At the start of the year, state and local tax experts with Grant Thornton LLP offered 10 predictions for what to expect in 2014, and two of their top three prognostications involved the Multistate Tax Compact. Regarding University of Connecticut School of Law professor Richard Pomp's hearing officer recommendations for revising the Uniform Division of Income for Tax Purposes Act, the Grant Thornton team said that where Pomp's proposals diverge from the Multistate Tax Commission's, they foresee the MTC ultimately deciding to largely stick with its own draft amendments.
But apparently, it's one thing for those in the field to have suspected this might be the outcome all along, and another thing entirely to stand by on the sidelines and watch the MTC Uniformity Committee reject every last one of Pomp's proposals, as it did on March 12.
"That was shocking," said Greg Turner, senior tax counsel for the Council On State Taxation, who was in Denver for the two-hour vote during the MTC's winter meeting. In particular, he expressed astonishment that the Uniformity Committee "basically scrubbed all of Professor Pomp's work on alternative apportionment."
Turner wasn't alone in those sentiments. "I'm certainly disappointed they rejected his carefully thought-out recommendations," said Prentiss Willson, of counsel at Sutherland Asbill & Brennan LLP. The Uniformity Committee "rejected Pomp's section 18 recommendations as 'procedural,' as if that should be the end of the argument," he said.
"Maybe that was true in 1957, but we have a lot more experience today," Willson said. "Why shouldn't UDITPA address a point central and key to section 18 like the burden of proof just because some might characterize it as 'procedural?'"
Varying burdens of proof could lead to different results for the same taxpayer for the same years, "a result obviously at odds with the uniformity that the MTC touts itself as seeking," he said. "Moreover, it's in the MTC's interest to address issues that will attract corporate support."
The Uniformity Committee's vote on how to recommend the Executive Committee proceed with Pomp's recommendations comes at a time when the MTC is in the midst of a full-scale analysis of the organization's strengths, weaknesses, opportunities, and challenges -- a project launched three years ago. One area the MTC is studying revolves around the question of why states do or do not adopt MTC model language. Initial reasons why models are not more widely adopted include opposition from business taxpayers.
The Uniformity Committee spent several weeks meeting via teleconference to discuss those areas in which Pomp's recommendations diverge from the MTC's draft amendments; Pomp was not in attendance. During those conversations, business representatives repeatedly said that Pomp's recommended changes to section 18 on alternative apportionment could make an updated model more palatable not just for corporations but for the state legislators who ultimately would need to rally support behind the MTC's proposed amendments to pass them.
"It's interesting that they had someone as well known and prestigious as Professor Pomp as their hearing officer and didn't accept one of his proposals," said Diann Smith, counsel at McDermott Will & Emery. While some of Pomp's recommendations could be considered controversial, some of his section 18 recommendations "seemed to be rejected because they're too pro-taxpayer," she said.
It's not like business advocates even really consider Pomp to be one of them. For all the times he has testified as an expert witness on behalf of the taxpayer's position, Pomp for years at conferences has notoriously played the pro-state foil to some of the most prominent corporate tax advisers in the business. It's no secret that Pomp is in many ways the MTC's go-to guy when the organization needs an outside advocate, which makes the Uniformity Committee's rejection of his suggestions even more curious to some observers.
"It really surprises me because Professor Pomp offers very pragmatic solutions to some difficult questions facing both taxpayers and tax administrators," added COST Executive Director Doug Lindholm.
Lindholm said he believes part of the issue is that first drafts of MTC uniformity proposals tend to be written by a select few tax administrators without any outside collaboration on the front end. Those drafters naturally will be invested in the outcome of their draft, and are therefore undoubtedly more reluctant to accept other ideas. "I might have suggested they start with Professor Pomp's report as their initial draft instead of their own draft," Lindholm said.
According to MTC Executive Director Joe Huddleston, Pomp will be invited to join the Executive Committee at its May 8 meeting. Regarding comments Pomp made to Tax Analysts about wishing to examine the content of the Uniformity Committee's series of teleconferences, Huddleston said the MTC generally only takes notes and does not transcribe phone proceedings.
"The role of the hearing officer has been carried out very well by Rick and I much appreciate his work," Huddleston said. "The Uniformity Committee has also done a great job on a very complicated project. The Executive Committee now has its job to do and I am sure that they will also perform well.
