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Refund Suit Lacks the Facts to Go Forward, Government Says

APR. 21, 2021

Premier Tech Inc. v. United States

DATED APR. 21, 2021
DOCUMENT ATTRIBUTES

Premier Tech Inc. v. United States

PREMIER TECH, INC.,
Plaintiff,
v.
UNITED STATES OF AMERICA,
Defendant.

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF UTAH

UNITED STATES' MOTION TO
DISMISS AND MEMORANDUM IN
SUPPORT

The Honorable District Judge Ted
Stewart

The Honorable Magistrate Judge
Cecilia M. Romero

DAVID A. HUBBERT
Acting Assistant Attorney General

DYLAN C. CERLING
CHARLES M. DUFFY
Trial Attorney, Tax Division
U.S. Department of Justice
P.O. Box 683
Washington, D.C. 20044
Phone: 202-307-6406 (Duffy)
202-616-3395 (Cerling)
Fax:202-307-0054
Charles.M.Duffy@usdoj.gov
Dylan.C.Cerling@usdoj.gov


TABLE OF CONTENTS

Motion To Dismiss

Facts And Procedural Posture

I. The Tax Credit For Increasing Research Activities (26 U.S.C. § 41)

a. Qualified Research Expenses (QREs)

b. The Base Amount

II. Background Of Alliantgroup And Premier Tech

a. Alliantgroup's Business Strategy And Practices

b. Premier's Business

III. Premier's Tax Filings And Request For Refund

Argument

I. The Court Lacks Subject Matter Jurisdiction Because Premier Failed to Submit A Sufficiently Specific Claim To The IRS

a. Standard For Motion To Dismiss For Lack Of Subject-Matter Jurisdiction

b. Sovereign Immunity In Tax Refund Suits

c. The Specificity Requirement For Refund Claims

d. Premier's Purported Refund Claim Failed To Satisfy The Specificity Requirement

e. The IRS Did Not Waive The Specificity Requirement Through Its Summary Denial Of Premier's Purported Claim At The Administrative Level

II. Premier Has Failed To State A Claim For Relief

Conclusion


MOTION TO DISMISS

This is another case litigated by the Zerbe, Miller, Fingeret et al. (“the Zerbe Firm”)1 relating to an amended return in which a taxpayer claims a previously unclaimed credit for increasing research activities under 26 U.S.C. § 41 (the “research tax credit”). Section 41, which is more fully described below, is “one of the most complicated provisions in the [Internal Revenue] Code.” Suder v. Comm'r, T.C. Memo. 2014-201, 2014 WL 490724 at *30 (2014). In many § 41 cases, the Zerbe firm (in conjunction with an associated entity, Alliantgroup), submits claims to the IRS that are based on estimates rather than the factual basis underlying the claim that is required under the statute and applicable regulations. See Little Sandy Coal Co., Inc. v. Comm'r, 121 T.C.M. (CCH) 1113, 2021 WL 514302 at *10 (T.C. 2021); see also Harper v. United States, No. 18-cv-2110 DMS (LL), 2019 WL 1877185, at *2 (S.D. Cal. Apr. 25, 2019) (reversed on other grounds). If the taxpayer ends up litigating the case in federal court, taxpayers (and the Zerbe firm) often resist providing the government with information related to the factual basis underlying the claim. See, e.g., United States v. Quebe, 321 F.R.D. 303, 307 (S.D. Oh. 2017) (in Alliantgroup case where the Zerbe firm represented the taxpayer, the Court sanctioned the taxpayer after the taxpayer failed to “specifically describe the alleged research that was performed by each identified employee,” or to “specifically identify the business components,” and instead dumped hundreds of thousands of documents on the government).

Here, Premier Tech, Inc. (“Premier”) failed to provide facts sufficient to apprise the IRS of the exact basis of their claim at the administrative level, as is required by the relevant regulation. Similarly, Premier failed to allege any substantive facts in their Complaint that might show their entitlement to a tax refund. Accordingly, the United States moves under Fed. R. Civ. P. 12(b)(1) & 12(b)(6) to dismiss this case for lack of subject-matter jurisdiction and failure to state a claim on which relief may be granted.

Subject-matter jurisdiction: District courts have subject matter jurisdiction over a tax refund suit only if an administrative claim has been “duly filed” with the IRS. 26 U.S.C. §7422(a). A “duly filed” claim requires — among other things — that the taxpayer set forth, in detail, the grounds on which each credit is claimed and facts sufficient to show those grounds. 26 C.F.R. § 301.6402-2(b)(1). Here, although not mentioned in the complaint, Premier is seeking a tax refund based on certain tax credits to which Premier believes it is entitled. More specifically, Premier wants a tax credit under 26 U.S.C. § 41 for allegedly increasing the amount of research it conducted in 2014 as compared to prior years. (Declaration of Matthew Ennen in Support of Motion to Dismiss, Ex. A) (hereinafter “Ennen Decl.”). But Premier did not raise any facts that support its claim to the IRS at the administrative level: it submitted no information other than unadorned dollar amounts to inform the IRS of the factual basis of its claim. Premier did not explain who was paid the wages alleged, or how those wages (or claimed costs) related to specific research activities. Nor did Premier explain how the claimed wages and supply expenses were intended to develop one of Premier's business components. Because Premier did not submit these essential section 41elements, it did not “duly file” a claim and this Court lacks jurisdiction.

