The Tax Court System
Taxpayers generally have four judicial avenues for resolving federal tax controversies, namely the U.S. Tax Court, the U.S. Federal District Courts, the U.S. Court of Claims, or the U.S. Bankruptcy Courts.
The U.S. Tax Court
Most tax litigation is handled by the U.S. Tax Court. This is primarily due to the ability to litigate the tax dispute in U.S. Tax Court without having the taxpayer pay the tax liability upfront. This feature is unique to the U.S. Tax Court.
Taxpayers are only entitled to bring suit in this court if they timely file a petition, based on the date indicated in one of the notices that the IRS sends to taxpayers. Taxpayers usually have to have this IRS notice first, which is often referred to as a “ticket to tax court.”
The U.S. Tax Court is a nationwide court, with its base in Washington D.C. The court travels to larger cities several times each year to hear cases. The taxpayer may request one of 74 cities as the place of trial. In Texas, the Tax Court conducts hearings in Dallas, El Paso, Houston, Lubbock, and San Antonio.
Tax Court judges are appointed by the president and serve 15-year terms. Most tax court judges are former IRS chief counsel attorneys.
The tax court divides cases between those involving a tax liability under $50,000 for any one tax year and elects small tax case status and those over $50,000. Those that elect small tax cases are handled less formally. The rules of evidence are relaxed for smaller cases, the cases may be heard by the Special Trial Judges, and the holdings cannot be appealed.
The U.S. Tax Court hears a number of different types of tax cases. This includes cases to:
- Determine deficiencies in tax,
- Adjust partnership items,
- Determine relief from joint and several liability on a joint return, and
- Review certain collection actions.
The U.S. Tax Court’s jurisdiction also includes the authority to:
- Redetermine transferee liability,
- Make certain types of declaratory judgments,
- Order abatement of interest,
- Award administrative and litigation costs,
- Redetermine worker classification, and
- Review awards to whistleblowers who provide information to the IRS.
The discovery process is also unique for tax court cases. Discovery and Requests for Admission are permitted under Rules 70-104 of the Tax Court’s Rules of Practice and Procedure. The tax Court strongly encourages the parties to conduct discovery informally, exchange documents, and stipulate facts to the greatest extent possible. This is usually done by Branerton letters and compliance with the court’s Standing Pretrial Order.
The tax court’s opinion is either a:
- Regular opinion – which address more important or novel issues.
- Memorandum opinion – which address issues already considered in prior cases.
- Summary opinion – which address cases where the taxpayer elected small tax status.
The regular opinions can be reviewed or division opinions. Reviewed opinions are signed off on by all of the tax court judges. Division opinions are the opinion of the judge that issued the opinion.
Tax court cases can be appealed to the Federal Court of Appeals for the circuit in which the taxpayer resides.
The U.S. Federal District Courts
The U.S. Federal District Courts also hear federal tax claims brought by taxpayers. However, these courts are not as frequently used because taxpayers have to first pay the tax liability assessed and sue for a refund.
The U.S. Federal District Courts are located in most urban areas across the United States. One court may serve several nearby cities. U.S. Federal District Court judges are appointed for life. They are generalists, hearing all kinds of cases (not just tax cases). Typically, criminal cases (all types of federal crimes, not just federal tax crimes) will be given priority and heard before civil cases. Therefore, civil tax litigation can often take more time in these courts than in other courts.
The rules of evidence and court formalities are strictly adhered to in U.S. District Courts. Therefore, most U.S. District Court judges will generally not allow taxpayers to try their case without the assistance of counsel.
The U.S. Court of Federal Claims
The U.S. Court of Federal Claims hears cases against the United States, which includes federal tax claims. Like the U.S. Federal District Courts, taxpayers must prepay their tax liability before they can bring a suit in the U.S. Court of Federal Claims for a refund.
The U.S. Court of Federal Claims is located in Washington D.C. Its judges are appointed for 15-year terms. The U.S. Court of Federal Claims hears specialty cases (such as customs, patent, and tax cases), which allows them to specialize in tax cases more than U.S. Federal District judges, but less than U.S. Tax Court judges.
Proceedings in this court are more formal than those held in the U.S. Tax Court but less formal than those held in the U.S. Federal District Courts.
The U.S. Bankruptcy Courts
The U.S. Bankruptcy Courts often hear federal tax matters that arise in the context of bankruptcy proceedings. Typically these cases involve liability for taxes and dischargability of tax liabilities. The intersection of our tax and bankruptcy laws creates numerous opportunities; however, the complexities of these two bodies of law requires the assistance of an experienced tax attorney.
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