Civil Tax Litigation

• Author: W. PATRICK CANTRELL
• Pages: 107-180

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.