD OF REVIEW
Under the Federal Rules of Civil Procedure, the scope of discovery is
“traditionally quite broad.” Lewis v. ACB Bus. Servs, Inc., 135 F.3d 389, 402 (6th Cir.
1998) (citing Mellon v. Cooper–Jarrett, Inc., 424 F.2d 499, 501 (6th Cir.1970)).
Parties may obtain discovery regarding any nonprivileged
matter that is relevant to any party’s claim or defense and
proportional to the needs of the case, considering the
importance of the issues at stake in the action, the amount in
controversy, the parties’ relative access to relevant
information, the parties’ resources, the importance of the
discovery in resolving the issues, and whether the burden or
expense of the proposed discovery outweighs its likely
benefit. Information within this scope of discovery need not
be admissible in evidence to be discoverable.
Fed. R. Civ. P. 26(b)(1). But, “this desire to allow broad discovery is not without limits
and the trial court is given wide discretion in balancing the needs and rights of both
plaintiff and defendant.” Scales v. J.C. Bradford & Co., 925 F.2d 901, 906 (6th Cir.
A party may file a motion to compel discovery when the opposing party fails to
provide proper responses to requests for production under Rule 34, fails to answer an
interrogatory submitted under Rule 33, or fails to make a disclosure required by Rule
26(a). Fed. R. Civ. P. 37(a)(3). “[T]he proponent of a motion to compel discovery bears
the initial burden of proving that the information sought is relevant.” Mayer v. Allstate
Vehicle & Prop. Ins. Co., No. 2:15-cv-2896, 2016 WL 1632415, at *2 (S.D. Ohio Apr.
22, 2016) (Deavers, M.J.), objections overruled, No. 2:15-cv-2896, 2016 WL 2726658
(S.D. Ohio May 10, 2016) (Marbley, D.J.) (quoting Guinn v. Mount Carmel Health Sys.,
No. 2:09-cv-226, 2010 WL 2927254, at *5 (S.D. Ohio July 23, 2010) (Kemp, M.J.);
Clumm v. Manes, No. 2:08-cv-567 (S.D. Ohio May 27, 2010) (King, M.J.)); see also
United States ex rel. Shamesh v. CA, Inc., 314 F.R.D. 1, 8 (D.D.C. 2016) (“In cases
where a relevancy objection has been raised, the party seeking discovery must
demonstrate that the information sought to be compelled is within the scope of
discoverable information under Rule 26.”). If the proponent meets its initial burden, then
“the party resisting production has the burden of establishing that the information is
either not relevant or is so marginally relevant that the presumption of broad disclosure is
outweighed by the potential for undue burden or harm.” Pillar Title Agency v. Pei, No.
2:14-cv-525, 2015 WL 2238180, at *3 (S.D. Ohio May 12, 2015) (Kemp, M.J.) (citing
Vickers v. Gen. Motors Corp., No. 07-2172 M1/P, 2008 WL 4600997, at *2 (W.D. Tenn.
Sept. 29, 2008)).
THE RESEARCH TAX CREDIT & BURDEN OF PROOF
Before delving into the pending motions, exploration of the research tax credit and
related burden will provide context. Under 26 U.S.C. § 41, taxpayers can claim credit for
increasing research activities if they incur “qualified research expenses” (QREs). QREs
are the sum of in-house research expenses—including wages paid to an employee for
conducting or directly supervising qualified research—and contract research expenses.
26 U.S.C. § 41(b)(1), (2). To determine whether research is “qualified,” four tests are
applied to each business component.” Suder, 2014 WL 4920724, at *14.
First, expenditures connected with the research must be
eligible for treatment as expenses under section 174 (the
section 174 test). Second, the research must be undertaken
for the purpose of discovering technological information (the
technological information test). Third, the taxpayer must
intend that the information to be discovered be useful in the
development of a new or improved business component of the
taxpayer (the business component test). 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).
Id. (footnote and internal citations to 26 U.S.C. § 41 omitted). A “business component”
is “any product, process, computer software, technique, formula, or invention which is to
be-- (i) held for sale, lease, or license, or (ii) used by the taxpayer in a trade or business of
the taxpayer.” 26 U.S.C § 41(d)(2)(B).
Under the section 174 test, expenditures connected with the research are eligible
for treatment as expenses if the expenditures are “incurred in connection with the
taxpayer’s trade or business which represent research and development costs in the
experimental or laboratory sense.” Treas. Reg. § 1.174-2; see 26 U.S.C. § 174.
Expenditures represent research and development costs in the
experimental or laboratory sense if they are for activities
intended to discover information that would eliminate
uncertainty concerning the development or improvement of a
product. 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.
Treas. Reg. § 1.174-2(a)(1).
The technological information test requires that the research be undertaken for the
purpose of discovering technological information. Research is undertaken for that
purpose “if it is intended to eliminate uncertainty concerning the development or
improvement of a business component.” Treas. Reg. § 1.41-4(a)(3)(i). “[I]nformation is
technological in nature if the process of experimentation used to discover such
information fundamentally relies on principles of the physical or biological sciences,
engineering, or computer science.” Id. at (a)(4).
Under the business component test, the taxpayer must “intend that the information
to be discovered be useful in the development of a new or improved business component
of the taxpayer.” Suder, 2014 WL 4920724, at *17 (citing 26 U.S.C. § 41(d)(1)(B)(ii)).
Finally, under the process of experimentation test, substantially all of the research
activities must constitute elements of a process of experimentation for the purpose of
relating to a new or improved function, performance, or reliability or quality. 26 U.S.C.
§ 41(d)(1)(C), (3)(A). “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.” Treas. Reg. § 1.41-4(a)(5).
As Plaintiff, the United States “bears the ultimate burden of proof to show not
only that some amount has been erroneously refunded but also how much that amount
is.” United States v. McFerrin, 570 F.3d 672, 675 (5th Cir. 2009); see United States. v.
MacPhail, 149 F. App’x 449, 453 (6th Cir. 2005) (“To obtain repayment for an allegedly
erroneous refund under 26 U.S.C. § 7405(b), the Government must show that the money
was erroneously paid and that the Government brought suit within the two-year statute of
limitations.”). However, “Tax credits are a matter of legislative grace, and taxpayers bear
the burden of proving they are entitled to claim tax credits.” Suder, 2014 WL 4920724,
at *12 (citations omitted); see Shami v. Comm’r, 741 F.3d 560, 567 (5th Cir. 2014)
(“When claiming a tax credit, taxpayers are required to retain records necessary to
substantiate the credit.”) (citations and internal quotation marks omitted); 26 U.S.C. §
6001; Treas. Reg. § 1.6001-1(a), (e). Specifically, “A taxpayer claiming a credit under
section 41 must retain records in sufficiently usable form and detail to substantiate that
the expenditures claimed are eligible for the credit.” Treas. Reg. § 1.41-4(d).
Defendants’ Motion to Compel Responses to Requests for Production
Defendants’ Second Set of Requests for Production of
Defendants’ Second Set of Requests for Production includes sixty-five requests
concerning six IRS employees. For each employee, Defendants request the same
Please provide the full and complete copy of [the employee’s]
notes and files pertaining to the Taxpayers Dennis and Linda
Quebe or Quebe Holdings, Inc. for tax years 2009-2010.
(Doc. #32-2, Request #s 104, 114, 124, 134, 144, 155).
Please provide the personnel file for [the employee],
including but not limited to previous work history,
educational experience, training received from the Internal
Revenue Service, performance evaluations, promotions
received from the Internal Revenue Service. The intent for
the request is not to harass or request privileged health
information. Please redact any and all health related material
from the file. (Doc. #32-2, Request #s 105, 115, 125, 135,
Please provide the time entries and work logs prepared by
[the employee] pertaining to the Taxpayers Dennis and Linda
Quebe or Quebe Holdings, Inc. for tax years 2009-2010.
(Doc. #32-2, Request #s 106, 116, 126, 136, 146, 157).
Please provide documents reflecting the expenditures
incurred by [the employee] pertaining to the Taxpayers
Dennis and Linda Quebe or Quebe Holdings, Inc. for tax
years 2009-2010. (Doc. #32-2, Request #s 107, 117, 127,
137, 147, 158).
Please provide reports generated by [the employee] pertaining
to Taxpayers Dennis and Linda Quebe or Quebe Holdings,
Inc. for tax years 2009-2010. (Doc. #32-2, Request #s 108,
118, 128, 138, 148, 159).
Please provide documents generated by [the employee]
pertaining to Taxpayers Dennis and Linda Quebe or Quebe
Holdings, Inc. for tax years 2009-20l0, including but not
limited to correspondence, emails, faxes, text messages,
reports, memorandum, and meeting minutes. (Doc. #32-2,
Request #s 109, 119, 129, 139, 149, 160).
Please provide documents reviewed by [the employee] in
preparing his opinions pertaining to the Taxpayers Dennis
and Linda Quebe, for tax years 2009-2010. (Doc. #32-2,
Request #s 110, 120, 130, 140, 150, 161).
Please provide documents reflecting the job description and
job duties of [the employee] for the time period of June 1,
2015 to June 30, 2015. (Doc. #32-2, Request #s 111, 121,
131, 141, 151, 162).
Please provide any and all meeting notes produced wherein
[the employee] was present and the Taxpayers Dennis and
Linda Quebe or Quebe Holdings, Inc. claim for the tax credit
for increasing research activities or 179D Tax Deduction for
tax years 2009-2010 was discussed. (Doc. #32-2, Request #s
112, 122, 132, 142, 152, 163).
Please provide any and documentation [the employee]
specifically reviewed pertaining to Taxpayers Dennis and
Linda Quebe or Quebe Holdings, Inc. for tax years 20092010. (Doc. #32-2, Request #s 113, 123, 133, 143, 153, 164).
Defendants also request all the statistical models generated or reviewed and all
email correspondence between Sharon Jenkins and four IRS employees: Joseph Roussos,
Kurt R. Kuxhausen, Jeanette Czachur, and Wayde Smith. (Doc. #33-2, Request #s 154,
Plaintiff’s Responses and Objections
Plaintiff objected to every request in Defendants’ Second Request for Production
and has not produced any documents. First, Plaintiff objected to each request,
[O]n the ground that it seeks documents beyond the scope of
discovery provided for in Fed. R. Civ. P. 26(b)(1) in that it
seeks documents unrelated to any claim or defense of either
party in this litigation. As such, this request appears to have
been made for the improper purpose of harassing the United
States and its employees, as well as causing unnecessary
delay, and needlessly increasing the cost of litigation.
