Legislature(1995 - 1996)
02/29/1996 04:12 PM House JUD
| Audio | Topic |
|---|
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 341 - TAX APPEALS/ASSESSMENT/LEVY/COLLECTION Number 0032 CHAIRMAN PORTER said HB 341 addresses the tax appeal process within the Department of Revenue (DOR). He said Ms. Vogt would explain the current process and then Mr. Frankel would explain how the current process could be improved. DEBORAH VOGT, Deputy Commissioner, Office of the Commissioner, Department of Revenue, was first to testify. She said DOR has an old-fashioned in-house revenue of tax matters. She said there are a group of auditors who audit tax returns if they find something that needs to be assessed. She said, at that time, the taxpayer can ask for an informal conference in front of an informal conferee within DOR or can go straight to the DOR's formal hearing section. She said, depending on the nature of the proceeding, the informal conference can be just a taxpayer and a single representative of the DOR, or it can be a more formal matter with representation by the Attorney General's office and by the counsel for the taxpayer. MS. VOGT said the formal hearing is in the commissioner's office and occurs if the taxpayer is still dissatisfied with the result at the end of the informal conference and has appealed to the commissioner's office. She said the commissioner could hold the hearing himself, but usually hearing officers take testimony on behalf of the commissioner. She said when that determination is made, if the taxpayer is still dissatisfied, the taxpayer can appeal to superior court. She added that this appeal is on an appellate record, not a trial at the superior court and it is this issue which the taxpayers have complained about the most. The taxpayers feel, and Mr. Frankel would probably agree, that there needs to be a stage in the proceeding where a trial-like proceeding can take place outside the department. Number 0098 MS. VOGT said Representative Green introduced HB 341 last year which would have provided for a tax court and is currently in a revised form. The DOR in-house proceedings has been an area that taxpayers have been dissatisfied with for many years. She said the courts have always upheld this use of in-house proceedings and it is a model used by a fair number of states. She added that she believes that it is a fair system, but it has been perceived as a "a deck-stacked against the taxpayers." She said, at the beginning of the Knowles Administration, the DOR agreed to look at this issue anew, partially as a result of HB 341 and new taxpayer complaints. She said DOR spent a substantial amount of time drafting legislation that address this issue and the DOR feels comfortable with, which the Governor introduced, HB 427 and SB 224. She said the DOR has received advice from Mr. Frankel regarding this issue and has worked with a number of states in revising their hearings. She said the DOR has also completed a survey and found that Alaska is one of the few remaining states that holds all the tax hearings in-house until an appellate review. Number 0145 CHAIRMAN PORTER said Mr. Frankel has extensive background in tax appeal matters. He summarized Ms. Vogt's testimony for those Representatives joining the committee meeting including Representative Finkelstein from the House Judiciary Committee and Representatives Mulder, Martin, Navarre, and Grussendorf from the House Finance Committee. PAUL FRANKEL, Morrison & Foerster, said he does tax litigation within the state of New York and elsewhere in the United States. He said before doing this, he was tax counsel for W.R. Grace & Co., and before that he was an Internal Revenue Service (IRS) trial lawyer. He said, when a person has a tax dispute with the IRS, they can go through the entire in-house system consisting of conferences and appeals. Number 0171 MR. FRANKEL said at the end of this period, if the taxpayer is not satisfied, he/she gets a 90 day letter which gives him/her 90 days to file a petition with the United States Tax Court saying why the taxpayer does not feel he/she owes the tax. He said this petition begins the tax preceding, nothing is paid out. He added that the United States Tax Court is a stream-lined, efficient and independent system where the taxpayers felt they received a fair treatment. He said as a trial lawyer for the IRS, it was his job to defend the position of the IRS before this court. He said the IRS often felt that they were not receiving an edge as the judges took into consideration that the IRS trial lawyers knew the procedures and tried to balance out the other lawyers inexperience with this particular system to make it as fair as the judges could. He said the chief judge, when he was a trial lawyer, was a man named, Howard Dawson who told Mr. Frankel that the United States Tax Court was in the worst possible place, in the IRS building. Mr. Dawson said the public perceived that the U.S. Tax Court was part of the IRS. He said, as a result of Mr. Dawson's lobbying, the U.S. Tax Court now has their own building in Washington, D.C. MR. FRANKEL then discussed his job as tax counsel for W.R. Grace & Co. where he did federal as well as state tax litigation. He said, at the state level, there was a perception of real or imagined bias. He said the typical state revenue tax dispute consisted of a proposed notice of assessment or proposed assessment from an auditor which claimed the taxpayer owed taxes, announced a trial date and a