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TEI Audits & Appeals Seminar
State Tax Controversy Considerations Everyone Should Know About
May 3, 2018
Andrew ApplebyPartner
Jonathan FeldmanPartner
Eversheds Sutherland
− Settlement Strategies
− Closing Agreements
− Overcoming the Stigma of Tax Planning
− Navigating the Politics of SALT Controversy
− Procedural Considerations You Must Know
Agenda
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Settlement Strategies
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Overview
Settlement Strategies
─ At some point during audit (or later), the company may decide it wants to pursue settlement
─ Many reasons to settle• Company considerations• Publicity considerations• Case specific considerations
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Company Considerations
Settlement Strategies
─ Budget concerns about cost of litigation
─ Financial statement risks – sufficiency of reserves and impact on state ETR
─ Not economically feasible
─ Documentation or personnel not available
─ Executives don’t want to make time commitment
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Publicity Considerations
Settlement Strategies
─ Adverse public relations issues to consider?
─ Avoid publicity on negatively perceived issue (e.g., aggressive tax planning)
─ Avoid public disclosure of private financials
─ Avoid exposure of issue not identified by other states
─ Avoid exposure of confidential or proprietary information
─ Stave off False Claims Act/consumer fraud actions/shareholder lawsuits
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Case Specific Considerations
Settlement Strategies
─ Exposure in other states (and audits)
─ Issue limited to particular tax periods• Later change in structure, facts or law
─ Likelihood of prevailing in court
─ Avoid having litigation in a “bad” state move forward too quickly• Consider fairness of appeal forums
─ Allow other taxpayers’ cases to move out front
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Pursuing Settlement
Settlement Strategies
─ Know who to negotiate with • Understand your controversy options• Understand limitations on settlement at certain stages
─ Who goes first?• Consider whether to proactively make a settlement offer or try to
solicit one from the state
─ Consider global state settlement─ If settlement proposal is not accepted, take steps to minimize
risk that would later be used against you in litigation• For Example: “This offer is made for settlement purposes only, and
nothing set forth in the offer may later be used or construed to affect, or constitute an admission of, the Taxpayer’s positions on any of the issues in this matter, or for any other purposes.”
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Be Creative
Settlement Strategies
─ Consider alternative settlement methodologies• Foregoing a refund in lieu of a tax credit
• Legislative resolutions
• Dropping more contentious issues for settlement on other issues
• Combining or trading potential issues with other tax types
• Consider company investment possibilities in the state
• Withdraw assessment for “compliance” in future periods
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When Settlement May Not Be an Option
Settlement Strategies
─ DOR signals issue is new─ DOR’s policy is unclear or unwritten─ DOR wants/needs judiciary guidance on issue─ Settlement exceeds certain dollar amount─ Many other taxpayers have same issue─ Constitutional issues are involved─ Validity of regulation is involved─ National organizations (MTC, FTA) promoting
litigation
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Closing Agreements
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Closing Agreements
─ All settlements should be memorialized in a written closing agreement
─ Never rely on “verbal” promises─ Settlement agreement should be viewed as a
contract• Sono Equities LLC v. City of Norwalk, No. CV-09-
4016818S (Conn. Super. Ct. 2011)• Denied a motion to enforce a settlement agreement
because a series of emails between the property owner and the assessor did not evidence a “meeting of the minds” between the parties
─ Consider who has authority to approve/sign an agreement
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Closing Agreements
─ State form agreements are negotiable─ Settlement/closing agreement may address:
• Issue-by-issue versus dollar settlements• Methodology used• Impact on future periods and audits, including
impact of future law changes• Impact on tax attribute carryforwards• Impact on other members of affiliated group (if
separate reporting state)• Confidentiality of terms/state information
sharing
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Overcoming the Stigma of Tax Planning
Eversheds Sutherland
Overcoming the Stigma of Tax Planning
─ Justifying tax planning• Develop non-tax justifications and benefits • Be mindful of tax planning slide decks
─ HMN Financial, Inc. v. Commissioner of Revenue, 782 N.W.2d 558 (Minn. 2010)• Department has broad statutory authority to disregard business entities
structured solely to minimize tax liabilities• Tax Court relied on slide deck, workplan and emails from
accounting firm to find sole justification was tax benefit
─ Hormel Foods Corp. v. Wis. Dep’t of Revenue (Wis. Tax App. Comm’n Mar. 29, 2010)• Relied on internal slide deck to board: “Three Tax Strategies To Reduce
Hormel’s Income Taxes”• Also relied on design document, presentations and project charter from
accounting firm to find transaction done primarily for tax avoidance
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Navigating the Politics of SALT Controversy
Eversheds Sutherland
Navigating the Politics of SALT Controversy
─ Many considerations beyond the merits of the case/years in controversy:• Future years• Other jurisdictions• Legislative efforts• Publicity • Confidential/sensitive information• Impacting credits/incentives
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Procedural Considerations You Must Know
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Procedural Considerations You Must Know
