Opinion
11581-20
06-23-2023
STEVEN FELLER & LOUISE FELLER, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Christian N. Weiler Judge
This case was assigned to the undersigned on May 23, 2023. On July 29, 2022, respondent filed a Motion to Compel Responses to Interrogatories and a Motion to Compel Production of Documents. On July 29, 2022, petitioners filed a Motion to Preclude. For the reasons explained below, we will grant in part respondent's Motion to Compel Responses to Interrogatories, grant in part respondent's Motion to Compel Production of Documents, and deny petitioners' Motion to Preclude.
Background
The following facts are derived from the parties' pleadings, motion papers, and exhibits attached thereto. These facts are stated solely for the purpose of deciding the motions before us and not findings of fact in this case. Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff'd, 17 F.3d 965 (7th Cir. 1994).
Steven Feller P.E., P.L. (Feller PE), an S corporation, was founded in 1979. Feller PE provides mechanical, electrical, plumbing, and fire safety design and engineering services for commercial and residential construction projects. During tax years 2014 and 2015, petitioners were shareholders of Feller PE. Pursuant to section 41, petitioners claimed qualified research expenses (QREs) on their 2014 and 2015 joint individual returns in the amount of $159,607 and $221,294, respectively. The QREs were computed by Engineered Tax Services, Inc. (ETS). QREs include in-house research expenses paid or incurred by the taxpayer during the taxable year. See I.R.C. § 41(b)(1). In-house research expenses include wages paid or incurred to an employee for qualified services performed by such employee. I.R.C. § 41(b)(2)(A)(1). Qualified services are services consisting of (1) engaging in qualified research or (2) engaging in the direct supervision of direct support of research activities which constitute qualified research. I.R.C. § 41(b)(2)(B).
Unless otherwise indicated, all statutory references are to the Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times, all regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure.
Respondent thereafter issued a notice of deficiency, dated June 17, 2020, disallowing the QRE credits. On March 11, 2022, petitioners sent respondent an initial Branerton request that respondent stipulate or admit to certain facts.
On March 21, 2022, Jonathan E. Behrens, Senior Counsel for respondent, sent Louis H. Hill, Associate Area Counsel, an email recommending the assertion of a 20% penalty under section 6662(a) and (d). Mr. Hill replied to the email and included the statement, "I fully concur with, and approve, the assertion of the accuracy-related penalty for each of the taxable years . . . I am your current manager and this approval is given in accordance with, and as required by, I.R.C. section 6751(b)." Mr. Hill has submitted a declaration under penalty of perjury stating that he is and has been "the immediate supervisor of Jonathan E. Behrens since 2015" and that his statements were true and correct.
The parties agree that respondent and petitioners' counsel communicated about the proposed penalties on March 23, 2022. On March 30, 2022, respondent filed his First Amendment to Answer in which he asserts that petitioners are liable for accuracy-related penalties for the tax years at issue. However, petitioners contend that they had previously been in communication with respondent regarding the penalties asserted in the Answer, prior to respondent securing the required approval.
On April 14, 2022, respondent sent petitioners' counsel an initial Branerton request to provide answers to certain questions and to produce certain documents. Petitioners responded to the informal request on May 9, 2022. Respondent sent another informal request to petitioners on May 26, 2022, to which petitioners did not respond. On June 27, 2022, respondent served on petitioners his First Interrogatories to Petitioners. On August 16, 2022, petitioners served their Response to Motion to Compel Responses to Interrogatories on respondent contending that respondents did not comply with informal discovery prior to issuing the interrogatories and that the interrogatories are overbroad, unduly burdensome, or already in respondent's possession.
Discussion
I. Discovery Standard
Pursuant to Rule 72, the answering party shall serve a written response, and objections, if any, within 30 days after service of the request. Rule 72 is not limited to documents in a party's actual possession when the party has sufficient control so as to be able to obtain the documents. See Rosenfeld v. Commissioner, 82 T.C. 105, 116-118 (1984).
The party objecting to discovery has the burden of establishing that the documents sought by the other party are not relevant or that they are otherwise not discoverable. See Rosenfeld v. Commissioner, 82 T.C. 105, 116-18 (1984); Rutter v. Commissioner, 81 T.C. 191, 193 (1975). We have also concluded that any claim that a party is not in possession, custody, or control of documents constitutes an objection to the production of documents. Gaw v. Commissioner, T.C. Memo. 1995-531, 1995 WL 664592, at * 31 (citing Henderson v. Zurn Indus., Inc., 131 F.R.D. 560 (S.D. Ind. 1990) (construing analogous provision of Federal Rules of Civil Procedure)).
