© 2018 Tax Analysts. All rights reserved. Analysts does not claim copyright in any public domain or third party content. SEESALT DIGEST state tax notes® Ill-Fated Litigation: Exhausting Administrative Remedies and De Novo Review by Carley A. Roberts and Jessica N. Allen decision points early in the controversy cycle regarding the evidentiary record should litigation be pursued down the road. While exhaustion of administrative remedies and de novo review are separate principles, each can have a significant impact — either separately or together — on the viability of the claim(s) brought in a suit for refund. This article examines the underpinnings of the exhaustion doctrine and the de novo review standard and why taxpayers should be aware of their collective importance long before administrative appeals and formal litigation are afoot. Carley A. Roberts is a partner and Jessica N. II. Exhaustion of Administrative Remedies Allen is an associate in Pillsbury Winthrop Shaw Pittman LLP’s Sacramento, California, When challenging an assessment or refund office. claim denial, the available administrative relief procedures and the taxpayer’s level of In the inaugural installment of SeeSALT responsiveness during those procedures play an Digest, Roberts and Allen examine the essential role in the success of the taxpayer’s underpinnings of the exhaustion doctrine and the de novo review standard. challenge. All states, and many local governments, have specific administrative I. Introduction procedures that apply to tax controversies. While exhaustion rules vary from state to state, the Pre-litigation pitfalls exist at all stages of the general principles supporting the rules are the state or local tax controversy life cycle. Two same. principles warrant careful attention; otherwise, California, for example, has a well-defined mistakes early on can result in a taxpayer not only and long-standing judicial exhaustion of waiving a valid tax suit for refund but also administrative remedies doctrine. In 1941 the forfeiting necessary or otherwise valuable California Supreme Court held that “where an evidence. The first principle is the often administrative remedy is provided by statute, overlooked and highly jurisdiction-dependent relief must be sought from the administrative exhaustion of administrative remedies doctrine, body, and this remedy exhausted before the courts which involves determining what levels of will act.”1 The failure to exhaust administrative administrative challenge are required and how early the grounds on which a taxpayer can bring a suit for refund are established. The second 1 principle is de novo review, in which variations Abelleira v. District Court of Appeal, 17 Cal. 2d 280, 292 (Cal. 1941). The court relied primarily on its understanding of the exhaustion doctrine at among tax types and jurisdictions create critical the federal level, including citation to many federal cases, in addition to reliance on several cases from other states and six law review articles. STATE TAX NOTES, DECEMBER 3, 2018 849 For more State Tax Notes content, please visit www.taxnotes.com. SEESALT DIGEST © 2018 Tax Analysts. All rights reserved. Analysts does not claim copyright in any public domain or third party content. remedies is a limiting factor to the court’s which in turn puts the tax agency on notice of jurisdiction to hear a case.2 The rule acts as a those grounds, satisfying the notice requirement condition precedent, restricting a trial court’s established by the exhaustion doctrine. ability to find an exception to the rule.3 The principle of exhaustion of administrative A. What Administrative Remedies Must a remedies has two main components. First is the Taxpayer Exhaust? requirement that administrative appeals be Often mistaken to be simple in theory, the brought before the proper tax agency or raised at exhaustion doctrine can be complicated once put the proper administrative level before a court into practice. State and local tax rules can be considers the taxpayer’s cause(s) of action. This unclear regarding whether some levels of issue can arise in class action sales tax cases in administrative review are required, as illustrated which the class seeks to proceed against an in the following examples. individual taxpayer responsible for collecting and First, taxpayers often misinterpret exceptions to remitting a tax rather than seek a refund from the the exhaustion doctrine, causing them to skip a tax agency or vice versa, depending on the 4 necessary administrative step and head straight to jurisdiction. Second, the exhaustion of court. Incorrectly relying on an exception to the administrative remedies doctrine requires exhaustion doctrine can ultimately result in costly taxpayers to raise all issues before