Tax Court denies boat maker’s motion to strike investigatory report

A southern Indiana barge and water vessel manufacturer hit rough waters after the Indiana Tax Court denied its motion to strike an investigatory report and testimony presented in its income tax refund litigation.

In 2015, Tell City Boatworks Inc. filed an amended Indiana income tax return on six projects it claimed entitled it to both qualified research expense credit and an income tax refund for 2010.

But after the Indiana Department of State Revenue determined Tell City was not entitled to the QRE credit and denied its refund claim, the manufacturer appealed in Tell City Boatworks, Inc. v. Indiana Department of State Revenue, 18T-TA-4, arguing the determination was erroneous.

During litigation, the revenue department retained Robson Forensic Inc. to investigate whether a process of experimentation would have been necessary for Tell City to complete its six projects.

Once a report was issued upon Robson Forensic employee John William Sullivan’s investigation of the matter, Tell City moved to strike the report and exclude Sullivan’s testimony from the record. 

However, Indiana Tax Court Judge Martha Blood Wentworth denied the manufacturer’s motion Thursday, finding Tell City failed to prove Sullivan’s report and testimony were inadmissible regarding its “overall lack of relevancy and credibility.” 

First, Wentworth rejected Tell City’s assertion that Sullivan’s report and testimony were not relevant, were misleading and potentially prejudicial because due to their basis on Indiana’s discovery rule.

The court noted that arguments on the merits of the case indicated that one of the issues before the court involved whether Tell City’s activities constituted “elements of process of experimentation” for purposes of Internal Revenue Code 41 and the related Treasury Regulations for purposes of determining whether taxpayers qualify for the QRE credit.

“The Treasury Regulations expressly provide, however, that taxpayer does not need to show that it sought to obtain information that exceeded, expanded, or refined the common knowledge of science in the relevant field to meet the ‘uncertainty’ requirement,” Wentworth wrote.

“Nonetheless, evidence of that type is not automatically irrelevant, misleading, or potentially prejudicial that would make it inadmissible. Indeed, other courts have considered similar evidence in determining whether taxpayer’s activities were undertaken for the purpose of discovering technological information.”

The court further found that pursuant to Indiana Evidence Rule 704, Sullivan’s report and testimony were based on his experience and expertise in the maritime industry, which provided opinions — rather than legal conclusions — regarding Tell City’s activities in relation to appropriate standards of practice. 

Finally, it concluded that Rule 702 of the Federal Rules of Evidence did not preclude the admission of Sullivan’s report and testimony as only Indiana’s rules of evidence were applicable in the case at hand.

“Sullivan’s knowledge, skill, experience, and training regarding designing and building vessels exceeds that of lay persons, and thus, the Court finds it to be reasonable that his report and testimony will assist the Court in understanding the evidence,” Wentworth wrote.