(Doc. #33-7, PageID #s 477-519) (citing Fed. R. Civ. P. 26(g)). This was Plaintiff’s only
objection to the requests for the employees’ personnel files; time entries and work logs;
documents reflecting expenditures; and documents reflecting job descriptions and job
duties. (Doc. #33-7, Requests #s 105-07, 111, 115-17, 121, 125-27, 131, 135-37, 141,
145-47, 151, 156-58, 162).
However, Plaintiff objected on several other grounds to the requests for the
employees’ notes; reports and documents generated by the employees; documents
reviewed by the employees in preparing their opinions; meeting notes produced where
the employees were present; documentation the employees specifically reviewed; and
correspondence between employees. (Doc. #33-7, Request #s 104, 108-10, 112-14, 11820, 122-24, 128-130, 132-34, 138-40, 142-44, 148-50, 152-53, 155, 159-61, 163-68). For
these requests, Plaintiff objected “to the extent that [the request] seeks documents
protected from disclosure by the attorney-client privilege, work-product doctrine, lawenforcement privilege, and government deliberative-process privilege.” Id.
Plaintiff also asserts:
The United States has already produced the IRS’s complete
paper examination file for the Defendants in this matter,
and will comply with its obligations to supplement its
production to the extent additional responsive documents are
located. [The] [r]equest . . . seeks documents from an
individual who was never assigned to examine the relevant
tax returns. The fact that such individual may have been
consulted by an examining officer for [his/her] knowledge of
a particular subject matter area does not make [him/her] a
source of relevant information for purposes of this case.
Notwithstanding the irrelevance of the revenue agent's
decision-making process at the administrative level, any
information the revenue agent utilized in reaching her
decision is reflected in the examination file and revenue
agent report already provided to Defendants.1
In response to the request for statistical models generated or reviewed, Plaintiff
asserts, “the IRS reviewed any and all statistical models provided to the IRS by the
taxpayers and/or their representatives during the examination, which are already in
Defendants’ possession and control. The IRS did not review or generate any other
responsive statistical models.” Id. at 509.
Plaintiff also submitted declarations from each of the employees detailing his/her
position within the IRS and involvement with Defendants’ refund analysis. (Docs. #s 361–36-6). First, Joseph Roussos, a General Business Credits Practice Network
Coordinator and Subject Matter Expert with the IRS’s Large Business and International
Division (“LB&I”), received a question from the revenue agent, and “[he] provided her
with general information about Section 41 tax credits and sample examination reports
In response to request 149, Plaintiff added, “The examination file produced contains the following
documents specifically responsive to this request: USA-001961-65[,] USA-002528-32[,] USA-00273436[, and] USA-002744-51.” (Doc. #33-7, PageID #506).
involving the taxpayer’s industry.” (Doc. #36-1, PageID #583). “Any advice [he]
provide[s] . . . is informative and non-binding—the revenue agent is free to accept or
reject it at [his or her] discretion.” Id.
Kurt Kuxhausen, a Senior Program Analyst for Abusive Transactions and
Technical Issues with the IRS’s Small Business/Self Employed Division (SB/SE),
provided the revenue agent “with guidance as to how to approach the Section 41 and
179D issues in her examination.” (Doc. #36-2, PageID #585). Jeanette Czachur, a
Senior Program Analyst for Abusive Transactions and Technical Issues with IRS’s
SB/SE, was copied on emails from Kuxhausen and the revenue agent. (Doc. #36-4,
PageID #589). She also “communicated with the revenue agent directly to ensure that
her case was coded correctly and for internal coordination purposes, and to provide her
with subject matter guidance on her work papers.” Id. at 589-90.
Sharon Jenkins, a Revenue Agent for Abusive Transactions with SB/SE, “received
summary data from the revenue agent for coordination purposes and advised the agent as
to who, elsewhere in the IRS, might provide substantive guidance for developing the
case.” (Doc. #36-5, PageID #591). Wayde Smith, a General Engineer, provides
engineering assistance to revenue agents when their examinations involve technical
subject matter. (Doc. #36-6, PageID #592). At the revenue agent’s request, he suggested
questions to ask Defendants and documents to request. Id. He also “provided feedback
on the taxpayers’ responses and general guidance on the taxpayers’ positions.” Id.
Satpal Bir, a Statistical Sampling Coordinator with LB&I, “evaluated the attribute
sample and wrote a brief report, which [he] provided to the Revenue Agent, in which [he]
concluded that the sample was not valid for purposes of determining the dollar amount of
Qualified Research Expenses for various reasons.” (Doc. #36-3, PageID #588). Plaintiff
notes that of the six, Satpal Bir is the only person listed in its initial disclosures as a
witness. Plaintiff acknowledges that “it erred by including Mr. Bir on its initial
disclosures as a potential fact witness. Mr. Bir has no personal knowledge of any facts in
this case and the United States has no intention of calling him as a fact witness.” (Doc.
#36, PageID #570). Plaintiff indicates it will amend its disclosures with the Court’s
leave. Plaintiff also notes that at this time, due to the parties’ sampling agreement, expert
testimony regarding sampling will likely not be necessary. However, if sampling
becomes an issue, Plaintiff might want to use Mr. Bir as an expert witness and will then
make all disclosures required by Fed. R. Civ. P. 26(a)(2). Id. at 570, n.9. Finally,
Plaintiff contends that “all documents reflecting Mr. Bir’s input into the examination
have already been produced to Defendants.” Id. at 570.
Defendants’ First Set of Requests for Production of Documents
and Plaintiff’s Responses
In each of Defendants’ twenty-three requests for production, they ask Plaintiff to
provide the documents that support its response to each corresponding interrogatory.
(Doc. #33-3, PageID #s 445-64). In each of its responses, Plaintiff “cross-references and
incorporates its General Objections above and its Response to . . .” each corresponding
interrogatory. Id. Plaintiff also provided a privilege log. (Doc. #33-4, PageID #s 46570).
Beyond the Scope of Discovery/Relevancy
Defendants have the initial burden of showing that the documents they seek are
relevant to either party’s claims or defenses. Mayer, 2016 WL 1632415, at *2 (citations
omitted). They contend that the requested records are within the scope of discovery
because “Plaintiff has relied on the opinions of the Exam officials in crafting its cause of
action and responses to Discovery.” (Doc. #33, PageID #382). Further, “Plaintiff
pointed the Court to the underlying reports and examinations as having provided, in part
at least, the basis upon which the suit was filed.” Id. at 384.2 As a result, Defendants
contend that they “should be able to discover the factual and specific legal basis for the
underlying examination decision if Plaintiff is directing the Court to the examination as
part of the ‘fair notice’ to the Quebes of the claims in the lawsuit.” Id.
The record establishes that Plaintiff has provided Defendants with the factual and
legal basis for the present case. For example, the Amended Complaint sets forth several
QHI claimed the credits for activities that did not constitute
qualified research under 26 U.S.C. § 41(d), in part, because
QHI did not engage in technological or scientific research to
design and/or create new or improved business components
of QHI. . . . QHI did not maintain, and did not claim and
compute credits under 26 U.S.C. § 41 with, sufficient
documentation and substantiation of the percentage of overall
work time . . . , the hours and wages attributable to such work
. . . , and the nature and specifics of such work . . . .
(Doc. #7, PageID #42).
Defendants are referring to and later cite to Plaintiff’s Reply to Defendants’ Supplement to Rule 26(f)
Report of the Parties (Doc. #17).
Plaintiff’s response to Interrogatory 1 and the documents it produced contain
additional details. For example, Revenue Agent McGraw concludes in her Revenue
Agent Report (RAR) that alliantgroup’s statistical sampling is invalid, and she explains
why. (Doc. #37-1, PageID #s 610-14). She also indicates that QUI “did not engage in
any qualified researching activities, but was engaged to install electrical systems based on
plans and specifications created and approved by the underlying contractors and
customers.” Id. at 614-15. Information such as this is sufficient to fairly alert Defendants
to the factual and legal basis of Plaintiff’s claims.
Defendants assert, “The Government’s impressions during the administrative
examination can provide the Defendants guidance in preparing a defense.” (Doc. #38,
PageID #855). They further contend that because the analysis of the Research Tax
Credit is “complicated and cumbersome with a multitude of issues,” they are attempting
“to narrow down the myriad of issues possible . . . .” Id. However, more information
about the IRS’s examination will not likely narrow the number of issues because Plaintiff
is not bound by it in the present case.
Plaintiff is not bound because “a challenge to a tax determination results in a trial
de novo rather than a review by this Court of an existing administrative record . . . .”
United States v. Nordberg, No. 93-12681, 1996 WL 170119, at *2 (D. Mass. April 8,
1996). See also Ky. Trust Co. v. Glenn, 217 F.2d 462, 466 (6th Cir. 1954) (“The action
of the Commissioner in making the assessment was, properly, of no concern to the jury . .
. .”); Trinity Indus., Inc. v. United States, 757 F.3d 400, 413 (5th Cir. 2014) (“The district
court correctly held that the report’s conclusion, though admissible evidence, was neither
binding nor entitled to a presumption of correctness. In tax refund actions, the district
court reviews de novo the Commissioner's decision regarding a taxpayer’s tax liability.”)
(footnotes omitted); LPCiminelli Interests, Inc. v. United States, No. 09-cv-274, 2012
WL 5499444, at *4 (W.D.N.Y. Nov. 13, 2012) (“[T]he factual considerations and legal
analysis employed by the audit team during their examination of LPCiminelli’s
consolidated tax returns, and in their proposed adjustments to the Commissioner’s tax
assessment, must be deemed to be of no consequence to the de novo review required in
this refund action . . . .”) (citation and internal quotation marks omitted).
Thus, even if the IRS made substantial errors in its examination of Defendants’
taxes, Plaintiff might still prevail. “[T]he court is to ‘place itself in the shoes of the
commissioner’ and apply the law to the facts presented. Even if an assessment was made
on erroneous grounds, it must be upheld if it is appropriate under any theory.” Mayes v.
