Chapter Five: The United States Tax Court
THE PETITION
To begin an action in Tax Court to contest the existence of, or the amount of, a deficiency, the taxpayer must file a petition. The form of the petition should be substantially similar to the form contained in Appendix 1 of the Tax Court Rules. Pursuant to Tax Court Rule 34(b), the petition should contain the following information:
- The petitioner’s name and legal residence as of the date of the filing of the petition.
- The petitioner’s mailing address, if different from above, the petitioner’s taxpayer identification number (social security number or employer identification number), and the Service Center where the return in issue was filed.
- The date of the notice of deficiency in issue and the identity IRS office that issued the notice.
- The amount of the proposed deficiency, the type of tax, and the years in issue.
- A section of separately lettered assignment of errors contained in the notice, including items for which the Service has the burden.
- A concise statement of facts on which the petitioner relies, exclusive of issues upon which the IRS has the burden.
- A request for relief.
- A signature, mailing address, and telephone number of the taxpayer or his or her representative. The representative should also include the representative’s tax court number.
- A copy of the notice of deficiency.
- Other exhibits.
Tax Court Rule 39 requires the petitioner to raise any claim of affirmative defense(s). Failure to raise a defense constitutes waiver. However, challenge to the Court’s jurisdiction can be raised at any time by motion. Tax Court Rule 40. Additionally, any issue not raised in the assignment of errors section is deemed conceded.
The petitioner must file the original petition with two conformed copies. The petitioner should also file an original and two conformed copies of the taxpayer’s designation of the place of trial. The form of the designation should be substantially similar to the form contained in Appendix 1 of the Tax Court Rules. If the petitioner fails to designate the place of trial, the IRS is permitted to do so in its answer.
The petitioner must include a $60.00 filing fee with the petition and the designation of the place of trial. If the filing fee is not sent with the petition, the taxpayer will be given one opportunity to pay the fee. If the fee is not paid after demand, the case will be dismissed.
The petition, fee, and designation of place of trial must be either hand delivered or mailed to the United States Tax Court within 90 days of the date contained on the notice of deficiency. If the 90th day is a Saturday, Sunday or other legal holiday in the District of Columbia, then the last day is the next business day. Tax Court Rule 25(a)(2).
The Tax Court applies the timely mailed, timely filed rule so long as the Tax Court receives the petition within the ordinary delivery time for mail. See Stotter v. Commissioner, 69 T.C. 896 (1978). The relevant date of mailing is the postmark of the United States Postal Service. Prior to 1997, the timely mailed timely filed rule did not apply to private delivery services. However, after 1996, the timely mailed, timely filed rule will apply, but only to those services designated by the Secretary. Taxpayer Bill of Rights 2.
If the taxpayer mails the petition by registered or certified mail, the taxpayer enjoys a presumption of delivery, even if receipt is denied by the Court. This presumption occurs only when the petition is mailed by registered or certified mail. If the taxpayer loses the certified receipt, the taxpayer cannot use extrinsic evidence to prove that the petition was mailed by certified mail. See Storelli v. Commissioner, 86 T.C. 443 (1986).
The timely mailed, timely filed ruled only applies when the envelope is properly addressed to the United States Tax Court. The address for the Court is United States Tax Court, 400 Second Street, N.W. Washington D.C. 20217. Tax Court Rule 10(e).
Lastly, the taxpayer has a right to amend the petition once prior to the service of the answer from the IRS. Amendments after the IRS’ service of its answer can only occur by leave of court or by consent of the parties.
DISTRICT COUNSEL
THE TAX COURT
The Tax Court is governed by the Rules of Practice and Procedure of the United States Tax Court. Any procedural issue not addressed by the Tax Court Rules can determined by the Tax Court judge assigned to the case, who will give weight to the Federal Rules of Civil Procedure where suitable. Tax Court Rule 1.
The Tax Court is a court of limited jurisdiction. It is an Article I tribunal rather than an Article III judicial court. This means that it has jurisdiction over cases only to the extent specifically granted by Congress. The Tax Court has jurisdiction in the following types of cases:
- Deficiency cases subject to the notice of deficiency requirements.
- Declaratory judgment actions involving the tax exempt status of exempt organizations, employee plans, and tax exempt bonds.
- Disclosure cases involving IRC §6103.
- TEFRA cases (unified audit procedures). However, the Tax Court does not have jurisdiction to consider partnership items in a proceeding based on a notice of deficiency involving non-partnership items.
