Court Won’t Dismiss Suit After Taxpayer’s Favorable Jury Verdict

AUDIO TECHNICA U.S., INC.,
Plaintiff,
v.
UNITED STATES OF AMERICA,
Defendant.

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF OHIO
EASTERN DIVISION

Judge John R. Adams

ORDER

The above-captioned case is before the Court on two motions by Defendant United States of America to dismiss for lack of subject matter jurisdiction following a trial and unanimous jury verdict in favor of Plaintiff Audio Technica, Inc. (“Audio Technica”). For the following reasons, the motions (Docs. 128 and 131) are DENIED. The Court has contemporaneously entered a final judgment for Audio Technica. Thus, the motion with document number (Doc. 129) is GRANTED.

Also at issue is Audio Technica's motion for sanctions. (See Doc. 137.) This motion is also DENIED. Lastly, the motion with document number (Doc. 140) is DENIED AS MOOT.

This matter is a civil action against the United States for a refund of amounts paid in federal taxes to the Internal Revenue Service (“IRS”) under 26 U.S.C. § 7422. Audio Technica creates high-performance microphones, headphones, wireless systems, mixers and electronic projects for home and professional use. Audio Technica manufactures products for live sound tours, broadcast and recording studios, corporate and government facilities.

Audio Technica claimed that in the carrying on of its business during the tax years ending March 31, 2002-2011, Audio Technica engaged in qualified research activities and incurred qualified research expenses as defined in sections 41 and 174 of the Internal Revenue Code. As the basis of its complaint, Audio Technica asserted that its claimed qualified research expenses increased from the base period, as defined in section 41, such that Audio Technica is entitled to tax credits for the aforementioned tax years as provided by sections 41 and 174 of the Internal Revenue Code, also known as “the Tax Credit for Increasing Research Activities.”

Tax years ending March 31, 2002-2005 were examined by the IRS and were eventually litigated in Tax Court, resulting in a settlement as reflected in the Decision Document signed by the United States Tax Court on April 12, 2001 in Docket No. 17540-09.

The 2010 tax year was also examined by the IRS as part of the same examination that forms the underlying basis of the current case, and then litigated in Tax Court. Such litigation on the 2010 tax year resulted in specific calculation of Plaintiff's research expenses, including identifying each employee that performed qualified research, each supply expense that was allowable, and each contract research expense that was allowable. The parties also reached an agreement as to the Plaintiff's Fixed Base Percentage (.92%). As a result of the agreements reached, all calculations were finalized by and through the Filed Stipulation of Settled Issues filed Decision Document signed by the United States Tax Court on November 25, 2015 under Docket No. 27948.

The remaining tax years ending March 31, 2006-2010 were at issue before this court and subject to a jury trial. Prior to trial, the parties agreed to and filed joint stipulations with the Court, agreeing that the amounts of Audio Technica's claimed gross receipts and employee wages are as provided on Audio Technica's tax returns.

On the days of June 25-29, 2018, this action was tried before a panel of eight jurors. At trial, Audio Technica presented over 6,000 pages of documents and oral testimony of seven fact witnesses in support of its claims. Defendant introduced no exhibits into evidence, and called no witnesses.

On June 29, 2018, the jury issued a unanimous verdict in favor of Audio Technica. The jury unanimously found that: (1) all five business components involved qualified research activities; (2) Audio Technica conducted qualified research activities in all five years at issue; and Audio Technica incurred qualified research expenses in all five years at issue. The jury's verdict provided the amounts of wages, contractor costs, and supply costs the jury unanimously found to be reasonable qualified research expenses of Audio Technica for each of the tax years at issue.

Now, after trial and an unfavorable jury verdict, Defendant moves for dismissal of the complaint for lack of subject matter jurisdiction. “A court must dismiss an action “if the court determines at any time that it lacks subject-matter jurisdiction, see Fed. R. Civ. P. 12(h)(3). “The objection that a federal court lacks subject-matter jurisdiction, see Fed. R. Civ. P. 12(b)(1), may be raised by a party, or by a court on its own initiative, at any stage in the litigation, even after trial and the entry of judgment.” Arbaugh v. Y&H Corp., 546 U.S. 500, 5006 (2006).

With respect to the tax years 2005-2008, Defendant claims that the Court lacks subject-matter jurisdiction over Audio Technica's claim for refund because the factual basis of the claims in those tax years substantially varied from the factual basis that Plaintiff presented to the IRS. Having reviewed the motion and Audio Technica's opposition thereto (Doc. 133), the Court disagrees with Defendant for the reasons stated in the opposition. The Court finds that: (1) there is no substantial variance in Audio Technica's tax refund claim; (2) Defendant mistakenly asserts that the R&D tax studies performed by third parties for the benefit of the taxpayer constitute the taxpayer's claim for refund; (3) Defendant relies on cases that are inapplicable or mischaracterized; and (4) Defendant's application of the substantial variance doctrine runs contrary to the original purpose and principles of the de novo doctrine which Defendant itself has relied upon in the instant matter. Accordingly, the Court finds no basis for the claim that it lacks subject matter jurisdiction over Audio Technica's claim for refund for tax years 2005-2008.

Defendant further argues that the Court lacks subject matter jurisdiction over Audio Technica's claim for the 2009 tax year “because Plaintiff concedes that there is not any case or controversy.” The Court disagrees, for the reasons stated in Audio Technica's opposition (Doc. 134). Accordingly, the Court finds that it has subject matter jurisdiction over Plaintiffs' 2009 tax year claims.

For the foregoing reasons, Defendant's motions to dismiss for lack of subject matter jurisdiction (Docs. 128 and 131) are DENIED. The motion to enter judgment in favor of Audio Technica (Doc. 129) is GRANTED. Although the Court finds suspect the timing of Defendant's motions, and believes them to be no more than an attempt to relitigate a matter that Defendant lost at trial, the Court declines to impose sanctions on Defendant at this time. Therefore, Plaintiff's motion for sanctions (Doc. 137) is DENIED. The motion with document number (Doc. 140) is DENIED AS MOOT.

IT IS SO ORDERED.

JOHN R. ADAMS
UNITED STATES DISTRICT JUDGE

Dated: 3/27/2019