We welcome back guest blogger G. Brint Ryan, Chairman and CEO of Ryan, LLC. Brint wrote a guest blog post for us at the end of 2014 about a case we described then as perhaps the most important procedural case of the year combined with the Loving case. He has continued to litigate concerning the issue of fees for service and the ability of the government to control the fee arrangement between parties. The most recent case involves litigation with the state rather than the IRS but has implications that go beyond just the laws in California. Keith
In an important win for business against government encroachment, a California Superior Court recently invalidated a rule restricting taxpayers from paying performance-based fees for professional services. In this case, Ryan, LLC (“Ryan”) filed suit challenging the legality of an emergency rule promulgated by the California Governor’s Office of Business and Economic Development (“GO-Biz”) in August 2014, which sought to restrict performance-based fee arrangements for companies applying for the California Competes Tax Credit. California Superior Court Judge Timothy M. Frawley ruled in favor of Ryan, stating that the “cost of a consultant’s services is a matter between the taxpayer and the consultant.” He found that the state had failed to show any link between these costs and the economic development goals of the program.
read more...This ruling is a win for businesses and the professionals who assist them in making their growth and investment decisions.
Federal, state, and local governments in the U.S. offer tens of billions of dollars annually in credits and incentives (like the California Competes Program) to businesses to promote job creation and economic development. However, due to the complexity of uncovering and applying for available credits and incentives, half of them go unclaimed each year. Firms like Ryan provide the advice needed to ensure that these incentives aren’t missed by growing businesses that are generating local jobs and economic opportunities.
Of the nearly six million employer firms in this country, companies with fewer than 500 workers accounted for 99.7% of those businesses. In other words, the businesses that make up the very backbone of the U.S. economy are the ones likely to engage a credits and incentives consultant. They are small to medium-sized and unlikely to have the experience, expertise, or bandwidth needed to properly research, identify, and negotiate business incentives. These smaller organizations are the most likely to need external counsel to assist them in unlocking incentives that will help expand their businesses by impacting their bottom line.
Adopting a performance-based fee structure, which pays a consultant only if that consultant successfully procures useful business incentives, is a “win-win” situation, especially for firms who can’t afford to pay these fees upfront. This is precisely why a ban on fee arrangements makes no sense. Restricting taxpayer contracts for professional services would only hamper the appetite and ability of businesses to apply for tax credits—producing a self-defeating result for any economic development program.
Judge Frawley agreed with this argument, writing that banning performance fee arrangements “does nothing to stimulate ‘new employment’ or ‘economic growth,’ and does nothing to encourage businesses to invest in California. The only thing the ban is likely to accomplish is [to] discourage businesses with contingent fee arrangements from participating in the California Competes tax credit program.”
Thus, ironically, losing this lawsuit is actual a “win” for the California economy. Removing this ban puts California back in line with the way other states operate. It opens the market back up for California as a business-friendly state and promotes the California economy.
In addition, the nature of the ban was inherently flawed and lacked a fundamental understanding of how performance-based fees work with regards to incentives. It restricted the fee structure for one particular tax credit. But companies that are considering expansions and relocations typically are not focused on a specific tax credit or incentive in a single state. For example, Ryan works on behalf of its clients to research and pursue any and all potentially available credits and incentives for each potential site so that the client can take all of them into account in determining the return on investment for a project. In general, because the services Ryan provides to its clients are interconnected, span multiple years and locations, and encompass a variety of different tax credits and incentives (national, state, regional, and municipal), the fees it charges cannot be isolated on a “per credit” basis.
Underscoring these arguments is the basic notion of fairness. It is unjust for government to intrude into a company’s business judgments to the point of dictating how a company pays its consultants. Ryan levied a similar blow to Internal Revenue Service (IRS) business regulatory overreach in 2014 in Ridgely v. Lew, which invalidated restrictions prohibiting attorneys, certified public accountants (CPAs), and other practitioners from entering into performance-based fee arrangements for services before the IRS (known as Circular 230 provisions).
This ruling on the California GO-Biz case is a win for businesses as well as economic development in the state of California. Ryan will continue to lead the charge against unfair and illegal government interference that infringes on the rights of taxpayers and inhibits economic growth.
