Dow Lohnes Price has significant experience with audit management and favorable dispute resolution in states across the country. We are committed to resolving all issues at the lowest possible level and to engage state officials in a manner which will allow for an impartial review and fair consideration of the strength of your position. The following is a sampling of our experience and results.
- Following the inability of New York consultants to mitigate a combined filing assessment of a non-client taxpayer, Dow Lohnes Price was given three days to review New York's assessment and workpapers, as a last ditch effort, to determine if the taxpayer has any "outs." After thoroughly reviewing all facts related to the taxpayer's structure, Dow Lohnes Price realized that the auditors' computations excluded the flow-through of partnership receipts in the substantial intercorporate transactions calculation. Upon the the inclusion of additional partnership receipts, the taxpayer's intercompany transactions fell below the 50% threshold for distortion, and New York quickly abandoned the combined filing position and its tax assessment of over $300,000. Other strategic arguments presented by Dow Lohnes Price and accepted by the auditors included affirmative positions related to "interest deductions indirectly attributable to subsidiary capital," which not only increased the taxpayer's preapportioned New York net operating loss carryforwards by approximately $88 million, but also provided additional deductions for post-audit periods. By removing the original tax assessment and garnering additional tax attributes, the taxpayer received total tax benefits of approximately $680,000.
- Dow Lohnes Price was engaged by a client upon receipt of a $940,000 assessment from the State of South Carolina primarily regarding the nexus of a certain entity that had not previously filed returns in South Carolina. Essentially, South Carolina assessed an out-of-state factoring company, sourcing its receipts to the location of the customer that originally generated the accounts receivable. Utilizing a multilevel approach, Dow Lohnes Price initially reduced the assessment by more than 25 percent by correcting improper computations with respect to unrelated issues. Dow Lohnes Price then presented a new position to South Carolina based on current court cases, economic analysis, and other developed strategies in order to establish the real issue as one of fair apportionment, as opposed to nexus. Based on the true business activities occurring in South Carolina and discussions held with the South Carolina Department of Revenue, the entire assessment was removed.
- After first correcting audit errors and reducing the original $2.5 million assessment by $0.9 million, Dow Lohnes Price prepared and presented a comprehensive position package in opposition to North Carolina's assertion that the out-of-state operations of a 25 percent corporate partner should be subject to tax based on its share of the partnership's North Carolina apportionment factors. While North Carolina relied heavily on the "directly or integrally related" language of regulation T17:5C.1702 and its Perkins decision [Secretary of Revenue Decision No. 97-548], in addition to putting forth technical analysis of all applicable statutes, regulations, and case law (federal and state), our package included supporting evidence and exhibits proving there was no unitary relationship between the partnership operations and the corporate partner and that the partnership investment did not serve an operational function to the corporate partner. In the end, North Carolina walked away from its remaining $1.6 million assessment and the taxpayer was left owing nothing.
- Dow Lohnes Price was asked to prepare separate "nonbusiness income" support packages for a variety of investments, the income from which New Hampshire auditors deemed to be "business income" and included as such in its overall audit assessment. These investments ranged from simple minority stock investments, to 50/50 partnership interests, to very complex derivative instrument holdings (e.g., investment monetization debt structures). A comprehensive package was prepared for each investment depicting applicable investment summary and background facts, income recognition and reporting, proper application of state and Constitutional law, and supporting evidence and exhibits. In the case of the derivative instruments, further analysis was prepared in order to adequately explain and "simplify" the structures. In addition to utilizing these packages to ultimately derive favorable settlement terms within the overall New Hampshire audit, the packages were prepared in such a way to be universally used in other state jurisdictions where these same investments and transactions will surely be examined and scrutinized.
- After local counsel worked for 10 years to reduce a Louisiana assessment by a mere $250,000 on a $2.7 million issue, Dow Lohnes Price was brought in at the request of the taxpayer to move the 18 year old case along. Upon gaining an understanding of the legal issues involved, performing numerous reconciliations, and the development of an appropriate strategy, Dow Lohnes Price presented to the Office of Attorney General, the Louisiana Department of Revenue ("DOR"), and the DOR's outside counsel, ultimately resulting in an additional assessment reduction of $1,250,000. Due to the taxpayer's satisfaction with the current offer, the taxpayer's desire was to accept settlement. However, Dow Lohnes Price assisted in convincing the taxpayer to issue a counteroffer, resulting in an additional $300,000 concession by the State.