Failure to state a claim: In the alternative, Premier has failed to state claim on which relief may be granted, as the Complaint contains only a cursory statement that it is entitled to a refund. Premier fails to allege even conclusory allegations related to any of the elements of the research tax credit, let alone sufficient facts to apprise the United States (and the Court) of the factual basis of its claim. Indeed, Plaintiff does not even cite to (or mention a single element of) 26 U.S.C. § 41 in its Complaint at all.

FACTS AND PROCEDURAL POSTURE

The Zerbe Firm and Alliantgroup, who represented the taxpayer at the administrative level and represent the taxpayer in this action, specialize in submitting section 41 claims for tax refunds to the IRS. Why AlliantGroup?, https://www.alliantgroup.com/about-us/why-alliantgroup/ (last visited April 19, 2021)(permalink: https://perma.cc/8STL-JE3G). As described below, their claims fail to satisfy the statutory and regulatory requirements applicable to section 41 both as a general matter and this case specifically.

I. The Tax Credit For Increasing Research Activities (26 U.S.C. § 41)

Section 41 authorizes a tax credit for certain qualified research expenses. Trinity Indus., Inc. v. United States, 757 F.3d 400, 407 (5th Cir. 2014). The research tax credit, in this case, equals 14 percent2 of Premier's qualified research expenses (“QREs”) in the year for which the credit is claimed (the credit year) exceed 50% of the average QREs for the three previous years. See 26 U.S.C. §§ 41(a)(1), (c)(4)(A); Trinity Indus., 757 F.3d at 407. The statutory definitions of QREs and the base amount show the essential defects in Premier's refund claim in this case.

a. Qualified Research Expenses (QREs)

QREs include: (1) wages paid to employees for the performance of “qualified services,” defined as either the performance of qualified research or the direct supervision or support of qualified research; (2) supplies used in the conduct of qualified research; and (3) 65% of any contract expenses paid to another for qualified research. See 26 U.S.C. §§ 41(b)(1)(A), (b)(2), (b)(3). Qualified research is defined as research (1) for which expenditures are deductible under 26 U.S.C. § 174, (2) undertaken to discover technological information, the application of which is intended to be useful in the development of a new or improved business component of the taxpayer, and (3) substantially all the activities of which constitute elements of a process of experimentation for a specified purpose. 26 U.S.C. § 41(d)(1). To qualify for the credit, the purposes of the research must relate to a new or improved function, performance, or reliability or quality. 26 U.S.C. § 41(d)(3)(A).

Section 41(d)(4) excludes from “qualified research” “[a]ny research related to the adaptation of an existing business component to a particular customer's requirement or need,” “[a]ny research related to the reproduction of an existing business component (in whole or in part) from a physical examination of the business component itself or from plans, blueprints, detailed specifications, or publicly available information,” and “routine or ordinary testing or inspection for quality control.” See 26 U.S.C. §§ 41(d)(4)(B), (C), (D)(v). Finally, “qualified research” has several exceptions: it does not include research if another person (or governmental entity) funds it, see 26 U.S.C. § 41(d)(4)(H), or research conducted outside the United States. See 26 U.S.C. § 41(d)(4)(F).

The qualified research test is applied separately to each business component of the taxpayer, which is defined as “any product, process, computer software, technique, formula, or invention” to be held for sale, lease, or license, or to be used by the taxpayer in the taxpayer's trade or business. 26 U.S.C. § 41(d)(2)(A)-(B). The taxpayer is obligated to demonstrate a nexus between the business component and the specific expenses related to that business component. It is insufficient to group all costs into one bucket and call all of it “research.” And for research activities to meet the “substantially all” threshold (see 26 U.S.C. § 41(d)(1)(C)), at least 80 percent of the activities performed for that business component (measured on a cost or other consistently applied basis) must constitute elements of a process of experimentation. See 26 C.F.R. § 1.41-4(a)(6). In other words, unless 80 percent or more of the research activities for a business component constitutes part of a process of experimentation, none of the research activities for that business component is “qualified research,” because the so-called “research” has not satisfied all three elements of 26 U.S.C. § 41(d)(1).