- Certain IRS determinations of employment status (pursuant to IRC § 7436, added by the Taxpayer Relief Act of 1997).
- Certain collection actions taken by the IRS (pursuant to new code IRC §6330, added by the IRS Restructuring and Reform Act of 1998).
- IRS denials of innocent spouse relief and separate liability elections (pursuant to new code IRC §6015(e)(1)(A), added by the IRS Restructuring and Reform Act of 1998).
- Refund actions with respect to certain estates that have elected the installment method of payment (pursuant to new code IRC §7422(j)(1), added by the IRS Restructuring and Reform Act of 1998).
The Tax Court also provides for a special litigation process for “small taxpayers”. The small claims cases are much more informal than regular litigation, the rules of evidence are relaxed, the taxpayer’s often represent themselves and the decisions are not appealable. Prior to the passage of the IRS Restructuring and Reform Act of 1998, the jurisdictional limitation for small cases was $10,000. The new legislation increased this limitation to $50,000.
DISCOVERY
Pursuant to the Tax Court Rules, the parties are required to engage in discovery through informal means before resorting to the formal procedures contained in the rules. See International Air Conditioning Corporation v. Commissioner, 67 T.C. 89 (1976). The parties are generally not allowed to engage in discovery until 30 days after issue has been joined. Discovery must be completed no later than 45 days before the case is to be called on the trial calendar.
Use of IRS Administrative Summons During Pending Court Action
Generally, once a case is in litigation, the Service can no longer use an administrative summons to obtain information about a taxpayer, and is limited to the informal or formal discovery procedures allowed by the Court. However, some courts have allowed the use of information obtained pursuant to the administrative summons even though the IRS could have obtained the same information through discovery. See National Plate & Window Glass Co. v. United States, 254 F.2d 92, 58-1 USTC ¶ 9421 (2d Cir. 1958), cert. denied, 358 U.S. 822 (1958).
Interestingly, the position of the IRS as to use of information or documentation obtained through a Freedom of Information Act request during a pending Tax Court proceeding is contrary to the position taken by the IRS in National Plate & Window Glass Co., supra. See Williams v. Internal Revenue Service, 72-1 USTC ¶ 9476 (D.C. Del. 1972), aff'd 479 F.2d 317, 73-1 USTC ¶ 9476 (3d Cir. 1973), cert. denied, 414 U.S. 1024.
STIPULATIONS
The Tax Court does not have a structured settlement procedure, such as mandatory pre-trial settlement conferences with a judge. The Tax Court, however, could not possibly hold trials for most of the docketed cases. Thus, the Court relies heavily on the ability of the parties to settle most cases.
The Tax Court Rules contain many procedures which can facilitate settlement or help remove barriers to settlement. These include resolution of legal issues by motions for full or partial summary judgment (Rule 121) and resolution of factual issues by submissions to arbitration (Rule 124). Most helpful, however, towards settlement of a tax court case is the mandatory process of stipulation. See Rule 91. The petitioner should not expect to settle a case with District Counsel without engaging in the stipulation process, which begins with participation in informal discovery. See Branerton Corp. v. Commissioner, 61 T.C. 691 (1974). The petitioner should not expect much aid from the Court if the stipulation process has been ignored.
Tax Court Rule 91 requires the parties to stipulate to all non-privileged matters that are relevant to the case in issue. A stipulation should include all documents and facts relevant to the case. Objections to facts or documents should be noted in the stipulation, but said grounds do not provide a sufficient basis for refusing to stipulate. The proper time to formally object to inclusion of a fact or document is at trial when initially introduced or identified as evidence.
The Stipulation should be in writing, signed by both parties, and in the format detailed in Tax Court Rule 91(b). Two copies of the stipulation should be filed with the Court. However only one copy of the exhibits need be filed.
TRIAL
Generally, once a petition is filed, the case is placed on the trial calendar and the parties are given 90 days notice of the date on which the case will be called. If the petitioner and the IRS are unable to stipulate to all relevant factual issues, or are unable to settle the matter without trial, the case is called at the trial calendar when the Tax Court is in session in the city designated as the place of trial by the petitioner.
The Tax Court in Buffalo is located in the Brisbane Building, Main Street, Buffalo, NY 14202. In Buffalo, generally the Tax Court visits twice a year. The Small Claims calendar is called in approximately April of the year. The general calendar occurs in June of each year. Notice that a case is calendared for June is generally received by the parties in January. Notice of the date of the calendar call is generally received in March.