Because of Dow Lohnes Price's persistence and innovative approach, the assessment was reduced by an additional $1.5 million in just over a year's time.
- Dow Lohnes Price successfully obtained a favorable New Mexico informal gross receipts tax ruling indicating certain journalism-related activities and certain printed material distribution activities did not create nexus in New Mexico. In addition, the ruling confirmed that for magazines published out-of-state, the gross receipts for advertising space are not taxable.
In this case, the taxpayer, a non-filer, was prepared to voluntarily remit gross receipts taxes to the state and requested that Dow Lohnes Price assist in a managed audit/voluntary disclosure to accomplish same. Upon review of all of the facts and the applicable statutes, Dow Lohnes Price convinced the taxpayer to first obtain a ruling instead of remitting any tax, interest, or penalty. After preparing the informal ruling request with all of the facts and relevant legal analysis, Dow Lohnes Price engaged in conferences with the New Mexico Taxation and Revenue Department. As a result of these efforts, the nexus and tax determinations were favorable to the taxpayer, avoiding the remittance of approximately $700,000 in gross receipts tax for the years at issue, exclusive of interest and penalties.
- Through the defense of multiple taxpayers’ investment income, gains, and transactions, Dow Lohnes Price has gained significant and invaluable experience in the nonbusiness income arena. In numerous states, Dow Lohnes Price has successfully defended nonbusiness income, gains, and partnership flow-through items by developing and supporting a variety of constitutional and statutory arguments, including:
- a unitary relationship must exist between an investor and an investment before the investment can generate business income;
- the use of proceeds is not relevant to a nonbusiness determination;
- the form in which an investment is made (i.e., separate corporation, partnership, or even a division of the investor) is not a determinative factor in a business/nonbusiness analysis;
- high level involvement by investors does not, on its own, create a unitary relationship with an investment;
- a pattern of acquiring and disposing of investment interests does not convert investment income into business income;
- the ability or intent to control an investment is not sufficient for a business income determination if actual control is not exerted;
- merely investing in related or similar businesses and industries is not indicative of business income;
- intercompany transactions do not create a unitary/operational function relationship if the nature of the transactions is arm’s-length;
- the initial business reason or purpose for making the investment is not as relevant as the investor’s actual use of the asset in question; and
- generally, less than 50 percent owned and controlled investments which are held long-term represent nonbusiness income.
- Dow Lohnes Price successfully defended the use of the cost of performance method in computing a taxpayer's sales factor for Illinois purposes. During the two audit cycles at issue, Illinois auditors argued that a market-based sales factor more accurately reflected the taxpayer's activities in Illinois. After taking the issue to the Illinois Informal Conference Board, Dow Lohnes Price accumulated and supplied documentation supporting the fact that the majority of the taxpayer's cost of performance occurred outside of Illinois (pursuant to 35 Ill. Comp. Stat. 5/304(a)(3)). Illinois ultimately conceded the issue in its entirety, resulting in the elimination of approximately $2 million in assessed tax, interest and penalties. Since the taxpayer had the same issue in open tax years not yet under audit, the taxpayer avoided additional potential assessments of approximately $1.6 million in post-audit tax years.
- A multi-year assessment was issued against a non-filing taxpayer under a Geoffrey nexus argument. Dow Lohnes Price protested the assessment on three grounds: 1) nexus did not exist since the economics of the transaction occurred outside of South Carolina; 2) the sourcing of the sales were inappropriate based on where the income-producing activity occurred; and 3) the tax liabilities would be more clearly stated by filing a combined report. Ultimately, cross motions for summary judgment were filed as to whether South Carolina could allow for combined filing in a unitary context. Based on its long-standing policy and a South Carolina Supreme Court case, the state argued that it could not allow for a combined report even if distortion existed. In further representing the client, Dow Lohnes Price managed local counsel at trial, contending that the South Carolina alternative apportionment statutes, which are equivalent to UDITPA Section 18, allow for a combined report filing upon a determination of statutory distortion. Our position was affirmed by the Administrative Law Court, thereby reducing the assessment by more than 85 percent. Additionally, we successfully negotiated with South Carolina to utilize a combined apportionment approach for the license fee computation based on statutory authority.
