Remember Lois Lerner? Remember her pleading the Fifth, and refusing to answer questions about alleged IRS wrongdoing? In City of Phila. v. Lerner, we learn that this doesn’t work out the same way when you’re not employed by the government.
In 2004, the City of Brotherly Love (home of the Tax-Free Shopping Spree) received an anonymous tip that one of its residents—Nathan Lerner—wasn’t shouldering his share of the city’s tax burdens and was concealing the existence of businesses (and thus, their taxable profits) from the City. But games of hide-and-seek don’t end just because the Seeker asks where you’re hiding, and Mr. Lerner declined to answer the City’s requests for information about his businesses. More audaciously, Lerner ignored the exorbitant tax bills that the City sent him to smoke out the true information.
The City filed an enforcement action in the CCP, requesting full payment of the exorbitant taxes they assessed. A default judgment followed, and an opening of the default, and finally Mr. Lerner showed up in court. Lerner, as appears to be his custom, declined to answer the City’s motion in limine, which was granted, preempting Lerner from challenging the underlying tax estimates, which the City’s own employees described as “just [made] up,” and designed to scare the taxpayer into “com[ing] in and mak[ing] sure the figures are accurate.” The trial court agreed, concluding the tax bill was “basically an amount pulled out of the sky,” but nonetheless ordered Lerner to pay the full, assessed amount with interest.
Lerner challenged the trial court’s ruling that he must pay the tax bill as against the weight of the evidence, and argued that he should have been able to argue the underlying tax bill in the CCP. SCOPA disagreed, ruling that a litigant’s failure to exhaust all administrative remedies barred him from raising the waived argument in court. The Court framed this as a jurisdictional matter, arguing that the Philadelphia Tax Review Board had exclusive original jurisdiction over the tax amount.
Lerner urged for a special exception to the rule, which has been around since at least Krug v. City of Phila., 152 Pa.Cmwlth. 475 (1993). The Court declined to create such an exception, and made little effort to disguise its disgust with Lerner for his failure to answer requests for information, tax bills, complaints, and even motions before the trial court. “Lerner asserts that reversal is necessary to prevent a ‘fraud’ in the legal process. But that process consists of rules, and Lerner has flouted them at every turn.”
An unusually spirited pair of dissents issued from Chief Justice Saylor and Justice Donohue. Justice Donohue argues that the “scam preceded any attempt by Lerner to assert a defense,” and expresses hope that it will be “the rarest of occasions when a plaintiff comes into a Pennsylvania court, straightforwardly admits in its case-in-chief that it is proceeding arbitrarily and without any evidentiary basis whatsoever, and nevertheless demands that the court enter judgment in its favor on a fictional damage amount.” Justice Donohue would eschew the typical considerations of efficiency underlying the “exhaustion of administrative remedies rule,” and refuse to allow an admitted fraud to be perpetrated through the courts.
This case is not terribly noteworthy for its rule of decision: after all, exhaustion of administrative remedies is a standard precursor to arguments in trial courts. But one can’t help but notice the way in which this decision would be different if the parties were reversed. We don’t need the experience of Lois Lerner to know that local taxing authorities don’t feel constrained to respond to the taxpayer’s request for information in a timely manner. For the taxpayer, however, failure to respond gives the taxing authority power to pick the penalty in a Pennsylvania court, and apparently to accompany the choice with an open admission of its exorbitance.
Furthermore, while this case rested largely on procedural grounds, one wonders why the Court did not consider the possibility that there is a difference between skipping administrative remedies as a Plaintiff, and being able to raise the lack of substantive proof as a Defendant. No one is arguing that Lerner should be able to sue the City of Philadelphia without first exhausting all administrative processes; but when sued over an amount that is admittedly made up, a trial court seems like the appropriate venue for fact-finding, regardless of the taxpayer’s past omissions.
Slip opinion here.
Saylor, C.J., dissenting.
Donohue, J., dissenting.