How To Settle A Tax Deficiency Case

Transcription

1 The Nuts And Bolts Of Deficiency Cases: From Examination To The Tax Court Jaime Vasquez is an associate with Chamberlain, Hrdlicka, White, Williams and Aughtry. He represents for-profit and non-profit entities and individuals in income and employment disputes with the IRS and state and local taxing authorities. This outline was prepared by Jaime Vasquez and Zhanna A. Ziering for a CLE panel that included Judge Peter J. Panuthos, Chief Special Trial Judge, of the United States Tax Court and Kevin G. Gillin from the IRS Office of Chief Counsel. The outline was drafted to provide background information regarding panel discussion topics for a seminar sponsored the ABA Section of Taxation (2012 May Meeting). Zhanna A. Ziering is an associate in Caplin & Drysdale s New York office. She offers guidance to individual and corporate clients concerning their domestic tax issues, offshore assets and U.S. reporting requirements in connection with their multinational business interests and represents both individuals and corporations before the U.S. Tax Court, federal and state courts, and administrative agencies, including the IRS, the Department of Justice, and other federal and state government regulators. Jaime Vasquez and Zhanna Ziering You can avoid surprises when you know the process. I. IRS Examination A. How A Return Is Selected Matching Programs/DIF Score. Generally, the IRS accepts most taxpayers returns as filed. However, IRS computer programs routinely locate disparities between amounts reported on a tax return and amounts reported to the IRS via information returns and other sources, such as Forms 1099, W-2, etc. When this occurs, the IRS may contact the taxpayer, generally via mail, to inquire about the disparity and, when appropriate, propose an adjustment. See IRS Pub. 3498; Rev. Proc o DIF Score. Every individual return and some corporate returns are assigned a score by an IRS computer program called the Discriminant Inventory Function System ( DIF ). If a return is selected for audit because of a high DIF score, the potential is high that an examination of the return will result in a change to the taxpayers income tax liability. See IRS Pub The Practical Tax Lawyer 25

2 26 The Practical Tax Lawyer Fall 2012 Referrals, public sources, etc. A return may be selected as a result of information received from other sources on potential non-compliance with the tax laws or inaccurate filing. This information can come from a number of sources, including newspapers, public records, and individuals such as whistleblowers, former employees, etc. See IRS Pub Examination of related parties or tax return preparers. The IRS may examine the return of a related party such as a partner in a partnership or another partnership in a tiered partnership structure or a related corporation. Additionally, the IRS has aggressively targeted tax return preparers in recent years who meet certain characteristics, such as a high fail rate of Earned Income Tax Credit compliance, a higher than average amount of large refunds, etc. The IRS will sometimes obtain the client lists of these tax return preparers and audit those taxpayers. B. During The Examination Examination by mail. Some examinations are conducted entirely by mail. A taxpayer will receive a letter requesting additional information about certain items shown on the return, such as income, expenses, and itemized deductions. IRS Pub The IRS letter will generally propose a response date by which information must be submitted. If no information is submitted, or if the information submitted is insufficient, the IRS will generally either request additional information or propose an adjustment. Examination in person. If the examination is conducted in person, the IRS examiner will contact the taxpayer and request documentation to be presented at a meeting. Generally, an IRS Revenue Agent will be assigned to examine a corporation, partnership or high net worth individual and an IRS Compliance Officer will be assigned to examine other individuals or small businesses. Generally, the IRS examiner will request information from the taxpayer in advance of the meeting via an Information Document Request ( IDR ), or Form 4564 ( gov/pub/irs-utl/form4564.pdf). The IDR will list specific information or documents requested and set a deadline to respond. A typical IDR requests the taxpayer s books and records, copies of tax returns, information returns and other specific information. Depending on the scope of the examination, the IDR will be limited to specific issues that the examiner is auditing. If additional time is needed to respond to the IDR, the taxpayer may request additional time from the Revenue Agent or Compliance Officer. The taxpayer may need to explain why additional time is needed and should not expect that a lengthy extension or multiple extensions will be granted. During the examination, the IRS examiner will review the taxpayer s information, ask questions of the taxpayer and/or her representative and discuss follow-up or proposed adjustments.

