1st Global, Inc. v. Glenn Hegar, Comptroller of Public Accounts of the State of Texas, and Ken Paxton, Attorney General of the State of Texas

• Court: Court of Appeals of Texas
• Decided: October 29, 2021
• Docket: 03-19-00740-CV
• Status: Published

Opinion

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

NO. 03-19-00740-CV

1st Global, Inc., Appellant

v.

Glenn Hegar, Comptroller of Public Accounts of the State of Texas, and Ken Paxton, Attorney General of the State of Texas, Appellees

FROM THE 53RD DISTRICT COURT OF TRAVIS COUNTY NO. D-1-GN-18-003916, THE HONORABLE DUSTIN M. HOWELL, JUDGE PRESIDING

DISSENTING OPINION

I respectfully dissent. I disagree with the Court’s conclusion that the phrase “the

amount claimed by the state” in Section 112.051(a) of the Tax Code does not include the franchise

tax owed to the state that is calculated each year by taxable entities and must be paid with their

regular annual report by May 15. Instead, I would conclude that the phrase unambiguously

includes the franchise-tax amount that the Tax Code imposes annually “on each taxable entity that

does business in this state or that is chartered in this state” and that the Code requires to be paid

on May 15 each year. Tex. Tax Code §§ 171.001(a) (imposing tax), .152(c) (establishing date

upon which payment is due). Failure to timely pay this mandatory self-assessed tax amount and

submit the required annual report can result in a corporation’s loss of corporate privileges, as well

as penalties for delinquent taxes and other enforcement actions. Id. §§ 171.152(c), .202(a)-(b)

(requiring filing of annual report on forms supplied by Comptroller), .251 (providing that Comptroller shall forfeit corporate privileges of corporation if corporation does not file report and

pay tax after receiving notice of forfeiture), .362 (establishing penalties for failure to pay tax when

due and payable or to file report when due); see generally id. §§ 171.351-363 (Subchapter H,

Enforcement). Consequently, considering the statutory language in the context of the entire Tax

Code as we must, see TGS-NOPEC Geophysical Co. v. Combs, 340 S.W.3d 432, 439 (Tex. 2011),

I would conclude that the Comptroller, acting on behalf of the State, “claims” that taxable entities

owe the State franchise taxes to be paid each year in the amount prescribed by the Tax Code, and

thus a taxable entity may file a protest letter with its annual report challenging any portion of that

amount owed that it contends is unlawful. Accordingly, I dissent from the Court’s holding that a

taxpayer can never pay under protest its annual self-assessed franchise-tax amount due on May 15

and then later file a protest suit.

The Comptroller asserts that “protest suits are reserved for those who[m] the

Comptroller has demanded to pay a specific amount” and that the only remedy now available to

1st Global is to request a refund of the amounts at issue and proceed with an administrative hearing

for Tax Report Year 2018, see Tex. Tax Code § 111.104 (authorizing refund claim), to be followed

by a refund suit if it were dissatisfied with the outcome of that proceeding, see id. § 112.151

(allowing suit after denial of refund request). The Court agrees, and it holds that until the

Comptroller reviews an annual report and assesses a liability, conducts an audit, issues a jeopardy

determination, determines a deficiency, or issues a refund denial for 2018, 1st Global cannot

challenge the lawfulness of the tax. (Slip op. at 6-7.) However, the Texas Legislature chose not

to limit the broad language—“the amount claimed by the state”—to an amount that the

Comptroller calculates that a particular taxpayer has underpaid on the original “amount claimed

by the state.” If the Legislature had sought to limit protest suits to situations in which the

2 Comptroller assesses a liability, conducts an audit, issues a jeopardy determination, determines a

deficiency, or issues a refund denial, as the Comptroller contends and the Court now holds, the

Legislature would have included language specifying that protest suits are limited to those

circumstances. See TGS-NOPEC, 340 S.W.3d at 439 (noting that courts presume the Legislature

carefully chooses a statute’s language, “purposefully omitting words not chosen”).

