Audio Technica U.S., Inc. v. United States, 062620 FED6, 19-3469

Docket Nº:19-3469
Party Name:Audio Technica U.S., Inc., Plaintiff-Appellee, v. United States of America, Defendant-Appellant.
Attorney:Ellen Page DelSole, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellant. Jeremy M. Fingeret, ZERBE, MILLER, FINGERET, FRANK, & JADAV, P.C., Houston, Texas, for Appellee. Ellen Page DelSole, Randolph L. Hutter, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellant. ...
Judge Panel:Before: CLAY, ROGERS, and DONALD, Circuit Judges.
Case Date:June 26, 2020
Court:United States Courts of Appeals, Court of Appeals for the Sixth Circuit

Audio Technica U.S., Inc., Plaintiff-Appellee,


United States of America, Defendant-Appellant.

No. 19-3469

United States Court of Appeals, Sixth Circuit

June 26, 2020

Argued: June 9, 2020

Appeal from the United States District Court for the Northern District of Ohio at Akron. No. 5:16-cv-02052-John R. Adams, District Judge.


Ellen Page DelSole, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellant.

Jeremy M. Fingeret, ZERBE, MILLER, FINGERET, FRANK, & JADAV, P.C., Houston, Texas, for Appellee.


Ellen Page DelSole, Randolph L. Hutter, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellant.

Jeremy M. Fingeret, John H. Dies, Robert G. Wonish, Jefferson H. Read, ZERBE, MILLER, FINGERET, FRANK, & JADAV, P.C., Houston, Texas, for Appellee.

Before: CLAY, ROGERS, and DONALD, Circuit Judges.



In this tax refund suit, Audio Technica U.S., Inc. contends that it was entitled to a tax credit for increasing research and development activities under 26 U.S.C. § 41 (the "R&D tax credit"). The R&D tax credit is available when taxpayers increase certain research expenses over time, with the increase measured in part against research costs from the five-year period from 1984 through 1988, taken as a percentage of the company's gross receipts during those years. 26 U.S.C. § 41(c)(3)(A). This number is called the fixed-base percentage. Id.

The government attempted to challenge Audio Technica's preferred fixed-base percentage, but Audio Technica moved to bar the government from making any such argument to the jury. The district court agreed with Audio Technica, finding that because the government had entered into tax court settlements with Audio Technica for other tax years using that same fixed-base percentage, it was judicially estopped from now arguing that the percentage was incorrect. Because judicial estoppel is not triggered by such a settlement, we vacate the district court's judgment, reverse the order granting Audio Technica's motion in limine, and remand for a determination of Audio Technica's fixed-base percentage.


Audio Technica is a company headquartered in Stow, Ohio, that makes high-end audio equipment such as microphones and mixers for both professional and consumer use. Based on its development of this technology, Audio Technica claimed the tax credit for increasing research activities under 26 U.S.C. § 41, including for the 2006 to 2010 tax years at issue in this lawsuit.1Under that R&D tax credit, a taxpayer is entitled to a credit equal to twenty percent of the amount that its qualified research expenses for the year exceed something called the "base amount." 26 U.S.C. § 41(a)(1). And so, the higher a taxpayer's qualified research expenses that year, and the lower its base amount, the greater the tax credit.

As might be expected with the Internal Revenue Code, the base amount is calculated in a somewhat convoluted fashion. First, the taxpayer calculates its average gross receipts for the previous four years. Id. § 41(c)(1)(B). It then multiplies this number by another figure called the "fixed-base percentage." Id. § 41(c)(1)(A). That number-the fixed-base percentage-in turn is determined by adding up the taxpayer's total qualified research expenses for all tax years beginning in the five-year period from 1984 to 1988, and then dividing that number by the taxpayer's aggregate gross receipts for that same period. Id. § 41(c)(3)(A). There are other methods that can be used in limited circumstances, such as for companies that were not in operation during the 1980s, see id. § 41(c)(3)(B), but the parties agree that the general method described above applies in this case. The important part is that the lower the taxpayer's fixed-base percentage, the higher its R&D tax credit.

In addition to the 2006-2010 tax years at issue here, Audio Technica also claimed the credit for the 2002-2005 tax years, as well as the 2011 tax year. The IRS disagreed and issued Audio Technica a notice of deficiency, essentially saying that it was not entitled to the credit amounts it claimed, and so Audio Technica filed a petition for review with the United States Tax Court.