3 Nuts and Bolts of Deficiency Cases 27 Proposed adjustments. An IRS Examiner may issue to the taxpayer a Form 5701, Notice of Proposed Adjustment ( NOPA ) ( The NOPA will provide the proposed examiner s adjustments and provide an explanation for the proposed adjustments. If the explanation is lengthy, it will be included on a Form 886-A, Explanation of Items (example: The taxpayer will be provided an opportunity to respond to the NOPA prior to the issuance of the Revenue Agent s Report. The taxpayer may also request a meeting with the IRS examiner and his/her manager to discuss the proposed adjustments. The IRS examiner generally does not have settlement authority and must resolve issues based on the Examiner s interpretation of the applicable law as it applies to the taxpayer s facts and circumstances. Statute of limitations extension. Any additional deficiency must generally be assessed by the IRS within three years after the return was filed. Internal Revenue Code ( Code ) 6501(a). But see Code 6501(e) (six year statute of limitations for substantial omission of gross income). Accordingly, if the applicable statute of limitations is approaching, the IRS examiner may request that the taxpayer extend the statute by executing Form 872, Consent to Extend the Time to Assess Tax (example: If the taxpayer does not execute the statute extension, the IRS examiner may close the audit and issue a Notice of Deficiency based upon the information then available. The matters and periods subject to the statute extension, along with the length of the extension, may be negotiated between the taxpayer and the IRS. See IRS Pub ( Other considerations; summons. If the taxpayer does not respond to the IDR or provides insufficient information, the IRS examiner may elect to issue another IDR, issue a summons, or propose adjustments based upon the information available. An IRS summons may also be issued to the taxpayer, officer or employee of the taxpayer, third-party recordkeeper, or any other person the Secretary may deem proper. Code The summons may require the recipient to produce records or appear before the IRS examiner for inquiry, or both. If the recipient neglects or refuses to obey the summons, the Department of Justice, on behalf of the IRS, may enforce such summons in a U.S. District Court. If the taxpayer does not comply with the Judge s order to comply with the IRS summons, the Judge can hold the taxpayer in contempt of court. Criminal/Fifth amendment considerations. Depending on the taxpayer or scope of the audit, consideration may want to be given to a taxpayer s risk of criminal prosecution and/or liability for civil fraud penalties. If these are a concern, consideration may want to be given to potential incriminatory statements by the taxpayer and/or preserving Fifth amendment, attorneyclient, and other privileges. Below are some examples of civil and criminal penalties to consider. o Civil penalty (examples): See Code 6663 (civil fraud penalty of 75 percent of the portion of the underpayment attributable to fraud); Code 6700 (Promoting Abusive

4 28 The Practical Tax Lawyer Fall 2012 Tax Shelters, etc.), 6701 (Penalties for Aiding and Abetting Understatement of Tax Liability), 6702 (Frivolous Tax Submissions). o Criminal penalty (examples): Code 7201 (Attempt to Evade or Defeat Tax), 7202 (Willful Failure to Collect or Pay Over Tax), 7203 (Willful Failure to File Return, Supply Information, or Pay Tax), 7204 (Fraudulent Statement or Failure to Make Statement to Employees), 7205 (Fraudulent Withholding Exemption Certificate or Failure to Supply Information), 7206 (Fraud and False Statements), 7212 (Attempts to Interfere with Administration of Internal Revenue Laws). C. After The Examination 30-day letter; protest. If any issues remain outstanding, and sufficient time exists on the collection statute, the IRS examiner will issue a 30 day letter notifying the taxpayer of their right to appeal the examiner s adjustments within 30 days of the date of the letter. The taxpayer s formal written appeal, which is generally required for cases over $25,000 and S corporation and partnership cases, is referred to as a Protest. The Protest is similar to a legal brief in that the taxpayer should state the facts relating to the issue(s), state her legal position(s), and evaluate the relevant authorities. A less formal appeal is permitted for certain cases of not more than $25,000. Included in the package will be the examiner s proposed adjustments along with an explanation for the adjustments. IRS Pub. 556 ( An extension of time to file the Protest may be requested from the IRS examiner and/or manager. Notice of deficiency. If the taxpayer does not respond to the 30 day letter, if there are concerns with the statute expiring, or if an agreement was not reached with IRS Appeals, the IRS will issue a Notice of Deficiency ( NOD ). The date of the NOD sets the 90 day statutory deadline by which the taxpayer may file a Petition with the United States Tax Court ( Tax Court ). Code 6212, Absent any rare defects with the NOD, a timely filed Petition is generally the only means by which the Tax Court can have jurisdiction over the taxpayer s case (absent applicable appeals for collection cases). As discussed below, because the Tax Court is the taxpayer s only means for judicial review without full payment of the alleged tax liability, this 90-day deadline to file the Tax Court Petition is critical. Mediation. If agreement cannot be reached with the IRS examiner, a taxpayer may request Fast Track Mediation with a trained and neutral mediator. The mediator has no authority to require either party to accept any resolution and the taxpayer may withdraw from the mediation process at any time. The taxpayer maintains all usual appeal rights for any issue that remains unresolved. The following cases are excluded from Fast Track Mediation: o Issues for which there is no legal precedent; o Issues where the courts have rendered opposing or differing decisions in different jurisdictions; o Industry Specialization Program issues;