"Everyone has a role to play. Some have taken the opportunity to be heard and have input; others have not," Huddleston continued. "The MTC has followed its processes from day one and I am confident that we will continue to invite input and discussion on these important issues."
With that, Pomp -- State Tax Notes' "Person of the Year" for 2013 for his work as the MTC's hearing officer on this project -- reflects on the Uniformity Committee's proceedings.
A Q&A With Pomp
Tax Analysts: Is it true the MTC never asked you to join the Uniformity Committee meetings to discuss your report?
Richard Pomp: True. I was a bit surprised. I assumed I would have been brought into the discussions and found out they were occurring only when State Tax Notes contacted me and when third parties monitoring the proceedings started to call me rather concerned about the nature of the MTC discussions.
I assume this was an oversight. Hearing officers are normally on MTC staff. Obviously, internal hearing officers would know when the Uniformity Committee was meeting and I suspect it's simply that no one thought of notifying me. I learned later that the meetings were posted on the MTC home page -- I just didn't check that site, assuming I would have been notified personally. As it turns out, the Tuesday meetings of the Uniformity Committee conflicted with my teaching schedule.
TA: What were the people who contacted you concerned about?
Pomp: Quite a few things. It seemed the meetings were dominated by a very few individuals. There were misstatements of Supreme Court jurisprudence, such as stating that the term "regular" in the existing definition of business income was required by the U.S. Supreme Court. The report suggested removing that term to avoid needless litigation.
There were misunderstandings of what was in my report, or perhaps a failure of some to have read the report -- understandable because it is quite lengthy and dense. Nontax folks might even think "boring." Statements were made suggesting there was a mandate to change as little as possible in the Uniformity Committee's draft.
Rather trivial situations were being used to obscure larger issues; put differently, letting very small tails wag big dogs. I was told there was the repeating of mantras like "the sales factor is supposed to reflect the market," a proposition the Supreme Court has never endorsed and which should be the start of any analysis and not a substitute for analysis. Also, the idea that UDITPA should not deal with procedural issues, which, if anything, should be the starting point and not the ending point of any analysis in 2014.
Almost everyone who contacted me commented that the tone of the discussions was "Let's find a reason to ignore the report," rather than "Let's see what can be done to work with it." But these are secondhand reports, albeit consistent with each other. We should all hold off judgment until some kind of transcript is released so everyone can see exactly what occurred and evaluate the quality and nature of the discussions.
TA: Other than what you heard from third parties, do you have any independent support to those views?
Pomp: I think a State Tax Notes article on one of the meetings ("News Analysis: Will the MTC Adopt Pomp's Equifax-Driven Recommendations?") supports what I was told.
I think many of the comments in that article illustrate why third parties have been so disappointed with the discussions. Consider one comment in the piece: "State participants also repeatedly said that most states already have general statutes or rules dealing with burden of proof and the application of penalties." I am not sure what the point is supposed to be. In 1957, when UDITPA was adopted, most states already had general statutes dealing with apportionment and allocation. That did not keep UDITPA from addressing those issues to further uniformity.
In any event, I do not think that most states have penalty statutes that address the unfairness of imposing penalties on taxpayers who actually follow the law. Just think about Mississippi. The Department of Revenue, upheld by the Mississippi courts, held that Equifax should be penalized because it did not request permission to deviate from the tax department's own regulation and pay more tax than the regulation required. Is the business community the only group to see the absurdity in that position? I would like to think the states had statutes that prohibited penalties in this situation, but many taxpayers claim otherwise, which is why they wanted the report to address that issue.
The article also reported, "Participants also said that while Equifax is the immediate background noise, the case is an anomaly, and that many of Pomp's recommendations are already common practice in most states anyway."
If many of my recommendations are already common practice in most states, someone forgot to tell all the taxpayers that contacted me as hearing officer to ask that these issues be specifically addressed. I'm not sure it's fair to dismiss these concerns or to act like these taxpayers, which are some of the biggest corporations in the country and do business in most states, aren't being reasonable when they express doubts about whether these recommendations are "common practice."
But let's assume that they are common. What is the harm in reaching out to the business community and incorporating these "common practices" in UDITPA? If we expect legislatures to adopt the MTC changes, wouldn't it make good sense to try to have allies in the business community? Isn't it about time we got over the "we" versus "them" mentality?