location of the hearing. He said the hearing auditor would work for the same person that proposed the assessment, which caused the taxpayer to feel that the "cards were stacked against you all over the place." He said there were no separation of powers. He stressed the importance of having someone outside the process looking at, weighing the facts and making an independent judgement whether the taxpayer was right or wrong. MR. FRANKEL said one of the tax cases he was counsel for was in the state of Alaska, twenty years ago. He said the corporate treasurer was at the hearing and questioned how the system could be fair with the same people working at different levels within the different hearing process. Number 0244 MR. FRANKEL said he is originally from New Jersey and said he is active in the bar association in that state. He said, twenty years ago, he began to work in the state of New Jersey to make it a better tax dispute place as it probably had the worst tax procedures within the United States. He said, it wasn't just the lack of an independent, prepayment tax dispute system, but the state of New Jersey gave the state revenue department statutes of limitations to audit which were lengthy, and the taxpayer short periods of time to claim refunds, gave no interest on refunds, gave the state big interest on deficiency, gave the taxpayer short times to protest and if the taxpayer was away he/she lost this opportunity. He said New Jersey changed their tax system into the best system in the nation because the bar association, businesses, legislature and, the key factor, the Department of Revenue supported an independent tax court. He said taxpayer feel that when they leave the New Jersey tax court they have had a fair "shake." Number 270 MR. FRANKEL said the state of New York had an in-house tax system, but the state was reluctant to give up this process. He said the New York formed a tax appeals bureau which functioned in a similar manner to the U.S. Tax Court except it was part of the N.Y. Department of Revenue, the bureau reported to the commissioner and there was still a perception of bias. He said, after ten years, a new commissioner with advice changed the system. A tax tribunal was set up in 1987 with three judges at the top level, which is the tribunal for appellate. He said there are hearing officers at the lower level within the state system. He said the New York system is fast, efficient, contains no new discovery, is inexpensive and the taxpayers feel they are treated fairly. He said the chief judge was the general counsel for the Department of Revenue. Number 292 MR. FRANKEL said New York City has the fourth largest tax collection agency in the country, behind California, the IRS, and the state of New York. New York City was long viewed as an aggressive department with in-house hearing officers who usually ruled for the city, 80 percent to 90 percent of the time, no matter what the case was. He said a new commissioner was appointed in the late 1980's who drafted a change in the city charter, pushed through a New York City tax tribunal, took the existing hearing officers with the same budget and informed them that they were to judge the cases as fairly as possible and to not back up city policy. He said the same officers who had ruled 80 percent to 90 percent, now were ruling 50 percent in favor of the city. Number 318 MR. FRANKEL said there have been many movements, for changes within the tax system, throughout the country. He mentioned some of these examples. In Connecticut, a tax court was formed three years ago by appointing two judges, who liked tax, to head this court. The state of Indiana picked one judge to run the tax court. He said state after state have adopted similar systems of many different forms, and added that it does not matter if the change is judicial or administrative as long as it is separate from the Department of Revenue. He said it is important that taxpayers go into the system feeling that they are going to be listened to and judged on the facts and the law. He added that this system works before anyone has to pay anything, they should have their day in court before they have to pay or post a bond. He heard of a case in Tennessee where a company was almost put in bankruptcy because an agent had declared a big deficiency. He said there was no review system in Tennessee before the state took the money. MR. FRANKEL stated that there should a right to a hearing before anyone takes money or posts a bond, someone who is independent and someone who knows and likes tax. A lot of people are afraid of tax and a judge who likes tax law will do a good job. Massachusetts has a wonderful system, as well as Maryland, Ohio, Wisconsin, Minnesota, Delaware, Missouri, Oregon, Montana, Hawaii, and Arizona and once these systems are in place everyone realizes it's the only way to go. The commission cannot also be the judge and have the power to tell somebody they owe them money. Number 352 MR. FRANKEL said he had reviewed the present legislation before the committees for consideration and noted that there are two areas in general which he felt were important to mention. The first area was discovery, which is where a party has the right to issue a subpena before a trial and put an executive or governmental official on a witness stand to ask questions in deposition form. This can be a major burden. He also mentioned interrogatories where someone would be requested to produce all sorts of documents. The