5 Nuts and Bolts of Deficiency Cases 29 o An issue for which the taxpayer has filed a request for competent authority assistance; o Service Center penalty appeals cases; o Service Center Offer in Compromise cases; o Collection Appeals Program cases; o Automated Collection System cases; o Constitutional issues; o For more details, see IRS Pub ( D. Appeals Purpose. The IRS Appeals mission is to resolve tax controversies, without litigation, on a basis that is fair and impartial to both the Government and the taxpayer in a manner that will enhance voluntary compliance and public confidence in the integrity and efficiency of the Service. Background. The Appeals Office is separate from and independent of the IRS office that proposed the adjustment. An Appeals or Settlement Officer is tasked with reviewing the strengths and weaknesses of the issues in the case and giving them a fresh look. Appeals Office hearings or meetings are conducted informally, with no rules of evidence, and can be conducted by telephone. Most cases (over 80 percent) are settled during the Appeals process. See IRS Pub ( Where the alternative is litigation, Appeals can be a cost effective method to resolve tax disputes with the IRS. Process. If a Protest is drafted, the IRS examiner will generally draft a rebuttal memorandum that is reviewed by the IRS Appeals Officer. During the Appeals process, IRS Appeals Officer may ask additional questions and may make requests for additional information, documents, and submissions. Settlement authority. The Appeals Office has settlement authority. Appeals settlements are generally based upon IRS s hazards of litigation or the likelihood that the taxpayer s position would prevail if the tax issues were litigated. Appeals has flexibility with settlement parameters and can consider hazards of litigation discounts or percentages with respect to particular issues. Appeals may also concede one issue in consideration for another and may move or allocate adjustments between or among the years or periods within Appeals jurisdiction. Ex parte rules. To preserve and ensure the independent appeals function, the IRS implemented certain procedures to preclude certain communications between IRS Appeals and other IRS employees. These procedures were recently revised in Rev. Proc , C.B Post-appeal mediation. If the taxpayer s issue is not resolved through IRS Appeals, the taxpayer can request post-appeal mediation. A request for mediation must be made with the Appeals Team Manager who will confer with the Appeals Office of Tax Policy and Procedure

