Let the Shakedowns Begin: Tax False Claims Legislation in California
Legislators in Sacramento, California, are mulling over one of the most (if not the most) troubling state and local tax bills of the past decade.
Senate Bill (SB) 799, introduced earlier this year and recently amended, would expand the California False Claims Act (CFCA) by removing the “tax bar,” a prohibition that exists in the federal False Claims Act (FCA) and the vast majority of states with similar laws.
If enacted, SB 799 will open the floodgates for a cottage industry of financially driven plaintiffs’ lawyers to act as bounty hunters in the state and local tax arena. California taxpayers would be forced to defend themselves in high-stakes civil investigations and/or litigation – even when the California Attorney General’s Office declines to intervene. As seen in other states, this racket leads to abusive practices and undermines the goal of voluntary compliance in tax administration.
While the CFCA is intended to promote the discovery and prosecution of fraudulent behavior, Senator Ben Allen introduced the bill specifically to “protect public dollars and combat fraud.” The enumerated list of acts that lead to a CFCA violation does not require a finding of civil fraud. In fact, a taxpayer who “knowingly and improperly avoids, or decreases an obligation to pay or transmit money or property to the state or to any political subdivision” would be in violation of the CFCA (See Cal. Gov’t Code § 12651(a)(7)).
This standard is particularly inappropriate in the tax context and is tantamount to allowing vague accusations of noncompliance with the law, leading to taxpayers being hauled into court. Once there, taxpayers would be held hostage between an expensive legal battle and paying an extortion fee to settle. The CFCA is extremely punitive: Violators would be subject to (1) treble damages (i.e., three times the amount of the underreported tax, interest, and penalties), (2) an additional civil penalty of $5,500 to $11,000 for each violation, plus (3) the costs of the civil action to recover the damages and penalties (attorneys’ fees).
To the extent the action was raised by a private plaintiff (or relator) in a qui tam action, the recovered damages or settlement proceeds would be divided between the state and the relator, with the relator permitted to recover up to 50% of the proceeds (Cal. Gov’t Code § 12652(g)(3)). If the state attorney general or a local government attorney initiates the investigation or suit, a fixed 33% of the damages or settlement proceeds would be allotted to their office to support the ongoing investigation and prosecution of false claims (Cal. Gov’t Code § 12652(g)(1)).
Adding further insult to injury, the CFCA has its own statute of limitations independent of the tax laws. Specifically, the CFCA allows claims to be pursued for up to 10 years after the date the violation was committed (Cal. Gov’t Code § 12654(a)). A qui tam bounty hunter’s claim would supersede the tax statutes of limitations.
Next, the elements of a CFCA violation must only be shown “by a preponderance of the evidence” (Cal. Gov’t Code § 12654(c)). The common law burden of proof for fraud is by “clear and convincing evidence,” a much higher bar.
Absent amendments, SB 799 would put every significant California taxpayer in jeopardy when the taxpayer takes a legitimate tax return position on a gray area of the state or local tax law, even when the position was resolved through the California Department of Tax and Fee Administration, the California State Board of Equalization, the California Franchise Tax Board, or a local government. Settlement agreements, voluntary disclosure agreements, and audit closing agreements all would be disrupted if the attorney general or a plaintiff’s lawyer believes the underlying tax dispute or uncertainty is worth pursuing under the CFCA.
In countless cases in Illinois and New York, we have seen companies face False Claims Act shakedowns after the company already had been audited, had entered into a settlement with the state, or when the tax statute of limitations had long closed. SB 799 would bring the horrors experienced in Illinois and New York to taxpayers doing business in California.
Fundamentally, SB 799 threatens to open the litigation floodgates and undermine the authority of California tax administrators, putting tax administration in the hands of profit-seeking “whistleblower” bounty hunters. The goal of motivating whistleblowers and addressing tax fraud can be accomplished by simply adopting (and funding) a tax whistleblower program similar to the very successful programs offered by the Internal Revenue Service and many other states.
Ideally, SB 799 will be rejected in full or deferred for further consideration by an interim/study committee. With this in mind, the following amendments are essential to prevent the most severe abuses that stem from the CFCA’s application to tax.
Bring qui tam suits without government involvement. Eliminating the ability of private plaintiffs to bring qui tam suits without the involvement of the attorney general would significantly reduce the number of frivolous claims and give the state its sovereign right to decide whether a claim should be pursued under the CFCA. If this amendment is not accepted, companies that introduce new technology and innovative products will be at the greatest risk of being targeted for qui tam It is always the case that tax law does not keep up with technological advances. Thus, the gray areas of tax law will be most present for high-tech taxpayers.
Protect reasonable, good-faith tax positions. Companies should not be liable under the CFCA merely for taking a reasonable return position or otherwise attempting to comply with a reasonable interpretation of law. CFCA exposure should be limited to cases of specific intent to evade tax, proven by clear and convincing evidence. Tax law is notoriously murky, and good-faith disputes are what keep lawyers and accountants employed worldwide.
Defer to existing tax statutes. The CFCA should not override the California Revenue and Taxation Code provisions governing statutes of limitation or burden of proof.
Apply prospectively only. The CFCA should be limited in application to prospective matters (i.e., claims for taxable years beginning on or after January 1, 2026) to avoid retroactive liability and constitutional risk.
Additionally, there is an emerging body of caselaw involving the federal FCA, holding it violates the separation of powers under the US Constitution. Justice Thomas, in a dissent, suggested that the federal FCA might be unconstitutional because it transfers executive power to the private sector. A district court in Florida recently dismissed a qui tam action brought under the federal FCA on similar grounds. The California Constitution is structured like the US Constitution in this regard, with executive power vested in the governor and the attorney general serving as the chief law enforcement officer (See Cal. Const. art. V, §§ 1, 13). The qui tam provisions of the existing CFCA transfer these powers to private actors with no political accountability. It is likely these qui tam provisions of the CFCA similarly violate the California Constitution.
San Francisco Holds Hearing on Proposed New Sourcing Regulations Under Proposition M
On the heels of Proposition M—which mandates that the San Francisco Tax Collector adopt sourcing rules for determining the location of gross receipts—the San Francisco Office of the Treasurer & Tax Collector released proposed sourcing regulations, holding a hearing to discuss the matter on April 8, 2025.
Overview of the Proposed Regulations
The proposed regulations generally align with the California Franchise Tax Board (FTB)’s market-based sourcing rules, but diverge in certain areas:
1. Waterfall Approach to Sourcing: The regulations implement a waterfall (tiered) approach to sourcing gross receipts from:
Services and intangible property, including the use of customer-related data, books and records, or reasonable approximation; and
Financial instruments, which also follow a waterfall structure due to limitations on mirroring FTB’s treatment via regulation.
2. Industry-Specific Rules Excluded: The proposed regulations do not adopt some of the FTB’s special industry sourcing rules (e.g., rules applicable to partnerships, banks, and construction contractors).
3.Clarification on Apportionment: The Tax Collector’s Office explicitly notes that the proposed sourcing rules do not modify the apportionment rules and are solely intended to guide the sourcing of gross receipts within the apportionment formula.
