IBM Corp. v. City of Golden

Decision Date13 February 2020
Docket NumberCourt of Appeals No. 18CA1540
Parties 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.
CourtColorado Court of Appeals

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 20032005 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 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 20032005 (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.

¶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 , 2012 WL 758142 (Colo. App. No. 11CA0367, Mar. 8, 2012) (not published pursuant to C.A.R. 35(f) ).

¶7 Meanwhile, Golden audited IBM for tax years 20062008 (the second audit) and then 20092012 (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 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 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 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 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, 68 S.Ct. 715, 92 L.Ed. 898 (1948). The Court reasoned that issue preclusion should not be used to prevent a taxpayer from challenging tax assessments in later years when circumstances have changed since a prior judgment. See id. at 599–601, 68 S.Ct. 715. 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, 68 S.Ct. 715.

¶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...

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