United States, No. 84-5157, 1986 WL 10093, at *3 (W.D. Mo. June 12, 1986) (quoting
Nat’l Right to Work Legal Def. & Educ. Found., Inc. v. United States, 487 F.Supp. 801,
805 (E.D.N.C. 1979)) (citing Blansett v. United States, 283 F.2d 474, 478 (8th Cir. 1960);
Bernstein v. Comm’r, 267 F.2d 879, 881 (5th Cir. 1959)). Defendants acknowledge this
point in their Response in Opposition to Plaintiff’s Motion to Compel, “the factfinder will
review and determine whether a process of experimentation is present not the Plaintiff . . .
.” (Doc. #50, PageID #1415) (emphasis added).
Defendants contend that a court in the Southern District of Ohio has already
addressed this issue in NetJets Large Aircraft, Inc. v. United States, No. 2:11-cv-1023,
2014 WL 1672588 (S.D. Ohio Apr. 28, 2014). In that case, Magistrate Judge Kemp
rejected the United States’ argument that IRS deliberations are irrelevant and granted the
taxpayers’ motion to compel. Id. NetJets, however, is significantly different from the
present case. In NetJets, the taxpayers sought relief under four grounds, one of which
asserted they were not subject to the tax at issue. Id. at *3. The court acknowledges that
if the taxpayer were proceeding under this ground alone, “they would not need most of
the discovery being sought in the motion to compel.” Id. The present case involves one
such issue, rather than the multiple issues involved in NetJets. The result: The present
case is not guided by the broader discovery permitted in NetJets; it is instead
circumscribed by the narrower focus of discovery, which is unconcerned with the IRS’s
deliberations. Defendants’ reliance on NetJets is therefore misplaced.
Turning to the requested documents at issue, a review of the personnel files
Defendants have requested reveals that they have not met their initial burden to show
how the personnel files of the six employees are relevant. Defendants, in fact, fail to
specifically mention the personnel files in their Motion. “Because of the extremely
private nature of personnel files, the court does not order production of such files except
upon a compelling showing of relevance by the requesting party.” Blackmond v. UT
Med. Grp., No. 02-2890, 2004 WL 3142214, at *1 (W.D. Tenn. Nov. 2, 2004) (citing
Miller v. Fed. Express Corp., 186 F.R.D. 376, 384 (W.D. Tenn. 1999). Defendants do
not provide a compelling, or even any, reason why these files are relevant and
Additionally, Defendants do not provide any reason why documents reflecting the
employees’ job descriptions and duties are relevant to any parties’ claim or defense.
Although it seems to be a somewhat specific time period, it is not clear why Defendants
only request the descriptions and duties for the time period between June 1, 2015 and
June 30, 2015. Defendants do not give any reason for the specific date range or explain
its significance to the case. Thus, Defendants’ requests for the employees’ job
descriptions and duties seek documents beyond the scope of discovery.
Further, Defendants fail to show how the employees’ notes and files; time entries
and work logs; reports and documents generated by the employees; documents reviewed
by the employees in preparing their opinions; documentation the employees specifically
reviewed; documents reflecting the expenditures incurred by the employees; meeting
notes produced wherein the employees were present; and email correspondence between
the employees are relevant to any parties’ claim or defense. Defendants are therefore
thwarted again by lack of relevance. See Nordberg, 1996 WL 170119, at *2
(“Information about people who participated in the audit are not relevant, nor are notes
made by IRS employees during the audit.”); Mayes, 1986 WL 10093, at *3 (“IRS
employee’s legal analysis is not relevant to any of the issues herein and is thus outside the
scope of discovery.”); United States v. Elsass, No. 2:10-cv-336, 2012 WL 1409624, at *5
(S.D. Ohio Apr. 23, 2012) (King, M.J.) (holding that taxpayers could not discover
internal IRS communications or the personal views of the IRS agents). “While no doubt
disclosure of such information would be of interest to plaintiff, it is not essential nor
required for proper preparation.” Detroit Screwmatic Co. v. United States, 49 F.R.D. 77,
79 (S.D.N.Y. 1970) (citation omitted).
There is no need to determine whether statistical models generated or reviewed are
relevant to the case, as Plaintiff asserts that the IRS only reviewed statistical models
provided by the taxpayers and did not review or generate any other responsive statistical
models. There is no reason in the present record to doubt Plaintiff’s assertion.
Plaintiff’s Privilege Log
Defendants contend that “Plaintiff’s initial privilege log failed to properly claim
the privilege and identify the documents withheld, thereby waiving the privilege
claimed.” (Doc. #33, PageID #376). They further assert that Plaintiff’s subsequent
privilege logs fail to provide adequate descriptions of the privilege claimed, the specific
request to which each assertion of privilege pertains, subject matter, dates produced,
authors, and recipients of the withheld documents as required by [S.D. Ohio Civ. R.]
26.1(a) and FRCP 26(b).” Id. at 376-77.
The Court will review Plaintiff’s August 17, 2016 privilege log, as it is the most
recent. Plaintiff indicates that it has produced 3,238 pages of documents and has only
asserted privilege over seventeen documents, three of which were redacted in full and
fourteen of which were partially redacted. (Doc. #36, PageID #570).3
Under Fed. R. Civ. P. 26(b)(5),
When a party withholds information otherwise discoverable
by claiming that the information is privileged . . . , the party
must: (i) expressly make the claim; and (ii) describe the
nature of the documents, communications, or tangible things
not produced or disclosed--and do so in a manner that,
Defendants acknowledge that attorney work-product privilege appears to apply to the document
identified as Bates No. USA000001. Plaintiff’s log also contains documents with third-party taxpayer
information redacted; Defendants do not seek to compel disclosure of that information.
without revealing information itself privileged or protected,
will enable other parties to assess the claim.
Rule 26.1 of the Southern District of Ohio Civil Rules further provides, “Any privilege
log shall refer to the specific request to which each assertion of privilege pertains. A
privilege log shall list documents withheld in chronological order . . . .”
The Federal Rules do not specifically list what must be included in a privilege log.
The advisory committee’s note explains, “Details concerning time, persons, general
subject matter, etc., may be appropriate if only a few items are withheld, but may be
unduly burdensome when voluminous documents are claimed to be privileged or
protected, particularly if the items can be described by categories.” Fed. R. Civ. P.
26(b)(5) advisory committee’s note, 146 F.R.D. 401, 639 (Apr. 22, 1993).
As a result, courts have set out elements to be identified in privilege logs. For
example, some courts require:
(a) The author(s) and all recipients (designated so as to be
clear who is the sender and who [is] the receiver), along with
(b) The document’s date.
(c) The purpose and subject matter of the document.
(d) The nature of the privileged asserted, and why the
particular document is believed to be privileged.
Mafcote, Inc. v. Fed. Ins. Co., No. 3:08-cv-11, 2010 WL 1929900, at *6 (W.D. Ky. May
12, 2010) (citations omitted).
Notably, “the withholding of such a privilege log may subject a party to sanctions
under Rule 37(b)(2) and may be viewed by the court as a waiver of any privilege or
protection.” Banks v. Office of Senate Sergeant-at-Arms, 222 F.R.D. 7, 20 (D.D.C. 2004)
(citing Fed. R. Civ. P. 26 advisory committee’s note; Avery Dennison Corp. v. Four
Pillars, 190 F.R.D. 1, 2 (D.D.C. 1999)). For example, one court found that the
defendants waived their right to assert attorney-client privilege and work-product
immunity because they did not provide a privilege log until the plaintiff filed a motion to
compel, and defendants’ responses only included general objections. Sonnino v. Univ. of
Kan. Hosp. Auth., 221 F.R.D. 661, 668 (D. Kan. 2004).
In the present case, Plaintiff provided a privilege log with its first responses to
Defendants’ Requests for Production. Generally, Plaintiff’s privilege log includes most
of the information courts require. Specifically, it contains an author for each entry and a
recipient is listed when applicable. When possible, Plaintiff included the date. Finally,
Plaintiff identified the privilege type and provided an adequate description.
However, Plaintiff did not include the request number to which each assertion of
privilege pertains. Additionally, Plaintiff did not list the documents in chronological
order. Due to these omissions and shortcomings, Plaintiff’s privilege log does not meet
the requirements of S.D. Ohio Civ. R. 26.1(a). This, however, is not fatal to the privilege
log in this case because it contains sufficient information for Defendants to assess each
claimed privilege. Thus, Plaintiff has not waived the right to assert privileges.
This Court ordered Plaintiff to submit to the Court unredacted copies of each
document it claims are privileged. This Court then completed an in camera review of
Plaintiff asserts that four documents are protected by the deliberative-process
privilege. (Doc. #33-10, PageID #s 529-30). This includes one whole document and
portions of three others. The deliberative-process privilege was created “to protect
communications made in the course of formulating agency decisions on legal and policy
matters.” Proctor & Gamble Co. v. United States, No. 1:08-cv-608, 2009 WL 5219726,
at *2 (S.D. Ohio Dec. 31, 2009) (Black, M.J.) (citations omitted). In practice, the
privilege allows employees to discuss issues candidly without fear that their ideas will
later be available to the public. In addition, “[t]he privilege’s purposes are . . . to protect
against premature disclosure of proposed policies [or decisions] before they have been
finally formulated or adopted; and to protect against confusing the issues and misleading
the public by dissemination of documents suggesting reasons and rationales for a course
of action which were not in fact the ultimate reasons for the agency’s action.” Id.
(quoting Schell v. U.S. Dep’t of Health & Human Servs., 843 F.2d 933, 937 (6th Cir.
1988); Coastal States Gas Corp. v. Dep’t of Energy, 617 F.2d 854, 866 (D.C. Cir. 1980)).
The deliberative-process privilege applies when documents are predecisional and
deliberative. U.S. ex rel. Williams v. Renal Care Grp., Inc., 696 F.3d 518, 527 (6th Cir.
2012) (citing Norwood v. FAA, 993 F.2d 570, 576 (6th Cir. 1993)). “A document is
predecisional when it is received by the decisionmaker on the subject of the decision
prior to the time the decision is made, and deliberative when it reflects the give-and-take
of the consultative process.” Id. The privilege does not always protect whole documents,
and if it is possible to separate the privileged information from the factual and
investigative information without compromising the confidentiality of the privileged
information, it should be separated. Williams, 696 F.3d at 527.