6 30 The Practical Tax Lawyer Fall 2012 before deciding to approve or deny the mediation request. Rev. Rul , C.B. 462, The denial of the mediation request is not subject to judicial review. Id. at 5.03(2). If the mediation request is granted, the taxpayer and the Appeals Team Manager will select the Appeals mediator from a list of trained employees who, generally, will be located in the same Appeals office or geographical area as the taxpayer, but will not be a member of the same team that was assigned to the case. Id. at Additionally, at the taxpayer s expense, the taxpayer may elect to use a co-mediator who is not employed by the IRS. Id. The taxpayer and the Appeals Team Manager will select the non-irs co-mediator from any local or national organization that provides a roster of neutral mediators. Id. A representative from the Appeals Office of Tax Policy and Procedure may participate in the negotiations to select a non-irs co-mediator. Id. At the mediation, both the Taxpayer and the IRS must have at least one participant with decision-making authority attending. Id. at At the conclusion of the mediation process, the mediator will prepare a brief written report and submit a copy to each party. Id. at If the parties reach an agreement on all or some issues, Appeals will use established procedures, including preparation of a Form 906, Closing Agreement on Final Determination Covering Specific Matters. Id. at If the parties do not reach an agreement on an issue being mediated, they may request arbitration for the issue, provided that the requirements for arbitration are met. Id. A. Assessment And Collections II. Collections Notice of deficiency. If the agreement is not reached with the IRS, the IRS will issue a Notice of Deficiency. See Code 6212, At that juncture, the taxpayer has several options, which include (i) petitioning the Tax Court within 90 days; (ii) paying the amount due and filing administrative claim for refund (and if necessary, eventually suing for refund); and (iii) doing nothing. If the taxpayer takes no action, the IRS will assess the taxpayer. Assessment. Once the IRS assesses the taxpayer, a creditor/debtor relationship is created. The IRS can issue Notice and Demand for Payment within 60 days of the assessment. Code Collection action: If the taxpayer does not pay the amount due within the allotted time frame, the IRS can either place a lien on or levy the taxpayer s property. Code 6321, B. Collections Due Process Considering the downturn in the economy, more and more taxpayers are unable to timely pay their taxes. Depending on the stage of the case, one avenue that may be available to the taxpayer is a collection due process ( CDP ) hearing. The CDP process gives taxpayers the right to appeal levy or lien actions to the IRS Appeals Office, which is independent of the Collection Office.

7 Nuts and Bolts of Deficiency Cases 31 Notice requirements. In accordance with Code 6330 and 6331, generally, the IRS must send certain notices before proceeding with lien, levy, and/or seizure of assets. These notices include the following: o Notice of Federal Tax Lien Filing and Your Right to a Hearing Under Code 6320 (Lien Notice); o Final Notice Notice of Intent to Levy and Notice of Your Right to a Hearing; o Notice of Jeopardy Levy and Right of Appeal; o Notice of Levy on Your State Tax Refund Notice of Your Right to a Hearing; and o Notice of Levy and Notice of Your Right to a Hearing with respect to a Disqualified Employment Tax Levy. See IRS Publication 1660, Collection Appeal Rights and Instructions to Form CDP hearing. o Taxpayers have the right to request a CDP hearing after receiving any of the notices listed above. There are exceptions to the notice requirements if: (i) the tax is in jeopardy; (ii) the IRS has served a levy on a State to collect a Federal tax liability from a State tax refund; or (iii) the IRS has served a disqualified employment tax levy. Code 6330(f). o When should you request a CDP hearing? In order to be timely, a taxpayer must request a CDP hearing within 30 days from the date of the levy notice or by the date indicated in the lien notice. See Instructions to Form Appeals may grant a hearing on an untimely request. I.R.M. Section (Feb. 23, 2012). This type of hearing is called an equivalent hearing. A taxpayer must request an equivalent hearing within one year from the date of the levy notice or within one year and five business days of the lien notice. See IRS Publication 1660, Collection Appeal Rights. o How do you request a CDP hearing? A CDP Request is made on Form Form can be found at If the taxpayer received a levy notice and a lien notice, he or she may appeal both notices by filing one CDP Request. o What are the consequences of filing a CDP Request? Unless the payment is in jeopardy, the IRS will stop the levy action during the 30 days after the levy notice and during the appeal process. Code 6330(e). Also, the 10-year statute of limitations on collection is suspended from the date of receipt of a timely-filed Form until the date the determination is final or the CDP Request is withdrawn in writing. Id. The decision of the Appeals Officer in a CDP hearing is subject to judicial review. The Tax Court has sole jurisdiction in appeals for CDP hearing determinations. The Tax Court has held that it is not limited to the administrative record in reviewing CDP determinations unless a case will be appealed to the Eighth Circuit. Kovacevich v. Commissioner, T.C. Memo (U.S. Tax Ct. 2009), citing Robinette v.