The South Carolina Department of Revenue appealed the case to the South Carolina Supreme Court. Dow Lohnes Price managed the entire process of defending the taxpayer's position before the South Carolina Supreme Court and organized the case for local counsel to argue before the Court. The South Carolina Supreme Court affirmed the Administrative Law Court decision and held that the combined filing methodology was an acceptable alternative apportionment method.
The scope of services provided in this case included, but was not limited to, performing numerous computations and analyses to determine the best alternative apportionment method, materially reducing the assessment by correctly re-sourcing the location of sales in the apportionment factor, negotiating stipulations of fact favorable to the taxpayer, quantifying and proving the degree of distortion, and drafting legal briefs for the trial and appellate levels. As the Department of Revenue had specifically marked this case for trial, we were not able to settle it at a lower level.
- After two Big Four firms and two boutique firms had already looked for potential benefits, Dow Lohnes Price identified Texas margin tax savings in the amount of $300,000 per year. These results were achieved due to Dow Lohnes Price's expertise and knowledge of this particular industry, a proper understanding of the accounting principles that govern certain items, and a thorough analysis of how these components fit within the new Texas taxing structure.
- Recently Dow Lohnes Price reached settlement in a case with Geoffrey arguments regarding royalty companies that had not filed in the State of Wisconsin despite the use of intangibles within the state. Even with the landslide of recent taxpayer adverse decisions involving Geoffrey issues, Dow Lohnes Price obtained a six figure reduction in the assessment, resulting in a favorable resolution of the case.
- Shortly before the lower court ruling in VFJ Ventures (which was favorable to the taxpayer), Alabama rejected Dow Lohnes Price’s alternative apportionment request in response to Geoffrey-based assessments for a client’s intangible holding company activities. Subsequent to the initial VFJ Ventures favorable ruling, and based on our evaluation that this lower court decision would not likely hold up on appeal, Dow Lohnes Price re-introduced the same alternative apportionment position to a more “receptive” Department of Revenue that ultimately acquiesced. As anticipated, the VFJ Ventures decision was later overturned, resulting in a significant benefit for the client due to our strategic handling of the case.
- Due to our identification and analysis of significant tax issues for a Fortune 100 company, Dow Lohnes Price was engaged to provide dispute resolution services in connection with a Massachusetts audit of approximately 35 entities that contained an assessment in excess of $300 million (the largest tax case in Massachusetts’ history). Throughout our six years of involvement in the case, our services included, but were not limited to:
- performing tax computations and analyses providing a strategic direction for the proper ordering and assertion of various arguments;
- research, analysis, and planning to support positions taken;
- preparation and review of 26 Applications for Abatement setting forth taxpayer’s statutory and constitutional positions regarding a number of issues including commercial domicile, valid debt, combined filing, and non-business income, to name a few;
- participation in exit conferences with the auditors and hearings before the Office of Appeals;
- interviewing key executives and securing affidavits in support of taxpayer’s arguments;
- searching through archived files for relevant documentation and responding to discovery requests;
- assistance in preparation and/or review of statement of agreed facts, briefs, and other court filings; and
- working closely with attorneys in continued development of the case and preparation for trial.
The case was ultimately resolved through a favorable settlement.
- In a multimillion dollar case which was previously being handled by a prominent law firm in South Carolina, Dow Lohnes Price was the only party capable of reconciling the interest expense deductions claimed with the general ledgers and intercompany notes, thereby establishing the accuracy and validity of the deductions claimed for book and tax purposes. In addition, Dow Lohnes Price drafted and filed the protest and held meetings with the South Carolina Department of Revenue, resulting in the removal of over $1 million in penalties. Ultimately, the case was settled in favor of the taxpayer.
