Opinion
21070-21
01-23-2024
WILLGRAND COMPANIES, INC. & SUBSIDIARY, KANNEGIESSER ETECH, INC., SHAREHOLDER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
RONALD L. BUCH JUDGE.
Pending before the Court is the Commissioner's Motion to Take Deposition Pursuant to Rule 74(c)(3), in which the Commissioner seeks to take a discovery deposition of Joseph Schult, the former owner and president of Willgrand Companies, Inc. (Willgrand). According to the Commissioner, prior attempts at discovery did not produce sufficient information on how Willgrand calculated its research credits. Rule 74(c)(1)(B) permits a party to file a motion to take a nonconsensual discovery deposition of a party witness only if the information is not practicably obtainable through other means. Because the Commissioner has not been able to obtain this information through other means, we will grant the motion.
Background
Willgrand was a Minnesota Corporation that claimed to have researched and developed laundry automation systems and designed related software. In 2015 and 2016 (years in issue), Mr. Schult was the sole owner and president of Willgrand. During that time, the company conducted 372 projects that Mr. Schult directly supervised. In his role as a supervisor, Mr. Schult confirmed his employees' roles, responsibilities, and research activities as well as determined what percentage of time employees spent performing qualified services. Additionally, Mr. Schult personally reviewed all project specifications and engineer designs for each project, and his wages were included as wages for qualified services. Willgrand claimed research credits for the years in issue based on information determined or provided by Mr. Schult.
Kannegiesser ETECH, Inc. is the successor in interest for Willgrand. At the time Mr. Schult was the sole owner and president of Willgrand, E-Tech, Inc. was a wholly owned subsidiary of Willgrand. Mr. Schult sold his stock in Willgrand to Passat Laundry Systems, Inc. (Passat). The purchase agreement included an executive employment agreement, whereby Mr. Schult became an employee of E-Tech, Inc. After Passat purchased the stock of Willgrand, they merged with E-Tech, Inc. to form Kannegiesser ETECH, Inc. Mr. Schult remains employed with what is now Kannegiesser ETECH, Inc.
The Commissioner issued a Notice of Deficiency, disallowing Willgrand's research credits for the years in issue. Kannegiesser ETECH, Inc. timely filed a petition. During discovery, the Commissioner issued an informal discovery request to Kannegiesser ETECH, Inc. containing 111 requests. The petitioner responded, but the Commissioner was not satisfied with their responses. The Commissioner subsequently issued a request for responses to interrogatories and a request for production of documents. Again, the petitioner responded but the Commissioner did not consider their responses to be sufficient. This brings us to the pending motion.
Discussion
The Commissioner seeks to conduct discovery into how Willgrand calculated its research credit eligibility. The calculation of the research credit depends, in part, on the amount of qualified research expenses a taxpayer generates during the tax year. Qualified research expenses include wages paid for qualified services. In his Notice of Deficiency, the Commissioner disallowed research credits for Willgrand. Consequently, the underlying facts of how Willgrand calculated its credit eligibility is directly at issue in this case.
In discovery, the Commissioner seeks to depose Mr. Schult. As previously stated, Mr. Schult oversaw all projects related to the qualified expenses. His wages were qualified expenses, and he directly supervised employees whose wages were also qualified expenses. In his role, he reviewed all project specifications as well as engineer designs for each project. Therefore, testimony from Mr. Schult would aid in discovery.
The information the Commissioner seeks is discoverable. Information is discoverable information under Rule 70(b) if it includes any matter not privileged that is relevant to the subject matter involved in the pending case. Testimony from Mr. Schult is highly relevant to the subject matter in this case. Further, the Commissioner is not seeking privileged information, and a deposition would not present any disproportionate burden on the petitioner. Rule 70(b)(1).
The Commissioner could not practicably obtain the information through alternative means. The taking of a deposition is an extraordinary method of discovery. Rule 74(c)(1)(B). For a discovery deposition to be available to a party, that party must follow a sequence of steps of informal discovery. The record shows the Commissioner complied. Per Rule 74(c)(1)(B), the Commissioner sought discovery through informal means. After that, he sent a request for responses to interrogatories and a request for production of documents. This proved insufficient. It is clear from the record that the petitioner would not consent to a deposition. Therefore, the Commissioner could not practicably obtain this information through alternative means and such a motion is available to the Commissioner.
Conclusion
The Commissioner may take a nonconsensual discovery deposition of Mr. Schult, a party witness, because he may provide testimony relevant to Willgrand's calculation of their research credits that the Commissioner has not otherwise been able to obtain. Therefore, we will grant the Commissioner's motion, allowing for a deposition of Mr. Schult at a time and location that is convenient for both parties.
To reflect the foregoing, it is
ORDERED that the Commissioner's Motion to Take Deposition Pursuant to Rule 74(c)(3) is granted, in that the Commissioner may take the deposition of Mr. Schult at a time and location agreeable to the parties.