Chapter 3
Judicial Sources
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Judicial Authorities of the Tax Law
• The third branch of the government is the
Judiciary.
• The role of judiciary is to resolve cases
and controversies under the law.
– A decision of the court is a rule of law
• And thus, a source of tax authority when the case
deals with tax issues.
The Courts Authority
• Questions of Law versus Questions of Fact
– Questions of Law – an issue that must be resolved by
interpreting a law that is unclear.
– Questions of Fact – an issue of fact, the proof of which is
uncertain. The decision-maker must determine whose version of
the facts to believe.
• Query: Which question should carry more authoritative
weight to a tax practitioner in researching a tax problem?
• Answer: Questions of law because they involve
interpretations or explanations of the law itself. Questions of
fact are taxpayer specific and carry little weight.
• Questions of law as applied to the facts carry authoritative
weight, as case law decisions often involve the application of
the law to facts.
Limits on a Court’s Authority
• Courts will defer to Congress’ law-making
authority.
– Courts will not invalidate a tax law enacted by
Congress except in a clear case of unconstitutionality.
– Courts will invalidate an interpretation as contrary to
legislative intent.
• Stare Decisis – let the decision stand
– A self-imposed court doctrine that states where we
have reached a decision (applied the law in certain
way) in the past, we will continue to follow that
decision to resolve future similar controversies.
Stare Decisis
Query: Why is stare decisis an important doctrine?
Answer: The doctrine promotes certainty under the law.
As individuals we will know our rights and obligations
under the law and can plan our actions accordingly.
For example, if a court decision permits a taxpayer to
put an elevator in her house for medical reasons and
deduct that portion of the cost which exceeds the
increase in value to her property, she may do so
without the worry of being assessed a deficiency.
The Court System – Overview
• The taxpayer resorts to the courts only after all
administrative settlement options have been
exhausted.
• Trial courts (courts of original jurisdiction)
– U.S. Tax Courts
– Federal District Courts
– U.S. Court of Federal Claims
• Appellate Courts
– 12 Geographic Circuit Courts of Appeal
– U.S Court of Appeals for the Federal Circuit
– U.S. Supreme Court
The Tax Court
• Small Cases Division
– Taxpayer need not pay deficiency before the
hearing.
– The taxpayer’s case must involve a deficiency
or a claim for refund of less than $50,000
including interest and penalties.
– Taxpayer may appear pro se
– Taxpayer may not appeal adverse ruling.
The Tax Court (Cont’d)
• Regular Tax Court
– National court of special jurisdiction – federal tax
cases only.
– 19 Judges who travel to 80 cities to hear cases
– Taxpayer must file his petition within 90 days of
receiving a statutory notice of deficiency.
– The deficiency need not be paid in advance.
– No jury trial available.
– Hearing conducted by a Tax Court Judge (or
Associate Judge)
• Draft opinion sent to Chief Judge for review
• Important decisions heard en banc.
• Final decision designated Regular or Memorandum
Tax Court Appeals
• Query: What are some advantages to a
taxpayer in choosing to initiate its case in Tax
Court?
• Answer:
– Deficiency need not be paid up front.
– The Tax Court is a court of limited or special
jurisdiction. The judges are experts in the tax law and
hear only tax cases. Thus, if the taxpayer’s case
revolves around complex or technical provisions of
the tax law and he has sound arguments, Tax Court
may be the best choice.
Tax Court Appeals (Cont’d)
• Appeals from the Tax Court are made to one of twelve
U.S. Circuit Courts of Appeal, based on the geographic
location in which the taxpayer resides.
• The Golsen Rule – The Tax Court agrees to follow the
decisions of the Court of Appeals for Circuit in which the
taxpayer’s appeal may be filed. If no precedent exists in
that Circuit, the Tax Court is free to make its own
interpretation. However, it will not necessarily apply its
own interpretation. Rather it is free to follow the
decisions of other Circuit courts on the same set of facts
in the interests of uniformity.
