The Stages of Tax Litigation
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to filings in the Tax Court, once a petition has been filed in the U.S. Court of Federal Claims the matter may not be withdrawn and refiled in the Tax Court or in a U.S. District Court.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:
- Pay the full amount of the proposed tax deficiency
- File an Amended Tax Return (Form 1120X or Form 1140X), making a claim for a refund of the amount paid
- 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.