Rather than litigate the Tax Court proceedings through trial, Audio Technica and the government reached agreements to settle those cases, which were approved by the Tax Court. These settlements did not address the details of the parties' dispute; rather, they (1) listed the dollar amounts of the agreed-upon deficiencies by tax year, in the case of the 2002-2005 dispute, or (2) stated the total dollar amount of Audio Technica's research credit, in the case of the 2011 dispute. But according to Audio Technica, these amounts were determined by the parties through their "specific agreement" as to Audio Technica's fixed-base percentage, namely .92%. (Mem. in Support of Mot. in Limine, R. 80-1 at PageID #1126.)2

With respect to the 2006-2010 tax years, instead of litigating the issue in Tax Court, Audio Technica paid the amount requested by the IRS and sued in the Northern District of Ohio for a refund. As the case was about to proceed to trial, Audio Technica filed a motion in limine arguing that the government was judicially estopped from claiming that the .92% fixed-base percentage did not apply in this case. Specifically, Audio Technica said that the IRS had "twice previously agreed to stipulated settlements recognizing that [Audio Technica's] fixed base percentage of .92% for the 1984 to 1988 base period was correct." (Mem. in Support of Mot. in Limine, R. 80-1 at PageID #1127.) Because of this, Audio Technica said, "the doctrines of judicial estoppel and general principles of equity and fairness" required that the government "be estopped from introducing any evidence or asserting a position different than it agreed to with regard to the Fixed Base Percentage in the instant matter." (Id.) With respect to the requested remedy, the motion asked for an order prohibiting any argument or reference to the jury "that the 80's base calculation or fixed base percentage should be any alternative amount other than the amounts claimed by Plaintiff or [that] were accepted in the prior 2010 litigation between Plaintiff and Defendant." (Mot. in Limine, R. 80 at PageID #1122-23.)

The district court granted this motion, holding that because the government "agreed to settlements with results derived through a stipulated, fixed base percentage of .92%," and because these settlements were "accepted and signed by the Tax Court," the government was barred from arguing that another percentage might apply in this case. (Order Granting Mot. in Limine, R. 114 at PageID #1345-46.) And while the government had argued that the .92% figure "was a compromise position" reached through negotiation, the court found that it had "consistently allowed this same basis of .92% to be used to resolve similar tax issues in dispute here," meaning that judicial estoppel applied. (Id. at #1346.)

After this motion practice, the case went to trial, and the jury largely found in favor of Audio Technica. The verdict form did not include any questions about the fixed-base percentage and did not ask the jury to calculate the amount of Audio Technica's resulting tax credit. Rather, the form asked the jury whether certain projects for each tax year counted as qualified research and development activities, and if so, what amount of qualified research expenses was reasonable for each of them. The court then issued a preliminary judgment in favor of Audio Technica and directed it to propose a supplemental final judgment detailing its relief.

As requested, Audio Technica filed a proposed final judgment, which noted that the fixed-base percentage from the Tax Court proceedings was .92% and calculated the total amounts for R&D tax credits it was owed in certain of the tax years at issue. This in turn showed an overpayment of tax in the 2008 tax year, and so the proposed judgment awarded Audio Technica a $40, 432 refund. It also found that "Audio Technica has substantially prevailed on the primary issues in dispute, and is thereby awarded its reasonable court costs." (Id. at #2501.)

The government filed objections to Audio Technica's proposed judgment. Most notably for this appeal, the government complained that it was unclear whether the judgment's costs award was made under the standard court-costs provision of 28 U.S.C. § 1920, or the tax-specific provision of 26 U.S.C. § 7430. This distinction mattered because § 7430 has heightened requirements for prevailing parties-including a cap on net worth-but also carries heightened benefits, such as allowing an award of reasonable attorney's fees. Because Audio Technica's net worth exceeded the $7, 000, 000 cap for corporations, the government said the company was not entitled to an award under § 7430.3

The district court did not address the government's objections, and instead signed the proposed final judgment without changes. Audio Technica then moved for costs, specifically claiming costs under Federal Rule of Civil Procedure 54(d) and 28 U.S.C. § 1920. While this request was pending, the government filed its notice of appeal. About two months later, the district court granted Audio Technica's request for costs in part, and specifically noted that the request and order were entered pursuant to Rule 54(d) and 28 U.S.C. § 1920. Audio Technica U.S., Inc. v. United States, No. 5:16-CV-2052, 2019 WL 3213049, at *1 (N.D. Ohio July 17, 2019).

On appeal, the government raises two issues. First, it says that the district court erred in holding that it was judicially estopped from challenging the .92% fixed-base percentage. Second, while the government believes that...

To continue reading