Procedural Background and Public Hearing
On April 8, 2025, the Tax Collector’s Office held a public hearing to discuss the proposed regulations and solicit feedback. Highlights from the hearing include:
1.Comparative Reviews: Tax Collector Office Staff conducted comparative reviews of sourcing frameworks from the FTB and other jurisdictions.
2.Written Comments: Hearing officials confirmed that written comments were due by close of business on April 18, 2025. They specified that comments identifying specific clients will be treated as confidential, whereas general submissions will be public.
3.Oral Comments: There were also oral comments provided by industry representatives.
One private practice tax representative raised concerns over ambiguity in the treatment of asset management service providers.
A San Francisco Chamber of Commerce representative expressed support for consistency with FTB rules but requested clarity regarding the applicability of certain industry-specific rules. The Chamber representative also suggested the addition of a presumption of correctness in favor of taxpayers who follow the regulations.
Takeaways
The Tax Collector’s Office collected public comments on the proposed sourcing regulations on April 18, 2025. Based on these comments, additional hearings may be held to discuss the concerns raised by the public in response to the proposed sourcing regulations.
OFAC Issues Updated Guidance to Shipping and Maritime Sector Regarding Evasion of Iranian Oil Sanctions
On April 16, 2025, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) issued an update to its Sept. 2019 advisory, addressed to the global shipping and maritime sector, regarding sanctions evasion activities in connection with the shipment of Iranian-origin petroleum, petroleum products, and petrochemical products. The update was prompted by the Feb. 4, 2025 National Security Presidential Memorandum (NSPM-2), which directs the U.S. Department of the Treasury to implement a vigorous sanctions program to deny Iran and its terrorist proxies access to revenue.
Previously, on Oct. 11, 2024, Secretary of the Treasury Janet Yellen, in consultation with Secretary of State Anthony Blinken, had designated the petroleum and petrochemical sectors of the Iranian economy pursuant to Executive Order 13902, which authorizes the imposition of sanctions on any designated sector of the Iranian economy.
Iran relies on oil sales revenues to fund its malign activities, including its nuclear weapons and ballistic missile programs, and its support of terrorist groups. The oil shipments create significant sanctions risks for shipping companies, vessel owners, managers, operators, insurers, port operators, port service providers, financial institutions, and others in, or that work with, the maritime industry.
Iran’s Deceptive Practices
Iran-linked networks deploy an array of deceptive practices designed to circumvent sanctions, including:
Use of a “shadow fleet” of tankers. Iranian cargo is often transported on a shadow fleet of tankers, comprised of older, poorly maintained vessels that operate outside of standard maritime regulations. On Dec. 6, 2023, the International Maritime Organization (IMO) issued a resolution urging relevant stakeholders to avoid aiding illegal operations by the shadow fleet, but some stakeholders and jurisdictions continue to do so, by allowing substandard tankers to call at their ports; by overlooking adherence to international maritime regulations such as regular port state control inspections; and by providing bunkering, flagging, and crew management services to tankers sanctioned by OFAC or to other shadow fleet vessels. Iran also uses a separate shadow fleet of gas carriers to transport liquefied petroleum gas, primarily to China.
Use of ship-to-ship transfers to obscure origin and destination. While ship-to-ship (STS) transfers can be legitimate, Iran often uses multiple such transfers (typically three to five per shipment) to obfuscate the origin of the cargo and/or the involvement of sanctioned vessels. Multiple transfers are a strong risk factor for sanctions evasion. This is especially so when the transfers are conducted at night, in unsafe waters, near sanctioned jurisdictions, terminals, or refineries, or involve a vessel with missing or manipulated Automatic Identification System (AIS) data.
Use of falsified documents. To obscure the origin and destination of shipments, Iran-linked networks falsify cargo and vessel documents, including bills of lading, certificates of origin, invoices, packing lists, proof of insurance, and lists of last ports of call.
Disabling or tampering with AIS transponders. To mask their movements, including port calls and STS transfers, vessels transporting Iranian cargo often disable or tamper with their transponders. This is usually done together with other data manipulation, such as falsely reporting the Maritime Mobile Service Identity (MMSI) number or IMO number of the vessel. The updated guidance cautions not to rely solely on a single data point in verifying vessel activity for compliance.
Use of complex vessel ownership and management structures. Iran-linked networks use multiple shell companies and vessel-owning SPVs in high-risk, low-transparency, and low-regulation jurisdictions. Ship brokers in lax jurisdictions help facilitate transfers between and among shell companies.
Oil brokering networks. Oil brokers outside Iran help facilitate sales of Iranian petroleum and petroleum products, largely to China, often several steps removed from the initial sale. These oil brokers frequently create or distribute falsified documents, as noted above.
Identifying and Mitigating Sanctions Risks
To safeguard against these practices, and to avoid unwitting violations of sanctions laws, the updated guidance advises maritime sector stakeholders to review their sanctions compliance programs, and to enhance their due diligence and strengthen their internal controls as appropriate. The recommendations include:
Verify cargo origin. Recipients of cargo should conduct due diligence to corroborate the origin of goods. Red flags include vessels exhibiting deceptive behavior, or suspected links to sanctioned persons or locations. Testing samples of the cargo can reveal chemical signatures unique to Iran’s oil fields. Certificates of origin from Oman, the UAE, Iraq, Malaysia, or Singapore should be thoroughly investigated. Shipowners or charterers involved in STS transfers should request documentation regarding vessel STS history or verification of the last time the tank of the offloading vessel was empty, to ensure the cargo is not of Iranian origin.
Verify insurance. Parties should verify that vessels have adequate and legitimate insurance coverage, and are not relying on sanctioned insurance providers, or on new and untested providers without valid basis.
Verify flag registration. Vessels registered in jurisdictions known to service shadow fleet vessels, or that have flown multiple flags in a short period of time should be investigated as to ownership, voyage history, and flag history. The IMO’s Global Integrated Shipping Information (GISIS) database should be checked, to see if the vessel is flying a “FALSE” or “UNKNOWN” flag.
Review shipping documentation. Any indication that shipping documentation has been manipulated is a red flag that should be fully investigated. Documents related to STS transfers should establish that the cargo was delivered to the port reflected on the shipping documentation.
Know your customer (KYC) and know your vessel (KYV). In addition to conducting KYC due diligence (enhanced as appropriate), there should be KYV due diligence conducted on vessels, vessel owners, ultimate beneficial owners and group ultimate owners, and operators involved in contracts, shipments, and related maritime transactions. For vessels, this includes researching the IMO number and vessel history, including travel patterns, available STS history, ownership history, insurance, flag history, ties to evasive activities, actors, or regimes, and assessing risks associated with the owners, operators, or managers.
Monitor for manipulation of vessel location data. Irregularities in AIS data (including gaps in the data) could indicate manipulation, a serious red flag, warranting enhanced due diligence before further engagement.
Implement contractual controls. Contracts should contain representations and warranties that counterparties are not engaging in activity that violate, or that would cause a U.S. person to violate, U.S. sanctions laws, and that allow termination when such circumstances arise. In addition, contracts should allow termination based on certain types of suspicious activity.
Refuse service or port entry to sanctioned vessels. Port agents, operators, and terminals should engage in due diligence to ascertain whether a vessel is sanctioned, and should refuse service or port entry to such vessels.
