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Tax Court as a Choice of Forums

July 29, 2011

Tax Court As A Choice of Forums

A taxpayer should carefully consider in which court a particular kind of suit may be brought. In this section, we provide information relevant to choosing the Tax Court to hear your case. For a summary which of the courts hears cases on what kinds of taxes see Tax Court Jurisdiction.

Taxpayer Can Litigate Before Paying The Tax

The Tax Court is one of the three judicial forums that hears and determines federal tax cases. The other two forums are the United States District Courts and the United States Court of Federal Claims. The principal difference between the Tax Court and the other two courts is that the Tax Court is the only court in which a taxpayer may dispute the amount of tax deficiency before paying the tax; in the other two courts, a taxpayer must first pay the entire amount of the disputed tax and then file a claim for a refund.

The absence of a prepayment requirement in the Tax Court explains why so many cases are filed there as compared to the other two courts. While the Tax Court may average up to 30,000 docketed tax-deficiency cases per year, the total number of cases filed in all of District Courts in the Nation per year is approximately 1,500 and, in the Court of Federal Claims, it is only 600 cases.

Geographic Scope of Jurisdiction

The Tax Court has nationwide jurisdiction and holds trials, in both Regular and Small Tax Cases, throughout the United States. Insofar as the Tax Court’s ability to compel the presence of witnesses, service of process by the Tax Court is nationwide. The Court of Federal Claims also offers nationwide service of process, unlike the United States District Courts which are general trial courts which have only localized jurisdiction in the district in which theyare located.

 Nature of Expertise

U.S. District Courts hear all types of matters; unlike the Tax Court, they do not possess an exclusive tax expertise. Moreover, because of court backlogs and the speedy criminal trial rule, district court judges have increasingly assigned procedural and pretrial issues to magistrates who may possess even less tax expertise than do the district court judges themselves. The Court of Federal Claims was formerly known as the United States Claims Court. Although some judges on the Court of Federal Claims have a distinct tax background, there are other judges who may have had a government contracts or intellectual property career before their appointment to the bench. The number of tax filings on the Court of Federal Claims’docket has consistently declined over the years, although the amounts of tax in issue are generally large.

Jury Trials

The District Courts are distinguished by being the only court adjudicating tax controversies which affords the taxpayer a jury trial. If a taxpayer has a good reputation in the community and thinks that it would be to his/her advantage to be judged by his peers, then the District Court might be the preferable venue.

Applicable Rules of Procedure

Both the Tax Court and the Court of Federal Claims are governed by their own Rules, while all litigation in the District Courts is governed by the Federal Rules of Civil Procedure. Even though the Tax Court may give deference to the Federal Rules of Civil Procedure where no express Tax Court Rule exists, if there is an applicable Tax Court Rule, a different result may be generated than the result that would have been obtained in the District Courts. This difference can work for or against the taxpayer, depending on the facts of the case.

The rules of procedure and evidence may be applied more liberally by the Court of Federal Claims than in the District Courts or the Tax Court, and the Court of Federal Claims may apply equitable principles in determining the cases before it.

Contrast in Litigating Style

Beyond the differences among the three courts discussed above, the Courts present fundamental contrasts in litigating style. For example, if a taxpayer has a technically complicated case, he or she may give consideration to the selection of the Tax Court because of that court’s specialized tax expertise and the judges’ general familiarity with all types of tax law.

In the context of tax cases, Tax Court Judges are perhaps more accustomed to cases where taxpayers are representing themselves. With its Small Tax Case procedures in place, the Tax Court has a specialized informal and relatively speedy procedure which taxpayers may choose if the tax liability does not exceed $50,000.

Centralization of Court Review of Opinions

Individual district court and Court of Federal Claims judges operate more independently than do the Judges on the Tax Court which uses a centralized calendar and whose Judges’ decisions are not only reviewed for consistency with one another and with precedent but also may be submitted to the entire court for review. In the District Courts and the Court of Federal Claims, each judge has sole authority over the case before him/her, and decisions are not reviewed by either the Chief Judge or the judges en banc for consistency with either the courts’ own precedents or the opinions of the other judges.

Speedy Resolution of a Case

Processing tax cases in the District Courts may be delayed due to the speedy-trial rule which requires that criminal defendants be given first preference when docket conflicts arise. In contrast, on the average, it takes approximately one year from the time that a case is first docketed by the Tax Court to when a trial commences. There may be a longer delay in settling tax refund actions in the District Courts and the Court of Federal Claims than deficiency actions in the Tax Court because, as a general rule, most Tax Court cases are referred to the Internal Revenue Service’s Office of Appeals for settlement evaluation immediately after the government’s answer has been filed, while settlement of tax-refund cases will not be considered by the U.S. Department of Justice (the attorney for the IRS), until after the government has completed discovery. Even if the Department of Justice trial attorney recommends settlement of a case, there is an extensive  review process, and large refunds in excess of $1,000,000 must be referred to the Congressional Joint Committee on Taxation for approval, thereby further delaying settlement.

Application of Equitable Principles

Unlike the District Courts and the United States Court of Federal Claims, the Tax Court may not use equitable rules to expand its jurisdiction, although the Tax Court has held that it may apply equitable principles in the course of making determinations in those cases that come within its jurisdiction. Thus, the Court has applied the principles of waiver, quasi-estoppel, estoppel, substantial compliance, abuse of discretion, laches, equitable recoupment and the tax benefit rule.

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