CONSTITUTIONAL “GUARDRAILS” HELP US RESOLVE STATE & LOCAL TAX MATTERS BY NICK NIEMANN & MATT OTTEMANN, MCGRATH NORTH LAW FIRM TODAY WE HEAR A LOT OF DEBATES IN POLITICAL circles where someone on the political spectrum is contending that an action by the Executive Branch (typically the President) is not constitutional. These debates are most often not whether a statute is constitutional, but whether the action by the Executive Branch is unconstitutional in how it exercises the authority under statute. We are not weighing in on these debates. Instead, the purpose of this article is to highlight how we are often able to identify where a state department of revenue or county board taxing authority has applied a statute in an unconstitutional way. As tax attorneys, we collaborate with a company’s internal tax and legal teams, and their external CPAs, to resolve state and local tax audits and appeals. To help resolve many of these engagements, we have deployed what we refer to as constitutional “guardrail” defenses. Our objective is not to create new points of contention, but rather to utilize these defenses strategically to help achieve more favorable settlements in a shorter timeframe. We use these defenses most commonly to show how the taxing authority is applying a statute or regulation in a manner that violates constitutional principles (i.e., it is acting outside of the constitutional “guardrail” and is out of bounds). This approach serves to curtail overly broad or aggressive interpretations by the taxing authority. It helps ensure the statute is applied within constitutional bounds. In doing so, we are not attempting the difficult task of invalidating a statute (though at times we have also taken that on). Rather, we are simply insisting that the statute be applied in a lawful and constitutionally compliant manner. The following is a summary of some of the most frequently used and impactful constitutional “guardrail” defenses relevant to state and local tax matters. EQUAL PROTECTION CLAUSE: U.S. & NEBRASKA CONSTITUTIONS The 14th Amendment to the U.S. Constitution establishes that “No state shall ... deny to any person within its jurisdiction the equal protection of the laws.” A similar provision exists in Nebraska’s Constitution (Article I, Section 3). These provisions prohibit states from making unreasonable classifications. To be constitutional, the law (and how it is applied) must have a rational relationship to a legitimate legislative purpose. While that may seem to be simple enough, some distinctions can run afoul of this “guardrail.” STATE TAX BRIEFING 18 Nebraska CPA
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