Leverage available resources. A fair amount of information is available through open-source databases and from organizations in the maritime sector. These resources should be consulted.
The U.S. government continues to prioritize efforts to curtail Iran’s ability to generate revenue from its energy sector. Iran-linked networks have been finding ways to thwart U.S. sanctions. Companies in the maritime sector are particularly at risk of sanctions violations, which – even if inadvertent – potentially carry steep penalties, as the OFAC sanctions program is a “strict liability” regime. Up-to-date sanctions compliance programs are essential. Katten is ready to assist in implementing and upgrading sanctions compliance programs, and guiding clients through these deep and turbulent waters.
In Welcome News for Tax Whistleblowers, IRS Whistleblower Office Releases Operating Plan
Today, the Internal Revenue Service (IRS) Whistleblower Office released its first-ever multi-year operating plan, “outlining guiding principles, strategic priorities, recent achievements and current initiatives to advance the IRS Whistleblower Program.”
“This is welcome news for IRS whistleblowers whose cases languish for years, sometimes up to a decade or more, before the whistleblower can be paid an award,” says David Colapinto.
“This is an important step forward,” adds Stephen M. Kohn. “This is a critical program that has been held back by antiquated regulations. It’s time to modernize the program and effectively prosecute tax evaders.”
The plan lays out six strategic priorities:
Enhance the claim submission process to promote greater efficiency.
Use high-value whistleblower information effectively.
Award whistleblowers fairly and as soon as possible.
Keep whistleblowers informed of the status of their claims and the basis for IRS decisions on claims.
Safeguard whistleblower and taxpayer information.
Ensure that our workforce is supported with effective tools, technology, training and other resources.
“Of particular interest to the whistleblower community is the IRS’ emphasis on increasing efficiencies to speed up the process and issuing whistleblower awards faster and as soon as possible,” Colapinto adds.
“While paying whistleblower awards can incentivize other whistleblowers to report major tax fraud by wealthy tax cheats, the failure to pay whistleblower awards timely by taking over a decade to make payments, can act as a disincentive to blowing the whistle,” Colapinto adds. “This is an important step towards making the IRS whistleblower program more effective. To date, the IRS reports that it has collected more than $7.4 billion in taxes attributable to whistleblowers reporting tax fraud and underpayments. The IRS Whistleblower Program has potential to collect even more if it improves its program to encourage more whistleblowers to come forward.”
Modernized in 2006, the IRS Whistleblower Program offers monetary awards to whistleblowers who voluntarily provide original information about tax noncompliance. While the program has resulted in the collection of billions of dollars, in recent years payouts to whistleblowers have dipped while the processing time for award payments have risen to over 11 years on average.
Since taking over as the Director of the IRS Whistleblower Office in 2022, John Hinman has overseen a number of administrative reforms aimed at making the program more efficient and effective, including increasing staffing at the office and disaggregating whistleblower claims to speed up award payouts.
While the newly released operating plan promises to make needed changes to the IRS Whistleblower Program, Congressional reforms are also needed. In January, Senators Ron Wyden (D-OR) and Mike Crapo (R-ID) unveiled a discussion draft of a bipartisan IRS reform bill which contains reforms to the IRS Whistleblower Program previously found in the IRS Whistleblower Improvement Act of 2023.
Geoff Schweller also contributed to this article.
Bridging the Gap: Applying Anti-Money Laundering Techniques and AI to Combat Tariff Evasion
Introduction
In today’s global economy, characterized by complex supply chains and escalating trade tensions, tariff evasion has emerged as a significant threat to economic stability, fair competition, and government revenue. Traditional detection methods increasingly fall short against sophisticated evasion schemes that adapt quickly to regulatory changes. This article presents a compelling case for integrating advanced anti-money laundering (AML) methodologies with cutting-edge artificial intelligence to revolutionize tariff evasion detection. We also examine how established legal frameworks like the False Claims Act and transfer pricing principles from tax law can be weaponized against tariff fraud, and explore the far-reaching implications for commercial enterprises’ compliance programs — including how these tools can level the playing field for businesses facing unfair competition.
The Convergence of TBML and Tariff Evasion: An Untapped Opportunity
Trade-based money laundering (TBML) and tariff evasion operate through remarkably similar mechanisms, creating a natural synergy for detection strategies. Both practices manipulate legitimate trade channels for illicit purposes:
Mis-invoicing: Deliberate falsification of price, quantity, or product descriptions
False Classification: Strategic misclassification of goods under favorable Harmonized System (HS) codes
Value Manipulation: Artificial inflation or deflation of goods’ values
Phantom Shipments: Creation of entirely fictitious trade transactions
This striking overlap presents customs authorities with a valuable opportunity: leverage the sophisticated detection infrastructure already developed for AML compliance to identify and prevent tariff evasion.
TBML Detection Techniques: A Ready Arsenal for Customs Authorities
The AML compliance ecosystem has developed sophisticated techniques that can be immediately deployed to combat tariff evasion:
Advanced Price Anomaly Detection: Statistical modeling to identify transactions that deviate significantly from market norms, historical patterns, and comparable trade flows
Comprehensive Quantity Analysis: Algorithmic comparison of declared quantities against shipping documentation, customs records, and production capacity data
Systematic HS Code Scrutiny: Pattern recognition to flag suspicious classification practices, such as strategic code-switching or exploitation of classification ambiguities
Geographic Risk Mapping: Targeted scrutiny of transactions involving high-risk jurisdictions known for corruption, weak regulatory oversight, or prevalent smuggling
Related Party Transaction Surveillance: Enhanced monitoring of intra-company trades where pricing manipulation is more feasible
Integrated Data Analytics: Cross-referencing multiple data sources to identify inconsistencies that may indicate fraudulent intent
Network Analysis: Sophisticated mapping of business relationships to uncover hidden connections and coordinated evasion schemes
Artificial Intelligence: The Game-Changer in Tariff Evasion Detection
AI dramatically enhances detection capabilities through its ability to process vast datasets, identify subtle patterns, and continuously improve accuracy:
Deterministic AI and Machine Learning
Advanced Anomaly Detection: Supervised and unsupervised learning models that identify subtle deviations from established trade patterns by simultaneously analyzing multiple variables
Multi-factor Risk Classification: Algorithms that dynamically assess transaction risk based on importer history, commodity characteristics, trade routes, and pricing patterns
Predictive Regression Modeling: Statistical techniques that establish expected transaction values and flag significant deviations for investigation
Adaptive Learning Systems: Models that continuously refine detection parameters based on investigation outcomes, ensuring responsiveness to evolving evasion tactics
Large Language Models (LLMs)
Comprehensive Document Analysis: Automated extraction and verification of critical information across diverse trade documentation, identifying inconsistencies that human reviewers might miss
Natural Language Risk Assessment: Analysis of unstructured data sources including news reports, regulatory filings, and industry communications to develop comprehensive risk profiles
Behavioral Pattern Recognition: Identification of suspicious trade patterns that may indicate coordinated evasion strategies
Contextual Trade Analysis: Advanced semantic understanding that can detect mismatches between declared product uses and actual characteristics
Legal Frameworks: Powerful Tools for Enforcement and Competitive Equity
Effective enforcement requires robust legal mechanisms to prosecute and penalize violations:
The False Claims Act: A Powerful but Underutilized Weapon
The False Claims Act (FCA) represents a particularly potent tool in the anti-evasion arsenal, with key advantages that make it especially effective:
