Perfect Form Mfg. LLC v. United States

• Decision Date: 24 April 2019
• Docket Number: No. 18-52T,18-52T
• Court: U.S. Claims Court
• Parties: PERFECT FORM MANUFACTURING LLC, Plaintiff, v. THE UNITED STATES, Defendant.

PERFECT FORM MANUFACTURING LLC, Plaintiff, v. THE UNITED STATES, Defendant.

No. 18-52T

United States Court of Federal Claims

April 24, 2019

I.R.C. § 4161(b); Excise Tax on Archery Products; I.R.C. § 4216(b); Constructive Sale Price; Motion to Compel; RCFC 26(b); Relevance; Overly Broad; Unduly Burdensome

Casey T. Grabenstein, Chicago, IL, for plaintiff.

Miranda Bureau, United States Department of Justice, Washington, DC, for defendant.

OPINION AND ORDER

SWEENEY, Chief Judge

The parties in the above-captioned case dispute the propriety of an assessment by the Internal Revenue Service ("IRS") against plaintiff Perfect Form Manufacturing LLC ("Perfect Form") for excise taxes on Perfect Form's sale of certain archery products pursuant to section 4161(b) of the Internal Revenue Code ("I.R.C.") and the IRS's refusal to refund excise taxes that Perfect Form contends it paid in error on some of its purchases of archery products. The parties are currently engaged in discovery, and a dispute has arisen that caused defendant to move the court to compel Perfect Form to produce various documents. As explained below, defendant's discovery requests are within the scope permitted by the Rules of the United States Court of Federal Claims ("RCFC") and are neither overly broad nor unduly burdensome. Accordingly, the court grants defendant's motion.

I. BACKGROUND

Chapter 32 of the I.R.C. pertains to excise taxes on manufacturers. Under that chapter, there is an 11% tax on the sale price of archery bows sold by a "manufacturer, producer, or importer." I.R.C. § 4161(b)(1) (2012); see also Compl. ¶ 11 (referring to the "11 percent tax on the sales price of taxable bows and archery equipment" as the "Archery Tax"). When an item subject to the excise tax on manufacturers is "sold (otherwise than through an arm's length transaction) at less than the fair market price," the excise tax is based on a constructive sale price determined by the IRS—i.e., "the price for which such articles are sold, in the ordinary course of trade, by manufacturers or producers thereof." I.R.C. § 4216(b)(1)(C).

The purpose of imposing the constructive sale price is to prevent tax avoidance. Blue Mountain Energy, Inc. v. United States, No. 2:14-cv-418-DN, 2016 WL 4179366, at *5 (D. Utah Aug. 5, 2016). Of particular relevance here, when a manufacturer sells an archery bow to a related-party distributor that "regularly sells such article to one or more independent retailers, but does not regularly sell to wholesale distributors," the "constructive sale price of such article shall be 90 percent of the lowest price for which such distributor regularly sells such article in arm's-length transactions to such independent retailers." I.R.C. § 4216(b)(3). The presumption is that the constructive sale price constitutes the fair market value price; the burden is on the manufacturer to prove otherwise—i.e., that its sales to a related party were at fair market value and thus should be the sale price upon which the excise tax is computed. Storm Plastics, Inc. v. United States, 770 F.2d 148, 154 (10th Cir. 1985).

Elite Outdoors LLC ("Elite") is a wholesale distributor of archery bows, selling primarily to independent retailers.¹ See Compl. ¶¶ 8, 10. Beginning in 2009 and continuing through mid-2011, Elite "purchased 100% of its archery bows from an unrelated bow manufacturer, Grace Manufacturing Corporation ("Grace")," at a price set by Grace. Id. ¶ 10. In May 2011, Perfect Form was organized as an entity for the express purpose of replacing Grace in Elite's supply chain, and began selling its archery bows to Elite. Id. ¶ 17. Perfect Form acknowledges that it is, and was at all relevant times, a "related entity" with respect to Elite.² See id. ¶ 8.

From July 1, 2011, through September 30, 2012, Perfect Form sold archery bows to Elite and paid the archery tax on those sales. Id. ¶ 23. In April 2014, the IRS instituted an audit of Perfect Form's excise tax returns for those time periods. Resp. Ex. F at 1. Eventually, the IRS determined that Perfect Form did not sell its bows to Elite at a fair market value price and assessed additional excise taxes (plus penalties and interest) based on a constructive sale price. Compl. ¶¶ 9, 23; Compl. App. 17-19.

In the meantime, Perfect Form sought a refund of excise taxes it paid with the third quarter of 2011 ("2011-Q3") by filing an amended excise tax return. Compl. ¶ 24. On its 2011-Q3 amended return, Perfect Form stated that it was entitled to a refund of $14,622 of the excise taxes it had paid because it "purchased completed archery items 'tax paid' from [Grace, an] unrelated manufacturer" and therefore federal excise tax "was erroneously paid on the same articles . . . thus double paying the excise tax." Compl. App. 2.

