     The summaries of the Colorado Court of Appeals published opinions
  constitute no part of the opinion of the division but have been prepared by
  the division for the convenience of the reader. The summaries may not be
    cited or relied upon as they are not the official language of the division.
  Any discrepancy between the language in the summary and in the opinion
           should be resolved in favor of the language in the opinion.


                                                                  SUMMARY
                                                           February 13, 2020

                                2020COA26

No. 18CA1540, IBM Corp. v. City of Golden — Taxation —
Municipalities — Sales and Use Tax; Judgments — Issue
Preclusion

     A division of the court of appeals holds that IBM Corporation

was not barred by issue preclusion from contesting sales and use

taxes that were assessed by the City of Golden. The division also

holds that the prior judgment against IBM did not adjudicate

whether IBM’s tax accounting system was reliable, nor did the prior

judgment adjudicate whether IBM’s specific transactions were

taxable.
COLORADO COURT OF APPEALS                                       2020COA26


Court of Appeals No. 18CA1540
City and County of Denver District Court No. 16CV30076
Honorable John W. Madden IV, Judge


IBM Corporation,

Plaintiff-Appellee,

v.

City of Golden, Colorado, a home-rule municipality; and Jeffrey A. Hansen, in
his official capacity as Finance Director of the City of Golden,

Defendants-Appellants.


                      JUDGMENT AFFIRMED AND CASE
                       REMANDED WITH DIRECTIONS

                                 Division VII
                         Opinion by JUDGE BERGER
                         Fox and Lipinsky, JJ., concur

                         Announced February 13, 2020


Wheeler Trigg O’Donnell LLP, Hugh Q. Gottschalk, Pawan Nelson, Denver,
Colorado, for Plaintiff-Appellee

Berg Hill Greenleaf Ruscitti LLP, Thomas E. Merrigan, Heidi C. Potter, Denver,
Colorado, for Defendants-Appellants
¶1    After an audit, the City of Golden assessed sales and use taxes

 against IBM Corporation for the 2003–2005 tax period. Finding

 that IBM did not meet its burden of proving that the assessment

 was incorrect, the Jefferson County District Court (Jefferson court)

 upheld the assessment of those taxes and a 50% penalty authorized

 by the Golden Municipal Code (GMC).

¶2    Golden then performed a second audit for later tax years. This

 time, IBM provided Golden with more documentation and greater

 access to its tax records. Still, Golden assessed sales and use taxes

 that IBM contested. On appeal to the district court again, but this

 time in Denver District Court (Denver court), IBM largely prevailed. 1

 The court found that most of the transactions that IBM challenged

 were not taxable under the GMC.

¶3    The central issue in this appeal is whether, under the doctrine

 of issue preclusion, the Jefferson court order barred IBM from

 litigating the taxability of its transactions from the later audit

 period. Like the Denver court, we conclude that issue preclusion



 1 Jeffrey A. Hansen was also a party to that appeal, as he is now in
 this court. He is named in his official capacity as the Finance
 Director of Golden.

                                     1
 does not apply, so we affirm the district court’s order, except that

 we remand for the imposition of the lesser 10% penalty and interest

 under the GMC.

                           I.    Background

¶4    IBM provides information technology services to Xcel Energy

 Services, Inc., at Xcel’s facility in Golden, under an “Information

 Technology Services Agreement.” The parties agree that Xcel pays

 IBM for three types of transactions under the agreement: fixed

 management fees, variable charges, and pass-through charges.

¶5    Golden audited IBM for the tax period from 2003–2005 (the

 first audit) regarding IBM’s transactions with Xcel. The city’s

 auditor concluded that IBM was not providing information that

 detailed which specific transactions, including transactions

 classified as fixed management fees and variable charges, were

 taxable, so the auditor estimated IBM’s tax liability. Exercising

 review under section 39-21-103, C.R.S. 2019, the Colorado

 Department of Revenue (DOR) upheld this estimate and imposed a

 50% penalty on IBM for being delinquent without good cause. This

 penalty is authorized by the GMC, §§ 3.08.010(a), 3.08.030.




                                    2
¶6    IBM appealed to the Jefferson court, which upheld the

 assessment and the penalty. The court found that IBM had failed

 to meet its burden of proving that the assessed taxes were

 unauthorized by the GMC. IBM tried to prove that it was not

 subject to Golden’s taxes with testimony from an expert whom IBM

 hired to conduct his own sales and use tax audit, but the court

 found that the expert was unreliable for a host of reasons. One

 reason was that the expert treated a number of transaction

 classifications, including fixed management fees and variable

 charges, as containing only nontaxable transactions, but the court

 found that those classifications contained taxable and nontaxable

 transactions. The court also admonished IBM for repeatedly failing

 to provide Golden with documents it requested. A division of this

 court upheld the Jefferson court’s judgment on appeal. IBM Corp.

 v. City of Golden, (Colo. App. No. 11CA0367, Mar. 8, 2012) (not

 published pursuant to C.A.R. 35(f)).




