Finding the best forum.

• Author: Friedman, Jeffrey A.
• Position: Procedural State Tax Issues, part 1

Managing state and local tax controversies is not an easy task. In addition to understanding the differences between the substantive laws applied in each jurisdiction, multistate taxpayers also need to understand the differences in procedural rules governing those disputes. In this two-part article, we address the most common issues that impact how taxpayers litigate state tax cases.

Part I addresses the consequences arising from one of the most critical decisions that taxpayers face when engaging in a state tax controversy: determining the best forum for filing a lawsuit. Not all states offer alternative forums for taxpayers to challenge assessments. For instance, Maryland requires many taxpayers to bring suit at the Maryland Tax Court. However, in states that do provide alternative forums, taxpayers are required to decide not only whether to challenge an assessment but which forum is most appropriate for bringing that challenge. This decision will be influenced by a number of factors, including the nature of the process, whether taxpayers must "pay to play," whether taxpayers will lose confidentiality rights, the type of evidentiary rules that will be applied, at which point the record will be set, the scope of the parties' appeal rights, and the time spent in litigation.

Part II, which will appear in TEI's July/August issue, addresses factors that taxpayers should consider when coordinating multistate tax litigation. Such issues include prioritizing litigation among multiple States, protecting the evidentiary privileges, and the implications of state information sharing.

Nature of the Adjudicative Process

As state and local taxpayers are well aware, the nature of the process offered to taxpayers at the administrative level varies widely from state to state. At best, administrative tribunals are staffed by independent judges who have knowledge of the tax laws before them, are governed by clear rules of evidence, and issue precedential opinions. At worst, those administrative tribunals are nothing more than rubber stamps for a state's department of revenue. In such jurisdictions, taxpayers may opt to shortcut or bypass a states administrative hearing process altogether by paying the tax and filing a refund claim that can be appealed to a state court.

California's administrative process provides an interesting example. Corporate income taxpayers (1) who have received a notice of proposed assessment and wish to avail themselves of California's administrative process must file a written protest, which is then assigned to a protest hearing officer within the California Franchise Tax Board (FTB), the same agency that issued the assessment. (2) Following an informal protest hearing and potentially years of responding to requests for information and documentation, the protest hearing officer reviews the proposed decision with the FTB's management, which may accept or reverse the protest hearing officer's decision. The protest hearing officer will then issue a final determination letter to the taxpayer, and the FTB will issue a notice of assessment.

The taxpayer then has the opportunity to appeal the protest hearing officer's decision to the California Board of Equalization (BOE), (3) a five-member board composed of the state's controller and four elected members. The appeals process offered by the BOE bears no resemblance to any other state's. First, parties in...