While it is true that protest suits are most often filed after the Comptroller takes

some action to inform a taxpayer that it has underpaid the amount claimed by the state, the statutory

language does not limit a taxpayer’s ability to file a protest suit to only those situations. The

Comptroller asserts that if a taxpayer has reason to believe that the Comptroller will disagree with

the taxpayer about the amount that the taxpayer owes, the taxpayer has only two options. The first

option is to pay the amount it would owe under the Comptroller’s position, request a refund of the

amount it believes to be unlawful, request a hearing if the Comptroller denies its refund request,

and once its administrative remedies are exhausted, file a refund suit. See Tex. Tax Code

§§ 111.104 (allowing refund claims), .105 (allowing taxpayer to request hearing if Comptroller

denies refund claim), 112.151 (allowing taxpayer to file refund suit after exhaustion of

administrative remedies). The taxpayer’s second option is to pay only the amount it believes it

owes and wait for the Comptroller to perform an audit or review the report, assess the taxpayer’s

additional liability for the disputed amount, and issue a deficiency determination or a jeopardy

determination, at which point the taxpayer can pay the amount under protest and file a protest suit.

See id. §§ 111.004 (providing Comptroller with power to examine books and records necessary

for conducting examination), .0043 (detailing general audit and prehearing powers), .008

(establishing that Comptroller may compute and determine amount of tax to be paid if he “is not

satisfied with a tax report or the amount of the tax required to be paid to the state by a person” and

3 then must provide notice of deficiency determination to taxpayer), .009 (requiring petition for

redetermination to be filed before expiration of 60 days after date notice of determination is issued

and allowing taxpayer to request hearing and file motion for rehearing if dissatisfied with

Comptroller’s decision on motion for redetermination), .022 (establishing that Comptroller shall

issue jeopardy determination stating amount due and that tax collection is in jeopardy if he believes

collection of tax required to be paid to state or amount due for tax period is jeopardized by delay

and further establishing that jeopardy-determination amount becomes due and payable

immediately), 112.052 (allowing suit to recover tax paid under protest). Under the second option,

the taxpayer is liable for interest and penalties. See id. §§ 111.060 (establishing that yearly interest

rate on all delinquent taxes is prime rate plus one percent and that delinquent taxes draw interest

beginning 60 days after due date), .061 (imposing penalty of at least 5% of tax due on person who

fails to pay tax imposed or file report required by Title 2, e.g., franchise tax, when due).

The history of 1st Global’s engagement with the Comptroller illustrates why, under

the particular circumstances present here, a taxpayer should be able to protest with payment the

annual amount of franchise taxes owed and not be required to wait for a review or an audit followed

by an assessment or a jeopardy or deficiency determination from the Comptroller. The unusual

situation present here also illustrates why most taxpayers are unlikely to take the step that 1st

Global has taken of initiating litigation with the Comptroller, which means this construction of the

statutory language would not result in a sudden abundance of such suits, as the

Comptroller implies.

The underlying dispute between 1st Global and the Comptroller began in 2012

when 1st Global’s CPAs reviewed 1st Global’s annual tax reports for 2008, 2009, 2010, and 2011

and discovered that 1st Global had apportioned revenue by its out-of-state financial advisors to

4 Texas. 1st Global then filed amended tax reports correcting the error and sought refunds for the

franchise taxes that 1st Global believed it had overpaid. The Comptroller audited the amended

annual reports. Two years later, in 2014, the Comptroller denied 1st Global’s refund requests. In

response, 1st Global timely filed formal refund claims for all four years, seeking to recover

$503,846 in overpaid tax, and requested a refund hearing to contest the Comptroller’s position.

1st Global subsequently requested status updates and resolution eighteen times. In his Tax Position

Letter and in his Response to Interrogatories served in connection with the administrative

proceedings, the Comptroller has stated that 1st Global must calculate its Texas franchise-tax

liability by apportioning all of its revenues at issue to Texas. Seven years later, 1st Global’s refund

claims are still pending before the Comptroller.

Between 2012 and 2016, 1st Global filed its report and paid the amount that it

calculated was owed, using the apportionment method that it asserts is the correct one. Had the

Comptroller audited 1st Global and issued a tax assessment for those years, then 1st Global could

have paid the amount under protest and filed its protest suit in district court. The Comptroller has

not done so. However, as 1st Global pointed out at the hearing on the plea to the jurisdiction,

because the difference between the tax owed under 1st Global’s apportionment method and the tax

it would owe under the Comptroller’s method is more than 25%, there is no statute of limitations

that establishes a deadline by which the Comptroller must audit its report. See id. § 111.205(b)

(providing that four-year statute of limitation established in Section 111.201 does not apply and

Comptroller may assess tax imposed by Title 2 at any time if information contained in report

contains “gross” error, defined as underpayment of at least 25%). Thus, 1st Global must carry on

its books the liability of potential taxes, interest, and penalties that goes back almost ten years with

no potential ending date.