                                  3
¶7    Meanwhile, Golden audited IBM for tax years 2006–2008 (the

 second audit) and then 2009–2012 (the third audit). 2 The record

 demonstrates, and the Denver court found, that IBM was more

 cooperative this time. For instance, IBM hosted the auditor at its

 offices in Connecticut for three days so he could review IBM’s tax

 processes and systems. The auditor noted that IBM’s tax

 department was “extremely helpful and very courteous and

 professional.” And IBM presented evidence that during this round

 of auditing, it provided substantially more documentation to Golden

 and was more responsive to Golden’s requests.

¶8    Nevertheless, Golden’s auditor concluded that he could not

 render a complete and accurate tax assessment because IBM was

 not separately identifying the taxable and nontaxable components

 of certain transactions. The auditor issued tax assessments, again

 based on estimates.

¶9    IBM appealed those assessments to the Finance Director of

 Golden, Jeffrey A. Hansen, and then to the DOR, losing both


 2 The third audit was never completed because the auditor was
 retiring. The auditor’s superiors directed him to issue the
 assessment for the third audit period based on information from the
 second audit period.

                                   4
  appeals. The DOR further found that IBM was again delinquent

  without good cause in paying sales and use taxes, so it imposed the

  50% penalty and interest.

¶ 10   Then IBM appealed to the Denver court. At the time of trial,

  the tax assessments totaled $2,592,817.66 for the second audit

  period and $3,492,418.29 for the third audit period. IBM’s

  complaint alleged that the assessments were erroneous because

  they improperly imposed sales and use tax on services and

  transactions that were not subject to Golden’s tax.

¶ 11   Golden moved for partial summary judgment, arguing that the

  doctrine of issue preclusion barred relitigating (1) whether IBM had

  a reliable “tax accounting system” and (2) whether the variable

  charge and fixed management fee classifications contained any

  nontaxable transactions. The Denver court denied the motion in a

  written order.

¶ 12   On Golden’s first argument, the court reasoned that the

  “documents IBM provided Golden in the instant case and whether

  those documents itemized the transactions sufficiently for a

  determination of taxability goes to the essence of this issue . . . and

  the extent of the documentation produced by IBM remains a factual


                                     5
  issue.” The court also found that Golden did not “specifically

  identify the documentation produced and how it is essentially the

  same as those produced in the previous litigation.” Addressing

  Golden’s second preclusion argument, the court explained that the

  Jefferson court order found that some of the transactions under the

  agreement were taxable, but that the order did not provide a

  specific listing identifying which ones.

¶ 13   For these reasons, the Denver court concluded that issue

  preclusion did not prevent IBM from litigating the taxability of its

  transactions at issue in the second and third audits.

¶ 14   The case proceeded to a bench trial. By statute, because this

  was an appeal from a DOR determination, the Denver court tried

  the case de novo. § 39-21-105, C.R.S. 2019.

¶ 15   After the close of evidence, in a lengthy and well-reasoned

  order, the Denver court again concluded that IBM was not barred

  by issue preclusion from challenging the taxability of specific

  transactions. Next, the court found that IBM classified any taxable

  transactions as pass-through charges, not fixed management fees

  or variable charges. Thus, the court found that the specific

  transactions that were classified as fixed management fees or


                                     6
  variable charges were not taxable. Finally, the court found that

  IBM owed $32,896.13 stemming from certain pass-through

  transactions. Neither party appeals this portion of the judgment.

¶ 16   In a post-trial motion under C.R.C.P. 59, Golden asked the

  district court to assess a 10% penalty and 1% per month interest on

  the $32,896.13 award, as required by section 3.08.010(a) of the

  GMC. The 10% penalty and interest are required on any

  outstanding taxes of a delinquent taxpayer under section

  3.08.010(a) of the GMC. IBM agreed that it was liable for the 10%

  penalty and interest, but the district court did not rule on the

  motion within the sixty-three-day time period under C.R.C.P. 59(j),

  so the motion was deemed denied.3

                               II.   Analysis

                          A.    Issue Preclusion

¶ 17   Golden argues that the Denver court erred by failing to give

  preclusive effect to the Jefferson court order. “Issue preclusion is a




  3 At oral argument, IBM again agreed that Golden was entitled to
  the 10% penalty and interest on the taxes upheld by the Denver
  court.

