In what is hopefully one of the last of the old modifiable decisions in tax cases by North Carolina Administrative Law judges, the NCDOR allowed the ALJ to relieve a shareholder of transferee tax liability, but still modified the ALJ opinion. 10 REV 04058; Cherry v. Dep’t of Revenue (May 16, 2012).
The Case: The DOR wanted to collect a corporation’s sales taxes from one of its shareholders. The corporation had operated a restaurant that closed. The DOR auditor caused the petitioner Cherry to sign sales and use tax forms after the fact. When the taxes were not paid the DOR attempted to collect them from Cherry under the “responsible person” statute. The ALJ rejected the DOR claims due to Cherry’s lack of control over the day to day operations of the corporation.
The Administrative Hearing Features of the Case: As it was allowed to do for ALJ cases filed before 2012 the DOR lined out various parts of the proposed ALJ decision and added other new parts of its own. This occurred under a strange procedure that made ALJ decisions merely proposed until accepted or rejected by the agency involved. The agency could reject the decision in whole or in part. Of course it had to state reasons for rejection.
This strange procedure essentially gutted the ALJ process, if and to the extent the agency, and particularly the DOR, had the persistence to attack the ALJ decision in this manner. The DOR has never been lacking in persistence, and so it used this method several times in the short history of its dealings with the ALJ system since 2008.
Fortunately here the DOR did not wholly reject the outcome, but it made numerous changes to the decision itself. For example:
Under the “Findings of Fact” section the DOR changed a statement that Cherry had never run a restaurant, to state that Cherry said he had never run a restaurant. That is a small matter, but it is indicative of the great power of the DOR under the old system. The function of “Findings of Fact” is to find facts from evidence. Evidence often is conflicting and witnesses may or may not be believable. The ALJ is charged with finding facts. If the ALJ finds that Cherry never ran a restaurant, that means that there was evidence to that effect, which the ALJ believed. When that finding is changed to a finding that Cherry said he never ran a restaurant, that finding is worth nothing, which presumably was the reason the DOR substituted it.
On appeal the Superior Court judge will review the case and record made below, de novo, but normally cannot take additional evidence. As to the facts found, the standard is whether the facts are “unsupported by substantial evidence admissible” under the rules of evidence. If a finding that someone was not familiar with the restaurant business is relevant to whether that person is a responsible person for the restaurant corporation’s taxes, then that relevance is weakened if the finding below is merely that he said he was unfamiliar.
The reviewing court would have to first “correct” the “corrections” of the DOR before getting to the review of the case on the record, de novo. This was a very convoluted procedure, which may have to occur in the Cherry case if it is appealed, and it is highly likely the DOR will appeal it (else why did the DOR go to so much trouble to “correct” the ALJ decision?).
Conclusion: Fortunately for ALJ cases started in 2012 and later taxpayers will not face this pitfall, but plenty of pitfalls remain in the North Carolina tax dispute procedures. The “new” system since 2008, which involves first an internal appeal and then an appeal to the ALJ, and then a review on the record by a Superior Court judge, was supposed to speed up the process and make it fairer.
It is not entirely working out that way. The DOR drags its heels in the internal review, and there is no way to speed it up. Plenty of cases remain in the ALJ pipeline under the old procedure. Wouldn’t it be simpler just to let taxpayers sue for refunds and prove their cases directly in court? Hey, that’s what used to happen before the 2008 “reform.”
The solution is to shorten and institute hard time lines for the DOR’s internal appeals process, to institute reasonable controls over the ability of the DOR to “discover” from the taxpayer, and to make the ALJ process the focal point of tax appeals.