5 Faced with this large and annually growing liability, which affects its ability to

make business decisions, 1st Global determined in 2017 that under the plain language of the Tax

Code, it could pay under protest the amount claimed by the State and file suit. It did so, but this

Court dismissed that suit because we determined that 1st Global had not timely filed its protest

statement because it filed the statement with its later-filed franchise-tax report instead of filing it

when an extension of time to file its report was requested and payment was made. 1 See Hegar

v. 1st Glob., Inc., No. 03-18-00411-CV, 2019 WL 6765754, at *5 (Tex. App.—Austin Dec. 12,

2019, no pet.) (mem. op.) (“1st Global I”) (reversing trial court’s denial of Comptroller’s motion

to dismiss and rendering judgment dismissing 1st Global’s protest suit because we determined that

exception allowing later filing applied only to smaller taxpayers).

We explained in 1st Global I that our construction of the relevant statutes and rules

to require a larger taxpayer like 1st Global to file its protest letter at the time it seeks an extension

to file its report comports with both the statutory language and the Legislature’s purpose in

providing for both protest and refund suits:

A protest suit is intended to “provide an adequate legal remedy whereby a taxpayer may test the validity of a tax without having to resort to the traditional equitable remedy of injunction, which would restrain the state’s collection of the tax and disrupt the tax-collection process,” while a refund suit allows the Comptroller “to refund the payment of certain taxes found to have been paid through mistake of fact

1 After 1st Global filed its protest suit in October 2017, the Comptroller abated the administrative proceedings for Report Years 2008 through 2011 “[t]o avoid the possibility of the administrative body and the courts arriving at inconsistent decisions on the same question.” At the time the suit was abated, the Tax Division’s Reply to 1st Global’s Amended Response to the Tax Division’s Position Letter was the next procedural step that was supposed to occur. Because the suit underlying this appeal was filed before the 2017 suit was dismissed, the Comptroller never lifted the abatement. The Comptroller asserts in his brief that he offered to lift the abatement and proceed with 1st Global’s administrative hearing after the hearing on the plea to the jurisdiction in this suit, but that 1st Global never responded when the Comptroller “attempted to lift the stay by agreement.” 1st Global replies that it never requested an abatement and that it “would like the Comptroller to resolve its 2008-2011 administrative claims post haste.” 6 or law, thereby relieving the legislature of time-consuming claims made directly to lawmakers.”

Id. (quoting Strayhorn v. Lexington Ins., 128 S.W.3d 772, 779 n.9 (Tex. App.—Austin 2004),

aff’d, 209 S.W.3d 83 (Tex. 2006)). We further noted that “it is logical to conclude that a taxpayer

of such a size that it has paid sufficient taxes in past years to fall within the [electronic funds

transfer] provisions of Subsection (e) will often know that it believes the franchise-tax framework

is invalid or does not apply at the time it seeks an extension to file its report, as opposed to [filing]

a later refund request that contests the amount of taxes assessed by the Comptroller based on the

taxpayer’s franchise-tax report” and that 1st Global knew the grounds for its protest because it had

pending requests for refunds from past years. Id. & n.7.

In 2018, 1st Global submitted a protest letter with the payment it made on May 15

to extend its deadline to file its regular annual report and submitted the letter again on July 16

when it filed its report and the remainder of the payment claimed by the State based on 1st Global’s

regular annual report. 1st Global paid under protest a total of $184,912 in franchise taxes for

Report Year 2018 and seeks recovery of $123,205. In response to 1st Global’s requests for

disclosure, the Comptroller reiterated that he maintains his position expressed in the 2008-2011

administrative proceedings that 1st Global should apportion its revenue to Texas because its

revenue is created by its performance of services at its Dallas office. It is difficult to square the

Comptroller’s argument that 1st Global’s suit should be dismissed because “no amount has been

claimed by the state” with his continued position that 1st Global should apportion its revenue as it

did in its 2018 regular annual report; that is, all of its receipts should be apportioned to Texas

regardless of where its financial advisors provided their services.

