Audio Products Manufacturer Gets Refund From Research Tax Credits

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

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

Hon. John R. Adams
Mag. Judge Kathleen Burke

FINAL JUDGMENT

This matter is a civil action against the United States for a refund of amounts paid in federal taxes to the Internal Revenue Service under 26 U.S.C. §7422.

Plaintiff Audio Technica, Inc. (“Audio Technica”), having filed a Complaint and Defendant, United States of America, having entered an appearance by filing an answer, consented to the Court's jurisdiction.

WHEREAS, the following uncontroverted facts are before the Court:

Plaintiff Audio Technica, Inc. is a corporation organized under the laws of Delaware with its principal office in Stow, Ohio.

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 claims that in the carrying on of its business during the Tax Years ending March 31, 2002, March 31, 2003, March 31, 2004, March 31, 2005, March 31, 2006, March 31, 2007, March 31, 2008, March 31, 2009, March 31, 2010, and March 31, 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 part of the basis of Audio Technica's Complaint, Audio Technica asserts 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”.

To assist in quantifying its Tax Credits, Audio Technica retained the services of alliantgroup, a national professional tax consulting firm.

Tax years ending March 31, 2002 — March 31, 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, 2011 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 a specific calculation of Plaintiffs 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 Number 27948.

The remaining Tax Years ending March 31, 2006, March 31, 2007, March 31, 2008, March 31, 2009 and March 31, 2010 have been brought and are at issue before this Court.

On June 8, 2018, 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.

Whereas, on the days of June 25, 2018 through June 29, 2018, this action was tried before a panel of eight (8) jurors.

Whereas, Audio Technica presented over six thousand (6,000) pages of documentation including project documents, design drawings, testing documents, testing data, patents, photographs, and summaries of voluminous evidence in support of its case which were admitted into evidence. Oral testimony of seven (7) fact witnesses was also presented. These fact witnesses included Jacqueline Green (former vice president of Audio Technica's R&D and Engineering Department), Michael Fuller (Audio Technica's vice president and controller), Eric Peters (an IRS engineer and technical advisor on the R&D tax credit during examination), Jeff Hicks (an engineer and former employee of Audio Technica), Chris Nighman (an Audio Technica employee who worked in the quality control and audio solutions departments), Jim Lappin (an Audio Technica engineer and product manager), and Kurt Van Scoy (an Audio Technica product manager).

Whereas, Defendant introduced no exhibits into evidence and called no witnesses.

Whereas, on June 29, 2018, after presentation of the documentary and oral evidence, the jury instructions and interrogatories were read to the jurors.

Whereas, on June 29, 2018, the jury rendered a unanimous verdict in favor of the Plaintiff Audio Technica. A copy of the jury verdict signed by all eight jurors is attached as Exhibit A to the Final Judgment.

Whereas, the jury unanimously found that all five business components involved qualified research activities.

Whereas, the jury unanimously found that Audio Technica conducted qualified research activities in all five years at issue.

Whereas, the jury unanimously found that Audio Technica incurred qualified research expenses in all five years at issue.

Whereas, the Jury 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.

Whereas, following the jury verdict the parties submitted their proposed calculations applying the stipulated employee wages and gross receipt amounts of Audio Technica, the qualified research expenses found by the jury, and the applicable fixed base percentages to statutorily mandated formulas to derive the tax credit to which Audio Technica is entitled.

Whereas, upon the review of the calculations provided based on the jury verdict and parties' agreed stipulations:

IT IS ORDERED, ADJUDGED, AND DECREED that Plaintiff Audio Technica is entitled to the following R&D Tax Credits:

• For the tax year ending March 31, 2008 Audio Technica is entitled to $12,614 in tax credits;

• For the tax year ending March 31, 2009 Audio Technica is entitled to $32,107 in tax credits; and

• For the tax year ending March 31, 2008 Audio Technica is entitled to $49,437 in tax credits.

Whereas, the tax credits to which Audio Technica is entitled, generate a tax refund that is due and owing to Plaintiff Audio Technica,

IT IS ORDERED, ADJUDGED, AND DECREED that Plaintiff Audio Technica has over paid taxes in the following amounts:

• Forty thousand four hundred thirty two dollars ($40,432) for the tax year ending March 31, 2008; and

• One hundred fifty six thousand nine hundred nineteen dollars ($156,919) for the tax year ending March 31, 2010.

Whereas, Plaintiff Audio Technica has received the benefit for the tax year ending March 31,2010,

IT IS ORDERED, ADJUDGED, AND DECREED that Plaintiff Audio Technica is awarded Forty thousand four hundred thirty two dollars ($40,432) for the tax year ending March 31, 2008. IT IS FURTHER ORDERED, ADJUDGED, AND DECREED that Plaintiff Audio Technica has substantially prevailed on the primary issues in dispute, and is thereby awarded its reasonable court costs.

3-28-19

John R. Adams, JUDGE PRESIDING