At the calendar call, the Court will call all of the cases in order of the docket numbers. When the taxpayer’s particular case is called, the parties enter an appearance before the Court and report to the Court on the status of the matter, i.e. settled, ready for trial, etc. Once all of the cases have been called, the Court will recess to determine the order of the hearings and trials. When the Court reconvenes the Court announces the order of the trials and hearings.
There are no jury trials in Tax Court. Both the legal and factual issues are decided by a Tax Court Judge.
The Tax Court follows the “Golsen Rule” when determining issues that were previously decided by the Circuit Court in which the Tax Court sits. Thus, even if the Tax Court has held differently, if the appeal would be made to a Circuit Court that has previously ruled on the issue, the Tax Court will follow the prior decision of the controlling Circuit.
BURDEN OF PROOF
The Federal Rules of Evidence are the evidence rules that are controlling in the Tax Court. Tax Rule 143(a). Prior to the IRS Restructuring and Reform Act of 1998, in most cases the taxpayer had the burden of proof, and the standard of proof is a preponderance of the evidence. However, in some situations, either or both of the burden and standard of proof were different than the above. The most notable of these situations was where the government asserted fraud. If the IRS asserted fraud either for purposes of the fraud penalty or the statute of limitations, the Service had the burden of proving fraud by clear and convincing evidence. Tax Court Rule 142. The new law places the general burden of proof on the Service with respect to factual issues in certain situations. For the burden to rest with the IRS, the taxpayer must introduce credible evidence with respect to a factual issue that is necessary to determine the taxpayer’s liability and demonstrate the following:
- That he/she complied with all substantiation and record keeping requirements under the Code and regulations.
- That he/she cooperated with all reasonable requests by the Service for witnesses, information, documents, meetings and interviews. Full cooperation requires the taxpayer to exhaust all administrative remedies, but does not require the taxpayer to extend the statute of limitations.
- If the taxpayer is a corporation, trust or partnership, that it meets the net worth limitation which is defined as a net worth of not more than $7 million dollars.
The Senate Finance Committee defined “credible evidence” as quality evidence that, after critical analysis, a court would find to be sufficient to serve as the basis for its decision on the issue, absent any contrary evidence. If evidence from both sides is introduced and is equally balanced, the court should find that the IRS has not sustained its burden of proof.
Examples of the substantiation and record keeping requirements noted by the Senate Finance Committee are §6001 (requiring taxpayer to keep records by the IRS), §§6038 and 6038A (requiring the taxpayer to furnish information with respect to foreign businesses controlled by a U.S. person), §170 (requiring the taxpayer to keep certain records related to charitable contributions), §274(d) (requiring the taxpayer to substantiate claimed deductions related to travel, entertainment, gifts and other expenses) and §905(b) (requiring the taxpayer to provide all information to establish entitlement to the foreign tax credit).
The burden of proof is on the Service if an item of income is asserted solely on statistical information relating to an unrelated taxpayer. Under these circumstances there is no requirement that the taxpayer maintain records or cooperate, but rather the IRS has the burden of proof with respect to that item of income. This rule only applies to individuals.
Where the IRS asserts any penalty, the Service must initially produce evidence to establish a prima facie entitlement to the penalty. After the Service has introduced evidence substantiating the appropriateness of the penalty, the general burden of proof rules apply and the taxpayer must then establish credible evidence regarding his/her defense to the penalty. If established the burden would then shifts back to the IRS under the new law. This rule only applies to individuals.
BRIEFS
After the trial is completed, the parties are required to file briefs with the Court. The Judge will direct how and the date by which briefs should be filed. Most often, the Court will direct the parties to file the briefs simultaneously and no later than 75 days after the completion date of the trial. Reply briefs should then be filed within 45 days of receipt of the original briefs.
If briefs are filed seriatim (consecutively), the Court will usually direct one party to file the original brief no later than 75 days after the completion date of the trial. The answering brief should be filed within 45 days of receipt of the original brief. The reply brief should then be filed within 30 days after receipt of the answering brief. The parties are required to file an original and two copies, as well as one copy of each for the other parties.
The format of the brief is contained in Tax Court Rule 151(e). The format is a follows:
- Table of contents.
- Statement regarding the nature of the controversy.
- Proposed findings of fact.
- Statement of points on which the party relies.
- Argument regarding law and disputed facts.
