Opinion
14015-20
09-19-2024
CALVIN A. LIM & HELEN K. CHU, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Albert G. Lauber Judge
During 2016 and 2017 petitioners were the sole shareholders of Integra Capital Group, Inc. (Integra). Integra was an S corporation doing business in California. One of the questions presented by this case is whether petitioners are entitled to a section 41 qualified research credit (R&E credit) for 2016 and 2017.
Unless otherwise indicated, statutory references are to the Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times, regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and Rule references are to the Tax Court Rules of Practice and Procedure.
After receiving unsatisfactory responses to his informal and formal discovery requests, respondent filed on August 1, 2024, a Motion to Compel Production of Documents (Motion). Respondent contends that petitioners have not produced documents responsive to document requests ## 26-27, 35, 37, 42, 44, 47-51, 58-60, and 62-69, even though (as he alleges) petitioners are likely to have possession, custody, or control of documents. The documents that respondent has requested are as follows:
• 26. All minutes from meetings of Integra's board of directors conducted during the tax years for which the R&E credit is claimed.
• 27. An organizational chart or similar document showing how Integra's personnel structure is organized.
• 35. For all claimed "qualified research activities" (QRAs), all requests for quotes, requests for proposals, quotes, proposals, bids, and similar documents (including drafts, updates, revisions, etc., thereof).
• 37. For all claimed QRAs, all drawings and specifications relating to the
activities or products in question.
• 42. Any audio files created to memorialize any interviews with current or former Integra employees who worked on QRA projects.
• 44. All documents, including payroll records and Forms W-2, that support the qualifying wages claimed by Integra for the R&E credit base years.
• 47. All proposals to petitioners and/or Integra from third parties regarding the R&E Credit Study (Study) prepared for Integra by alliantgroup for tax years 2013-2017.
• 48. All legal, accounting, or other opinions utilized, presented, or given to petitioners and/or Integra in connection with the sale, promotion and offering of the Study.
• 49. With respect to drafts of the Study, all documents reflecting comments and/or suggested edits offered to alliantgroup by petitioners and/or Integra.
• 50. All forms, surveys, questionnaires, templates or other documents provided to Integra and/or petitioners and completed by them (or their staff or employees) in connection with the Study.
• 51. The letter or other communication from alliantgroup to Integra and/or petitioners enclosing the Study.
• 58. Any documents relating to the setting or approval of compensation paid to Integra employees and owners for tax years 2013-2017.
• 59. All surveys, outside data, or outside expert reports utilized by Integra and/or petitioners in setting compensation for employees during tax years 2013-2017.
• 60. Any documents relating to the calculation of bonuses to be paid by Integra during the tax years 2013-2017.
• 62. With respect to each of the Key Employees-defined to include Calvin A. Lim, Vice President; Mohamed Elhanafy, Vice President of Software Engineering; and Hsy-Min Hsu, Senior Software Engineer-all documents evidencing his/her:
a. Educational background; and
b. Professional credentials, including those related to research and the Sciences.
• 63. All employment agreements for the Key Employees.
• 64. All performance reviews for and/or self-assessment evaluations by the Key Employees for 2013-2017.
• 65. All time tracking data records (including time sheets or similar records) evidencing the work activities of the Key Employees during 2013-2017.
• 66. The Key Employees' work calendars (or similar documents) for 2013-2017.
• 67. The Key Employees' employee reviews and/or workload reviews for 2013-2017.
• 68. Any records of committee deliberations or other documents relating to compensation of Integra's officers for 2013-2017.
• 69. If Integra's compensation policy for officers is available in written form, all versions of that policy that cover 2013-2017.
On September 4, 2024, petitioners responded to the Motion, asserting that Integra is a small company that does not routinely follow such corporate formalities as board meetings, committee deliberations, and so on. This may explain the nonexist-ence of some documents. But the Court finds that it wholly implausible that petitioners possess no documents responsive to any portions of the document requests listed above.
We will direct petitioners to provide to respondent's counsel, within 45 days, forthright responses to these requests. In their response to the IRS they shall address each numbered category of documents requested. They shall provide all responsive information in their possession, custody, or control. To the extent they assert that requested information does not exist, they must certify that they made a reasonable search for the information and that they requested such information from alliant-group (or other third party) who might be in possession of the information. If petitioners assert that no responsive documents exist, such documents will be presumed not to exist in any future trial of this case.
Upon due consideration, it is ORDERED that respondent's Motion to Compel Production of Documents is granted. It is further
ORDERED that that petitioners shall complete and serve upon IRS counsel, on or before November 4, 2024, forthright and comprehensive responses to the document requests enumerated above.
In the event petitioners do not fully comply with the provisions of this Order, the Court will be strongly inclined to impose sanctions pursuant to Tax Court Rule 104, which may include deeming certain facts to be established for purposes of trial or prohibiting petitioners from introducing designated matters into evidence.