United States District Court, W.D. New York
CRA HOLDINGS US, INC. AND SUBSIDIARIES, Plaintiffs,
UNITED STATES OF AMERICA, Defendant.
FINGERET FRANK & JADAV Attorneys for Plaintiffs JOHN H.
DIES, JEFFERSON H. READ, ROBERT G. WONISH, II, of Counsel
A. HUBBERT Acting Assistant Attorney General Tax Division,
U.S. Department of Justice Attorney for Defendant JAMES M.
STRANDJORD, of Counsel
DECISION AND ORDER
G. FOSCHIO UNITED STATES MAGISTRATE JUDGE
action seeking a tax refund based on R&D tax credits for
Plaintiffs, a national environmental remediation consulting
firm, for tax years 2002 and 2003, Defendant, by papers filed
March 10, 2017 (Dkt. 52) moves to hold Plaintiffs in contempt
and dismiss Plaintiffs' First Amended Complaint (Dkt. 51)
(“Defendant's Second Sanctions motion”).
Alternatively, Defendant requests further proceedings for the
action be stayed pending Plaintiffs' compliance with this
court's Decision and Order filed January 26, 2017 (Dkt.
46). Plaintiffs' Memorandum in Opposition was filed April
3, 2016 (Dkt. 57) (“Plaintiffs' Memorandum”);
Defendant's Reply was filed April 7, 2017 (Dkt. 59)
(“Defendant's Reply”). Oral argument was
January 26, 2017 Decision and Order, the court found
Plaintiffs' answers to Defendant's Superseding
Interrogatory to be insufficient to enable Defendant to
decide on whether to agree to any form of sampling as a means
to streamline litigation of the case on the merits.
See January 26, 2017 D&O, Dkt. 46 at 7; CRA
Holdings US, Inc. v. United States, 2017 WL 370811, at
*2 (W.D.N.Y. Jan. 26, 2017) (“the January 26, 2016
D&O”). The court therefore denied Plaintiffs'
request for a self-selected sample limited to 10-12
remediation projects, and, instead, directed the parties to
select 40 of the 159 (reduced from 6, 100, see Dkt.
41 at 1) projects Plaintiffs now base Plaintiffs' claim
on as a pilot sample. The court further directed Plaintiffs
serve more particularized answers to Defendant's
Superseding Interrogatory in order that Defendant could
evaluate the content of the project files and whether to
agree to any form of sampling in the case. CRA Holdings
US, Inc., 2017 370811, at *5. On March 4, 2017, in
compliance with the court's direction, Plaintiffs served
Plaintiff's Third Amended Objections and Responses To
Second Interrogatories To Plaintiff CRA Holdings, Inc. And
Subsidiaries (Dkt. 52-3) (“Plaintiffs'
Second Sanctions motion, Defendant contends Plaintiffs'
Responses fail to provide answers which are nonevasive and
complete as required by Fed.R.Civ.P. 37(a)(4) and as such
constitutes a failure to respond to the Superseding
Interrogatory warranting sanctions. Defendant's
Memorandum at 3. More specifically, Defendant contends
Plaintiffs' Responses are as equally generalized as
Plaintiffs' prior responses which the court found
unsatisfactory in the January 26, 2017 D&O to enable
Defendant to assess the potential efficacy of using sampling
in this case, i.e., whether the contents of
Plaintiffs' project files have such a variety of peculiar
characteristics as to limit the potential usefulness of using
a sample. Defendant asserts that a scrutiny of
Plaintiffs' Responses to Defendant's Superseding
Interrogatories show such responses constitute “highly
generic and meaningless answers” in an attempt to
establish the remediation project activities to which they
relate for each of the 40 pilot sample projects satisfy the
requirements of 26 U.S.C. § 41(d)(2)(B) and 26 C.F.R.
§ 1.41-4(a)(3), (5), necessary to show the related
expenses are qualified research expenses (“QREs”)
and thus a sufficient basis upon which to claim an R&D
tax credit. See Defendant's Memorandum at 5.