The deliberative-process privilege is not absolute. See Netjets Large Aircraft, Inc.
v. United States, No. 2:11-cv-1023, 2015 WL 1526346, at *6 (S.D. Ohio Apr. 3, 2015)
(Kemp, M.J.). Even if a document is predecisional and deliberative, several factors guide
the determination of whether the privilege is overcome. The factors include: “(1) the
relevance of the evidence sought, (2) the availability of other evidence, (3) the role of
government in the litigation, and (4) the potential consequences of disclosure of the
information.” Id. (citing F.T.C. v. Warner Commc’ns Inc., 742 F.2d 1156, 1161 (9th Cir.
1984)). “Ultimately, in each case, the determinative question is whether production of
the contested document would be injurious to the consultative functions of government
that the privilege of non-disclosure protects.” Proctor & Gamble Co., 2009 WL
5219726, at *2.
Plaintiff redacted portions from three sets of e-mails. The first set of emails
(USA002370-2372) contains three emails between Kurt Kuxhausen, Senior Program
Analyst for Abusive Transactions and Technical Issues, and Rebecca McGraw, Revenue
Agent. Plaintiff redacted both emails from Kuxhausen but left the email from McGraw.
These emails are precisely what the deliberative-process privilege is designed to protect.
First, they both occurred on June 12, 2015, long before McGraw issued the RAR on
November 20, 2015 (Doc. #37-1, PageID #608), making them predecisional. Second,
both redacted emails contain Kuxhausen’s suggestions, recommendations, and opinions.
Therefore, Kuxhausen’s emails are protected by deliberative-process privilege.
The next set of emails (USA2747-2749)4 contains six emails between McGraw
and Satpal Bir, Statistical Sampling Coordinator. Plaintiff redacted portions of three of
Bir’s emails and did not redact McGraw’s emails. In USA002748, Plaintiff redacted two
paragraphs. However, Plaintiff had already provided this email in response to a Freedom
of Information Act request with only one paragraph redacted. (Doc. #54-7, PageID
#1553). The paragraph beginning “It is imperative . . .” is not redacted, but the next
paragraph is. That paragraph and the other redacted portions of Bir’s emails are
protected by deliberative-process privilege.
Bir’s emails are predecisional, as they occurred between April 18, 2014 and June
13, 2014. Bir’s emails are also deliberative—the redacted portions contain his opinions
and recommendations and IRS strategies. Further, McGraw is not bound by his
recommendations and can choose to ignore them. (Doc. #36-3, PageID #587). This
reflects the give and take of the consultative process. Thus, the deliberative-process
privilege protects Bir’s emails.
Plaintiff also asserts that an entire IRS memorandum and sample RAR are
protected by deliberative-process privilege.”5 (Doc. 33, PageID #529). Richard
Goldman, Deputy Associate Chief Counsel, explains the contents of the documents:
An internal IRS memorandum which consists of a six-page
participant case-examination guidance, undated, author not
identified, not paginated, and thirty page sample Revenue
Agent Report (RAR), undated, author not identified,
The redacted portion of USA002734 is also redacted in USA002747-2749.
Plaintiff also asserts 26 U.S.C. § 6103 to protect third-party taxpayer’s information. Defendants have
not challenged this assertion.
paginated. The examination guidance details coordination,
tax issues, suggested audit techniques, and analysis of
penalties and penalty relief. The sample RAR is a template to
assist Revenue Agents in drafting RARs involving research
credit issues, including: qualified research expenses (I.R.C. §
41(b)); qualified research activities (I.R.C. § 41(d)); base
period issues (I.R.C. § 41(c)); and, substantiation issues
(Treas. Reg. § 1.41-4(d) and I.R.C. § 6001)). The sample
RAR consists of discussion and analysis of issues relating to
sections 41 and 6001, pertinent legal analysis, IRS advisory
opinions, statutory exceptions, legal tests, substantiation tests,
and conclusions, which are analyzed in the context of
hypothetical factual situations.
(Doc. #36-7, PageID #600).
Although undated, it is clear that the memorandum and draft RAR are
predecisional as both assist revenue agents before they reach their decisions. See
E.E.O.C. v. Peoplemark, Inc., No. 1:08-cv-907, 2010 WL 748250, at *3 (W.D. Mich.
Feb. 26, 2010) (“[The transmittal memorandum from EEOC General Counsel to EEOC
Commissioners] is clearly protected by the governmental deliberative process privilege . .
. . Although undated, it was by its terms a deliberative documents presented to the EEOC
decision-makers . . . prior to and for the purpose of reaching the decision to file this
lawsuit.”); Brown v. E.E.O.C., No. 4:09-cv-444, 2010 WL 1929913, at *3 (W.D. Ky.
May 12, 2010) (“[T]he undated work notes are clearly predecisional and relate to the
EEOC’s internal decisionmaking process.”); B&P Co. v. I.R.S., No. 3:14-cv-232, 2015
WL 4455747, at *4 (S.D. Ohio July 20, 2015) (Rice, D.J.) (“It is beyond dispute that the
draft RAR is predecisional; it is not a final determination of B & P’s tax liability . . . .”).
Both documents are also deliberative, as they reflect an internal process of the
IRS. The use of each document is reflected in McGraw’s final RAR. She considered the
information in the documents and was required to decide what applied to her
examination. In other words, McGraw was required to choose some ideas over, or
instead of, others. This shows that these documents reflect the give and take of the
consultative process. Disclosure of these documents could very easily confuse the issues
and mislead the public by suggesting reasons and rationales for courses of action that
were not ultimately taken. Therefore, the deliberative-process privilege protects the
memorandum and draft RAR.
The analysis turns next to whether the privilege is overcome by the pertinent
factors, Williams, 696 F.3d at 527. The factors ultimately lean in Plaintiff’s favor. First,
for the reasons explained above, this evidence is not relevant to the present case. Further,
the memorandum and draft RAR do not even mention Defendants. Second, although this
evidence is not available to them from other sources, other evidence is available to
Defendants. Specifically, they doubtlessly have documents and information they relied
on to assert their entitlement to tax credits and keep such documents in the ordinary
course of business. The third factor favors Defendants. As Plaintiff, the government’s
role in this case is significant. Finally, if disclosed, there is potential for significant
consequences. The disclosure of the emails may inhibit the communication between
revenue agents and specialists. Further, the disclosure of the memorandum and draft
RAR “might disclose IRS strategy and deliberations about potential subject matters of
inquiry and strategic decisions in what to pursue and not to pursue.” Proctor & Gamble
Co., 2009 WL 5219726, at *7. Because the majority of factors lean toward Plaintiff, and
for the reasons stated above, the deliberative-process privilege shields the redacted
portions of the emails from discovery. Ultimately, in this case, production of the
contested documents would be injurious to the consultative functions of the IRS that the
For these reasons, the emails (Bates No. USA002370-2372, USA002734,
USA002747-27496) and memorandum and draft RAR (Bates No. USA002212-2247) are
protected by deliberative-process privilege.
Plaintiff asserts that three documents are protected under attorney-client privilege.
(Doc. #33-10, PageID #s 529-30). Although three documents are listed, the same two
sentences are redacted in each document. Plaintiff describes it as a “[p]ortion . . . of
email chain between IRS Statistical Sampling Coordinator and Revenue Agent reflecting
Chief Counsel advice regarding qualified research expense cases.” Id. Specifically, one
redacted paragraph is in an email to McGraw from Bir, and the other redacted paragraph
is in McGraw’s response.
Defendants correctly observe that Plaintiff provided this email in response to a
Freedom of Information Act request with only one paragraph redacted.7 (Doc. #33-12,
PageID #s 535-36). McGraw’s response indicating that she “already received the
litigation hold form . . .” is not redacted. The section that remains redacted refers to the
same subject and does not disclose Chief Counsel’s legal advice. Therefore, the attorney-
This does not include the paragraph in Bates No. USA002748 that was already provided to Defendants.
The IRS redacted part of a sentence and one full paragraph in PageID #535. However, on PageID #536,
the part of the sentence is not redacted.
client privilege does not apply, and Plaintiff must produce unredacted versions of
USA002735, USA002745, and USA002750-2751.
Plaintiff asserts that the law-enforcement privilege protects three documents,
including two whole documents and portions of another. Plaintiff describes all three as
IRS documents reflecting IRS law-enforcement techniques and procedures. (Doc. #3312, PageID #s 535-36).
Law-enforcement privilege is a common-law privilege recognized by state and
federal courts. E.g., Ohio Bureau of Workers’ Comp. v. MDL Active Duration Fund,
Ltd., No. 2:05-cv-0673, 2006 WL 3311514, at *3 (S.D. Ohio Nov. 13, 2006) (Kemp,
M.J.) (citing Friedman v. Bache Halsey Stuart Shields, Inc., 738 F.2d 1336, 1341 (D.C.
Cir. 1984)). See Morrissey v. City of N.Y., 171 F.R.D. 85, 90 (S.D.N.Y. 1997). The party
asserting law-enforcement privilege bears the burden of showing that it applies. In re
City of N.Y., 607 F.3d 923, 944 (2d Cir. 2010). To meet that burden, the party must first
establish that the documents contain information the privilege is intended to protect. The
privilege is intended to protect “information pertaining to ‘law enforcement techniques
and procedures,’ information that would undermine ‘the confidentiality of sources,’
information that would endanger ‘witness and law enforcement personnel [or] the privacy
of individuals involved in an investigation,’ and information that would ‘otherwise . . .
interfere[ ] with an investigation.’” Id. (quoting In re Dep’t of Investigation of City of
N.Y., 856 F.2d 481, 484 (2d Cir. 1988)). But, the law-enforcement privilege is not
absolute. City of N.Y., 607 F.3d at 945.
Although there is a strong presumption against lifting the privilege, the party
seeking disclosure can rebut the presumption by showing “(1) that [the suit] is nonfrivolous and brought in good faith, (2) that the information sought is [not] available
through other discovery or from other sources, and (3) that the information sought is
importan[t] to the party’s case.” Id. (citation and internal quotation marks omitted). If
the presumption is rebutted, the court’s analysis is still not over. “The public interest in
nondisclosure must be balanced against the need of a particular litigant for access to the
privileged information.” Tri-State Hosp. Supply Corp. v. United States, 238 F.R.D. 102,
103 (quoting In re Sealed Case, 856 F.2d 268, 272 (D.C. Cir. 1988)); see also United
States v. Pirosko, 787 F.3d 358, 365 (6th Cir. 2015) (“In evaluating the government’s
[law-enforcement] privilege argument, we agree with the district court’s decision to apply
a balancing approach, weighing the government’s concerns against the needs articulated
by [the defendant/Appellant].”).