b. The Base Amount

The research tax credit “rewards taxpayers who increase their spending on research” compared to an earlier period. United States v. Quebe, No. 3:15-cv-294, 2019 WL 250602, at *4 (S.D. Ohio Jan. 17, 2019); see Hewlett-Packard Co. & Consol. Subsidiaries v. Comm'r, 139 T.C. 255, 260 (2012), aff'd, 875 F.3d 494 (9th Cir. 2017); S. Rep. No. 97-144 at 83, reprinted in 1981-2 C.B. at 442. The other component in the calculation of the credit — the base amount and its subcomponents — is part of the formula used to compare prior and current research expenditures. See 26 U.S.C. § 41(a)(1); Siemer Milling Co. v. Comm'r, 117 T.C.M. (CCH) 1196, 1197 n.2, 2019 WL 1598588, at *2 (2019). It “represents what the taxpayer would have spent on research if it did not increase its research budget as a percentage of its gross receipts as compared to the base period.” Quebe, 2019 WL 250602, at *4.

In this case, because Premier selected the alternative simplified credit, the base amount equals fifty percent of the average QREs for the three taxable years before the tax year for which the credit is claimed. 26 U.S.C. § 41(c)(4)(A). In calculating the base amount, the QREs in that calculation “shall be determined on a basis consistent with the determination of [QREs] for the credit year.” 26 U.S.C. § 41(c)(5)(A).

II. Background Of Alliantgroup And Premier Tech

a. Alliantgroup's Business Strategy And Practices

The claims at issue in this case fit the pattern of the approach taken by the Zerbe firm and Alliantgroup in the past, as shown by the cases laid out below. The Zerbe firm is related to Alliantgroup.3 Some of the Zerbe Firm attorneys also serve on the management team of Alliantgroup, and the two entities are headquartered in the same building.4 Part of Alliantgroup's business is marketing R&D tax credit studies. See, e.g., Alliantgroup v. Feingold, 803 F. Supp. 2d 610, 616 (S.D. Tex. 2011). The amount of the research tax credit that Alliantgroup obtains for its clients dictates how much Alliantgroup is paid. Harper, 2019 WL 1877185 at *1 (describing Alliantgroup as “a consulting firm that markets the research tax credit to businesses nation-wide for a fee based upon a percentage of the credit obtained”), overruled on other grounds Harper v. United States, No. 19-55933, 2021 WL 732970 (9th Cir. 2021); see also Quebe, 2019 WL 250602, at *1. Some Alliantgroup clients take aggressive positions on their entitlement to the research tax credit. See, e.g., Max v. Comm'r, T.C. Memo. 2021-37, 2021 WL 1177973 at *2, *11 (Tax Court March 29, 2021) (in an Alliantgroup case, Tax Court denied 100% of research tax credit claimed for developing “stylish clothes that inspired confidence in the women who wore them,” after the Court “struggle[d] to grasp how fit testing garments on a model is investigative in nature,” among other issues).

Often, after a taxpayer has contracted with Alliantgroup for its research tax credit services, the taxpayer then files amended returns trying to claim research tax credits for the first time. See, e.g., United States v. Davenport, 897 F. Supp. 2d 496, 500 (N.D. Tex. 2012); Quebe, 2019 WL 250602, at *1-2; United States v. Goertz, No. A-09-CV-0179-LY, 2009 WL 1664085, at *1 (W.D. Tex. 2009).5 Many of the Zerbe Firm's clients seek to claim research tax credits based merely on estimates of the taxpayer's entitlement to the credit without identifying specific activities or business components that constitute qualified research or applying the statutory test for qualified research. See Little Sandy Coal Co., Inc. v. Comm'r, 121 T.C.M. (CCH) 1113, 2021 WL 514302 at *10 (T.C. 2021) (“Petitioner estimated the wages CIS paid to those individuals for qualified services by applying to each employee's total wages an allocation percentage equal to the estimated portion of the employee's time spent on qualified research.”); see also Harper, 2019 WL 1877185, at *2 (“Plaintiffs' refund claims were based simply on their estimate of how much they increased their research activities in the years 2008 and 2010 relative to their estimate of the amount of their research activities in the years 1984-1988.”) (overruled on other grounds).

b. Premier's Business

Premier Tech, Inc. appears to be the U.S. branch of a multinational corporation based in Quebec, Canada. (See Ennen Decl., Ex. A at 1) (address of Premier on amended return is in Quebec, Canada); see also Premier Tech Itée, Premier Tech and Mirego Join Forces to Accelerate the Digital Transformation of Businesses, Cision (Mar. 11, 2021), https://www.newswire.ca/news-releases/premier-tech-and-mirego-join-forces-to-accelerate-the-digital-transformation-of-businesses-876072962.html (permalink: https://perma.cc/HW82-V7CG) (describing Premier as a Quebec flagship). Premier seems to be an agricultural product company. Id. (Premier is “committed to creating sustainable solutions that help bring beautiful gardens to life, increase crop yields, improve the efficiency of manufacturing facilities, [and] treat and recycle water”). It is unclear, based on information provided to the IRS or this Court, what, if any, qualified research Premier conducts in the United States, let alone whether any such research would qualify under section 41.