Broad Scope of Liability: Importantly, the FCA does not require proof of specific intent to defraud. This means the law covers a spectrum of non-compliant behaviors ranging from simple negligence and mistakes to deliberate fraud, significantly expanding the universe of actionable violations
Whistleblower Incentives: Qui tam provisions that allow individuals with insider knowledge to report violations and share in financial recoveries, creating powerful incentives for disclosure
Treble Damages: Provisions for triple damages that significantly raise the stakes for would-be evaders
Reduced Burden of Proof: Civil rather than criminal standards of evidence, making successful prosecution more achievable
Extended Statute of Limitations: Longer timeframes for investigation and prosecution, allowing authorities to address complex schemes
A Competitive Equity Tool for Businesses
The FCA serves not only as a government enforcement mechanism but as a powerful resource for companies facing unfair competition:
Leveling the Playing Field: Companies that suspect competitors are gaining unfair advantages through tariff evasion can leverage the FCA to prompt investigation and enforcement
Industry Self-Regulation: The qui tam provisions enable industry insiders to report violations, effectively allowing sectors to police themselves
Competitive Intelligence Application: Information gathered through compliance monitoring can help identify and address unfair competitive practices
Market Access Protection: By ensuring all market participants play by the same rules, legitimate businesses are protected from being undercut by non-compliant competitors
Transfer Pricing Principles: Adapting Section 482 to Tariff Contexts*
Transfer pricing principles offer a sophisticated framework for addressing value manipulation:
Arm’s Length Standard: Application of market-based valuation standards to related-party transactions
Comparable Transaction Analysis: Methodologies for establishing appropriate pricing benchmarks
Documentation Requirements: Structured approaches to establishing and documenting fair market value
Burden-Shifting Frameworks: Legal mechanisms that require importers to justify significant pricing discrepancies
Impact on Commercial Enterprise Compliance Programs
The government’s adoption of these advanced detection techniques has profound implications for corporate compliance strategies:
Transformative Effects on Corporate Compliance
Elevated Risk Profiles: Companies face significantly increased detection risk as governments deploy AI-enhanced monitoring, necessitating more robust internal controls
Expanded Documentation Requirements: Enterprises must maintain comprehensive transaction records that can withstand sophisticated algorithmic scrutiny
Proactive Compliance Monitoring: Organizations need to implement their own advanced analytics to identify and address potential issues before they trigger regulatory attention
Cross-functional Compliance Integration: Tariff compliance can no longer operate in isolation but must coordinate with AML, anti-corruption, and tax compliance functions
Strategic Compliance Responses
AI-Enhanced Self-Assessment: Forward-thinking enterprises are deploying their own AI systems to continuously monitor trade activities against regulatory benchmarks
Predictive Risk Modeling: Companies are developing sophisticated models to identify high-risk transactions before filing customs declarations
Transaction Testing Programs: Implementation of statistical sampling and testing protocols to verify compliance across high volumes of transactions
Enhanced Training Programs: Development of specialized training for procurement, logistics, and finance personnel on evasion risk indicators
Third-Party Due Diligence: More rigorous vetting of suppliers, customs brokers, and other trade partners
Competitive Advantages of Robust Compliance
Reduced Penalty Exposure: Companies with sophisticated compliance programs face lower penalties when violations occur
Expedited Customs Clearance: Trusted trader programs offer streamlined processing for companies with demonstrated compliance excellence
Supply Chain Stability: Reduced risk of shipment delays and seizures due to compliance concerns
Reputational Protection: Avoidance of negative publicity associated with customs violations
Strategic Data Utilization: Compliance data becomes a valuable asset for business intelligence and operational optimization
Competitive Intelligence and Market Protection
For businesses concerned about competitors gaining unfair advantages through tariff evasion, these tools offer strategic options:
Market Analysis: Advanced analytics can help identify pricing anomalies that may indicate competitors are benefiting from tariff evasion
Evidence Building: Systematic collection and analysis of market data can help build compelling cases for authorities to investigate
Whistleblower Protection: Companies can establish secure channels for employees or industry insiders to report suspected violations
Regulatory Engagement: Proactive sharing of competitive intelligence with customs authorities can trigger enforcement actions
Industry Collaboration: Formation of industry working groups to establish compliance benchmarks and identify suspicious practices
Challenges and Considerations
Implementing these advanced approaches presents several challenges:
Data Quality and Accessibility: Effective analysis requires comprehensive, accurate data, often from disparate sources
Supply Chain Complexity: Modern trade flows involve numerous intermediaries, complicating transaction monitoring
Cross-Border Cooperation: Effective enforcement requires unprecedented levels of international information sharing
Adversarial Adaptation: Evasion techniques evolve rapidly in response to detection methods
Algorithmic Fairness: AI systems must be designed and monitored to avoid discriminatory impacts on specific countries or industries
Cost-Benefit Balance: Compliance costs must be proportionate to risk and competitive realities
False Positive Management: Systems must be calibrated to distinguish between intentional evasion, negligence, and legitimate mistakes
Conclusion
The integration of AML techniques, artificial intelligence, and established legal frameworks represents a paradigm shift in the fight against tariff evasion. By leveraging these complementary approaches, customs authorities can dramatically enhance detection capabilities while creating powerful deterrents through robust enforcement.
For commercial enterprises, this evolving landscape creates both obligations and opportunities. The expanded scope of FCA liability—covering even negligent errors—demands heightened vigilance in compliance programs. Yet these same tools also offer legitimate businesses powerful mechanisms to combat unfair competition from less scrupulous rivals. Companies facing market distortions from competitors’ tariff evasion now have sophisticated means to identify suspicious patterns and trigger enforcement actions.
As global trade continues to evolve, this multi-faceted approach will be essential to preserving the integrity of international trade systems and ensuring a level playing field for legitimate businesses. Organizations that proactively embrace these changes will not only mitigate regulatory risk but may discover competitive advantages through superior compliance capabilities and the strategic use of enforcement mechanisms to ensure market fairness.
Deference Denied to the South Carolina Department of Revenue
The South Carolina Court of Appeals determined that Duke Energy Corporation (“Duke”) was entitled to claim nearly $25 million in investment tax credits on its 1996 to 2014 South Carolina income tax returns, as the investment tax credit’s five-million-dollar statutory limitation was an annual—not a lifetime—limitation. Duke Energy Corp. v. S.C. Dep’t of Rev., No. 2020-001542 (S.C. Ct. App. Mar. 26, 2025).
The Facts: Duke provides electrical power to millions of customers in the United States, including to residents of South Carolina. To encourage business formation, retention, and expansion, South Carolina provides a tax credit to businesses that invest in certain property in South Carolina, provided specific requirements are met (the “Investment Tax Credit” or the “Credit”).
On its 1996 through 2014 South Carolina corporate income tax returns, Duke claimed a total aggregate Investment Tax Credit of $24,850,727. The South Carolina Department of Revenue (“Department”) audited Duke’s tax returns and disallowed $19,850,727 (approximately 80 percent) of the Credit that Duke claimed. The Department determined that Duke was entitled to claim only five million dollars of Investment Tax Credit—not because Duke did not meet the statutory requirements of the Credit but because the Department believed the statute imposed a five-million-dollar lifetime limitation on the Credit.