In the present case, Plaintiff met its burden of showing that the two portions
redacted from USA003090, and all of USA003236 and USA003165 contain information
pertaining to IRS law-enforcement techniques and procedures. See United States v. SixtyOne Thousand Nine Hundred Dollars, No. 10 Civ. 1866, 2010 WL 4689442, at *1
(E.D.N.Y. Nov. 10, 2010) (“The IRS checklist seems to be precisely the type of
document that was meant to be protected by this judge-made immunity; its revelation
could hinder future enforcement.”). Defendants have not successfully rebutted the
presumption against lifting the privilege. Although the suit is non-frivolous and brought
in good faith and the information sought is not available through other discovery or from
other sources, Defendants have not established that the information sought is important to
their case. They do not have a significant need for access to this information because the
redacted information does not refer specifically to them. In contrast, the IRS’s ability to
conduct current or future investigations may be significantly impaired if these documents
were to be released. Therefore, law-enforcement privilege applies to all three documents.
Defendants’ Motion to Compel Responses to Interrogatories and
Identification of Lay Witnesses
Defendants’ Motion to Compel Responses to Interrogatories
Plaintiff contends that Defendants’ second Motion is duplicative and frivolous, as
Defendants’ first Motion to Compel also sought responses to interrogatories. (Doc. #45,
PageID #s 1197-98). Plaintiff explains:
It is an abuse of the litigation process for Defendants to
demand that the United States repeatedly respond to the same
motion and that the Court repeatedly decide that motion. On
this ground, the United States asks that the Court deny the
October Motion as to the interrogatories without prejudice,
strike the portion of Defendants’ October memorandum of
law that addresses the Interrogatories, and resolve the issue
on the papers already submitted to the Court.
Id. at 1198.
Although Defendants argue that their first Motion to Compel does not address
Plaintiff’s responses to interrogatories, it is easy to see why Plaintiff believed it did.
Most notably, at the end of Defendants’ Motion to Compel, they specifically “request that
the Court GRANT its Motion to Compel Responses to Interrogatories and Requests for
Production and Order the United States of America to provide adequate responses to
Defendants’ First and Second Set of Interrogatories Numbers 1-25 . . . .” (Doc. #33,
PageID #388) (emphasis added).
Despite Defendants’ conflicting statements in their first Motion to Compel, it
would be unreasonable for the Court to refuse to consider Defendants’ second Motion on
that ground. The Court has not ruled on the first Motion, and Plaintiff had the
opportunity to review Defendants’ second Motion before responding. Therefore, no
prejudice will befall Plaintiff from the Court’s consideration of Defendants’ Motion to
Compel Responses to Interrogatories (Doc. #s 39-40), Plaintiff’s Response to
Defendants’ first Motion to Compel (Doc. #36), and Plaintiff’s Response to Defendants’
second Motion to Compel (Doc. #45).
Defendants’ first set of interrogatories includes twenty-four requests,8 and the
second set includes only one. (Doc. #s 40-1, 40-2). Defendants categorize their
interrogatories into three groups: “a) which of QHI’s research related projects it contends
do not qualify under Section 41 of the Internal Revenue Code; b) why it contends, these
projects fail to meet the requirements of Section 41 and 179D; and c) the factual basis for
each.” (Doc. #40, PageID #873).
Defendants first ask Plaintiff to “provide a complete list of reasons of why the
Plaintiff contends that Defendants are not entitled to the R&D tax credits it claimed in the
2009 and 2010 tax years.” (Doc. #40-1, PageID #889). In Interrogatory 2, they ask for
Defendants’ Interrogatory 24 refers to Defendants’ Requests for Admission. Defendants withdrew all
their Requests for Admission. Therefore, the Court will not consider address Interrogatory 24.
the factual basis for each contention set forth in response to Interrogatory 1. Id. The
interrogatories that follow request that Plaintiff identify general errors, such as
Interrogatory 6—“Do you contend that the Taxpayer has erred, in any way, in computing
the claimed qualified research expenses for the research and development tax credits?”—
as well as specific exceptions, such as Interrogatory 18—“Do you contend that
Defendants’ claimed research activity is excluded because it falls under an adaptation
exception?” Id. at 889-94.
Plaintiff’s Responses and Objections
In response to Defendants’ Interrogatory 1, Plaintiff provided a thirteen-page
answer detailing several objections as well as reasons Defendants are not entitled to the
R&D tax credits they claimed in 2009 and 2010. (Doc. #40-3, PageID #s 933-46). For
example, Plaintiff addresses the Section 174 test:
QHI . . . did not engage in research with respect to which
expenditures may be treated as expenses under 26 U.S.C. [§]
174. 26 U.S.C. [§] 41(d)(l)(A). . . . The activities . . . did not
involve identifying uncertainties as to the capability, method,
or appropriate design for developing or improving a product,
process, or appropriate design and eliminating the
uncertainties within the meaning of 26 U.S.C. [§] 41(d)(l)(A).
QHI . . . installed electrical components and systems pursuant
to blueprints, drawings, designs, and specifications prepared
by engineers and/or architects, who were employed by others.
. . . Assuming arguendo that any of the activities for which
the Defendants and QHI claimed or reported [§] 41 credits
constitute research, it was research (a) conducted after the
beginning of commercial production of the business
component, (b) related to the adaptation of an existing
business component to a particular customer's requirement or
need, and/or (c) related to the reproduction of an existing
business component . . . , and it therefore did not constitute
qualified research for purposes of 26 U.S.C. [§] 41. 26
U.S.C. [§] 41(d)(4)(A), (B), and/or (C). E.g. QHI0024-40,
0178-0198; Subcontract between Romanoff Electric and
Rudolph/Libbe, dated March 11, 2009, QHI000657-77;
Solicitation Offer and Award, Radiology Addition at the
Veterans Affairs Medical Center, Chillicothe, Ohio. Project
No. 538-09-CSI-104, QHI4690-5841.
. . .
Also, Defendants and QHI claimed [§] 41 credits based on
wages paid for field testing electrical work to confirm or
validate it functioned or worked as the customer and the
contract documents required, not to test and refine a
hypothesis to determine the strengths and weakness of an
alternative tested in a process of experimentation or to
determine whether other alternatives might be better suited.
E.g. Waite High School Renovation Projection., QHI009817,
9822-3, 9827, 9843. This type of testing does not satisfy the
requirements of 26 U.S.C. [§] 41(d)(l)(A), (B), and/or (C),
and does not constitute qualified research. United States v.
Davenport, 897 F.Supp. 2d 496, 506-7 (N.D. Tex. 2012).
Id. at 934-97.
In responses to Interrogatories 2-12, 15, 17-18, Plaintiff “cross-references and
incorporates its General Objection above and its Response to Interrogatory No. 1.” Id. at
946-53. Further, Plaintiff objects to all of Defendants Interrogatories as premature
because discovery has only recently begun in this case. Id. at 933-61. Finally, Plaintiff
objects to Interrogatories 13 and 14 on the ground that they are requesting an opinion on
a pure matter of law. Id. at 951.
Plaintiff asserts that the Federal Rules of Civil Procedure allow courts to defer
answers to contention interrogatories because they are best left until the end of discovery.
(Doc. #36, PageID #561) (citing Fed. R. Civ. P. 33, 1970 Notes). Defendants agree that
this is the normal course of discovery. However, they contend that Plaintiff is “not on the
same footing as a typical plaintiff that is beginning to gather information; rather it has the
benefit of its lengthy administrative review that should have yielded sufficient
information to determine [its] reasons for bringing suit.” (Doc. #40, PageID #875)
(citing Fed. R. Civ. P. 11; Cable & Computer Tech., Inc. v. Lockheed Saunders, Inc., 175
F.R.D. 646, 652 (C.D. Cal. 1997)).
Although Defendants are correct that Plaintiff is not beginning to gather
information, there are several reasons why Plaintiff’s answers should be deferred to the
end of discovery. First, the IRS and Plaintiff have consistently asserted that Defendants
have failed to provide sufficient documentation. (Doc. #45, PageID #1200) (“Defendants
refused to provide the IRS with the information necessary to evaluate the alleged research
and development activity.”); (Doc. #7, PageID #42) (“QUI did not maintain, and did not
claim and compute credits under 26 U.S.C. § 41 with, sufficient documentation and
substantiation of the percentage of overall worktime that specified employees spent
performing or supervising performance of allegedly qualified research . . . .”). If
Defendants are now producing these documents, it is reasonable that Plaintiff would need
time to examine the documents prior to responding to Defendants’ Interrogatories.
Second, the IRS examined QUI’s activities for tax years 2008, 2010, and 2011, but did
not complete its review of Defendants’ taxes for the years at issue in this case. (Doc.
#40, PageID #869). Third, Plaintiff is not bound in the present case by the decisions of
the IRS and may present new and/or different arguments that require additional
discovery. See, e.g., Nordberg, 1996 WL 170119, at *2; Ky. Trust Co., 217 F.2d at 466;
Trinity, 757 F.3d at 413 (5th Cir. 2014). Finally, Defendants have produced over 343,000
pages and may still produce more. It is reasonable that Plaintiff would need to review
those documents before responding to interrogatories.
Defendants’ Interrogatories further illustrate why Plaintiff’s responses should be
deferred to the end of discovery. For example, Defendants’ Interrogatory 20 asks
Do you contend that Quebe did not create technical
specifications for government owned buildings during the
2009-2010 tax years? If you do so contend, identify the
activities conducted by Quebe that do not comply with the
creation of technical specifications.
(Doc. #40-1, PageID #893). Although this seeks discoverable information, it is
reasonable for Plaintiff to ask Defendants, as it does in its Interrogatory 9 (Doc. #43-5,
PageID #1186), to provide the names of the architects, engineers and/or other persons
and identify the specifications before responding to whether Quebe and/or QHI created
the technical specifications. Similarly, it is reasonable for Plaintiff to ask Defendants to
identify the business components and uncertainties for each project, id. at 1187-88,
before responding to an interrogatory that asks if Defendants conducted any qualified
research (Doc. #40-3, PageID #s 946-47). Therefore, although Plaintiff must respond to
Defendants’ Interrogatories 1-12, 15-23, and 25, Plaintiff may defer its responses until
Defendants comply with this Order.