III. Premier's Tax Filings And Request For Refund

Premier's original Form 1120, federal corporation income tax return for its fiscal year ended February 28, 2015 did not claim a research tax credit. (Ennen Decl. at 3, ¶ 10.) In 2018, seemingly after engaging Alliantgroup, it filed an amended return for that fiscal year (“the amended return”) on which it purported to claim a research tax credit of $315,908. (Ennen Decl., Ex. A.) Alliantgroup represented Premier at the administrative level. (See Ennen Decl., Ex. C.)

On the amended return, the plaintiff purported to claim a research tax credit of $315,908 and reduced their claimed “other deductions” that it had claimed on its original return in that same amount. (See Ennen Decl., Ex. A at 4.) A tax credit is more valuable than a tax deduction because a “tax credit is a dollar-for dollar reduction in a taxpayer's tax liability” whereas a deduction only reduces taxable income used to compute a taxpayer's tax liability. See, e.g., Telecom*USA, Inc. v. United States, 192 F.3d 1068, 1079 (D.C. Cir. 2000) (explaining difference between a tax credit and a tax deduction). Based on the research tax credit purportedly claimed in the amount of $315,908 and the elimination of the deductions in the same amount, Premier argues that its tax liability would be reduced by $190,263.6

The amended return contains no facts (apart from unelaborated dollar amounts) to support the alleged $315,908 research tax credit. For example, in the “Explanation of Changes” form attached to the amended return that generally informs the IRS as the reason for the amendment, Premier only states the following: “Line 4: (315,908) INCREASE IN CREDIT FOR INCREASING ACTIVITIES (SEE ATTACHED FORM 6765 AND FORM 3800)” (capitalization in return). (Ennen Decl., Ex. A at 4.) But there is no explanation on the corresponding Forms 6765 or 3800 for the supposed specific research activities increased by Premier that year. (Ennen Decl., Ex. A at 15, 49.) There is no description of the research conducted or explanation of how that research worked to develop a business component. (Id.)

Nor were the alleged wages and supplies costs tied to that research on a particular business component. (Id.) There is no calculation of the base amount — an essential element of the credit, 26 U.S.C. § 41(c)(3). (Ennen Decl., Ex. A at 15, 49.) Instead, there is just the bald statement that Premier spent $1,950,364 on “[w]ages for qualified services” and $1,850,927 on “[c]osts of supplies” with no facts that might allow the IRS to understand why Premier is purportedly claiming that it is entitled to the research tax credit. (Ennen Decl., Ex. A at 49.)

In December 2018, the IRS summarily denied Premier's request for a refund. (Ennen Decl., Ex. B.) The (mistaken) stated reason was that the request was untimely. (Ennen Decl., Ex. B at 2.)7 Regardless of the timeliness issue, the Court lacks jurisdiction based on another fatal defect with the refund claim/amended return, discussed below.

ARGUMENT

I. The Court Lacks Subject Matter Jurisdiction Because Premier Failed to Submit A Sufficiently Specific Claim To The IRS

a. Standard For Motion To Dismiss For Lack Of Subject-Matter Jurisdiction

A motion to dismiss for lack of subject-matter jurisdiction under Fed. R. Civ. P. 12(b)(1) can hinge on a factual attack that looks beyond the complaint and challenges “the truth of the allegations that, by themselves, would otherwise invoke federal jurisdiction.” Safe Air for Everyone v. Meyer, 373 F.3d 1035, 1039 (9th Cir. 2004); Stuart v. Colo. Interstate Gas Co., 271 F.3d 1221, 1225 (10th Cir. 2001) (“In reviewing a factual attack, a court has 'wide discretion to allow affidavits, other documents, and a limited evidentiary hearing to resolve disputed jurisdictional facts.'” (quoting Holt v. United States, 46 F.3d 1000, 1003 (10th Cir. 1995))). In a factual motion to dismiss under Fed. R. Civ. P. 12(b)(1), the court does not assume that the truthfulness of the allegations in the complaint. Holt, 46 F.3d at 1003.

