According to some, litigation is an art. Others, including me, might say it is a craft. Sure, we all need inspiration, perseverance and creativity to get to a good result. In the end, however, it is experience and method that will get us there. Below we explore five best practices to reflect this.
1. Convince the court, not the counterparty
In litigation, clients and counsel must resist the natural urge to try and convince the opposing party. Whether you’re up against the authorities, another legal person or individual or the public prosecutor, immediately before the litigation phase started, you were trying to reach an understanding with the ‘other party’. You were trying to make them see your point, win them over and avoid litigation. Apart from ‘them’ being convinced of your point, many other factors could have lead to a compromise or even an all-out win for your side. Policy, lack of means or priority, the personality of the official, procedural mistakes, the kindness of their hearts, if you will. It could all have played a role. Once they’ve decided to reject a claim and the case escalates to the judicial chain (first instance, appeal and cassation, in the Netherlands), it’s goodbye to most of that.
You may yet reach a settlement, but the crux is: now you are addressing a judge. In Dutch tax litigation, typically three judges. It no longer matters whether the counterparty will be convinced of your arguments. It’s now in the court’s hands. Game theory suggests that, for any compromise, it matters only whether the counterparty believes the judge will support you instead of them.
I once launched a letter of appeal so ironclad, that the tax authorities called me before submitting their written defense. They wanted a ‘compromise’, the compromise being their full capitulation, including some damages for undue delay (very rare in the Netherlands) and expense compensation, in exchange for my client withdrawing the appeal. After consulting the client, I gladly agreed and asked them to send me that ‘settlement’ in writing.
2. Don’t confuse them – convince them
If convincing is key, what, then, is a convincing argument? A good argument has three key characteristics: it is simple, it stands on its own and a judge can endorse it without to much effort and without getting into trouble. Trouble being: conflicting case law or an unwanted precedent. Not all lower courts are daring, upper courts want to avoid cassation by the Supreme Court, and the Supreme Court prefers to keep matters away from the Court of Justice of the EU. These tendencies can be put to good use.
For a lawyer, it is tempting to try and ‘educate’ or ‘instruct’ a court, demonstrate your deep knowledge of (tax) doctrine. Let them see you are to be taken seriously, and impress your client while you’re at it. This is pointless. The court will know its doctrine and a simple mention of a precise source and element of jurisprudence, legislative history or policy is typically enough. Tell the court what you want for your client, and why. It is not more complex than that.
Besides, a convincing argument and reasoning is typically one they can copy-paste in their ruling. By definition, that’s preferably short or they will start tinkering with it and maybe lose their conviction.
It is always useful to present the rule as universal and your case as very unique. Search for a beaten track, even if not used for that purpose before, and use it. A good way to search for such ‘beaten tracks’ is outside the specific context you are in. If you litigate over Corporate Income Tax, find a beaten-track argument in Value Added Tax case law or in municipal canine taxes if you have to. Find the beaten path and use the same frame. Again, a convincing argument can be copied from another decision and redeployed. Courts are understaffed and their time is limited. Elaborate, complex and convoluted arguments are typically not helpful except in a supporting role (see below).
Surely, it is key to remain credible in the eyes of the court. Don’t be late, don’t be rude, don’t be sloppy. A former colleague and tax attorney once told me he was in session at the tax court of appeal with a client attending in person. Typically, the party itself showing up is a good thing. It shows commitment and belief and is a matter of respect towards the court. It also helps if the client speaks up and phrases his / her / its sense of what is right in simple words. Not this client. In the middle of the session, his mobile phone rang. Instead of turning it off and putting it away in embarrassment, muttering excuses, he merrily picked it up. His immortal words “Hey, is it important? I am in the middle of a court hearing. What? Nah, I don’t really think so but we can always try.” My former colleague, petrified, turned away in disgust.
3. The ‘fattest cow’ comes first, the most annoying monkey last
As a Dutch expression goes, if you are going to sell cows, place the fattest cow in front of the others. In plain sight, it will stand out, be bought first. Place it behind the others and the buyer may walk on. As figure of speech, the fattest cow is the strongest argument. As said, it isn’t really fat, it is in reality lean and mean.
