IBM Corp. v. City of Golden , 2020 COA 26 ( 2020 )

The summaries of the Colorado Court of Appeals published opinions
constitute no part of the opinion of the division but have been prepared by
the division for the convenience of the reader. The summaries may not be
cited or relied upon as they are not the official language of the division.
Any discrepancy between the language in the summary and in the opinion
should be resolved in favor of the language in the opinion.
SUMMARY
February 13, 2020
2020COA26
No. 18CA1540, IBM Corp. v. City of Golden — Taxation —
Municipalities — Sales and Use Tax; Judgments — Issue
Preclusion
A division of the court of appeals holds that IBM Corporation
was not barred by issue preclusion from contesting sales and use
taxes that were assessed by the City of Golden. The division also
holds that the prior judgment against IBM did not adjudicate
whether IBM’s tax accounting system was reliable, nor did the prior
judgment adjudicate whether IBM’s specific transactions were
taxable.
COLORADO COURT OF APPEALS 2020COA26
Court of Appeals No. 18CA1540
City and County of Denver District Court No. 16CV30076
Honorable John W. Madden IV, Judge
IBM Corporation,
Plaintiff-Appellee,
v.
City of Golden, Colorado, a home-rule municipality; and Jeffrey A. Hansen, in
his official capacity as Finance Director of the City of Golden,
Defendants-Appellants.
JUDGMENT AFFIRMED AND CASE
REMANDED WITH DIRECTIONS
Division VII
Opinion by JUDGE BERGER
Fox and Lipinsky, JJ., concur
Announced February 13, 2020
Wheeler Trigg O’Donnell LLP, Hugh Q. Gottschalk, Pawan Nelson, Denver,
Colorado, for Plaintiff-Appellee
Berg Hill Greenleaf Ruscitti LLP, Thomas E. Merrigan, Heidi C. Potter, Denver,
Colorado, for Defendants-Appellants
¶1 After an audit, the City of Golden assessed sales and use taxes
against IBM Corporation for the 2003–2005 tax period. Finding
that IBM did not meet its burden of proving that the assessment
was incorrect, the Jefferson County District Court (Jefferson court)
upheld the assessment of those taxes and a 50% penalty authorized
by the Golden Municipal Code (GMC).
¶2 Golden then performed a second audit for later tax years. This
time, IBM provided Golden with more documentation and greater
access to its tax records. Still, Golden assessed sales and use taxes
that IBM contested. On appeal to the district court again, but this
time in Denver District Court (Denver court), IBM largely prevailed. 1
The court found that most of the transactions that IBM challenged
were not taxable under the GMC.
¶3 The central issue in this appeal is whether, under the doctrine
of issue preclusion, the Jefferson court order barred IBM from
litigating the taxability of its transactions from the later audit
period. Like the Denver court, we conclude that issue preclusion
1 Jeffrey A. Hansen was also a party to that appeal, as he is now in
this court. He is named in his official capacity as the Finance
Director of Golden.
1
does not apply, so we affirm the district court’s order, except that
we remand for the imposition of the lesser 10% penalty and interest
under the GMC.
I. Background
¶4 IBM provides information technology services to Xcel Energy
Services, Inc., at Xcel’s facility in Golden, under an “Information
Technology Services Agreement.” The parties agree that Xcel pays
IBM for three types of transactions under the agreement: fixed
management fees, variable charges, and pass-through charges.
¶5 Golden audited IBM for the tax period from 2003–2005 (the
first audit) regarding IBM’s transactions with Xcel. The city’s
auditor concluded that IBM was not providing information that
detailed which specific transactions, including transactions
classified as fixed management fees and variable charges, were
taxable, so the auditor estimated IBM’s tax liability. Exercising
review under section 39-21-103, C.R.S. 2019, the Colorado
Department of Revenue (DOR) upheld this estimate and imposed a
50% penalty on IBM for being delinquent without good cause. This
penalty is authorized by the GMC, §§ 3.08.010(a), 3.08.030.
2
¶6 IBM appealed to the Jefferson court, which upheld the
assessment and the penalty. The court found that IBM had failed
to meet its burden of proving that the assessed taxes were
unauthorized by the GMC. IBM tried to prove that it was not
subject to Golden’s taxes with testimony from an expert whom IBM
hired to conduct his own sales and use tax audit, but the court
found that the expert was unreliable for a host of reasons. One
reason was that the expert treated a number of transaction
classifications, including fixed management fees and variable
charges, as containing only nontaxable transactions, but the court
found that those classifications contained taxable and nontaxable
transactions. The court also admonished IBM for repeatedly failing
to provide Golden with documents it requested. A division of this
court upheld the Jefferson court’s judgment on appeal. IBM Corp.
v. City of Golden, (Colo. App. No. 11CA0367, Mar. 8, 2012) (not
published pursuant to C.A.R. 35(f)).