Once subject-matter jurisdiction is challenged, the plaintiff has the burden of proving its existence. DaimlerChrysler Corp. v. Cuno, 547 U.S. 332, 342 n.3 (2006).

b. Sovereign Immunity In Tax Refund Suits

The United States, as sovereign, cannot be sued unless it consents to be sued, and the terms of that consent define the court's jurisdiction. United States v. Testan, 424 U.S. 392, 399 (1976); United States v. Sherwood, 312 U.S. 584, 586 (1941). A district court's jurisdiction over a tax refund suit requires the timely filing of an administrative refund claim with the IRS in accordance with the regulatory requirements. See 26 U.S.C. § 7422(a); United States v. Dalm, 494 U.S. 596, 601-02, 609 (1990). A waiver of the United States' sovereign immunity is to be “strictly construed, in terms of its scope, in favor of the sovereign.” Lane v. Pena, 518 U.S. 187, 192. (1996).

c. The Specificity Requirement For Refund Claims

Jurisdiction is conditioned not only on the filing of a claim, but a claim that complies with “the provisions of law in that regard, and the regulations of the Secretary established in pursuance thereof.” 26 U.S.C. § 7422(a). One of these regulations, 26 C.F.R. § 301.6402-2(b)(1), requires the claim to be specific:

The claim must set forth in detail each ground upon which a credit or refund is claimed and facts sufficient to apprise the Commissioner of the exact basis thereof. The statement of the grounds and facts must be verified by a written declaration that it is made under penalties of perjury. A claim which does not comply with this paragraph will not be considered for any purpose as a claim for refund or credit.

[Emphasis added.]

“It is well established that the requirement of detail in setting forth claims is mandatory and that it must be scrupulously observed.” L. E. Myers Co. v. United States, 673 F.2d 1366, 1367 (Cl. Ct. 1982). This requirement is intended “to provide the IRS with adequate information to consider and dispose of claims without the need for litigation, and thus to avoid surprise.” Angle v. United States, 996 F.2d 252, 254 (10th Cir. 1993). It “promote[s] orderly tax administration by requiring taxpayers to focus attention on the dispositive issues at the beginning of the process of administrative review” and, on the other hand, “avoid[s] dilatory, careless, and wasteful fiscal administration by barring incomplete or confusing claims.” Angelus Milling Co. v. Commissioner, 325 U.S. 293, 297 (1945).

As the Tenth Circuit has explained, the specificity regulation “'distinguishes between the grounds for a claim — that is, the legal theory upon which the refund is claimed — and facts sufficient to apprise the Commissioner of the exact basis thereof.'” Green v. United States, 880 F.3d 519, 532 (10th Cir. 2018) (discussing 26 C.F.R § 301.6402-2(b)(1) and quoting Lockheed Martin Corp. v. United States, 210 F.3d 1366, 1371 (Fed. Cir. 2000)). If a taxpayer fails to provide sufficient facts to apprise the IRS of the exact basis of the claimed refund, a there has been no “duly filed” claim, and the District Court lacks jurisdiction to hear a refund suit. Id.; see Dzula v. United States, 349 Fed. App'x 335, 2009 WL 3320796 at *3 (10th Cir. 2009) (affirming dismissal of refund suit where taxpayer “failed to set forth an adequate factual or legal basis for the claimed refund” at the administrative level).

In Green, the taxpayers filed a refund suit claiming that they were entitled to charitable deductions. 880 F.3d at 521. The Court held it lacked jurisdiction to consider the taxpayer's claim as to a specific charitable deduction, even though they had raised the legal theory of charitable deductions at the administrative level, because they had not given the IRS factual notice at the administrative level of that specific charitable deduction. Id. at 531. So, although the Green administrative claim listed “charitable deductions” as a deduction for the IRS to consider, the district court lacked jurisdiction to consider it during a refund action because they did not set forth any facts underlying the specific charitable deduction at the administrative level.

In other words, while the taxpayer need not “develop full factual backgrounds in their refund claims,” Boyd v. United States, 762 F.2d 1369, 1371-72 (9th Cir. 1985), the taxpayer must provide “sufficient facts to evaluate whether [the taxpayer] had satisfied all of the essential elements of its claims.” Worldwide Equip. of TN, Inc. v. United States, 876 F.3d 172, 177 (6th Cir. 2017). Thus, the taxpayer must “bring his asserted grounds of recovery to the attention of the Service and neither the Commissioner nor his agents can be expected to ferret out possible grounds for relief which a taxpayer might assert.” Herrington v. United States, 416 F.2d 1029, 1032 (10th Cir. 1969). Merely stating a potential ground for relief is not enough, without asserting facts underlying those claims that might allow the IRS to understand its basis.

This requirement is not a mere technicality. It serves as the foundation of our system of tax administration that requires taxpayers to first seek administrative review of their claim, before allowing a second, de novo review by the district court. The administrative refund process is intended “to provide the IRS with adequate information to consider and dispose of claims without the need for litigation, and thus to avoid surprise.” Angle, 996 F.2d at 254. Thus, courts lack jurisdiction over any claims that the taxpayer makes that varies from the claim as presented to the IRS. See Green, 880 F.3d at 532.