A fat cow is not the same as a maximalist claim, because you are not negotiating with a court. They have no skin in the game, except perhaps the hopes not to be overruled by a higher court. The fattest cow it is the best argument in support of the primary ground of appeal. If successful, it will yield the maximum result a client should reasonably want to achieve. Some would argue that, in the hierarchy of grounds for an appeal and of arguments, matters of substantive law come first and those of procedural law second. But if the fattest cow, potentially bringing a sweeping victory, revolves around procedural law, I’d say let it come first.
Complex or troublemaking arguments can serve a purpose too. Not as a ‘fat cow’, but as an ‘annoying monkey’. Think of an argument of EU-law, of sound administration, non-discrimination, something requiring further fact-finding, or something that would wreak havoc on the tax system or an existing piece of doctrine if approved. The ‘annoying monkey’ must be credible enough to be taken seriously, but complex and ‘dangerous’ enough for the court to want to circumvent it.
I once litigated over whether or not a corporate tax group had been discontinued. We made sure the final argument in the hierarchy of grounds was a complex non-discrimination claim. It was a claim under a widely applied non-EU tax treaty that could have ramifications way beyond the specifics of the case. I am convinced the court – it was the Supreme Court – was content to find support for our client in our fat cow, a bold but at least very simple argument. As a result, the ‘annoying monkey’ didn’t need to be addressed. Years later, I found the same argument in slightly different cases until one day it was endorsed by the Supreme Court. It had managed to fend off that monkey for a long time.
4. Go all in or regret it later
Despite the game of fat cows and annoying monkeys, all appeal grounds and arguments reasonably available must be brought forward. This takes time and effort. If the fat cow is the shortest way home for the court, and the annoying monkey the court’s incentive to take it, all other grounds are brought forward ‘just in case’. There are three reasons to do so. First, in theory, more arguments means: more options to win. An argument can be ‘off the wall’, as long as it is not nonsense one can – and should – use it. More importantly, an argument that wasn’t brought forward initially cannot always be used at a later stage if not made explicit early on. Third, if the court’s reasoning to reject an argument is lacking or unsatisfactory, it may provide the stepping stone for an appeal based on procedural law.
Any new litigation phase is an opportunity to fight another day. In tax litigation, clients only stand to lose the expense of the appeal. As a taxpayer, you cannot be worse of due to your own appeal (except for the expenses you incur). If new case law or new policies emerge during the litigation phase, doors may open up that were closed or at best ajar when the case began. In this context, it is particularly important to keep an eye out for pending cases and use the arguments brought forward in those.
I once opposed, based on argument X, a tax assessment for a Dutch resident who had underreported foreign financial assets. Just in case, I added argument Y in relation to a developing case vague similar to mine. The case was lost at the lower court as they saw no basis in argument X. By the time my case reached the upper court, argument Y was standing case law and even policy. Argument X wasn’t addressed anymore but the case was won anyway.
5. Don’t put all your eggs in one basket: multiple cases for alternative pressure points
Early in my career, I encountered the beauty of alternative pressure points. Most of the time, this means multiple routes of litigation. The first ones to think of are of course a civil action alongside a public law claim. But the answer is often found within the tax system itself.
As a young attorney, my mentor involved me in a case where a parent company had voluntarily waived a debt vis-à-vis its loss-making Dutch subsidiary. In our minds, it was a pretty clear case of a capital contribution that would have increased the equity of the subsidiary without creating a profit. That last point wasn’t trivial: a profit in relation to a debt waiver is exempt but only after consuming all losses carried forward. Such losses represented a potential future tax saving. The corporate tax inspector was adamant: according to him, the waiver amounted to a multimillion profit and all the losses were gone. My mentor thought of a beautiful detour: he applied for a formal decision as to the amount of capital contributed. Not for corporate tax purposes, but for dividend withholding tax purposes. The concept of ‘paid in capital’, however, is essentially the same for both taxes. My mentor obtained the decision that respected the full waiver as paid-in capital (share premium). Then he opposed the decision in the corporate tax matter and sent me to take it further. The case was won because the dividend tax statement issued by another branch of the tax authorities demonstrated that the corporate tax inspector was hanging on to a manifestly incorrect view.
This lesson stuck with me: I have applied the principle of alternative pressure points many times to avoid litigation or to prevail in it. It requires creativity and taking a step back. It means asking such questions as: “If this fact or transaction qualifies as [X] for [tax A], why wouldn’t it for [tax B]?” Very often, this thinking will yield results simply because the tax courts try to preserve the coherence and interpretation of universal concepts within the tax system if the legislator hasn’t made an exception.