8 32 The Practical Tax Lawyer Fall 2012 Commissioner, 123 T.C. 85 (2004), rev d. 439 F.3d 455 (8th Cir. 2006). The Tax Court will look at evidence not presented at the CDP hearing if it is relevant to the issues raised during the hearing and is admissible under the Federal Rules of Evidence. o Unlike the filing of a timely CDP Request, there will be no statutory suspension of collection action and no suspension of the statute of limitations upon the filing of a request for an equivalent hearing. In addition, the determination in the equivalent hearing is not subject to judicial review. C. Innocent Spouse Relief In certain cases, spouses can obtain relief from joint and several liability. The following types of relief are available to married persons who filed joint returns: (i) innocent spouse relief; (ii) separation of liability relief; and (iii) equitable relief. Relief is requested by filing Form 8857 (available at which should be filed no later than two years after the date on which the IRS first attempted to collect tax. Detailed information regarding such relief is available in the IRS Publication 971. The IRS s denial of relief is reviewable by the Tax Court. III. Litigation A. Choice of Fora United States Tax Court ( o The only judicial forum that permits judicial review prior to full payment. o In order to litigate in the Tax Court, the taxpayer must receive a valid Notice of Deficiency and must file a timely petition. o Discovery rules are more informal than the Federal Rules of Civil Procedure. o Jury trial is not available, all trials are bench trials.

9 Nuts and Bolts of Deficiency Cases 33 o The decision of the Tax Court is appealable to the Circuit Court of Appeals in the circuit in which the taxpayer was domiciled at the time the suit was commenced. Code 7482(a)(1). o The Tax Court is bound by its own precedent, and under the Golson rule, the Tax Court is bound by the decision of the Court of Appeals to which the case at bar could be appealed to. o Scope of the Tax Court s jurisdiction. The Tax Court has jurisdiction over the underpayment issues. See Code 6213(a). The Tax Court also has limited jurisdiction over the overpayment issues under Code 6512(b). All issues from the taxable year must be heard by the Tax Court, taxpayer cannot cherry-pick issues. o Burden of proof. Generally, the taxpayer bears the burden of proof on all issues outlined in the Notice of Deficiency. Under the Tax Court Rule 142, the Notice of Deficiency is accorded a presumption of correctness. The IRS, however, bears a burden of proof over any new issue raised, which was not listed in the Notice of Deficiency, any increase in deficiency, and affirmative defenses. Under Code 7491, the burden of proof of factual issues will shift from the taxpayer to the IRS if, the taxpayer: (i) produces credible evidence on the factual issues; (ii) had complied with all substantial requirements; (iii) has maintained all of the required records, (iv) had cooperated with the IRS s reasonable requests for witnesses, information, documents, meetings and interviews; (v) and, in some circumstances, meets the net worth requirement. United States Court of Federal Claims ( Refund jurisdiction. Jurisdictional prerequisite is: (i) a full payment in satisfaction of tax liability (Flora v. U.S., supra; and (ii) timely filing of a refund claim (Code 7422(a)). o Has its own procedures and discovery rules. o No jury trial available, bench trial only. o Appealable to the United States Court of Appeals Federal Circuit. United States District Court. The taxpayer can also file a refund claim in a federal district court in the district where the taxpayer was domiciled at the time the return was filed. Jurisdictional prerequisite is: (i) a full payment in satisfaction of tax liability (Flora v. U.S., 362 U.S. 145 (1960)); and (ii) timely filing of a refund claim (Code 7422(a)). o Federal Rules of Civil Procedure apply. o Jury trials are available. B. Litigating in Tax Court Jurisdictional Prerequisite: Need a valid Notice of Deficiency AND a timely filed petition to the Tax Court.

