Pennsylvania - Review of revised organization, procedures of tax appellate Board

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1 No May 9, 2014 Pennsylvania - Review of revised organization, procedures of tax appellate Board May 9: Legislation enacted in 2013 made changes to the structure, organization, and tax appeal procedures of the Pennsylvania Board of Finance and Revenue. Recent nominees to the Board have been confirmed by the state Senate. Background Pennsylvania Governor Corbett on July 9, 2013, signed Act 52 of 2013 into law, making changes to the Pennsylvania Board of Finance and Revenue i.e., converting the Board from a six-member quasi-tribunal into a three-member independent body effective April 1, The Board functions as the second level of administrative appeal to hear and decide state tax refund and assessment appeals. Previously, the Board was comprised of representatives from the Department of Revenue, Department of Treasury, Department of State, the Auditor General s Office, the Attorney General s Office, and the Governor s Office of General Counsel. New Board of Finance and Revenue Act 52 converts the Board into an independent body in the executive branch comprised of three members the state treasurer or a representative of the state treasurer, and two members nominated by the governor and approved by the senate. The nominees must be either attorneys or CPAs in good standing in the Commonwealth with at least 10 years experience in a position requiring substantial knowledge of Pennsylvania tax law. The state treasurer, or his/her representative, will be the chairman of the Board, and in consultation with the other members, will select and appoint counsel, clerks and other employees necessary to administer the responsibilities of the Board. On May 6, 2014, the governor s two nominations to serve on the Board (David Kraus, former chief counsel to the Department of Revenue, and Scott Shearer, a

2 long-practicing Pennsylvania state tax attorney) were confirmed by the Pennsylvania Senate. It is also expected that much of the current Board staff will remain in their respective positions. Procedural processes Currently, refund and assessment petitions are submitted to the Board of Appeals (BOA) the first level of administrative review organized under the Department of Revenue (Department). Those appeals are conducted by Department staff and limited relief is often available. Decisions and orders of the BOA may be appealed to the Board within 90 days by petition and a statement by the taxpayer setting forth the facts and points of law relied on for relief, in addition to any evidence, such as invoices and canceled checks. The new procedures retain the same 90-day appeal period, but in addition to a petition, the parties (including both the taxpayer and the Department) may file additional documents, including responsive pleadings in the nature of an answer and/or new matter, briefs in support or opposition to the petition, and amendments to a petition or supporting evidence. Previously, the Department was not allowed to submit arguments to rebut a taxpayer s position. The provisions in Act 52 result in an adversarial proceeding, essentially meaning that the tax appeal becomes a dispute between two opposing parties the taxpayer and the Department that will be decided by the Board. That adversarial nature is further shown in new procedures, akin to a court case, requiring pleadings to be verified (an affirmation that the facts set forth are true) and documents served to opposing parties. Act 52 permits taxpayers to be represented by themselves, attorneys, and accountants, but prohibits any representation constituting the unauthorized practice of law. The Department itself will be represented in all tax appeal proceedings. The previous Board regulations only permitted an attorney or the taxpayer itself to raise a legal question at the Board. Traditionally, this rule was not vigorously enforced. However, Act 52 prohibits representation that constitutes the unauthorized practice of law. Taxpayer representatives must be cautious in their representation as the boundaries of what is considered unauthorized practice are not clearly developed. Hearings

