Tell City Boatworks, Inc. v. Indiana Department of State Revenue

ATTORNEYS FOR PETITIONER: ATTORNEYS FOR RESPONDENT:
RANDAL J. KALTENMARK CURTIS T. HILL, JR.
ZIAADDIN MOLLABASHY ATTORNEY GENERAL OF INDIANA
BARNES & THORNBURG LLP REBECCA L. MCCLAIN
Indianapolis, IN DEPUTY ATTORNEY GENERAL
Indianapolis, IN
JOHN H. DIES
JEREMY M. FINGERET SEAN P. BURKE
ROSALIND J. LEWIS HAMISH S. COHEN
DAVID C. LORENTZ ELINAM B. KPOTUFE
JEFFERSON H. READ MATTINGLY BURKE COHEN &
ZERBE MILLER FINGERET BIEDERMAN LLP
FRANK & JADAV, P.C. Indianapolis, IN
Houston, TX

THEIN
FILED
INDIANA TAX COURT Apr 18 2019, 1:20 pm

CLERK
Indiana Supreme Court
Court of Appeals
and Tax Court
TELL CITY BOATWORKS, |NC.,

Petitioner,

v. Cause No. 18T-TA—00004
VVVVVVVVVV

INDIANA DEPARTMENT OF
STATE REVENUE,

Respondent.

ORDER ON PETITIONER’S MOTION TO STRIKE THE REPORT
AND EXCLUDE THE TESTIMONY OF JOHN WILLIAM SULLIVAN

FOR PUBLICATION
April 13, 2019

WENTWORTH, J.

This matter concerns Tell City Boatworks, |nc.’s Motion to Strike the Report and

Exclude the Testimony of John William Sullivan. Upon review, the Court denies Tell City’s

Motion.
BACKGROUND
Tell City is a domestic corporation that designs and manufactures barges and other

vessels. (E Jt. Stipulation of Facts (“Second Stip”) 1m 1-4, 1O (filed 1/1 1/2019).) In

2015, Tell City filed an amended Indiana income tax return, claiming its work on six

projects entitled it to both a qualified research expense credit (the “QRE credit”) and an

income tax refund for 2010. (fl Second Stip. 1111 6, 29.) The Department subsequently

determined that Tell City was not entitled to the QRE credit and denied Tell City’s refund

claim. (E Second Stip. 111T 7-8.)

On January 16, 2018, Tell City timely initiated an original tax appeal, claiming that

the Department’s final determination was erroneous. During the course of the litigation,

the Department retained Robson Forensic, Inc. to investigate “whether a process of

experimentation would [have] be[en] necessary . . . in order for [Tell City] to complete” the

six projects at issue. (fl Pet’r Mem. Supp. Mot. Strike Report & Exclude Test. John

William Sullivan (“Pet’r Br.”), Ex. A at 1.) Thereafter, Robson Foresnic’s employee, John

William Sullivan, investigated the matter and prepared a report. (E Pet’r Br., Ex. A.)

(fl fl Resp’t Resp. Opp’n Pet’r Mot. Strike & Exclude Test. John William Sullivan

(“Resp’t Resp. Br.”), Ex. 2.)

On January 24, 2019, Tell City moved to strike Sullivan’s report and exclude his

testimony. On February 18, 2019, after the matter was fully briefed, the Court took Tell

City’s Motion under advisement. Additional facts will be supplied when necessary.

LAW AND ANALYSIS
In its Motion, Tell City claims that Sullivan’s report and testimony are inadmissible

for three interrelated reasons regarding their overall lack of relevancy and credibility. (E
generally Pet’r Mot. Strike Report & Exclude Test. John William Sullivan (“Pet’r Mot.”).)

In response, the Department maintains that Sullivan’s report and testimony are

admissible because Tell City’s complaints simply go to the weight of the evidence, not its

admissibility. (E generally Resp’t Resp. Br.)

1.

Tell City first maintains that Sullivan’s report and testimony are inadmissible

because Sullivan’s opinions “are exclusively based upon a defunct legal standard[:]” the

Discovery Rule. (Pet’r Br. at 4-1 1 .) Tell City explains that “[t]he ‘Discovery Rule’ is an

antiquated idea whereby a company would have to exceed, expand or refine the common

knowledge of science in a given area to show qualified research was performed.” (Pet’r

Br. at 6 (footnote omitted).) Tell City contends that because the parties have previously

stipulated that another standard applies, Sullivan’s report and testimony are not relevant,

misleading, and potentially prejudicial. (fl Pet’r Br., Ex. C.)

The parties arguments on the merits indicate that one of the issues before the

Court involves whether Tell City’s activities constitute “elements of a process of

experimentation” for purposes of IRC § 41 and the related Treasury Regulations.1 (Si;

e_.g_., Pet’r Br. at 8—1 1; Resp’t Resp. Br. at 4-9.) The resolution of that issue will depend

on several factors. Si; fl, Treas. Reg. § 1.41-4(a)(3)(i) (2019) (implicating, for

example, questions of whether Tell City’s activities were “undertaken for the purpose of

discovering information that is technological in nature[,]” or were “intended to eliminate

uncertainty concerning the development or improvement of a business component”

1
Indiana incorporates certain provisions of the Internal Revenue Code and related Treasury
Regulations for purposes of determining whether a taxpayer qualifies for the QRE credit. See,
$1., IND. CODE § 6-3.1-4-1 (2019).
(emphasis added».

