September 14, 2010 in Idaho

Pending tax deals could cost Idaho $75 million

By The Spokesman-Review
 

BOISE - Idaho stands to lose more than $75 million just from tax compromises that are now in the works, according to a group of whistleblowers who are current and former employees of the state Tax Commission - including one $203,000 tax break about to be handed to a taxpayer on his $7 million private plane.

“This is the worst scandal I’ve seen in Idaho since I first came here in 1950,” declared Robert Huntley, the former Idaho Supreme Court justice who’s representing Rep. Shirley Ringo, D-Moscow, for free in her lawsuit against the state over the deals.

Ringo has offered to put the lawsuit on hold in favor of an immediate state investigation, along with job protection for the current Tax Commission auditors and managers who came forward with sworn statements about the deals. But so far, the state hasn’t taken her up on the offer.

“It’s our office policy not to comment on pending litigation,” said Bob Cooper, spokesman for the Idaho Attorney General’s office. “What we have to say to the court will be said to the court.”

There’s a Nov. 4 hearing scheduled in Ada County district court on the state’s motion to dismiss the lawsuit, charging that Ringo doesn’t have standing to sue as a state legislator, a contention Huntley disputes.

“They’ve stated that they were rejecting our offer but the lines of communication should remain open, and that they had no counter-offer at that time,” Huntley said. “I think we have just hit the tip of the iceberg on what’s gone wrong here. Most of the employees are terribly afraid to speak.”

Longtime senior state tax auditor Stan Howland sent lawmakers, the governor and the attorney general a 17-page whistleblower report in 2008, charging that tax commissioners routinely excuse large sums in taxes owed by large, multistate corporations, and confidentiality laws prevent anyone from finding out about it. He said the deals have become so frequent that corporations routinely protest their state taxes to get their “Idaho tax break.”

Since then, two state investigations have concluded no laws were broken, but seven more longtime Tax Commission employees have come forward with sworn statements about the tax deals, including three current commission employees who came forward in the past two weeks. All said reform legislation enacted in 2009 after Howland’s revelations didn’t fix the problem, and may even have made it worse.

Among the deals they’ve described in affidavits:

—- Paul Chugg, a tax auditor for the commission for the past 28 years and a CPA, said he was threatened with disciplinary action when he objected to waiving $400,000 in penalties for a taxpayer who falsely claimed more than $5 million in Idaho tax credits. The penalties were waived in full. “A few years later, I was subpoenaed to testify by the U.S. Department of Justice at the criminal trial of the taxpayer’s former employee who was responsible for the fraudulent claims,” Chugg said in his affidavit.

—- Three auditors said a large, multistate taxpayer with sales affiliates in Idaho wrongly claimed the affiliates weren’t taxable in the state, and the commission decided to settle the case for $1.2 million less than the amount owed, though the auditors said there was “absolutely no legal support for this extremely troubling compromise.”

—- Former longtime auditor Gary Mattox said a golf club owed more than $700,000 in sales taxes on high-priced membership fees, but the commission forgave the full amount and didn’t pursue it.

—- Barbara Nichols, manager of multistate income tax audits for the commission and an employee since 1983, said a taxpayer wrongly claimed non-business income, and the commission decided to compromise by allowing 50 percent of that income to be treated that way. “This compromise was made in direct violation of Idaho law and cost the state approximately $680,000,” according to her affidavit.

Most of the compromises described in the affidavits are secret deals that until 2009, a single tax commissioner could reach with a taxpayer. The 2009 legislation added some new requirements to the process, but the deals remain secret.

But the deal involving the private plane is even more troubling, Huntley said, because it is a pending formal, published decision and will set precedent. In that case, the owner of the $7 million plane claimed an Idaho investment tax credit on the full value of the plane, though by law, the credit is available only for use of the plane in Idaho. The portion of a plane’s value eligible for the credit is determined by the ratio between Idaho departures and out-of-state departures; according to its flight log, the plane had 45 Idaho departures among its 107 total departures.

But the taxpayer argued he should be able to get investment tax credits for the full value of the plane, because many of the out-of-state departures occurred when he’d leased the plane out for use by others, and he received that leasing income in Idaho. In the proposed decision, the commission agrees, allows the additional investment tax credit and waives all penalties, excusing the taxpayer from $202,252 in taxes, penalties and interest.

“The statute and rule involved has been to the Idaho Supreme Court two times, approved both times,” Huntley said. “That’s slam-dunk.” Huntley and Ringo have asked the Attorney General’s office to immediately intervene in that case.

Ringo said she fears that Idaho’s Republican leaders are discounting her lawsuit as a political ploy - not only is she a Democrat, but Huntley was the Democratic candidate for governor in 1998 - but she said it’s not. “We keep learning more and more, and it’s abundantly clear that there’s a pervasive problem there that we need to solve and it’s costing the state all kinds of money,” Ringo said, “and that affects every single taxpayer who’s not getting those breaks.”

Huntley, who has represented Howland for free since he first walked into Huntley’s Boise law office two years ago, said, “It really gripes me when these guys accuse me of politics - it’s good government.”


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