Respectfully, I ask how Mr. Ryan (a CPA by all accounts) gets around AICPA rules (same rule in California and Texas) prohibiting contingent fees for the preparation of tax returns, including original returns and amended tax returns or claims for refund. Perhaps this is the next piece of litigation, but the courts’ reasoning in Loving and Ridgely was specific to Circular 230 and would not apply to actions taken by state boards of accountancy.
Linda,
AICPA rules have never prohibited contingent fees other than for original tax returns and amended returns or claims for refunds not reasonably expected to be reviewed by the jurisdiction. In fact, earlier versions of Circular 230 mirrored the AICPA language until the IRS unilaterally decided to change it in 2008 for the sole purpose of reducing refund claims.
Mr. Ryan’s post raises two concerns in my mind.
First, Mr Ryan’s thesis is ” It is unjust for government to intrude into a company’s business judgments to the point of dictating how a company pays its consultants.” I am not quite sure I follow his logic. As I understand it, it’s the government that is offering money to a business via a tax credit in the first place. Contingency fees create a perverse incentive for tax advisors to take aggressive positions in order to secure fees. No credit, no fee. Credit allowed, HUGE fee. So if you have a system that operates as an audit lottery, it’s a “win-win” as between the taxpayer and tax advisor if they collaborate to make an outrageous claim and thereby secure oodles of moola they can share. The big losers are all the other taxpayers. I don’t see what so “unjust” about the government saying it does not want to give away its money to folks whose fee arrangement increases the likelihood of inaccurate returns. To me it’s a sensible protection of the public’s money.
Second, Mr. Ryan says nothing about how unjust contingency fees might be when clients get caught on audit and the credit is disallowed. The unjustness is to the client who has effectively shared the credit with the tax advisor and so reaped only a partial benefit but, after audit, must repay the entire amount while the tax advisor keeps the “fee.” Again, a prophylactic rule prohibiting contingency fee arrangements is a much more sensible approach to this problem than to tackle the problems ex post.
Mr. Ryan’s concern appears to be rooted in a notion that small entities don’t have cash flow to pay for tax work. Contingency fees are not the only way to deal with cash flow problems of a client. You can defer the obligation to pay the fee until the credit is received. That has nothing to do with the amount of the fee. If the tax advisor determines the client is not eligible for a credit, presumably the fee would be less. Either way, the client can pay off in installments.
Finally, I note that the relationship of this suit to the Ridgley litigation is unclear (aside from the fact that it is the same firm involved in both suits). Ridgley involved the question of whether the Treasury Department exceeded its statutory authority in prohibiting contingency fees in for amended returns. Neither Mr. Ryan’s post nor his website (which is the link) give the facts of this case so it is not clear whether the facts are on all fours with Ridgley or not. Was this an amended return? Is there an audit lottery for these types of returns or are all subject to the same scrutiny before the credit is allowed? In short, there may be some decent legal reason why the state agency went beyond its authority here that has nothing to do with Mr. Ryan’s rather bizarre thesis that government regulation of contracts is per se unjust.
The link goes to the company website, which has a link to the opinion.
http://ryan.com/Assets/Downloads/2014-00167988%20RYAN%20v%20STATE%20final%20ruling.pdf
Hi Bob, thanks. That was helpful. -bryan
It’s difficult for me to get worked up over these welfare-for-the-rich programs. In November, California announced that 89 companies would share $43.7 million in these tax credits. That’s about half a million per company, so Professor Camp is probably correct that these are people who can afford to pay an hourly fee. But they are not hiring a company to investigate eligibility and apply for just one tax credit in just one state. In fact, what it sounds like is that Ryan may be advising a company that there are better places than California to do business, if the objective is to maximize tax credits.
The key fact to me is that the total pot for this tax credit is limited. The more applications received, the smaller the slice of pie awarded to everyone. If the slice is small enough, it’s not worth the trouble.
California universities pay millions to employees and others who write grant proposals. This brings in lots of money that would otherwise be lost to other states or countries. Preparing one of these tax credit applications looks much more like writing a grant proposal, than filling out a tax return.
A few years ago a California voter initiative tried to raise the state’s tobacco tax, and lost when it was pointed out that the tax proceeds (for medical research, as I recall) did not have to be spent in the state. My guess is that Ryan doesn’t have any local competitors (although many local offices), and the bureaucrats want to keep the money in California.
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