SG Indus. Inc. v. RSM McGladrey, Inc.

• Court: U.S. District Court — Eastern District of Michigan
• Writing for the Court: MARK A. GOLDSMITH
• Decision Date: 07 December 2011
• Docket Number: Case No. 10-cv-11119
• Citation: SG Indus. Inc. v. RSM McGladrey, Inc., Case No. 10-cv-11119 (E.D. Mich. Dec 07, 2011)
• Parties: SG INDUSTRIES, INC., Plaintiff, v. RSM MCGLADREY, INC., Defendant.

SG INDUSTRIES, INC., Plaintiff,

v.RSM MCGLADREY, INC., Defendant.

Case No. 10-cv-11119

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION

Dated: December 7, 2011

HON. MARK A. GOLDSMITH

OPINION AND ORDER GRANTING DEFENDANT'S MOTION FOR SUMMARY

JUDGMENT (DKT. 59), DENYING PLAINTIFF'S MOTION FOR PARTIAL

SUMMARY JUDGMENT (DKT. 62), DENYING PLAINTIFF'S MOTION FOR LEAVE

TO NAME AN EXPERT WITNESS AFTER CLOSE OF DISCOVERY (DKT. 90), AND

DISMISSING CASE

I. Introduction

Plaintiff SG Industries, Inc. has brought claims of malpractice and breach of contract against its former accounting firm, Defendant RSM McGladrey, Inc., in connection with the tax services performed by Defendant for tax years 2007 and 2008. Before the Court are Defendant's motion for summary judgment (Dkt. 59), Plaintiff's motion for partial summary judgment (Dkt. 62), and Plaintiff's motion for leave to name an expert witness and provide an expert report after the close of discovery (Dkt. 90). For the reasons that follow, the Court grants the defense motion and denies Plaintiff's motions.

II. Background

In 2007 and 2008, Plaintiff hired Defendant to perform tax consulting services and to prepare Plaintiff's federal and state tax returns. 2007 Engagement Letter (Dkt. 59-24); 2008 Engagement Letter (Dkt. 59-25). Defendant consulted on tax matters and prepared Plaintiff's taxreturns for those years. In September 2009, while Defendant was engaged as Plaintiff's accounting firm, Plaintiff consulted with a competing accounting firm, BDO Seidman ("BDO"). BDO reviewed the tax returns prepared by Defendant for the previous two years and submitted a memorandum identifying several "potential income tax opportunities" that it claimed Plaintiff might exploit:

• Deduction for accrued payroll taxes. The memo stated that Plaintiff's tax returns did not claim a payroll tax deduction for certain accrued compensation.

• Deduction for certain prepaid items. The memo stated that the returns may not have claimed a deduction for certain prepaid foreign taxes.

• Deduction for accrued vacation pay. The memo stated that it was unclear whether Plaintiff had deducted certain accrued vacation pay expenses.

• Research and experimentation tax credits. The memo stated that "it would be beneficial to revisit the computation of the [research and experimentation] credit to see if there are any additional costs related to research activities that are not currently being captured." The memo indicated that a different computation method might have resulted in a larger credit.

• Interest Charge - Domestic International Sales Company ("IC-DISC"). IC-DISC entities are not subject to tax themselves; rather, tax is collected at the shareholder level, potentially yielding tax savings. IC-DISCs can be created by companies that profit from export sales to take advantage of the favorable tax status. The memo stated that Plaintiff "may be a candidate" for such a structure.

• State tax opportunities. The memo indicated that (i) Plaintiff may have failed to claim a deduction allowed by the Michigan Business Tax; (ii) the deductions from gross receipts may have been too low; and (iii) Plaintiff may have been able to benefit from credits available for Michigan personal property tax payments that were not taken.

BDO Tax Review Memo (Dkt. 59-9). Plaintiff forwarded the memo to Defendant in a letter dated December 18, 2009 with a demand that Defendant re-perform the tax services for both years (Dkt. 62-4). Defendant responded with a letter explaining why it believed it had filed Plaintiff's returns properly or otherwise did not bear any liability (Dkt. 59-10). Plaintiff declined to retain Defendant as its tax preparer for the 2009 tax year, instead using BDO.

Asserting grounds premised on the BDO review, Plaintiff filed this action in Oakland County Circuit Court on February 17, 2010. Defendant removed it to this Court on May 19, 2010 (Dkt. 1). The United States district judge initially assigned to this case issued a scheduling order on June 2, 2010 (Dkt. 11), which provided for witness lists to be filed by September 10, 2010; a fact discovery cutoff date of October 29, 2010; expert report filing date of November 15, 2010 and completion of expert discovery by December 15, 2010.