3
¶7 Meanwhile, Golden audited IBM for tax years 2006–2008 (the
second audit) and then 2009–2012 (the third audit). 2 The record
demonstrates, and the Denver court found, that IBM was more
cooperative this time. For instance, IBM hosted the auditor at its
offices in Connecticut for three days so he could review IBM’s tax
processes and systems. The auditor noted that IBM’s tax
department was “extremely helpful and very courteous and
professional.” And IBM presented evidence that during this round
of auditing, it provided substantially more documentation to Golden
and was more responsive to Golden’s requests.
¶8 Nevertheless, Golden’s auditor concluded that he could not
render a complete and accurate tax assessment because IBM was
not separately identifying the taxable and nontaxable components
of certain transactions. The auditor issued tax assessments, again
based on estimates.
¶9 IBM appealed those assessments to the Finance Director of
Golden, Jeffrey A. Hansen, and then to the DOR, losing both
2 The third audit was never completed because the auditor was
retiring. The auditor’s superiors directed him to issue the
assessment for the third audit period based on information from the
second audit period.
4
appeals. The DOR further found that IBM was again delinquent
without good cause in paying sales and use taxes, so it imposed the
50% penalty and interest.
¶ 10 Then IBM appealed to the Denver court. At the time of trial,
the tax assessments totaled $2,592,817.66 for the second audit
period and $3,492,418.29 for the third audit period. IBM’s
complaint alleged that the assessments were erroneous because
they improperly imposed sales and use tax on services and
transactions that were not subject to Golden’s tax.
¶ 11 Golden moved for partial summary judgment, arguing that the
doctrine of issue preclusion barred relitigating (1) whether IBM had
a reliable “tax accounting system” and (2) whether the variable
charge and fixed management fee classifications contained any
nontaxable transactions. The Denver court denied the motion in a
written order.
¶ 12 On Golden’s first argument, the court reasoned that the
“documents IBM provided Golden in the instant case and whether
those documents itemized the transactions sufficiently for a
determination of taxability goes to the essence of this issue . . . and
the extent of the documentation produced by IBM remains a factual
5
issue.” The court also found that Golden did not “specifically
identify the documentation produced and how it is essentially the
same as those produced in the previous litigation.” Addressing
Golden’s second preclusion argument, the court explained that the
Jefferson court order found that some of the transactions under the
agreement were taxable, but that the order did not provide a
specific listing identifying which ones.
¶ 13 For these reasons, the Denver court concluded that issue
preclusion did not prevent IBM from litigating the taxability of its
transactions at issue in the second and third audits.
¶ 14 The case proceeded to a bench trial. By statute, because this
was an appeal from a DOR determination, the Denver court tried
the case de novo. § 39-21-105, C.R.S. 2019.
¶ 15 After the close of evidence, in a lengthy and well-reasoned
order, the Denver court again concluded that IBM was not barred
by issue preclusion from challenging the taxability of specific
transactions. Next, the court found that IBM classified any taxable
transactions as pass-through charges, not fixed management fees
or variable charges. Thus, the court found that the specific
transactions that were classified as fixed management fees or
6
variable charges were not taxable. Finally, the court found that
IBM owed $32,896.13 stemming from certain pass-through
transactions. Neither party appeals this portion of the judgment.
¶ 16 In a post-trial motion under C.R.C.P. 59, Golden asked the
district court to assess a 10% penalty and 1% per month interest on
the $32,896.13 award, as required by section 3.08.010(a) of the
GMC. The 10% penalty and interest are required on any
outstanding taxes of a delinquent taxpayer under section
3.08.010(a) of the GMC. IBM agreed that it was liable for the 10%
penalty and interest, but the district court did not rule on the
motion within the sixty-three-day time period under C.R.C.P. 59(j),
so the motion was deemed denied.3
II. Analysis
A. Issue Preclusion
¶ 17 Golden argues that the Denver court erred by failing to give
preclusive effect to the Jefferson court order. “Issue preclusion is a
3 At oral argument, IBM again agreed that Golden was entitled to
the 10% penalty and interest on the taxes upheld by the Denver
court.
