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State tax authorities use a number of methods for obtaining taxpayer information. In this article, Cozen O'Connor's Joseph Bright discusses the Lerner case in which the Pennsylvania Supreme Court upheld a fraudulent assessment intended to coerce the taxpayer into supplying information.
By Joseph C. Bright
Joseph C. Bright is a member with Cozen O'Connor.
A sharply divided Pennsylvania Supreme Court held that the City of Philadelphia could collect on an assessment that the city admitted was not based on factual evidence, but rather on a figure made up to scare the taxpayer into complying with requests for tax information. City of Philadelphia v. Lerner, No. 26 EAP 2015 (Pa. Nov. 22, 2016). A majority opinion for four justices was filed, together with two dissenting opinions for three justices.
The taxpayer evidently was not a sympathetic litigant. The majority states that, throughout the litigation, the taxpayer violated court orders, abused the discovery process, and overwhelmed the lower courts with frivolous pleadings, motions, and interlocutory appeals. Nonetheless, the question on appeal was whether the city can collect on a fictitious assessment.
The city issued an assessment in 2006. The taxpayer took no appeal. Subsequently, the city brought a collection action. The taxpayer made no response. The city then obtained a default judgment. The taxpayer petitioned to open the judgment on the grounds of defective service of process. Collaterally, in 2010, the taxpayer appealed the 2005 assessment to the city's Tax Review Board, claiming that he did not receive the 2006 assessment. The petition ultimately was dismissed.
At a hearing in the trial court, the city filed a motion in limine to preclude the taxpayer from challenging the underlying tax assessment because the taxpayer had failed to supply or respond to any of the city's requests for tax information. The matter then proceeded to a bench trial, at which a city revenue employee admitted that the assessment was based on a wholly made up number, not on any factual information, and was intended simply to force the taxpayer to disclose information.
The trial court held for the city on the grounds that the taxpayer failed to exhaust his administrative remedies, relying on Krug v. City of Philadelphia, 620 A.2d 46 (Pa. 1993). On appeal, the Commonwealth Court affirmed, and on further appeal the Supreme Court also affirmed.
The majority and dissents all agreed that generally a taxpayer must exhaust his administrative remedies before proceeding to court to challenge a tax assessment. The difficult questions were whether an exception should be made for an assessment that was admittedly fictitious and designed to coerce discovery, and whether an argument to that effect had been waived by the taxpayer.
The majority of the Supreme Court held that the taxpayer had waived any argument that the city could not proceed to collect a judgment based on a fraudulent assessment. However, one of the dissents stated that in his post-trial motions and Rule 1925(b) statement of matters complained of, the taxpayer argued that the city had not introduced any evidence to support the assessment, and that it was in fact “simply made up.” The Commonwealth Court stated that the taxpayer's Rule 1925(b) statement could reasonably be read to include all the issues raised in his post-trial brief.
The dissents argued strongly that the court should not permit themselves to be used to enforce a made-up claim. The majority did not address that point, but decided on the grounds that the issue had been waived. However, in view of what the opinions described as the taxpayer's request for post-trial relief and Rule 1925 statement, it does not appear as a matter of substance that the taxpayer did waive that claim. In any event, the majority did not address the question of waiver in light of the history of Rule 1925, recited by a dissent. Several years ago, the rule stated that the failure to raise issues could result in a dismissal of such issues. The rule was amended to become mandatory. The amendment was strongly objected to by several prominent bar associations and was then further amended to permit exceptions in certain circumstances. The purpose of the rule is to give the trial court an opportunity to correct errors or address them in its opinion after an appeal has been filed. Perhaps the court should consider whether the failure to specify an issue in the Rule 1925 statement should mandate a dismissal in view of what is essentially an administrative purpose for the convenience of judges. A taxpayer must raise an issue in the trial court and preserve it in order to present the issue to an appellate court. The taxpayer did so here. The only question is whether a further filing in the Rule 1925 statement should act as an additional jurisdictional hurdle, particularly when the context necessarily is that the governmental authority is already on notice that the particular issue is raised.
Although the city prevailed, the language by the dissents was stinging as to the city's collection procedures. Justice Saylor's dissent expressed dismay that the city's Department of Revenue had a practice of making fictitious and arbitrary assessments that was so widespread that it acquired the misleading name of a jeopardy assessment. A jeopardy assessment is not authorized by the city's code. It is only authorized with respect to state taxes when there is an issue as to collectability.
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