- Leveraging prior wins in Illinois, and despite opposing advice, strategy, and approach from client’s “Big 4” advisors, Dow Lohnes Price successfully resolved three separate open audit cycles in California by supporting a combination of “line of business” and “overall” unitary approaches, resulting in tax and interest savings of approximately $21 million. The decision to take this approach was born from our analysis and evaluation of the entire open period tax liability resulting from each of the potentially available filing options and the effect of same on subsequent periods. Much of this work was also leveraged for the same client in Arizona to achieve a $4.4 million refund.
- Dow Lohnes Price is currently appealing an Illinois audit where the client was assessed $12.1 million based on a reclassification of nonbusiness income to business income and a forced unitary combined filing. Through careful review of the auditor’s workpapers, analysis of the sourcing of apportionment factors, and the substantiation of various net operating loss and capital loss utilization, Dow Lohnes Price was able to reduce the assessment by $7.5 million before dealing with the substantive legal issues. Additionally, after the Informal Conference Board had issued its opinion, the audit supervisor met with us at our request to discuss the issues in the case. Upon submission of additional evidence at the meeting, Dow Lohnes Price convinced the supervisor to perform an additional review and give fresh consideration to the remaining issues prior to forwarding the case to the next level. The meeting itself, and the supervisor’s willingness to reconsider un-agreed issues after a hearing, are highly unusual actions which demonstrate Dow Lohnes Price’s commitment to resolve disputes at the lowest possible level and to consider non-conventional approaches to achieve effective advocacy.
- Oregon argued the flow-through of partnership apportionment factors to a holding company that was unitary with its parent and affiliates but was not unitary with its partnership investment. Oregon’s assessment was merely an attempt to tax the nondomiciliary income of the consolidated group. Dow Lohnes Price argued this case using recent U.S. Supreme Court cases, Commerce Clause arguments, and non-unitary factual support. A settlement was ultimately achieved whereby taxes, interest, and penalties were reduced in excess of $700,000 for the audit years and later periods. Ancillary to our settlement negotiation preparation, diligent research and analysis resulted in a current year filing position to source a particular gain outside of Oregon for which estimated taxes had already been paid. Upon convincing Oregon of the taxpayer’s position with respect to this gain, Dow Lohnes Price successfully negotiated an offset of the current year’s refund with the taxes and interest assessed from settling the earlier years. The result was a net refund for the taxpayer.
- In North Carolina, Dow Lohnes Price identified, introduced, and substantiated a multi-year nonbusiness income refund position (100 percent of the income tax previously paid) at the audit level for a Maryland taxpayer receiving income from a flow-through entity with operations located in North Carolina. Similar successes for this client have been achieved in Pennsylvania.
- In a dispute with another party over an Arizona audit covered by a tax sharing agreement, Dow Lohnes Price assisted a client in proving that its counterparty’s defense was inadequate to justify full payment through indemnification. Under the terms of the agreement, our client’s counterparty was responsible for the management and defense of the Arizona audit which covered several nonbusiness items for the years at issue, while our client was liable for a significant portion of the tax liability resulting from the settlement of the audit. However, upon our review of the correspondence submitted to the state, it became evident that the facts and positions advanced by the counterparty’s attorneys contained errors and other material inadequacies. As a result, our client’s final payment under the tax sharing agreement was reduced by $600,000, representing a reduction of approximately 50 percent from the amount originally asserted.
- Dow Lohnes Price was engaged to assist with the defense of a $21 million federal tax assessment resulting from the IRS’ capitalization of interest on cable rebuilds, having represented another top five cable company on the same interest capitalization issue. After gathering a significant amount of detailed information pertaining to the identification, cost, and description of each and every component used in the upgrade or rebuild of a cable system, several meetings with engineers to assist us in the process, and preparing a report and live presentation to ten officials from the IRS National Office, Dow Lohnes Price was able to convince the IRS that the actual amount of interest that should be capitalized on the cable equipment during its relatively short construction period was just $1.2 million for the period under audit (a tax reduction of approximately $20 million). Since our presentation, the IRS has not revisited the issue, nor assessed additional taxes related to this issue.