II. Analysis
A. Motion to Compel Responses to Interrogatories
Rule 71(b) provides that answers to interrogatories "shall be made . . . as completely as the answering party's information shall permit" subject to the requirement that the answering party "make reasonable inquiry and ascertain readily obtainable information." The Rule further specifies that an "answering party may not give lack of information or knowledge as an answer or as a reason for failure to answer," unless the party states that it has made reasonable inquiry and that its information is insufficient to enable the person to provide an answer to the interrogatory. Id. In his motion, respondent seeks to compel responses to interrogatories 1-3.
In interrogatory No. 1, respondent requests petitioners to identify the agents or employees of respondent who purportedly communicated with them about the penalties prior to March 23, 2022, in addition to the dates these communications took place. Because respondent has made a showing that supervisory approval was obtained on March 21, 2022, the burden shifts to petitioners to show "that there was a formal communication of the penalty [to them] before the proffered approval" was obtained. See Frost v. Commissioner, 154 T.C. 23, 25 (2020). While petitioners' Response identifies the agents they believe made the penalty-related communications, petitioners failed to include the dates the alleged communications took place. The burden is upon petitioners to show that the supervisory penalty approval was untimely. Petitioners' introduction of evidence that identifies the dates these communications took place would satisfy their burden. We find the response to this interrogatory to be incomplete. Accordingly, we will grant the Motion to Compel Responses to Interrogatories with respect to interrogatory No. 1 and direct petitioners to supplement their response.
In interrogatory No. 2, respondent asks petitioners to state their net worth as of September 4, 2020. Petitioners averred that they owned an interest in Feller PE on September 4, 2020, and were subject to liability and ongoing litigation associated with the business that impacted the valuation of petitioners' net worth. Petitioners assert that they do not possess information regarding their net worth as of September 4, 2020, that would allow for an accurate estimation. Petitioners further suggest that a valuation expert will be required to obtain an accurate determination of their net worth and that the requested information is premature. Under section 7430, the definition of a "prevailing party" requires the net worth of an individual taxpayer's to be equal to or less than $2 million at the time the petition was filed. See I.R.C. § 7430(c)(4)(A); 28 U.S.C. § 2412(d)(1)(B). "Failure to meet any of the requirements of section 7430 will preclude an award of [litigation] costs." See Angle v. Commissioner, T.C. Memo. 2016-27; Minahan v. Commissioner, 88 T.C. at 47. Because petitioners' Branerton request asked respondent to stipulate that "[p]etitioners are entitled to an award of attorney's fees and costs pursuant to [section] 7430 if [petitioners] are the prevailing party," we find the inquiry by respondent to be relevant and will grant the Motion to Compel Responses to Interrogatories with respect to interrogatory No. 2.
In interrogatory No. 3, respondent requests petitioners to "identify with specificity" the business component for each of the projects. Petitioners' response states that "[t]he business components are the mechanical, electrical, and plumbing components and systems for each project identified by respondent." Because a sample has not been reached, this interrogatory request is overly broad and unduly burdensome as currently drafted. Considering the information petitioners provided regarding the complexity of obtaining responsive answers to this interrogatory, we agree with petitioners that this request is overly broad and unduly burdensome. Therefore, we will deny respondent's Motion to Compel Responses to Interrogatories with respect to interrogatory No. 3.
Respondent also moves pursuant to Rule 104 that the Court order, upon failure of petitioners to completely comply with any order issued by it in respect to this motion to compel, (1) that petitioners be precluded from denying that Steven Feller, P.E., PL is not entitled to research credits under section 41 for the tax years 2014 and 2015; (2) that petitioners be precluded from denying that the first formal communication of the accuracy-related penalties pled by respondent occurred on March 23, 2022; (3) that petitioners be precluded from claiming the status of a "prevailing party" within the meaning of I.R.C. § 7430(c)(4)(A); and (4) any other just relief determined by the Court. The relief sought by respondent under Rule 104 is premature at this time, and we will deny his motion as it relates to precluding petitioners from making the above-mentioned assertions.