Improperly Calling for a Legal Conclusion
Plaintiff objected to Interrogatories 13 and 14 on the ground that they request an
opinion on a pure matter of law. Defendants assert that “the Federal Rules of Civil
Procedure specifically permit for the issuance of these types of contention
interrogatories.” (Doc. #40, PageID #877). Defendants’ interrogatories ask:
13) Do you contend that the use of interviews and
estimations of percentage of employee time performing
qualified research activity as allowed in E.V. Fudim, 67 TCM
3011, Dec. 49,867 (M). TC Memo. 1994-235 and Suder v.
Commissioner, T.C. Memo. 2014-201, 2014 WL 4920724
(U.S. Tax Ct.) is an inappropriate mechanism to determine
allocation percentages? If so, please state in detail the factual
basis for your contention.
14) Do you contend that project based accounting is the only
acceptable methodology that taxpayers may use in
determining the Research Credit[?] If you do so contend,
please provide the particular code section and cited progeny
to support your contention upon which you rely.
(Doc. #40-1, PageID #s 891-92). Defendants contend that these interrogatories “request
the Government’s opinion as to the proper methodology in calculating the Research
Credit, i.e. an application of law to the facts, not a legal conclusion.” (Doc. #40, PageID
#877) (citations omitted).
“[A]n interrogatory is not objectionable merely because it calls for an opinion or
contention that relates to fact or the application of law to fact.” Fed. R. Civ. P. 33, 1970
advisory committee’s note, subdivision (b). But, “interrogatories may not extend to
issues of ‘pure law,’ i.e., legal issues unrelated to the facts of the case.” Id. For example,
a court found that the following interrogatory “requires defendant to provide a legal
interpretation of the word ‘purpose,’” and denied the plaintiff’s motion to compel: “What
do YOU contend was required of YOU in order to be able to demonstrate a ‘purpose’
under California Welfare and Institutions Code 14085.6 for SB 1255 funds?” United
States ex rel. Englund v. Los Angeles Cnty., 235 F.R.D. 675, 682 (E.D. Cal. 2006); see
Anderson v. Werholtz, No. 07-3275, 2009 WL 392673, at *1 (D. Kan. Feb. 17, 2009)
(“Interrogatory No. 4 . . . asks [Defendant] to explain his understanding of the definition
of ‘religious exercise’ . . . . Because this question does not ask for an opinion of the law
as applied to the facts, but asks about a purely legal issue, the court sustains the stated
objection and denies plaintiff’s motion to compel . . . .”).
The interrogatories do not request that Plaintiff apply the law to the facts. Instead,
each asks Plaintiff to provide its opinion on an issue of pure law. Defendants asking
Plaintiff in Interrogatory 13 to state the “factual basis for [its] contention” incorrectly
assumes that such a factual basis exists. It does not when interpreting a question of pure
law. Therefore, Plaintiff’s objections are well taken, and Defendants’ Motion to Compel
Responses to Interrogatories 13 and 14 is denied.
Defendants’ Motion to Compel Identification of Lay Witnesses
Defendants contend that Plaintiff’s Identification of Lay Witness does not comply
with the Court’s Discovery Plan. “The identifications numbered 12, 13, 14, 15, 16, and
17 fail to properly identify specific persons with knowledge to establish their case in
chief.” (Doc. #40, PageID #881). For example, in number 16, Plaintiff identifies “IRS
personnel as necessary to establish the allegations listed in their amended complaint.”
Id.; (Doc. #40-6, PageID #973). Defendants move the Court to Compel Plaintiff “to
identify the [IRS] personnel whom they rely upon.” (Doc. #40, PageID #881).
Plaintiff asserts, “The United States cannot fully identify the witnesses it will call
at trial until Defendants respond to the interrogatories requesting identification of third37
party witnesses.” (Doc. #45, PageID #1199). Specifically, Plaintiff’s Interrogatories
request Defendants identify employees of QHI and its subsidiaries who performed work
that resulted in alleged R&D credits; officers, construction supervisors, and foremen of
QHI’s customers who would be familiar with QHI’s alleged R&D activities; witnesses to
the alleged Section 179D activity; building inspectors; and architects, engineers, and
other designers. Id. at 1198-99 (citing Doc. #40-5).
In response to Defendants’ request that the Court compel Plaintiff to identify
“those IRS personnel necessary to establish the allegations,” Plaintiff asserts, “The only
issue in this case is whether activities performed by the Defendants’ companies qualify
for certain tax credits and deductions. No IRS personnel witnessed these activities, and
thus the United States does not expect to call any IRS witnesses or make use of any IRS
documents at trial.” Id. at 1199. Plaintiff adds, “Despite efforts to meet and confer, the
United States does not understand what relief Defendants seek.” Id.
“The deadline for identification of lay witnesses is this Court’s principal tool for
ensuring that lay witnesses are available for discovery within the time limits set for
discovery.” Paxar Americas, Inc. v. Zebra Techs. Corp., No. 3:03-cv-142, 2005 WL
6493791, at *1 (S.D. Ohio Aug. 31, 2005) (Merz, M.J.); see General Order No. 1 (“The
purpose of this filing of witness lists is to permit timely completion of discovery.”).
Plaintiff’s identifications 12 through 17 do not name specific individuals. Therefore, to
the extent possible, Plaintiff is required to amend its disclosure of lay witnesses to
include the names of specific individuals requested by identifications 12 through 17.
However, Plaintiff represented to the Court that it “does not expect to call any IRS
witnesses or make use of any IRS documents at trial” (Doc. #45, PageID #1199), and the
record provides no reason to doubt its representation. The Court cannot compel what
does not exist. Therefore, Defendants’ request that the Court order Plaintiff “to identify
the personnel whom they relied upon” is denied.
Plaintiff’s Motion to Compel Responses to Its Interrogatories
Plaintiff first moved to compel responses to interrogatories in June 2016. (Doc.
#22). In an effort to resolve the dispute informally and at the parties’ request, this Court
held several informal discovery conferences, during which the parties agreed to narrow
the scope of discovery. This Court then denied Plaintiff’s motion without prejudice to
renewal. (Doc. #30).
According to Plaintiff, “Defendants . . . continue to provide the same evasive and
incomplete answers that they served seven months ago. Defendants’ continued
obstruction hinders the United States’ ability to take timely discovery.” (Doc. #43,
PageID #1089). As a result, Plaintiff renewed its Motion to Compel, asserting that
Defendants’ responses to its interrogatories are inadequate. (Doc. #42).
Defendants contend that Plaintiff “renewed [its] Motion to Compel prematurely as
they have provided supplement[al] discovery responses continuously . . . .” (Doc. #50,
PageID #1406). Defendants emphasize that QHI has produced over 300,000 pages9 in
response to Plaintiff’s requests. Id.
Plaintiff categorizes its interrogatories into three general groups: “1) Defendants’
factual bases for their claimed R&D tax credits[;] 2) information about the employees
who allegedly engaged in qualified research; and 3) third party witness information.”
(Doc. #43, PageID #1095).
Defendants’ Factual Bases for Their Claimed R&D Tax Credits
Plaintiff asserts that Defendants should be compelled to disclose the bases for their
claimed tax credits in response to Interrogatories 11 and 12. 10 For each of the twelve
sample projects, Plaintiff asks that Defendants,
[I]dentify the business component(s) (the term “business
component” is defined in 26 U.S.C. Section 41(d)(2)(B))
involved in it, state with specificity what uncertainty
concerning the development or improvement of the business
component(s) existed (the phrase “uncertainty concerning the
development or improvement” is as used in Treas. Reg.
[Section] 1.174-2(a)(l) and incorporated under 26 U.S.C.
Section 41(d)((1)(A)) with respect to that business component
or components before QHI and/or its subsidiaries or affiliated
entities performed the work for which QHI reported or
claimed a credit under 26 U.S.C. Section 41 for 2009 and/or
2010. Please provide your responses separately for 2009 and
(Doc. #43-5, PageID #s 1187-88).
Plaintiff contends that identification of the business components and uncertainties
will substantially clarify and narrow the scope of discovery. For example, it is not clear
At one point, Defendants indicate that they have produced over 343,000 pages. (Doc. #54, PageID
Interrogatories 11 and 12 request the same information with a few minor changes.
if QUI is claiming more than one business component for each job, or whether QUI is
claiming the entire installation as a business component. (Doc. #43, PageID #1098.
“The United States cannot evaluate Defendants’ project documents or determine which
witnesses to depose without knowing what it is about each of the sample projects that
Defendants claim qualifies for the R&D tax credit.” Id. at 1099.
In response, “Defendants object to the request as calling for legal opinions
and conclusions.” Id. at 1188. However, they add,
For the identified projects in the Discovery Order, the
business components are the electrical designs and/or
electrical system installation process. Specific project scope
and electrical design product description have been produced
in the contract terms.
For the qualified projects the uncertainties in the development
and/or improvement of the business component involved the
following: 1) uncertainty at the outset as to how the
development new business component and/or improvement
would be accomplished; and 2) uncertainty if the requested
business component could developed as required; and 3)
uncertainty as to the final appropriate design. Specific
uncertainties are identified in, but no[t] limited to[,] the
project documents produced by QHI.
(Doc. #43-5, PageID #1188).11
Defendants assert that Plaintiff “fails to understand the nature of QUI’s work and
how it is incorporated into a larger building system.” (Doc. #50, PageID #1415).
Specifically, “the electrical system design and installation performed by QUI is a
component which is integrated into the entire building complex and cannot be isolated
Defendants object to interrogatory 12 for the same reasons, but add that Interrogatory 12 is redundant,
as Interrogatory 11 requests the same information. (Doc. #43-5, PageID #1189).
from each building system.” Id. (citing Trinity Indus., Inc. v. United States, No. 3:06-cv726 (N.D. Tex. May 11, 2012)).12
Defendants contend QUI’s system is similar to the beverage delivery system in
Trinity Industries. In the case, the court evaluated whether the costs of two projects were
“incurred in a process of experimentation and qualified research.” (Doc. #50-8, PageID
#1498). The court breaks the first project into seven primary issues and the beverage
system is one such issue. The court explains that the beverage distribution system
required tubes running throughout the vessel, but the tubes penetrated fire boundaries,
and the Coast Guard-approved metal connectors made drinks taste bad. The court found
that “designing a penetration technique that did not impair beverage quality required a
process of experimentation.” Id. at 1497.