10 34 The Practical Tax Lawyer Fall 2012 o The Tax Court acquires exclusive jurisdiction over the specific tax and taxable years that are at issue. However, Code 6214 allows the Tax Court to consider facts and circumstances with respect to other years, so long as it is necessary to correctly determine the liability in the taxable years before the court. o The Tax Court has limited overpayment jurisdiction. The Tax Court may determine the amount of overpayment in a deficiency proceeding, if the Tax Court determined that for the tax period subject to its jurisdiction, no deficiency exists and there is an overpayment. See Code 6512(b)(1). o Timely filed petition. A petition for redetermination must be filed within 90 days (in certain cases 150 days) from the day the Notice of Deficiency is mailed. If the petition is not timely filed, the Tax Court will not have jurisdiction over the matter and the petition will be dismissed. Tax Court petitions are subject to the mail box rule under Code section Therefore, a timely mailed petition will be deemed timely filed. o What must be included with the petition. The following must be send to the Tax Court: One signed original of the petition and two conformed copies, with the Notice of Deficiency attached as an exhibit to each of the copies and the original; A signed Statement of Taxpayer Identification Number (taxpayer s social security number should not be included in the actual petition); Filing fee in the amount of $60 payable to the Clerk, United States Tax Court must be included with the petition; A signed original of the Designation of Place of Trial and two conformed copies. o Tax Court s mailing address: Petition should be mailed to: United States Tax Court 400 Second Street, N.W. Washington, D.C o This information and sample forms are available on the Tax Court s website at www. ustaxcourt.gov. Representation. The IRS is represented by attorneys from the Office of Chief Counsel for the IRS. A taxpayer can either appear pro se or be represented by a person admitted to practice before the Tax Court. Note: Once a representative s appearance is entered, it cannot be withdrawn without approval of the Court.

11 Nuts and Bolts of Deficiency Cases 35 Form of pleadings. All papers filed with the Tax Court must have a caption, be dated, and be signed. In addition, each pleading must have a caption with the following: (i) name of the court (the United States Tax Court); (ii) the title of the case (John Smith, Petitioner v. Commissioner of the Internal Revenue Service, Respondent); (iii) docket number; and (iv) the name of the pleading. E-filing. E-filing is mandatory for most taxpayers represented by counsel in cases where the petition was filed on or after July 1, Initial filings, such as the petition, may be filed only in paper form. Please see e-filing instructions for practitioners for additional information, available at Entry of appearance. A counsel may enter appearance on a case either by signing the petition or by filing an Entry of Appearance. Discovery. Before proceeding with the formal discovery procedures, the parties are expected to pursue informal discovery. o Informal discovery. Pursuing informal discovery prior to commencing formal discovery procedures is mandatory and the failure to do so constitutes an abuse of the Court s procedures. See Branerton Corp. v. Commissioner, 61 T.C. 691 (1974). Informal discovery is initiated by a Branerton letter, which lists the factual and documentary information sought by the requesting party and proposes a date and location for an initial conference. o Formal discovery. The following discovery procedures are available to the Tax Court litigants: interrogatories, requests for document production, deposition and request for admissions. Discovery is available with respect to any matter relevant to the subject matter of the case and not privileged. The sought information must appear to be reasonably calculated to lead to the discovery of admissible evidence. See T.C. Rule 70. Under the T.C. Rule 70, the Tax Court may limit the use of discovery procedures if: (i) the discovery is unreasonably cumulative or duplicative or is otherwise obtainable from another source that will be more convenient, less burdensome and less expensive; (ii) there already has been ample opportunity to obtain information through discovery in the proceeding; and (iii) it is unduly burdensome or expensive considering the needs of the case, the amount in controversy, the limitations on resources of the parties, and the importance of the issues involved.

12 36 The Practical Tax Lawyer Fall 2012 Timing. Formal discovery must be commenced not earlier than 30 days after issue is joined and must be completed no later than 45 days before the trial call date. See T.C. Rule 70. Interrogatories. The use of written interrogatories is permitted under T.C. Rule 71. Without the leave of the Court, parties are no longer permitted to serve more than 25 written interrogatories upon another parties, except in specific circumstances. Answers to interrogatories are considered admissions of the answering party and may be used at trial. See T.C. Rule 70(d). Request for production. Requests for production of documents are permitted under T.C. Rule 72. A request for production of documents must set forth with reasonable particularity the items to be inspected. Id. Request for admissions. Requests for admissions are governed by T.C. Rule 90 and may relate to statements, opinions of fact, the genuineness of documents, and the application of law to fact. An admission in response to the request for admission will be conclusively established for all purposes in the pending case. Id. Depositions. T.C. Rule 74 allows depositions for discovery purposes upon motion by a party or at the discretion of the court. Depositions with consent of the parties may be taken of a party, nonparty, or expert witness. A deposition without consent of all the parties is considered an extraordinary method of discovery and may be taken only when the testimony or other information sought cannot be practically obtained through informal consultation or by other discovery devices. Subject to the rules of evidence, elicited deposition testimony may be used at trial or any other proceeding in the pending case against any party that was present at the deposition, represented at the deposition, or had reasonable notice of the deposition. T.C. Rules 143 and 81. o Defenses to discovery. Tax Court litigants may raise defenses to discovery requests, such as relevancy, overbreadth, burdensomeness, attorney-client privilege, and work product. Pretrial conference. The use of telephonic pretrial conferences has become more common in recent years. Pretrial conference can be requested by motion by either party or the Tax Court may order it. See T.C. Rule 110. Pretrial conference can be used for purposes of narrowing the issues, stipulating the facts, simplifying the presentation of evidence, or otherwise preparing a case for trial.