an and time-consuming judicial proceedings for the administrative body before subsequent judicial 5 taxpayer and may lead to a taxpayer forfeiting her review. Because exhausting administrative claim entirely. A California court of appeal in an remedies is a “procedural prerequisite” to an unpublished decision held that the taxpayers did action at law, failure to exhaust each challenge at not exhaust their administrative remedies because the administrative level can result in a waiver of a 6 they failed to challenge property tax assessments claim in later complaints. Courts are without before the local boards of equalization.9 In re 2009 jurisdiction to consider grounds not set forth in a Aircraft Tax Refund Cases involved assessments of taxpayer’s challenge to an administrative 7 personal property taxes by various California decision. Generally, the administrative level is the counties on commercial aircraft owned by the taxpayer’s opportunity to present all the issues it 10 8 taxpayers. The taxpayers did not apply for a may want the court to determine in the future, reduction in the assessments with the respective local boards of equalization.11 Instead, the taxpayers paid the personal property taxes and filed refund 2 Aronoff v. Franchise Tax Board, 60 Cal. 2d 177, 180-181 (Cal. 1963) claims with the county boards of equalization to (taxpayer did not exhaust his administrative remedy in which he filed a 12 writ of prohibition against the Franchise Tax Board while a petition for recover the taxes. The refund claims were denied rehearing was pending at the California State Board of Equalization). and the taxpayers filed individual suits for refund 3 However, a California trial court may determine whether a case falls and declaratory relief actions in a California within one of the few exceptions to the exhaustion rule, such as challenges to agency jurisdiction, inadequate administrative remedy, superior court, which were eventually consolidated. and alternative remedies granted by statute. See James E. Reed, The court dismissed the challenges, holding that the “Exhaustion of Remedies,” 56 Calif. L. Rev. 1061 (1968). 4 See, e.g., Loeffler v. Target Corp., 58 Cal. 4th 1081 (Cal. 2014); and failure to apply for a reduction in the assessments Larrieu v. Wal-Mart Stores Inc., 872 So. 2d 1157 (La. Ct. App. 2004). with the local boards of equalization was fatal to the 5 For a further discussion of this issue, see infra notes 41-69 and taxpayers’ claims.13 accompanying text. 6 In an attempt to bypass the first step of the Holland v. Union Pacific Railroad Co., 154 Cal. App. 4th 940, 946 (Cal. Ct. App. 2007). requisite administrative remedies, the taxpayers 7 Preston v. State Board of Equalization, 25 Cal. 4th 197, 205-206 (Cal. 2001) (citing Atari Inc. v. State Board of Equalization, 170 Cal. App. 3d 665, 672 (Cal. Ct. App. 1985)). 8 A limited “futile” exception to the exhaustion doctrine exists when 9 “the administrative agency is not empowered to correct the situation See In re 2009 Aircraft Tax Refund Cases, Cal. Ct. App. (4th App. Dist.) from which judicial relief is sought.” Park ‘N Fly of San Francisco v. City of Dkt. No. G053181 (Apr. 13, 2017) (not certified for publication). 10 South San Francisco, 188 Cal. App. 3d 1201, 1208-1209 (Cal. Ct. App. 1987) Id. at *1. (citing to Knoff v. City etc. of San Francisco, 1 Cal. App. 3d 184, 199 (Cal. Ct. 11 App. 1969)). For example, a taxpayer raising a constitutional challenge Id. at *2. 12 may skip administrative action and precede to the courts since an Id. administrative agency lacks jurisdiction to decide a constitutional claim. 13 Id. Id. at *3. 850 STATE TAX NOTES, DECEMBER 3, 2018 For more State Tax Notes content, please visit www.taxnotes.com. SEESALT DIGEST © 2018 Tax Analysts. All rights reserved. Analysts does not claim copyright in any public domain or third party content. relied on an exception to the exhaustion doctrine Similarly, in a California Supreme Court articulated in Westinghouse Electric Corp. v. County of decision, Williams & Fickett v. County of Fresno, the Los Angeles,14 which relied on the California State taxpayer attempted to sidestep the application for Board of Equalization’s Assessment Appeals assessment with the county board of equalization Manual.15 In Westinghouse, the California Court of and the county assessment appeals board.22 While Appeal stated that the Assessment Appeals Manual the taxpayer recognized the long-standing allowed a taxpayer challenging a property tax principle of exhaustion, it believed the exhaustion assessment to skip the application to the local board principle did not apply to its claim because the of equalization asking for a reduction in an assessment was “a nullity as a matter of law.”23 The assessment if “the