Defendants’ reliance on Trinity Industries is misplaced. The court’s analysis in
that case illustrates how important specific details about each project can be. Further, the
order establishes that complicated projects can be broken down into separate issues to
determine whether the taxpayer engaged in qualified research for each one. It also
emphasizes the importance of identifying business components and uncertainties. The
four tests to determine if research is qualified under 26 U.S.C. § 41 must be applied to
each business component, and thus, the tests cannot be applied until the business
components are identified. Suder, 2014 WL 4920724, at *14.
Defendants’ attached the district court’s order in Trinity Industries to their Response in Opposition as
an exhibit (Doc. #50-8).
Defendants may be correct that Plaintiff does not understand “the nature of QUI’s
work.” Perhaps for that reason, Plaintiff requested that Defendants identify the business
components and uncertainties for each project. Given Defendants’ inherent
understanding of their own projects and Plaintiff’s reasonable lack thereof, the burden on
Defendants to identify specific aspects of the projects does not outweigh the benefits of
the requested information.
Defendants’ objection on the ground that Interrogatory 11 calls for a legal opinion
and conclusion lacks merit. “[A]n interrogatory is not objectionable merely because it
calls for an opinion or contention that relates to fact or the application of law to fact.”
Fed. R. Civ. P. 33, 1970 advisory committee’s note, subdivision (b). The Interrogatory
asks Defendant to apply the definitions to the facts of the identified projects.
Interestingly, Defendants provide the same definition for business component in their
First and Second Set of Interrogatories and their Requests for Production of Documents.
(Doc. #40-1, PageID 888; Doc. #40-2, PageID #931; Doc. #33-1, PageID #415).
For these reasons, Plaintiff’s Motion to Compel a responses to Interrogatory 11 is
granted. Defendants must specifically identify the business components and uncertainties
for each of the twelve sample projects.
Information About Employees Who Allegedly Engaged in
Plaintiff next contends that Defendants should be compelled to provide
information about QUI employees in response to Interrogatories 1, 2, and 5 and
Production Requests 19 and 20. (Doc. #43, PageID #1100). Plaintiff’s Interrogatory
1 asks Defendants to identify “all persons with knowledge of facts relevant to
whether the Defendants . . . are entitled to the credits . . . and/or the deductions . . .
that are at issue in this case . . . .” (Doc. #43-5, PageID #1177). In addition to
identifying the names, addresses, and telephone numbers, Plaintiff asks Defendants
to “provide in detail the facts of which they have knowledge, and describe the job or
position in which they obtained such knowledge.” Id.
In Interrogatory 2, Plaintiff seeks additional information for “all employees of
QHI . . . who performed some of the work with respect to which you and QHI claim
that QHI incurred expenses for which QHI reported or claimed credits under 26
U.S.C. Section 41 that flowed through to you in 2009 and 2010 . . . .” Id. at 1179.13
In addition to asking for basic identification information, it asks Defendants to:
[P]rovide their job title, job description, wages/salary, the
hours they worked, the name and address of the project(s)
upon which they worked those hours, and a detailed
description of the specific work they performed for each
pay period in 2009 and in 2010 for the portion of the
overall wages that they received that was paid for the work
they performed for which QHI reported or claimed credits
under 26 U.S.C. Section 41.
Id. Plaintiff further asks Defendants to identify “employees whose work and wages
were taken into account in the statistical sampling study and report of Deborah
Goldwasser, PhD, that [a]lliantgroup and/or QHI used to report or claim Section 41
credits for any or all of the years 2008 through 2012.” Interrogatory 5 asks for the
Plaintiff notes that “Interrogatory 3 seeks similar employee information to Interrogatories 2 and 5, but
for those employees who worked on the projects for which QUI claimed the 179 deductions, and should
be answered for all the same reasons addressed herein.” (Doc. #43, PageID #1100).
same information as Interrogatory 2, but for “each employee whose wages were
incorporated in the Section 41 credits reported or claimed by the Quebes/QHI for
2009 and 2010 . . . .” Id. at 1182-83.
Defendants object to each of the interrogatories to the extent they request
information that is protected, confidential, or privileged such as dates of birth and
social security numbers. Further, in response to Interrogatory 1, Defendants object to
the request as being vague and ambiguous with respect to what knowledge would be
relevant to whether Defendants are entitled to tax credits under section 41 and
deductions under section 179D. Id. at 1177. However, Defendants provide some
information (name, job title, method of contact, and summary of knowledge) for
eight individuals. Defendants add,
For further answer please refer to Exhibit A which
provides list of employees and job titles and estimated
allocations of percentage of time spent on qualified
activities. Time records for additional employees will be
produced for the identified projects. The time tracking
system utilized by QHI does not capture all employee
hours who conducted research activities. Employees not
reflected in the time tracking system are identified in
response to Interrogatory number 1.
Id. at 1177-79.
Defendants object to Interrogatory 2,
Subject to and without waiving the foregoing objections,
as indicated in the materials already provided during
examination and in the recent production, time was not
tracked for individuals by task and project. The names of
the individual employees and their job titles, their gross
salaries, percentage allocations of research for 2008 and
for 2009, and adjustments made accounting for statistical
sampling have been provided (Bates # QHI 0178-0188)
and are again attached as Ex. A. Additional time records
for employees associated with each project will be
produced in accordance with the limitation outlined in
Interrogatory no 1. The individuals may be contacted
through counsel of record.
Id. at 1179-80. Defendants object to Interrogatory 5 on the same grounds they
objected to Interrogatory 2, and they add that Interrogatory 5 is duplicative of
Interrogatory 2. Id. at 1183.
Review of Plaintiff’s Interrogatory 1 reveals that it is overly broad, as it
requests information from “all persons with knowledge of facts relevant to . . .” the
present case. Id. at 1177. Defendants provided a list and also submitted their
Identification of Lay Witnesses. Although neither contains every detail requested by
Plaintiff, both provide names, descriptions of their knowledge, and how they can be
contacted. The information Defendants have provided will enable Plaintiff to
proceed with depositions. Therefore, Plaintiff’s Motion to Compel a Response to
Interrogatory 1 is denied.
Turning to Interrogatory 2, some of the information it seeks is not relevant and
discoverable under Rule 26(b)(1). Specifically, it seeks information about years
2008 through 2012. However, tax years 2008, 2011, and 2012 are not at issue in the
present case and, therefore, the sought-after information for these tax years is not
relevant to Plaintiff’s claims in this case. Similarly, because Plaintiff “does not
anticipate that expert testimony with regard to sampling will be necessary given the
parties’ sampling agreement[,]” the sampling information concerning tax years 2009
and 2010 is not relevant to Plaintiff’s claims at this time. (Doc. #36, PageID #470,
n.9). Thus, Defendants are not presently required to specifically identify which
employees’ work and wages were taken into account in the statistical sampling study
and report of Deborah Goldwasser.
Additionally, birthdates and social security numbers are highly sensitive,
personal, and confidential. At this time, Defendants are not required to provide
either to Plaintiff. Defendants are, however, required to respond to the remainder of
Plaintiff’s Interrogatories 2 and 5. Defendants must provide Plaintiff all such
information so that Plaintiff can contact the individuals through counsel of record.
Although this Court does not have access to all the records produced by Defendant, it
does not appear, based on the current record, that Defendants have sufficiently
answered Plaintiff’s interrogatories relating to QUI’s employees.
Defendants disagree, contending, “[t]he qualification of wages and final credit
calculation appearing on the amended tax returns for tax years 2009 and 2010 was
determined by a Court approved method outlined in Suder . . . .” (Doc. #50, PageID
#1418); see Suder, 2014 WL 4920724. In Suder, the taxpayer’s senior vice president
of product operations (2004-2006)/senior vice president of product development
(2007) determined the percentage allocations for each employee. 2014 WL 4920724,
at *10. He testified for four days about his allocations and introduced a diagram
containing the employees for which they claimed wage QREs, the employees’
department or area, and the percentage allocations. Id. at *22. He “identified the
employees on the diagram, described their roles and responsibilities, and explained
how he determined their percentage allocations.” Id. The court found him to be a
“highly credible and reliable witness.” Id. Based on his credible testimony, the
credible testimony of the taxpayer’s and IRS’s other witnesses, and the documentary
evidence, the court found the wage allocations to be a reasonable estimate of the
percentages of time the taxpayers’ employees spent performing qualified services.
Id. at *24.
At this point, it is premature for Defendants to rely on Suder, as the proper
method of substantiating QREs is not yet before the Court. However, notably,
Defendants have not provided the information identified in Suder. For example,
Defendants have not described the roles and responsibilities of each employee.
According to Defendants, “Mr. Ross reviewed the duties of each employee
and estimated the amount of time each employee was engaged in qualified research.”
(Doc. #50, PageID #1418). It is not clear how Mr. Ross could review the duties of
each employee if those details are not available. Additionally, alliantgroup’s study
indicates that they interviewed three employees of QUI “to identify specific activities
undertaken on the identified projects during the Study Period and the associated
documentation available.” (Doc. #22-1, PageID #150) (emphasis added). Thus,
Defendants must identify which projects each employee worked on and what their
Defendants note, “It is important to remember that the Defendants are the
individual shareholders of QUI with limited personal knowledge of the business and
research credit. The Defendants’ discovery responses are contingent on QUI’s
document responses to its subpoena.” (Doc. #50, PageID #1413). However, this
conflicts with their previous statement that “Defendant Dennis Quebe is the sole
shareholder in [QUI].” Id. at 1406. It is reasonable to believe that as the sole
shareholder, he has personal knowledge of QUI. This is further illustrated by
alliantgroup’s R&D Tax Credit Study that notes, “In order to calculate wage
expenses, Dennis Quebe, Owner of [QUI] provided alliantgroup with information
regarding the amount of time each employee spent during tax years 2008 through
2011 on the activities discussed within this report.” (Doc. #22-1, PageID #150).