U.S. Tax Court had no discovery when he was there and he thought it was a very efficient system. New York state does not have discovery either and when discovery bogs people down, it's a bad thing, particularly if one of the parties can't afford to go through this procedure extensively. It almost never produces anything worthwhile. He said he was generally against discovery, but if they chose discovery, it should not be discretionary discovery. In the case of discretionary discovery, the judge has the right to establish what type of discovery will be allowed on a case by case basis. This could also lead to a perception of bias. He suggested a compromise which might allow for no depositions, but just requests for questions, things like this. MR. FRANKEL noted that one of the things which made the U.S. Tax Court very efficient were mandatory stipulations of fact. In this situation each side is required to agree in writing to all facts that are not in dispute, or which should not be in dispute and attach all documents which are authentic, even if there is a challenge to materiality or relevance. These cases would really move through the system and usually nine out of 10 cases settle. MR. FRANKEL suggested that the committees rather than get bogged down in side issues, just pass the legislation through. If there is a bill which allows for a system independent from the department and the tax payer can have their day without paying or posting a bond, if the judges are specialized in tax law, and if they could adopt it, the sooner the better. Number 394 CHAIRMAN PORTER noted that Alaska has a very small amount of people residing here and a small amount of cases, but with very high value attached to them. He asked if these characteristics set up a scenario for a different procedure than what Mr. Frankel outlined. MR. FRANKEL responded that there is a similar situation in the U.S. Tax Court where there are very large cases. These Section 482 cases involve transfer pricing of foreign operations, involving multi-millions of dollars, but there are other smaller cases too. The key ingredient in every case that whomever the tax payer is, they should have the feeling that someone is listening and they will get a fair shake regarding their cases. In other states, where the cases are complex, they appoint a special trial judge or a special master to work with a particular case. This seems to work with long and complex cases. In regards to budget, Mr. Frankel pointed out that the U.S. Tax Court has a filing fee system. He noted that no one seems to mind paying a filing fee. Number 418 REPRESENTATIVE JOE GREEN noted that a sub-committee was presently working through some big and small differences regarding their legislation. One of the concerns that has come up is that because Alaska is a small state, it's going to be difficult and maybe unduly expensive to establish this kind of review team to be available for the big and small cases. He noted that there may not be enough litigation to warrant a specialize system. He also added that these tax issues are from one industry. Alaska is such a large resource state. He asked if there was any place where Mr. Frankel had worked where there was an establishment of one or more of these administrative law judges by something other than the commissioner. Is this appointment accomplished by law temporarily, permanently, etc. He asked what the most expeditious and fair way would be to establish this system. MR. FRANKEL noted that establishing a system is proceeded by the enactment of a bill and outlining an appointment process, but keeping the judges or hearing officers busy is also something to consider. In Maryland, they do not have a full time tax court. They have these judges who do other things, maybe they're lawyers in private practice, but they're available when needed, although they probably wouldn't be able to practice tax cases. Number 454 REPRESENTATIVE GENE THERRIAULT asked about the majority of the other states and how their judges are selected. MR. FRANKEL stated that in New Jersey there are judicial judges and they are appointed like any judge. The state bar association submits a slate of names to the governor which they believe are qualified. The governor appoints them. He noted that every other appointment in New Jersey is Democrat and Republican on a rotation basis. There is a political balance of the judges in this state. It seems to work. In New York, the governor appoints the top three of the New York tribunal, but there are hearing officers called administrative law judges at the second level who the governor does not appoint. These are appointed by the chief judge of the New York state tribunal. Generally they are appointed by the governor and generally are legislatively confirmed. Number 485 REPRESENTATIVE GREEN mentioned the related piece of legislation introduced last year which attempted the establishment of a tax court and with people who are knowledgeable about tax law. Presently, it allows for appointment of tax specific individuals, but if after a hearing there is still dissatisfaction, their system allows for appeal to a superior court. He noted Mr. Frankel's mention of those states which don't have this by-pass feature in their system. MR. FRANKEL said that every state has a system where an individual can appeal up to court, but the crucial level is where is the record made. If the record of the trial is made in the department people don't feel right about