- While defending a large taxpayer in a unitary audit consisting of multiple issues, Dow Lohnes Price identified, filed, and sustained a refund claim relating to the client’s property factor used for apportionment purposes. The affirmative claim was due to the taxpayer’s use of a top-sided elimination company to record fair market value adjustments for a merger that occurred six years prior to the years at issue. Although the fair market value adjustments were made in accordance with GAAP for financial statement purposes only, the taxpayer erroneously included these adjustments in arriving at its California numerator and everywhere denominator for its property factor. Since the merger adjustments only affected property outside of the state and California statutes dictate the use of original cost, Dow Lohnes Price was able to increase the everywhere property factor, thereby reducing the income tax paid by approximately $750,000 for the years under audit.
- Dow Lohnes Price successfully resolved and settled a New York City audit for a taxpayer where the proper amounts utilized for the payroll factor were at issue. The taxpayer owned an interest in a partnership that conducted business in New York City and California. However, the partnership did not have any employees of its own, since all work performed on behalf of the partnership was conducted by the other partner who properly reported these wages for payroll factor purposes on its New York City corporate income tax return. Since the partnership did not have any employees of its own; the partnership did not issue any W-2s or report any wages to New York City; and the other partner properly reported the partnership-related wages for income tax purposes to New York City, Dow Lohnes Price was able to negotiate a very favorable settlement for the taxpayer.
- In representing a broadcaster who received a gross receipts tax assessment from the City of Atlanta, Dow Lohnes Price convinced the City that it did not have a legitimate position. The City had assessed the broadcaster on its receipts from advertisers located outside of Georgia. Contending that a broadcaster should pay its license fee to Atlanta based on where the broadcast is received, the City had overlooked the statute which specifically addressed an exception for out-of-state customers. Dow Lohnes Price was able to establish a solid position, proving that the vast majority of the regional and national sales, and sales generated by a national rep firm, constituted sales to customers located outside the state. After considering these arguments, the City discontinued its pursuit of the assessment.
- After the Pennsylvania Department of Revenue issued jeopardy assessments for ten years worth of income tax on a non-filer who had trucks delivering into and traveling through the state, Dow Lohnes Price successfully worked with the nexus group in using an alternative Pennsylvania apportionment method, thereby reducing a six figure jeopardy assessment to approximately $16,000.
- A client was issued an assessment by the state of New York disallowing interest expense reported by various partnerships in which the taxpayer was a partner. New York attempted to exercise its discretionary authority to make an adjustment under New York Tax Law Section 211.5 by asserting that the taxpayer had “improperly or inaccurately reflected” its income. By successfully proving that the taxpayer’s interest expense was based on arm's length rates, qualified as a valid deduction under IRC Section 163, and was not between related parties, Dow Lohnes Price was able to demonstrate that New York did not have the authority to exercise its discretionary powers to make an adjustment in this case. The result was the removal of an assessment in excess of $200,000.
- During a Florida audit, the Florida Department of Revenue issued a notice of proposed assessment in an attempt to disallow interest expense on a client’s intercompany loan. Dow Lohnes Price successfully convinced Florida auditors that the intercompany loan was valid debt. Thus, 100 percent of the interest expense was allowed as a deductible business expense. A second issue in the audit pertained to intercompany payments to an intangible holding company. Florida sought to force a combined filing between the out-of-state intangible holding company and the Florida taxpayer. After projecting the Florida tax impact in prospective periods for all companies in addition to the impact for the periods under audit, Dow Lohnes Price correctly convinced the Florida Department of Revenue that while Florida’s statutes did allow for combined filings in this situation, it could require separate company filings under its Geoffrey statutes. The successful resolution of these issues saved the client several million dollars in tax and interest for the audit period and later years.
- While assisting a client with a Minnesota audit, Dow Lohnes Price identified several stock gains which qualified for nonbusiness treatment. Dow Lohnes Price managed the refund application process by gathering support for nonbusiness treatment, assisting the client in filing refund claims, and responding to follow-up questions from the auditor. Due to Dow Lohnes Price’s identification and management of this refund opportunity, the client received refunds, including tax and interest, of slightly over $1 million.