Duke protested the Department’s determination, arguing that the five-million-dollar limitation applied on an annual basis. The South Carolina Administrative Law Court (“ALC”) found the statute to be ambiguous and interpreted the Investment Tax Credit’s five-million-dollar limitation to be a lifetime limit. Duke appealed the ALC’s order to the South Carolina Court of Appeals.
The Law: South Carolina’s Investment Tax Credit is available “for any taxable year” in which corporate taxpayers meet the statutory requirements. The statute states, “[t]here is allowed an investment tax credit against the tax imposed pursuant to [the South Carolina Income Tax Act] for any taxable year in which the taxpayer places in service qualified manufacturing and productive equipment property.”
At issue here was the statute’s subsection imposing a five-million-dollar limit amount on the Credit for utility and electric cooperative companies—“[t]he credit allowed by this section for investments made after June 30, 1998, is limited to no more than five million dollars for an entity subject to the [South Carolina] license tax [on utilities and electric cooperatives].”
The Decision: The South Carolina Court of Appeals found that the statute was not ambiguous, reversed the ALC’s order, and held that Duke was entitled to the $19,850,727 of Investment Tax Credits disallowed by the Department.
In making its determination, the Court analyzed the statute as a whole, indicating that while the five- million-dollar limitation subsection does not contain any time-specific language, it refers to the Investment Tax Credit provision that explicitly defines the Credit as being available in “any taxable year.” The Court also looked to the statute’s purpose provision, which indicates that the Credit was designed to “revitalize capital investment in [South Carolina], primarily by encouraging the formation of new businesses and the retention and expansion of existing businesses . . . .” Reading these provisions together, the Court concluded that because taxpayers can claim the Credit each year the statutory requirements are met, and because the Credit’s purpose is not limited to initial business formation, the Legislature intended to encourage continued investment in South Carolina and a lifetime limit of five million dollars does not comply with that intent.
The Court indicated that while it is deferential to the Department’s interpretation of its laws, it could not give deference to an interpretation that conflicts with the Court’s own reading of a statute’s plain language. This is a nice reminder that even in states where courts are deferential to an agency’s statutory interpretation, deference will not always be provided.
If You Don’t Ask, The Answer’s Always No
One of the first rules of business is that you don’t leave money on the table. That adage is equally important in tax matters. Taxpayers can leave behind funds by failing to follow the rules. The importance of compliance with the procedural requirements in requesting a refund was highlighted in the recent Michigan Tax Tribunal decision in Comerica, Inc. v. Michigan Dep’t of Treasury, MTT Docket No. 17-000150 (Mar. 18, 2025).
At issue in Comerica was whether the company was entitled to interest on refunds paid by the Department of Treasury (the “Department”). The company challenged an assessment, and after decisions from the Tax Tribunal, the Court of Appeals, and the Michigan Supreme Court, the Department paid the company refunds of almost $11 million. The company then filed a motion with the Tax Tribunal related to its request of over $6 million in interest and costs.
The Department argued, in part, that the company did not request refunds and, therefore, interest was not permitted under the statute. On review, the Tax Tribunal reiterated that in order to receive interest on a refund, there are three required steps. First, the tax must have been paid. (It is unsurprising that it is not possible to receive a refund of something if it was never paid.) Second, the taxpayer must make a claim for a refund or petition for a refund. Finally, the refund claim (or petition) must be filed.
In Comerica, the only issue was whether a claim or petition for the refund had been made (i.e., step two). Notably, the Tax Tribunal stated that there is no specific form or manner by which the refund must be claimed. Instead, it must merely be a request for the refund. While the company requested a refund in a letter to the Department during the audit, the Tax Tribunal held that was premature as the Department had not made a determination until the audit was complete.
In reviewing the petitions originally filed in the matter, the Tax Tribunal noted that there was no explicit request for a refund. Nevertheless, the Tax Tribunal held that filing a petition constitutes a claim for refund. Therefore, it held that the company was entitled to interest under the statute starting 45 days after the petition was filed to the date of the refund payments.
In addition, the Tax Tribunal held that the company was entitled to costs and attorney fees related to the proceedings on remand related to the request for interest because the Department’s payment of the refunds undermined the Department’s arguments that interest was not permitted.
The decision in Comerica serves as an important reminder to ensure you always request all of the funds to which you may be entitled. Because if you don’t ask for it, you won’t receive it.
Massachusetts Court Subjects Nonresident to Income Tax on Gain from Stock Sale
In a decision with troubling potential implications, a Massachusetts appellate court held that a nonresident individual was subject to Commonwealth income tax on capital gain from the sale of his stock in the corporation that he formed and worked for because the court concluded that it related to his trade or business in the Commonwealth. Craig H. Welch v. Comm’r of Rev., No. 24-P-109 (Mass. App. Ct., Apr. 3, 2025).
The Facts: In 2003, Craig Welch (“Welch”), a resident of Massachusetts at the time, formed AcadiaSoft, Inc. (“AcadiaSoft”), a Massachusetts-based business that developed and marketed derivative and collateral management solutions to institutional investors. Over more than a decade, Welch worked exclusively for AcadiaSoft in various capacities, including as its President, Chief Executive Officer, and Treasurer, primarily in Massachusetts, and received a salary. Although initially the corporation’s sole stockholder, over time his stock ownership percentage was diluted as outside investors were brought in and additional financing was obtained.
By 2015, however, Welch no longer had an operational role at AcadiaSoft. In June 2015, AcadiaSoft offered to purchase Welch’s stock, and he accepted the offer and submitted his resignation. Later that month, AcadiaSoft purchased Welch’s stock for $4.7 million. Since Welch had a zero cost basis in his stock, the entire sales proceeds were capital gains for federal income tax purposes.
Significantly, on or about April 30, 2015—two months before the sale—Welch and his wife had moved to New Hampshire, and he was no longer a Massachusetts resident.
From 2003 through 2014, Welch and his wife had filed Massachusetts resident income tax returns. No longer a resident after April 30, 2015, Welch filed a Massachusetts nonresident/part year resident tax return for 2015 but did not report the $4.7 million capital gain as Massachusetts source income.
After an audit, the Department of Revenue (“Department”) assessed income tax on the capital gain, treating it as Massachusetts source income. The Massachusetts Appellate Tax Board (“ATB”) upheld the imposition of the tax, ruling that the stock gain “was of a compensatory nature” attributable to Welch’s employment in Massachusetts. This appeal followed.
Taxation of Massachusetts Non-Residents: Like most states, Massachusetts taxes nonresident individuals only on their in-state source income. “Massachusetts source income” is defined to include income “derived from or effectively connected with . . . any trade or business, including any employment carried on by the taxpayer in the commonwealth” and “gain from the sale of a business or of an interest in a business . . ..” Mass. G.L. c. 62, §5A(a).