7
question of law that we review de novo.” Stanton v. Schultz, 222
P.3d 303, 307 (Colo. 2010).
¶ 18 Issue preclusion prevents relitigation of a legal or factual
matter that has been decided in a prior proceeding. McLane W., Inc.
v. Dep’t of Revenue, 199 P.3d 752, 757 (Colo. App. 2008). It applies
when
(1) the issue in the second proceeding is
identical to an issue actually and necessarily
adjudicated in a prior proceeding; (2) the party
against whom estoppel is asserted was a party
or in privity with a party in the prior
proceeding; (3) there was a final judgment on
the merits; and (4) the party against whom
estoppel is asserted had a full and fair
opportunity to litigate the issue in the prior
proceeding.
Id. (citing City & Cty. of Denver v. Block 173 Assocs., 814 P.2d 824,
831 (Colo. 1991)). Issue preclusion can apply in tax cases. Id. at
758.
¶ 19 But in interpreting federal income tax statutes, the United
States Supreme Court has noted that courts should be careful
when applying issue preclusion to tax cases. Comm’r v. Sunnen,
333 U.S. 591, 597–600 (1948). The Court reasoned that issue
preclusion should not be used to prevent a taxpayer from
8
challenging tax assessments in later years when circumstances
have changed since a prior judgment. See id. at 599–601. Issue
preclusion “is not meant to create vested rights in decisions that
have become obsolete or erroneous with time, thereby causing
inequities among taxpayers.” Id. at 599.
¶ 20 While we are not bound by Sunnen, the Supreme Court’s
analysis addressing the limits of issue preclusion in tax cases is
persuasive. Other states have likewise applied Sunnen to state tax
cases. McLane, 199 P.3d at 758–59 (listing cases).
¶ 21 Here, the parties dispute only the first element of issue
preclusion — whether issues in the second proceeding are identical
to issues actually and necessarily adjudicated in a prior proceeding.
Golden first argues that the Jefferson court found that IBM’s entire
“tax accounting system” was unreliable for calculating IBM’s tax
liability, so IBM was precluded from arguing that any components
of its tax accounting system were reliable in the Denver district
court. The record does not support this argument, so we reject it.
¶ 22 Nowhere in the Jefferson court order does the court make a
broad finding on the reliability of IBM’s “tax accounting system.” In
9
fact, nowhere in the Jefferson court order does the phrase “tax
accounting system” appear.
¶ 23 Rather, the Jefferson court order relied both on IBM’s failure
to produce the documents necessary for determining the
corporation’s tax liability and on the unreliability of IBM’s expert.
In support of the court’s finding that IBM’s expert was unreliable,
the Jefferson court noted several components of IBM’s accounting
system that it found unreliable, which the expert had relied on in
his analysis. Because the Jefferson court never found that IBM’s
entire tax accounting system was unreliable, IBM was not
precluded in the Denver case from arguing that it provided reliable
tax information to Golden, nor was IBM precluded from using its
tax information, as it did, to argue that certain transactions were
not taxable.
¶ 24 Moreover, the facts found by the Denver court illustrate why
Sunnen’s warning regarding the unrestricted application of issue
preclusion to tax cases is well founded. Under Sunnen, it would be
improper to conclude that a taxpayer’s intransigence in one tax
period forecloses the possibility that the taxpayer kept better
records and provided more documentation in later tax periods.
10
Here, the district court found that during the second audit, IBM
was cooperative, provided substantially more information than it
provided during the first, and even brought Golden’s auditor to the
corporation’s headquarters in Connecticut. These findings support
our conclusion, and the Denver court’s conclusion, that issue
preclusion was inappropriate on the issue of documentation and
access provided by IBM.
¶ 25 Golden next contends that IBM was precluded from arguing
that its purchase and sales journals were a reliable basis for
assessing tax liability. Again, the record does not support this
argument.
¶ 26 The Jefferson court never made a finding on the reliability of
purchase and sales journals. The term “purchase and sales
journals” appears only once in the Jefferson court order — and not
in the sections of the record cited by Golden for this supposed
finding — when the court discussed the documents that Golden
requested. The last time that the Jefferson court order mentioned
the documents requested by Golden, which would seemingly
include the purchase and sales journals, was in the court’s
admonition that “IBM still had not provided the information
11
requested.” So, as best we can tell, there is no indication that these
journals were ever provided to Golden or the court. 4 Because the
Jefferson court did not make a finding on the purchase and sales
journals’ reliability, IBM was not precluded from offering them as
evidence of its tax liability, and the Denver court permissibly could
find, as it did, that the journals were reliable for that purpose.
