Sometimes it pays to fight the tax authorities

When the Science Applications International Corporation (SAIC) filed its 1999 tax return, it made a huge mistake based on a misreading of the tax law. That mistake led them to overpay their state taxes by millions of dollars. Combined with other amounts they had paid (about $4.9 million) they still got a refund of over $685,000.

Here's where the mistake occurred. SAIC, a California- based company also had offices in Maryland. In 1999 they sold stock, in Network Solutions, Inc, which they had held for investment, resulting in a gain of $716 million. Based on their reading of the laws of the state of Maryland (Section 13-603 of the Tax General Article), they believed the gain was subject to Maryland state tax. They reported it, and paid over $4.2 million in addition to amounts they had already paid. Later they concluded that the gain from the sale of stock was not taxable in Maryland. Just before the statute of limitations expired, they filed an amended return, requesting a refund.

The state comptroller denied the refund, claiming that the tax as originally figured was correct because part of the gain on the sale of stock was taxable in Maryland.

SAIC took them to the Maryland Tax Court, and the Court found that there was "no nexus between SAIC's capital gain on the stock sale and the State of Maryland," therefore, the income was not taxable. Because of the legal delay, 32 months passed between the time SAIC filed its amended return and the actual payment of the refund.

SAIC then went back to the Tax Court to ask for interest accrued during that 32 month period. According to Maryland state law, interest is generally due if a refund is not paid within 45 days, says Assistant Attorney General Gerald Langbaum. But, he added, this law has two exceptions, one of which reads: "a tax collector may not pay interest on a refund if the claim for refund is based on: An error or mistake of the claimant not attributable to the State or a unit of the State."

The comptroller relied on this exception to deny the interest payment. The Tax Court ruled for SAIC, finding that the interest was payable.

Back to Court

The state took the case to the Court of Special Appeals in Maryland, and SAIC cross-appealed. The comptroller's argument centered on the belief that, because the error was made by SAIC, it could not be attributable to the state. He asked the high court to find the lower courts were in error. SAIC contended that the error was made by the state, therefore the lower courts were correct.

The high court ruled that the state's case refuted itself. The state of Maryland argued that SAIC was at fault for not realizing sooner that they were due a nearly $4.3 million refund. But because the comptroller denied and fought that refund, it was clear to the court that the state also believed that a refund was not due. Therefore the error was at least partly attributable to the state. Langbaum was unable to accurately report the amount of interest that will be paid to SAIC, but estimates it will be in excess of $400,000. He added that, in cases involving a good faith difference of opinion, the Court tends to lean in favor of the taxpayers.

Comptroller of the Treasury v. Science Applications International Corporation

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