1 Chapter 5 Copyright ©2006 Thomson South-Western, Mason, Ohio William A. Raabe, Gerald E. Whittenburg, & Debra L. Sanders Judicial Interpretations

2 Overview of the Federal Court System (1 of 3) Federal Court Cases –Third source of primary law –Concern controversial areas of taxation –Answer questions regarding proper interpretation or intended application of the law

3 Overview of the Federal Court System (2 of 3) Disagreement with the IRS during administrative review process –Taxpayer may use the court system to Recover an overpayment Reverse a deficiency assessment

4 Overview of the Federal Court System (3 of 3) Disagreement with the IRS during administrative review process –IRS may use the court system to Assert a claim to a deficiency Enforce collection Impose civil or criminal penalties

5 Organization of the Federal Court System for Tax Cases

6 Trial Courts All litigation between taxpayer & IRS begins in a trial court One of three venues is selected: –U.S. Tax Court –U.S. District Courts –U.S. Court of Federal Claims

7 Appellate Courts Dissatisfied party may appeal a trial court decision The appellate court will: –Review the trial court decision –Hear new evidence & arguments –Uphold, modify, or reverse the trial court decision

8 Legal Conventions: Burden of Proof Burden of proof is on the taxpayer (per IRC) except cases of: –Hobby losses –Fraud with intent to evade tax –Accumulated earnings tax

9 Burden of Proof The burden of proof shifts to the IRS if the taxpayer: –Introduces credible factual evidence –Has proper records & substantiation –Cooperates with IRS requests for Meetings, interviews, witnesses, & documents –Corporations, partnership, and trusts with net worth < $7 million – burden is on taxpayer

10 Burden of Proof The burden of proof shifts to the IRS if: –The IRS uses statistics to reconstruct an individual’s income, or –The court proceeding against an individual taxpayer involves a penalty or addition to tax

11 Tax Confidentiality Privilege (1 of 2) Attorney-client privilege for non-attorneys practicing before IRS –Only in noncriminal tax proceedings before IRS or Federal courts –Privilege does not extend to written communications between tax practitioner and a corporation about tax shelters –You must understand the confidentiality privilege rules

12 Tax Confidentiality Privilege (2 of 2) Does not apply to: –Preparation of tax returns –Giving accounting or business advice –Tax accrual workpapers Privilege limit follows state law

13 Common Legal Terminology Page 149 of the text contains 25 common legal terms and their definitions.

14 U.S. Tax Court Jurisdiction: Hears only Federal tax cases –Authorized by Code §7741 Jurisdiction limited to cases involving IRC & revenue acts Pre 1943: Known as the Board of Tax Appeals U.S. Tax Court website:

15 U.S. Tax Court: Judges (1 of 2) 19 Judges –Tax law specialists –15-year terms Appointed by President & approved by Senate –Temporary special trial judges may be appointed –Important cases may be heard en banc (by all of the Tax Court judges)

16 U.S. Tax Court: Judges (2 of 2) Cases are usually heard by one judge Chief judge may have case reviewed by other Tax Court judges before release

17 U.S. Tax Court: Domain National court –Cased heard in D.C. & major cities several times per year (see next slide for locations) No jury trial is available

18 Tax Court Trial Locations

19 Types of Tax Court Decisions Regular Decisions –Recently around 50 to 100 decisions per year –Cases that involve new or unusual points of law Memorandum Decisions –Concern only the application of the existing law or an interpretation of the facts

20 U.S. Tax Court Taxpayer does not have to pay the tax deficiency before trial Taxpayer must file petition with the Tax Court within 90 days of IRS mailing notice & demand for payment Rule 155: the court does not compute tax due (or refund due) –Computation determined by IRS and taxpayer

21 Precedents Tax Court Must Follow Supreme Court Decisions Circuit Court in taxpayer’s circuit Tax Court –Regular Decisions –Memorandum Decisions

22 Golsen Rule Based on identical facts –The Tax Court may reach opposite decisions for taxpayers living or based in different geographical areas

23 Tax Court Small Cases Division Limited to $50,000 (with penalties) Informal –May represent yourself (pro se) –No elaborate briefs or oral arguments –Decisions Cannot be appealed Not officially published (issued as summary opinions) Not precedent for other taxpayers –But, they indicate how TC may rule in a similar situation

