SUCCESSFULLY NEGOTIATING A TAX SETTLEMENT – EVEN IN THIS ECONOMY California Tax Policy Conference San Diego, California November 2, 2012 Jeffrey M. Vesely Pillsbury Winthrop Shaw Pittman LLP

1 | Cutting a Deal  Are you really willing to settle?  Are you prepared to go to the mat in litigation?  Are you prepared to make it look like you are willing to go to the mat?  What are you willing to give up?  Do you have flexibility regarding terms of a settlement?

2 | Cutting a Deal (Cont.)  Why settle?  Evaluate pros and cons  Evaluate the relative merits of the issues  Be realistic  Don’t let it get personal  Assess the strengths and weaknesses of the facts and legal arguments  Are the equities on your side  Use of resources and expenses related to continuing the controversy  Effect on future years  Effect on other issues  Are the issues continuing?

3 | Cutting a Deal (Cont.)  When to settle?  At audit?  At protest?  At appeal?  In court?

Cutting a Deal (Cont.)  When to settle?  Before litigation costs start mounting  After discovery is complete  After a victory  Just prior to end of state’s fiscal year  On the courthouse steps 4 |

5 | Cutting a Deal (Cont.)  Alternatives to payment of large refunds  Refund payment over time  Combine refund with abatement of taxes for other years  Consider NOL and credit carryovers  Consider future years’ tax exposures

6 | Cutting a Deal (Cont.)  Alternatives to payment of large refunds (cont.)  Apply refund to other taxes  Hold funds as tax deposit  Apply refund credits to future years  Closing agreement as to certain issues for future years

Audit  Should you consider entering into a pre-filing agreement with respect to certain issues?  Should you consider entering into a closing agreement with respect to specific issues?  Evaluate pros and cons 7 |

Administrative Review Process  Should you consider entering into a closing agreement during the administrative review process outside the Settlement Bureau?  Evaluate pros and cons 8 |

9 | Settlement Bureau  Advantages to the Settlement Bureau  Cases generally move more quickly through the system  Nine Month Rule (FTB)  May minimize extensive information requests  Some issues are settled administratively which in the past had to be litigated  Allows for splitting of issues  Less expensive than judicial litigation

10 | Settlement Bureau  Disadvantages to the Settlement Bureau  Process is somewhat cumbersome due to the various levels of approval  Does not apply to cases at audit  FTB/SBE policies on settlements and litigating hazards  Only dealing with FTB/SBE Staff  In Court, the Attorney General’s Office is directly involved  Public disclosure of settlement results

11 | Settlement Bureau  Should You Consider Going to Settlement? Why? When?  Timing  Early vs. late in Protest/Petition process  Should you wait for the hearing officer to issue his/her decision?  Do you have issues you do not want to compromise?  Do you want to minimize inquiries by the hearing officer?

12 | Settlement Bureau  Should You Consider Going to Settlement? Why? When? (cont.)  Do you have evidentiary problems?  Do you have difficult issues?  Will FTB/SBE settle refund claims?  Should you narrow the issues or keep as many issues on the table as possible?

13 | Settlement Bureau  Should You Consider Going to Settlement? Why? When? (cont.)  Should you keep as much tax in dispute as possible?  Should you settle specific issues or entire tax years?  What about Federal RARs?

Court  Formal Procedures  Early Settlement Program  Mandatory Settlement Conference  Alternative Dispute Resolution  Arbitration  Mediation 14 |

Court  Informal Procedures  Involvement of Attorney General’s Office  Effect of Third Party Conferees  Use of Closing Agreements 15 |

16 | Questions

17 | Jeffrey M. Vesely Pillsbury Winthrop Shaw Pittman LLP San Francisco (415)