Key Takeaways
- U.S. Tax Court: Only forum where you can sue WITHOUT paying tax first.
- District Court: Only forum with a JURY trial.
- Court of Federal Claims: Review claims against the US government (pay first).
- Tax Court Small Case Division ("S Case"): Disputes ≤ $50,000. No appeal allowed.
- Golsen Rule: Tax Court follows the Court of Appeals for the taxpayer's circuit.
- Supreme Court decisions are binding on everyone.
Court Cases & Precedent: The Tax Court System
Why This Matters for the Exam
Understanding the court system is essential for Part 3 because it determines how taxpayers can challenge IRS decisions. The exam tests your knowledge of which court to use, the differences between them, and how precedent works.
Expect at least 3-5 questions on the trial courts, the Golsen Rule, and appeal procedures.
The Three Trial Courts for Tax Cases
When a taxpayer disputes an IRS determination and cannot resolve it through Appeals, they can take the case to court. There are three trial-level options:
| Factor | U.S. Tax Court | U.S. District Court | Court of Federal Claims |
|---|---|---|---|
| Pay First? | No ("deficiency" jurisdiction) | Yes (refund suit) | Yes (refund suit) |
| Jury Trial? | No | Yes (only court with jury) | No |
| Location | Travels nationwide | Taxpayer's district | Washington, D.C. |
| Judges | Tax specialists | Generalists | Generalists |
| Small Case Option? | Yes (≤ $50,000) | No | No |
| Appeal Route | Court of Appeals for taxpayer's circuit | Court of Appeals for taxpayer's circuit | Court of Appeals for Federal Circuit |
U.S. Tax Court
The Tax Court is the only court where taxpayers can challenge the IRS without paying the disputed tax first. This is called "deficiency" jurisdiction.
Key Characteristics:
- 90-Day Letter: The taxpayer must receive a Statutory Notice of Deficiency and file a petition within 90 days (150 if abroad).
- Judges: 19 presidentially appointed judges, all tax specialists.
- Location: Judges travel to cities across the country to hold trials.
- Appeals: To the Court of Appeals for the taxpayer's circuit.
Small Tax Case (S Case):
- Available for disputes of $50,000 or less per tax year.
- Procedures are simplified (less formal).
- Decisions are final—no appeal is allowed.
- Decisions cannot be cited as precedent.
U.S. District Court
District Court is the only option if the taxpayer wants a jury trial. However, the taxpayer must pay the tax first and then sue for a refund.
Key Characteristics:
- Pay First: File a refund claim, wait for denial (or 6 months), then sue.
- Jury: Available upon request.
- Judges: Generalists (hear all types of federal cases).
- Location: Taxpayer's home district.
- Appeals: To the Court of Appeals for the taxpayer's circuit.
When to Choose District Court:
- Taxpayer wants a jury (may be favorable for sympathetic cases).
- The law in the taxpayer's circuit favors the taxpayer's position.
Court of Federal Claims
The Court of Federal Claims hears claims against the federal government, including tax refund suits.
Key Characteristics:
- Pay First: Must pay the tax and sue for refund.
- No Jury: Bench trial only.
- Location: Washington, D.C. (judges may travel).
- Appeals: To the Court of Appeals for the Federal Circuit (not the taxpayer's geographic circuit).
When to Choose the Court of Federal Claims:
- The law in the Federal Circuit favors the taxpayer's position.
- The taxpayer's geographic circuit has unfavorable precedent.
The Appellate System
| Trial Court | Appeals To |
|---|---|
| Tax Court | Court of Appeals for taxpayer's circuit |
| District Court | Court of Appeals for taxpayer's circuit |
| Court of Federal Claims | Court of Appeals for the Federal Circuit |
| All Courts of Appeals | U.S. Supreme Court (certiorari) |
The Golsen Rule
The Golsen Rule (from Golsen v. Commissioner, 1970) states that the Tax Court will follow the precedent of the Court of Appeals to which the case is appealable—i.e., the circuit where the taxpayer resides.
Example:
- A taxpayer in California (9th Circuit) petitions Tax Court.
- The 9th Circuit has ruled on the issue.
- Under Golsen, the Tax Court will follow the 9th Circuit's ruling, even if the Tax Court disagrees.
Why It Matters:
- Forum shopping: If your circuit has favorable precedent, use Tax Court (Golsen applies).
- If your circuit has unfavorable precedent, consider the Court of Federal Claims (Federal Circuit may have different precedent).
Precedent Hierarchy
| Court | Binding On |
|---|---|
| U.S. Supreme Court | All courts, IRS, and taxpayers |
| Court of Appeals | District Courts and Tax Court within that circuit |
| Tax Court (Regular) | Not binding on other cases (but persuasive) |
| Tax Court (S Case) | Not precedent; cannot be cited |
| District Court | Not binding on other cases (but persuasive) |
Real-World Scenario
Scenario: A taxpayer receives a 90-Day Letter proposing a $40,000 deficiency. They disagree with the IRS.
- Option 1: Tax Court – Petition within 90 days without paying. Simple procedure.
- Option 2: Wait and Pay – Let assessment happen, pay the tax, file for refund, then sue in District Court (jury) or Court of Federal Claims.
Strategic Consideration: If the taxpayer's circuit (say, 5th Circuit) has ruled against the IRS on this issue, Tax Court may apply Golsen and follow the 5th Circuit. Otherwise, consider whether the Federal Circuit has more favorable law.
On the Exam
Expect 3-5 questions on courts and precedent, typically:
- Forum Questions: "Which court allows litigation without paying first?"
- Jury Questions: "Which court offers a jury trial?"
- Golsen Questions: "What does the Golsen Rule require?"
- S Case Questions: "What is the limit for a Small Tax Case?"
The key is to remember: Tax Court = no pay first, District = jury, Claims = D.C., Golsen = follow taxpayer's circuit.
Which court allows a taxpayer to litigate without paying the disputed tax first?
What is the limit for a "Small Tax Case" in Tax Court?
Under the Golsen Rule, which precedent does the Tax Court follow?