Tell City Boatworks, Inc. v. Ind. Dep't of State Revenue

162 N.E.3d 603

TELL CITY BOATWORKS, INC., Petitioner,

v.INDIANA DEPARTMENT OF STATE REVENUE, Respondent.

Cause No. 18T-TA-00004

Tax Court of Indiana.

FILED December 18, 2020

ATTORNEYS FOR PETITIONER: RANDAL J. KALTENMARK, ALEXANDRA R. FRENCH, BARNES & THORNBURG LLP, Indianapolis, IN, JEREMY M. FINGERET, JEFFERSON H. READ, JOHN H. DIES, ROSALIND J. LEWIS, ZERBE MILLER FINGERET, FRANK & JADAV, P.C., Houston, TX

ATTORNEYS FOR RESPONDENT: CURTIS T. HILL, JR., ATTORNEY GENERAL OF INDIANA, ZACHARY D. PRICE, DEPUTY ATTORNEY GENERAL, Indianapolis, IN, HAMISH S. COHEN, SEAN P. BURKE, ELINAM B. KPOTUFE, JEFFREY N. FURMINGER, MATTINGLY BURKE COHEN & BIEDERMAN LLC, Indianapolis, IN

WENTWORTH, J.

Tell City Boatworks, Inc. has appealed the Indiana Department of State Revenue's denial of its claim for a refund of income taxes for the tax year beginning on July 1, 2010, and ending on June 30, 2011 (the "2010 tax year"). Tell City's appeal presents the following issue of first impression: whether Tell City is entitled to Indiana's research expense tax credit ("Indiana Credit") for the 2010 tax year. Upon review, the Court finds that it is not.

FACTS AND PROCEDURAL HISTORY

During the 2010 tax year, Tell City operated a shipyard along the banks of the Ohio River in Tell City, Indiana. (See Unified Stipulation of Facts ("Stip.") ¶ 1; Stip. Ex. 541-J at 1.)¹ Tell City was a custom builder of made-to-order vessels that did not produce an inventory of duplicate vessels for sale. (See Tr. Vol. 2 at 12-13.)² This family-owned business also performed a small array of vessel repairs, including "repowering, hull replacement, cooler replacement, and shaft work." (See Stip. ¶ 4; Stip. Ex. 541-J at 1.) (See also Stip. ¶ 14; Stip. Ex. 3-J at 988; Tr. Vol. 3 at 139 (providing that Don Foertsch and his three sons, David, Marcus, and Brian owned the company).)

Incorporated in December 2007, Tell City's roots may be traced back to another of the family's businesses: Corn Island Shipyard, Inc., which was incorporated in 1988 to build custom barges and specialized marine structures and launched its first vessel in 1991. (See Stip. ¶¶ 2, 15-17, 19, 21; Stip. Ex. 542-J; Tr. Vol. 1 at 40-41, 306.) Located roughly 11 river miles from Corn Island, Tell City was "added kind of as an overflow yard for Corn Island" to alleviate its capacity issues. (See Tr. Vol. 1 at 40-41, 310-12.) Nonetheless, each of the shipyards has distinct capabilities suitable to its size and launch systems. (See Tr. Vol. 1 at 41-42, 51 (explaining that Tell City is smaller than Corn Island and has a cradle launch system for launching "odd[-]shaped vessels that don't have flat bottoms"); Tr. Vol. 3 at 144-46.) (See also Stip. Ex. 566-J (depicting Tell City's cradle launch system).)

The two businesses used each others' resources in manufacturing custom-made vessels; for example, Tell City used Corn Island's draftsmen and AutoCAD software, its fabrication shop and related equipment, and its office space. (See Tr. Vol. 1 at 45, 47-49, 190-92, 334-35; Tr. Vol. 2 at 18, 26-27; Tr. Vol. 3 at 143-44, 147-49.) Although the two shipyards worked on projects together, they were separate legal entities with their own accounting systems, bank accounts, and employees. (See, e.g., Tr. Vol. 1 at 41, 329-30; Tr. Vol. 2 at 13; Tr. Vol. 3 at 182; Stip. ¶¶ 25-26.) They did not provide warranties for each other's vessels and have never executed a partnership agreement, joint venture agreement, joint contract with a customer, or any type of written contract with each other. (See Tr. Vol. 1 at 315, 329-30; Tr. Vol. 3 at 8, 149.)

Tell City's Design Process

Tell City leveraged Corn Island's decades of shipbuilding experience and launched its first barge in October 2009 just two years after its inception. (See Stip. ¶¶ 11, 21; Stip. Ex. 541-J.) In doing so, it used a design process consisting of five phases: 1) pre-bidding and award, 2) estimating and initial design, 3) detailed design, 4) fabrication and assembly, and 5) testing and launch. (See, e.g., Tr. Vol. 1 at 137-43; Tr. Vol. 3 at 159-60; Stip. Ex. 727-J.)

Phase one is the pre-bidding and award phase. During this phase, Tell City ascertains from its client the operational and transport requirements of the vessel to be built and performs certain preliminary engineering work (e.g., creates sketches). (See Stip. ¶ 40; Resp't Trial Ex. 2, Exs. 3-R at 23, 4-R at 40-41.)