The Treasury Regulations expressly provide, however, that a 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.

fl Treas. Reg. § 1.41-4(a)(3)(ii). 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 a taxpayer’s

activities were undertaken for the purpose of discovering technological information.

Compare qenerallv, e.q., Suder v. Comm’r, 108 T.C.M. (CCH) 354 (T.C. 2014) m Trinity

Indus. Inc. v. United States, 757 F.3d 400 (5th Cir. 2014). The Court therefore finds that

Tell City has not shown that Sullivan’s report and testimony are inadmissible on this basis.

2.

Next, Tell City maintains that Sullivan’s “testimony regarding [its] compliance with

inaccurate legal standards” is inadmissible because it makes legal conclusions that

“‘invade[] the province of the court to determine the applicable |aw[.]”’ (fl Pet’r Br. at

11-12; Pet’r Reply [Resp’t Resp. Br.] (“Pet’r Reply Br.”) at 5-6.) Indiana Evidence Rule

704 generally allows opinions to embrace ultimate issues to be decided by the trier of

fact, but prohibits opinions as to legal conclusions. fl Ind. Evidence Rule 704.

Sullivan’s report and testimony are based on his experience and expertise in the maritime

industry and appear to provide opinions regarding Tell City’s activities in relation to the

standards of practice in that field, not legal conclusions. (fl Pet’r Br., Ex. A; Resp’t

Resp. Br., Ex. 2.) Therefore, Tell City has not established that Sullivan’s testimony is

inadmissible on this basis.
3.

Finally, Tell City claims that Rule 702 of the Federal Rules of Evidence precludes

the admission of Sullivan’s report and testimony because: 1) Sullivan lacks sufficient

facts, knowledge, background, or data “to discuss the technical aspects of the design and

construction of ships and barges[;]” 2) Sullivan’s opinions are not the product of reliable

principles or methods; and 3) Sullivan failed to apply the principles and methods reliably

to the facts of the case. (fl Pet’r Mot. at 2; Pet’r Br. at 12-25; Pet’r Reply Br. at 6-8.)

The federal rules of evidence, however, do not govern the resolution of this issue because

this case involves Indiana’s laws, and thus, Indiana’s rules of evidence . See, 1.9;,

Malinski v. State, 794 N.E.2d 1071, 1084 (Ind. 2003) (explaining that the federal rules of

evidence and federal case law may be helpful in analyzing Indiana Rule of Evidence

702(b), but they are not binding on state evidentiary law matters).

Indiana Rule of Evidence 702 provides:

(a)A witness who is qualified as an expert by knowledge, skill,

experience, training, or education may testify in the form of an
opinion or otherwise if the expert’s scientific, technical, or other
specialized knowledge will help the trier of fact to understand the
evidence or to determine a fact in issue.

(b) Expert scientific testimony is admissible only if the court is

satisfied that the expert testimony rests upon reliable scientific
principles.

Ind. Evidence Rule 702. This Rule, among others, governs the admission of two types of

expert evidence: 1) scientificalIy-based evidence; or 2) non-scientific evidence based on

an expert’s specialized knowledge and experience. fl Malinski, 794 N.E.2d at 1084-

86. When expert evidence is based upon the expert’s skill or experience instead of the

application of scientific principles, the proponent of the evidence “must only demonstrate
that the subject matter is related to some field beyond the knowledge of lay persons and

that the witness possesses sufficient skill, knowledge or experience in the field to assist

the trier of fact to understand the evidence or to determine a fact in issue.” Norfolk S. Ry.

Co. v. Estate of Waqers, 833 N.E.2d 93, 102 (Ind. Ct. App. 2005) (citation omitted), trans.

m.
Sullivan has a Bachelor of Science in Marine Engineering, he is a Licensed Chief

Engineer and a Certified Marine Surveyor, and he has worked within the Maritime Industry

for over 30-years in a variety of capacities. (fl Resp’t Br., Ex. 1 at 5.) For instance,

Sullivan’s curriculum vitae indicates that he has many years of experience in shipyards

worldwide as a “senior level manager on new builds from the design phase through

delivery, commissioning, and operations[.]” (Resp’t Br., Ex. 1 at 4.) Moreover, his report

indicates that his opinions were based on his review of a variety of materials concerning

Tell City and the six projects at issue. (E generally Pet’r Br., Ex. A; Resp’t Resp. Br.,

Ex. 2.) 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.

Consequently, Tell City has not shown Sullivan’s report should be stricken or his

testimony excluded pursuant to Indiana Evidence Rule 702.
CONCLUSION

For the foregoing reasons, Tell City’s Motion to Strike the Report and Exclude the

Testimony of John William Sullivan is DENIED.

SO ORDERED this 18th day 0f April 2019.

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Indiana Tax Court

Distribution:
Randal J.Kaltenmark, John H. Dies, Jeremy M. Fingeret, Rosalind J. Lewis, David C.
Lorentz, Ziaaddin Mollabashy, Jefferson H. Read, Rebecca L. McClain, Sean P. Burke,
Hamish S. Cohen, Elinam B. Kpotufe