U.S. District Courts
• Courts of general jurisdiction – can hear any type of case
or controversy.
• Taxpayer must pay deficiency and sue for refund
• Right to jury trial
• Judges are not specialists in tax law
– Therefore district court judges rely more heavily on
administrative rulings of the Service – Revenue Rulings, GCM
etc.
• 94 geographic locations (districts) spread out amongst
12 judicial circuits
• Appeals made to one of twelve Circuit Courts of Appeal
– geographic Circuit in which taxpayer resides
U.S. Court of Federal Claims
• Trial court of general jurisdiction/national court created in
1982 by Act of Congress
• 16 judges who hear trials throughout the U.S.
– Commissioner collects evidence, testimony and makes findings,
which are given to a Judge who drafts a tentative opinion
• The tentative opinion is reviewed by Chief Judge.
– Case may be heard en banc
• Deficiency must be paid in advance of hearing and
taxpayer sues for refund.
• No jury trials
• Court of Claims judges hear all kinds of cases
– Therefore judges are not specialists
– Party to the lawsuit must be the U.S. government
U.S. Court of Federal Claims
(Cont’d)
• Appeals made to Court of Appeals for the Federal Circuit
(also established in 1982)
• As a national court, the Court of Claims is not bound by
decisions of 12 geographic Circuit Courts.
• Query: When would it be a good idea for taxpayer to
initiate his lawsuit in the Court of Federal Claims?
• Answer: Given the generally short life-span of the Court
of Federal Claims and its appeals court, the Court of
Appeals for the Federal Circuit (since 1982), there is little
tax precedent in this system. Hence, if the taxpayer had
a relatively new or untried tax issue, it may be best to
choose the Claims Court. It might be the best chance
the taxpayer has to influence the trial court with his or
her interpretation of the tax law.
Circuit Courts of Appeal
• U.S. court system is divided by geographic location into 12 circuits
encompassing 94 districts.
– 11 numbered districts and Washington D.C.
– The Court of Appeals for Federal Circuit is the appeals court for the
Court of Federal Claims only.
• Each Circuit has approx. 20 judges, each case is heard by a panel
of three judges.
• Actions the court may take on appeal:
– Affirm
– Reverse
– Remand for further proceedings
• Circuit Court decisions as precedent
– Circuits, like all courts, follow stare decisis and are bound by their
previous decisions.
– However decisions of one Circuit are not binding on others.
– All Circuit Courts are bound by Supreme Court decisions.
U.S. Supreme Court
• Comprised of 8 Justices and 1 Chief Justice – cases heard by all
nine Justices
• Review is discretionary only – request for hearing through writ of
certiorari
– 4 Justices must vote to hear the case
Note, denying cert. is not a decision on the merits.
– Not many tax cases heard by the Supreme Court – recall that great
deference is paid to Congressional law-making in this arena.
Query: When will the Supreme Court grant certiorari?
Answer:
(1) There are conflicting interpretations of tax law amongst the Circuit
Courts.
(2) The case involves an important tax law issue of major significance to
taxpayers (often Congress and law-makers not acting quickly enough).
Locating and Citing Judicial
Authority
• Decisions of the court in tax cases – published in both
official (by the court) and unofficial (by private
publishers) reporters.
• Official reporters (Government Printing Office or West
Publishing)
–
–
–
–
Tax Court regular decisions – Tax Court Reports
Tax Court memorandum decisions – private publishers only
District Court opinions – Federal Supplement – F.Supp.
Claims Court – post 1991 – United States Court of Federal
Claims Reporter – Fed. Cl.
• Pre-1992 United States Claims Court Reporter – Cl. Ct.
– Circuit Courts of Appeal – Federal Reporter – F. F.2d, F.3d, F.4th
– Supreme Court – United States Reports – U.S.
