District of Columbia ~ Corporate Income Tax: Decision Remanded for Abuse of Non-Mutual Collateral Estoppel

CCH Tax Day Report

The District of Columbia Court of Appeals vacated orders issued by the Office of Administrative Hearings (OAH) that granted three oil companies summary judgement and cancelled the Office of Tax and Revenue’s (OTR) corporate franchise tax assessments against them. The Court of Appeals concluded that the OAH abused its discretion in applying offensive non-mutual collateral estoppel against the OTR. Further, OAH erred in granting the oil companies summary judgement. The Court of Appeals remanded the case for further proceedings.

The oil companies were contesting a tax assessment based on a transfer pricing analysis prepared by a contractor (Chainbridge Software LLC) that used the comparable profits found in the regulations to IRC §482. This issue was litigated in Microsoft Corporation v. Office of Tax and Revenue, District of Columbia Office of Administrative Hearings, No. 2010-OTR-00012, May 1, 2012, ¶200-722. Thus, the oil companies asserted before the OAH that non-mutual offensive collateral estoppel applied. The OAH agreed. This prevented the OTR from relitigating the same issue. Before the Court of Appeals, the OTR argued that the OAH’s grant of summary judgement to the oil companies was premised on the erroneous application of offensive non-mutual collateral estoppel against the OTR. Alternatively, the OTR argued that the OAH abused its discretion in applying offensive non-mutual collateral estoppel.

First the Court of Appeals determined that the case, District of Columbia v Gould, 852 A.2d 50 (D.C. 2004), was binding on them as to the question of whether offensive non-mutual collateral estoppel applies to the District of Columbia and its entities. Proper application of non-mutual offensive collateral estoppel requires a two step inquiry: (1) whether the case meets the traditional requirements for invoking collateral estoppel and (2) a discretionary balancing of a list of factors to determine whether the offensive use of non-mutual collateral estoppel would be fair. However, Gould added a third step in cases involving the assertion of offensive non-mutual collateral estoppel against the District of Columbia or one of its entities. It requires that when the party against whom the offensive non-mutual collateral estoppel is asserted is the District of Columbia or one of its entities, the courts should apply the doctrine only in those special cases involving exceptional circumstances where the interest of justice clearly require it. The OAH did not address the question of whether exceptional circumstances exist in the case of the three oil companies. The OAH’s application of offensive non-mutual collateral estoppel against the OTR was an abuse of discretion and the case remanded. Collateral estoppel exists to prevent parties from relitigating an identical issue that was resolved in a previous proceeding; the doctrine promotes judicial economy.

District of Columbia Office of Tax and Revenue v. Exxon Mobil Oil Corporation, et al., District of Columbia Court of Appeals, Nos. 14-AA-1401, 14-AA-1403, 14-AA-1404, June 30, 2016, ¶200-760

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