The specificity requirement in 26 C.F.R. § 301.6402-2(b)(1), has been called the codification of the variance doctrine because it requires the taxpayer to identify the specific legal and factual basis for their claim from the start. See Rodgers v. United States, 843 F.3d 181, 195 (5th Cir. 2016). It requires those requesting tax refunds to supply “facts sufficient to apprise” the IRS of the factual basis of the refund claim when the refund claim is submitted. 26 C.F.R. §301.6402-2(b)(1). A document submitted to the IRS that lacks those facts “will not be considered for any purpose as a claim for refund.” Id. When, as here, a taxpayer has provided no factual basis for their claim, any presentation of facts before the district court will vary from the factual basis presented to the IRS.

d. Premier's Purported Refund Claim Failed To Satisfy The Specificity Requirement

Premier's purported administrative claims for refund failed to adequately specify its legal and factual basis. This failure renders it as not a claim for refund and deprives the Court of jurisdiction over these purported claims. See Green, 880 F.3d 532; Quarty v. United States, 170 F.3d 961, 972 (9th Cir. 1999); 26 U.S.C. § 7422(a); 26 C.F.R. § 301.6402-2(b)(1). First, the only information Premier submitted consisted of dollar amounts related to the alleged research tax credit, which cannot give the IRS the factual basis underlying the purported claim. Second, Premier submitted no information on the alleged QREs for the tax year at issue: the purported claim contained no detail on who the alleged wages were paid to, what “supplies” were used to perform research, what activities those wages and supplies were linked to that qualified as “research” under the statute, or how that alleged “research” applied to one of Premier's business components. Third, Premier submitted no information about how it came up with the comparison point that shows that it increased its research (called the “base amount” and the “fixed-base percentage” in the statute). Despite the entire purpose of research tax credits being a comparison between current research expenses with past research expenses, Premier failed to give the IRS any facts that would allow the IRS to understand either the current research expenses Premier is purportedly comparing to past expenses, or the past research expenses Premier purportedly wants to compare its current research expenses to.

i. Premier's Amended Tax Returns Failed To Adequately Put Forward Any Facts Beyond A Bald Assertion Of Dollar Amounts

Premier's purported refund claim is facially insufficient. Premier provided no “facts sufficient to apprise the [IRS] of the exact basis” of their purported claim beyond bare dollar amounts, and the assertion that certain required amounts were spent to increase research activities. Premier's purported claim consists merely of dollar amounts listed, with conclusory labels attached: it says that it spent $1,950,364 for “[w]ages for qualified services” and $1,850,927 for “cost of supplies,” adding up to $3,801,291 for qualified research expenses for the tax year. (Ennen Decl., Ex. A at 49.)

The mere statement of a dollar amount, without facts allowing the IRS to understand the basis of the purported claim, fails to sufficiently state any factual basis for the claimed refunds. See Provenzano v. United States, 123 F. Supp. 2d 554, 558 (S.D. Cal. 2000) (holding that claim for refund is insufficiently specific where it merely states the nature of the claim and dollar amount of refund). For that reason alone, the Court should dismiss this claim because Premier did not “duly file” its refund claim in accordance with the relevant law.

ii. Premier Failed To Identify The Specific Research Performed, Which Employee Performed It, Or To The Applicable Business Component

Premier's purported claim fails to lay out any facts that would allow the IRS to understand the basis of the alleged QREs that form the basis for any potential research tax credit claim. As explained, a research tax credit for a given year equals 14 percent of the difference between the taxpayer's QREs for the year, and the base amount from a prior period. 26 U.S.C. §§ 41 (c)(4)(A). Therefore, to qualify for the credit, the taxpayer must show that it had sufficient QREs for that year. To prove QREs, the expenses must (among other requirements) relate to elements of a process of experimentation, involve technological research, and be a part of the development of a new or improved business component of a taxpayer. 26 U.S.C. § 41(d)(1). In other words, the expenses must relate to specific research activities (and wages must be linked to specific people performing those activities), consisting of a process of experimentation, for the development of the taxpayer's business component. See Little Sandy Coal Co., Inc. v. Comm'r of Internal Revenue, 121 T.C.M. (CCH) 1113, 2021 WL 514302, at *14 (T.C. 2021) (expenses were not QREs where taxpayer could not show that the wages paid to employees were for activities that constituted elements of a process of experimentation, as “[t]he record provides no means of measuring the activities of CIS' nonproduction employees other than the wages paid to those employees,” and there was no way to separate out non-research from research activities).

Costs of supplies must likewise relate to specific research activities for the development of one of the taxpayer's business components. And 80% of the taxpayer's research activities for each business component must constitute elements of a process of experimentation. 26 C.F.R. § 1.41-4(a)(6). Premier's purported claim contains no facts that would allow the IRS to understand Premier's basis for claiming that any of those elements are satisfied.