13 Nuts and Bolts of Deficiency Cases 37 Pretrial memoranda. Must be exchanged by the parties at least 14 days before the first day of the trial. (Standard Pretrial Order, available at Final status report. Used by the parties to inform the court of last-minute settlements or changes in the parties estimated time for the trial. The form must be received by the court no later than 3:00 p.m. (Eastern) on the last business day before the first day of the trial session. See Stipulation of facts. The Tax Court requires the parties to submit a comprehensive stipulation and the attached exhibits at or before commencement of the trial. Under T.C. Rule 91, the parties are required to stipulate, to the fullest extent to which complete or qualified agreement can or fairly should be reached, all nonprivileged matters relevant to the proceeding, including facts, opinions, or the application of law to fact. o Form of the Stipulation. Stipulation must be signed by both parties. Each matter in the stipulation should be stated in a clear and concise manner in a separate numbered paragraph. Parties objections to any part of the stipulation are to be noted in the document and will be addressed at the beginning of the trial. o Stipulation is considered a conclusive admission of a party but is only binding for the purpose of pending litigation. See T.C. Rule 91(e). o Rule 122 Cases. Under T.C. Rule 122, parties can submit a fully-stipulated case for decision to the Tax Court without the necessity of the trial. Pretrial motions: o Motion to Consolidate (T.C. Rule 141); o Motion in Limine (Fed. R. Evid. 403); o Motion to Seal the Record (Code 7461(b)(1)). Pretrial settlement. In order to expedite the disposition of docketed cases, there are additional post-docketed settlement procedures that allow the parties to negotiate and settle the docketed cases without the necessity of judicial involvement. o Appeals again? After a case is docketed in the Tax Court, in most cases, exclusive settlement authority will be transferred from District Counsel to the Appeals Division. Post-docketed Appeals is not available in certain circumstances, including cases in which the taxpayer had a settlement conference with Appeals prior to filing the petition and, as a result, Appeals issued the Notice of Deficiency. See Rev. Proc , C.B o District Counsel s settlement jurisdiction. District Counsel has settlement jurisdiction either after the Appeals or in lieu thereof. o Alternative dispute resolution. Under T.C. Rule 124, the litigants can engage in voluntary binding arbitration or mediation.

14 38 The Practical Tax Lawyer Fall 2012 Trial proceedings o Burden of Proof. In the Tax Court litigation, the burden of proof is generally on the taxpayer to establish each element of the case by a preponderance of the evidence. See T.C. Rule 142(a). However, the IRS has the burden of proof in specific circumstances, including any new matter asserted by the Commissioner, increase in deficiency, or affirmative defenses asserted in the Answer (T.C. Rule 142(a)) and fraud with the intent to evade tax, for which the burden of proof must be carried by clear and convincing evidence (Code 7454(a), T.C. Rule 142 (b)). o Evidence. Trials before the Tax Court are conducted in accordance with the Federal Rules of Evidence. See T.C. 143(a). Generally, the evidence must be material and relevant. Fed. R. Evid Evidentiary privileges, such as attorney-client privilege or work product apply in appropriate circumstances. A trial witness s testimony is limited to truthful recitation of the relevant facts as to which the witness has personal knowledge. Fed. R. Evid , o Subpoenas. Subpoenas may be issued to compel persons to attend and give testimony or produce documents or electronically stored information at a Tax Court trial. T.C. Rule 147, Code 7156(a). On request, a subpoena may be obtained from the Tax Court s Office of the Clerk. o Trial framework Call of Trial Calendar. At the call of a trial calendar, the case will be called by the judge. T.C. Rule 132. At that time, the parties should let the judge know whether the case is ready for the trial and an anticipated trial time. Id. At the calendar call, the judge will announce the tentative order in which the cases will be heard for trial. Opening Statements. Opening statements are generally allowed, and the party that carries the burden of proof will typically be the first to present its opening statement. Offering documents into evidence. It is generally a good practice to formally offer into evidence documents, such as deposition transcripts and answers to interrogatories, at the commencement of the trial. The party with the burden of proof will generally be the first one to present direct testimony. This is generally followed by opposing party s cross-examination. Thereafter, the witness may be subject to re-direct and re-cross examinations.

