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Tax Court Forum Shopping Reminder

Posted on Mar. 22, 2021

Several years ago I wrote a post focused on the choice petitioners have when filing a Tax Court petition and how that choice could impact the outcome of their case.  I wrote the post because the Tax Court had entered a precedential decision in the case of Rand v. Commissioner, 141 T.C. 12 (2014), determining that the IRS could not impose the IRC 6662 penalty for understatement on taxpayers who overclaimed the earned income tax credit since the overstatement of the credit was not an understatement of tax.  The IRS disagreed with the decision initially and indicated a desire to continue litigating the issue.  A similar situation had occurred earlier when the Tax Court issued a precedential opinion in Lantz v. Commissioner, 132 T.C. 131 (2009), striking down the innocent spouse regulations interpreting IRC 6015(f) to impose a two-year time limit after the initial collection action on requesting innocent spouse relief.

In these situations, my suggestion in the post was to elect the small tax case procedure, if it was available, and the Tax Court would follow its precedent, resulting in an automatic victory for the petitioner. To go this route, you must not only qualify for small tax case procedure but also be in a circuit that does not have adverse precedent on the issue, since the Tax Court inexplicably follows the Golsen rule in deciding small tax cases as discussed in an article by Carl Smith “Does the Tax Court’s Use of its Golsen Rule in Unappealable Small Tax Cases Hurt the Poor?” Carl pointed out in his article that the Golsen rule by which the Tax Court adopted the rule of following the precedent of the circuit to which a Tax Court case would be appealed does not logically follow when a case cannot be appealed to the circuit court. By their very nature, small tax cases are cases entirely within the jurisdiction of the Tax Court. The Tax Court reversed its prior precedent in adopting Golsen in order to keep petitioners who lost at the Tax Court from simply appealing and obtaining a reversal in circuits where the Tax Court and the circuit court disagreed. If a case cannot be appealed to the circuit court, no need exists for following circuit precedent, yet the Tax Court applies Golsen anyway.

Given the Tax Court’s application of the Golsen rule, choosing the small tax case route does not make sense if the taxpayer lives in a circuit where adverse precedent exists. If no circuit precedent exists in the circuit where the taxpayer resides at the time of filing the Tax Court petition, then the Tax Court follows its own precedent. If it has a precedential opinion on its books, you know the outcome of the case, which makes choosing the small tax case route the logical choice for qualifying taxpayers.

This brings me back to the discussion at the end of the post on Friday, March 19. The discussion focused on the Tax Court’s decision in Sutherland v. Comm’r, 155 T.C. No. 6 (2020) and the apparent disagreement of the IRS with the Tax Court’s decision regarding the administrative record in innocent spouse cases. The situation in Sutherland presents another example of the value of electing small tax case status once the Tax Court has issued a precedential opinion on an issue. A high percentage of innocent spouse cases will qualify for small tax case status. Going that route gives you certainty if you fit within the facts of Sutherland.

Even if you do not elect small case status at the outset of the case as about 50% of petitioners do, you can make the election later in the case with leave of court. Pursuant to Tax Court Rule 171 you must make the election prior to the start of trial. You can expect to face some opposition from the IRS if you are making the election in a situation which will result in automatic loss for the IRS, but the IRS does not have many good arguments for opposing your request.

I have heard some practitioners say they always elect regular case status. Doing so ignores the what can be a winning strategy in situations like Rand, Lantz and Sutherland. The IRS has the right to keep litigating in Tax Court after obtaining a losing opinion on an issue, because it can set the issue up for a fight in the circuit courts where it might overturn the precedential decision of the Tax Court, as it did in Lantz. Conversely, taxpayers have the right to choose a Tax Court “forum” that prevents the IRS from getting to circuit court. Pay attention to the situations when this strategy could create an easy victory for your client.

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