The Department‘s regulations provide that the taxation of gain from the sale of a business applies to the sale of interests in, for example, sole proprietorships and partnerships, but that this rule “generally does not apply… to the sale of shares of stock in a C corporation or S corporation, to the extent that the income from such gain is characterized for federal income tax purposes as capital gains,” unless it is “connected with the taxpayer’s conduct of a trade or business . . ..” 830 Code Mass. Regs. § 62.5A.1(3)(c)(8).
Welch argued on appeal that it was AcadiaSoft that was conducting a trade or business, not Welch personally, and that his stock was not compensation for his services since he acquired it before AcadiaSoft conducted any business.
The Decision: The Court, applying a deferential standard of review, upheld the taxation of Welch’s capital gain from the stock sale, holding that it was “derived from and was effectively connected with his trade or business or employment.” According to the Court, because Welch obtained the stock soon after founding AcadiaSoft and expected that the value of the stock would appreciate because of his “hard work,” the ATB had substantial evidence for concluding that Welch’s gain “was derived from his employment.”
Observations: The Court’s decision fails to recognize the distinction between AcadiaSoft’s business—for which it filed Massachusetts corporate tax returns and apportioned 100 percent of its income to the Commonwealth—and Welch’s employment with AcadiaSoft for which he received a salary and paid Commonwealth income tax. Also troubling is that the Court failed to apply the Department’s own regulation providing that Massachusetts source income generally does not include gain from the sale of stock in a corporation characterized as capital gains, not compensation for services, for federal tax purposes. The Court emphasized Welch’s desire that his stock appreciate in value because of his efforts, but that can be said about every founder of a business who anticipates that the business will be successful and that the value of the stock will increase over time. If left standing, the decision would make Massachusetts an outlier in taxing founders of corporate businesses who eventually wish to sell their stock and exit the business.
Gains on Sales of Franchises Held Nonbusiness Income in Arkansas
Consistent with the decisions in several other states interpreting the Uniform Division of Income for Tax Purposes Act’s (“UDIPTA”) definition of nonbusiness income, an Arkansas Circuit Court concluded that gains from the sales of franchises constituted nonbusiness income since the company was not in the business of disposing of franchises. United States Beef Corp. v. Walther, Case No. 60 CV-22-2158 (Ark. Cir. Ct. Pulaski Cty. Mar. 10, 2025).[1]
The Facts: United States Beef Corporation (“US Beef”), an Oklahoma corporation, owned and operated fast food franchises in nine states, including Arkansas, for approximately 45 years. In 2018, it sold its franchises to two separate purchasers and liquidated its business. Prior to these sales, the company had not contemplated the sale of the franchises nor had it sold any other franchises.
The company filed refund claims in Arkansas on the basis that the gains constituted nonbusiness income, which the Department of Finance and Administration (“Department”) denied. The Department’s Office of Hearings & Appeals affirmed the denial, and the company appealed to the Circuit Court.
The Statute: Arkansas continues to use the original UDIPTA definitions of business income and nonbusiness income. As a result, business income is defined as “income arising from transactions and activity in the regular course of the taxpayer’s trade or business and includes income from tangible and intangible property if the acquisition, management, and disposition of the property constitute integral parts of the taxpayer’s regular trade or business operations.” Ark. Code Ann. § 26-51-701. Nonbusiness income is all income that is not business income.
The Decision: Arkansas courts apply both the transactional test and the functional test to determine if income constitutes apportionable business income. The parties agreed the sales of the franchises were outside the regular course of US Beef’s business and, therefore, the transactional test was not satisfied.
The Court then had little difficulty in determining that the gains did not satisfy the functional test since, while US Beef may have been in the business of acquiring and operating franchises, it was not in the business of disposing of franchises.
Many states have amended their statutes to define business income as income from “the acquisition, management, or disposition of the property” or “the acquisition, management, and/or disposition of the property.” Other states have amended the definition of business income to define it as any income apportionable under the U.S. Constitution. This case demonstrates that in states that continue to use the original UDIPTA definition, the acquisition, management, and disposition of the property must all constitute integral parts of the taxpayer’s regular business operations for the gain from the sale of a business to be considered business income. Inasmuch as companies are not in the business of going out of business, gains from the sale of entire businesses (or even divisions) will often constitute nonbusiness income under such definition.
[1] While this article was pending publication, the Department of Finance and Administration initiated an appeal of the Circuit Court’s decision to the Arkansas Supreme Court. Watch for future updates as this matter continues.
Deli’s Party Platters Found Subject to Sales Tax Despite Customer Assembly Required
In the world of sales tax, the devil is often in the details. A recent decision from the New York State Tax Appeals Tribunal (“Tribunal”) serves as an example of how seemingly insignificant details can determine whether a sale is subject to tax. In the Matter of Todd A. Neupert, DTA No. 830368 (Feb. 13, 2025).
The Facts: Petitioner is the owner of a deli that sells a variety of prepared foods, as well as deli meat and other non-prepared items. The New York Division of Taxation audited the deli and determined that Petitioner improperly failed to charge sales tax on “party platters” sold by the deli resulting in a notice of determination for $12,579.62 in sales tax due. The party platters include pre-sliced meats and cheeses served on a deli tray with condiments and other accoutrements, such as lettuce, tomatoes, and banana peppers. Rolls are provided separately in a bag that accompanies the platters, and the customer is charged one price for all the items. Petitioner argued that the platters were not “prepared food” because the platters required assembly by the customer, i.e., making sandwiches.
At the administrative law judge (“ALJ”) level, the ALJ determined that the party platters were prepared foods subject to tax, relying on a Tax Bulletin issued by the Department of Taxation & Finance (“Department”) (TB-ST-283) which states that the sale of “cold cut platters” is taxable.
The Decision: While generally food sales are exempt from tax, if the food is “prepared” by the seller, it is taxable. Thus, the sole issue before the Tribunal was whether the party platters are considered “prepared foods” within the meaning of the sales tax law. The Tribunal found that the party platters were prepared because the Petitioner compiled a number of items in ready-to-eat form either as-is or through some further preparation such as by making a sandwich with the products provided. Petitioner’s preparation included separating the condiments into individual packaging and providing pre-sliced lettuce, tomatoes, and onions.
The Tribunal upheld the ALJ’s decision, rejecting Petitioner’s argument that “the opportunity for additional preparation, such as by making sandwiches…, negates his own preparation or the readily consumable nature of the foods provided.” The Tribunal noted that “[m]any foods that are ready to eat can be augmented in some fashion and so we decline to adopt [Petitioner’s] reasoning.” Following the ALJ’s lead, the Tribunal also relied on Tax Bulletin TB-ST-283, which explicitly states that cold cut platters are considered prepared food and are subject to sales tax.
The Takeaway: A rationale for not taxing unprepared food is to make basic food necessities more affordable. If Petitioner sold sliced cold cuts by weight but did not arrange them on a platter, the sale would not be taxable. Petitioner’s argument here—that the party platters were not prepared foods because the customer would make additional preparations—appears to have some merit, as the Department’s Tax Bulletin relied on by both the ALJ and the Tribunal defines prepared food as “ready to be eaten” and not requiring further preparation. While technically the cold cuts on the platter could be consumed as-is, it was contemplated that customers would prepare sandwiches.
