Chapter 5
Judicial Interpretations
William A. Raabe, Gerald E. Whittenburg, &
Debra L. Sanders
Copyright ©2006 Thomson South-Western, Mason, Ohio
1
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
2
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
3
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
4
Organization of the Federal Court System
for Tax Cases
5
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
6
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
7
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
8
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
9
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
10
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
11
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
12
Common Legal Terminology
Page 149 of the text contains 25 common
legal terms and their definitions.
13
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:
http://www.ustaxcourt.gov/
14
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)
15
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
16
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
17
Tax Court Trial Locations
18
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
19
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
20
Precedents Tax Court Must Follow
• Supreme Court Decisions
• Circuit Court in taxpayer’s circuit
• Tax Court
– Regular Decisions
– Memorandum Decisions
21
Golsen Rule
• Based on identical facts
– The Tax Court may reach opposite decisions
for taxpayers living or based in different
geographical areas
22
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
23
Citing a Tax Court Case:
Regular Decisions
Temporary Citation
Permanent Citation
24
Citing a Tax Court Case:
Memorandum Decisions
25
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
26
U.S. District Courts
• U.S. District Courts’ website:
– http://www.uscourts.gov/districtcourts.html
• Jurisdiction
– Hears cases based on entire U.S. Code (not
just IRC)
• Judges
– Generalists
– Case heard before one judge
27
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
28
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
29
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
30
U.S. District Court Citations
F.Supp – Federal Supplement Series
AFTR – American Federal Tax Reports
USTC – United States Tax Cases
Parallel citation example:
31
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
32
U.S. Court of Federal Claims
• Website: http://www.uscfc.uscourts.gov/
• Jurisdiction
– Cases concern monetary claims against U.S.
Government
• Newest trial-level court
– 1982 by Federal Courts Improvement Act
– Renamed in 1992
33
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
34
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
35
U.S. Court of Federal Claims
Citations
36
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
37
U.S. Courts of Appeal
• Website:
http://www.uscourts.gov/courtsofappeals.html
• 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
38
U.S. Courts of Appeal
• Judges
– Generalists
– 20 judges (approx.) per circuit
– Three-judge panel typical
• Jury trial is not available
39
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
40
U.S. Courts of Appeal
41
U.S. Courts of Appeal
Citations
42
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
43
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
44
U.S. Supreme Court
• A jury trial is not available
• Precedents to follow
– Supreme Court Decisions
– Decisions have full force of law
• Website: http://www.supremecourtus.gov/
45
U.S. Supreme Court
Citations
46
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
47
Court Case Brief Illustrated
48
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
http://www.law.emory.edu
Cornell U. School of Law http://www.law.cornell.edu
U. of Texas School of Law http://www.utexas.edu/law
Practitioners Publishing Co. http://www.ppcnet.com
Will Yancey’s Home Page http://www.willyancey.com
• Not as easy to use as commercial services
49
Summary of Trial Courts
50
Court Reporter Summary
51
Court Reporter Summary
52
Citation Conventions & Observations
53