                                     7
  question of law that we review de novo.” Stanton v. Schultz, 222

  P.3d 303, 307 (Colo. 2010).

¶ 18     Issue preclusion prevents relitigation of a legal or factual

  matter that has been decided in a prior proceeding. McLane W., Inc.

  v. Dep’t of Revenue, 199 P.3d 752, 757 (Colo. App. 2008). It applies

  when

              (1) the issue in the second proceeding is
              identical to an issue actually and necessarily
              adjudicated in a prior proceeding; (2) the party
              against whom estoppel is asserted was a party
              or in privity with a party in the prior
              proceeding; (3) there was a final judgment on
              the merits; and (4) the party against whom
              estoppel is asserted had a full and fair
              opportunity to litigate the issue in the prior
              proceeding.

  Id. (citing City & Cty. of Denver v. Block 173 Assocs., 814 P.2d 824,

  831 (Colo. 1991)). Issue preclusion can apply in tax cases. Id. at

  758.

¶ 19     But in interpreting federal income tax statutes, the United

  States Supreme Court has noted that courts should be careful

  when applying issue preclusion to tax cases. Comm’r v. Sunnen,

  333 U.S. 591, 597–600 (1948). The Court reasoned that issue

  preclusion should not be used to prevent a taxpayer from



                                      8
  challenging tax assessments in later years when circumstances

  have changed since a prior judgment. See id. at 599–601. Issue

  preclusion “is not meant to create vested rights in decisions that

  have become obsolete or erroneous with time, thereby causing

  inequities among taxpayers.” Id. at 599.

¶ 20   While we are not bound by Sunnen, the Supreme Court’s

  analysis addressing the limits of issue preclusion in tax cases is

  persuasive. Other states have likewise applied Sunnen to state tax

  cases. McLane, 199 P.3d at 758–59 (listing cases).

¶ 21   Here, the parties dispute only the first element of issue

  preclusion — whether issues in the second proceeding are identical

  to issues actually and necessarily adjudicated in a prior proceeding.

  Golden first argues that the Jefferson court found that IBM’s entire

  “tax accounting system” was unreliable for calculating IBM’s tax

  liability, so IBM was precluded from arguing that any components

  of its tax accounting system were reliable in the Denver district

  court. The record does not support this argument, so we reject it.

¶ 22   Nowhere in the Jefferson court order does the court make a

  broad finding on the reliability of IBM’s “tax accounting system.” In




                                    9
  fact, nowhere in the Jefferson court order does the phrase “tax

  accounting system” appear.

¶ 23   Rather, the Jefferson court order relied both on IBM’s failure

  to produce the documents necessary for determining the

  corporation’s tax liability and on the unreliability of IBM’s expert.

  In support of the court’s finding that IBM’s expert was unreliable,

  the Jefferson court noted several components of IBM’s accounting

  system that it found unreliable, which the expert had relied on in

  his analysis. Because the Jefferson court never found that IBM’s

  entire tax accounting system was unreliable, IBM was not

  precluded in the Denver case from arguing that it provided reliable

  tax information to Golden, nor was IBM precluded from using its

  tax information, as it did, to argue that certain transactions were

  not taxable.

¶ 24   Moreover, the facts found by the Denver court illustrate why

  Sunnen’s warning regarding the unrestricted application of issue

  preclusion to tax cases is well founded. Under Sunnen, it would be

  improper to conclude that a taxpayer’s intransigence in one tax

  period forecloses the possibility that the taxpayer kept better

  records and provided more documentation in later tax periods.


                                    10
  Here, the district court found that during the second audit, IBM

  was cooperative, provided substantially more information than it

  provided during the first, and even brought Golden’s auditor to the

  corporation’s headquarters in Connecticut. These findings support

  our conclusion, and the Denver court’s conclusion, that issue

  preclusion was inappropriate on the issue of documentation and

  access provided by IBM.

¶ 25   Golden next contends that IBM was precluded from arguing

  that its purchase and sales journals were a reliable basis for

  assessing tax liability. Again, the record does not support this

  argument.

¶ 26   The Jefferson court never made a finding on the reliability of

  purchase and sales journals. The term “purchase and sales

  journals” appears only once in the Jefferson court order — and not

  in the sections of the record cited by Golden for this supposed

  finding — when the court discussed the documents that Golden

  requested. The last time that the Jefferson court order mentioned

  the documents requested by Golden, which would seemingly

  include the purchase and sales journals, was in the court’s

  admonition that “IBM still had not provided the information


                                   11
  requested.” So, as best we can tell, there is no indication that these

  journals were ever provided to Golden or the court. 4 Because the

  Jefferson court did not make a finding on the purchase and sales

  journals’ reliability, IBM was not precluded from offering them as

  evidence of its tax liability, and the Denver court permissibly could

  find, as it did, that the journals were reliable for that purpose.