- Signature of representative or party.
OPINION AND DECISION DOCUMENTS
Opinions
After the filing of all briefs, the judge will prepare and issue an opinion. The opinion will include the judge’s findings of fact and conclusions of law. The Chief Judge of the Tax Court will review all opinions before they become final.
An opinion can exist in one of three forms. It can be a regular opinion, a memorandum opinion, or a summary opinion. A regular opinion is published in the official United States Tax Court Reports and can be used as precedent. Memorandum opinions are not published by the Tax Court, but are published by some commercial services. Memorandum opinions, although not precedent, can and should be used and cited for persuasive purposes. Summary opinions are the opinions of small claims cases and are not precedential and should not be cited.
Decisions
Generally, the decision document is the final paper issued by the Tax Court. If the case did not settle, the Court will issue the decision document following its opinion. If the case settled, the parties will usually prepare the decision document and submit it to the Court for approval and signature. The decision document must state the exact tax liability of the petitioner, if any, for the years in issue.
In unsettled cases, after the Court’s issuance of the opinion, the parties must submit computations regarding the correct tax deficiency, liability and/or overpayments, if any, pursuant to the Court’s opinion. If the parties are in agreement regarding the tax deficiency and/or overpayments they may submit an agreed computation with a statement of their agreement. If the parties are not in agreement regarding the deficiency and/or overpayments, the parties must each submit individual computations. If overpayments are involved, the exact date and amount of each payment must be specified in the decision document. The rules governing computations are contained in Tax Court Rule 155.
Neither accrued interest nor payments towards interest will be reflected in the decision document. However, a representative should request computations regarding interest for the client’s information. Additionally, if the taxpayer has paid any portion of the interest, the representative should confirm the proper application of said payment by letter. Lastly, payments are only included in a decision document when an overpayment exists. Payments applied to years that do not result in overpayments are not included in the decision document. However, the Court is unconcerned as to what the parties stipulate to “below the signature line.” Thus, the parties can include the payment amounts and proper applications thereof in the stipulation portion of the decision document which is contained below the judges signature.
POST TRIAL MOTIONS AND APPEALS
Post Trial Motions
If a party is unsatisfied with a decision of the Tax Court, the party has 30 days from the date the party is served with the Court’s written opinion, to file a motion for reconsideration. Tax Court Rule 161. A motion to vacate or revise a decision must be filed within 30 days of the Court’s entry of the decision. Tax Court Rule 162. The allowance of either type of motion is within the sole discretion of the Tax Court. Generally, either will only be granted if a party can show substantial error or unusual circumstances. See Robert Haft Trust v. Commissioner, 62 USTC ¶145 (1974).
Appeals
If a party is unsatisfied with a decision of the Tax Court, said party can appeal the decision to the United States Court of Appeals for the city or town that is the legal residence of the petitioner on the date the original petition was filed. See Tax Court Rule 190 and IRC 7482(b). The notice of appeal must be filed with the Tax Court within 90 days from the Court’s entry of the decision. If an appeal is filed by one party within the 90 days, the remaining parties have 120 days from the Court’s entry of the decision (30 additional days), to file an appeal.
If a party makes a timely 161 or 162 motion, the motion tolls the 90 day period for perfecting an appeal until after the Tax Court has responded to the post-trial motion. Additionally, if a party makes an untimely motion pursuant to Tax Court Rules 161 or 162, and the Tax Court grants the motion for leave prior to the decision becoming final, the time for appeal runs from the Court’s decision on the post-trial motion. See Nordvik v. Commissioner, 95-2 USTC ¶50,564 (9th Cir. 1995).
A timely notice of appeal does not stay the Service’s ability to assess and collect the liability in issue. However, the taxpayer can stay the assessment and collection by posting a bond with the Tax Court on or before the filing of the notice of appeal. The amount of the bond will be determined by the Tax Court, but cannot exceed 2 times the amount of the deficiency in issue. See IRC §7485(a)(1). Generally, the Tax Court will set the amount of the bond at the deficiency plus statutory additions and interest to two and a half years from the filing of the notice of appeal.
If no appeal is taken within 90 days after entry of the Tax Court’s decision, the decision of the Tax Court becomes final on the 91st day. If an appeal is taken from the Tax Court’s decision, the finality of the Tax Court’s decision depends on the action taken by the Court of Appeals. Either way, once the Tax Court’s decision becomes final, the IRS can assess the deficiency in issue and begin collection.
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