Locating and Citing Judicial
Authority (Cont’d)
• Unofficial – private publishers – CCH, RIA
– Regular & Memorandum decisions of the Tax Court –
CCH Tax Court Reporter, RIA Tax Court Reports
(CCH TCM, RIA TC Memo)
– All other tax cases – CCH United States Tax Cases
(USTC), RIA American Federal Tax Reports – (AFTR)
Note: Because the same case may be published in
different places, it may have 3 different citations –
these are known as parallel citations.
How to find the cases? Primarily through tax services
such as RIA and CCH either in print or on CD-ROM,
but also on the web through internet databases
(sometimes free). See
http://www.findlaw/casecode/supreme.html
Citing Judicial Authority
• Official Format – Volume # /Reporter/ Page #
(Court, year)
• Mellon Bank, N.A. v. United States, 265 F.3d
1275 (CA Fed. 2001)
– This is a decision of the Court of Appeals for the
Federal Circuit handed down in 2001.
– It is located in Volume 265 of the 3rd printing of the
Federal Reporter on Page 1275.
– The same case is cited on CCH as 2001-2 USTC P
50,621. Thus, it appears in Volume 2001-2 of the
United States Tax Cases at Paragraph 50,621.
Citators
• Citators: Update the practitioner as to how other
courts/authorities have subsequently dealt with
the decision of interest.
– Some Citators let the practitioner know where other
decisions have cited to this case. For example, CCH
Citator
– Other citators provide some detail as to how the
subsequent court/authority dealt with the decision of
interest, such as following it, overturning it,
distinguishing it, or limiting it.
• Examples of such citators include – RIA Citator and
Shepard’s Citator
Assessing the Authoritative Value
of a Decision
•
•
To what extent may the practitioner rely on a certain
decision?
Rules of thumb:
1.
2.
3.
•
•
The higher the level of the court the more authority the
decision has.
En banc decisions carry more weight than regular decisions.
The 2nd (NY) and 9th (CA) Circuits decisions carry more weight
than the other circuits.
Tax Court decisions carry more weight than district
court or court of claim decisions.
Tax Court regular decisions carry more weight than
memorandum decisions.
On Whom do you rely?
Query: On which case would you rely in deciding whether a CT
trust is required to deduct its investment advisor fees subject
to the 2% floor on miscellaneous itemized deductions?
Rudkin Testamentary Trust v. Comm’r, 124 TC 304 (2005) –
held that investment advisor fees are subject to 2% floor
because they are not uncommonly incurred outside the trust
setting, that is individuals commonly incur them. (Michael
Knight as trustee for this trust bought suit on its behalf. The
trust is located in CT, which is in the 2nd Circuit)
Knight, Trustee for Rudkin Testamentary Trust v. Comm’r, 552
U.S. (2008) – held that investment advisor fees are subject to
2% floor because it is not uncommon or unusual for an
individual to incur them.
On Whom do you rely? (Cont’d)
O’Neill v. Comm’r, 994 F.2d 302 (CA 6, 1993) – found
investment advisor fees fully deductible.
Knight v. Comm’r, 467 F.3d 149 (CA 2, (2006) – found that the
2% floor applies only to those costs which are incapable of
being incurred by individuals. Because investment advisor
fees are capable of being incurred by individuals, the trust’s
investment advisor expense is subject to the 2% floor.
Answer: The Supreme Court, of course. If the Supreme Court
had not made a decision on which case would the trust rely?
The 2nd Circuit opinion, as this is binding precedent for a
taxpayer in this geographic location.
Note: You can see why the Supreme Court chose this case?
Conflicting interpretations amongst the Circuits and Tax
Court.
Briefing a Case
• A case brief is an outline of the important
elements of a court decision
• It includes the following
–
–
–
–
The full case name and citation
A summary of important facts
Legal issue(s) to be resolved by the court
Holding(s) or Legal Conclusion(s) reached by the
court with respect to those issues.
– Legal Reasoning or Analysis of the law used in
reaching its conclusions.