Comptroller hearing decisions have imposed the clear and convincing evidentiary standard on franchise taxpayers seeking deductions. In recent state court franchise tax suits, the Comptroller has made similar allegations in his trial and appellate court briefing. However, the Third Court of Appeals, in Newpark, Titan, CGG , and AMC has imposed no such standard. As a result, it appears that taxpayers pursuing relief through the administrative process may face hurdles in proving their cases that are not present in state court litigation.

The clear and convincing standard is a heightened burden of proof normally reserved for taxpayers seeking sales tax exemptions. Otherwise, taxpayers only have to prove their case by a preponderance of the evidence, which means just over 50% in percentage terms.

In Comptroller Hearing No. 112,081 (recently released to the STAR system), the Comptroller stated:

“Generally the burden rests on the taxpayer to show audit error by a preponderance of the evidence. However, the courts treat a franchise tax deduction as tantamount to an exemption and therefore construe the provisions strictly against the taxpayer and in favor of the taxing authority. Therefore, in order to prevail in the instant matter [the taxpayer] must demonstrate, by “clear and convincing” evidence that the auditor erred in denying the COGS deductions for the report periods at issue.” Hearing No. 112,081 at 7 (internal citations omitted).

In support of his position, the Comptroller cites to Comptroller Rule 1.40(2)(A) and a 1998 Third Court of Appeals opinion construing a now-repealed version of the Texas franchise tax and holding that the taxpayer failed to show, by clear and convincing evidence, that future lease payments constitute a “debt” when computing the former franchise tax on the corporation’s surplus.

However, in its recent opinion issued in American Multi-Cinema v. Hegar, the Third Court of Appeals declined to apply a heightened evidentiary burden, stating instead that “[t]axing statutes are construed strictly against the taxing authority and liberally for the taxpayer.”