3 Previously, taxpayers could request that a petition before the Board be decided on the record or could request a five-minute oral hearing in front of the Board to further present or explain the arguments set forth in the petition. The hearing was conducted between the Board and the taxpayer or the taxpayer s representative. The various Board members, including the Department s representative and the Attorney General s representative, could question the taxpayer throughout the hearing, but did not otherwise present evidence contesting a taxpayer s position. The Board met to conduct hearings over a period of one to two days on an almost monthly basis. At that time, the Board made final decisions for all petitions eligible for decision. The new procedures allow either the taxpayer or the Department to request a hearing in writing. Hearings are open to the public, but either party or the Board can request an executive hearing a hearing limited to protect a privilege or confidentiality. Unlike the previous hearing process, Act 52 dictates that the hearings will be adversarial both the taxpayer and the Department have the right to present oral and written evidence at the hearing. Additionally, both parties have the right examine and cross-examine witnesses. Act 52 prohibits ex-parte communications (one-sided material communications relevant to the merits of the proceeding) between the Board, or its staff, and the taxpayer or the Department representative. The adversarial nature of the Board proceedings is a significant change to the operation of the Board. The taxpayer and the Department have the right to argue in support of their respective side replacing a taxpayer s five minute oral presentation held before the former Board. Additionally, taxpayers and the Department under the former Board were able to communicate directly with Board staff to discuss the merits of the appeal and present issues and evidence directly to Board staff. Instead of a quick phone call or to that staff, the new procedures require arguments to be presented in Board pleadings and at the hearing, as well as evidence submitted to all of the parties. Compromised settlements, decision and orders Previously, taxpayers were unable to enter compromised settlements at the Board. If a taxpayer wished to reach a settlement, the petition first had to be decided by the Board and then appealed to Commonwealth Court where the taxpayer could attempt a stipulated settlement with the Office of Attorney General

4 and the Department of Revenue. The risk of the court appeal was that a settlement before a trial was not guaranteed, and the costs of litigation could be significant relative to the tax disputed. Act 52 grants the Board the authority to enter into compromised settlements with the agreement of all parties. Certain issues, however, will not be eligible for compromise including: (1) petitions for denial of property tax or rent rebate claims, (2) denials of charitable tax exemptions, (3) revocations of sales tax licenses, (4) jeopardy assessments or (5) petitions relating to gaming. Once a settlement is reached between the parties, it is expected that the Board will review the settlement before issuing a final order. If compromise is not available, the Board must issue a written decision and order within six months after the receipt of the petition. The decision and order must include the conclusions reached and the relevant case facts relied upon. Either party may request a one-time six-month extension for the Board to dispose of the case. If the Board fails to provide a decision within the time allotted, the petition will be deemed denied, and the Board must accordingly provide notice to both parties. The Board decisions must now be appropriately redacted and published on a publically accessible website. Finally, either party may file a de novo appeal to Commonwealth Court, the date of mailing of the notice starts the statute of limitations to do so. Entering into a compromised settlement at the Board level was an option previously unavailable to the taxpayer. Depending on the taxpayer s facts and circumstances, it may be strategically beneficial for the taxpayer to settle at the Board level rather than risk a complete denial and/or the cost of an appeal and possible settlement at Commonwealth Court. It is expected that a number of taxpayers will take advantage of the settlement option. Additionally, taxpayers should be aware that appeals to Commonwealth Court remain de novo; however, a compromise at the Board may preclude a taxpayer from further appeal. Applicability The new procedures apply to all petitions filed with the Board after April 1, Additionally, any petitions that have not been subject to a final decision and order by the previous Board prior to April 1, 2014, are also subject to the procedures and jurisdiction of the new Board.

5 Pennsylvania taxpayers need to be aware of the change in the Board regime. The previous Board was neither adversarial in nature nor truly independent as a member of the Department of Revenue and Attorney General s Office sat on that Board. The new Board is represented by independent appointees. Additionally, taxpayers must be aware that the Department may now argue and be represented at Board proceedings. Unlike the prior Board procedures which consisted of informal hearings, the revised Board procedure is more akin to a hearing or court case, as taxpayers will not have carte blanche access to Board members or staff to discuss their respective arguments. On the other hand, the new process offers an opportunity to settle matters at the Board level, an option not available under the prior arrangement. For more information, contact a tax professional with KPMG s State and Local Tax practice: Harley Duncan Kimberley Wick Joe Duch Howard Sklaroff ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY KPMG TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in TaxNewsFlash-United States is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. Direct comments, including requests for subscriptions, to US-KPMGWNT@kpmg.com. For more information, contact KPMG s Federal Tax Legislative and Regulatory Services Group at , 1801 K Street NW, Washington, DC To unsubscribe from TaxNewsFlash-United States, reply to US-KPMGWNT@kpmg.com. Privacy Legal