Welcome back.
Recall that the three sources of tax law
follow the three branches of the US Federal Government.
First is the statutory source,
which follows the legislative branch,
as represented by the two houses of Congress,
the US House of Representatives and the US Senate.
Second is the administrative source of tax law,
which is represented by the executive branch,
and includes the President and various departments.
Importantly for tax, the Department of Treasury and the IRS.
The third source of tax law is the judicial source.
This includes the various federal courts,
appeals courts, the Supreme Court, and the tax court.
So in this video,
we'll look at the third source of tax law in more detail.
The judicial source of tax law is based on the structure of the US federal court system
that resolves disputes between parties.
Specific to tax, disputes frequently arise between taxpayers and the IRS
that require resolution when the tax law is ambiguous,
or perhaps different sources of tax law conflict,
or one court's ruling on a federal tax issue differs from
another court's ruling on a similar issue in another part of the country.
The court system is designed to resolve these issues and
in doing so, the court system develops precedent in case law
that is as authoritative, or more authoritative,
as sources of tax law from the other two branches of government.
What's important here is that when there is a tax dispute,
the taxpayer can choose the route for litigation.
Here there are four courts of original jurisdiction,
where the dispute is first heard by the courts,
shown in the bottom half of this figure.
First, there's the US Tax Court, which is a specialized court,
only hearing tax cases.
Interestingly, there's no jury in the Tax Court.
Second, the Small Cases Division of the Tax Court also only hears tax cases,
but the disputed amounts must be less than $50,000.
Here there's also no jury,
and not only is there no jury,
there's no right to appeal.
The court's decision here is final.
A third court of original jurisdiction is the Federal District Court.
The Federal District Court is the general trial court.
So it hears tax and non-tax cases,
in both civil and criminal cases.
For example, the Federal District Court could handle
discrimination cases, voter right cases,
bankruptcy cases, and it handles cases
regardless of whether the United States is a party in the case.
The last court of original jurisdiction is the US Court of Federal Claims.
This court hears disputes that parties have against the US government, specifically.
But they can be tax or non-tax,
and usually involve monetary damages,
such as those related to injuries on federal property,
or by a federal employee,
federal contractors, or seizure by the US government or private property.
After the courts of original jurisdiction, except the Tax Court Small Cases Division,
if one of the parties to the dispute would like to appeal, then
they can appeal to the appellate courts shown in the top half of this figure.
For the US Tax Court and US District Court,
the case would head to the appellate region's
US Court of Appeals.
If the tax case originated at the US Court of Federal Claims,
the appeal goes to the US Court of Appeals for the Federal Circuit.
In both cases, if there's still a dispute,
one of the parties can appeal to the US Supreme Court.
Of course, it's very rare for a case to be heard by the Supreme Court.
So the rulings at the US Courts of Appeals usually stand.
What else affects the decision of litigation route?
As mentioned earlier, the US Tax Court hears tax cases only,
while the other federal courts of original jurisdictions hear tax and non-tax cases.
What are the pros and cons here?
Well, if the taxpayer's issue was highly technical,
and relies on complex tax law and interpretations,
then the Tax Court may be more appropriate, where the judges are specialized tax judges,
rather than going to a more generalist court,
where the judge's expertise may simply not be as deep.
In addition, recall that going to the US Tax Court
essentially waives a taxpayer's right to a jury trial.
Again, because the issues are so complex,
perhaps it's advantageous not to see the jury here,
because a jury of non-tax laypeople,
may simply not understand the relevant complex issues.
However, if you're a taxpayer with a dispute with the IRS,
and you believe you'll have a stronger case to be made
not on the technical merits of the code,
but maybe on the more qualitative aspects,
such as, for example, fairness or equity,
then perhaps going into a less tax technical court and
appealing to a jury of non-tax laypeople,
will give the taxpayer a better chance at winning the case.
Another major consideration is how the tax deficiency is handled
by a taxpayer for his or her case to be heard in a particular court.
Specifically, if the IRS issues you a deficiency,
it is essentially saying that you did not pay enough in tax.
That is, you're deficient in your tax payment.
This becomes the disputed amount.
So let's say the IRS says you owe a $100,000,
and you say you don't.
Well in order to take your case to the US Tax Court,
you do not have to pay the $100,000 tax deficiency before trial.
But you do have to pay the $100,000 deficiency
if you go to the other federal courts.
So you're paying $100,000 up front,
and effectively suing for a refund to get the $100,000 back.
To the extent you can afford to prepay $100,000 and then try to get the money back,
perhaps the US Tax Court is the route to go,
assuming the other considerations are less important,
such as waiving the right to a jury trial
and having technical tax judges ruling in the case.
There are many other considerations,
such as the number and type of judges to hear the cases,
and even the location of the district and regional circuit courts
that may have developed case law,
that may be more favorable to a particular type of taxpayer or issue,
compared to another district or regional circuit court
that may be less favorable.
That is, two courts may in fact rule in different ways on a similar issue,
And without the Supreme Court getting involved
to resolve many of these inconsistencies,
taxpayers need to be aware that different courts may in fact follow different precedent.
And thus, increase the likelihood of one outcome over another.
In all, through their various rulings on cases
to resolve disputes between taxpayers and the IRS,
the federal courts make up an important
and authoritative source of tax law.
Matthew HutchensLecturer of Accountancy
Petro Lisowsky, PhD, CPAAssociate Professor of Accountancy
