What is the US Tax Court?
The US Tax Court is a national court of record under Article I of the Constitution and is the primary venue for litigating a civil federal tax dispute. The Court is headquartered in its own building in Washington, D.C., but its judges travel the country hearing Federal tax controversies at various locations. The US Tax Court primarily hears cases when there is a dispute regarding an IRS deficiency.
The US Tax Court has several types of judges, including Regular Judges that are appointed by the President of the United States after confirmation by the Senate, Senior Judges, and Special Trial Judges.
Tax deficiency cases against the IRS can either be regular cases, or small tax cases (“S Cases”). Trial sessions for S Cases are usually held separately, and any decision cannot be appealed nor does it serve as precedent in any subsequent case.
In addition to deficiency disputes, the US Tax Court’s jurisdiction also includes the authority to re-determine transferee liability, make certain types of declaratory judgments, adjust partnership items, order abatement of interest, award administrative and litigation costs, re-determine worker classification, determine relief from joint and several liability on a joint return, review certain collection actions, and review awards to whistleblowers who provide information to the IRS.
Why Litigate in the US Tax Court?
The US Tax Court is not the only available forum for litigating a tax controversy. Taxpayers can generally choose between the US Tax Court, the U.S. District Courts, and the U.S. Court of Federal Claims. However, the one key advantage the US Tax Court has over other courts is it allows taxpayers to contest a deficiency before paying the disputed amount. The other forums generally require a “pay to play” format that can be cost-prohibative for many taxpayers.
When can you Litigate in US Tax Court?
One special feature of the US Tax Court is it can only be utilized under certain circumstance, most of which depend on the actions of the IRS. The primary trigger for the right to go to the Tax Court occurs when the IRS issues a Statutory Notice of Deficiency.
Generally there are two prerequisites for the US Tax Court to have jurisdiction to redetermine a deficiency:
- The IRS issuing a valid Statutory Notice of Deficiency, and
- A taxpayer’s timely filing a petition with the US Tax Court.
The IRS will send a Statutory Notice of Deficiency to a taxpayer’s last known address and outline the proposed deficiency in tax, additions to tax, and penalties. The idea is that the IRS gives a taxpayer actual notice of a proposed deficiency in a timely manner, and the taxpayer has an opportunity to seek a redetermination of such deficiency in the prepayment forum offered by the US Tax Court.
Once you receive a Statutory Notice of Deficiency, you will generally have 90 days to file a Petition with the US Tax Court. Internal Revenue Code §6213 states that:
Within 90 days, or 150 days if the notice is addressed to a person outside the United States, after the notice of deficiency authorized in section 6212 is mailed (not counting Saturday, Sunday, or a legal holiday in the District of Columbia as the last day), the taxpayer may file a petition with the Tax Court for a redetermination of the deficiency. Except as otherwise provided in section 6851, 6852, or 6861 no assessment of a deficiency in respect of any tax imposed by subtitle A, or B, chapter 41, 42, 43, or 44 and no levy or proceeding in court for its collection shall be made, begun, or prosecuted until such notice has been mailed to the taxpayer, nor until the expiration of such 90-day or 150-day period, as the case may be, nor, if a petition has been filed with the Tax Court, until the decision of the Tax Court has become final. Notwithstanding the provisions of section 7421 (a), the making of such assessment or the beginning of such proceeding or levy during the time such prohibition is in force may be enjoined by a proceeding in the proper court, including the Tax Court, and a refund may be ordered by such court of any amount collected within the period during which the Secretary is prohibited from collecting by levy or through a proceeding in court under the provisions of this subsection. The Tax Court shall have no jurisdiction to enjoin any action or proceeding or order any refund under this subsection unless a timely petition for a redetermination of the deficiency has been filed and then only in respect of the deficiency that is the subject of such petition. Any petition filed with the Tax Court on or before the last date specified for filing such petition by the Secretary in the notice of deficiency shall be treated as timely filed.
A case in the US Tax Court is commenced by filing that Petition. A $60 filing fee must be paid when the Petition is filed. Once the petition is filed, payment of the underlying tax ordinarily is postponed until the case has been decided.
Taxpayer should know that the law states: “If the taxpayer does not file a petition with the Tax Court within the time prescribed … the deficiency, notice of which has been mailed to the taxpayer, shall be assessed, and shall be paid upon notice and demand from the Secretary.”
In addition to redetermining the correct amount of a tax deficiency following the IRS issuing a Statutory Notice of Deficiency, the law provides the US Tax Court jurisdiction to also:
- Redetermine the liability of a transferee or fiduciary,
- Issue a declaratory judgment in specific cases,
- Adjust partnership or S corporation items,
- Make an award for reasonable administrative costs,
- Review the IRS’s determination as part of a Collection Due Process Hearing, and
- Review certain Innocent Spouse relief cases.