this. It seems to be unfair. If the record is made in front of an independent judge, then things are fine. He noted that most states provide for a de novo trial level in the tax courts. Some of these tax courts are administrative and some are judicial, but it's within the tax forum which this de novo case is made and it's made outside of the department. Number 509 REPRESENTATIVE AL VEZEY asked if Mr. Frankel was advocating a single judge or adjudicator per case as opposed to an arbitration where there are typically three. MR. FRANKEL said he felt that the U.S. Tax Court had a good system for this. They have 19 judges. The chief judge assigns a case to one judge. The trial is before one judge, but an opinion is passed from the court. This judge is asked to write a proposed opinion, which is circulated among all the other judges. If the other judges think the proposed opinion is wrong, they have the power to vote by majority as to what the right answer is. Mr. Frankel noted that some states do their own opinions, but he did not recommend this because there could be judges on the same court which seem to go in a different direction. In the case of California where they have a board of equalization, the tax payers go before five judges at once. Mr. Frankel felt as though this was not too efficient and not productive. Number 527 REPRESENTATIVE ELDON MULDER referred to an independent agency which would hear tax cases and then if the parties involved were not satisfied with this review they could appeal it to superior court, with a caveat that they could go directly to superior court. He asked if this option was available in other states and he asked what the justification would be to go to superior court and bypass a judge or a hearing officer. MR. FRANKEL said the only place he sees this system is in California and even there an individual has to pay to go directly to court. There is such a perception of bias in California that people do not want to go through the system. The state board of equalization in California made up of five judges are the same individuals who supervise all the sales tax agents. They also sit on the franchise tax board which is the group which does the income tax audits. This is the only place where he sees individuals by- passing the system. Usually the system is set up that if an individual goes up the ladder, and the individual looses, they can then appeal on this record to the appellate division. He recommended that the first stage must be perceived as independent allowing for a latter process of appeal, rather than a side-jump. Number 604 MR. FRANKEL outlined the following federal procedure in response to a question by Representative Green provide that an informal hearing would be instigated before a more formalized hearing was undertaken, with a court proceeding built into the system. In the federal system a taxpayer receives a 90 day letter. If they decide to opt for a trial without payment, they have to go to the United States Tax Court. After 90 days go by, they pay their tax, they file a claim for refund and then they can either go to the U.S. Claims Court or the U.S. District Court. The state of Michigan has a similar system. REPRESENTATIVE MARK HANLEY asked Representative Green where under his provision does he anticipate having the administrative law judge. REPRESENTATIVE GREEN answered that they would be outside of the Department of Revenue, perhaps in the Department of Administration. REPRESENTATIVE HANLEY noted that the perception of creating independence seemed to be of the utmost importance. This judge would obviously be appointed by the governor, possibly confirmed by the legislature and Representative Hanley asked if a judge with the Department of Revenue would be separate enough. MR. FRANKEL noted that the more separate the better. Number 646 REPRESENTATIVE GREEN added that the original bill in essence tried to set up a separate tribunal. The problem in Alaska is that they were afraid they wouldn't find enough qualified individuals to hear these cases. He also noted the infrequency of these tax cases. When they do come up they're so large in terms of money. He thought there might be a point where they couldn't go too far because they wouldn't be able to justify this expenditure. MR. FRANKEL said they just need to do the best they can. If the Department of Administration is the best they can do, this is fine. About staffing, he found that ex-government people go out of their way to be fair because they don't want to be thought of as an extension of the department they used to work for, or as a rubber stamp. Number 668 REPRESENTATIVE THERRIAULT asked if this administrative judge just dealt with questions of tax or to the constitutionality of a tax. MR. FRANKEL stated that the judicial New Jersey tax court will make a constitutional finding like any judge, but the New York state tax tribunal which is administrative wrestled with making constitutional findings. They do not rule a statute as unconstitutional, but they can rule that a regulation is invalid. They can rule that the application of the law by the department is unconstitutional, but if there is a case in New York that someone is convinced represents an unconstitutional statute, there is a mechanism to go directly to court in order to address constitutionality questions. REPRESENTATIVE THERRIAULT asked Representative Green whether an individual would go through an administrative tax system. REPRESENTATIVE GREEN stated that