Premier's purported claim gets no more specific than alleging it spent specific amounts on wages and supplies that supposedly qualify as QREs, with no additional information. (See Ennen Decl., Ex. A at 49.) But Premier submitted no facts related to the alleged business components, or what activities constituted “research,” or how Premier intended that “research” to develop a business component, or how the activities constituted a “process of experimentation.” Nor did Premier submit any facts tying specific wage or cost expenses to those necessary elements of the research tax credit. These general claims are insufficient under the regulation.

iii. Premier Failed To Identify Any Facts Supporting Their Alleged Fixed-Base Percentage

Premier also failed to allege any facts that would allow the IRS to understand the basis of its claimed fixed-base percentage, a necessary element to calculate the research tax credit. A research tax credit is granted not for conducting research, but for increasing it over a statutorily defined base amount. 26 U.S.C. §§ 41(a)(1), (c)(4). The base amount “represents what the taxpayer would have spent on research if it did not increase its research budget as a percentage of its gross receipts as compared to the base period.” Quebe, 2019 WL 250602, at *4. Where (as here) the taxpayer opted to use the alternative simplified method of determining the credit, the credit would equal 14% of the claim year QREs that exceed 50% of the average QREs from the past three years. 26 U.S.C. § 41(c)(4)(A).

Here, no information relates to the amounts of QREs for any of those three years, let alone facts sufficient to allow the IRS to understand the factual basis for the QREs claimed during those three years. Thus, the IRS cannot determine the alternative simplified method base amount, which means the IRS cannot compare Premier's 2014 research expenditures to past expenditures in the way required by the statute.

Premier's purported claim is so bare-bones and cursory that, under the regulation, it does not qualify as a “claim” at all. 26 C.F.R. § 301.6402-2(b)(1). Because no regulation-compliant claim was filed, this Court lacks jurisdiction.

e. The IRS Did Not Waive The Specificity Requirement Through Its Summary Denial Of Premier's Purported Claim At The Administrative Level

The IRS did not waive the specificity requirement in this case. While, generally, an administrative tax refund submitted to the Internal Revenue Service must lay out, with specificity, the factual and legal basis for the refund, see 26 C.F.R. § 301.6402-2(a), the IRS can waive that requirement if it has “investigated the merits of a claim and taken action upon it.” Angelus Milling Co. v. Comm'r, 325 U.S. 293, 297 (1945). But “'[i]t is not enough that in some roundabout way the facts supporting the claim may have reached him. The Commissioner's attention should have been focused on the merits of the particular dispute.'” Green v. United States, 428 Fed. App'x 863, 869 (10th Cir. 2011) (quoting Angelus Milling Co., 325 U.S. at 297).8 Rather, it must be clear that the IRS “'understood the specific claim that was made even though there was a departure from form in its submission.'” Green, 428 Fed. App'x at 869 (quoting Angelus Milling Co., 325 U.S. at 297).

Thus, in a recent case involving research tax credits, the Ninth Circuit held that the IRS waived the specificity requirement because the IRS “accept[ed] Taxpayer's properly filed Forms 6765 and substantively examin[ed] Taxpayer's specific claims.” Harper v. United States, 2021 WL 732970, at *2 (9th Cir. Feb. 25, 2021). The Ninth Circuit held that the IRS's “targeted investigation and final determination [into the claimed research tax credit] unmistakably” demonstrated that it understood the Taxpayer's claim and its exact basis, but chose not to stand on the formal claim requirements, id., even if the claim may have otherwise violated 26 C.F.R. § 301.6402-2(a).

Here, the IRS did not waive the specificity requirement by examining the purported claim on the merits: the IRS did not examine Premier's purported claim at all, and instead summarily rejected it. (Dkt. No. 1 at 4, ¶ 13). It is true that the IRS's summary rejection did not rely on the lack of specificity of the purported claim, and instead asserted that it was untimely. (Id.) And it is true that the United States currently does not believe that the purported claim was untimely. But regardless of the grounds for the dismissal, the IRS summarily dismissed the purported claim as an improper refund claim, never examining the substance of the purported claim, and so the IRS has not waived the specificity requirement.

II. Premier Has Failed To State A Claim For Relief

In the alternative, the United States asks that the Court dismiss this case because Premier has failed to state a claim on which relief may be granted.

For a complaint to survive a motion to dismiss for failure to state a claim on which relief may be granted under Federal Rule of Civil Procedure 12(b)(6), the complaint must contain “enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). A properly pleaded complaint “demands more than an unadorned, the-defendant-unlawfully-harmed-me accusation,” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009), and will not satisfy the pleading standard “if it tenders 'naked assertion[s]' devoid of 'further factual enhancement.'” Id. (quoting Twombly, 550 U.S. at 557). “Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Id. Finally, while a court must accept as true all of the factual allegations in a complaint, that tenet “is inapplicable to legal conclusions.” Id.

Premier's complaint contains no assertions beyond bare legal conclusions. Premier claims only that it is entitled to a tax refund for $190,263. (Dkt. No. 1 at 5.) But the Complaint contains no facts that would allow the United States to understand the alleged factual basis underlying its claimed refunds. For instance, Premier lists no business components that might entitle it to claim QREs, lists no research activities taken to develop those business components, fails to make even a cursory effort to link the specific wages of specific employees (or specific costs) to specific research activities (and the associated business components). Similarly, Premier has no explanation (or even mention) of the factual basis underlying its alleged fixed-base percentage: what research activities did Premier conduct in the three prior years, to develop which business components. Indeed, Premier does not even make a cursory mention of the 26 U.S.C. § 41 research tax credit in its Complaint.