Litigating in the US Tax Court
After a Petition is filed, a case will be assigned to an attorney at the IRS Office of Chief Counsel. Their initial job will be to file an Answer to your Petition, which must be filed in all cases. An adequate Answer includes appropriate admissions, qualifications, and denials of each material fact alleged in your Petition. It may present defenses available to the IRS, requests for affirmative relief to which the IRS is entitled, and allegations of facts in sufficient detail to support any issue upon which the IRS has the burden of proof. An adequate Answer may be one in which detailed facts are alleged, or one in which the minimum required facts are alleged, depending upon the facts and circumstances of each case.
After an IRS attorney answers the Petition, a case will generally be referred to an IRS Appeals Officer or Settlement Officer. They will work with you towards a possible settlement rather than going to trial.
If a case is calendared for a trial before the US Tax Court, a taxpayer and the IRS will be notified by the Tax Court of the date, time, and place of trial.
Pretrial procedures for US Tax Court cases are unique, even though the rules for discovery are modeled on the Federal Rules of Civil Procedure. One informal meeting to attain the objectives of discovery and informal communication between the parties occurs in a Branerton Conference, which is a meeting usually scheduled by the Office of Chief Counsel to exchange documents and begin the stipulation process. Formal discovery (including written interrogatories, request for production, and depositions), subpoenas, and protective orders might all be used depending on the individual case.
There may also be various pretrial motions in a US Tax Court case. Some of the more common include requests for admissions, motions to compel stipulations, motions to compel discovery, motions for summary judgment, motion to submit without trial, and motion to dismiss. Litigants are also expected to file with the Tax Court a Pretrial Memorandum not less than 14 days before the start of a trial session. The Pretrial Memorandum is usually the first exposure a Tax Court judge will have to your case. The Pretrial Memorandum provides important information to the US Tax Court judge, including any expected motions, the status of the stipulation of facts, identification of the issues, a list of witnesses, a summary of the facts, a synopsis of legal authority, anticipated evidentiary problems, and the estimated trial time.
For additional information, please refer to our article, “The Importance of the Pretrial Memorandum in Tax Court.”
Sometime after a Petition if filed, you will receive a calendar date. At the first day of the trial session, the US Tax Court will call each case calendared which has not yet been resolved. The purpose of the “calendar call” is to determine the status of each case, and if necessary, assign a time in the trial session for the trial. The US Tax Court will also receive the stipulations and exhibits to be used during the trial.
The vast majority of US Tax Court cases are settled by mutual agreement without the necessity of a trial. However, if a trial is conducted, it is conducted de novo. At the conclusion of a US Tax Court trial, a briefing schedule will be established and the litigants will have to submit opening briefs with the Court in support of their case. The Tax Court has several types of opinions it could issue, including a court reviewed opinion, a division opinion, or a memorandum opinion.
Representation Before the US Tax Court
Over the past years, McLaughlin Legal has represented numbers taxpayers, both businesses and individuals, with various matters pending before the US Tax Court. Examples of the issues under review by the US Tax Court have included:
- Was a taxpayer an employee or independent contractor as a registered representative of a securities broker-dealer, and did the U.S. Tax Court properly address the application of Section 921(a) of the Taxpayer’s Relief Act of 1997?
- Was a $1,307,200 settlement to an S-Corporation ordinary income or subject to preferable capital gains rates?
- Were various workers employees, rather than independent contractors, of a corporation such that it was subject to an additional $972,244 liability for payroll taxes?
- Was an individual and two related businesses subject to $227,552 civil fraud penalty under IRC § 6663?
- Was a $1,560,000 payment in 1 year taxable alimony or a tax-free property settlement incident to divorce?
- Was a self-employed taxpayer entitled to deduct various costs for travel, supplies, car & truck, and other itemized deductions associated with their tax preparation business?
- Was a $231,247 distribution from a retirement account taxable income to an individual taxpayer?
- Were married taxpayers entitled to the full extent of their $116,886 loss from two rental properties under IRC § 469?
- Were self-employed, married taxpayers, entitled to deduct various costs for the cost of goods sold, meals and entertainment, travel, car & truck, and depreciation of capital assets associated with their two businesses?
- Was an individual taxpayer entitled to deduct the entire $70,115 in home mortgage interest paid?
The material contained within this website and any attached or referenced pages, has been written or gathered by McLaughlin Legal, for information purposes only. It is not intended to be and is not considered to be legal advice. Transmission is not intended to create and receipt does not establish an attorney-client relationship. Legal advice of any nature should be sought by contacting legal counsel.
To ensure compliance with U.S. Treasury Regulations governing tax practice, we inform you that any U.S. federal tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any penalties under U.S. Federal tax law, or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.