Although Linda Quebe may have limited personal knowledge, it appears that Dennis
Quebe is well-suited to respond to Plaintiff’s requests.
To the extent that Plaintiff is requesting information about employees who did not
perform any qualified activities, Defendants need not produce information relating to
those employees’ activities. However, if an employee performed both qualified and notqualified activities, information concerning both is relevant and therefore discoverable
under Rule 26(b)(1). It is difficult to estimate what percentage of an employee’s work is
qualified if only one part of the employee’s work is provided. To the extent that these
interrogatories request the same information, Defendants need only respond with the
requested information once.
Third-Party Witness Information
Plaintiff asserts that Defendants should be compelled to provide information about
key third-party witnesses in response to Interrogatories 6-10 and 13-14. (Doc. #43, Page
ID #1103). In Interrogatories 6 and 7, Plaintiff requests the identities of and contact
information for the officers, construction supervisors, and foremen of the contractors and
customers for whom QHI performed work, and Interrogatory 8 asks for the same
information for each building inspector. (Doc. #43-5, PageID #s 1183-85).
Interrogatories 9 and 10 request Defendants identify each architect, engineer, and/or other
persons who created the designs, blueprints, drawings, and/or specifications for the work
performed by QHI and identify the designs, blueprints, sketches, drawings, and
specifications. Id. at 1186-87. In Interrogatory 13, Plaintiff asks Defendants to identify
each contractor or customer that provided any progress payments for the work for which
Defendants and QHI reported or claimed the Section 41 credits and the person who
approved each progress payment. Id. at 1189-90. Interrogatory 14 asks Defendants to
“identify any documents showing or evidencing the date and amount of the payments and
describe and identify any documents describing the work for which each payment was
provided and the percentage of the overall work completed for which the payment was
provided.” Id. at 1190.
Defendants object to each of these on the grounds that they are “overly broad,
unduly burdensome and because it is requested for the purpose of harassment.” Id. at
1183-90. Defendants further object to Interrogatories 6-8 and 13-14 on the grounds that
the “minimal relevant value of the evidence sought is outweighed by the expense,
disruption and prejudice that will be caused to Defendants by harassment of clients.”14
Id. at 1183-86, 1189-91. Finally, Defendants contend that QUI, alliantgroup, and
Defendants’ objections to Interrogatory 14 do not include “by harassment of clients.”
Defendants produced the requested information in the contract and project documents.
Id. at 1184-91.
Under Fed. R. Civ. P. 33(d), parties are permitted to provide documents
responsive to interrogatory requests:
If the answer to an interrogatory may be determined by
examining, auditing, compiling, abstracting, or summarizing
a party’s business records (including electronically stored
information), and if the burden of deriving or ascertaining the
answer will be substantially the same for either party, the
responding party may answer by:
(1) specifying the records that must be reviewed, in sufficient
detail to enable the interrogating party to locate and identify
them as readily as the responding party could; and
(2) giving the interrogating party a reasonable opportunity to
examine and audit the records and to make copies,
compilations, abstracts, or summaries.
Fed. R. Civ. P. 33(d).
Although the answers to Plaintiff’s Interrogatories may be determined by
examining business records, the burden is not the same for either party. As of December
2, 2016, Defendants produced 343,000 pages of documents. According to Defendants,
“[t]he documents are produced by project in specific folders which allows for ease in
comprehension.” (Doc. #50, PageID #1421). However, it is difficult to imagine the
number of folders that would be necessary to allow ease in comprehension or to
significantly reduce the high burden imposed upon Plaintiff by this large number of
documents or folders.15
Defendants have not indicated the total number of folders but it is reasonable to infer that it is a large
number, given the production of 343,000 documents.
In addition, although alliantgroup did not review all of the twelve projects chosen
for this case, there is at least some overlap between these projects and their sample.
(Doc. #22-1, PageID #134). Their study indicates that “Quebe employees provided
examples of the following contemporaneous documentation associated with the
aforementioned projects: Design drawings with comments; Building information
modeling; Specifications; Requests for information; Change orders; Sketches; Meeting
notes, and Email correspondence.” Id. at 150. If these documents were already identified
for alliantgroup, it will not be overly burdensome for Defendants to identify them again.
Further, Defendant Dennis Quebe is the sole shareholder of QUI and is therefore
more familiar with the documents than Plaintiff. According to alliantgroup’s R&D Tax
Credit Study, Mr. Quebe was able to “provide alliantgroup with information regarding
the amount of time each employee spent during tax years 2008 through 2011.” (Doc.
#22-1, PageID #150). This suggests that he is very familiar with the projects completed
Finally, earlier in discovery, Defendants sought to reduce the total number of
projects to focus on, in part, because they asserted they would need to review the
documents before producing them to Plaintiff. As a result, Defendants should be much
more familiar with the documents than Plaintiff.
Defendants contend, “As in Wilkinson v. Greater Dayton Regional Transit
Authority, No. 3:11-cv-247, 2012 WL 3527871 (S.D. Ohio Aug. 14, 2012), documents
produced in accordance with Rule 33 satisfy the rules of discovery.” (Doc. #50, PageID
#1420). However, unlike the interrogatories in Wilkinson, Plaintiff’s Interrogatories 6-8
are not overly broad or unduly burdensome when applied to the twelve projects at issue.
Each asks Defendants to provide information about specific individuals associated with
the projects. These should not be difficult for Defendants to identify. Therefore,
Defendants must respond to Interrogatories 6-8.
Turning to Interrogatories 10 and 14, Plaintiff asks Defendants to identify
documents. Therefore, Defendants must answer by identifying responsive documents in
sufficient detail to enable Plaintiff to locate and identify them as readily as Defendants
could. Fed. R. Civ. P. 33(d). The fact that the documents are organized in folders,
although helpful, does not excuse Defendants from Rule 33(d)’s requirement. The
information Plaintiff requests in Interrogatory 9 should be included in the documents
identified in 10. To the extent that it is not, Defendants are required to answer
Interrogatory 9. Similarly, the information Plaintiff requests in Interrogatory 13 should
be included in the documents identified in 14. To the extent that it is not, Defendants are
required to answer Interrogatory 13.
Defendants’ General Objections
Defendants also “incorporate [eleven] General Objections in each response to the
individually numbered interrogatories as if they were stated in each response.” (Doc.
#43-2, PageID #1126-28).
As explained by Defendants in their Motion(s) to Compel, “objections to
interrogatories must be specific and supported by [a] detailed explanation of why the
interrogatories are objectionable.” (Doc. #40, PageID #876) (citing Burnes v. Imagine
Films Entm’t, Inc., 164 F.R.D. 589, 593 (W.D.N.Y. 1996)) (internal quotation marks
omitted). Defendants’ general objections do not meet these criteria and, therefore, will
not be considered by this Court.
Plaintiff’s Motion to Quash the Depositions of Rebecca McGraw and
Plaintiff moves the Court for an order quashing the depositions of IRS employees
Rebecca McGraw and Wayde Smith, both of whom “worked on or had some connection
with the IRS examination of Defendants’ claim for refund.” (Doc. #49, PageID #1403).
Plaintiff asserts that their depositions present the same issues that are raised by
Defendants’ Motion to Compel Responses to Requests for Production. Id.
Defendants contend that both McGraw and Smith are “highly relevant and
necessary to ascertain and resolve material facts at issue (i.e., what is the factual basis for
the Government to initiate this suit?).” (Doc. #54, PageID #1520).
The deposition of McGraw presents new issues not addressed in Defendants’ first
Motion to Compel. Most notably, Plaintiff lists her in its Rule 26(a) disclosures as an
individual likely to have discoverable information. (Doc. #33-13, PageID #538-40).
Plaintiff notes that “[s]he has knowledge of discoverable information on some of the
claims made in the complaint.” Id. Thus, it is difficult to see how Plaintiff could now
establish that her deposition is not relevant to the present case. As a result, Plaintiff’s
Motion to Quash the Deposition of Rebecca McGraw is denied.
The deposition of Wayde Smith presents similar issues, as Smith is one of the
employees that Defendants sought documents from and about. In addition, both McGraw
and Smith worked on the examination of Defendants’ taxes. However, a key difference
between them exists: Smith was only involved as a consultant, and McGraw engaged in
independent fact finding. For example, McGraw conducted an initial interview and
regularly contacted QUI’s representative. (Doc. #54-3). In comparison, Smith did not
communicate with QUI’s representative, was limited to reviewing documents, and did
not conduct any independent fact finding. Id. Given Smith’s limited involvement,
information about him is not relevant. For this reason and the reasons discussed above,
Plaintiff’s Motion to Quash the Deposition of Wayde Smith is granted. See Nordberg,
1996 WL 170119, at *2 (“Information about people who participated in the audit are not
relevant, nor are notes made by IRS employees during the audit.”); Mayes, 1986 WL
10093, at *3 (“IRS employee’s legal analysis is not relevant to any of the issues herein
and is thus outside the scope of discovery.”).
In this incredibly contentious case, counsel for both parties “should strive to be
cooperative, practical and sensible, and should turn to the courts (or take positions that
force others to turn to the courts) only in extraordinary situations that implicate truly
significant interests.” Cable & Computer Tech., 175 F.R.D. 646, 652 (citations and
internal quotations marks omitted).
IT IS THEREFORE ORDERED THAT:
1. Defendants’ Motion to Compel Responses to Requests for Production
(Doc. #32) is DENIED, in part, and GRANTED, in part, as described
2. Defendants’ Motion to Compel Reponses to Interrogatories and
Identification of Lay Witnesses (Doc. #39) is GRANTED, in part, and
DENIED, in part, as described above;
3. Plaintiff’s Motion to Compel Responses to Interrogatories (Doc. #42) is
GRANTED, in part, and DENIED, in part, as described above;
4. Defendants’ Motion to Quash the Depositions of Kenneth Lowery and
Lance Beck and Motion for Protection (Doc. #47) is DENIED as moot;
5. Plaintiff’s Motion to Quash the Depositions of IRS Employees or, in the
Alternative, for a Protective Order (Doc. #49) is GRANTED, in part, as
to the Deposition of Wayde Smith, and DENIED, in part, as to the
Deposition of Rebecca McGraw.
January 23, 2017
s/Sharon L. Ovington
Sharon L. Ovington
United States Magistrate Judge
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