Attorney-at-Law

“SUCH RAREFIED HEIGHTS OF PURE MATHEMATICS” – REDUX

In Uncategorized on 12/17/2019 at 16:36

Again I echo Holmes’ (Sherlock, not His Honor Judge Mark V) remarks “here lie the glory and the wonder of it!” I’m referring to Judge Morrison, who, in Kroeschell, Inc., Docket No. 15748-18, filed 12/17/18, “ascends to such rarefied heights of pure mathematics that it is said that there was no man in the scientific press capable of criticizing it.”

I do wish Judge Morrison had designated this order.

Kroeschell wants to derive a sampler of its qualified research expenditures, the majority of which consists of wages to its employees. There are allegedly 95 (count ‘em, 95) “truncated” projects for the years at issue; there might be as many as 670 full-boat. Judge Morrison’s math gyrations generate a three-year-trial, if each project has to be separately stated and numbered.

“Limiting discovery and trial in this case could potentially save trial time. If trial were limited to only 10 projects, Kroeschell estimates that the trial would take 2.5 weeks. It is unclear how many projects would be the subject of a full trial. Kroeschell has indicate that even a truncated trial might involve 95 projects. Such a trial might last for perhaps 23.75 weeks, equal to 95 projects × (2.5 weeks ÷ 10 projects). Kroeschell has indicated that a fuller-scale trial might involve 670 projects. Such a trial might last 107.5 weeks, equal to 670 projects × (2.5 weeks ÷ 10 projects). That would be a trial lasting over 3 years. The Court is amenable to the proposition that discovery and trial be limited to a sample of projects.” Order, at p. 3.

But Judge Morrison and IRS say that Judge Morrison’s carefully calculated sampling equation won’t work, because “(O)ne problem is that Kroeschell did not record the amount of qualified research expenses that it reported on a project-by-project basis. Thus, if we determined the qualified research expenses for 10 projects, we would be unable to compare our determination against the comparable amounts that Kroeschell reported.” Order, at p. 5 (Footnote omitted, but it says Kroeschell didn’t allocate employee research time per project).

Likewise, to calculate what flies under Section 41(c)(5)(A), Judge Morrison needs the qualified research expenses for each of the three years immediately preceding the year at issue, and Kroeschell has no way of calculating those.

And if that wasn’t enough, “(T)he remaining issue to consider is whether the Court should limit the first phase of the trial to 10 test projects without adopting a method of extrapolating the results of the test projects to the projects for which Kroeschell reported qualified research expenses on its returns. The advantage of this bifurcation approach, according to Kroeschell, is that the results of the test projects could be used by the parties to settle the remaining portions of the case.

“We reject the idea that the case should be bifurcated in this way. Bifurcation under Kroeschell’s proposal would result in yes/no determinations rather than dollar amounts. But a deficiency proceeding must ultimately determine dollar amounts. And, even if the Court were to make determinations as to dollar amounts after the first phase of a trial, it is unlikely that the parties would agree on how to extrapolate these dollar amounts to the total population of projects. The Court would then be faced with the question of how to conclude the case without an agreed-upon method for extrapolation.” Order, at p. 6.

So no sampling. But why not Cohan? Try the batch of ten, and then do what the late great Learned Hand said: “Absolute certainty in such matters is usually impossible and is not necessary; the [Court] should make as close an approximation as it can, bearing heavily if it chooses upon the taxpayer whose inexactitude is of his own making.” Cohan v. Com’r, 39 F. 2d 540, at pp. 543-544 (2 Cir., 1930).

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