The Texas Court of Appeals recently ruled that pay-to-play appeals from assessments means that the Comptroller has to first assert amounts due, then you pay them under protest, and then you appeal. If the first step does not happen, the challenge fails for lack of court jurisdiction to hear the appeal. 1st Global, Inc. v. Hegar, No. 03-19-00740-CV, 2021 WL 5022390 (Tex. App.—Austin Oct. 29, 2021).
Facts: 1st Global (the “company”), an investment advisory business, had an office in Texas where it performed the supporting work for its investment advisory business. The company also had investment advisors working in and out of Texas to assist the company’s clients. The company believed it should source receipts for Texas franchise tax apportionment purposes to where its advisors were located (i.e., not all to Texas). The Comptroller, in an administrative proceeding, asserted that all investment advisory receipts should be sourced to the location of the transaction-support office (i.e., all to Texas).
What purportedly went wrong? The company filed using the Comptroller’s 100-percent-to-Texas method in a self-assessment on its original return and paid the tax. At the same time, the company protested the payment and then filed suit in the district court. The state moved to dismiss the suit and asserted that because the Comptroller had not asserted any amount due, the company could not have paid “the amount claimed by the state” as is required by the pay-to-play appeal statute (Tax Code Section 112.151(a)). That is, the state asserted that the company paid the amount that the company claimed was due—it did not pay the amount that the state claimed was due.
The Decision: The court of appeals affirmed the district court’s dismissal of the company’s case and ruled that “the phrase ‘the amount claimed by the state’ can reasonably be read to require some sort of affirmative claim by the state for a specific amount of franchise taxes.”
Why should the decision be overturned? While we may have urged caution regarding the manner in which the company proceeded, by self-assessing and appealing the self-assessment, it was undisputed in the case that “the Comptroller previously announced his position that receipts generated through the provision of services by 1st Global’s financial advisors, wherever they are located, should all be apportioned to Texas because of its Dallas office.” Therefore, the Comptroller claimed the amount arising from its position, the company in fact paid “the amount claimed by the state,” and that payment should have been sufficient to give the Texas courts jurisdiction. States should not pursue litigation advantage or hide the ball, that is the essence of the square-corners doctrine. Justice Douglass, in a U.S. Supreme Court concurring decision, said: “[t]he revenue laws have become so complicated and intricate that I think the Government in moving against the citizen should also turn square corners.” Comm’r of Internal Revenue v. Lester, 366 U.S. 299, 306 (1961), superseded by statute, I.R.C. § 71(c)(2) (repealed 2017). The Comptroller has failed to turn square corners here.
The takeaway? For procedural aspects of assessment appeals (and refund appeals, for that matter), err on the side of procedural conservatism.