TEI Audits & Appeals Seminar Pay Up or Protest! Challenging Assessments
May 2, 2018
Michele BorensPartner
Eric CoffillSenior Counsel
Eversheds Sutherland
− Pre-Protest
• Setting the Scene
• Initial Considerations
• Forum Considerations
− Protest
• Basics
• Burden of Proof
• Discovery, or Lack Thereof
• Hearing
• Evidentiary Issues
• Use of Witnesses/Experts
• Result of Proceedings
− Post-Protest
• Strategic Considerations
Agenda
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Setting the Scene
Pre-Protest
─ Detailed audit is complete─ Taxpayer handled the audit primarily in-house
with some support from an accounting firm ─ Taxpayer disagrees with many findings, but
acknowledges some of the auditor’s conclusions are proper
─ Taxpayer has been assessed a substantial amount and seeks advice on options moving forward
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Initial Considerations
Pre-Protest
─ How far are you willing to fight this issue?• What are your realistic chances of success?• Will a decision in this state influence (for better
or worse) other states in the region?• Do you have the resources to effectively lead
the case?
─ Always remember the Taxpayer Bill of Rights• Keep states accountable
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Initial Considerations
Pre-Protest
─ Isolated event? • Do these issues exist in other states?• Could these issues arise in other states?
─ What issue is involved?• Unity • Business/nonbusiness income • Sourcing (COP → Market-based)• Taxability issues
─ What is the broader context of this potential protest?
• Are there political reasons the state is taking certain positions?• Is the state looking to make an example out of a taxpayer?
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Nature of the Adjudicative Process
Pre-Protest: Forum Considerations
─ Training/experience of appeal officer─ Exhaustion of administrative remedies
─ Exclusive remedy provisions• N.Y. Tax Law § 1090(b) (commencement of Article 78
proceeding in Appellate Division, Third Department is exclusive remedy to obtain judicial review of adverse corporate income tax determination)
─ Can the DOR appeal? (e.g., California)─ Can the DOR overrule the appeal officer’s decision?─ Published opinion?
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Pre-Protest: Forum Considerations
─ Approximately 35 states provide administrative appeals to independent decision makers specifically dedicated to tax cases
Notable Independent Review States• AZ (Board of Tax Appeals)• DC (OAH)• LA (Board of Tax Appeals)• MA (Appellate Tax Board)• MI (MI Tax Tribunal)• NJ (NJ Tax Court)• NY (Division of Tax Appeals
and Tax Appeal Tribunal)• CA (1/1/18 Office of Tax
Appeals)
Notable States w/o Independent Review
• VA (Commissioner makes final determination in administrative appeals)
• VT (Commissioner conducts hearings on appeals)
Independence of Forum
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Pre-Protest: Forum Considerations
─ Does the jurisdiction require taxpayers to “pay-to-play” for access to an independent tribunal?• Must pay disputed tax? Must pay interest and penalties?
─ Examples:• CA: No pay-to-play requirement for BOE; however, taxpayer
must pay tax and file refund claim for de novo review in Superior Court
• MA: No pay-to-play for appeal to Appellate Tax Board or Probate Court
• NJ: No pay-to-play requirement for appeal to NJ Tax Court, but taxpayer may be required to post bond depending on risk of taxpayer nonpayment
─ Other alternatives• State escrow of funds – e.g., IL: Protest Moneys Act (State
cannot use the funds while in escrow); LA: payment under protest (agency holds funds in escrow until matter concluded)
• Issuance of bond – e.g., CO and TX
Pay-to-Play
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Taxpayer Confidentiality
Pre-Protest: Forum Considerations
─ Taxpayer confidentiality rights may change depending upon the level of review• CA and NJ: Taxpayer information is protected at the
protest level, but loses protection in appeals to the BOE and Tax Court
─ Rules for taxpayer confidentiality may not be clear for administrative proceedings• How will competitive/proprietary information and
customer data be protected when exchanged in discovery or admitted into evidence? (i.e., protective order or in camera review)?
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Setting the Record
Pre-Protest: Forum Considerations
─ At what point in the process is the record set? • Can new evidence be submitted?• Can DOR request additional information?
─ Consider the benefits and drawbacks of developing and previewing a case
─ Consider that you may be able to stipulate to the record
─ Many states provide trial de novo, even though parties have undergone extensive administrative hearings
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Setting the Record: Examples
Pre-Protest: Forum Considerations
─ CA: Adverse findings at OTA hearing are afforded de novo review in Superior Court
─ IN: Adverse findings at DOR informal hearing are afforded de novo review before Tax Court
─ NM: Choice of: • Record being established in appeal to the
Secretary with no de novo review at Court of Appeals; or
• De novo review at District or Santa Fe Court, but only after prepayment of tax
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Protest
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Basics
Protest
─ After this session, you will spend your lunch with our colleagues understanding the basic considerations for administrative protests and a workshop aimed at practical protest drafting
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Burden of Proof
Protest
─ Taxpayer generally bears burden to demonstrate that the DOR’s determination is erroneous• Initial burden on state related to assessment?• “Rational and reasonable”?
─ Standard can be high (e.g., “clear and convincing evidence” standard in New York)
─ States may have the burden of proof on some issues
─ Burden of proof vs. burden of persuasion
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Discovery, or Lack Thereof
Protest
─ Formal discovery is often not allowed or is limited in administrative proceedings
─ Freedom of Information Law requests may be useful
─ Some jurisdictions will permit the taxpayer to issue a subpoena for testimony or records at the administrative level • NYS Tribunal Rules of Practice and Procedures
§ 3000.7
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Hearing
Protest
─ Be prepared!
─ Know your hearing officer• Solicits questions/areas of concern prior to hearing• Focuses discussion on disputed issues/items
─ Use presentation document at hearing?• Provides record of presentation allowing Hearing
Officer to listen• Ensures coverage of all of your points• Hearing should be a conversation; engage the
Hearing Officer
─ Consider carefully whether to bring client• Preparation – what role?
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Evidentiary Issues
Protest
─ Evidentiary rules tend to be informal
─ Most evidence accepted
─ Objections, if any, often taken “under advisement”
─ Copies of records usually permitted
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Use of Witnesses/Experts
Protest
─ Hearing Officers often appreciate having access to taxpayer or key witnesses• What about a declaration?
─ Use of expert witnesses and reports• Presentation at or before hearing to allow
questions• Depends on issue?
• Economists on unitary issues• Transfer pricing experts on arm’s-length pricing• Valuation experts
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Result of Proceedings
Protest
─ Resolution of issues• Hearing Officer may trade issues or years• Might settle on hazards of litigation
• May not be an option• Alternative settlement route?
─ Issuance of written determination• Typically given time to respond
• Worth the effort/expense?
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Post-Protest
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Strategic Considerations
Post-Protest
─ Re-evaluate your positions in the new context
• New political and legal landscape
─ Potential advantages of further litigation
─ Another opportunity to resolve case in taxpayer’s favor
─ Better settlement terms?
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Questions?
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