Defendant particularly attacks Plaintiffs' Responses as
insufficient to either identify the prerequisite for an
R&D tax credit of a business component any product,
process, computer software, technique, formula or invention
as defined by 26 U.S.C. 41(d)(2)(B), Defendant's
Memorandum at 4, specify the nature of the uncertainty with
respect to the related business component encountered,
identify the required science, e.g., biology,
chemical, or other, on which the project fundamentally
relies, or identify the process of experimentation used, and
how the results of the experimentation was intended to be
useful in the development of a new or improved business
function. Defendant's Memorandum at 4. However, even
assuming for the sake of analysis only, that none of
Plaintiffs' Responses establish Plaintiffs are entitled
to claim QREs for any of the 40 pilot sample projects, as
Defendant asserts, the purpose of requiring Plaintiffs'
Responses at this stage of the case, as the court directed in
the January 26, 2016 D&O, was not to enable the parties
to adjudicate the merits of Plaintiffs' claims based on
the pilot sample project files, but rather to assist the
parties and the court in determining whether a sampling
process of some kind should be employed to reduce the 159
projects which Plaintiffs assert qualify for the R&D tax
credit to a more manageable number (e.g., 40 = 25%
of 159, 16 = 10% of 159) for discovery, summary judgment or
it is apparent that the alleged deficiencies in
Plaintiffs' Responses as described in detail by Defendant
indicate that Plaintiffs' 159 project files may well lack
the more specific information Defendant forcefully contends
necessary to support Plaintiffs' claims, but that issue
is not before the undersigned at this time. Plaintiffs'
Reponses show that, based on 40 project files in the pilot
sample, the balance of Plaintiffs' project files is
unlikely to provide any further details regarding more
information responsive to the Superseding Interrogatory
compliant with § 41 and related regulations to support a
tax refund based on Plaintiffs' alleged QREs. For
example, Plaintiffs' responses related to the 17770 Site
Investigation project involving radioactive thorium in
downtown Chicago, Ill., state that the business component
required for a QRE involved development of a “new
process of remediation” and that how such
“business component would be developed” was
uncertain at the outset. Dkt. 52-1 at 4-5 (referencing Dkt.
57-5 at 17). Yet, Plaintiffs' response with respect to
this project fails to provide any indication of the technical
nature of the “new process of remediation”
Plaintiffs assert comprised such new remediation process as
compared to the commonly known remediation techniques of
removal, capping, and chemical or biologic neutralization.
Similarly, according to Plaintiffs, Plaintiffs' 31603
RAM-Anaconda Mine project involved “development of a
new process of remediation[, ]” without any explanation
of what such new process of remediation conceivably might be,
a fact underscored by Plaintiffs' acknowledgement that
the “project was not completed by CRA.”
See Dkt. 52-1 at 6 (referencing Dkt. 57-5 at 20).
Despite the evident imprecision of Plaintiffs' Responses,
Defendant nevertheless fails to explain how greater
specificity in Plaintiffs' Responses relative to §
41's criteria is necessary to allow Defendant to discern
whether some form of sampling should be used in the case, or
not. Accordingly, it appears to the court that, for possible
sampling purposes, the population in this case
Plaintiffs' 159 projects are relatively homogeneous as to
their content thereby permitting the use of a smaller sample.
See CRA Holdings US, Inc., 2017 WL 370811, at **4-5
(discussing need for larger sample sizes where target
population composed of a wide range of material heterogeneous
characteristics). Accordingly, the court finds
Defendant's Second Sanctions motion is premature and
should be DENIED as such without prejudice. See Longi v.
New York, 363 Fed.Appx. 57, 58 (2d Cir. Jan. 26, 2010
(affirming district court's denial of plaintiff's
discovery motions as not abuse of discretion). Instead, the
parties are directed to advise the court jointly or
individually, within 10 days of this Decision and
Order as to their positions regarding the use of some form of
sampling in the case upon which the merits of the case shall
be determined. Based on these submissions, absent a
stipulation which resolves this issue, the court will make
its own determination.
meantime, Defendant's alternative request (Dkt. 58) to
extend the time necessary for further proceedings is GRANTED
without opposition. The parties shall meet and confer and
within 10 days of this Decision and Order and submit
jointly or individually proposed amended scheduling orders
governing further proceedings in this case.
on the foregoing, Defendant's Second Motion for Sanctions
(Dkt. 52) is DENIED without prejudice; Defendant's motion
to extend time (Dkt. 58) is GRANTED.
 By papers filed May 18, 2017,
Defendant submitted a Supplement to Defendant's Second
Motion for Sanctions (Dkt. 61) which included a recent
decision by the District Court for the Southern District of
Ohio, United States v. Dennis F. Quebe and Linda G.
Quebe, 15-CV-294, in which the court found
defendants' answer to plaintiff's interrogatories
directed to defendants' prior assertions of tax refunds
based on alleged R&D tax credits to be insufficiently
vague. However, although such issues have some similarity to
those raised in this case, the court finds that in as much as
the Ohio case addresses such issues ...