After reassignment of the case to the undersigned judge on September 21, 2010 (Dkt. 33), the schedule was modified multiple times at the request of the parties. The due date for expert witness lists and reports was moved to February 14, 2011, and the expert discovery cut-off was moved to March 15, 2011 (Dkt. 37). Those dates were then moved again to April 15, 2011 and May 16, 2011, respectively, by stipulated order (Dkt. 44). Following a motion to further move the dates back (Dkt. 52), the Court again reset those dates to June 17, 2011 and July 15, 2011, respectively (Text-only order of 4/15/11). Plaintiff did not disclose expert witnesses or provide expert reports by the due dates.

After Plaintiff attempted to pursue further discovery beyond the discovery cut-off, Defendant filed a motion for a protective order on July 22, 2011, seeking to enforce the discovery deadlines (Dkt. 55). That same day, Plaintiff filed a motion to compel depositions of Defendant's fact and expert witnesses (Dkt. 57) and a motion for leave to file a "rebuttal expert" report to respond to Defendant's expert report (Dkt. 56). At a hearing on August 8, 2011, the Court denied Plaintiff's motion for leave to file a rebuttal expert report, allowed Plaintiff to takethe deposition of Defendant's expert, but denied Plaintiff's request to take the deposition of Defendant's fact witnesses (Dkt. 75).¹

Also on July 22, 2011, Defendant filed a motion for summary judgment (Dkt. 59), in which Defendant argues that, without an expert, Plaintiff cannot prove essential elements of its claims, or refute the opinions and conclusions of Defendant's expert. Further, Defendant addressed the specific tax issues underlying Plaintiff's malpractice and breach of contract claims, presenting an expert report (Dkt. 59-5) and other evidence in support of its contention that Plaintiff's claims lack factual support:

• Deduction for accrued payroll taxes. Defendant argues that it is not liable for any understatement because it based its calculations on figures that Plaintiff supplied, and therefore the "[u]nderstatement of the amount - if any - was due to SG's own error." Defendant also argues that Plaintiff has produced no support for its contention that the amount was understated. Finally, Defendant argues that the matter is moot because Plaintiff later filed for the deduction in 2009, which mitigated any damages caused by Defendant's alleged negligence for earlier tax years. Def.'s Summ. J. Mot. at 3-4.

• Deduction for certain prepaid items. Defendant argues that Plaintiff has produced no evidence to support its claim that it qualified for the deduction. Further, Defendant argues that the matter is moot on the grounds that a deduction claimed by Plaintiff in 2009 for these expenses mitigated any damages. Id. at 4-5.

• Deduction for accrued vacation pay. Defendant argues that Plaintiff has produced no support for its contention that an alternate accounting method could have been used to claim additional benefits. Further, Defendant asserts that Plaintiff could have cured the alleged problem by filing for additional deductions in 2009, and therefore Defendant is not liable, even though Plaintiff did not claim a deduction for these liabilities in 2009. Id. at 6.

• Research and experimentation tax credits. Defendant argues that it based its calculations on figures that Plaintiff supplied and therefore Defendant is not liable for any error. Defendant also argues that Plaintiff has not produced evidence showing that it was entitled to additional credits, and that the amount in credits that BDO claimed for Plaintiff in 2009 - which is substantially similar to theamounts Defendant claimed for Plaintiff in 2007 and 2008 - contradicts Plaintiff's claim that the credits should have been in a significantly higher range. Id. at 8-9.

• IC-DISC. Defendant asserts in response that an IC-DISC would not have resulted in more favorable tax treatment for the year 2008, and for 2007 it is unclear whether it would have resulted in more favorable tax treatment. To the extent that it would have been beneficial in 2007, Defendant argues that any damage resulted from Plaintiff's error in failing to provide Defendant with the necessary information to make a determination whether an IC-DISC would be beneficial. Id. at 10-12.

• Michigan Business Tax. Defendant argues that the subsequent repeal of the Michigan Business tax moots Plaintiff's claims in connection with deductions to such tax. Id. at 13-14.

• State personal property tax credit. Defendant argues that Plaintiff is ineligible for its claimed credit for 2007 because the credit is only available for taxes levied after 2007. Defendant admits that Plaintiff is eligible for credit for 2008 person property taxes paid, but argues that it can obtain the full benefit of this credit by amending its return before 2013, and therefore there are no damages for which Defendant is liable. Id. at 14-15.

• State tax deductions. Defendant argues that it based its calculations on figures that Plaintiff supplied, and therefore Defendant is not liable for any error. Defendant further maintains that it calculated deductions properly, and that Plaintiff erred in its calculation. Finally, Defendant argues that Plaintiff has mitigated any damages with a subsequently amended tax return. Id. at 16-17.

In response, Plaintiff argues that it may call at trial Defendant's expert and accountants from BDO or FGMK (another accounting firm with which Plaintiff consulted), to supply the necessary expert testimony, Pl.'s Resp. at 10-11, although it fails to provide any such opinions. Plaintiff also responds to the specific substantive arguments raised by Defendant as to the individual...