Civil Tax Litigation

AuthorW. Patrick Cantrell
Pages107-180
107
CHAPTER 3
Civil Tax Litigation
Choice of Forum
I. Introduction
A. General Considerations
Taxpayers and the Internal Revenue Service have a mutual interest in
settling disputed tax cases without the necessity of litigation. Litiga-
tion necessarily involves the consumption of enormous amounts of
resources. But there are those occasions when litigation of a tax case
becomes necessary. Fortunately, tax litigators get to forum-shop. They
typically make the decision as to choice of forum based on the tax law-
yer’s assessment of where the case law is better and whether or not the
client can pay the tax before litigation.
B. Courts of Original Jurisdiction
There are three1 possible courts in which to litigate federal tax cases, all
of which have concurrent jurisdiction:2
1. U.S. Court of Federal Claims,
2. U.S. district courts, and
3. U.S. Tax Court.3
C. Consideration of Precedents
Avoiding unfavorable precedents may be the primary consideration
in selecting a trial forum. One must consider decisions, both favorable
and unfavorable, of the following courts: (1) U.S. Tax Court, (2) federal
district courts, (3) U.S. Court of Federal Claims, and (4) the circuit court
to which appeal would lie.
108 CIVIL TAX LITIGATION
D. Orientation of the Judges
The experience and orientation of the judges of the three courts of
original jurisdiction are sign ificantly different. Therefore, this is an
important factor in the selection process.
E. Recovery of Litigation Costs
If the government’s position is not substantially justified, a successful
taxpayer can file a motion for recovery of litigation costs regardless of
the forum in which suit was brought.4
II. U.S. Court of Federal Claims
A. Jurisdiction
The U.S. Court of Federal Claims (also known as the claims court) is
located in Washington, D.C., and its jurisdiction is limited to claims
against the federal government. Therefore, a potential litigant must
first pay the tax and then sue for a refund to get into this court. The
defendant in these cases is always the United States. Unlike the tax
court, the court of federal claims has jurisdiction over any type of fed-
eral tax, not just income, estate, or gift taxes.
B. Location of Trial
The court of federal claims’ hearings and tria ls are normally heard in
Washington, D.C., although the court does have the authority to travel.
The cost of litigating in Washington, D.C., can be prohibitively expen-
sive. Therefore, the court of federal claims is best avoided by novices
and nonspecialists.
C. Expertise of Judges
Judges in the court of federal claims hear all types of clai ms litiga-
tion, not just tax cases. Their expertise is in hearing claims against the
government. Accordingly, their tax law expertise may be somewhat
limited. This makes it difficult to argue logical but novel positions.
D. Opposing Counsel
The government is represented in the court of federal claims by the
Depart ment of Justice —Tax Division.
E. Rules of Practice
The operative rules for the court of federal claims are the federal rules
of the U.S. Court of Federal Claims.
F. Appeal
The court of federal claims accepts as binding precedent the published
decisions of its own cases, unless modified by the federal circuit or the
U.S. Supreme Court. The federal circuit is the only court to which an
appeal from the court of federal claims will lie.5
Federal District Court 109
III. Federal District Court
A. Claims for Refund
Litigation in federal district court is also known as “refund litigation”
for the reason that one must pay the tax in full and file a claim for
refund (generally by a Form 843 or by an amended return) to get into
this cou rt.
B. Variance Doctrine
Another factor that must be considered is the “variance doctrine.”
This doctrine requi res that one sue only on claims that are part of the
claim for refund. One cannot add additional claims. This means that
a claim must be prepared very carefully to include all possible avail-
able claims. If a claim omits an essential element, the refund litigation
may be impossible for the claimant to win.
C. Full Payment Rule
To commence a refund suit in federal district court, the entire amount
of income tax must be prepaid to establish the proper jurisdictional
prerequisite.6
D. Statutory Periods
To initiate refund litigation, there are some statutory waiting periods.
First, the litigant-taxpayer must file a claim for a refund and then wait
until the expiration of the earlier of (1) claim disallowance notifica-
tion, or (2) six months from the date of claim filing. Moreover, refund
litigat ion may not be filed after the expiration of two years from the
date of claim disallowance notification. This two-year period may be
extended by written agreement.7
E. Orientation of Judges
In federal district courts the dockets are heavily criminal, and very
few tax cases ever get heard there. For the most part the judges have
little or no background in tax law. They are generalists, presiding over
a wide variety of both criminal a nd civil litigation.
F. Jury Trials
The unique distinction of federal district courts is the availability of
juries to try fact issues. That is to say, a taxpayer who wants a trial by
jury must bring suit in a federal district court. Jury trials are consid-
ered to be appropriate in cases involving the following:
1. Trust fund liability (§6672) cases,
2. Valuation issues,
3. Reasonable compensation issues, and
4. Other assessable penalties.

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