Recently, the government filed notice with the United States Court of Appeals for the Sixth Circuit that it was appealing the outcome of Audio-Technica U.S. v. United States. The lower court case, heard in the U.S. District Court for the Northern District of Ohio, appears to be the first research and development tax credit case heard by a jury.
A jury trial is unusual for tax matters. Tax litigation originates in three potential courts, a U.S. district court, the U.S. Court of Federal Claims or the U.S. Tax Court. Of those three courts, a jury trial is available only in a district court. A district court can have jurisdiction in a tax case only if the taxpayer already paid the tax for the matter at hand, and is seeking a refund. Often, taxpayers prefer not to make the payment prior to a court judgement, which excludes the district court as a venue. Additionally, tax matters are often highly technical and a jury may have a difficult time applying the law to the facts.
Audio-Technica creates high-performance microphones, headphones, wireless systems, mixers and electronic products for home and professional use and claimed refund for research activities occurring in 2008 and 2009, with tax refunds in 2008 and 2010. Prior to the start of the trial, the court issued an order that the government was bound by the taxpayer’s claimed fixed base percentage because the IRS had consistently allowed the same basis to resolve disputes during examinations in earlier tax years.
During the trial, Audio-Technica successfully relied on an IRS Engineer to testify what he observed within Audio-Technica’s engineering department to help support treating all of its engineering departments annual wages as qualified wages for the credit. The government did not introduce any exhibits or call any witnesses.
The jury issued a unanimous verdict that all five of the business components that the government challenged were qualified research activities.
In its appeal, the government intends to challenge the district court’s holding that the IRS was bound by the fixed base percentage the IRS had previous agreed to, and whether the district court had subject matter jurisdiction of the taxpayer’s 2008 and 2009 tax years.