CONCLUSION

For these reasons, the United States respectfully requests that the Court dismiss this case for lack of subject-matter jurisdiction, or in the alternative for failure to state a claim on which relief may be granted.

Respectfully submitted this 21st day of April 2021.

DAVID A. HUBBERT
Acting Assistant Attorney General

By: DYLAN C. CERLING
CHARLES M. DUFFY
Trial Attorney, Tax Division
U.S. Department of Justice
P.O. Box 683
Washington, D.C. 20044
Phone: 202-307-6406 (Duffy)
202-616-3395 (Cerling)
Fax:202-307-0054
Charles.M.Duffy@usdoj.gov
Dylan.C.Cerling@usdoj.gov


​[PROPOSED] ORDER GRANTING THE UNITED STATES’ MOTION TO DISMISS

This matter is before the Court on the United States’ Motion to Dismiss for lack of subject-matter jurisdiction and failure to state a claim. Having considered the Motion and all relevant filings, the Motion is HEREBY GRANTED, and this case is DISMISSED for lack of subject-matter jurisdiction, and failure to state a claim on which relief may be granted.

Dated this ___________ day of ____________, 2021.

TED STEWART
United States District Judge

Submitted by:

DAVID A. HUBBERT
Acting Assistant Attorney General

DYLAN C. CERLING
CHARLES M. DUFFY
Trial Attorney, Tax Division
U.S. Department of Justice
P.O. Box 683
Washington, D.C. 20044
Phone:202-307-6406 (Duffy)
202-616-3395 (Cerling)
Fax:202-307-0054
Charles.M.Duffy@usdoj.gov
Dylan.C.Cerling@usdoj.gov

FOOTNOTES

1Attorney Jeremy M. Fingeret of the Zerbe Firm applied for (and was granted) Pro Hac Vice admission to represent the plaintiff in this case. (See Dkt. No. 5-1 and 7.)

2Normally the credit percentage amount is 20%, over a base amount calculated using (in part) the amount spent on research between 1984-1988. 26 U.S.C. § 41(a). But where the taxpayer affirmatively elected to calculate the purported credit under the § 41(c)(4) alternative simplified credit rules, the percentage equals 14% of a different amount. 26 U.S.C. § 41(c)(4)(A).

3“Alliantgroup” is often uncapitalized on the entity's website and letterhead, but court opinions routinely capitalize it in opinions as a matter of general usage. See, e.g., Quebe, 2019 WL 250602, at *1.

4Compare Our Team, ZMFF&J, zmflaw.com/attorneys/ (last visited 4/19/2021) (permalink: https://perma.cc/F74F-K7Q3) to Management Team, Alliantgroup, alliantgroup.com/about-us/management-team/ (last visited 4/19/2021) (permalink: https://perma.cc/PBK6-J6AJ). The address of Alliantgroup is 3009 Post Oak Boulevard, Suite 2000 in Houston, Texas. See Where To Find Us, Alliantgroup, alliantgroup.com/about-us/where-to-find-us/ (last visited 4/19/2021) (permalink: https://perma.cc/6NE6-6UPJ). The address of the Zerbe firm is 3009 Post Oak Boulevard, Suite 1700, Houston, Texas. (See Dkt. No. 5-1; Ennen Decl., Ex. C.)

5These are all fully resolved cases. In Davenport and Quebe, the Government's summary judgment motions were granted. See Davenport, 897 F. Supp. 2d at 519 and Quebe, 2019 WL 250602. The taxpayers in Goertz conceded the case and paid back the erroneous refund at issue. (See Declaration of Charles M. Duffy in Support of Motion to Dismiss, Exs. A & B) (hereinafter Duffy Decl.).

6Premier made one other adjustment on the amended return, which also appears to be related to the research tax credit: it reduced the amount of taxes that it paid to various states in the amount of $53,636. (See Ennen Decl., ¶ 12, Ex. A at 4.) The aggregate amount of the deductions taken on the original return that were reduced on the amended return is $369,544 (the $53,636 reduction in state taxes, and the $315,908 reduction in other deductions). (See Ennen Decl., Ex A at 1, line 2, column b.)

7Alliantgroup then sent a letter on behalf of Premier to the IRS, protesting that denial. (Ennen Decl., Ex. C.)

8This case, Green v. United States, 428 Fed. App'x 863 (10th Cir. 2011), is separate from, and involves different taxpayers and tax periods than a previously cited case, Green v. United States, 880. F.3d 519 (10th Cir. 2018).

END FOOTNOTES

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