7 Furthermore, even under the Court’s proposed construction of the statutory

language, as the Court points out in its opinion, in this specific case, the Comptroller has already

made a claim:

The underlying dispute between 1st Global and the Comptroller goes back several years and involves how 1st Global’s gross receipts should be apportioned for franchise-tax purposes. Under the Texas Tax Code, apportionment of taxable margin is based on a taxable entity’s “business done in this state.” Tex. Tax Code § 171.103(a)(2). In a separate administrative proceeding involving 1st Global, the Comptroller previously announced his position that receipts generated through the provision of services by 1st Global’s financial advisors, wherever they are located, should all be apportioned to Texas because of its Dallas office. 1st Global, on the other hand, asserts that it earns its revenues in the states where its advisors perform services on its behalf, which would result in its owing substantially less franchise taxes to the State of Texas.

(Slip op. at 2) (emphasis added). The Comptroller continues to assert his position in this litigation,

meaning that he “claims” that 1st Global’s 2018 franchise tax should be calculated the way that

1st Global calculated it.

Most importantly, however, in my view, the plain language of Section 112.051(a)

provides a taxpayer with a third option for challenging a tax that it believes is unlawful: paying

the amount of its self-assessed franchise-tax liability under protest with its timely filed regular

annual report. The Texas Supreme Court explicitly recognized the validity of this option when it

allowed a taxpayer’s second suit challenging the franchise tax as unconstitutional to proceed after

dismissing the taxpayer’s first suit for want of jurisdiction because the taxpayer had failed to

comply with the statutory prerequisite of first paying the tax under protest. Compare In re Nestle

USA, Inc., 387 S.W.3d 610, 616 (Tex. 2012) (orig. proceeding) (“In re Nestle II”) (explaining that

in prior suit, supreme court “held that payment under protest was a jurisdictional prerequisite to

[taxpayer’s] challenge and dismissed the proceeding. Nestle then paid the $8,682,999 due for 2012

8 under protest and re-filed its challenge.”), with In re Nestle USA, Inc., 359 S.W.3d 207, 208-10

(Tex. 2012) (orig. proceeding) (“In re Nestle I”) (dismissing taxpayer’s first suit for want of

jurisdiction). Contrary to the Court’s conclusion that the supreme court’s decision in In re Nestle

II does not constitute “an affirmative and authoritative decision” on this jurisdictional issue

because it was neither raised by the parties nor discussed in the court’s opinion, the supreme court

considered precisely the issue of whether a taxpayer could file a protest suit after paying its self-

assessed tax under protest in In re Nestle I. The fact that no one raised the issue of whether that

self-assessed tax was an “amount claimed by the state” speaks to the unambiguous nature of the

phrase. And although the Comptroller attempts to distinguish the Nestle cases because the

taxpayer there sought to challenge the constitutionality of the franchise tax rather than the legality

of the Comptroller’s position on how the taxpayer should calculate the amount of tax due on its

report, in effect arguing that a taxpayer can pay under protest with its annual report only if it intends

to challenge the entire amount of tax due rather than some portion of the tax, there is no such

limitation present in Section 112.051(a). 2

Because I would conclude that 1st Global has complied with the statutory

prerequisite to establish a waiver of sovereign immunity by timely paying “the amount claimed by

the state” under protest, I respectfully dissent.

2 If this were true, Section 112.051(a) also would allow a taxpayer to challenge only the entire amount of tax due when filing a protest suit after an assessment, a deficiency or jeopardy determination, or a denied refund claim, but there is no statutory language in Section 112.051(a) indicating that the Legislature intended such a result. Indeed, because the protest statement must set forth each reason for recovering the payment, and because the issues in the suit are limited to those issues arising from the reasons expressed in the written protest, the statutory scheme contemplates that a taxpayer may seek recovery for only some portions of the tax paid if it challenges only some parts of how the tax is calculated by the Comptroller. See Tex. Tax Code §§ 152.051(b), .053(b). 9 __________________________________________ Gisela D. Triana, Justice

Before Justices Baker, Triana, and Jones*

Filed: October 29, 2021

*Before J. Woodfin Jones, Chief Justice (Retired), Third Court of Appeals, sitting by assignment. See Tex. Gov’t Code § 74.003(b).