TA: Anything else in the article that supports what you were hearing?
Pomp: People were also upset by the view expressed by one leading tax administrator that if the same section 18 adjustment is made on two taxpayers, a regulation must then be issued. The article quotes him as stating that "if such an adjustment is being made with more than one taxpayer, in terms of either transaction type or industry, then it's no longer an audit circumstance and has to be addressed through a regulation."
But consider what the report actually said:
On the one hand, if alternative apportionment were limited to unique, non-recurring, isolated situations, few would argue that a tax department should publish that result in a regulation -- there would be no value in doing so because few, if any, other taxpayers would care.
On the other hand, a position on alternative apportionment that has broad application to an entire industry and was intended to be applied generally and uniformly to that industry should be published as a regulation. (Indeed, a state's administrative procedures act might require that a regulation be issued under these circumstances.) These are two bookends between which a wide variety of situations can arise.
[. . .] The Draft implicitly and only weakly serves the goals of transparency, notice, and even-handed treatment of similarly situated taxpayers by allowing, but not requiring, the tax administrator to establish appropriate rules or regulations if the alternative apportionment affects all taxpayers engaged in a particular industry or in a particular activity. The Hearing Officer believes that the goals of the democratic process and sound principles of tax administration are best served if alternative apportionment of general and widespread applicability is required to be established as a rule or regulation, which must be applied uniformly.
Finally, nothing in the Draft or the discussion above would affect a tax department's normal procedures of issuing non-binding guidance on how it will treat certain transactions or industries. A department should be free to explore various preliminary approaches as it gathers experience and sharpens its understanding of taxpayers and their business practices, and to provide early guidance to the public.
I am baffled by how anyone would get a "two taxpayer" rule out of the report.
TA: What about the comments on your proposal that the burden of proof in a section 18 case should be on the party -- taxpayer or tax department -- seeking alternative apportionment?
Pomp: The report shows that this approach is a deeply engrained feature of American jurisprudence. But apparently to try to show how that approach is wrong, one state tax administrator offered the example of sham transactions, in which it's very unusual for the burden of proof to be on the state.
I do not view the sham transaction doctrine, step transaction doctrine, business purpose doctrine, and the like as having anything to do with equitable apportionment. To the contrary, in the context of penalties, the report clearly states:
This approach is not intended to prevent a tax department from imposing penalties in tax avoidance situations. A tax department can continue to argue a transaction is a sham, lacks economic substance, does not reflect arm's-length pricing, violates the step transaction doctrine, and the like. A state may also have adopted special penalty statutes dealing with tax avoidance. The hearing officer does not intend that violations of these statutes or anti-abuse doctrines would be precluded. Such situations and the concomitant penalties are outside the Act.
TA: Your section 18 proposals have been criticized for precluding a state from requiring a taxpayer to be consistent from year to year. Is that a correct view?
Pomp: A tax administrator quoted in the article said:
Most state apportionment rules are uniform in also requiring that the taxpayer apply the alternative apportionment rule consistently year to year, and that there's nothing in Pomp's language that would allow the state to go back in and revisit what the taxpayer is doing if the taxpayer receives approval to use an alternative method but is then inconsistent in the way it responds to that approval.
I am not sure why anything in the report would be viewed as superseding any state consistency requirement. The report does not prohibit this. The report does not address that. But that statement is a wonderful example of looking for anything that could be used to reject the report and the tone that third parties tell me was common throughout the discussions.
What is interesting about all of these quotes is the mindset they reflect. Instead of saying, "Maybe we, the Committee, should simply add a caveat to a valid point in the report," the tone seemed to be, "Let's find some counterexample, whether valid or not, so we can ignore the report."
TA: Your report recommended that permission that has been granted to a taxpayer under section 18 to file in a particular way should not be revoked unless there has been a material change in the facts or a material misrepresentation. That was opposed, again on the grounds that it is unnecessary. What is wrong with that position?
Pomp: Tax administrators again said this is "normal practice in most states" and thus there is no need to change UDITPA. I would like to think this reasonable position was the common, typical practice because it quite appropriately protects a taxpayer's legitimate reliance interests and prevents a bait and switch. On the other hand, another tax administrator implicitly contradicted this position by stating that if the proposal were adopted, "We'll be arguing a lot about what material change or misrepresentation in facts are going to be as opposed to what the correct apportionment method is." But again, this "normal practice" is not the experience of many in the business community that raised this issue as a problem area to be addressed.