Whether an item is taxable can hinge on seemingly trivial details. While the distinctions can seem absurd at times, they have real financial implications for businesses. Given the complexity and potential for costly mistakes, businesses must be vigilant about the details and should consult with a tax professional to ensure compliance. By staying informed and seeking professional advice, businesses can avoid unexpected tax liabilities. Understanding the rules can make all the difference.
Navigating Tariff Risk in Construction and Development Deals
Tariff Policy Shifts Introduce New Real Estate Risks
Over the past few months, there have been significant changes to tariffs by the United States and other countries around the world. These changes continue to evolve and there is significant uncertainty about the timing, rate, and overall impact of tariffs. The magnitude of uncertainty and cost associated with tariffs has resulted in new and increased risks to existing and prospective real estate projects. We see this broken down into the following questions from clients:
How are these new costs covered under our existing agreements?
How do we address the risks of these potential new costs in the agreements that we are currently negotiating?
Where to Look: Construction and Partnership Agreements
In real estate, answers to these questions are most likely to be found in the construction contract between the owner and the general contractor and the partnership agreement(s) (i.e., operating or joint venture agreement) among sponsors and investors in the project.
Reviewing Key Construction Contract Provisions
As an initial step to clarifying these questions, we recommend reviewing the provisions in your construction contracts which govern the allocation of risk and costs with respect to compliance with changes in the law, force majeure (also known as, third-party delays), and tax and tariff responsibility (Sections 3.7, 8.8 and 3.6 in the form AIA 201-2017, respectively). While the standard AIA form is silent, some parties may have negotiated these terms to clarify whether the contractor or the owner is responsible for the costs associated with newly enacted tariffs. We are already seeing general contractors proposing new provisions that expressly place the risks associated with increased costs from tariffs on the owner. In these circumstances, at a minimum, those increased costs should be passed through without any additional fees or general conditions costs and, generally speaking, there is no reason for these increased costs to result in schedule delays (unlike traditional force majeure events).
Impact on Ownership Structure and Cost Sharing
When the owner is responsible for increased costs from tariffs, the next question to ask is how those costs are allocated among the ownership parties; and whether the developer or sponsor of a project is obligated to incur all or a disproportionate share of such costs. In many circumstances, the operating agreement governing the relationship among the partners should determine how cost overruns are to be shared and whether there is any overriding force majeure clause that applies to the situation. The traditional concept of force majeure, as interpreted by the courts, is limited to “acts of God” and the like, and is unlikely to cover changes to tariffs. However, force majeure clauses are often heavily-negotiated in development joint ventures and may include concepts such as “changes in law” that, when read closely, encompass the costs associated with the changes in tariff policy. Additional questions to ask are:
In what proportion are those costs allocated among the partners;
What discretion does the developer have to apply contingency or other cost savings to cover these costs; and
What approvals are needed to adjust the development budget to reflect these costs (including through change orders to the construction contract).
Mitigating Risks Through Careful Legal Review
As clients brace for the impact from these ongoing policy changes, we encourage you to consult with legal counsel to familiarize yourself with your rights, obligations and risks with respect to newly-imposed tariffs. In these unprecedented times, attorneys can provide tailored advice to address your specific circumstances to mitigate exposure to increased project costs and schedule impacts. This can only be done through careful analysis and negotiation of your transactional documents.
Megan Goldman Watts contributed to this article
Skating on Thin Ice: The CAS Re-affirms the Field of Play Doctrine in the ‘Kyiv Capitals’ Case
What is the Field of Play Doctrine?
Regardless of the sport or the level of competition, refereeing decisions are inevitably the subject of question and complaint. Players, managers, clubs, fans, commentators, pundits and casual observers may all criticise the merits of officiating decisions – something undoubtedly made all the more prevalent by the multitude of camera angles, slow-motion replays and technology that define modern broadcast sport.
The “Field of Play” doctrine, a concept enshrined in the so-called lex sportiva and consistently applied by the Court of Arbitration for Sport (“CAS”), is based on the belief that the rules of the game, in the strict sense of the term, are not subject to judicial control. The rationale behind this “qualified immunity”[1] is twofold: (1) to ensure that match officials have the requisite authority and autonomy to make decisions, and (2) that sporting contests will be completed and thus deliver a result.
As per the 2017 CAS case of Japan Triathlon Union v International Triathlon Union[2], for the doctrine to apply, the following two conditions are needed:
“that a decision at stake was made on the playing field by judges, referees, umpires and other officials, who are responsible for applying the rules of a particular game” and
“that the effects of the decision are limited to the field of play.”[3]
Nonetheless, the doctrine is not absolute, meaning that field of play decisions may be disputed in narrow circumstances relating to integrity. These include instances where there is evidence of bad faith, malicious intent, fraud, bias, prejudice, arbitrariness and corruption.[4]
Hockey Club Kyiv Capitals v Ice Hockey Federation of Ukraine[5]
(i) Introduction
In an Award handed down by the CAS on 20 February 2025, the Ice Hockey Federation of Ukraine (the “Federation”) successfully argued that the CAS had no authority to review officiating decisions. The appeal to the CAS had been brought by Hockey Club Kyiv Capitals (the “Club”) in connection with a match during the 2023/2024 Ukrainian Men’s Ice Hockey Championship season.
(ii) Factual Background
The case concerns an incident that occurred on 3 February 2024 during a match between the Club and the Hockey Club of Dnipro (“Dnipro”).
Throughout the match, several incidents occurred which resulted in both teams receiving penalties. The Club received a total of 13 penalties for unsportsmanlike conduct (including kneeing, tripping, elbowing, and roughing) which were committed by several players and their Head Coach, Vadym Shahraichuk. By contrast, Dnipro received three penalties.
With 50 minutes and 48 seconds of the match played, the Club refused to continue and instead left the ice hockey rink, the score being tied a 2-2 at the time. This decision was, according to their Head Coach, due to “unfair and one-sided refereeing.”[6]
(iii) Procedural Background
Following the match, the Club appealed to the Federation Refereeing Quality Assessment Committee (the “RQAC”), citing twelve occasions during the match where the referees failed to impose a sanction. Although the RQAC subsequently ruled that the majority of the refereeing decisions were correct, they did identify several which had been overlooked.[7]
The Disciplinary Committee of the Federation consequently initiated proceedings to determine the application of sanctions against the Club, later opting to impose disciplinary and monetary sanctions on 5 February 2024.[8]
The Club responded by filing an appeal against the Disciplinary Committee’s decision to the Appeals Committee. However, this was unanimously dismissed on 26 February 2024.
Finally, having received confirmation that they could appeal the Appeals Committee ruling to the CAS, the Club consequently filed a Statement of Appeal requesting that the CAS set aside the decision.
Arguments advanced before the CAS
(i) The Club
In seeking relief, the Appellant Club advanced five core arguments:
That the technical defeat should not have been awarded. In supporting this argument, the Club maintained that the game had begun and so the referees had exclusive authority to determine the outcome. The Federation’s competence only extended to matches that did not take place and the referees could therefore not delegate to the Federation. The Club further submitted that the game had been stopped too soon (i.e. after only two minutes rather than 5 minutes) due to an error in the translation of the Official Rule Book on the Federation’s website.