Perfect Form also disputed the assessments of additional excise tax, along with the concomitant penalties and interest, for the fourth quarter of 2011 ("2011-Q4") and the first three quarters of 2012 ("2012-Q1," "2012-Q2," and "2012-Q3"). To that end, Perfect Form paid the tax for a single transaction that took place during each of the quarters at issue, filed a claim for refund of the divisible tax, and requested abatement of the remaining assessments. Compl. ¶¶ 26-30, 34.

On March 24, 2017, the IRS denied Perfect Form's refund claim for 2011-Q3. Id. ¶ 25. That same day, the IRS denied Perfect Form's refund claim and abatement request for 2011-Q4. Id. ¶ 28. The IRS did not respond to Perfect Form's refund claims and abatement requests for 2012-Q1, 2012-Q2, and 2012-Q3. Id. ¶ 31.

Perfect Form filed suit in this court on January 10, 2018. In its complaint, Perfect Form seeks (1) a refund of certain excise taxes paid for 2011-Q3 based on its theory that it purchased archery products "tax-paid" from Grace, (2) a refund of the divisible excise taxes it paid for 2011-Q4 through 2012-Q3, (3) abatement of the remaining assessments based on its theory that it sold archery bows to Elite at fair market value, and (4) costs and attorney's fees. Defendant filed a counterclaim for the value of the unpaid assessments, penalties, and interest, for an estimated total amount of $225,215.96. The parties then filed a joint preliminary status report. Formal discovery began on July 25, 2018, when the court issued a discovery scheduling order.

After amending its discovery requests and conferring with counsel for Perfect Form, defendant moves the court—pursuant to RCFC 37(a)(3)(B)—to compel Perfect Form to produce certain documents pertaining to Perfect Form's (1) formation and operations, including that of its related entity Elite; (2) records of purchases and sales; (3) prices and pricing methodology; and (4) communications relevant to various issues in this case, including communications with Deloitte Tax LLP ("Deloitte"). Perfect Form objects to defendant's discovery requests as irrelevant, overbroad, burdensome, and not proportional to the needs of the case. Defendant's motion has been fully briefed. The parties did not request oral argument, and the court deems it unnecessary. Defendant's motion is now ripe for adjudication.

II. LEGAL STANDARDS

Title V of the RCFC governs discovery in this court. Specifically, RCFC 26(b)(1) provides that

parties may obtain discovery regarding any nonprivileged matter that is relevant to any party's claim or defense and proportional to the needs of the case, considering the importance of the issues at stake in the action, the amount in controversy, the parties' relative access to relevant information, the parties' resources, the importance of the discovery in resolving the issues, and whether the burden or expense of the proposed discovery outweighs its likely benefit.

Information is relevant if "it has any tendency to make a fact more or less probable than it would be without the [information]" and such fact "is of consequence in determining the action." Fed. R. Evid. 401; accord Oppenheimer Fund, Inc. v. Sanders, 437 U.S. 340, 351 (1978) (explaining that relevant information includes "any matter that bears on, or that reasonably could lead to other matter that could bear on, any issue that is or may be in the case"). Moreover, "[q]uestions of the scope and conduct of discovery are . . . committed to the discretion of the trial court." Florsheim Shoe Co. v. United States, 744 F.2d 787, 797 (Fed. Cir. 1984). The United States Court of Federal Claims ("Court of Federal Claims") "generally has afforded a liberal treatment to the rules of discovery." Securiforce Int'l Am., LLC v. United States, 127 Fed. Cl. 386, 400 (2016), aff'd, 879 F.3d 1354 (Fed. Cir. 2018); accord Herrmann v. United States, 127 Fed. Cl. 22, 40 (2016) ("A court must be careful not to deprive a party of discovery that is reasonably necessary to afford a fair opportunity to develop and prepare the case." (internal quotation marks omitted)). Written interrogatories "may relate to any matter that may be inquired into under RCFC 26(b)." RCFC 33(a)(2). Responding parties "must provide true, explicit, responsive, complete, and candid answers . . . directly and without evasion in accordance with information that [such] party possesses after due inquiry." Lakeland Partners, L.L.C. v. United States, 88 Fed. Cl. 124, 132 (2009) (internal quotation marks omitted). Similarly, a party may request production of documents or electronically stored information ("ESI") "in the responding party's possession, custody, or control" that are "within the scope of RCFC 26(b)." RCFC 34(a). Requests must be reasonably particular, and responding parties must "respond to such requests to the extent the requests are not objectionable." Dairyland Power Co-op v. United States, 79 Fed. Cl. 722, 728 (2007).

However, the Court of Federal Claims has also "recognized that discovery has ultimate and necessary boundaries." Securiforce, 127 Fed. Cl. at 400 (internal quotation marks omitted). The court "must limit the frequency or extent of discovery" allowable under the RCFC if ...