15 Nuts and Bolts of Deficiency Cases 39 The Commissioner will next present its evidence. After the Commissioner rests, petitioner may present rebuttal testimony. Closing Arguments. Judges, at their discretion, may allow closing oral arguments. T.C. Rule 151(a). Post trial briefs. Generally, post trial opening briefs must be filed 75 days after the conclusion of the trial and the answering briefs must be filed 45 days thereafter. See T.C. Rule 151(b)(1). o Each brief must include a cover page, a table of contents, and a table of authorities. T.C.Rule 23 and 151(e)(1). o The brief should also include a summary statement of the nature of the case, which includes a description of the tax involved, the issues to be decided, the date and place of trial, the judge, and the due date of the brief being filed.t.c. Rule 151(e)(2). o The opening brief must include proposed findings of fact in numbered paragraphs.t.c. Rule 151(e)(3). o In an answering or reply brief, the parties should include objections to the proposed findings of the opposing party. Id. o The brief should contain a summary of the argument. T.C. Rule 151(e)(4). o The brief must also include a persuasive argument which sets forth and discusses in detail the points of law involved and any disputed questions of fact. T.C. Rule 151(e)(5). o The brief should also include a conclusion and be signed by either the party or its counsel. T.C. Rule 151(e)(6) The Tax Court s opinions: The Tax Court issues several types of opinions. o Division opinions. A division opinion is a regular opinion of a single judge. It is published in the official Tax Court reporter. A division opinion or a regular opinion is usually issued in cases of first impression or in cases that are selected to serve as a precedent. o Reviewed opinions. A reviewed opinion is reviewed by the entire court sitting as a Court Conference. A reviewed opinion is generally issued in high profile cases or cases with legal sensitivities, such where the Tax Court has been reversed on this issue by a court of appeals, or where a decision would invalidate a regulation or overrule a prior opinion.

16 40 The Practical Tax Lawyer Fall 2012 o Memorandum opinion. A memorandum opinion is not published in the official Tax Court reporter. However, it is published unofficially by various tax services. It is generally issued in a fact-intensive cases and are not considered a binding precedent by the Tax Court. o Summary opinion. A summary opinion is an opinion in a case tried under the small case procedure. There opinions are generally not published and are not reviewable by any court of appeals. See Kafka and Cavanaugh, Litigation of Federal Civil Controversies, Deficiency computation. A decision of the Tax Court in deficiency litigation must specify the dollar amount of deficiency, liability, or overpayment redetermined by the Tax Court. Code 745. In cases where several cases are consolidated for the purposes of the trial, a separate decision is entered for each docket number. T.C. Rule 155 provides a procedure for a submission of computation of the liability in accordance with the findings of facts and conclusions of the Tax Court. Motion for reconsideration of opinion or findings of fact. In certain circumstance, the parties may file a motion for reconsideration of opinion or findings of fact under T.C. Rule 161. Such motion is generally appropriate in circumstances where there is a discovery of evidence, which was unavailable during trial, or where the Court s decision conflicts with a recent decision of another court. The Tax Court will generally not grant such a motion absent a showing of unusual circumstances, prejudice, or substantial error. For further explanation, see Kafka & Cavanaugh, Motion to vacate or revise decision. T.C. Rule 162 allows parties to motion the Tax Court to vacate or revise a decision either with or without a new or further trial. The Tax Court has discretion as to whether grant or deny such motion. A decision of the Tax Court becomes final 90 days after entry if a notice of appeal is not filed. Code 7481(a)(1), To purchase the online version of this article, go to and click on online.