My reaction is the same as the penalty issue: If it is the common practice, then what is lost by offering an olive branch to the business community? Why should the MTC continue to marginalize itself?
TA: If the MTC Executive Committee follows the recommendations of its Uniformity Committee, would the MTC be missing an opportunity?
Pomp: Sadly, yes. The states and the business community have a great opportunity because of the current leadership of the MTC and COST.
The younger people in the field may not know that there was a time when the MTC and COST would not appear together on the same programs at conferences, yet Joe Huddleston and Doug Lindholm shared the dais recently and played to rave reviews at the February Deloitte national symposium in Orlando.
Joe and Doug are charismatic leaders -- sophisticated and powerfully bright. They have a healthy respect for each other's challenges and viewpoints. Nobody thought this project would be easy. But we have the chance to engage in the necessary debate and discussion to try to move the project forward.
To be sure, both Joe and Doug have difficult constituencies to deal with. Maybe they will never hold hands and sing "Kumbaya" together, but to continue their traditional adversarial relationship will be tantamount to simply moving around the deck chairs on the Titanic. The country has legitimate problems facing it. The MTC and COST -- and more generally, the states and the business community -- should be part of the solution and not be engaged in internecine warfare.
TA: You've indicated your disappointment with the MTC Uniformity Committee's rejection of your proposals. What were your expectations?
Pomp: Nothing in the report has the right to be adopted just because of the work that went into it. All I could reasonably expect was that the report be studied in depth and in detail commensurate with the efforts of everyone that worked on it; that the rationale for each proposal be understood and fairly debated in a dispassionate, unbiased, even-handed manner; that the debate occur in a spirit of good faith; that this be viewed as a joint venture with the common goal of making the MTC draft as good as we can. That was certainly the spirit in which the project was undertaken.
I hoped the Uniformity Committee would be open to new paradigms to deal with a different environment from 1957, when UDITPA was first adopted. That's key. It has been 57 years since UDITPA was adopted; who knows how many decades before we undertake another project to reexamine it?
Having done my share of drafting for states, Indian tribes, and developing countries, there was nothing I ever did that could not be improved on by others. I am somewhat surprised and disappointed that there was not a scintilla in the report that merited adoption.
TA: Have you heard from taxpayers about the actions of the Uniformity Committee?
Pomp: There was a lot of "we told you so." I probably feel worse about that than anything else. With the support of Joe, I engaged in the broadest outreach that ever took place in the context of a hearing process. I cajoled, coaxed, and called in some IOUs to get many taxpayers and their representatives to participate in this project. Almost none of them wanted to work on this, convinced their efforts would be wasted. They have felt isolated by the MTC in the past and did not want to throw good money after bad.
If you look at who participated in the project -- and many others participated on an anonymous basis -- it was a veritable "who's who" in the field. Many had more than 40 or 50 years of experience. They consisted of tax lawyers, academics, tax managers, past and current tax administrators, and the like. They spent hours vetting each iteration of the report as only a group like this could. And yet apparently there was not a nugget worth incorporating into the committee's draft.
TA: Will you testify should a legislature hold hearings?
Pomp: The Executive Committee will be the final arbiter of what goes forward. I hope I will have a chance to meet with them personally.
Whatever the Executive Committee does, my only wish is that a legislature will receive a balanced view of the issues, understand the arguments on each side, and appreciate what the report actually said and its analysis.
I have a long history of working with the MTC, dating back 35 years, when Gene Corrigan, the executive director at that time, asked me to work with then-Sen. Frank Church in stopping the proposed U.S.-U.K. tax treaty. That treaty contained a provision that would have prohibited worldwide combined reporting. We got that provision dropped and the treaty was subsequently ratified.
That started a long relationship with the MTC. Nearly half my consulting has been on behalf of the states, most recently in Tesoro Corp. v. Alaska. But that means more than half my consulting has been for taxpayers, and that has ruffled some feathers. One thing I learned, however, is that no one has a monopoly on wisdom or on the moral high ground.
Ironically, when I contacted many in the business community to participate in this project, their initial reaction was that I was simply shilling for the MTC. I suspect that others thought I was shilling for the business community. I hope that kind of "balance" is reflected in the report.
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