Tax Lawyer Blog

A Blog written by the Tax Attorneys for Individuals and Businesses

Refund Litigation in the U.S. Court of Federal Claims and District Court

In our last post in this series, we introduced deficiency litigation in the U.S. Tax Court. In this post we will cover refund litigation in the U.S. Court of Federal Claims and in U.S. District Courts.

The U.S. Court of Federal Claims

Under 28 U.S. Code § 1491, the U.S. Court of Federal Claims has jurisdiction over claims against the United States, and a substantial number of those claims are tax cases. This court may hear claims arising from throughout the country, and generally handles large claims for national and multinational corporations. In addition, similar to filings in the Tax Court, once a petition has been filed in the U.S. Court of Federal Claims the matter may not be withdrawn and refiled in the Tax Court or in a U.S. District Court. There is no jury present in cases heard by the Court of Federal Claims.

The U.S. District Courts

District courts are general trial courts which handle both civil and criminal cases in the federal court system. There are 94 district courts, and more than 670 district court judges in the U.S. and its territories. If a taxpayer wishes to litigate in this forum, a complaint must be filed in the judicial district in which the taxpayer resides or in the case of a corporation, where its principal place of business is located. The taxpayer and the government are both entitled to request a jury trial in District Court.

Note that there are some tax disputes that must be heard by the District Court, including tax return preparer and tax shelter injunction suits.

Filing a Petition

Prior to filing a petition in the U.S. Court of Federal Claims or District Court, the taxpayer must:

  1. Pay the full amount of the proposed tax deficiency
  2. File an Amended Tax Return (Form 1120X or Form 1140X), making a claim for a refund of the amount paid
  3. File a formal complaint with the Court

After paying the deficiency, but before filing their refund claim, a taxpayer may appeal for a review by the IRS Appeals Office. There are advantages and disadvantages to filing an appeal first or filing directly with the Court. For example, if the limitations period has expired when the case is filed with the Court, the Department of Justice may not raise any additional claims that would raise the amount owed by the taxpayer (although claims may be raised to offset the taxpayer’s refund). If the limitations period has not expired, opposing counsel may raise new issues at trial and claim a larger tax deficiency. The taxpayer’s legal counsel should discuss these and other strategic procedural decisions with their client at the conclusion of the audit.

Tax Litigation Considerations in the U.S. Court of Federal Claims and District Courts

Following are some more things to keep in mind before deciding to file in the Court of Federal Claims or District Court:

  • The proposed tax deficiency must be paid in full before filing.
  • These courts are often backlogged and it may take some time for the case to be tried.
  • U.S. Department of Justice attorneys are highly skilled in courtroom practice and evidentiary issues.
  • Although tax expertise is not required for their appointment, U.S. Court of Federal Claims judges are generally well-versed in tax law.
  • District Court judges as a general rule are less knowledgeable about tax law, but are more familiar with local issues that may be relevant to the case.
  • A case tried in District Court is more likely to receive local publicity.
  • District Courts have greater backlogs than Tax Court or Court of Federal Claims.
  • The Federal Rules of Civil Procedure are more strictly enforced in the District Courts.

Also keep in mind that as opposed to Tax Court, which utilizes informal and more limited discovery procedures, in the Court of Federal Claims and District Court there is a broad use of discovery and U.S. Department of Justice attorneys make extensive use of subpoenas, depositions, and requests for admissions.

The next blog in this series will cover tax litigation in bankruptcy.

Deficiency Litigation

If a civil tax dispute is not settled in appeals, taxpayers have two types of litigation processes from which to choose: Deficiency Litigation in U.S. Tax Court and Refund Litigation in the U.S. Court of Federal Claims or U.S. District Court. This blog post will focus on Deficiency Litigation and the benefits and disadvantages of pursuing a case in the Tax Court.

The U.S. Tax Court

The Tax Court is currently composed of 19 members appointed by the President. One judge presides over each trial, and there is no jury. Many taxpayers represent themselves, although they may be represented by counsel (and this is generally advised).

A taxpayer may challenge an IRS tax deficiency determination in U.S. Tax Court following receipt of a 90-day letter (statutory notice of deficiency). The petition must be made within the prescribed 90 days, and after filing, the Tax Court will have exclusive jurisdiction over the matter. This means that the taxpayer will not have the option of withdrawing their petition and refiling in the U.S. Court of Federal Claims or in a U.S. District Court.

Benefits and drawbacks of U.S. Tax Court litigation

The overwhelming majority of tax cases are filed in the U.S. Tax Court for the following reasons:

  • As opposed to the other tax litigation forums, taxpayers are generally not required to pay any disputed amount before litigating it in Tax Court – payment of any tax is usually postponed until the case has been decided. Note, however, that interest will accrue unless a deposit is made, per 26 U.S. Code § 6603 or under 26 U.S. Code § 6213(b).
  • All of the judges are highly knowledgeable experts in tax law and practice.
  • The judges travel to cities nationwide.
  • There is typically less backlog in the Tax Court than in the other forums, so the taxpayer’s case is likely to be heard sooner (often within 12 months)
  • The rules of evidence are relaxed and discovery rules generally favor taxpayers.

Litigation in Tax Court does have its drawbacks as well:

  •  The Tax Court takes some time to issue its opinions – often for well over a year.
  • By filing a petition in Tax Court, the statute of limitations is suspended and the IRS is free to raise new issues that could increase the tax deficiency.

Note that there are some tax disputes that must be heard by the Tax Court, such as an appeal from a collection due process determination (a case involving a lien or levy).

Settlements and Small Tax Cases

Note that settlement proposals made in appeals may still be considered during Tax Court proceedings and a compromise made through the IRS Appeals Office. In addition, where a tax dispute is valued at $50,000 or less, taxpayers may opt for litigation under the Court’s faster and less formal Small Tax Case proceedings – however, the Court’s decisions in small tax cases cannot be appealed.

The next blog in this series will cover U.S. Court of Federal Claims tax litigation considerations.