¶ 27 Golden also contends that IBM was precluded from arguing
that any transactions classified as variable charges or fixed
management fees were not taxable because the Jefferson court
found that some of those charges were taxable. We disagree.
¶ 28 In the Denver court, IBM argued that several specific
transactions, which were classified as variable charges or fixed
management fees, were not taxable. There is little or no detail in
the Jefferson court order that defines which particular transactions
gave rise to sales and use tax liability. Instead, the Jefferson court
4 Golden repeatedly cites footnote seventeen of the order for the
Jefferson court’s finding on the reliability of the journals. But
there, the court discussed how “data feeds” were not provided to the
city in an understandable format. We do not know what “data
feeds” refer to. Absent any record support that data feeds are
synonymous with purchase and sales journals, the Jefferson court’s
judgment did not actually or necessarily decide that the journals
were unreliable.
12
order noted that “some” fixed management fees and variable
charges “collected pursuant to the ITS Agreement were taxable in
the City.” Because the Jefferson court order did not specify which
transactions were taxable, IBM was not precluded in the second
case from arguing that specific transactions were not.
¶ 29 For these reasons, we conclude that the Denver court correctly
rejected the application of issue preclusion and correctly allowed
IBM to challenge the tax assessments on their merits.
¶ 30 Golden does not otherwise challenge the district court’s
findings or conclusions, except as discussed below, so we do not
review them further.
B. C.R.C.P. 37(a) Sanctions
¶ 31 Golden challenges the district court’s C.R.C.P. 37 ruling that
precluded Golden from presenting evidence on the taxability of
IBM’s software maintenance agreements. The court found that
Golden had failed to disclose this legal theory in response to IBM’s
discovery request, IBM did not have sufficient notice of the
argument, and IBM was prejudiced by the nondisclosure.
¶ 32 We review C.R.C.P. 37 sanctions for an abuse of discretion.
Sheid v. Hewlett Packard, 826 P.2d 396, 399 (Colo. App. 1991). The
13
trial court is generally in the best position to determine what
sanctions are appropriate when a party fails to fully answer
discovery requests. See Kallas v. Spinozzi, 2014 COA 164, ¶ 19.
¶ 33 Golden contends that IBM had notice that Golden would argue
that the software maintenance agreements were taxable because
they were a subject of the Jefferson court litigation, IBM’s witnesses
discussed software maintenance agreements on direct examination,
and Golden argued that software maintenance agreements were
taxable in its motion for summary judgment. 5
¶ 34 The Denver court considered Golden’s preserved contentions.
The court had the broad discretion to conclude, notwithstanding
Golden’s contentions, that IBM was prejudiced by Golden’s
nondisclosure and that the appropriate sanction was to prohibit
Golden from presenting evidence on its undisclosed argument.
Therefore, we do not disturb the Denver court’s C.R.C.P. 37 ruling.
5 The argument that IBM’s witnesses discussed software
maintenance agreements was not made to the Denver court, so we
do not address it further. Russell v. First Am. Mortg. Co., 39 Colo.
App. 360, 363, 565 P.2d 972, 975 (1977) (holding that a party on
appeal may not allege error on grounds that were not considered by
the trial court).
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C. Tax Penalties Under The Golden Municipal Code
¶ 35 Lastly, Golden asks for the reimposition of the 50% penalty if
we reverse the district court’s ruling on issue preclusion. Because
we do not, we uphold the Denver court’s determination that the
50% penalty is unwarranted.
¶ 36 But in the alternative, Golden asks us to remand for the
imposition of the mandatory 10% penalty, with 1% per month in
interest. IBM confessed Golden’s C.R.C.P. 59 motion regarding the
assessment of the 10% penalty and interest on the taxes that were
found due by the district court, but the Denver court never ruled on
the motion, so it was deemed denied. Accordingly, we remand the
case to the Denver court and instruct the court to amend the
judgment to include the required 10% penalty and interest on the
taxes it upheld against IBM.
III. Conclusion
¶ 37 The case is remanded to the district court to amend the
judgment to include a 10% penalty on the amounts found due by
the district court and to assess interest as provided by the GMC. In
all other respects, the judgment is affirmed.
JUDGE FOX and JUDGE LIPINSKY concur.
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