¶ 27   Golden also contends that IBM was precluded from arguing

  that any transactions classified as variable charges or fixed

  management fees were not taxable because the Jefferson court

  found that some of those charges were taxable. We disagree.

¶ 28   In the Denver court, IBM argued that several specific

  transactions, which were classified as variable charges or fixed

  management fees, were not taxable. There is little or no detail in

  the Jefferson court order that defines which particular transactions

  gave rise to sales and use tax liability. Instead, the Jefferson court


  4 Golden repeatedly cites footnote seventeen of the order for the
  Jefferson court’s finding on the reliability of the journals. But
  there, the court discussed how “data feeds” were not provided to the
  city in an understandable format. We do not know what “data
  feeds” refer to. Absent any record support that data feeds are
  synonymous with purchase and sales journals, the Jefferson court’s
  judgment did not actually or necessarily decide that the journals
  were unreliable.

                                     12
  order noted that “some” fixed management fees and variable

  charges “collected pursuant to the ITS Agreement were taxable in

  the City.” Because the Jefferson court order did not specify which

  transactions were taxable, IBM was not precluded in the second

  case from arguing that specific transactions were not.

¶ 29   For these reasons, we conclude that the Denver court correctly

  rejected the application of issue preclusion and correctly allowed

  IBM to challenge the tax assessments on their merits.

¶ 30   Golden does not otherwise challenge the district court’s

  findings or conclusions, except as discussed below, so we do not

  review them further.

                     B.    C.R.C.P. 37(a) Sanctions

¶ 31   Golden challenges the district court’s C.R.C.P. 37 ruling that

  precluded Golden from presenting evidence on the taxability of

  IBM’s software maintenance agreements. The court found that

  Golden had failed to disclose this legal theory in response to IBM’s

  discovery request, IBM did not have sufficient notice of the

  argument, and IBM was prejudiced by the nondisclosure.

¶ 32   We review C.R.C.P. 37 sanctions for an abuse of discretion.

  Sheid v. Hewlett Packard, 826 P.2d 396, 399 (Colo. App. 1991). The


                                   13
  trial court is generally in the best position to determine what

  sanctions are appropriate when a party fails to fully answer

  discovery requests. See Kallas v. Spinozzi, 2014 COA 164, ¶ 19.

¶ 33   Golden contends that IBM had notice that Golden would argue

  that the software maintenance agreements were taxable because

  they were a subject of the Jefferson court litigation, IBM’s witnesses

  discussed software maintenance agreements on direct examination,

  and Golden argued that software maintenance agreements were

  taxable in its motion for summary judgment. 5

¶ 34   The Denver court considered Golden’s preserved contentions.

  The court had the broad discretion to conclude, notwithstanding

  Golden’s contentions, that IBM was prejudiced by Golden’s

  nondisclosure and that the appropriate sanction was to prohibit

  Golden from presenting evidence on its undisclosed argument.

  Therefore, we do not disturb the Denver court’s C.R.C.P. 37 ruling.




  5 The argument that IBM’s witnesses discussed software
  maintenance agreements was not made to the Denver court, so we
  do not address it further. Russell v. First Am. Mortg. Co., 39 Colo.
  App. 360, 363, 565 P.2d 972, 975 (1977) (holding that a party on
  appeal may not allege error on grounds that were not considered by
  the trial court).

                                    14
         C.   Tax Penalties Under The Golden Municipal Code

¶ 35   Lastly, Golden asks for the reimposition of the 50% penalty if

  we reverse the district court’s ruling on issue preclusion. Because

  we do not, we uphold the Denver court’s determination that the

  50% penalty is unwarranted.

¶ 36   But in the alternative, Golden asks us to remand for the

  imposition of the mandatory 10% penalty, with 1% per month in

  interest. IBM confessed Golden’s C.R.C.P. 59 motion regarding the

  assessment of the 10% penalty and interest on the taxes that were

  found due by the district court, but the Denver court never ruled on

  the motion, so it was deemed denied. Accordingly, we remand the

  case to the Denver court and instruct the court to amend the

  judgment to include the required 10% penalty and interest on the

  taxes it upheld against IBM.

                            III.   Conclusion

¶ 37   The case is remanded to the district court to amend the

  judgment to include a 10% penalty on the amounts found due by

  the district court and to assess interest as provided by the GMC. In

  all other respects, the judgment is affirmed.

       JUDGE FOX and JUDGE LIPINSKY concur.


                                    15