B. Motion to Compel Production of Documents
Pursuant to Rule 72, respondent seeks to compel production request Nos. 1 and 2, as set forth in his Second Request for Production of Documents, which was served on petitioners on June 27, 2022. Production Request No. 1 asks petitioners to produce "[e]xecuted copies of the Purchase Agreement and Employment Agreement defined in paragraph B and D, respectively, of the Settlement Agreement and Mutual Release" (together, the Agreements) from their time at Feller P.E. On July 18, 2022, petitioners responded that they are not in possession, custody, or control of the Agreements. Petitioners further noted that they contacted Brian S. Behar, the bankruptcy attorney for Feller PE, to obtain copies of the requested records and that they "will supplement this request if and when Mr. Behar provides the requested records."
According to the Settlement Agreement and Mutual Release entered into on March 16, 2022, by and among Steven Feller, Feller PE, and Steven Feller P.E., LLC, Feller PE was wholly owned by petitioners until 2016.
On August 16, 2022, petitioners filed their Response to Motion to Compel Production of Documents and stated, among other things, that they have directed respondent to the third party that may possess "executed copies" of the [A]greements." It is unclear to the Court if Mr. Behar represented Feller PE when the Agreements were executed or if he provided petitioners with the requested records. Consequently, with respect to production request No. 1, we will order petitioners to supplement their response as to this request.
Production request No. 2 reiterates respondent's request in interrogatory No. 1, and asks petitioners to "produce all documents evidencing the existence" of alleged communications between respondent and petitioners regarding the accuracy-related penalties prior to March 23, 2022. Petitioners' response identifies respondent's agents that they believe took part in the alleged communications, but the response does not specify any dates. Petitioners' response further notes that they have not received a response from ETS; however, we find petitioners have sufficient control so as to enable them to obtain the documents and records of ETS, which are related to petitioners' QRE claims. In accordance with our finding relating to interrogatory No. 1, we will grant respondent's Motion to Compel Production of Documents and require petitioners to supplement their response to request No. 2 and make responsive documents, including those held by ETS, available.
Moreover, respondent moves pursuant to Rule 104 that the Court order, upon failure of petitioners to completely comply with any order issued by it in respect to this motion to compel, (1) that petitioners be precluded from denying that they are in possession, custody, or control of the records of Feller PE; (2) that petitioners be precluded from denying that the first formal communication of the accuracy-related penalties pled by respondent occurred on March 23, 2022; and (3) any other just relief determined by the Court. As with respondent's Motion to Compel Responses to Interrogatories, we find that he is prematurely moving that the Court enter an order precluding petitioners from making the above-mentioned assertions.
C. Motion to Preclude
In petitioners' Motion to Preclude, petitioners seek an order to limit discovery and trial in relation to the number and list of projects to be considered. As discussed during a conference call with the Court on June 7, 2023, the parties are at an impasse until a representative sample of projects is agreed to for discovery and trial. Although the Court is not inclined to choose a representative sample of projects and accordingly will deny petitioners' motion; the parties are expected to work in good faith toward a mutual resolution of this issue, and select a mutually acceptable representative sample of projects to be considered in discovery and for trial purposes.
Considering the foregoing, it is
ORDERED that respondent's Motion to Compel Responses to Interrogatories, filed on July 29, 2022, is granted in part, in that petitioners shall, on or before July 21, 2023, serve on counsel for respondent full, complete, and responsive answers to interrogatory Nos. 1 and 2. It is further
ORDERED that respondent's Motion to Compel Responses to Interrogatories, filed on July 29, 2022, is denied in part as it relates to interrogatory No. 3 and to any preclusive effect failing to comply with this Order may have. It is further
ORDERED that respondent's Motion to Compel Production of Documents, filed on July 29, 2022, is granted in part, in that petitioners shall, on or before July 21, 2023, supplement their responses and produce those documents requested in request Nos. 1 and 2. It is further
ORDERED that respondent's Motion to Compel Production of Documents, filed on July 29, 2022, is denied in part as it relates to any preclusive effect failing to comply with this Order may have. It is further
ORDERED that petitioners' Motion to Preclude, filed July 29, 2022, is denied. It is further
ORDERED that, no later than July 14, 2023, the parties shall file a joint status report (or separate reports, if preferred) that includes an agreed to sample of projects for discovery and trial purposes. If the parties cannot agree to a sample, then each party shall separately report their proposal for future proceedings in this case.