Lessons in Tax Disputes (5 of 18)

Lessons in Tax Disputes - Musings of a retired tax accountant - (5 of 18)

AN EARLY LESSON: EMOTIONAL ENTAGLEMENTS, ARGUMENTS AND CONJECTURES

"Emotional entanglements, in tax? Are you joking?"

No. I am not. 

We get entangled in the issues of our clients. Their tax issues become our tax issues with the taxmen. Without knowing it, we inject our emotions into the resolution process. We become entangled. We risk losing our independence, our balance. 

"It is so unfair!"

Heard this before? 

A colleague just had an encounter with the taxmen. He didn't like the taxmen's technical position. He didn't like it because it was different from his, which he saw clearly in his head, so indisputable but yet disputed. "How dare he! How dare he disagree with me?" "So unreasonable! So high-handed!" And a litany of such followed.

Sounds familiar? I bet.

What happens when we become emotionally entangled?

Anger seeps in. Our brain conjures up all kinds of projections, projections of hatred, injustices, and even more irritation to fuel a justifiable retaliation. So we turn on our laptop. We punch away at the keyboard, spewing fury at the opposing technical position we so vehemently disagree with. 

We may later tone down the language a tad. But the anger and the emotions still evident.

Guess what happens after the taxmen read the rebuttal?

Anger now seeps in at the other side of the fence! And so a battle rages on.

Pretty soon, the tax issues are debated with constant barbs traded. Both sides dig their heels in for a long fight. 

In my early days, this kind of battle can rage on for years. Six years or more were not uncommon.

Until the late '80s, I was often entrapped in these emotional entanglements with a client engagement. Then something changed me in 1990.

"Mere arguments and conjectures."

"What you wrote are mere arguments and conjectures, not facts." These words by a then senior assessing officer screamed at me.

This was in 1990, a little over a year after I joined the Firm. 

I saw that as an accusation. My blood boiled. Well, I was young then.

I called for the file. The issue was whether the profit from the disposal of an asset was taxable. The dispute had gone on for more than six years. Long enough. Arguments had become circular. High energy was apparent in the exchanges.

That evening I worked from home. With Chivas Regal in hand, I wrote my first draft. My alcohol-soaked blood was evident in my writing. The whisky egged me on.

The next day, free of the alcoholic influence, I read what I wrote. Plenty of counter-accusations, angry rebuttals, and innuendos. I wasn't happy with it. I recrafted it, trying to take out the emotions. It was hard work. I had to wash away the anger, the counter-accusations, and the rudeness in stages over a week.

Four different re-drafts later, I drifted towards a pattern that became a personal style.  

It started with a detailed statement of primary facts. Then a series of facts I called the secondary facts.  

Next was my analysis of the primary and secondary facts. And, of course, liberally infused with my arguments and case law citations. By then, there was no anger, no accusation, and no emotion evident. 

Less than two months later, the senior assessing officer agreed. The profit wasn't taxable!  

I saw that as an endorsement on the approach of my submission - no emotion, singular concentration on facts, proving the facts, argue on the facts established, support with relevant case law.

In the years that followed, I kept refining the approach in my submissions why a profit was not taxable, why an expenditure was deductible, why a payment qualified for relief, etc. 

More refinements in later years

By the year 2000, one of the features in the analysis section of my submission was this. I tried to rebut every angle of challenge the taxmen could level at me. Meaning, I would refute even before the taxmen had a chance to ask the question!

Others in the profession called my approach aggressive. An ex-colleague in my previous Firm told me the taxmen were annoyed and irritated by my submissions. He said I was wasting their time and threatening them with a thick pile of documents each time I filed a tax submission. 

The undertone was, "Why you like that?"

I was unmoved by his remarks. I stayed on my path. 

Around the year 2000, I learned an important lesson from an old gentleman. He was the CEO of a family company. After reading my draft submission, he asked me to remove the analysis section altogether. 

"Let the facts speak for themselves", he said. 

"Your analysis section is asking for a fight. The taxmen should come to the same conclusion based only on the facts." 

Darn good advice! 

I removed the analysis section altogether. The entire submission was on the primary facts, the secondary facts, my inferences and conclusions on those facts. 

I felt uneasy the entire time I waited for the taxmen's reply. I mean, how could you write a tax submission without the legal arguments? Preposterous. 

The old gentleman was right. The taxmen accepted my submission without further challenges. The fight was over before it even began.

Still, I continued to write every one of my tax submissions in full length, including the arguments in the analysis section. But the version sent to the taxmen was without it. Why look for a fight if the facts alone are enough to persuade the taxmen? 

But why write the analysis section when I do not intend to include it in the tax submission? Two reasons. One, to test how watertight is my analysis (a la argument). Two, an insurance if the taxmen should come back with a different interpretation on those facts. I would have some ready material to tailor to the occasion.

Do I always take out the analysis section in my submission? Not always. It is a judgement call. 

There was yet another evolution in my approach to tax submission writing. This time, it was after my retirement. The focus was entirely on finding the facts, proving the facts, and the analysis section built into the fact pattern and devoid of case law citation. Does it work? Yes, it does. This is another story. I might tell it another time.

Connecting the dots

I could not connect some dots till after my retirement. Over the years, I cited fewer and fewer case laws in almost all my tax submissions. Yet, I seemed to get good results. This has been my experience. Why? I didn't figure this out till after retirement.  

I want to make this clear. It is not that I do not believe in case law precedents. I do. Fervently. 

It is just that I 'deployed' them differently. I avoided throwing case after case in my tax submission and citing big chunks of the judgement for effects. Instead, I preferred to weave the principles from the case law into the inferences I drew from the proven facts and the secondary facts. In other words, I supported those inferences with the case law principles written in plain words, believing the taxmen could see where these principles came from; after all, case law knowledge is not a monopoly of the private sector.

When the old gentlemen told me my legal analysis (then full of citations and chunky bits of what this judge said and what that judge said) was looking for a fight, he already connected all the dots. He didn't explain these dots to me. It didn't occur to me I should ask him then.

It was after retirement that I made the connection. When we write the legal analysis, we argue for our position. Most time, we do more than just arguing. We give the impression that we are giving the taxmen a lecture on the law and showing them all the superior case law on our side. Without knowing it, we taunt them to meet us on the battlefield!

Now turn the table around. If you were the taxmen at the receiving end, what you would most likely do? Rebut! Of course, rebut! Instead of getting the taxmen to focus on the facts, we invite them to focus on our case law rich arguments.

The reasoning is quite simple. It is not so much what you said in your tax submission. It is how you said it, and how you make the taxmen feel.

There is nothing wrong with almost any approach preferred by the tax professional. There is no right way or wrong way. On this, each tax professional is to his own. Mine is just one of the many possible approaches.

To this day, I still live by this one rule: "Let the facts speak for themselves."

(Continue in the next instalment.)