24 Citing a Tax Court Case: Regular Decisions Temporary Citation Permanent Citation

25 Citing a Tax Court Case: Memorandum Decisions

26 Reasons to (or Not to) Choose Tax Court Good court to argue a technical tax issue Tax Court may examine entire tax return (not just items in question) Precedent in taxpayer’s favor Do not have to pay the tax deficiency before trial

27 U.S. District Courts U.S. District Courts’ website: – Jurisdiction –Hears cases based on entire U.S. Code (not just IRC) Judges –Generalists –Case heard before one judge

28 U.S. District Courts: Domain Numerous geographical districts located throughout U.S. –based on population Must request hearing in the District Court that has jurisdiction over taxpayer’s residence or where taxpayer conducts business

29 U.S. District Courts Jury trial is available Taxpayer must pay deficiency before trial Then sue the Federal government for a refund of the disputed liability –Payment stops time-based penalties & interest from accruing on disputed deficiency

30 Precedents District Courts Must Follow Supreme Court Decisions Circuit Court in taxpayer’s circuit However: –Decisions may vary among districts –Decisions may vary over time –Many decisions are technically poorly structured Not as reliable as precedent May be overturned on appeal

31 U.S. District Court Citations F.Supp – Federal Supplement Series AFTR – American Federal Tax Reports USTC – United States Tax Cases Parallel citation example:

32 Reasons to (or Not to) Choose District Court Good court to argue emotional issue –Taxpayer and associates are particularly credible witnesses Juries are limited to questions of fact Might find a precedent in taxpayer’s favor

33 U.S. Court of Federal Claims Website: Jurisdiction –Cases concern monetary claims against U.S. Government Newest trial-level court –1982 by Federal Courts Improvement Act –Renamed in 1992

34 U.S. Court of Federal Claims 16 judges –Generalists, but more tax knowledge than District Court judges Case heard before 1-5 judges National court –Cased heard in D.C. & major cities several times per year Jury trial is not available

35 U.S. Court of Federal Claims Taxpayer must pay deficiency before trial Sue government for refund of disputed liability –Payment stops time-based penalties and interest from accruing on disputed deficiency Precedents court must follow –Supreme Court Decisions –Federal Circuit Court

36 U.S. Court of Federal Claims Citations

37 Reasons to (or Not to) Choose Court of Federal Claims Good court if own District or Circuit Court of appeals has ruled adversely on issue Good place to argue non-technical matter

38 U.S. Courts of Appeal Website: First level Federal appellate court –Usually last appeal for tax cases because the Supreme Court does not accept many tax cases Considers both tax and non-tax issues Only hears cases that involve a question of law

39 U.S. Courts of Appeal Judges –Generalists –20 judges (approx.) per circuit –Three-judge panel typical Jury trial is not available

40 U.S. Courts of Appeal Domain: 13 Courts of Appeals –11 geographical circuits See map on next slide –Washington D.C. –Federal Court of Appeals Hears cases from U.S. Federal Court of Claims Precedents court must follow –Supreme Court Decisions –Circuit Court in taxpayer’s circuit

41 U.S. Courts of Appeal

42 U.S. Courts of Appeal Citations

43 U.S. Supreme Court Jurisdiction: Highest court in nation –Article III of Constitution Judicial power “to all cases of law and equity, arising under this Constitution, the laws of the U.S. and treaties...” Nine justices –Appointed for life by the President and confirmed by the Senate –All justices hear every case

44 U.S. Supreme Court Domain Only hears cases in Washington, D.C. Hears tax cases from the Federal appellate courts But rarely accepts tax cases –about 12 annually –Permission to present a case requested by writ of certiorari –Tax cases accepted usually involve Conflict among Federal circuits Tax issue of major importance

45 U.S. Supreme Court A jury trial is not available Precedents to follow –Supreme Court Decisions –Decisions have full force of law Website:

46 U.S. Supreme Court Citations

47 Headnotes & Case Briefs Headnotes –A summary of the case written and inserted by the court reporter editors –There may be a separate headnote for each issue A brief summarizes the court case –One page Citation Issue(s) Facts Holding Analysis

48 Court Case Brief Illustrated

49 Internet and Judicial Sources Many free web sites available to obtain court cases –Law schools, journals, tax publishers, and individuals –Examples: Emory U. School of Law Cornell U. School of Law U. of Texas School of Law Practitioners Publishing Co. Will Yancey’s Home Page Not as easy to use as commercial services

50 Summary of Trial Courts

51 Court Reporter Summary

52 Court Reporter Summary

53 Citation Conventions & Observations