the system allows for an initial informal review, then a person would go directly to a formal review and from there a superior court if the parties still had not reached an agreement. He also mentioned a side-bar, that after an informal review a individual could go directly to superior court. Effectively, he pointed out that there were two avenues emanating after the individual has had an informal review. REPRESENTATIVE THERRIAULT wondered if this system could further be refined when the question was more mathematical in terms of how the tax was figured or constitutional, that the individual could choose one course of action over the other depending on the issue. Number 702 MR. FRANKEL stated that usually the appeal from the tax court is on the record, it is not de novo. It's an appeal usually claiming error of law or a substantial error of fact at the lower level. When an individual comes to a tax court, the job of that judge is to make a decision based upon what comes into this court room. The Alaska pending legislation has a provision that if the judge believes a remand is appropriate, the judge could remand it to a lower level, but what is in this court room as evidence should decide this case. TAPE 96-27, SIDE B Number 008 REPRESENTATIVE VEZEY asked if he believed if this tax court system works better when it's under the administrative branch of government or the executive branch of government. MR. FRANKEL said he thought it worked best when it's out of the Department of Revenue. What matters is that someone is told that he or she is an administrative law judge or a judicial judge and their job is to do the right thing. They should not be responsible to the commissioner who wrote the regulations, or a co-worker with the auditors who did the audit and that they don't have to back up their friends. Number 034 CHAIRMAN PORTER asked Mr. Frankel if there were other parts of the bill which raised red flags. MR. FRANKEL responded that the time periods regarding a request for reconsideration which was established at ten days grabbed his attention. He said he would change this to 30 days. He would make any 30 day provision, 60 days. There was also a provision which said that the parties shall attend a hearing, except that the administrative judge can monitor by teleconference or telephone. Mr. Frankel wouldn't give the judge this power. He thought that if the tax payer wants to come they should be able to attend the court room. If they don't want to come, they shouldn't be forced to do so. The tax payer should have the right to make the election for a telephonic hearing. Number 073 REPRESENTATIVE GREEN asked about judges being appointed by the governor and confirmed by the legislature. MR. FRANKEL said that where he sees this system, it works. He saw no downside to doing this, but it shouldn't stop the bill either. If the bill is ready to go and this is still a problem it's probably more important to push the bill through for passage. Number 102 REPRESENTATIVE CYNTHIA TOOHEY asked about rotating the appointments of these judges, one Republican, the next Democrat and wondered if this was included in the proposed Alaskan legislation. She felt as though this was an important concept. REPRESENTATIVE GREEN said that no, the Alaska legislation did not provide for this type of system. He saw no reason for a prospective judge to disclose their party preference. Representative Finkelstein pointed out that the state of Alaska does provide for this rotation in the appointment of their other judges. REPRESENTATIVE TOOHEY felt as though this party rotation was an important concept to provide balance to the system. She felt as though this rotation spoke to the concept of keeping the system fair. CHAIRMAN PORTER said he had the opposite take on this. He noted that under this system there is the assumption that a person will be appointed with a certain persuasion in mind and a different one the next. He spoke to the concept of neutrality. Number 145 REPRESENTATIVE GREEN felt as though that what they were looking for was fairness, but not necessarily a concept of fairness based on a party affiliation. He then answered a question by Representative Hanley regarding how the legislation treated discovery. He noted that there was an attempt to limit discovery. The bill as drafted does not address the specific types of discovery regarding depositions or interrogatories, but it does set up a procedure where by the parties come to the administrative law judge for approval of a discovery plan. Number 193 MR. FRANKEL noted that the U.S. Tax Court works very well with mandatory stipulations. If discovery is changed, Mr. Frankel thought that depositions could be limited. He felt that out of all the forms of discovery which are burdensome for both sides, it would be depositions. They could be limited to special situations such as perpetuation of testimony of someone which is ill. He added that generally depositions can be very burdensome. REPRESENTATIVE GREEN asked how far they could go with determining relevancy because in some cases someone wouldn't know if something was relevant until you go into it. MR. FRANKEL said it helped if discovery was limited, the more the better because attorneys love discovery and the process can go on and on, but a small case can't afford this. The mandatory stipulation of fact tends to limit this and makes the trial shorter and helps to focus people on settlements.
| Document Name | Date/Time | Subjects |
|---|