The violation of the principles of publicity and openness, namely that the Club had not been furnished with sufficient information about the proceedings, the receipt of statements from third parties, the hearing (including the time, place and composition of the authority), and the opportunity to renew statements and provide objections.
The violation of the right to an effective remedy, with the Club alleging that the Federation conducted a secret proceeding which deprived the Club of an effective defence.
The violation of ethical norms due to conflicts of interest, with the Club alleging a “direct connection between the Referee and the Chairperson and Deputy Chairperson of the Appeals Committee.”[9]
The violation of the right to a fair trial, namely as a result of the aforementioned arguments.
(ii) The Federation
In response, the Federation advanced nine core arguments:
The inadmissibility of the Appeal. In advancing this argument, the Federation submitted that the CAS lacked authority relating to future issues and that the Club failed to identify the point being appealed along with the exact basis of appeal.
The lack of interest and/or legitimacy of the Appellant. The Federation argued that the Club had neither the direct nor personal interest required to appeal certain aspects of the decisions. As part of this argument, the Federation maintained that the Club’s Head Coach should have appealed the decisions in his personal capacity and that the Club’s final league position was not impacted by the technical defeat awarded.
The binding nature and correct application of the Federation Rules. In invoking the “chain of references”[10] principle, the Federation contended that the Club had, by participating in the championship, consented to and agreed to be bound by the rules of the Federation.
The fair trial objection according to the de novo principle. In invoking the de novo principle[11], the Federation further contended that the Club’s submissions concerning the lack of a fair trial were immaterial and that the CAS would correct “all procedural flaws.”[12]
The field of play doctrine. By relying on the doctrine, the Federation argued that the on-field decisions made by the referees were not reviewable by the CAS.
The absence of any conflict of interest in earlier proceedings. In rebutting the allegation that there was a violation of ethical norms due to conflicts of interest, the Federation asserted that there was no conflict of interest or corruption. They further highlighted that such an argument had only been raised by the Club upon appeal to the CAS and could have been submitted in earlier proceedings.
The respect of the principles of publicity and openness. Far from not being in receipt of information relating to the proceedings, the Federation considered that the Club had been made provided with the first instance decision. They submitted that they were thus “informed of the entire proceeding, including evidence and facts.”[13]
The absence of determination of the outcome of the Match by the Referees. The Federation asserted that the technical defeat finding was a “logical sanction” rather than “an unlawful “determining of outcome””[14] after the Club departed the hockey rink.
The troublesome widespread effect of CAS decision annulling the technical defeat. Finally, and perhaps most persuasively, the Federation highlighted that “annulling the appealed decisions would justify and legalize the abandonment of matches as a means of remedy against field of play decisions and would represent a precedent allowing clubs to abandon games if they are not in their favor.”[15]
Ruling of the CAS
The sole arbitrator, Ms Carine Dupeyron, held that jurisdiction of the CAS had been established in the case and that the Club’s appeal had been filed within the relevant time limits.
Ms Dupeyron further found that the Club’s appeal was both admissible and that the Club had a legal interest in appealing the decisions.
Moreover, Ms Dupeyron concluded that the relevant International Ice Hockey Federation and the Federation rules and regulations applied in the case, with Swiss Law and case law also applying due to the arbitration’s seat in Lausanne, Switzerland.
With regard to the match itself and in applying the Federation Rules, Ms Dupeyron reasoned that the game period had not ended when the Club departed the hockey rink and refused to continue playing. Despite ruling that the referees had applied Rule 73.2 rather than Rule 73.3[16] of the Official Rule Book 2023/24, this did not impact the ability of both the Disciplinary Committee and the Appeals Committee to examine the case.
In considering the disciplinary and financial sanctions imposed on the Club, Ms Dupeyron concluded that the Disciplinary Committee and the Appeals Committee had both the authority to impose such sanctions and to impose a technical defeat on the Club.
Finally, the Club’s submissions regarding the violation of ethical norms due to conflicts of interest did not find favour with Ms Dupeyron. She instead concluded “that the de novo appeal before the CAS cured the potential procedural flaws regarding the appealed decisions”.[17]
Therefore, Ms Dupeyron declined to allow the appeal – thus confirming the decision of the Appeals Committee of the Federation.
Impact of Ruling
The ruling serves as a timely reminder that the Field of Play doctrine will prevent sporting contestants from simply leaving the arena and appealing the decisions of officials, including in situations where appeal boards subsequently find refereeing to have overlooked inappropriate or unfair acts that occurred within matches.
Moving forwards, participants should therefore continue to be mindful of the doctrine and that it will apply save for specific circumstances relating to integrity. If such circumstances are not apparent, then participants are walking on thin ice when choosing to abandon matches prematurely and seeking subsequent judicial relief. As the case demonstrates, the likelihood is that the doctrine will be upheld, certainly before a CAS tribunal, and participants will suffer the regulatory consequences of their abandonment.
The full CAS Award is available here: CAS 2024/A/10449 Hockey Club Kyiv Capitals v. Ice Hockey Federation of Ukraine
[1] CAS OG 02/2007 Korean Olympic Committee v. International Skating Union; 2015/A/4208 Horse Sport Ireland & Cian O’Connor v. FEI.
[2] CAS 2017/A/5373.
[3] Ibid [Paragraph 51].
[4] For example, see the following cases: CAS 2004/A/727 Vanderlei De Lima & Brazilian Olympic Committee (BOC) v. International Association of Athletics Federations (IAAF), CAS 2008/A/1641 Netherlands Antilles Olympic Committee (NAOC) v. International Association of Athletics Federations (IAAF) & United States Olympic Committee (USOC), Aino-Kaisa Saarinen & Finnish Ski Association v. Fédération Internationale de Ski (FIS) CAS 2010/A/2090, CAS 2015/A/4208 Horse Sport Ireland (HSI) & Cian O’Connor v. Fédération Equestre Internationale (FEI).
[5] CAS 2024/A/10449.
[6] [Paragraph 9].
[7] These overlooked instances included “a tripping, a blocking, a player interference, and a hand-checking on behalf of the opponent team” [Paragraph 11].
[8] These included disciplinary and monetary sanctions on the Club; imposing a technical defeat in the match on the Club / awarding a technical victory to Dnipro; warning the Club that repeated refusal to continue upcoming matches will result in automatic exclusion from the Ukrainian Men’s Ice Hockey Championship; imposing two disciplinary sanctions on the Club’s player Pavlo Taran; imposing a disciplinary sanction on the Club’s player Serhii Chernenko; obligating the Club’s Head Coach Vadym Shahraichuk to familiarise himself and the players with the Federation’s golden rules; and warning the Head Coach that he would receive one-match suspensions for each major, disciplinary or game misconduct penalty of the Club’s players.
[9] [Paragraph 85].
[10] [Paragraph 97].
[11]De novo refers to the standard of review employed by an appellate court, with the appellate court reviewing the decision of a lower court as if the lower court had not rendered a decision.
[12] [Paragraph 103].
[13] [Paragraph 112].
[14] [Paragraph 114].
[15] [Paragraph 115].
[16] Rule 73.2 permits the team refusing to play only 15 seconds to resume the match when already on the ice, whereas Rule 73.3 permits 5 minutes for the team to return to the ice.
[17] [Paragraph 179].
Jonathan Mason also contributed to this article.