Phase two is the estimating and initial design phase. During this phase, Tell City develops and submits to the client a quote for building the vessel. (See Resp't Trial Ex. 2, Ex. 4-R at 42-43.) To ensure the quote is accurate, Tell City analyzes information it acquires from several sources, such as the client, certain regulatory bodies, vendors, Corn Island's personnel, and Scantling Data.³ (See, e.g., Stip. ¶ 41; Resp't Trial Ex. 2, Ex. 4-R at 42-47.) In addition, Tell City creates design drawings, typically starting with the general arrangement, which depicts the "barge[ ] the way you would see it if you walked up to it." (See Tr. Vol. 2 at 29; Resp't Trial Ex. 2, Exs. 3-R at 144, 4-R at 42.) (See also, e.g., Stip. Ex. 25-J (general arrangement illustration); Tr. Vol. 1 at 83-84 (stating that the general arrangement is the "foundation of the whole vessel and then all other supporting drawings fall underneath that").)

Phase three, the detailed design phase, begins after the client accepts the quote and formally engages Tell City. (See Resp't Trial Ex. 2, Ex. 4-R at 47-48.) During this phase, Tell City orders the steel and performs engineering calculations to ensure the vessel, as designed, satisfies all longitudinal strength, stability, and buoyancy requirements. (See, e.g., Tr. Vol. 1 at 43-44, 87-88, 99-100; Tr. Vol. 4 at 28, 144-45; Stip. Exs. 52-J, 70-J to 72-J, 106-J, 108-J, 172-J, 176-J.) In addition, Tell City designs the vessel's "fine details," such as the layout of the subcomponents and physical welds, by creating inventor files, which are 3-D prototypes of the vessel's subcomponents. (See, e.g., Resp't Trial Ex. 2, Ex. 4-R at 48; Tr. Vol. 1 at 109; Tr. Vol. 2 at 167-68; Tr. Vol. 3 at 48-50; Stip. Exs. 543-J to 559-J.) In this phase, Tell City also creates burn files, the 2-D "drawing[s] of a shape of a piece of steel[,]" which are then electronically transferred to Corn Island's plasma machine that cuts the steel according to the burn file pattern. (See, e.g., Tr. Vol. 1 at 166-67; Tr. Vol. 2 at 166-68; Stip. Exs. 45-J, 131-J, 323-J.)

Phase four, fabrication and assembly, primarily involves construction activities, yet often overlaps with phase three. (See, e.g., Tr. Vol. 1 at 88, 283.) The overlap happens because Tell City does not "engineer a vessel fully and then build it" but rather strives "to get that vessel going as quickly as possible ... [by] design[ing it] as [it] go[es] through construction[.]" (See Tr. Vol. 1 at 119.) After the subcomponents produced in Corn Island's fabrication shop are transported to Tell City by barge or truck for assembly, Tell City addresses issues arising from either an ill-fitting part (i.e., a "fit-up" issue) or a customer's change order. (See Resp't Trial Ex. 2, Ex. 2-R at 24;⁴ Tr. Vol. 3 at 159-63.) (See also Tr. Vol. 1 at 195 (explaining that design changes do not always lead to revisions, "but you do [have to] verify that all the components are still good"); Stip. ¶ 455 (describing the work that "fitters" perform).)

In the fifth and final phase, testing and launch, Tell City conducts various tests, completes the final stability calculations, and launches the vessel. (See, e.g., Tr. Vol. 1 at 77-79; Tr. Vol. 2 at 78-79.) For example, the pre-launch tests include air tests to ensure the vessel has no leaks, x-ray tests to verify the physical welds are good, and American Bureau of Shipping (the "ABS") verification surveys to confirm the vessel conforms to all applicable ABS-standards.⁵ (See Tr. Vol. 1 at 77-79.) After the vessel is launched, Tell City performs post-launch tests such as a damage survey to determine whether the vessel was damaged during launch and a dead weight survey to confirm that the center of buoyancy calculations are correct. (See Tr. Vol. 1 at 222; Tr. Vol. 2 at 78-79; Tr. Vol. 3 at 158-59; Tr. Vol. 4 at 152-53, 157-58.)

General Background of the Projects at Issue

Tell City claimed an Indiana income tax refund resulting from applying Indiana's Credit related to its design and construction of six first in class vessels⁶ using its five-phase design process. (See, e.g., Stip. ¶¶ 39, 50.) Four of those vessels are at issue: 1) Project 112, a 230' x 62' x 14' cutter dredge, 2) Project 107, a 150' x 69' x 10' crane barge, 3) Project 109, a 200' x 69' x 10' crane barge, and 4) Project 111, a 100' x 50' x 7.5' deck barge.⁷ (See, e.g., Stip. ¶¶ 82, 169, 233, 635-36; Stip. Exs. 105-J at 311, 164-J at 372, 201-J at 483.)

Project 112

Project 112 was the design and manufacture of a cutter dredge for Weeks Marine, Inc. for its use in dredging operations in protected and exposed ocean environments. (See Stip. Ex. 201-J at 481-83.) This non-self-propelled industrial barge was to be completely self-supporting given its onboard supply of fuel, lube oil, water, and its superstructure that included living quarters for a crew of sixty. (See, e.g., Stip. Ex. 201-J at 483; Trial Exs. 736-P, 737-P.)

Weeks Marine expressed its preference that Corn Island, not Tell City, build its vessel. (See Tr. Vol. 1 at 64-65, 351-53; Tr. Vol. 2 at 18-19; Tr. Vol. 3 at 177-78.) Ultimately, Corn Island acquiesced and executed a Construction Agreement with Weeks Marine on September 17, 2010. (Stip. ¶ 270; Stip. Ex. 198-J.) Corn Island's written construction plan provided that "[a]ll engineering, drawings and project management will be [done] by [Corn Island]." (See Stip. Ex. 645-J.) The construction plan also provided, however, that Tell City, as a subcontractor, "would assemble [the] structure (hull and superstructure), install any required below deck piping or...