- In a New York State audit, the auditors contended that “distortion” was presumed to exist due to intercompany transactions between related parties. Using this distortion position, the auditors stated that all related entities in the same line of business must file a combined New York State return, which resulted in a proposed audit assessment of approximately $1.5 million of tax and interest. Dow Lohnes Price convinced the auditors that under New York statutes and regulations in effect for the years under audit, “distortion” cannot be presumed unless 50 percent of a corporation’s receipts or expenses are incurred between related entities. After Dow Lohnes Price proved that no more than 30 percent of any entity’s expenses were incurred between related parties and no intercompany sales existed, the auditors conceded that distortion did not exist and never issued a notice of deficiency related to the combined filing issue.
- In a complicated nonbusiness case, Dow Lohnes Price convinced the Iowa Department of Revenue that gain on the sale of a Pennsylvania business was not apportionable to Iowa, even though it was in the same business and in the same legal entity as the Iowa taxpayer. Dow Lohnes Price won this issue by supplying information and documents to prove that no operational link existed between the Iowa and Pennsylvania businesses. Although both businesses were operationally linked to the same corporate parent, Dow Lohnes Price prevailed by maintaining that the relationship between the business in Iowa and the parent corporation had no bearing on the issue, since the parent corporation did not have nexus in Iowa. After proving a lack of any operational links, Iowa agreed and issued a six figure refund.
- In a Massachusetts audit, the auditors proposed to recharacterize a taxpayer’s $13.4 million intercompany loan from its parent corporation as an equity contribution and disallow the related interest expense deduction. Dow Lohnes Price argued that the loan was valid debt by proving that the taxpayer had sufficient cash flow to repay the debt, had acceptable debt-to-equity ratios, and that the loan was justified due to the acquisition of fixed assets by the taxpayer in subsequent years. After considering the arguments presented by Dow Lohnes Price, the taxpayer and the auditors entered into a settlement agreement which was significantly favorable to the taxpayer.
- Dow Lohnes Price successfully defended refund claims for intercompany management fees that were inadvertently omitted from the originally filed income tax returns. The filing of these refund claims highlighted the management fees and subjected them to additional scrutiny. Dow Lohnes Price was able to prove that the management fees were based on actual expenses and allocated to subsidiaries under I.R.C. Section 482 and the regulations promulgated thereunder. Due to the successful defense of these management fees, the taxpayer received refunds of over $200,000 from Ohio and Wisconsin.
- During a North Carolina audit, Dow Lohnes Price convinced the auditors that management fees allocated from an out-of-state parent company to a North Carolina subsidiary were appropriate. The auditors were supplied with a detailed summary of the items covered by the management fee and the methodology used for allocation purposes. Since Dow Lohnes Price was able to prove that the amounts and allocation techniques were accurate and in accordance with the principles of I.R.C. Section 482 and the regulations promulgated thereunder, no assessment was issued. The taxpayer received a refund of approximately $63,000 for one tax year where the management fees were not claimed on the original return and received a “no change” on the additional years under audit.
- After a client received a Kentucky notice of assessment requiring an addback of expenses related to nontaxable income, Dow Lohnes Price convinced the auditors that Kentucky’s addback calculation was unreasonable and distorted the proper amount of expenses attributable to the nontaxable income. Dow Lohnes Price successfully proposed an alternative addback calculation which reduced the final payment to an immaterial amount.
- In a complicated Texas sales and use tax case, Dow Lohnes Price negotiated a favorable settlement agreement regarding the printing and distribution of direct mail advertising. The case involved the use of tangible personal property purchased out-of-state and used in Texas, including samples, marketing materials and extras. Other issues included use tax on advertising purchased from a related entity and sales tax on advertising sold to customers. After a thorough explanation of the facts and the taxpayer’s business arrangements and a proper application of the statutes, Dow Lohnes Price was able to reduce the assessment in excess of $600,000.
The key to the success of Dow Lohnes Price is analysis of all tax and financial issues simultaneously, thereby resulting in the best advocacy for our clients. This approach is vital in successfully resolving assessments in the current state tax environment.