─ State tax administrative forums have varying rules on whether a representative must be a lawyer
─ Often, but not always, depends on whether a factual record is set at the forum
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Representation Considerations
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Procedural Considerations You Must Know
─ Appeals panel hearings “shall not be construed to be, or to be conducted by, a tax court…”
─ No factual record established at the OTA
─ Taxpayer may be represented by any authorized person not limited to attorney, appraiser, accountant, bookkeeper, employee, business associate or other person
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New California Office of Tax Appeals
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Procedural Considerations You Must Know
─ Factual record established at the Tax Tribunal level
─ Business taxpayers must be represented by legal counsel (except for Small Claims Division)
─ Nonresident attorneys may move for permission to appear before Tribunal
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Georgia Tax Tribunal
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Procedural Considerations You Must Know
─ Factual record established at Tribunal
─ Business taxpayers must be represented by an attorney authorized to practice before the courts of Illinois
─ Persons authorized to practice law in another jurisdiction may be authorized to practice before the Tribunal if they have followed Illinois Supreme Court procedures for admission to practice pro hac vice
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Illinois Independent Tax Tribunal
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Procedural Considerations You Must Know
─ Factual record not established
─ Business taxpayers may be represented by an attorney, accountant or any other representative
─ Board members may be lawyers or CPAs
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Pennsylvania Board of Finance and Revenue
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Procedural Considerations You Must Know
─ While the practice of law is limited to the jurisdictions in which lawyers are licensed, there are exceptions to this rule
─ Admission pro hac vice enables out-of-state lawyers to be admitted to practice in a local jurisdiction for a particular case only
─ States (and sometimes certain courts) have their own rules on pro hac vice requirements
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Pro Hac Vice Considerations
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Procedural Considerations You Must Know
─ West Virginia• Non-attorneys may represent taxpayers before the Office
of Tax Appeals• But may not call witnesses, argue unconstitutionality or
make statutory construction arguments
• Out-of-state attorneys (including in-house counsel) may become licensed pro hac vice but must become associated with a “responsible local attorney” • A responsible local attorney is a WV attorney with an in-state
office• The responsible local attorney must sign all pleadings and
attend all hearings
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Pro Hac Vice Considerations
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Procedural Considerations You Must Know
─ Oregon• Out-of-state lawyer must provide a certificate of liability
insurance, including the deductible, to the Oregon State Bar
─ Illinois• Out-of-state lawyer must obtain an ARDC number before
filing a motion – and if filing in Cook County, must also have a separate Cook County attorney code assigned to you
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Pro Hac Vice Considerations
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Procedural Considerations You Must Know
─ Tax consulting firm (non-attorneys) filed Notice of Appeal with Ohio Board of Tax Appeals (BTA)
─ State Bar Association filed a complaint against the firm for unauthorized practice of law
─ Ohio Supreme Court determined such activity represented the unauthorized practice of law by: • Preparing and filing notice of appeal; and
• Appearing before the BTA
─ Taxpayer was required to withdraw BTA appeal
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Ohio St. Bar Assn. v. Ryan, L.L.C
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Procedural Considerations You Must Know
─ Out-of-state in-house attorney filed notice of appeal to BTA
─ BTA dismissed filing based on lack of jurisdiction because notice was not filed by a licensed attorney
─ Ohio Supreme Court reversed dismissal • Found that filing did invoke jurisdiction of BTA
• Unauthorized practice of law separate issue from jurisdiction
• Licensed attorney necessary to further represent taxpayer before BTA
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NASCAR Holdings v. Testa
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Procedural Considerations You Must Know
─ Virginia Supreme Court dismissed tax appeal sua spontebecause not signed by Virginia licensed attorney
─ Three lawyers of record were with the same law firm• One of the lawyers was licensed in Virginia and the other
two were admitted pro hac vice
─ After unexpectedly denying unopposed motion to stay, lawyers timely filed notice of appeal
─ Pro hac vice lawyer signed petition which included all lawyers in signature block• Virginia licensed lawyer was on scheduled vacation
─ Court denied subsequent petition for reconsideration
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Corporate Executive Board v. Virginia DOR
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Questions?
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eversheds-sutherland.com© 2018 Eversheds Sutherland (US) LLPAll rights reserved.This communication cannot be used for the purpose of avoiding any penalties that may be imposed under federal, state or local tax law.
Contact us
Andrew ApplebyPartnerEversheds Sutherland (US) LLP [email protected]
Jonathan FeldmanPartnerEversheds Sutherland (US) [email protected]
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